InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
District Court rejects borrower’s RESPA, TILA mortgage servicing claims
On March 15, the U.S. District Court for the Southern District of Ohio granted a defendant mortgage loan servicer’s motion for summary judgment in an action claiming violations of federal law based on alleged defects in the servicing of the plaintiff’s loan. According to the court, after settling similar claims against his two prior loan servicers, the plaintiff sued the companies that own and service his mortgage loan (collectively, defendants) disputing the precise amount of his delinquency and claiming the defendants failed to properly apply his mortgage payments or to respond to his notice of error (NOE). The plaintiff contended, among other things, that the defendants’ response to the NOE, misapplication of payments, and inaccurate periodic mortgage statements breached the terms of the mortgage agreement and violated RESPA, FDCPA, and TILA. In granting summary judgment, the court agreed with the defendants, finding that plaintiff’s breach of contract claim was foreclosed by a prior settlement agreement with his former servicer. The court also found that the servicer’s response to plaintiff’s NOE did not violate RESPA because it “fully addressed both ‘errors’ that the plaintiff presented,” and the perceived errors “amounted to confusion about basic arithmetic.” The court emphasized that “[n]othing in RESPA or Regulation X gives borrowers authority to dictate the parameters of a lender’s investigation,” and concluded that the servicer’s investigation and response was sufficient since the servicer provided the documents used to conclude that there was no misapplication of funds and “[e]ven a cursory investigation would have revealed that the specific errors alleged in the NOE did not occur.”
In granting the defendants’ request for summary judgment regarding claims that the plaintiff received five inaccurate mortgage statements in violation of the FDCPA and TILA, the court concluded that the periodic statements contained all the fields required under Regulation Z, and explained that allegations contesting the accuracy of the information contained in the statements did not violate TILA because “12 C.F.R. § 1026.42(d) does nothing to regulate the accuracy of information presented in a periodic statement.” As to the plaintiff’s FDCPA claim, which was premised on allegations that plaintiff’s prior servicer misapplied funds which caused defendants to collect amount that plaintiff did not owe, the court found that that the disputed periodic statement was truthful and accurate and that the plaintiff released the defendants of any liability under the FDCPA in his settlement agreement with the prior servicer.
Idaho updates licensing provisions for debt collection agencies
On March 31, the Idaho governor signed HB 610, which amends existing law to revise certain requirements for collection agencies and applicants for licensure. The amendments remove the prior requirement that applicants and licensees must designate an experienced individual to serve as in charge of the licensee’s collection agency business. Additionally, the bill now permits collection agencies to collect incidental charges if they are included in the contract between the creditor and the debtor, with some exceptions. The bill also establishes licensing efficiencies by requiring the use of an “electronic system of licensing as prescribed by the director” and permitting the reinstatement of an expired license. The bill is effective July 1.
West Virginia updates money transmitter licensing law
Recently, the West Virginia governor signed SB 505, which updates laws regarding licensure and regulation of money transmitters. Among other things, the bill (i) enhances and expands defined terms, including the definition of “control”; (ii) removes the provisional licensing option for check sellers; (iii) gives West Virginia the authority to participate in multistate examinations; (iv) increases the net worth requirement for licensees; (v) sets forth prior approval requirements for a change in control of a licensee; and (vi) requires licensees to maintain specified “permissible investments” at all times. The bill is effective June 7.
DFPI concludes MTA licensure not required for digital asset trading platform
On March 23, the California Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to a digital asset trading platform. The redacted opinion letter examines whether the inquiring Company (a registered money services business) requires licensure under the MTA. The Company requesting an interpretive opinion operates a software platform that allows retail and institutional investors to buy and sell digital assets, including cryptocurrency, and access related services, within the platform. The letter explains that U.S. customers must fund an account on the Company’s platform prior to purchasing cryptocurrency with either fiat currency (U.S. dollars) or cryptocurrency. The letter also describes, among other things, how customers can buy from and sell to the Company cryptocurrencies on one or more cryptocurrency exchanges using the platform. In these transactions, the Company would sell or buy cryptocurrency from the customer at the selected price and settle the trade using fiat or cryptocurrency held in its own accounts. Simultaneously, the Company would execute a trade for its own benefit on the exchange offering the price selected by the customer. Customer funds would not be used to buy or sell cryptocurrency from or to the exchange. After executing a transaction, a customer may choose to withdraw all or part of the customer’s fiat or cryptocurrency from the platform, or may choose to maintain a balance to execute future transactions.
