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Freddie Mac Appoints New CEO, OCC Names Senior Deputy Comptroller
On May 10, Freddie Mac announced that Donald Layton will serve as the organization’s Chief Executive Officer. Mr. Layton will join the firm on May 21, 2012. Mr. Layton has served as chairman & CEO of E*TRADE Financial and worked for nearly 30 years at JP Morgan Chase and its predecessors.
On May 7, the Office of Comptroller of the Currency announced the hiring of Paul Nash to succeed John Walsh as Senior Deputy Comptroller and Chief of Staff. Mr. Nash comes from the FDIC, where he served for two years as the Deputy to the Chairman for External Affairs.
State Law Update: Recent Changes in Maryland, Minnesota, and Mississippi
Maryland Adds Foreclosure Registration Requirement, Authorizes Pre-file Mediation, Amends Mortgage Licensing. On May 2, Maryland Governor O’Malley signed House Bill 1373, which establishes a state foreclosed property registry. Foreclosure purchasers are required to (i) file an initial registration and pay a $50 registration fee for each foreclosed property within 30 days after a foreclosure sale, and (ii) file a final registration, with no additional fee, within 30 days after a deed transferring the title has been recorded. The law allows local jurisdictions to (i) enact laws that impose a civil penalty for failure to register under the new state requirement and (ii) collect from the foreclosure purchaser, as a charge on the property’s property tax bill, any costs associated with abating a nuisance on a registered property. The Governor also signed on May 2, House Bill 1374, which authorizes a secured party to offer to participate in pre-file mediation with a mortgagor or grantor to whom the secured party has delivered a notice of intent to foreclose. If the mortgagor or granter elects to participate, an order to docket or complaint to foreclose cannot be filed until the completion of the mediation. The bill also establishes a process through which a person with a secured interest in residential property that is in default can seek from a local jurisdiction a certificate of vacancy. If a certificate is not challenged by the record owner or occupant of the property the secured party can expedite the foreclosure process.
Finally, on the same date, Maryland enacted Senate Bill 546, which (i) requires a mortgage lender licensee to provide the commissioner with proof satisfying specified minimum net worth requirements within 90 days after the last day of the licensee’s most recent fiscal year and (ii) establishes a nonactive license status and process for licensees that cease to be employed by an approved financial institution.
Minnesota Amends Debt Collector Requirements. On April 23, Minnesota enacted House Bill 2335, which amends requirements for individual debt collectors and collection agencies. The bill (i) provides individual collectors additional time to report a change of contact information, (ii) sets requirements for a personnel screening process that a debt collection agency must follow in hiring and retaining individual collectors, and (iii) revises the list of past events that disqualify a person from registration as a debt collector. The final bill did not include a proposed revision that would have allowed individual debt collectors to remedy violations of the statute.
Mississippi Adds Protections for Bank Self-Assessments. On April 19, Mississippi enacted House Bill 1460 to grant privileged treatment to certain bank reports. The law takes effect July 1, 2012. Under the new law, reports reflecting voluntary self-assessments by banks, which are submitted to a bank regulator but not otherwise provided to third parties, will be considered privileged and not admissible in any legal or investigative action and are not subject to discovery in such actions. The law sets forth exceptions and circumstances under which the protections do not apply, including if a court determines that a report shows that a bank was not in compliance with a material provision of banking law, the bank did not initiate good-faith efforts to achieve substantial compliance within a reasonable time after the noncompliance was discovered, and the bank's failure to comply caused material harm to a bank customer or consumer.
