InfoBytes, April 6, 2012 - A Weekly In-depth review of news & developments in the financial services industry.

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Federal Issues 

Federal Court Approves Multi-Party Mortgage Servicing Settlement. On April 5, the U.S. District Court for the District of Columbia approved the consent orders that comprise the previously announced settlement of various government probes, including investigations and inquiries by numerous federal regulators and 49 state Attorneys General, into alleged mortgage-related violations by five large mortgage servicers.

Housing Groups Plan Multiple Fair Housing Act Complaints, Release Report on REO Property Maintenance. On April 4, the National Fair Housing Alliance and several of its member organizations (collectively NFHA) indicated they plan to take legal action against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. The NFHA promised that it will file administrative complaints with the U.S. Department of Housing and Urban Development and/or legal complaints in federal courts. The first such complaint could be filed as early as next week. The anticipated complaints will be based on the results of an investigation conducted by the NFHA concerning the practices of several lenders and investors responsible for maintaining and marketing REO properties in African-American and Latino neighborhoods. According to the NFHA report, the investigation revealed that, among other things, REO properties in predominantly minority neighborhoods are 42 percent more likely to have maintenance problems and are 33 percent less likely to have a "For Sale" sign than properties in predominantly White neighborhoods. The report suggests that the poor maintenance practices and other alleged neglect can result in properties being vacant for longer periods and can increase the likelihood that a property eventually will be purchased by an investor at a discounted price, as opposed to an owner-occupier. NFHA maintains that these alleged practices violate the Fair Housing Act and HUD's implementing regulations and leave those neighborhoods in "crisis."The NFHA report also makes several policy recommendations. The report offers recommendations for financial institutions to (i) enhance their vendor selection and oversight, (ii) better market and sell properties, and (iii) make REO data more transparent. The NFHA also (i) urges federal regulators, including the CFPB, to conduct a major nationwide investigation into REO practices, (ii) proposes a policy to make REO properties available exclusively to owner-occupants and non-profit organizations prior to offering them more broadly, and (iii) suggests further development of lease-purchase programs for REO properties.

Federal Reserve Board Announces Additional Mortgage Servicing Consent Order. On April 3, the FRB announced a consent order with Morgan Stanley related to the foreclosure practices of a subsidiary. The Order is substantially similar to the 2011 consent orders entered with other FRB-supervised institutions.

FTC Announces First Actions Against Auto Loan Modification Schemes. On April 4, the FTC released complaints filed recently against two operations allegedly engaged in deceptive auto loan modification schemes. According to the FTC, the two companies and several related individuals instructed consumers to stop paying their auto loans and promised to lower their monthly payments in exchange for up-front payment of fees, but then did not provide promised refunds when they failed to obtain car loan modifications. The FTC complaints detail the companies' Internet and other marketing efforts and alleged false promises of lower monthly payments and money-back guarantees. These are the first auto loan modification cases filed by the FTC, which has been actively pursuing allegations of similar mortgage loan modification schemes. Concurrent with these announced cases, the FTC released an alert for consumers seeking assistance in managing their auto loans. The FTC also recently closed out a year of seeking public input on consumer protection issues that arise in auto sales, financing, and leasing.

FTC Files Case Against Tribe-Affiliated Payday Lenders. On April 2, the FTC announced that it filed a complaint in the United States District Court for the District of Nevada against a payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. The FTC alleges that the operation, consisting of numerous defendants including three Internet-based lending companies, seven related companies and numerous individuals (i) violated the FTC Act by making misrepresentations and false threats, (ii) violated TILA by failing to accurately disclose APR and other loan terms, and (iii) violated the Electronic Funds Transfer Act by requiring consumers to preauthorize electronic fund transfers from their accounts. According to the FTC, the defendants have claimed in state court that they are immune from legal action because of their affiliation with Native American tribes. The FTC argues that notwithstanding any such affiliation, the defendants are still subject to federal law. This is the second time in seven months that the FTC has brought suit against a payday lender that has used a tribal affiliation defense against actions by state authorities.

CFPB Issues Guidance on Loan Originator Compensation. On April 2, in response to questions it has received from loan originators and their firms seeking to comply with compensation rules issued under TILA Regulation Z, the CFPB issued Bulletin 2012-02. The Bulletin states that employers of loan originators may make contributions to employees' qualified profit sharing, 401(k), and stock ownership plans (qualified plans) out of a profit pool derived from loan originations. While the Bulletin expands the ability of lenders to contribute to their employees' qualified plans, the Bulletin does not provide guidance about other types of profit-sharing arrangements, noting that such issues are "fact-specific." According to the Bulletin, the CFPB will address these and other loan originator compensation issues in more detail in a proposed rule, which it plans to release in the "near future." Under the Dodd-Frank Act, the CFPB is required to finalize loan originator compensation rules by January 21, 2013, and these rules must take effect by January 21, 2014.

FSOC Approves Final Rule to Designate Systemically Important Nonbanks. On April 3, the Financial Stability Oversight Council (FSOC) voted to approve a final rule and interpretive guidance regarding the process it intends to use in designating nonbank financial companies as systemically important and subject to supervision by the Federal Reserve Board (FRB). The final rule and guidance follow an advanced notice of proposed rulemaking, two proposed rules, and proposed guidance. The final designation process is substantially similar to that outlined in the second proposed rule, issued in October 2011, with some clarifications. For example, the final rule provides a longer time period (no less than 30 days) for companies to respond to a notice that it is being considered for a systemically important determination and makes clear that hearings conducted as part of the determination process are nonpublic. The FSOC also clarified in response to comments that it intends to interpret the term "company" broadly to include any corporation, limited liability corporation, partnership, business trust, association, or similar organization, but not unincorporated associations. The rule does not provide any industry-based exemptions and the FSOC indicated that it does not intend to provide any, but will consider related comments as part of the determination process. Regarding coordination, the FSOC declined to delay finalizing this rule until related regulatory activities are completed, for example, the FRB's rule for determining if a company is "predominantly engaged in financial activities," choosing to view those considerations as non-essential to its consideration of whether a nonbank financial company could pose a threat to U.S. financial stability.

