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Massachusetts Bankruptcy Court Upholds Validity of TILA/CCCDA Disclosures, Waiver

On May 28, the U.S. Bankruptcy Court for the District of Massachusetts held that (i) the use of a reduction feature to calculate the Annual Percentage Rate (APR) provided for an adjustable rate mortgage (ARM) loan does not violate the disclosure requirements of the Massachusetts Consumer Credit Cost Disclosure Act (CCCDA), the Massachusetts analog to the federal Truth in Lending Act (TILA), by failing to reflect that subprime borrowers would be more likely to be delinquent in their payments, and (ii) the waiver of TILA/CCCDA claims, even after the initial rescission period, is valid if the waiver is knowing and voluntary and communicated in a clear and conspicuous manner. In re DiVittorio, Adversary Proceeding No. 09-1089, 2010 WL 2204167 (Bankr. D. Mass. May 28, 2010). In this case, the debtor plaintiff brought suit seeking rescission of his loan through a bankruptcy court adversary proceeding, alleging that the defendant lender violated the CCCDA by providing an inaccurate APR on the Truth in Lending Disclosure Statement (TIL Disclosure). The debtor’s ARM interest rate was subject to a performance-based rate reduction feature by which the debtor would qualify for a reduced rate if he timely made the first two years of payments. In disclosing the APR in the TIL Disclosure, the lender used the reduced interest rate that the debtor would have been entitled to under the rate reduction feature, thereby assuming that he would timely make the first two years of payments. The debtor alleged that the APR stated on the TIL Disclosure was numerically inaccurate because it was calculated using the reduction feature, which did not take into account that subprime borrowers would be more likely to be delinquent in their payments. The debtor had previously signed a waiver of any claims against the lender in connection with the making, closing, administration, collection, or the enforcement of the loan documents. The lender moved to dismiss the debtor’s claims and additionally moved for summary judgment.

On the motion to dismiss, the bankruptcy court held that the CCCDA generally requires disclosures to reflect the terms of the legal obligation between the parties and, in the absence of exact information, to be based on the best information reasonably available at the time the disclosure is provided. The court reasoned that all disclosures are premised on what the parties obligate themselves to do, and to assume otherwise would render every disclosure an estimate and preclude any meaningful disclosure. Because the lender had the exact information regarding the debtor’s legal obligation to make timely payments, resorting to the best information reasonably available (e.g., the debtor’s contention that subprime borrowers were less likely to repay), was unnecessary.

On the motion for summary judgment, the lender argued, among other things, that the debtor’s written waiver prohibited any loan origination claims. However, the debtor argued that it is not permissible to waive the right of rescission after the expiration of the initial three-day rescission period. The court held that the provisions in TILA and the CCCDA applicable to waiver of the right to rescind before the initial three-day rescission period do not apply to the extended right of rescission. The court noted that judicial review of a waiver or release, at a minimum, requires that it is knowing and voluntary. Here, the debtor argued that his waiver was not "knowing" because he was unaware that he had a CCCDA claim due to the lender’s concealment of the "true" APR. The court disagreed, finding that the debtor’s possession of the loan documents put him on inquiry notice of his purported CCCDA claims and his right to rescind. Further, by specifically referencing claims arising in connection with the making, closing, administration, collection, or the enforcement of the loan documents, the waiver should have compelled him to investigate the possibility of such claims. The court noted that it was significant that the debtor executed the waiver as part of a loan modification after eight months of negotiations, during which the debtor was represented by counsel. As such, the court found that the debtor’s execution of the waiver was knowing and voluntary. Further, the court acknowledged that TILA and the CCCDA require any waiver to be clearly and conspicuously disclosed, as distinct from general waivers of "any and all claims." The court found that the debtor’s waiver satisfied this burden because it expressly referenced claims arising in connection with the loan documents.

