On June 28, the CFPB released a report to Congress detailing the characteristics and evolving uses of reverse mortgages in today’s marketplace. The report presents findings from a CFPB study on reverse mortgages required by the Dodd-Frank Act. Among the findings, the CFPB report states that reverse mortgages are often difficult for consumers to understand. The report further observes that reverse mortgages are being used by younger borrowers to obtain all available equity upfront, a use that contravenes the original and intended use of reverse mortgage products and may pose substantial risks to consumers. Concurrent with the release of the report, the CFPB issued a Notice and Request for Information on topics related to reverse mortgages and will accept comments for 60 days following publication of the Notice in the Federal Register. The CFPB intends to use the information and comments received from the public, as well as the findings from its study, to determine whether further consumer education or regulatory action related to reverse mortgages is necessary.
On June 28, the CFPB released a final rule that will govern how it handles privileged information submitted by supervised financial institutions. In the final rule, the CFPB adopted the proposed rule without modification. The rule allows parties to submit information to the CFPB in the supervisory or regulatory process without waiving any applicable privileges; it further permits the CFPB to share that information with federal and state agencies without affecting federal or state privileges. The rule takes effect 30 days following its publication in the Federal Register.
On June 26, the U.S. Court of Appeals for the Sixth Circuit concluded that a misrepresentation of the creditor’s name in a foreclosure action may constitute a false representation actionable under Section 1692e of the FDCPA. Wallace v. Washington Mut. Bank, F.A., No. 10-3694, 2012 WL 2379664 (6th Cir. June 26, 2012). In Wallace, a law firm allegedly brought a foreclosure action before the firm’s bank client received an assignment of the mortgage and transfer of the promissory note. The borrower contended that the law firm violated the FDCPA in foreclosing on behalf of the bank before the transfer and assignment occurred. The district court dismissed the case, holding that the failure to record an assignment before filing a foreclosure action is not a deceptive practice under the FDCPA. The Sixth Circuit disagreed and reversed, holding that the borrower’s allegations were sufficient to support a claim of material misrepresentation that would confuse or mislead an unsophisticated consumer.
Massachusetts Supreme Judicial Court Rules That Lenders May Foreclose Without Possessing Mortgage Note, But Only In Certain Circumstances
On June 22, the Massachusetts Supreme Judicial Court held that lenders do not need to be in physical possession of a mortgage note to foreclose on a property, but that they must establish that they are acting on behalf of the noteholder. Eaton v. Federal Nat’l Mortgage Ass’n, No. SJC-11041, 2012 WL 2349008 (Mass. June 22, 2012). The lower court had preliminarily enjoined defendant Fannie Mae from evicting the plaintiff following a foreclosure sale; that court interpreted the term “mortgagee,” as used in Massachusetts’ statutes, to refer to a person holding both the mortgage and the mortgage note. At the time of the foreclosure, the foreclosing party held only the mortgage. Reversing the lower court, the Supreme Judicial Court found that the term “mortgagee” refers to a person who (i) holds the mortgage, and (ii) either physically holds the mortgage note or acts on behalf of the mortgage note holder. Recognizing that it was common prior practice to interpret the term “mortgagee” as requiring possession of only the mortgage, the court held that its new interpretation of “mortgagee” should be given only prospective effect.
On June 26, the FTC filed a complaint in the U.S. District Court for the District of Arizona alleging that Wyndham Worldwide Corporation (and several of its subsidiaries) violated the FTC Act by misrepresenting the adequacy of their data security procedures. The FTC specifically maintains that Wyndham and its subsidiaries engaged in unfair and deceptive practices when they represented on their website that they maintained measures adequate to protect customers’ personal information. In truth, the FTC alleges, Wyndham failed to maintain such protections. According to the FTC, the companies’ lack of reasonable data security allowed intruders to obtain unauthorized access to that information on three separate occasions. These breaches purportedly resulted in more than $10.6 million in fraud loss and the export—to a foreign-registered domain—of payment card account information for hundreds of thousands of consumers.
