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Fannie Mae Issues Lender Letter On Mortgage Loan Requirements
On August 25, Fannie Mae issued Lender Letter LL-2014-04, which reminds lenders that when a mortgage loan is selected by Fannie Mae for an anti-predatory and HOEPA compliance review, the lender must provide requested loan information to Fannie Mae. Further, the letter reminds sellers that mortgage loans with either an annual percentage rate or total points and fees payable by the borrower that exceed the applicable HOEPA thresholds are not eligible for delivery to Fannie Mae. Additionally, Fannie Mae released an optional worksheet, available on the Fannie Mae website, designed to assist lenders in responding to any information requests from Fannie Mae. This letter highlights the continued focus of Fannie Mae regarding its anti-predatory lending quality control process.
CFPB, State AGs Announce Joint Enforcement Action Against Military Consumer Lender
On July 29, the CFPB and 13 state Attorneys General announced a consent order that requires a consumer lender currently in Chapter 7 bankruptcy to provide $92 million in debt relief for about 17,000 U.S. servicemembers and other consumers harmed by the company’s alleged predatory lending scheme. The lender offered credit to consumers purchasing computers, videogame consoles, televisions, or other products, which typically were purchased at mall kiosks near military bases. In some cases the lender was the initial creditor, and in other cases, the lender provided indirect financing by agreeing to buy the financing contracts from merchants who sold the goods.
Allegations
The CFPB claims the lender “lured consumers with the promise of no money down and instant financing.” Then, according to the CFPB, the lender and its merchant partners artificially inflated the disclosed price of the consumer goods being sold to mask finance charges collected by the lender. The CFPB also asserts that the company withheld information on billing statements, failed to obtain required lending licenses, and illegally collected on loans that were void pursuant to state licensing and usury laws.
Specifically, the CFPB alleges the lender violated TILA by (i) failing to accurately disclose the finance charge and annual percentage rate for financing agreements where they served as the creditor; and (ii) failing to disclose or accurately disclose in periodic billing statements for open-end financing agreements the annual percentage rate, the balance subject to interest rate, how that balance was determined, itemized interest charges, the closing date of the billing cycle, and the account balance on that date.
In addition, the CFPB claims the lender violated the Consumer Financial Protection Act’s UDAAP provisions by purchasing deceptive financing agreements from merchants and thereby facilitating the merchant’s deceptive disclosures. The CFPB also asserts UDAAP violations for servicing and collecting on consumer financing agreements that state laws rendered void or limited the consumer's obligation to repay.
Debt Relief
The order requires that all efforts to collect on any outstanding financing agreements cease—approximately $60 million in contracts owed by about 12,000 consumers—and that the liquidating trust created as part of the company’s bankruptcy plan stop collections on approximately $32 million owed by more than 5,000 consumers. Servicemembers may keep the merchandise they purchased. In addition, the company must update credit reporting agencies and notify servicemembers and other consumers of debt status.
Penalty & Redress
The order also requires the company, through its bankruptcy trustee, to make a $1 penalty payment to the CFPB’s Civil Penalty Fund. The CFPB states that the bankruptcy prevents it from assessing a larger penalty, but the $1 payment may allow harmed consumers to be eligible for relief from the Civil Penalty Fund in the future, although that determination has not yet been made. The order also requires redress payments for excess finance charges. Due to the company’s inability to pay, the redress requirement will be suspended once the company complies with the debt relief provisions.
Florida Federal District Court Dismisses Miami's Fair Housing Act Cases
On July 10, the U.S. District Court for the Southern District of Florida dismissed with prejudice the Fair Housing Act claims in three suits filed by the City of Miami against mortgage lenders. City of Miami v. Bank of Am., No. 13-cv-24506, 2014 WL 3362348 (S.D. Fla. July 9, 2014); City of Miami v. Wells Fargo & Co., No. 13-cv-24508 (S.D. Fla. July 9, 2014); City of Miami v. Citigroup Inc., No. 13-cv-24510 (S.D. Fla. July 9, 2014). The city alleged the lenders engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services.