New York Appellate Court Holds that Federal Law Does Not Preempt State Contract and Consumer Protection Laws in Gift Card Suit
On April 17, 2012, the Appellate Division of the New York Supreme Court held that federal laws and regulations do not preempt state contract and consumer protection laws, reversing an earlier trial court decision dismissing a lawsuit concerning gift card expiration dates and renewal fees. Sharabani v. Simon Property Group, Inc., No. 2010-07552, 2012 WL 1320067 (N.Y. App. Div. Apr. 17, 2012). The plaintiff filed an action based on New York state law to recover damages arising out of a gift card that required a reactivation fee for use after its expiration date. The defendant, a federally chartered thrift that managed the gift card program, and its co-defendant moved to dismiss the lawsuit on various grounds, including that all of the plaintiffs state law claims were preempted by federal law. The court held that although Office of Thrift Supervision (OTS) regulations permitted the issuance of gift cards with administrative fees, the OTS has explicitly stated that its regulations do not preempt state contract law, commercial law, tort law, or criminal law to the extent those laws are consistent with the OTSs intent to occupy the field of federal savings associations deposit-related regulations. Based on this regulatory guidance, the court determined that only the claim based on New Yorks abandoned property law was preempted by federal law because the OTS has specific regulations regarding abandoned accounts. The court affirmed dismissal of the abandoned property claim and remanded the remaining claims based on state contract and consumer protection laws to the trial court for evaluation under the remaining prongs of the defendants motion to dismiss.
Suit Challenging Charges for Minors' In-App iTunes Purchases Survives Motion to Dismiss
On March 31, the U.S. District Court for the Northern District of California denied, in large part, a motion to dismiss claims brought by parents of children who made in-app purchases from the parents iTunes accounts. In re Apple In-App Purchase Litigation, No. 11-1758, 2012 WL 1123548 (N.D. Cal. Mar. 31, 2012). The parent plaintiffs sued Apple on behalf of a putative class claiming that apps provided by Apple and advertised as free allowed children, without the parents knowledge, to make in-app purchases of online game supplies during a 15-minute window following the parents initial account authentication. The parents alleged that each purchase by a minor under these circumstances constituted separate, voidable contracts with Apple that may be disaffirmed by a parent or guardian. Apple countered that the only contracts at issue are those between it and the iTunes account holders, and the terms and conditions of those contracts provide that account holders are solely responsible for maintaining the confidentiality and security of [their] Account and for all activities that occur on or through [their] Account. In denying the motion to dismiss, the court held that the complaint can not be dismissed as a matter of law because Apple offered no case law to support its contention that the terms and conditions constitute a relational contract that governs each subsequent transaction. Further, the court allowed to proceed (i) claims under Californias Consumer Legal Remedies Act because allegations that Apple omitted material facts to induce minors into buying additional gaming products were actionable, and (ii) Unfair Competition Law claims because plaintiffs alleged all three prongs of the UCL, properly pleading that Apples actions were unlawful, unfair, and fraudulent business acts or practices.
CFPB Puts Consumer Lenders on Notice Regarding Discriminatory Practices
The CFPB today put consumer lenders on notice that it “will use all available legal avenues, including disparate impact, to pursue lenders whose practices discriminate against consumers.” The CFPB intends to employ disparate impact when examining auto lenders, credit card issuers , student lenders, mortgage lenders, and other providers of consumer credit, allowing the CFPB to claim an institution has engaged in discriminatory lending based on the effects and not the intent of the lending practices. In remarks to the National Community Reinvestment Coalition today, CFPB Director Richard Cordray stated that “[t]he consequences of ‘disparate impact’ discrimination are very real and they affect consumers just as significantly as other forms of discrimination.” To help consumers identify and avoid credit discrimination, the CFPB also compiled and released new lending discrimination “tips and warning signs.”
Concurrent with the announcement, the CFPB published Bulletin 2012-04 to specifically reaffirm its commitment to applying disparate impact when conducting supervision and examination under the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. In support of this application, the CFPB cites what it refers to as the “consensus approach” outlined by a 1994 interagency Policy Statement on Discrimination in Lending, which notes court findings that discriminatory lending in violation of ECOA can be established through (i) overt evidence of discrimination, (ii) evidence of disparate treatment, and (iii) evidence of disparate impact. The CFPB also argues that the ECOA legislative history, as characterized in the original Regulation B adopted by the Federal Reserve Board, supports application of the disparate impact doctrine.
