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FTC Affirms Holder in Due Course Rule
On May 10, the FTC released an advisory opinion affirming that the Holder in Due Course Rule does not limit or preclude a consumers right to recovery other than to restrict awards to monies paid under a contract. The opinion was prepared in response to a request by consumer groups concerned by court decisions, beginning with Ford Motor Credit Co. v. Morgan, 536 N.E.2d 587 (Mass. 1989), that had limited recovery under the Rule to cases in which the consumer is entitled to rescission or similar relief under state law. Noting that such courts have misinterpreted the Rules Statement of Basis and Purpose, the advisory opinion states that the plain language of the Rule is clear and does not limit affirmative recovery to those circumstances where rescission is warranted or where the goods or services sold to the consumer are worthless.
Spotlight on Auto Finance (Part One of Three): A New Road for Auto Finance Companies
Traditionally, non-bank lenders looked to the states and the FTC for industry regulations. But, this has changed with the introduction of the CFPB. Recent reports show that the federal government is stepping up efforts to regulate and review auto finance companies, many of whom have never been subject to bank-style examinations.
“The CFPB has created a new layer of regulation,” according to John Redding, Counsel in the Southern California office of BuckleySandler. “Auto lenders have to be alert and aware of their fair and responsible lending risks.”
Redding says one of the ways to minimize these risks is to be proactive when reviewing a company’s policies, procedures, discretionary underwriting and pricing practices. The CFPB is likely to conduct statistical reviews for loans that the company has made or purchased to ensure there is no unexplained or improper disparity between protected and non-protected classes , so companies should consider performing such analyses in advance of the regulator conducting such an analysis.
“This will help mitigate risks for the companies by identifying areas that may present risk and allowing them to proactively take steps to modify policies and practices. When the regulators are conducting an exam, companies will have to explain why the business is conducted as it is, including steps taken to ensure fair and responsible lending to all consumers, regardless of status, and address any issues that may arise,” says Redding.
The bottom line: Recognize that there are new regulators and more scrutiny on the industry and begin taking steps to perform these important reviews now.
Redding suggests the following steps auto finance companies can take to prepare for the CFPB:
- Evaluate the institution’s risk profile and prepare an operations and compliance strategy
- Update policies and procedures (review CFPB exam guidelines)
- Monitor, address, and retain records regarding consumer complaints
- Monitor third-party sources of complaints
- Appoint an ombudsman
- Conduct internal audits
- Consider patterns and practices that emerge regarding operations
- Focus on areas that may lead to consumer harm, as well as technical violations
- Include the compliance team to monitor, analyze and advise on specific proposals
State Law Update: Several States Alter Mortgage and Other Consumer Finance Laws
CSBS and NMLS Issue New Forms for Expanded Use of Registry. On April 16, the Conference of State Bank Supervisors and the National Mortgage License and Registry System (NMLS) issued new licensing forms to support the CSBSs previously announced plans to expand the use of NMLS to include nonbank, non-mortgage financial service providers. With the issuance of the new forms, the NMLS announced that 11 states have committed to requiring non-mortgage financial services institutions to begin using the NMLS this year, with Washington, Vermont, and Rhode Island as the most recent to provide transition plans. The other states include theDistrict of Columbia,Idaho,Louisiana,Maryland,Massachusetts,New Hampshire,Oklahoma,Tennessee, andPennsylvania. Nebraska Expands NMLS Use and Alters Mortgage Licensing. On April 5, Nebraska enacted Legislative Bill 965 to require and provide for the transition of the states manual licensing of installment loan companies to licensing through the NMLS. This change will take effect beginning January 2013. The law also amends the Residential Mortgage Licensing Act to, among other things (i) update and add certain exemptions for mortgage banker and mortgage loan originator licensing requirements, and (ii) adjust the powers of the Department of Banking and Finance to administer the mortgage banker and loan originator licensing process. Kentucky Enacts Numerous Bills Impacting Mortgages and Vehicle Finance. On April 11, Kentucky Governor Steve Beshear signed several bills impacting consumer lending. House Bill 417 makes a variety of amendments impacting motor vehicle installment contracts, including, among other things, (i) altering the form and required content of retail installment contracts, (ii) adjusting the permissible delinquency and collection charge on an installment in arrears for a period of 10 or more days, (iii) creating a safe harbor for retail installment contracts that satisfy the requirements of the Truth in Lending Act, and (iv) making various amendments regarding retail installment sales that are precomputed. House Bill 62 and House Bill 396 relate to foreclosures. The former requires a mortgage holder to file a deed in lieu of foreclosure with the county clerk within 45 days of the instrument's execution and allows for a penalty in the form of a violation of law for any mortgage holder who fails to do so. The bill also exempts filing deeds in lieu of foreclosures from the states transfer tax on property as well as the voluntary surrender under a mortgage in lieu of a foreclosure proceeding. The latter relates to an expedited sale mechanism for foreclosures