FRB Reissues Proposal to Determine Significant Nonbanks. On April 2, the FRB released an amended proposed rule to establish requirements for determining whether a company is "predominantly engaged in financial activities." The original proposal also defined the terms "significant nonbank financial company" and "significant bank holding company." Comments received in response to the February 2011 proposed rule raised questions as to whether conditions imposed on the conduct of financial activities by the Bank Holding Company Act and the FRB's implementing regulations should be considered in defining financial activities. In response, the FRB amended the proposal to clarify that any activity referenced in section 4(k) of the Bank Holding Act will be considered to be a financial activity without regard to conditions that were imposed on bank holding companies that do not define the activity itself. The revised proposal also adds an appendix that lists all activities that would be considered to be financial activities as of April 2, 2012. While the FSOC can designate nonbanks as systemically important, it can only do so with regard to nonbank financial companies that are predominantly engaged in financial activities which, under Section 102 of the Dodd-Frank Act, means that 85 percent or more of the company's revenues or assets are related to financial activities, as defined in section 4(k) of the Bank Holding Act. The FRB is tasked with establishing the detailed criteria for determining whether a company meets this definition.

Senators Offer FHFA Suggestions for HARP Program Adjustments. On March 30, Senate Banking Committee Democrats, led by Chairman Tim Johnson, sent a letter to Acting Director of the Federal Housing Finance Agency, Edward DeMarco, suggesting changes to the Home Affordable Refinance Program (HARP) to facilitate additional refinancings. In their letter, the Senators endorsed policy changes suggested in a January 2012 Federal Reserve Board white paper, including (i) reducing or eliminating remaining loan-level price adjustments for HARP refinances where Fannie Mae and Freddie Mac already carry the credit risk on the original mortgage, (ii) streamlining the financing process for borrowers with loan-to-value ratios below 80 percent, and (iii) more comprehensively reducing putback risk in order to remove disincentives for servicers to refinance. The letter was in response to a request for suggestions that Mr. DeMarco made during a February 28, 2012 Senate Banking Committee hearing.

Financial Services Committee Members Seek Information on CFPB Cost-Benefit Analysis. On March 29, Representatives Randy Neugebauer and Shelley Moore Capito sent a letter to CFPB Director Richard Cordray seeking his assurance that the CFPB will "conduct rigorous, transparent cost-benefit analysis whenever it drafts a new rule." The letter also asks the CFPB to respond by April 19 to a series of questions related to its rulemaking and other regulatory processes and procedures, as well as the applicability of federal regulatory reform initiatives to the CFPB's regulatory activities.

FinCEN Issues Guidance on New E-Filing System, Tax Refund Fraud. On March 29, the Financial Crimes Enforcement Network (FinCEN) announced that it is accepting the new Currency Transaction Report (CTR) and Suspicious Activity Report (SAR) into FinCEN's BSA E-Filing System. FinCEN issued guidance to assist institutions in filing the new reports and indicated that the new forms will replace the existing forms ("legacy reports"), but do not create any new obligations or otherwise change existing statutory and regulatory expectations for financial institutions. The new forms are now accepted for electronic filing and their use becomes mandatory on March 31, 2013. Until that date institutions may electronically file either the new reports or the legacy reports. In a separate action FinCEN had already mandated the electronic filing of most reports through the BSA E-Filing System beginning on July 1, 2012. FinCEN has recommended that institutions file electronically before that date, but until then they may continue to file via paper or by use of the legacy report form. The new CTR and SAR report forms may only be submitted electronically.

On March 30, FinCEN issued advisory FIN-2012-A005 to assist financial institutions with identifying tax refund fraud and filing SARs. The Advisory lists multiple "red flag" activities that could indicate tax refund fraud. When completing SARs on suspected tax refund fraud, financial institutions should use the term "tax refund fraud" in the narrative section of the SAR and provide a detailed description of the activity.

State Issues

Ohio Amends Ability to Repay Mortgage Rule. Last month, the Ohio Attorney General's office finalized amendments to that state's "ability to repay" rules adopted under the Ohio Consumer Sales Practices Act. Under that Act, it is unconscionable for a lender to, among other things, (i) engage in a pattern or practice of providing consumer transactions to consumers based predominantly on the supplier's realization of the foreclosure or liquidation value of the consumer's collateral without regard to the consumer's ability to repay the loan in accordance with its terms, and (ii) enter into a consumer mortgage transaction knowing there was no reasonable probability of payment of the obligation by the consumer. Effective March 30, 2012, the Act's two new rules (available here and here) provide a safe harbor for certain loans. A consumer will be considered to have an ability to repay and to have a reasonable probability of payment under the provisions identified above if the lender is offering a fully-amortizing fixed-rate refinance loan that (i) has the same or lesser interest rate as the rate of the consumer's current loan, (ii) has the same or lesser principal amount as the consumer's current loan, and (iii) does not extend the payoff date of the consumer's current loan.