Oklahoma Amends Mortgage Licensing Act; Adds Exemption for Depository Institutions

On May 28, Oklahoma Governor Brad Henry signed HB 2831, a law that amends the Oklahoma Mortgage Licensing Act (MLA). The law will:

• Expressly exempt depository institutions and their subsidiaries from registering under the MLA; 
• Require all applicants for a mortgage loan originator license to be sponsored by a licensed mortgage broker. The Oklahoma Commission on Consumer Credit will establish regulations regarding the sponsors of mortgage loan originators; and
• Modify the administrative procedures provided by the MLA by creating a Hearing Examiner to consider alleged MLA violations and to propose findings to the Administrator of Consumer Credit, who retains the power to issue final agency orders.

The amendments take effect July 1, 2010.

Florida Law Expands Regulation of Consumer Debt Collection

On May 27, Florida Governor Charlie Crist approved SB 2086, a bill that amends the current statute regulating Florida consumer debt collection agencies. Specifically, the new law will:

• Enable the Florida Office of Financial Regulation (OFR) to more thoroughly investigate collection agencies through expanded subpoena power;
• Authorize the OFR to issue cease and desist orders and direct collection agencies to take corrective action; 
• Grant the OFR discretion to promptly respond to a certified consumer complaint (currently, the OFR must wait for five certified complaints to accumulate within a 12-month period before taking action); 
• Empower the Florida Attorney General to take action for debt collection violations in response to a certified consumer complaint; 
• Require debt collection agencies to maintain books and records necessary to determine compliance with the debt collection provisions; and
• Increase the cap on administrative fines (from $1,000 to $10,000) for both out-of-state agencies operating without proper registry and for registered agencies.

Colorado Creates Board of Mortgage Loan Originators to Regulate Mortgage Companies

On May 26, Colorado Governor Bill Ritter, Jr. signed a bill (H.B. 10-1141) that (i) creates a new state mortgage regulatory division, the Board of Mortgage Loan Originators, and (ii) establishes registration deadlines for mortgage loan originators and mortgage companies via the Nationwide Mortgage Licensing System (NMLS). The law establishes a new licensing category of “mortgage company,” defined as entities that take residential mortgage loan applications or offer or negotiate the terms of a residential mortgage loan. The new law exempts from mortgage company licensing requirements banks, savings associations, subsidiaries owned and controlled by a bank or savings association, employees of bank or savings association or its subsidiaries, credit unions, and employees of credit unions. Mortgage companies will be overseen by the newly-created Board of Mortgage Loan Originators, which will, among other things, have the authority to impose fines and deny license applications or renewals. Mortgage companies, as well as individual mortgage loan originators, must be licensed via NMLS by January 1, 2011.

Vermont Enacts Law Restricting Certain Practices of Credit Card Companies

On May 21, the Vermont legislature enacted S. 138, a bill limiting certain practices of “electronic payment systems” (a defined term that includes most credit card companies). Under the new law, electronic payment systems would be prohibited from (i) imposing penalties on merchants that offer discounts for use of certain cards (or alternate forms of payment), (ii) restricting the freedom of merchants to set minimum card transaction amounts up to $10, and (iii) limiting the right of merchants to accept electronic payments at some, but not all, of their locations. Electronic payment systems that violate S.138 would also violate Vermont’s Consumer Fraud Act and could face civil penalties of up to $10,000, as well as private civil actions. Notably, the final bill does not contain a restriction on interchange fees that was present in the original version of the bill. The bill becomes effective January 1, 2011.

Maryland Enacts Reverse Mortgage Loan Legislation

On May 20, Maryland Governor Martin O’Malley signed into law S.B. 878, a bill setting forth requirements applicable to reverse mortgage loan lenders and arrangers of financing. Among other things, the bill:

• Requires reverse mortgage loan lenders and arrangers of financing to comply with certain federal laws and regulations governing federally-insured home equity conversion mortgage loans;
• Prohibits reverse mortgage loan lenders and arrangers of financing from conditioning the origination of a reverse mortgage loan upon a borrower’s purchase of an annuity, long-term care policy, or other related financial or insurance product. However, a reverse mortgage loan borrower may be required to purchase title, hazard, and/or flood insurance, as well as any other financial or insurance product that is required for reverse mortgage loans insured under federal law; and
• Requires reverse mortgage loan lenders and arrangers of financing, upon receipt of a reverse mortgage loan application from a prospective borrower, to provide a borrower with a written checklist of reverse mortgage loan-related issues that a borrower should discuss with a counseling agency.