The DFPI stated that it “has not concluded whether a wallet storing cryptocurrency constitutes a form of monetary value representing a claim against the issuer and accepted for use as a means of redemption for money or monetary value or payment for goods or services.” As such, the DFPI will not require the Company to be licensed under the MTA to provide customers with an account via a proprietary software platform to transfer and store cryptocurrency in order to execute trades directly with the Company.
DOJ: Property owner’s LEP policies violate FHA
On April 1, the DOJ filed a statement of interest in a 2021 lawsuit alleging defendants violated the Fair Housing Act (FHA) by refusing to rent to applicants with limited English proficiency (LEP) unless someone who speaks and reads English resides in the apartment unit. The complaint, filed in the U.S. District Court for the Northern District of New York, also alleged that the defendants refused offers made by the applicants to bring their own interpreters to translate lease documents and assist with communications.
According to the plaintiff fair housing organization, “the defendants’ LEP exclusion policy imposes an unjustified disparate impact on the basis of national origin and race,” with the defendants’ restrictive language policy acting as “a pretext to discriminate against applicants based on” these protected classes. The defendants moved to dismiss the case, “arguing that their LEP exclusion policy cannot, as a matter of law, violate the FHA” and that HUD’s 2016 HUD Office of General Counsel Guidance on Fair Housing Act Protections for Persons with Limited English Proficiency (2016 HUD LEP Guidance), which explains how restrictive language policies may violate the FHA, is wrong and does not deserve deference by the court.
In its statement of interest, the DOJ agreed with the plaintiff that dismissal of the complaint would be inappropriate. In explaining how policies that screen on the basis of an applicant’s language ability may violate the FHA, the DOJ pointed out that some courts have held that language policies can have an unjustified disparate impact on the basis of national origin or race, while others “have recognized that language polices can serve as proxies or pretexts for intentional discrimination based on national origin or race.” As such the DOJ contended that the defendants’ claim that LEP status is not a protected class under the FHA “misses the point.” The DOJ also defended the 2016 HUD LEP Guidance as a reasonable interpretation of the FHA.
OCC’s Hsu discusses managing tail risks
On March 31, acting Comptroller of the Currency Michael J. Hsu spoke before the American Bankers Association Risk 2022 Conference to discuss managing low probability, high impact risk events, or tail risks. In particular, Hsu highlighted the connection between Russia’s invasion of Ukraine and heightened tail risks associated with geopolitical risk, cyber risk, and inflation risk. Hsu warned that multiple possible events stemming from the conflict, including cyber-attacks from Russia, broader conflict in Europe, and increased inflation could materialize simultaneously increasing the chances that tail risks materialize that could trigger a recession. Hsu noted that the increase of sanctions to oil and gas would put upward pressure on fuel prices, and “Ukraine’s role as a producer of wheat, neon, platinum, and palladium is also beginning to affect global prices in certain markets.” Despite the elevated risks, Hsu noted that enhanced stress testing has positioned large banks to absorb a range of shocks, but warned that “nonetheless, greater caution and risk management vigilance is warranted today, perhaps more than any time in recent memory.” Hsu also singled out risks associated with crypto assets and said that the OCC is collaborating with other agencies on “how to maintain a consistent, careful and cautious” approach to bank involvement in cryptocurrency. Hsu cautioned that in light of “limited or unreliable price histories” of crypto-assets, financial institutions should “carefully consider” the tail risks associated with factoring cryptocurrency positions into the overall risk management process. Hsu discussed his worry regarding the potential for crypto derivatives to create “wrong-way risk” in which a leveraged party use trades to “double-down” at the same time it is experiencing financial stress. Hsu stated that the OCC has engaged with government agencies in the U.K. and U.S. on “how to maintain a consistent, careful, and cautious approach to bank involvement in crypto.”
OFAC reaches $78,750 settlement with financial analytics company
On April 1, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a roughly $78,750 settlement with a financial analytics company for allegedly processing transactions in violation of Ukraine-Related Sanctions Regulations. According to OFAC’s web notice, in August 2016, the company (which had been recently acquired) reissued and re-dated an August 2015 invoice with a new date that was 374 days after the invoice for the debt was originally issued. After a partial payment, the company reissued the original August 2015 invoice creating two “new” invoices each reflecting half of the remaining balance and dated November 2016, both with payment due upon receipt. After another partial payment, the company reissued a fourth invoice with the remaining debt in September 2017, again altering the date. OFAC concluded that the company violated the Ukraine-Related Sanctions Regulations “by dealing in new debt of longer than 90 days maturity when [it] extended the payment date of its invoices.”