West Virginia Removes Mortgage Licensing Exemption, Creates Procedure for Abandoned Personal Property Following Foreclosure. On April 2, West Virginia Governor Tomblin signed into law Senate Bill 336 and Senate Bill 360, both effective June 8, 2012. Senate Bill 336 eliminates an exemption under the state's residential mortgage licensing requirement. Prior to the change, mortgage lenders and brokers operating under the regular supervision and examination for consumer compliance by an agency of the federal government were exempt from having to obtain a state license. Those entities now must obtain a license and comply with related state laws. Federally insured depository institutions remain exempt from the licensing requirements. Senate Bill 360 creates a procedure to deem personal property abandoned following the transfer of real property by tax sale or foreclosure. The law requires the purchaser of the real property to provide 30 days notice to the former owner, after which unclaimed personal property will be deemed abandoned.

Washington Enacts New Short Sale and Foreclosure Protections, Adds Escrow Licensing Exemption. On March 29, Washington enacted House Bill 2614, which took effect immediately and created new borrower protections. The bill requires mortgagees that intend to permit a short sale of a residential property to provide written notice to the borrower that it is either waiving or reserving its right to collect the full debt. Mortgagees that reserve the right to collect must initiate a court action to collect within three years of the short sale. House Bill 2614 also amends provisions of Washington's Foreclosure Fairness Act, including, among other things, (i) to allow meetings with the borrower to discuss foreclosure avoidance options to be conducted by phone, if the borrowers agrees, (ii) to alter the foreclosure mediation procedures, (iii) to extend the time period for a trustee's sale, and (iv) to change beneficiary reporting requirements. Lastly, the bill creates a process to rescind a trustee sale under certain circumstances.

Also on March 29, Washington, through Senate Bill 6218, amended its escrow licensing requirements to clarify that attorneys are not required to obtain a license, provided that (i) the escrow transactions are performed by either the lawyer while engaged in the practice of law or any employee of the law practice under direct supervision of the lawyer, (ii) all escrow transactions are performed under a legal entity that is publicly identified and operated as a law practice, and (iii) all escrow funds are deposited to, maintained in, and disbursed from a trust account in compliance with rules enacted by the Washington Supreme Court regulating the conduct of lawyers. These changes take effect June 7, 2012.

Courts

Federal District Court Enforces Arbitration Clause Included in Clickwrap Terms. On March 26, the U.S. District Court for the Northern District of Illinois required arbitration of a dispute regarding alleged overcharging by an Internet service provider (ISP) because the consumer had agreed to an arbitration provision included in the ISP's clickwrap terms of service.

Sherman v. AT&T Inc., No. 11-C-5857, 2012 WL 1021823 (N.D. Ill. Mar. 26, 2012). The court held that the plaintiff's assent to the terms during the online activation process constituted acceptance of those terms, regardless of when he believed the contract was formed. To activate his Internet service, the plaintiff was required to confirm through an online process that he had read and agreed to the ISP's terms of service. The activation and confirmation page included a link to the terms of service, which included an agreement to arbitrate all disputes. The plaintiff argued (i) that his contract with the ISP was formed during a phone call with an ISP customer service agent pursuant to which he ordered the service, prior to the online activation process, and therefore the terms of service do not apply, and (ii) the terms were not expressly incorporated into the broader conditions of his contract and were procedurally unconscionable. The district court granted the ISP's motion to compel arbitration of the plaintiff's allegation (made on behalf of a putative class) that the ISP systematically overcharged consumers for residential Internet service by advertising promotional plans while actually charging standard rates.. The court reasoned that vendors may enclose the full legal terms with their products rather than reciting them prior to purchase, for practical purposes, even if the full terms are not delivered until after the consumer's order and payment. The court also held that the terms were not procedurally unconscionable, as they were not difficult to find, read or understand, and the plaintiff had a full and fair opportunity to review the terms prior to activation.

New York State Court Refuses to Enforce Website's Forum Selection Clause. On March 20, New York's District Court of Nassau County refused to enforce a forum selection clause because the defendant did not make an affirmative effort to reasonably communicate that key term to the other party or otherwise do enough to ensure the clause became a part of the parties' contract. Jerez v. JD Closeouts, LLC, No. CV-024727-11, 2012 WL 934390 (N.Y. Dist. Ct. Mar. 20, 2012). The plaintiff filed suit alleging that products ordered over the Internet following an e-mail solicitation from the defendant were defective. The defendant moved to dismiss, arguing that a forum selection clause in the parties' contract required that the dispute be heard in a Florida state court. The court found that the forum selection clause was not reasonably communicated through any of a printed contract, a confirming letter agreement incorporating provisions from the website by reference, or a click-through acceptance. Rather, the court found, the clause was included in terms and conditions "buried" and "submerged" on the defendant's website, on a page "that could only be found by clicking on an inconspicuous link to the company's 'About Us' page." The court denied the defendant's motion to dismiss.

Washington Federal Court Allows Data Privacy Case Against IMDb to Proceed. On March 28, the U.S. District Court for the Western District of Washington held that actress Huong Hoang's lawsuit against website IMDb.com pled sufficient facts to move forward on her breach of contract and Washington Consumer Protection Act claims, based in part on the web site's privacy policy. Hoang v. Amazon.com, Inc., No. C11-1709MJP (W.D. Wash. Mar. 28, 2012). IMDb, a subsidiary of Amazon, moved to dismiss Ms. Hoang's four claims. Although two claims were dismissed, the court found that the defendant did not show that Ms. Hoang gave IMDb permission to use her information provided when subscribing to the web site to search public records for additional information about her. Plaintiff pointed to a statement in the IMDb privacy policy that it would "carefully and sensibly" manage how information about customers is used and shared, and that "[y]ou can choose not to provide certain information...." Plaintiff alleges that IMDb used the personal information she provided, including credit card information, to locate her date of birth, among other things. Ms. Hoang alleged that IMDb then added her date of birth and age to its web site, causing her to lose roles and decrease her earnings. Defendant's motion to dismiss the remaining claims was denied.

