On March 29, the Federal Reserve Board published its quarterly Consumer Compliance Outlook, which includes the Board’s response to questions raised during a September 2012 interagency webinar on servicemember protection issues and SCRA compliance. Because that event had limited time for questions, the Board responded in writing to the most common questions received. The publication includes answers to questions related to (i) notification of active duty, (ii) maximum rate of interest on debts incurred prior to military service, (iii) foreclosure protection, (iv) the Homeownership Counseling Act, (v) permanent change of station orders, (vi) the Defense Manpower Data Center, and (vii) other miscellaneous issues.
On May 1, the CFPB’s Office of Servicemember Affairs published its Semi-Annual Complaint Report, which states that the volume of complaints from servicemembers, veterans, and their families has steadily increased since the CFPB first started accepting complaints in July 2011. The report provides limited summary information about the complaints, noting that mortgage complaints predominate, followed by credit card and credit reporting complaints. In a related blog post, the CFPB states that it has received more than 5,000 servicemember complaints to date, and calls again for additional questions or complaints from the entire military community.
Recently, the U.S. District Court for the Central District of California barred a claim for violation of Section 521 of the Servicemembers Civil Relief Act (SCRA) by holding that California’s litigation privilege applies to military affidavits. William v. U.S. Bank Nat’l Assoc., No. 12-748, 2013 WL 571844 (C.D. Cal. Feb 13, 2013). While the plaintiff was serving overseas, the defendants filed an inaccurate affidavit stating that the plaintiff was not on active military duty, and on that basis obtained a default judgment of unlawful detainer against the plaintiff. After returning from military service, the plaintiff sued the defendants for violating the SCRA by fling an inaccurate military affidavit. The court held that California’s litigation privilege, which protects communications made in the course of litigation, applied to the military affidavit and thus barred the plaintiff’s claim based on the accuracy of that affidavit. Although the borrower could—and successfully did—move to set aside the default judgment, the litigation privileged barred this secondary suit. The court also held that federal law did not preclude the state-law litigation privilege because the alleged violations occurred prior to enactment of a private right of action under the SCRA.
Massachusetts Supreme Court Holds Standing in Servicemember Proceeding Requires Evidence of Mortgagee Status
On January 14, the Massachusetts Supreme Judicial Court (SJC) reversed a Land Court decision and held that a trustee lacked standing to bring a servicemember proceeding because the trustee was not the clear holder of either the note or the mortgage. HSBC Bank USA, N.A. v. Matt, 464 Mass. 193 (Mass. 2013). As the court explained, under the Massachusetts Soldiers’ and Sailors’ Civil Relief Act, a lender must file a complaint in equity, a proceeding separate from the foreclosure proceeding, to determine if a borrower is entitled to foreclosure protections under the federal Servicemembers Civil Relief Act (SCRA). Failure to bring a such a servicemember proceeding leaves the title vulnerable to a challenge that the foreclosure sale was defective due to the possibility that it violated a borrower’s rights under the SCRA. On appeal, the borrower argued that the Land Court erred in holding that the trustee bringing the servicemember proceeding satisfied general requirements of standing based on its contractual right to become the holder of a mortgage, even though the trustee failed to establish that it was the current holder of the note or the mortgage. Extending its holding in Eaton v. Fannie Mae that a party with an option to become the holder of a mortgage does not have the present authority to foreclose, the court held that the Massachusetts servicemembers act contemplated that only mortgagees would have the requisite standing to bring a servicemember complaint, and parties with an option to hold the mortgage lack standing. As such, the court held that “only mortgagees or those acting on behalf of mortgagees have standing to bring servicemember proceedings.”
On January 2, President Obama signed H.R. 4310, the National Defense Authorization Act (NDAA) for Fiscal Year 2013, which includes provisions that enhance federal enforcement of the Military Lending Act (MLA). The MLA (i) caps the annual interest on certain loans to servicemembers at 36 percent, (ii) prohibits such loans from being secured with a personal check, debit authorization, car title, or wage allotment, and (iii) includes other servicemember protections related to the offering of consumer credit. The MLA generally covers short-term, small dollar loans, including payday, car title, and refund anticipation loans, but, pursuant to DOD regulations, excludes credit cards, overdraft loans, military installment loans, and all forms of open-end credit. By amending the MLA to state that the same regulators that enforce the Truth in Lending Act now have administrative authority to enforce consumer credit protections for servicemembers and their dependents under the MLA, the NDAA (Secs. 661-663) makes clear that the CFPB has enforcement authority under the MLA. Further, the bill gives the CFPB an opportunity to influence implementation of the MLA regulations, including their scope, by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections, and by requiring that such consultation occur at least every two years. These changes add new force to the MLA and provide additional legislative support for the CFPB and DOD to collaborate on servicemember protection issues. The CFPB and DOD already have collaborated on issues related to, for example, fraud protection and student lending. The bill also adds a civil liability section to the MLA, which permits private actions to obtain actual damages (but not less than $500 per violation), as well as punitive damages. Finally, the bill simplifies the definition of dependents protected under the MLA.