On June 21, the California Supreme Court held that the National Bank Act (NBA) preempts California Civil Code section 1748.9, which requires that certain disclosures accompany preprinted checks provided by a credit card issuer to its cardholders. Parks v. MBNA Am. Bank, N.A., No. S183703, 2012 WL 2345006 (Cal. June 21, 2012). In a unanimous decision, the court concluded that the NBA preempts section 1748.9 because the law is an obstacle to the broad grant of power given to national banks to conduct the business of banking. The court held that the specific disclosure obligations imposed by section 1748.9, including precise language and placement of the disclosures, exceeded any federal law requirements. In addition, the court recognized that the NBA was intended to prevent banks from complying with a patchwork of local disclosure requirements like section 1748.9.
On June 27, the House Financial Services Committee unanimously approved H.R. 4367, which would amend the Electronic Fund Transfer Act to remove the requirement that ATMs attach a placard disclosing fees. Instead, the bill would require only that fees be disclosed on the ATM screen.
On June 21, North Carolina Governor Bev Perdue signed Senate Bill 816, which rewrites substantial portions of the state’s banking laws. The bill derives from a Joint Legislative Study Commission report, which found several deficiencies in the state’s existing state banking laws. In particular, the report found that the state’s banking laws (i) needed to be modernized in the wake of the Dodd-Frank Act and other changes in federal law, (ii) encouraged banks to avoid the burden of the banking law by forming holding companies under the more liberal standards of the North Carolina Business Corporation Act, and (iii) failed to address changes in banks’ capital needs. To remedy these and other issues, the bill revises several parts of the existing law, including: (i) the size and composition of the Banking Commission, (ii) the rules regarding bank governance, powers, and operations, and (iii) the framework for bank supervision and liquidation.
Incoming NAAG President to Focus on Privacy Issues. On June 22, after being elected president of the National Association of State Attorneys General (NAAG), Maryland Attorney General Doug Gansler announced a year-long Presidential Initiative titled “Privacy in the Digital Age.” The Initiative will explore the best ways to manage consumer privacy risks in light of “emerging technologies and business models” that are challenging consumers’ ability to control their personal information. Through the Initiative, state Attorneys General will attempt to ensure that “the Internet’s major players protect online privacy and provide meaningful options for privacy control” to consumers.
Two States Expand Data Breach Notification Requirements. Recently, Connecticut and Vermont altered state requirements for firms experiencing a data breach to report the breach. Connecticut’s revision – in the state’s annual budget bill, House Bill 6001 – expanded existing breach notification provisions to include notification to the state attorney general and takes effect October 1, 2012. Vermont amended, in House Bill 254, its breach notice law to require consumer notice of a security breach within 45 days and notification to the attorney general within 14 days of discovery of the incident. The Vermont requirement was effective as of May 8, 2012.
Oklahoma High Court Approves Rules for Electronic Filing and Signatures. On June 21, the Supreme Court of Oklahoma issued new state court rules governing the electronic filing of court documents in that state. These rules apply to a new statewide electronic management system that will replace the mix of electronic and paper-based record systems previously used in Oklahoma. Among other things, the rules provide for the use of electronic signatures where any statute or court rule requires a person’s signature in an Oklahoma state court. Like the new electronic system, the new rules will be phased in gradually; they become effective in each district and appellate court at the time the Oklahoma Unified Case Management System is implemented in that court.
On June 21, the California Second District Court of Appeal held that a defendant brokerage firm had established an agreement to arbitrate, where the brokerage account application signed by the plaintiffs incorporated by reference certain arbitration provisions of a separate client agreement. Rodriguez v. Citigroup Global Markets, Inc., No. B230310, 2012 WL 2354637 (Cal. Ct. App. June 21, 2012). The appeals court observed that the plaintiffs had signed an account application that explicitly stated that any signatories had also agreed to all terms of a separate client agreement. Another paragraph of the same application, located directly above the signature lines, included an express acknowledgement that the client agreement included an arbitration provision. The court rejected several arguments proffered by the plaintiffs, including that (i) the references to the arbitration provision were unreadable, (ii) the plaintiffs had never received the client agreement containing the arbitration provision, (iii) the client agreement itself was not signed, and (iv) the client agreement was confusing.