Federal Appeals Court Limits Review of FTC Interpretation of FCRA. Recently, the U.S. Court of Appeals for the District of Columbia Circuit held that the FTC's interpretation of a Fair Credit Reporting Act (FCRA) provision is not subject to direct review by the federal appeals court. Nat'l Auto. Dealers Assoc. v. FTC, 670 F.3d 268 (D.C. Cir. 2012). In July 2011, the FTC promulgated a rule to implement changes made by the Dodd-Frank Act to FCRA's risk-based pricing protections. Those protections entitle consumers to a notice when they are offered credit at materially less favorable terms based on information contained in their credit reports. As part of the July 2011 rule, the FTC provided "supplementary information" that included an interpretation of the scope and applicability of the rule, stating that automobile dealers are subject to the rule, even when dealers rely on third-party financing sources and not directly on credit reports obtained from a consumer reporting agency. The National Association of Automobile Dealers (NADA) filed a petition asking the appeals court to review the FTC's interpretation. NADA concurrently filed a complaint in district court seeking a review of the rule under the Administrative Procedures Act. The appeals court held that direct appellate review of an agency action is only permissible when a statute unambiguously grants such a review. In this case, the direct review provision of the FTC Act is not ambiguous and clearly does not apply to the FCRA interpretation at issue. Under the FTC Act, direct review is only available for challenges to trade regulation rules and substantive amendments thereto. NADA is not challenging a substantive amendment, but rather an interpretation, and in any case the FCRA interpretive statement is not related to a trade regulation rule. Therefore, the appeals court dismissed the petition without prejudice to the parallel district court action.

Florida Federal District Court Holds Creditor Vicariously Liable for a Servicer's TILA Violation. On March 19, the U.S. District Court for the Southern District of Florida determined that a mortgage loan creditor can be held vicariously liable under TILA for the loan servicer's alleged failure to properly respond to a borrower's request for information. In Khan v. Bank of New York Mellon, No. 12-60128-CIV, 2012 WL 1003509 (S.D. Fla. Mar. 19, 2012) the borrowers sued their creditor for their servicer's failure to respond to the borrowers' TILA request for information about the identity of the owner of the note. The creditor moved to dismiss the complaint, arguing that as the creditor of the mortgage loan at issue, it cannot be vicariously liable for the servicer's TILA violation. The creditor further argued that while TILA imposes an obligation on servicers to provide information about the owner of the loan to the borrower upon request, it also absolves servicers of any liability where the servicers are not also owners of the obligation. Borrowers, however, have a private cause of action under TILA against any creditor for a failure to comply with certain TILA requirements, including the obligation to provide the loan owner's information to the borrower. The court reasoned that, because TILA expressly absolves the servicer of liability under these circumstances, if there is no vicarious liability for the creditor, the provision allowing a private right of action would be without effect. The court, therefore, denied the motion to dismiss, determining that Congress intended to make creditors vicariously liable for a servicer's failure to provide information to the borrower upon request.

Firm New

Join Us! 2012 Fair Lending Today Conference on Compliance, Regulatory and Litigation Issues and the CFPB in Today's Changing Enforcement Environment, hosted by BuckleySandler LLP.

2012 Panel Topics Include:

  • Overview: A New Agency Emerges
  • The Justice Department and Fair Lending: Disparate Impact Escapes Potential Elimination in Magner
  • Mortgage Servicing Developments: The AG/DOJ Settlement, the CFPB, and Ongoing Enforcement
  • Anatomy of a CFPB Enforcement Action
  • The CFPB's Fair Lending Agenda for Auto, Private Student Lenders, and Non-Secured Lending
  • New CFPB Enforcement Priorities for Credit Cards
  • Fair and Responsible Banking Risk Management Update

When: Monday, April 30, 2012

Where: The Fairmont Hotel in Washington, DC

Registration required. This conference is open to all financial services companies and others subject to CFPB oversight. Please no outside law firms, government agency personnel, consultant firms or media. For more information visit www.fairlendingtoday.com or contact fairlending@buckleysandler.com.

BuckleySandler LLP will be hosting a complimentary webinar entitled "The Consumer Financial Protection Bureau: A Recap of Activities To Date and Predictions for Actions Ahead" on Tuesday, April 17, 2012 from 2:00 PM - 3:15 PM ET. In this webinar, BuckleySandler attorneys Jeff Naimon, Jonice Gray Tucker, and Lori Sommerfield will recap the CFPB's recent activities and provide guidance for institutions which are regulated by the CFPB. The webinar will include discussion of issues related to the protection of confidential data provided by institutions in examination, enforcement, and other contexts as well as bills currently pending in Congress to provide greater assurances to the industry that privileged information will not be further disclosed by the CFPB.

Registration required. This webinar is open to all financial services companies and others subject to CFPB oversight. Please no outside law firms, government agency personnel, consulting firms, or media. After registering and being approved, you will receive a confirmation email containing instructions for joining the webinar. Click here to register: https://www1.gotomeeting.com/register/149905752

David Baris will be speaking at the NACD/AABD Bank Director Workshop on April 12, 2012 in Fort Lauderdale, Florida. The topic of the presentation is "Bank Director Liability and Practical Steps to Minimize It."

David Krakoff will be speaking at ACI's 27th National Conference on the Foreign Corrupt Practices Act in New York, NY on April 17, 2012. Mr. Krakoff's session will focus on defending executives in FCPA investigations.