On November 19, the OCC issued Bulletin 2012-37, which advises all national banks and federal savings associations of the extension of certain servicemember protections afforded by the Servicemembers Civil Relief Act (SCRA). Currently, SCRA grants an individual protection from foreclosure during the period of active duty and for nine months thereafter, a benefit that was due to expire at the end of 2012. The Bulletin notes that the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, which was enacted in August 2012, provides that (i) SCRA will continue to provide servicemembers with foreclosure protection during the period of active duty and for nine months thereafter past the end of the current calendar year into 2013, (ii) beginning February 2, 2013, the mortgage foreclosure protection will extend to one full year after the period of active duty, and (iii) on January 1, 2015, SCRA’s expanded foreclosure protection will sunset, and the protection period will revert to the period of active duty service plus 90 days.
On November 12, National Mortgage Settlement Monitor Joseph Smith, Jr. launched a military-specific outreach program to encourage servicemembers to report mortgage servicing complaints using an online form. The Monitor released a separate form for complaints by attorneys, caseworkers, counselors or other professionals assisting servicemembers with their mortgages, as well as a servicemember-specific fact sheet. The national settlement does not require that the Monitor collect or address individual borrower complaints. The Monitor intends to use the complaint process to identify and investigate any trends in servicing complaints.
On October 16, CFPB Student Loan Ombudsman Rohit Chopra published the first annual report on student loans, as required by the Dodd-Frank Act. According to the report, the CFPB has received nearly 3,000 complaints regarding private student loans since it began accepting such complaints in March 2012. Based on the complaints and other data obtained by the CFPB, the report describes issues in the student loan market as similar to those seen in the mortgage servicing market including (i) improper application of payments, (ii) untimeliness in error resolution, and (iii) inability to contact appropriate personnel when facing economic hardship. Further, the report notes problems reported in the application of the Servicemembers Civil Relief Act, including obstacles to obtaining the available interest rate cap. The CFPB Student Loan Ombudsman recommends that the Treasury Secretary, the CFPB Director, and the Education Secretary assess whether efforts to remedy problems in mortgage servicing can be applied to improve student loan servicing. The Ombudsman also invites lenders to develop creative programs to help borrowers restructure debt, and recommends that the relevant Senate and House committees identify opportunities to spur the availability of loan modification and refinance opportunities. Additionally, on October 18, the CFPB released a report that expands on the servicemember-related issues presented in the Ombudsman’s annual report.
On September 10, federal banking regulators, the CFPB, and the FHFA conducted a webinar on federal servicemember financial protections, recent changes to the Servicemembers’ Civil Relief Act (SCRA), and recent changes to Fannie Mae and Freddie Mac short sale procedures for servicemembers and loan modification options for servicemembers. The event featured compliance and enforcement updates from the CFPB, the DOJ, and the OCC. Ann Thompson from the CFPB Office of Nonbank Supervision described recent joint agency guidance regarding servicemembers with Permanent Change of Station (PCS) Orders as an extension of the CFPB’s mortgage servicing exam procedures. Ms. Thompson explained that the CFPB will look at bank and nonbank servicers’ policies and procedures to determine their adequacy for handling servicemembers with PCS orders. If there are deficiencies, the CFPB may take supervisory or enforcement actions to support implementation of the guidance. Eric Halperin from the DOJ’s fair lending unit provided an update on enforcement activity and described a recent SCRA enforcement action against a national bank that covered all aspects of SCRA, not just foreclosure protections, as the model for the DOJ moving forward. Finally, Kimberly Hebb from the OCC offered some considerations for institutions seeking to comply with SCRA. She explained that the SCRA compliance process need not stand alone. For example, with regard to the law’s rate reduction requirements, compliance steps could be incorporated into existing processes for error resolution. Ms. Hebb also stressed documentation and record keeping, pointing out that while the law does not include a specific record retention requirement, examiners will want to see the full scope of compliance processes documented for use in determining compliance.
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 9, Illinois enacted SB 3287, a bill to expand and create various new protections for servicemembers. The bill clarifies the scope of coverage of servicemember protections by amending the definition of “military service” to include any full-time training or duty, no matter how described and no matter which state, federal, or other authority ordered the service. The bill provides new relief for covered servicemembers with regard to (i) default judgments, (ii) mortgage foreclosures, and (iii) installment sales contracts. For example, the bill provides that any mortgagor who is a covered servicemember, or a family member who resides with a covered servicemember, may seek a stay of foreclosure proceedings and an adjustment of the monthly payment obligation for ninety days after the servicemember returns from service. Similarly, a covered servicemember may seek a stay of any repossession of goods subject to an installment sales contract and an adjustment of the obligation. Other protections added or expanded by the bill relate to (i) limitations on interest rates, (ii) termination of motor vehicle and property leases, (iii) cellular phone and long distance contracts, and (iv) utility services. These changes take effect on January 1, 2013.
