On August 30, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s representation to a debtor that her student loans were “ineligible” for bankruptcy discharge is a “false, misleading, or deceptive” debt collection practice in violation of the FDCPA. Easterling v. Collecto, Inc., No. 11-3209, 2012 WL 3734389 (2nd Cir. Aug. 30, 2012). The debt collector sent a collection letter to the debtor with a notice that the account was ineligible for bankruptcy discharge. The debtor sued the collector on her own behalf and on behalf of nearly 200 borrowers who also received such notices. The district court granted summary judgment in favor of the debt collector, concluding that because the debtor had previously filed for bankruptcy without seeking to discharge her student loan debt, and because student loan debt is presumptively non-dischargeable, her debt was, in fact, not eligible to be discharged. The appeals court disagreed and held that the district court erred in focusing on the borrower’s circumstances instead of applying the “least sophisticated consumer” standard. In applying that standard on appeal, the court reasoned that while the bar for bankruptcy discharge is high, it is not impossible and the “least sophisticated consumer” might not seek the advice of counsel for pursuing discharge through bankruptcy after receiving the debt collector’s inaccurate notice. The court held that the debt collector’s notice did violate the FDCPA and reversed and remanded the case for further proceedings.
On August 31, the FHFA announced that Fannie Mae and Freddie Mac will attempt to bring more private capital into the secondary mortgage market by increasing guarantee fees (g-fees) on single-family mortgages by an average of ten basis points. The increases will be effective on December 1, 2012 for loans exchanged for mortgage-backed securities, and on November 1, 2012 for loans sold for cash. The increases are designed to decrease the difference between g-fees charged to large volume lenders and those charged to small volume lenders, and to reduce cross-subsidies between higher-risk and lower-risk mortgages. With the announcement the FHFA released a report on guarantee fees charged in 2010 and 2011. The FHFA also stated that it soon will seek public comment on a proposal to develop risk-based pricing at the state level.
On August 30, the SEC published a study of financial literacy. The Dodd-Frank Act required the SEC to examine (i) existing financial literacy among retail investors, (ii) methods to improve disclosures, (iii) information needed to make informed investment decisions, (iv) disclosure improvements related to expenses and conflicts of interest, (v) existing efforts to educate investors, and (vi) options for increasing investor financial literacy. The report’s findings reveal that currently investors lack knowledge of elementary financial concepts. The SEC staff reports that investors (i) prefer to receive disclosures before making a decision on whether to engage a financial intermediary, (ii) consider information about fees, conflicts of interest, and investment strategy essential, (iii) have mixed preferences on method of delivery for disclosures, but generally prefer that they be written in clear and concise language presented in summary and detailed form. The study concludes that transparency about conflicts of interest may be improved through the use of specific examples, among other things.
On August 29, National Mortgage Settlement Monitor Joseph Smith, Jr. issued a progress report “intended to inform the public about the nature of the settlement, the steps that have been taken to implement it and the results to date.” The report, which was not required by the settlement, summarizes the terms of the several consent judgments that make up the national settlement, reviews the Monitor’s progress in implementing the administrative aspects of the settlement, describes relief extended to borrowers as of June 30, 2012, and updates the status of servicing standards implementation. For example, the Monitor states that as of July 5, 2012, all five servicers subject to the agreement had incorporated at least fifty-six servicing standards into their business processes, while four of the five banks reported that they had implemented more than half of all of the standards.
State Law Update: California Enacts Blight Bill As Part of Homeowner Bill of Rights, Broadens Servicemember Protections
On August 27, California enacted Assembly Bill 2314, another bill included as part of the state’s proposed Homeowner Bill of Rights. The bill extends indefinitely portions of existing state law that (i) require property owners maintain vacant property obtained in foreclosure, (ii) authorize local enforcement of vacant property maintenance requirements, and (iii) provide for notice and processes to correct or contests violations. The extended provisions were due to sunset on January 1, 2013. The bill also provides a sixty day period for purchasers of foreclosed properties to remedy any violations of state housing law or building codes. Current law only requires a thirty day period for all properties in violation. Finally, the bill requires that an entity that releases a lien on a property subject to corrective action for maintenance violations must provide notice to the enforcement agency within thirty days of releasing the lien. These changes take effect on January 1, 2013.