James Parkinson will be speaking at a PLI program seminar entitled "Foreign Corrupt Practices Act 2012" in San Francisco, California on April 17, 2012 and in New York, New York on May 4, 2012.

Andrew Sandler will be speaking at the 2012 Marquis National Compliance Conference in Fort Worth, Texas on April 18, 2012. Mr. Sandler's session will cover the view from Washington, DC on CRA, HMDA, and Fair Lending.

Donna Wilson will be moderating a panel entitled "BANKS UNDER SCRUTINY: The Civil, Criminal, Regulatory and Insurance Fallout from Mortgage Foreclosures and Bank Failures" at the ABA Section of Litigation annual meeting in Washington DC, April 18-21, 2012.

Andrea Mitchell will be speaking at the National Community Reinvestment Coalition's Annual Conference on April 20, 2012 in Washington, D.C. Ms. Mitchell will be a panelist at a session entitled: "Challenging the Use of Discriminatory Overlays."

David Krakoff will be speaking at the ALI-ABA Environmental Crimes Conference in Washington, DC on April 26, 2012. Mr. Krakoff's session will discuss the key issues at the outset of an environmental criminal action.

Jonice Gray Tucker and Amanda Raines will be participating in a D.C. Bar Women Litigators' Committee panel entitled, "Women Litigators: What We Do Right" on April 26, 2012 in Washington, D.C. The panel will discuss those characteristics that female litigators have which make them effective and persuasive advocates.

Benjamin Klubes and Jonice Gray Tucker will be speaking at The Financial Services Roundtable's Spring Meeting of the Lawyers Council on May, 3, 2012, in a session entitled "Litigation & Enforcement Update."

Jonice Gray Tucker will be participating in an American Bar Association webinar focusing on the Federal-State Mortgage Servicing Settlement on May 15, 2012.

Andrew Sandler, Benjamin Klubes, and Benjamin Saul will be speaking at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference in Palm Springs, CA on May 20, 2012. Mr. Klubes will provide updates on developments in both regulatory and litigation matters in the use of various privileges. Mr. Saul's session will provide an overview and update of the Fair Credit Reporting Act (FCRA), Fair Housing Act, Equal Credit Opportunity Act (ECOA) and Home Mortgage Disclosure Act (HMDA) requirements including recent proposed and final changes.

Jonathan Cannon will be speaking at the Predictive Methods Conference in Dana Point, CA on June 4, 2012 in a session entitled "The Dodd-Frank Act: Understanding its Impact on the Mortgage Industry."

Mortgages

Federal Court Approves Multi-Party Mortgage Servicing Settlement. On April 5, the U.S. District Court for the District of Columbia approved the consent orders that comprise the previously announced settlement of various government probes, including investigations and inquiries by numerous federal regulators and 49 state Attorneys General, into alleged mortgage-related violations by five large mortgage servicers.

Housing Groups Plan Multiple Fair Housing Act Complaints, Release Report on REO Property Maintenance. On April 4, the National Fair Housing Alliance and several of its member organizations (collectively NFHA) indicated they plan to take legal action against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. The NFHA promised that it will file administrative complaints with the U.S. Department of Housing and Urban Development and/or legal complaints in federal courts. The first such complaint could be filed as early as next week. The anticipated complaints will be based on the results of an investigation conducted by the NFHA concerning the practices of several lenders and investors responsible for maintaining and marketing REO properties in African-American and Latino neighborhoods. According to the NFHA report, the investigation revealed that, among other things, REO properties in predominantly minority neighborhoods are 42 percent more likely to have maintenance problems and are 33 percent less likely to have a "For Sale" sign than properties in predominantly White neighborhoods. The report suggests that the poor maintenance practices and other alleged neglect can result in properties being vacant for longer periods and can increase the likelihood that a property eventually will be purchased by an investor at a discounted price, as opposed to an owner-occupier. NFHA maintains that these alleged practices violate the Fair Housing Act and HUD's implementing regulations and leave those neighborhoods in "crisis."The NFHA report also makes several policy recommendations. The report offers recommendations for financial institutions to (i) enhance their vendor selection and oversight, (ii) better market and sell properties, and (iii) make REO data more transparent. The NFHA also (i) urges federal regulators, including the CFPB, to conduct a major nationwide investigation into REO practices, (ii) proposes a policy to make REO properties available exclusively to owner-occupants and non-profit organizations prior to offering them more broadly, and (iii) suggests further development of lease-purchase programs for REO properties.

Federal Reserve Board Announces Additional Mortgage Servicing Consent Order. On April 3, the FRB announced a consent order with Morgan Stanley related to the foreclosure practices of a subsidiary. The Order is substantially similar to the 2011 consent orders entered with other FRB-supervised institutions.

CFPB Issues Guidance on Loan Originator Compensation. On April 2, in response to questions it has received from loan originators and their firms seeking to comply with compensation rules issued under TILA Regulation Z, the CFPB issued Bulletin 2012-02. The Bulletin states that employers of loan originators may make contributions to employees' qualified profit sharing, 401(k), and stock ownership plans (qualified plans) out of a profit pool derived from loan originations. While the Bulletin expands the ability of lenders to contribute to their employees' qualified plans, the Bulletin does not provide guidance about other types of profit-sharing arrangements, noting that such issues are "fact-specific." According to the Bulletin, the CFPB will address these and other loan originator compensation issues in more detail in a proposed rule, which it plans to release in the "near future." Under the Dodd-Frank Act, the CFPB is required to finalize loan originator compensation rules by January 21, 2013, and these rules must take effect by January 21, 2014.

