InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Mortgage Disclosure Rule Now Expected on November 20, 2013
On November 1, the CFPB announced a field hearing on “Know Before You Owe: Mortgages,” to be held on Wednesday, November 20 at 11 a.m. EST in Boston. In conjunction with the hearing, the Bureau is expected to release its long-awaited final rule combining the Good Faith Estimate and HUD-1 with the mortgage disclosures under the Truth in Lending Act.
The CFPB has stated that the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. The final rule, which was originally expected in October, will not only replace the forms that consumers receive during the mortgage origination process but will also fundamentally alter the regulations governing the preparation and provision of – and liability for – those disclosures. As a result, lenders, settlement agents, and service providers will be required to make extensive changes to their systems, compliance programs, and contractual relationships.
In September, BuckleySandler hosted a webinar covering the key issues in this rulemaking and discussing what industry can do to start preparing now. The webinar featured a discussion with Jeff Naimon, who has spent years assisting the industry with the existing forms. Please contact Jeff for a copy of the webinar materials or with any questions about the expected rule.
S.D.N.Y. Dismisses Putative TILA Class Action Based on Credit Card Billing Practices
On October 18, the United States District Court for the Southern District of New York dismissed a putative TILA class action alleging that a bank made improper interest rate disclosures on credit card bills and assessed incorrect late fees and interest. Schwartz v. HSBC Bank USA, N.A., No. 13-cv-00769, 2013 WL 5677059 (S.D.N.Y. Oct. 18, 2013). The card holder asserted that despite his timely payments the bank assessed him late fees and incorrectly disclosed the annual interest rate and balances on his monthly statements. The court first rejected the card holder’s disclosure claim, characterizing the alleged violations as “hypertechnical” disclosure defects that did not provide a basis for plaintiff to recover. The court held that, while the applicable TILA rule mandates the disclosure of the applicable rate, the balance to which the rate applied, and the nominal APR, the card holder did not properly allege how his statements lacked or misstated any of these required disclosures. The court also held that dismissal was warranted because the bank had refunded the alleged improper late fees before plaintiff commenced the lawsuit, and therefore plaintiff sustained no actual damages.
Eighth Circuit Extends Recent TILA Rescission Holding
On August 19, the U.S. Court of Appeals for the Eighth Circuit held that borrowers facing foreclosure were required to file suit prior to the foreclosure sale to complete the exercise of their right to rescind under TILA. Hartman v. Smith, No. 12-1947, 2013 WL 4407058 (8th Cir. Aug. 19, 2013). In this case, the bank moved to foreclose after the borrowers failed to make payments to a real estate financing firm with which the borrowers had placed mortgages on the property. After the property was sold at a sheriff’s sale, the borrowers sued the bank and the financing firm, seeking, among other things, to rescind the loans under TILA on the basis that they provided written notice of rescission prior to the foreclosure sale. Applying its recent holding in Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. Jul. 12, 2013) that a borrower seeking rescission under TILA must file suit within three years to preserve the borrower’s right of rescission, the court again held that providing notice under TILA is a necessary but not sufficient predicate to exercising the right to rescind. Here, where the foreclosure sale occurred within the three-year rescission period, the court held that the borrowers were required to file a rescission action in a court prior to the foreclosure sale. Because they failed to do so, the court held that their rescission claim was barred.
CFPB Releases Second Update of Examination Procedures for Mortgage Rules
On August 15, the CFPB released new TILA and RESPA examination procedures, updated to cover all mortgage origination rules issued through May 29, 2013 and all mortgage servicing rules issued through July 10, 2013. The CFPB intends the updated procedures to help prepare financial institutions and mortgage companies for examinations regarding the new mortgage rules covering ability-to-repay requirements, qualified mortgages, high-cost mortgages, servicing, appraisals for higher-priced mortgage loans, and loan originator compensation. Please see our summaries of the key rules here and here.
Notably, the new examination procedures do not reflect the amendments proposed by the CFPB in June, which are expected to be finalized shortly. It is unclear whether the CFPB intends to update the procedures to reflect these and any other amendments.
Eleventh Circuit Affirms TILA's Safe Harbor Exception Applies to Servicer Seeking to Foreclose
On July 29, the U.S. Court of Appeals for the Eleventh Circuit held that a mortgage servicer moving to foreclose on borrowers pursuant to an assignment from the lender’s nominee was exempt from TILA’s debt ownership disclosure requirements. Reed v. Chase Home Fin., LLC, No. 12-15755, 2013 WL 3868079 (11th Cir. Jul. 29, 2013). The borrowers argued that the assignment made the servicer the new owner of the debt and triggered the servicer’s obligation under TILA to inform the borrowers of a change in debt ownership. The court agreed with the servicer and the district court, holding that the servicer was exempt from the disclosure requirements because it was operating under an assignment made solely for “administrative convenience,” based on the plain meaning of those terms, which are not defined in the statute. The court held that because the servicer was operating within the administrative convenience safe harbor, it was allowed to service the loan – including by seeking to foreclose on the home – without making any additional disclosure. The court affirmed the district court’s grant of summary judgment in favor of the servicer.