Also on August 27, California enacted Assembly Bill 2475, which extends from three to nine months the period following military service within which it is unlawful to sell, foreclose upon, or seize a servicemember’s mortgaged property. These changes also take effect on January 1, 2013.
On August 29, the CFPB released an updated and corrected report on private student loans. Although the updated report provides the same findings and recommendations as the original report, the revised report attempts to address concerns about some of the study’s methodologies. The CFPB’s summary of updates states that the new report includes revised methodologies for determining the extent to which private student loan borrowers exhausted their Federal Stafford Loan options before taking on a private student loan and the extent to which private student loans were originated without certification of borrower need by the institution of higher education. Specifically, the revised report provides updated results showing a higher percentage of students who took out a private loan without exhausting the individual Stafford maximum, and a higher level of school certification of private loans.
On August 28, the U.S. District Court for the District of Columbia dismissed a putative class action that claimed that a bank’s use of overseas call centers subjects private financial records to U.S. government review in violation of the Right to Financial Privacy Act (RFPA). The RFPA generally prohibits financial institutions from providing customer information to a government authority. Stein v. Bank of Am. Corp., No. 11-1400, 2012 WL 3671009 (D.D.C. Aug. 28, 2012). The bank customer plaintiffs claim that because foreign states and foreign nationals are not subject to U.S. privacy laws, including the RFPA, the bank’s transmission of account and other customer data to an overseas call center risks making that data available for potential review by federal national security authorities. The bank moved to dismiss for lack of subject matter jurisdiction and failure to state a claim. The court granted the bank’s motion, finding that the plaintiffs failed to allege a cognizable injury sufficient to establish standing. The court held that the bank customers do not allege that the bank actually provided any records to a government entity and therefore, the customers do not adequately plead “a concrete and particularized injury, free of conjecture or speculation.”
On August 28, the CFPB announced several changes to its senior staff, including the departure of Leonard Chanin who has supervised all of the CFPB’s rulemakings as the Assistant Director for Regulations. Replacing Mr. Chanin on an acting basis is Kelly Thompson Cochran. Ms. Cochran previously served as Deputy Assistant Director, overseeing development of the CFPB’s mortgage and remittance rules. Ms. Cochran has been with the CFPB since its creation as an office within the U.S. Treasury and prior to that was a lawyer in private practice. The CFPB also announced the appointment of Chris Lipsett as Senior Counsel in the Office of the Director, Stephen Van Meter as Deputy General Counsel, and Delicia Reynolds Hand as Staff Director for the Consumer Advisory Board and Councils.
On August 27, the U.S. District Court for the Southern District of New York approved a settlement between the DOJ and GFI Mortgage Bankers, Inc., a nonbank mortgage lender, resolving allegations that certain of the lender’s pricing policies disproportionately impacted African-American and Hispanic borrowers in violation of the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA). The DOJ brought the case in part under the disparate impact theory of discrimination, by which it attempts to establish discrimination based solely on a statistical analysis of the outcomes of a neutral policy without having to show that the lender intentionally discriminated against certain borrowers. In the consent order, the lender acknowledged that a statistical analysis performed by the government indicated that the note interest rates and fees it charged on mortgage loans to qualified African-American and Hispanic borrowers were higher than those charged to non-Hispanic white borrowers. Prior to the settlement, the lender had filed a motion to dismiss the DOJ lawsuit, arguing that the DOJ’s disparate impact claims are not cognizable under the FHA or ECOA, and challenging the government’s statistical analysis. Under the agreement, the lender agreed to pay $3.5 million over five years in compensation to several hundred borrowers identified by the DOJ, as well as a $55,000 civil penalty. The lender also agreed to enhance certain of its lending policies and monitor and document loan prices and pricing decisions. Whether disparate impact claims are cognizable under the FHA remains unsettled, though the U.S. Supreme Court may have an opportunity to address the issue in the near future. BuckleySandler recently prepared a white paper examining the issue and explaining why the FHA does not permit disparate impact claims. A copy of DOJ’s announcement of the settlement may be found at http://www.justice.gov/opa/pr/2012/August/12-crt-1052.html.