Senators Offer FHFA Suggestions for HARP Program Adjustments. On March 30, Senate Banking Committee Democrats, led by Chairman Tim Johnson, sent a letter to Acting Director of the Federal Housing Finance Agency, Edward DeMarco, suggesting changes to the Home Affordable Refinance Program (HARP) to facilitate additional refinancings. In their letter, the Senators endorsed policy changes suggested in a January 2012 Federal Reserve Board white paper, including (i) reducing or eliminating remaining loan-level price adjustments for HARP refinances where Fannie Mae and Freddie Mac already carry the credit risk on the original mortgage, (ii) streamlining the financing process for borrowers with loan-to-value ratios below 80 percent, and (iii) more comprehensively reducing putback risk in order to remove disincentives for servicers to refinance. The letter was in response to a request for suggestions that Mr. DeMarco made during a February 28, 2012 Senate Banking Committee hearing.

Ohio Amends Ability to Repay Mortgage Rules. Last month, the Ohio Attorney General's office finalized amendments to that state's "ability to repay" rules adopted under the Ohio Consumer Sales Practices Act. Under that Act, it is unconscionable for a lender to, among other things, (i) engage in a pattern or practice of providing consumer transactions to consumers based predominantly on the supplier's realization of the foreclosure or liquidation value of the consumer's collateral without regard to the consumer's ability to repay the loan in accordance with its terms, and (ii) enter into a consumer mortgage transaction knowing there was no reasonable probability of payment of the obligation by the consumer. Effective March 30, 2012, the Act's two new rules (available here and here) provide a safe harbor for certain loans. A consumer will be considered to have an ability to repay and to have a reasonable probability of payment under the provisions identified above if the lender is offering a fully-amortizing fixed-rate refinance loan that (i) has the same or lesser interest rate as the rate of the consumer's current loan, (ii) has the same or lesser principal amount as the consumer's current loan, and (iii) does not extend the payoff date of the consumer's current loan.

West Virginia Removes Mortgage Licensing Exemption, Creates Procedure for Abandoned Personal Property Following Foreclosure. On April 2, West Virginia Governor Tomblin signed into law Senate Bill 336 and Senate Bill 360, both effective June 8, 2012. Senate Bill 336 eliminates an exemption under the state's residential mortgage licensing requirement. Prior to the change, mortgage lenders and brokers operating under the regular supervision and examination for consumer compliance by an agency of the federal government were exempt from having to obtain a state license. Those entities now must obtain a license and comply with related state laws. Federally insured depository institutions remain exempt from the licensing requirements. Senate Bill 360 creates a procedure to deem personal property abandoned following the transfer of real property by tax sale or foreclosure. The law requires the purchaser of the real property to provide 30 days notice to the former owner, after which unclaimed personal property will be deemed abandoned.

Washington Enacts New Short Sale and Foreclosure Protections, Adds Escrow Licensing Exemption. On March 29, Washington enacted House Bill 2614, which took effect immediately and created new borrower protections. The bill requires mortgagees that intend to permit a short sale of a residential property to provide written notice to the borrower that it is either waiving or reserving its right to collect the full debt. Mortgagees that reserve the right to collect must initiate a court action to collect within three years of the short sale. House Bill 2614 also amends provisions of Washington's Foreclosure Fairness Act, including, among other things, (i) to allow meetings with the borrower to discuss foreclosure avoidance options to be conducted by phone, if the borrowers agrees, (ii) to alter the foreclosure mediation procedures, (iii) to extend the time period for a trustee's sale, and (iv) to change beneficiary reporting requirements. Lastly, the bill creates a process to rescind a trustee sale under certain circumstances.

Also on March 29, Washington, through Senate Bill 6218, amended its escrow licensing requirements to clarify that attorneys are not required to obtain a license, provided that (i) the escrow transactions are performed by either the lawyer while engaged in the practice of law or any employee of the law practice under direct supervision of the lawyer, (ii) all escrow transactions are performed under a legal entity that is publicly identified and operated as a law practice, and (iii) all escrow funds are deposited to, maintained in, and disbursed from a trust account in compliance with rules enacted by the Washington Supreme Court regulating the conduct of lawyers. These changes take effect June 7, 2012.

Florida Federal District Court Holds Creditor Vicariously Liable for a Servicer's TILA Violation. On March 19, the U.S. District Court for the Southern District of Florida determined that a mortgage loan creditor can be held vicariously liable under TILA for the loan servicer's alleged failure to properly respond to a borrower's request for information. In Khan v. Bank of New York Mellon, No. 12-60128-CIV, 2012 WL 1003509 (S.D. Fla. Mar. 19, 2012) the borrowers sued their creditor for their servicer's failure to respond to the borrowers' TILA request for information about the identity of the owner of the note. The creditor moved to dismiss the complaint, arguing that as the creditor of the mortgage loan at issue, it cannot be vicariously liable for the servicer's TILA violation. The creditor further argued that while TILA imposes an obligation on servicers to provide information about the owner of the loan to the borrower upon request, it also absolves servicers of any liability where the servicers are not also owners of the obligation. Borrowers, however, have a private cause of action under TILA against any creditor for a failure to comply with certain TILA requirements, including the obligation to provide the loan owner's information to the borrower. The court reasoned that, because TILA expressly absolves the servicer of liability under these circumstances, if there is no vicarious liability for the creditor, the provision allowing a private right of action would be without effect. The court, therefore, denied the motion to dismiss, determining that Congress intended to make creditors vicariously liable for a servicer's failure to provide information to the borrower upon request.