On August 6, President Obama signed into law the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012, H.R. 1627. Section 710 of this Act expands foreclosure protections for active duty servicemembers. Currently, under the Servicemembers Civil Relief Act, 50 U.S.C. app. § 533 (SCRA), an individual is entitled to foreclosure protection during the period of active duty and for nine months thereafter. This extended foreclosure protection was set to expire at the end of calendar year 2012, at which point the foreclosure protection would only last for ninety days after the end of active duty.
This bill signing makes three important changes to the SCRA that expand protections for servicemembers:
- The SCRA will continue to provide servicemembers with foreclosure protection during the period of active duty and for nine months thereafter past the end of the current calendar year into 2013;
- One-hundred-and-eighty days from the date of enactment (i.e., February 2, 2013), the mortgage foreclosure protection will extend to one full year after the period of active duty; and
- On January 1, 2015, the SCRA’s expanded foreclosure protection will sunset, and the protection period will revert to its 2008 level: the period of active duty service plus ninety days.
Additionally, this Act requires the Comptroller General of the United States to report to Congress information related to the use of this expanded foreclosure protection. This report is due a year-and-a-half after enactment-giving Congress several months to review the report prior to the 2015 sunset.
On July 26, the OCC and the DOJ announced resolution of actions brought against a national bank for alleged violations of the Servicemembers Civil Relief Act (SCRA). The DOJ filed a complaint and consent order in the U.S. District Court for the Eastern District of Virginia, simultaneously bringing and resolving allegations that over a roughly five year period the bank failed to provide sufficient protections to servicemembers (i) denying valid requests for interest rate reductions because the servicemembers’ military orders did not include specific end dates for the period of military service, (ii) foreclosing without a court order, (iii) repossessing motor vehicles without a court order, and (iv) obtaining default judgments without first filing accurate affidavits. Under the DOJ settlement, the bank must pay $12 million in damages to servicemembers. Concurrently, the OCC released consent orders resolving similar allegations. Under both the DOJ and OCC orders, the bank must take specific actions to enhance compliance with SCRA, including with regard to vendor management, training, and internal reporting. The OCC also is requiring that the bank report periodically to the OCC, and conduct a look-back review of its servicemember accounts. The DOJ notes that the bank already has adopted enhanced SCRA policies on its own initiative, including extending a four percent interest rate to qualifying servicemembers and giving an additional one-year grace period before de-enrolling servicemembers from the reduced interest rate program.
California AG Announces Privacy Enforcement Unit. On July 19, California Attorney General Kamala Harris announced the creation of the Privacy Enforcement and Protection Unit. The unit will combine the various existing privacy functions of the California Department of Justice to centrally enforce and protect consumer privacy. The unit will pursue civil prosecution of state and federal privacy laws regulating the collection, retention, disclosure, and destruction of private or sensitive information by individuals, organizations, and the government. These include laws relating to cyber privacy, financial privacy, identity theft, and data breaches, among others. The new unit will reside within the eCrime Unit, which was created in December 2011 to identify and prosecute identity theft crimes, cyber-crimes and other crimes involving the use of technology.
California Expands Servicemember Protections. On July 13, California enacted AB 2476, which expands the period of time during which servicemembers are protected from high interest rates. Under current law, a creditor cannot charge, during a servicemember’s period of military service, an interest rate in excess of 6% on any obligation or liability incurred by a servicemember before that person’s entry into service. The bill expands the interest rate protections to prevent an increase in any such rate on a mortgage, trust deed, or other security in the nature of a mortgage for one year after the period of military service.
Hawaii Enacts Multiple Mortgage-Related Bills and Legislation to Protect Personal Information. Recently, Hawaii enacted a set of bills related to mortgage origination and servicing. With regard to mortgage origination, S.B. 2763 amends the state SAFE Act to reflect changes to the federal law and to adjust originator registration fees. With regard to mortgage servicers, H.B. 2502 allows the Commissioner of Financial Institutions to require registration with the NMLS and makes it unlawful for a servicer to provide loan modifications without first complying with certain licensing requirements. Another bill, H.B. 1875 makes numerous changes to the state’s foreclosure laws, largely implementing recommendations from the Mortgage Foreclosure Task Force created by the state legislature in 2010. Finally, with regard to mortgages, H.B. 2375 establishes criminal penalties for certain violations of the state’s Mortgage Rescue Fraud Prevention Act. Hawaii also recently enacted S.B. 2419, which prohibits businesses from scanning a customer’s identification card or driver’s license with an electronic device capable of obtaining information electronically encoded on that identification card, except for specific purposes.
On March 7, Washington Governor Christine Gregoire signed Senate Bill 5627 which expands protection for members of the state National Guard. The law expands the definition of “military service” to include servicemembers called to service by the governor for more than thirty consecutive days. This change is designed to provide National Guard members activated by the governor the same protections already provided under state law to servicemembers called to federal service by the President or the Secretary of Defense. This law becomes effective June 7, 2012.