CFPB Issues Bulletin Regarding Supervision of Vendors
On April 13, the CFPB issued Bulletin 2012-3, which states the CFPB's expectation that supervised banks and nonbanks have an effective process for managing the risks of service provider relationships. In a press release announcing the Bulletin, the CFPB promised to “take a close look at service providers’ interactions with consumers” and “hold all appropriate companies accountable when legal violations occur.” According to the Bulletin, the CFPB expects supervised institutions to (i) conduct thorough due diligence to verify that a service provider understands and is capable of complying with the law, (ii) request and review a service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities, (iii) include in the contract with a service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities; (iv) establish internal controls and on-going monitoring to determine whether a service provider is complying with the law, and (v) take prompt action to address fully any problems identified through the monitoring process.
Fourth Circuit Holds State Debt Collection Law Not Preempted by National Banking Act
On April 5, the Fourth Circuit held that the National Bank Act (NBA) did not preempt the Maryland Credit Grantor Closed End Credit Provisions (CLEC). Epps v. JP Morgan Chase Bank, No. 10-2444, 2012 WL 1134065 (4th Cir. Apr. 5, 2012). In Epps, the plaintiff purchased a car through a retail sales installment contract subject to the CLEC. The contract was later assigned to Chase which repossessed the vehicle after the plaintiff defaulted. The plaintiff brought a putative class action alleging in part that Chases notices regarding the sale of the vehicle failed to comply with the CLEC. Relying on OCC regulations implementing the NBA, 12 C.F.R. § 7.4008(d)-(e), the Fourth Circuit reversed the District Court for the District of Maryland and held that the CLEC was not preempted. The court explained that because the CLEC provisions at issue related exclusively to repossession and not to the extension of credit, they were not preempted by the NBA and excluded from preemption by the OCCs regulations. The court further found that the notices required under CLEC, which only related to debt collection upon default under an existing loan, were not disclosures within the meaning of the NBA and OCC regulations.
Housing Groups Plan Multiple Fair Housing Act Complaints, Release Report on REO Property Maintenance
According to reports, the National Fair Housing Alliance and several of its member organizations (collectively NFHA) indicated this week that 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 a report that was released on April 4, the investigation covered more than 1,000 REO properties in nine metropolitan areas including Atlanta, Baltimore, Dallas, Dayton, Miami/Fort Lauderdale, Oakland, Philadelphia, Phoenix and Washington, DC. The investigation claims to have 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 Banking Regulators Propose Joint Revisions to Leveraged Finance Guidance
On March 26, the Federal Reserve Board, the FDIC, and the OCC proposed revisions to the interagency leveraged finance guidance issued in 2001. Leveraged finance transactions are characterized by a borrower with a degree of financial or cash flow leverage that significantly exceeds industry norms as measured by various debt, cash flow, or other ratios. According to the agencies, the guidance needs to be revised given increasing leveraged lending volumes, deteriorating underwriting practices, limited protection of debt agreements, aggressive capital structures and repayment prospects, and less than satisfactory management information systems. Specifically, the agencies believe that the guidance should be updated to refocus attention on the following five key areas: (i) establishing a sound risk-management framework, (ii) underwriting standards, (iii) valuation standards, (iv) pipeline management, and (v) reporting and analytics. The agencies are accepting comments on the proposed guidance through June 8, 2012.
HUD Issues Guidance Regarding Occupied Conveyance Procedures
On March 16, HUD issued Mortgagee Letter 2012-6 to provide updated guidance for complying with the Protecting Tenants at Foreclosure Act of 2009 (PTFA). The Mortgagee Letter revises the information required in a Notice to Occupant of Pending Acquisition and provides updated sample letters and forms. The Mortgagee Letter also provides guidance regarding (i) reasonable diligence in obtaining possession of the property under PTFA, (ii) rent collection under bona fide leases and tenancies, and (iii) reimbursement for preservation and protection costs due to PTFA compliance.