Banking

FSOC Approves Final Rule to Designate Systemically Important Nonbanks. On April 3, the Financial Stability Oversight Council (FSOC) voted to approve a final rule and interpretive guidance regarding the process it intends to use in designating nonbank financial companies as systemically important and subject to supervision by the Federal Reserve Board (FRB). The final rule and guidance follow an advanced notice of proposed rulemaking, two proposed rules, and proposed guidance. The final designation process is substantially similar to that outlined in the second proposed rule, issued in October 2011, with some clarifications. For example, the final rule provides a longer time period (no less than 30 days) for companies to respond to a notice that it is being considered for a systemically important determination and makes clear that hearings conducted as part of the determination process are nonpublic. The FSOC also clarified in response to comments that it intends to interpret the term "company" broadly to include any corporation, limited liability corporation, partnership, business trust, association, or similar organization, but not unincorporated associations. The rule does not provide any industry-based exemptions and the FSOC indicated that it does not intend to provide any, but will consider related comments as part of the determination process. Regarding coordination, the FSOC declined to delay finalizing this rule until related regulatory activities are completed, for example, the FRB's rule for determining if a company is "predominantly engaged in financial activities," choosing to view those considerations as non-essential to its consideration of whether a nonbank financial company could pose a threat to U.S. financial stability.

FRB Reissues Proposal to Determine Significant Nonbanks. On April 2, the FRB released an amended proposed rule to establish requirements for determining whether a company is "predominantly engaged in financial activities." The original proposal also defined the terms "significant nonbank financial company" and "significant bank holding company." Comments received in response to the February 2011 proposed rule raised questions as to whether conditions imposed on the conduct of financial activities by the Bank Holding Company Act and the FRB's implementing regulations should be considered in defining financial activities. In response, the FRB amended the proposal to clarify that any activity referenced in section 4(k) of the Bank Holding Act will be considered to be a financial activity without regard to conditions that were imposed on bank holding companies that do not define the activity itself. The revised proposal also adds an appendix that lists all activities that would be considered to be financial activities as of April 2, 2012. While the FSOC can designate nonbanks as systemically important, it can only do so with regard to nonbank financial companies that are predominantly engaged in financial activities which, under Section 102 of the Dodd-Frank Act, means that 85 percent or more of the company's revenues or assets are related to financial activities, as defined in section 4(k) of the Bank Holding Act. The FRB is tasked with establishing the detailed criteria for determining whether a company meets this definition.

FinCEN Issues Guidance on New E-Filing System, Tax Refund Fraud. On March 29, the Financial Crimes Enforcement Network (FinCEN) announced that it is accepting the new Currency Transaction Report (CTR) and Suspicious Activity Report (SAR) into FinCEN's BSA E-Filing System. FinCEN issued guidance to assist institutions in filing the new reports and indicated that the new forms will replace the existing forms ("legacy reports"), but do not create any new obligations or otherwise change existing statutory and regulatory expectations for financial institutions. The new forms are now accepted for electronic filing and their use becomes mandatory on March 31, 2013. Until that date institutions may electronically file either the new reports or the legacy reports. In a separate action FinCEN had already mandated the electronic filing of most reports through the BSA E-Filing System beginning on July 1, 2012. FinCEN has recommended that institutions file electronically before that date, but until then they may continue to file via paper or by use of the legacy report form. The new CTR and SAR report forms may only be submitted electronically.

On March 30, FinCEN issued advisory FIN-2012-A005 to assist financial institutions with identifying tax refund fraud and filing SARs. The Advisory lists multiple "red flag" activities that could indicate tax refund fraud. When completing SARs on suspected tax refund fraud, financial institutions should use the term "tax refund fraud" in the narrative section of the SAR and provide a detailed description of the activity.

Consumer Finance

FTC Announces First Actions Against Auto Loan Modification Schemes. On April 4, the FTC released complaints filed recently against two operations allegedly engaged in deceptive auto loan modification schemes. According to the FTC, the two companies and several related individuals instructed consumers to stop paying their auto loans and promised to lower their monthly payments in exchange for up-front payment of fees, but then did not provide promised refunds when they failed to obtain car loan modifications. The FTC complaints detail the companies' Internet and other marketing efforts and alleged false promises of lower monthly payments and money-back guarantees. These are the first auto loan modification cases filed by the FTC, which has been actively pursuing allegations of similar mortgage loan modification schemes. Concurrent with these announced cases, the FTC released an alert for consumers seeking assistance in managing their auto loans. The FTC also recently closed out a year of seeking public input on consumer protection issues that arise in auto sales, financing, and leasing.

FTC Files Case Against Tribe-Affiliated Payday Lenders. On April 2, the FTC announced that it filed a complaint in the United States District Court for the District of Nevada against a payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. The FTC alleges that the operation, consisting of numerous defendants including three Internet-based lending companies, seven related companies and numerous individuals (i) violated the FTC Act by making misrepresentations and false threats, (ii) violated TILA by failing to accurately disclose APR and other loan terms, and (iii) violated the Electronic Funds Transfer Act by requiring consumers to preauthorize electronic fund transfers from their accounts. According to the FTC, the defendants have claimed in state court that they are immune from legal action because of their affiliation with Native American tribes. The FTC argues that notwithstanding any such affiliation, the defendants are still subject to federal law. This is the second time in seven months that the FTC has brought suit against a payday lender that has used a tribal affiliation defense against actions by state authorities.

Financial Services Committee Members Seek Information on CFPB Cost-Benefit Analysis. On March 29, Representatives Randy Neugebauer and Shelley Moore Capito sent a letter to CFPB Director Richard Cordray seeking his assurance that the CFPB will "conduct rigorous, transparent cost-benefit analysis whenever it drafts a new rule." The letter also asks the CFPB to respond by April 19 to a series of questions related to its rulemaking and other regulatory processes and procedures, as well as the applicability of federal regulatory reform initiatives to the CFPB's regulatory activities.