On June 22, the FHFA, along with Fannie Mae and Freddie Mac (the Enterprises), filed a lawsuit in the U.S. District Court for the Northern District of Illinois challenging the authority of Illinois state and county officials to impose transfer taxes on transactions moving property to or from the Enterprises. Although the complaint concedes that federal law requires the Enterprises to pay real estate taxes on the value of properties held, it asserts that federal law exempts the Enterprises from other state and local taxation, including taxes tied to property transfers. This suit follows a class action raising the same issues, which was filed by a Florida county against FHFA and the Enterprises on June 15.
FinCEN Offers Guidance on Application of BSA Regulations to Daily Money Management Services and Prepaid Card Vendors
Recently, FinCEN released two Administrative Rulings, FIN-2012-R003 and FIN-2012-R004, that provide guidance on the application of Bank Secrecy Act (BSA) regulations to certain types of businesses. In the first ruling, FinCEN analyzed a prepaid access arrangement where a bank exercises primary control over the arrangement, while a bank vendor distributes and sells the prepaid access (via prepaid cards). FinCEN determined that the vendor would not be required to register as a prepaid access provider. Still, the vendor may be a seller of prepaid access—who would be required to register—in certain listed circumstances. In the second ruling, FinCEN advised that companies that offer daily money management services may be subject to FinCEN’s regulations implementing the BSA. The company that requested the ruling facilitated the payment of monthly expenses for its customers and managed customers’ day-to-day finances. FinCEN concluded that the company was a “money transmitter” under FinCEN regulations because (i) the company disbursed company checks on its customers’ behalf, (ii) the company was not engaged in core debt management services, and (iii) the disbursements were not ancillary to some other good or service.
On June 21, a New York state appellate court held that an electronically signed affirmation is admissible under state court rules. Martin v. Portexit Corp., No. 303854/07, 2012 WL 2344889 (N.Y. App. Div. June 21, 2012). In this personal injury case, the defendants moved for summary judgment in the trial court and relied on two electronically signed expert affirmations. In opposing the motion, the plaintiff argued that the electronically signed affirmations were inadmissible because they did not comply with court rules. The trial court agreed. On appeal, the court determined that the term “subscribed” in state court rules does in fact include electronic signatures; as such, electronic signatures have the same legal effect as handwritten signatures. Further, the court held that under the federal E-SIGN Act and state law, a party to a suit need not prove who placed the electronic signature on an affirmation.
Spotlight on Anti-Money Laundering (Part 2 of 3): Establishing an AML Compliance Program at a Non-Bank Residential Mortgage Lenders and Originators
As reported in Part 1 of this series, all non-bank residential mortgage lenders and originators (RMLOs) have until August 13, 2012 to establish an Anti-Money Laundering (AML) program as part of the new rule.
Howard Eisenhardt, Counsel in BuckleySandler’s Washington, DC office, cautions against simply attempting to use a bank model AML template. “Bank models are focused on cash, account monitoring, and include many things that are not part of the business model of an RMLO. In addition, there are many things peculiar to an RMLO that would not be present in the traditional depository AML program. While some parts may be the same, the RMLO AML Program is not a ‘one size fits all.’ The bank model is like the proverbial square peg, the RMLO model is more like a round hole, and the two just don’t fit together,” explains Eisenhardt.
On June 21, the OCC and the Federal Reserve Board announced that the deadline for borrowers to seek review of foreclosures under the Independent Foreclosure Review program has been extended through September 30, 2012. At the same time, the regulators released a Financial Remediation Framework that sets out specific recommendations for remediation of financial injury for servicing errors, depending on the type of error and whether the foreclosure was in progress or complete at the time of remediation. Independent consultants will use the Framework to recommend remediation for financial injury identified during the Independent Foreclosure Review. Each servicer will prepare its own remediation plan based on independent consultant recommendations, which must be approved by the federal banking regulators. Also on June 21, the OCC published its second interim report on the status of the Independent Foreclosure Review and actions required under the April 2011 consent orders.