In arriving at the settlement amount, OFAC considered various aggravating factors, including, among other things, that (i) the company “failed to exercise a minimal degree of caution or care when it reissued and re-dated four invoices to extend the payment date of invoices far beyond the authorized debt tenor, knowing or having reason to know such conduct would violate U.S. sanctions regulations”; (ii) the company’s staff “were aware of and involved in the conduct giving rise to the Apparent Violations”; and (iii) the company “was a commercially sophisticated entity and considered a leader in global energy market analysis, with over 500 customers in 60 countries.” OFAC also considered various mitigating factors, including, among other things, that the company (i) has not received a penalty notice from OFAC in the preceding five years; (ii) “took remedial measures by enhancing their compliance program to better ensure compliance with OFAC sanctions, creating more robust training, adding periodic testing to invoices involving SSI List entities, and adding additional staff to manage sanctions issues”; and (iii) cooperated during the investigation.
Providing context for the settlement, OFAC stated that this “case underscores the importance of careful adherence to OFAC regulations, including in cases where counterparties may make compliance challenging.”
9th Circuit upholds dismissal of wrongful garnishment claims
On March 30, the U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s dismissal of claims based on the FDCPA and the Washington Consumer Protection Act (WCPA). According to the memorandum, the complaint alleged that the defendants violated the FDCPA and WCPA when they sought to garnish plaintiff’s wages based a state court judgment that was not yet final. The district court dismissed the FDCPA claim, holding that “at worst, Defendants violated a state court procedural rule—not substantive law—when they applied for the writ of garnishment based on the valid, albeit, not final judgment.” In affirming that dismissal, however, the appellate court noted that “[t]he issue is not whether [the defendant] and [the defendant’s attorney] violated state law but whether they violated the FDCPA.” The 9th Circuit clarified that “[t]he [plaintiff] might have argued that [the defendant] and [the defendant’s attorney] falsely represented the legal status of their debt by implicitly claiming in the garnishment application that the debt was subject to a final judgment. But they [did] not make this argument, so it is waived.” With respect to the WCPA claim, while the district court’s dismissal was based on a determination that the garnishment did not “occur[] in trade or commerce” as required under that statute, the 9th Circuit pointed out that if the garnishment was “a violation of the Washington Collection Agency Act (WCAA), [it] would have established an unfair or deceptive act in trade or commerce for purposes of the WCPA,” but upheld dismissal because the plaintiff had waived that argument as well.
FDIC highlights NSF/overdraft fees, fair lending in 2022 Consumer Compliance Supervisory Highlights
On March 31, the FDIC released the spring 2022 edition of the Consumer Compliance Supervisory Highlights to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2021. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities.
- An overview of the most frequently cited violations (approximately 78 percent of total violations involved TILA, the Flood Disaster Protection Act (FDPA), EFTA, Truth in Savings Act, and RESPA). During 2021, the FDIC initiated 20 formal enforcement actions and 24 informal enforcement actions addressing consumer compliance examination observations, and issued civil money penalties totaling $2.7 million against institutions to address violations of the FDPA and Section 5 of the FTC Act.
- Information on the charging of multiple non-sufficient funds fees (NSF) for re-presented items, and risk-mitigating activities taken by banks to avoid potential violations. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Recommendations on addressing overdraft issues are discussed in the report.
- An overview of fair lending concerns highlighting ways to mitigate risk, including “[m]aintaining written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy” and reviewing requirements used to screen potential applicants to make sure there is no “discriminatory impact.”
- Information on regulatory developments, such as (i) rulemaking related to the Community Reinvestment Act, flood insurance, false advertising/misuse of the FDIC’s name or logo rulemaking, deposit insurance, and LIBOR; and (ii) guidance on fintech due diligence, artificial intelligence/machine learning, and third-party risk management.
- A summary of consumer compliance resources available to financial institutions.
- An overview of consumer complaint trends.
HUD proposes 40-year term for loan modifications
On April 1, HUD published a proposed rule in the Federal Register to increase the maximum term limit allowable on loan modifications for FHA-insured mortgages from 360 to 480 months. According to the proposed rule, the update would allow mortgagees to provide a 40-year loan modification option to borrowers who may not qualify for loss mitigation options and is intended to help borrowers experiencing a financial hardship, including those impacted by the Covid-19 pandemic, obtain affordable monthly payments. The proposed rule noted that “[i]ncreasing the maximum term limit to 480 months would allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” Additionally, the proposal would align FHA with Fannie Mae and Freddie Mac, “which both currently provide a 40-year loan modification option.” Comments are due by May 31.