The bill applies to reverse mortgage loans applied for on or after October 1, 2010.

Minnesota Law Amends Requirements for Reverse Mortgages, Foreclosure Notices

On May 19, Minnesota Governor Tim Pawlenty signed SF 2430, a bill that amends reverse mortgage loan and foreclosure notice requirements. Regarding reverse mortgage loans, the law:

• Provides for a seven-day “cooling off” period subsequent to a borrower’s written acceptance of a reverse mortgage. During the period, a borrower cannot be required to proceed with or close the reverse mortgage. The law requires lenders to provide notice of this period to borrowers, and the period cannot be waived;
• Provides that a lender that fails to make required loan advances and fails to cure an actual default after notice forfeits any right to repayment for reverse mortgages that are not federally insured. Once forfeiture has occurred, the mortgage may then be declared null and void by a court;
• Prohibits making the purchase of insurance, annuities, or related products a condition of obtaining, or obligation of, a reverse mortgage loan, as well as prohibits lenders from receiving compensation for providing referrals for these services; and
• Requires lenders to provide at least 3 independent housing counseling agencies to the applicant. Lenders must receive and maintain (for the duration of the mortgage) certification from the applicant that the applicant received the required counseling.

Regarding foreclosure notice requirements, the bill provides borrowers new “redemption rights” and requires a “results of sale” notice. In addition to prescribing the content of the notices, the bill provides a private right of action to recover damages and attorneys’ fees and costs for violations of the “notice of results of foreclosure sale” requirements. The notice requirements become effective August 1, 2010 and apply to notices delivered on or after that date.

Colorado Governor Signs Bill on Refund Anticipation Loans

On May 19, Colorado Governor Bill Ritter signed HB 10-1400, a bill that creates protections for Colorado consumers seeking refund anticipation loans (RALs). RALs are loans made based on a borrower’s anticipated income tax refund. The bill establishes the Refund Anticipation Loan Act (RAL Act), under which:

• Individuals offering tax refund loan services must be employed directly by an electronic return originator;
• Loan facilitators must provide specific oral, written and posted disclosures that communicate, among other things, (i) a schedule of fees and example interest rates for different loan amounts up to $5,000, (ii) the duration, amount, applicable fees and interest rates associated with the anticipated tax refund loan, and (iii) procedures for making a complaint about the tax refund loan; and
• A willful violation of the RAL Act is a misdemeanor punishable by a $500 fine and/or imprisonment for up to one year.

The RAL Act becomes effective August 11, 2010.

Wisconsin Enacts Payday Lending Reform; Prohibits Motor Vehicle Title Loans

On May 18, Wisconsin Governor Jim Doyle signed SB 530, a bill that increases the regulation of payday loans and bans motor vehicle title loans. The law tightens existing payday loan restrictions by (i) capping maximum loan amounts, (ii) limiting rollover loans at one-per-customer, (iii) prohibiting the accrual of interest after the maturity date, (iv) establishing a customer rescission period, (v) prohibiting wage garnishments, and (vi) placing a ceiling on the number of lenders permitted in any given area. The law also bans all motor vehicle title loans; in this regard, Governor Doyle exercised a partial veto by striking a provision that would have permitted such loans in limited circumstances. The bill becomes law on January 1, 2011.

Minnesota Passes SAFE Act Legislation

On May 14, Minnesota Governor Tim Pawlenty signed SF 2510, an omnibus bill including provisions to effect the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). The bill requires mortgage loan originators to (i) register with the Nationwide Mortgage Licensing System (NMLS), (ii) complete pre-license testing and education, (iii) submit to fingerprinting for the purpose of a criminal history background check, and (iv) pass a qualified written exam developed by the NMLS. The law becomes effective July 31, 2010. Unless a later date is approved by the Secretary of the U.S. Department of Housing and Urban Development, the licensing requirement provisions will also become effective on July 31, 2010.