The court held that under the U.S. Supreme Court’s recent decision in Lexmark Intern., Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1387 (2014), purely economic injury is outside the zone of interest of the Fair Housing Act. The court explained that the “policy behind the Fair Housing Act (FHA) emphasizes the prevention of discrimination in the provision of housing” while the city’s alleged “economic injury from the reduction in tax revenue . . . [and] expenditures” in contrast is not “affected by a racial interest.” Thus, the court held that the city’s claim fell outside the FHA’s zone of interest and the city lacked standing to sue. The court explained that the recent decision in City of Los Angeles v. Bank of America, which allowed that city’s FHA claim to proceed, was not persuasive because, unlike in the Ninth Circuit, controlling Eleventh Circuit precedent requires the application of the zone of interest to FHA claims.
The court also held that the city could not establish proximate causation because it did not allege facts that isolated the lenders’ practices as the cause of any alleged lending disparity, citing the independent actions of a multitude of non-parties during the financial crisis that “break the causal chain.” The court rejected the city’s statistical correlations as insufficient to support a causation claim. Finally, the court held that the city’s FHA claims were time barred and that the continuing violation doctrine did not apply to extend the time limit. For further discussion of how courts should apply Lexmark to these types of municipal FHA cases the way the court did in this case, see the article published recently by BuckleySandler attorney Valerie Hletko.
California Federal Judge Allows Second Los Angeles Fair Housing Case To Proceed
On June 9, the U.S. District Court for the Central District of California denied a mortgage lender’s motion to dismiss the City of Los Angeles’s Fair Housing Act suit, the second such denial by the same judge in recent weeks. Los Angeles v. Citigroup, Inc., No. 13-9009, 2014 WL 2571558 (C.D. Cal. Jun. 9, 2014). The case is one of several the city has filed alleging that certain mortgage lenders engaged in predatory lending in minority communities, the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s property tax base and increased the costs of providing municipal services. The instant order adopts the court’s prior holdings on all of the overlapping arguments presented by the lenders in the two cases. In addition, the court rejected the additional argument that the city’s suit was time barred because the city was on notice of its claims as early as November 2011 when it invited a law firm to “present proposed FHA litigation against ‘several large banking institutions.’”
California Federal Court Allows City's Fair Housing Case To Proceed
On May 28, the U.S. District Court for the Central District of California held, without addressing the merits, that the City of Los Angeles has standing to pursue Fair Housing Act and restitution claims against a mortgage lender, and that the claims were sufficiently and timely pled. Los Angeles v. Wells Fargo & Co., No. 13-9007, 2014 WL 2206368 (C.D. Cal. May 28, 2014). The court denied the lender’s motion to dismiss. The city alleges the lender engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services. The court found that by identifying specific properties alleged to have caused injury and asserting that regression analysis would support its claims and attenuated theory of causation, the city adequately pled a connection between the injury and the alleged conduct sufficient to support Article III standing. The court further concluded that the city adequately pled statutory standing under the FHA insofar as it alleged that its injuries are separate and distinct from the injuries of borrowers, and were proximately caused by the alleged lending practices. The court also held that the city’s claims were timely under the FHA’s two-year statute of limitations because it alleged broad discriminatory practices that are alleged to continue, no matter how changed over time (e.g., from redlining to reverse redlining). Notably, the court did not consider whether the city slept on its rights and could have filed sooner notwithstanding the alleged continuing nature of the practices. Finally, the court found that the city sufficiently pled facts, for purposes of surviving the motion to dismiss, to support claims of disparate treatment and disparate impact under the FHA.
White House Big Data Review Addresses Discrimination, Privacy Risks
On May 1, the White House’s working group on “big data” and privacy published a report on the findings of its 90-day review. In addition to considering privacy issues associated with big data, the group assessed the relationship between big data and discrimination, concluding, among other things, that “there are new worries that big data technologies could be used to ‘digitally redline’ unwanted groups, either as customers, employees, tenants, or recipients of credit” and that “big data could enable new forms of discrimination and predatory practices.” The report adds, “[t]he same algorithmic and data mining technologies that enable discrimination could also help groups enforce their rights by identifying and empirically confirming instances of discrimination and characterizing the harms they caused.” The working group recommends that the DOJ, the CFPB, and the FTC “expand their technical expertise to be able to identify practices and outcomes facilitated by big data analytics that have a discriminatory impact on protected classes, and develop a plan for investigating and resolving violations of law in such cases,” and adds that the President’s Council of Economic Advisers should assess “the evolving practices of differential pricing both online and offline, assess the implications for efficient operations of markets, and consider whether new practices are needed to ensure fairness.” The working group suggests that federal civil rights offices and the civil rights community should collaborate to “employ the new and powerful tools of big data to ensure that our most vulnerable communities are treated fairly.” With regard to privacy the report states that the “ubiquitous collection” of personal information and data, combined with the difficulty of keeping data anonymous, require policymakers to “look closely at the notice and consent framework that has been a central pillar of how privacy practices have been organized for more than four decades.” Among its policy recommendations, the working group urges (i) enactment of a Consumer Privacy Bill of Rights, informed by a Department of Commerce public comment process, and (ii) the adoption of a national data breach bill along the lines of the Administration’s May 2011 Cybersecurity legislative proposal. It also calls for data brokers to provide more transparency and consumer control of data.