Magistrate Judge Finds Tribal Payday Lender Subject to FTC Act; Lender Agrees to Settle Some FTC Charges
On July 22, the FTC announced that it obtained a partial settlement of claims it filed last year against a Native American Tribe-affiliated payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. FTC v. AMG Servs, Inc. No. 12-536 (D. Nev.). The agreement does not include any monetary resolution of the claims, but (i) prohibits the defendants from certain collection practices, (ii) prohibits the defendants from conditioning the extension of credit on preauthorized electronic fund transfers, and (iii) requires the defendants to implement enhanced compliance policies that are subject to new reporting requirements. The settlement follows a report and recommendation issued last week by the magistrate judge assigned to the case in which he concluded that the FTC has authority under the FTC Act to regulate “Indian Tribes, Arms of Indian Tribes, employees of Arms of Indian Tribes and contractors of Arms of Indian Tribes” with regard to the payday lending activities at issue in the case. Relying on Ninth Circuit precedent, the magistrate judge held that while the FTC Act does not expressly apply to Indian Tribes, it is a statute of general applicability with reach sufficient to cover the Tribal entities. Further, the magistrate judge concluded that “both TILA and EFTA provide the FTC the power to enforce the statutes without regard for any jurisdictional limitations contained in the FTC Act.” The FTC will continue litigating other charges against the defendants, including allegations that they deceived consumers about the cost of their loans by charging undisclosed charges and inflated fees.
Eighth Circuit Holds Borrowers Must File Suit Within TILA Three-Year Rescission Period
On July 12, the U.S. Court of Appeals for the Eighth Circuit held that a borrower seeking rescission under TILA must file suit within three years, and that merely providing the lender notice is insufficient to preserve the borrower’s right of rescission. Keiran v. Home Capital, Inc., No. 11-3878 (8th Cir. Jul. 12, 2013). As the Tenth Circuit did last year, the Eighth Circuit reasoned that the text of the statute, as explicated by the Supreme Court in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), establishes that filing suit is required. Also like the Tenth Circuit, the court expressly rejected the CFPB’s argument that the lender, rather than the obligor, should be required to file suit to prevent rescission. To adopt the CFPB’s position, the court explained, “would create a situation wherein rescission is complete, in effect, simply upon notice from the borrower, whether or not the borrower had a valid basis for such a remedy. Under this scenario, the bank’s security interest would be unilaterally impaired, casting a cloud on the property’s title, an approach envisioned and rejected by Beach.” The holding is the latest in a series of circuit court decisions on this issue, with the majority of circuits now holding in favor of the lender and rejecting the position that notice extends the three-year TILA rescission right. BuckleySandler LLP filed an amicus brief in Keiran on behalf of the American Bankers Association, Consumer Bankers Association, and Consumer Mortgage Coalition.
CFPB Updates TILA, ECOA Examination Procedures
On June 4, the CFPB released new TILA and ECOA examination procedures, which were updated to incorporate certain of the CFPB mortgage rules finalized in January 2013 that address appraisals, escrow accounts, and mortgage loan originator compensation and qualifications. Parts of the Regulation Z (TILA) amendments took effect June 1, 2013, while the majority of the changes to both Regulation Z and Regulation B (ECOA) take effect in January 2014. The CFPB explained that the procedures will help financial institutions and mortgage companies understand how they will be examined under the new requirements that, among other things: (i) set qualification and screening standards for loan originators, (ii) prohibit steering incentives, (iii) prohibit “dual compensation,” (iv) extend the required duration of an escrow account on higher-priced mortgage loans, (v) prohibit mandatory arbitration, (vi) require lenders to provide appraisal reports and valuations, and (vii) prohibit single premium credit insurance.
FHA Commissioner Issues Statement on Insurance Premiums and HPMLs
On June 3, FHA Commissioner Carol Galante issued a statement in response to lenders’ concern that new monthly mortgage insurance premium requirements will increase the APR on FHA mortgages resulting in more mortgages exceeding Regulation Z’s high priced mortgage loan (HPML) threshold. Mortgagee Letter 2013-04 requires most borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a policy adopted in 2001 under which the FHA cancelled premium requirements on loans when the outstanding principal balance reached 78 percent of the original principal balance. Commissioner Galante’s statement acknowledges the concern, but states that all lenders are expected to comply with existing Regulation Z requirement for HPMLs. Her statement provides guidance, based on consultation with the CFPB, as to how HPML requirements differ from FHA requirements related to escrow accounts, appraisals, ability to repay, and prepayment penalties. Commissioner Galante also stated that the FHA continues to work on defining an FHA qualified mortgage standard to address these issues.
CFPB Publishes Additional Mortgage Rule Compliance Guides
On May 2, the CFPB published three additional guides to assist companies seeking to comply with its HOEPA rule, ECOA valuations rule, and TILA high-priced mortgage appraisal rule. As with other prior guides it has released, the CFPB cautions that the guides are not a substitute for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination of mortgage loans. BuckleySandler also has prepared detailed analyses of these and other CFPB mortgage rules.