Federal Appeals Court Limits Review of FTC Interpretation of FCRA. Recently, the U.S. Court of Appeals for the District of Columbia Circuit held that the FTC's interpretation of a Fair Credit Reporting Act (FCRA) provision is not subject to direct review by the federal appeals court. Nat'l Auto. Dealers Assoc. v. FTC, 670 F.3d 268 (D.C. Cir. 2012). In July 2011, the FTC promulgated a rule to implement changes made by the Dodd-Frank Act to FCRA's risk-based pricing protections. Those protections entitle consumers to a notice when they are offered credit at materially less favorable terms based on information contained in their credit reports. As part of the July 2011 rule, the FTC provided "supplementary information" that included an interpretation of the scope and applicability of the rule, stating that automobile dealers are subject to the rule, even when dealers rely on third-party financing sources and not directly on credit reports obtained from a consumer reporting agency. The National Association of Automobile Dealers (NADA) filed a petition asking the appeals court to review the FTC's interpretation. NADA concurrently filed a complaint in district court seeking a review of the rule under the Administrative Procedures Act. The appeals court held that direct appellate review of an agency action is only permissible when a statute unambiguously grants such a review. In this case, the direct review provision of the FTC Act is not ambiguous and clearly does not apply to the FCRA interpretation at issue. Under the FTC Act, direct review is only available for challenges to trade regulation rules and substantive amendments thereto. NADA is not challenging a substantive amendment, but rather an interpretation, and in any case the FCRA interpretive statement is not related to a trade regulation rule. Therefore, the appeals court dismissed the petition without prejudice to the parallel district court action.

E-Commerce

Federal District Court Enforces Arbitration Clause Included in Clickwrap Terms. On March 26, the U.S. District Court for the Northern District of Illinois required arbitration of a dispute regarding alleged overcharging by an Internet service provider (ISP) because the consumer had agreed to an arbitration provision included in the ISP's clickwrap terms of service.

Sherman v. AT&T Inc., No. 11-C-5857, 2012 WL 1021823 (N.D. Ill. Mar. 26, 2012). The court held that the plaintiff's assent to the terms during the online activation process constituted acceptance of those terms, regardless of when he believed the contract was formed. To activate his Internet service, the plaintiff was required to confirm through an online process that he had read and agreed to the ISP's terms of service. The activation and confirmation page included a link to the terms of service, which included an agreement to arbitrate all disputes. The plaintiff argued (i) that his contract with the ISP was formed during a phone call with an ISP customer service agent pursuant to which he ordered the service, prior to the online activation process, and therefore the terms of service do not apply, and (ii) the terms were not expressly incorporated into the broader conditions of his contract and were procedurally unconscionable. The district court granted the ISP's motion to compel arbitration of the plaintiff's allegation (made on behalf of a putative class) that the ISP systematically overcharged consumers for residential Internet service by advertising promotional plans while actually charging standard rates.. The court reasoned that vendors may enclose the full legal terms with their products rather than reciting them prior to purchase, for practical purposes, even if the full terms are not delivered until after the consumer's order and payment. The court also held that the terms were not procedurally unconscionable, as they were not difficult to find, read or understand, and the plaintiff had a full and fair opportunity to review the terms prior to activation.

New York State Court Refuses to Enforce Website's Forum Selection Clause. On March 20, New York's District Court of Nassau County refused to enforce a forum selection clause because the defendant did not make an affirmative effort to reasonably communicate that key term to the other party or otherwise do enough to ensure the clause became a part of the parties' contract. Jerez v. JD Closeouts, LLC, No. CV-024727-11, 2012 WL 934390 (N.Y. Dist. Ct. Mar. 20, 2012). The plaintiff filed suit alleging that products ordered over the Internet following an e-mail solicitation from the defendant were defective. The defendant moved to dismiss, arguing that a forum selection clause in the parties' contract required that the dispute be heard in a Florida state court. The court found that the forum selection clause was not reasonably communicated through any of a printed contract, a confirming letter agreement incorporating provisions from the website by reference, or a click-through acceptance. Rather, the court found, the clause was included in terms and conditions "buried" and "submerged" on the defendant's website, on a page "that could only be found by clicking on an inconspicuous link to the company's 'About Us' page." The court denied the defendant's motion to dismiss.

Privacy/Data Security

Washington Federal Court Allows Data Privacy Case Against IMDb to Proceed. On March 28, the U.S. District Court for the Western District of Washington held that actress Huong Hoang's lawsuit against website IMDb.com pled sufficient facts to move forward on her breach of contract and Washington Consumer Protection Act claims, based in part on the web site's privacy policy.

Hoang v. Amazon.com, Inc., No. C11-1709MJP (W.D. Wash. Mar. 28, 2012). IMDb, a subsidiary of Amazon, moved to dismiss Ms. Hoang's four claims. Although two claims were dismissed, the court found that the defendant did not show that Ms. Hoang gave IMDb permission to use her information provided when subscribing to the web site to search public records for additional information about her. Plaintiff pointed to a statement in the IMDb privacy policy that it would "carefully and sensibly" manage how information about customers is used and shared, and that "[y]ou can choose not to provide certain information...." Plaintiff alleges that IMDb used the personal information she provided, including credit card information, to locate her date of birth, among other things. Ms. Hoang alleged that IMDb then added her date of birth and age to its web site, causing her to lose roles and decrease her earnings. Defendant's motion to dismiss the remaining claims was denied.

 

Published In: Administrative Agency Updates, Consumer Protection Updates, Finance & Banking Updates, Privacy Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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