Congressional Democrats Want Meeting With Attorney General On Mortgage Fraud Enforcement
On March 17, Senator Elizabeth Warren (D-MA) and Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA) sent a letter requesting a meeting with Attorney General Eric Holder to review the findings of a recent report on the DOJ’s mortgage fraud enforcement efforts. The lawmakers state that the report raises questions about the DOJ’s “commitment to investigate and prosecute crimes such as predatory lending, loan modification scams, and abusive mortgage servicing practices.” They are seeking information from the Attorney General about steps the DOJ will take to ensure that its efforts “to identify and prosecute those responsible for fraudulent mortgage practices are equal to the harms such crimes have caused [the members’] constituents.”
CFPB Releases Revised Payday Loan Exam Manual Incorporating MLA Requirements
On September 17, the CFPB released revised short-term, small-dollar lending Examination Procedures that incorporate the regulations issued by the Department of Defense (DoD) to implemente the Military Lending Act (MLA), which addresses alleged predatory lending practices by lenders that operate near military bases. The CFPB was given explicit power to enforce the MLA in the National Defense Authorization Act for Fiscal Year 2013.
The revised Procedures note that the MLA covers active-duty military members and their dependents and applies to “consumer credit,” defined as closed-end loans that are payday loans with a term of 91 days or fewer and an amount financed of $2,000 or less as well as certain vehicle title loans and tax refund anticipation loans. The revised Manual notes the special requirements of the MLA, including: (i) capping the Military Annual Percentage Rate (the APR under TILA plus other charges such as credit insurance premiums and fees for certain credit-related ancillary products) at 36 percent; (ii) prohibiting a lender from holding a post-dated personal check, debit authorization, or title to a vehicle for repayment or security; (iii) prohibiting mandatory arbitration clauses and waivers of legal rights under the SCRA or other consumer protection laws; (iv) prohibiting lenders from rolling over loans, unless the new transaction results in more favorable terms for the consumer; (v) prohibiting lenders from requiring consumers to pay through the military wage allotment system; and (vi) prohibiting prepayment penalties.
The CFPB’s press release notes the Bureau’s ongoing coordination with the Department of Defense on servicemember protection, as described in the agencies’ 2012 Joint Statement of Principles on small-dollar lending.
North Carolina Amends Anti-Predatory Lending Law
On August 23, North Carolina enacted HB 692, which amends the state’s anti-predatory lending law. Effective October 1, 2013, the law increases the points and fees threshold for high cost home loans from 4% to 5% for loans of $20,000 or more and excludes from the points and fees calculation any up-front fees collected and paid to the FHA, VA, or USDA. The bill also alters the state’s rate spread home loans provisions to match federal restrictions.
State Law Update: Michigan Excludes Certain Loans from State Mortgage Laws, Extends Loan Modification Program
On December 22, Michigan Governor Rick Snyder signed three bills—SB 1283, SB 1284, and SB 1285—to exclude from state mortgage laws, including its predatory lending law and loan originator licensing act, any loan transaction in which the proceeds are not used primarily for a personal, family, or household purpose. The changes took effect immediately. On December 28, the Governor executed SB 1172, which extends until June 30, 2013 a law enacted in 2009 to create a residential mortgage loan modification program. The program provides for a 90-day moratorium before a mortgage lender may pursue a non-judicial foreclosure against a delinquent borrower, during which time the borrower must be given an opportunity to modify the loan. Under prior law the program was scheduled to sunset on December 31, 2012.