involving vacant and abandoned real property and amends the offense of defrauding a secured creditor to add situations where collateral is intentionally damaged. Finally, House Bill 409, among other things, exempts from most laws and regulations applicable to mortgage loan companies and brokers persons other than natural persons that originate four or fewer mortgage loans per year and do not hold themselves out to be primarily in the mortgage loan business, while House Bill 533 prohibits private transfer fees. Oregon Establishes Foreclosure Mediation Process. On April 11, Oregon established a foreclosure mediation process when it enacted Senate Bill 1552. The law requires that a beneficiary (i) enter into mediation with a grantor for the purpose of negotiating a foreclosure avoidance measure and (ii) notify a grantor if they are not eligible for any foreclosure avoidance measure or if the grantor has not complied with the terms of a foreclosure avoidance measure. The new law details the form for notices required under the new process and establishes potential penalties for a beneficiary failing to comply with the new procedures. The bill took effect on April 11, with most of the new requirements becoming operative 91 days after the effective date. Maryland Alters Mortgage Licensing Exemptions, Expands Commissioners Enforcement Power. On April 10, Maryland enacted Senate Bill 302, which removes the mortgage licensing exemption for a person who makes three or fewer mortgage loans per calendar year and brokers no more than one mortgage loan per calendar year. The law also expands the authority of the Commissioner of Financial Regulation to investigate and enforce state law with regard to a subsidiary or affiliate of an institution over which the Commissioner has jurisdiction. The law becomes effective on January 1, 2013. Colorado Amends Foreclosure Law. On April 12, Colorado passed a law amending administrative procedures under its foreclosure law. Pursuant to Senate Bill 30, effective September 1, 2012 counties must (i) notify a homeowner during the foreclosure process that they may be due money if excess funds are obtained through the sale of their foreclosed property, (ii) attempt to locate the homeowner and notify them of excess funds obtained from the public auction of their foreclosed property, and (iii) turn excess funds over to the state treasurer if the homeowner cannot be located. The state will hold the funds in perpetuity, allowing a homeowner to claim the funds at any time. Under existing law, counties are not required to conduct any initial outreach and can retain for themselves any money not claimed within five years of the sale.
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.
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.
FTC Announces First Actions Against Auto Loan Modification Schemes
On April 4, the FTC released complaints filed recently against two operations allegedly engaged in deceptive auto loan modification schemes. According to the FTC, the two companies and several related individuals instructed consumers to stop paying their auto loans and promised to lower their monthly payments in exchange for up-front payment of fees, but then did not provide promised refunds when they failed to obtain car loan modifications. The FTC complaints detail the companies’ Internet and other marketing efforts and alleged false promises of lower monthly payments and money-back guarantees. These are the first auto loan modification cases filed by the FTC, which has been actively pursuing allegations of similar mortgage loan modification schemes. Concurrent with these announced cases, the FTC released an alert for consumers seeking assistance in managing their auto loans. The FTC also recently closed out a year of seeking public input on consumer protection issues that arise in auto sales, financing, and leasing.
CFPB Seeks Complaints Regarding Auto and Installment Loans, Announces Complaint Sharing with FTC
On March 12, the CFPB announced that it launched a system to handle consumer complaints regarding auto loans and installment loans. The new complaint form also allows consumers to submit complaints regarding vehicle leases and personal lines of credit. While the system will accept all such complaints, the CFPB initially can handle only complaints with regard to consumer loans with large banks, those over $10 billion in total assets. Loans issued by small banks or nonbanks will be referred to the appropriate federal or state authority. After it has finalized a rule defining “larger participants” in these markets, the CFPB will be permitted to handle directly complaints regarding covered nonbanks.
On March 14, the CFPB announced on its blog that, pursuant to its Memorandum of Understanding with the FTC, the CFPB now is sharing consumer complaint information with the FTC through the FTC’s Consumer Sentinel system. Consumer Sentinel is an online database of consumer complaints maintained by the FTC that helps law enforcement track and respond to consumer complaints. Many state attorneys general, the U.S. Postal Inspection Service, and the FBI’s Internet Crime Complaint Center also access and provide data to the FTC’s Consumer Sentinel system.
Nevada Delays Effective Date for New Motor Vehicle Credit Sale Forms
On March 1, the Nevada Financial Institutions Division issued an order delaying implementation of its amended motor vehicle credit sales application and contract forms. Creditors now will have until July 1, 2012 to begin using the new forms.
FTC Seeks Public Input Regarding Motor Vehicle Financing
On February 21, the FTC issued a reminder that public comments may be submitted through April 1, 2012 as part of the FTC’s ongoing project to gather information on consumer experiences in the sale, financing, and leasing of motor vehicles at dealerships. The FTC held multiple events on the topic last year. A recent FTC report identified automobile finance as an area of focus in 2012.