On August 27, the U.S. Court of Appeals for the Eight Circuit upheld a district court’s dismissal of a suit by borrowers challenging the validity of a foreclosure completed by their mortgage servicer. Butler v. Bank of Am., N.A., No 11-2653, 2012 WL 3641469 (8th Cir. Aug. 27, 2012). On appeal, the borrowers argued that their putative class action suit should be reinstated because the district court mistakenly characterized their claims as a single “show-me-the-note” claim, rather than as a quiet title action. After a close review of the allegations and causes of action, the court found no merit in this “borderline frivolous lawsuit” and upheld the dismissal. The court characterized the borrowers’ claims that the foreclosure was invalid because the servicer held the mortgage but not the note as a “flawed theory” unsupported by Minnesota law. Under Minnesota law and previous application of that law by the Eighth Circuit and Minnesota Supreme Court, the court held that the servicer has an undeniable right to initiate foreclosure as the legal holder of title.
Recently, Maine finalized a rule to convert licensing of state supervised mortgage lenders and brokers to the Nationwide Mortgage Licensing System and Registry (NMLS). In concert with the transition to NMLS, the state regulator (i) converted the state’s two-year license to a one year license, (ii) shifted the annual licensing date from September 30 to January 1, and (iii) set new licensing fees. Starting August 31, 2012, new applicants can begin using the NMLS to obtain a license and currently licensed lenders and brokers can transition to the NMLS as renewals. To aid in the transition, the NMLS provides requirements checklists and transition information on its website.
On August 23, the American Association of Residential Mortgage Regulators, the Conference of State Bank Supervisors, and other state financial regulators sent a letter to Representatives Jim Renacci (R-OH) and Ed Perlmutter (D-CO) in support of H.R. 6125. The recently introduced legislation seeks to amend the Federal Deposit Insurance Act to ensure that information submitted by banks and nonbanks to the CFPB is treated as privileged and confidential information. The state regulators argue that the bill will allow state and federal regulators to share information to facilitate better collaboration and will support use of the Nationwide Mortgage Licensing System and Registry. The letter adds that other federal legislation to address the confidentiality of information submitted to the CFPB does not go far enough to support federal-state coordination.
Missouri District Court Holds State Funds Transfer Act Preempts Certain Customer Indemnity Agreements
On August 20, the U.S. District Court for the Western District of Missouri dismissed a bank’s counterclaims that its customer’s agreement to indemnify the bank for any losses, costs, or expenses covers the customer’s losses from an allegedly fraudulent transfer of funds. Choice Escrow & Title, LLC v. BancorpSouth Bank, No. 10-03531, slip op. (W.D.Mo. Aug. 20, 2012). The customer sued the bank claiming that a $440,000 wire transfer from its account through the bank’s internet wire transfer system was fraudulently initiated by a third-party. The bank filed four counterclaims for the same amount based on indemnity agreements signed by the customer. The customer moved to dismiss the counterclaims, arguing that the state Funds Transfer Act, part of the Uniform Commercial Code, displaces the counterclaims. Describing its decision as a “very close call,” the court held that the Funds Transfer Act preempts the types of indemnity agreements relied upon by the bank in its counterclaims and dismissed those claims. The court reasoned that while the Funds Transfer Act generally was not intended to preempt or displace all causes of action between a bank and its customers, the Act does provide that common law causes of action based on allegedly fraudulent transfers are preempted where the common law claims would create rights, duties, or liabilities inconsistent with the Act or where the circumstances giving rise to the claims are specifically covered by the Act. The court held the indemnity agreements could require the customer to pay back to the bank the very losses the bank might owe if the customer proves a fraudulent transfer, a result that is inconsistent with the Act.
On August 20, Illinois enacted House Bill 3935, which amends the state’s Consumer Installment Loan Act and Payday Loan Act to clarify that loans made by unlicensed lenders are considered null and void and that unlicensed lenders have no right to collect on such loans. The amendments take effect on January 1, 2013.