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CFPB Proposes Narrowing Application of Credit Card Fee Limit
On April 12, the CFPB published a proposed rule that would lift the current limit on credit card fees charged prior to account opening. Under the current rule, as adopted by the Federal Reserve Board (FRB) in April 2011, card issuers are limited to charging fees up to 25 percent of the credit limit in effect when the account is opened. The FRB rule applies this fee limit prior to account opening and during the first year after account opening. The CFPB proposal would limit the application of this fee restriction to only during the first year after account opening. This proposal addresses a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the FRBs broader application of the fee limit. The CFPB is accepting comments on the proposal through June 11, 2012.
Federal District Court in Florida Lacks Jurisdiction Over TILA and RESPA Claims After State Court Foreclosure Judgment
On April 2, the U.S. District Court for the Middle District of Florida dismissed an action brought by a borrower against her mortgage lender alleging violations of TILA and RESPA and seeking a declaratory judgment that the lender holds no interest in the property. Chipman v. US Bank, N.A., No. 10-cv-483, 2012 WL 1093144 (M.D. Fla. April 2, 2012). The borrower brought the pro se action alleging that a forensic audit revealed certain TILA violations. Upon discovering those violations, the borrower submitted two Qualified Written Requests, at least one of which was not acknowledged by the lender in the time frame established by RESPA. The borrower brought suit seeking a recession of the loan. The court dismissed the case, taking judicial notice of a final foreclosure judgment in state court and holding that the Rooker-Feldman doctrine applies. Applying that doctrine, the court found that it is precluded from reviewing the state court final foreclosure judgment because (i) the parties to the two actions are the same, (ii) the state court ruling was a final judgment on the merits, and (iii) the borrower could have raised the TILA and RESPA claims in the state court action.
Florida Federal District Court Holds Creditor Vicariously Liable for a Servicer's TILA Violation
On March 19, the U.S. District Court for the Southern District of Florida determined that a mortgage loan creditor can be held vicariously liable under TILA for the loan servicers alleged failure to properly respond to a borrowers request for information. In Khan v. Bank of New York Mellon, No. 12-60128-CIV, 2012 WL 1003509 (S.D. Fla. Mar. 19, 2012) the borrowers sued their creditor for their servicers failure to respond to the borrowers TILA request for information about the identity of the owner of the note. The creditor moved to dismiss the complaint, arguing that as the creditor of the mortgage loan at issue, it cannot be vicariously liable for the servicers TILA violation. The creditor further argued that while TILA imposes an obligation on servicers to provide information about the owner of the loan to the borrower upon request, it also absolves servicers of any liability where the servicers are not also owners of the obligation. Borrowers, however, have a private cause of action under TILA against any creditor for a failure to comply with certain TILA requirements, including the obligation to provide the loan owners information to the borrower. The court reasoned that, because TILA expressly absolves the servicer of liability under these circumstances, if there is no vicarious liability for the creditor, the provision allowing a private right of action would be without effect. The court, therefore, denied the motion to dismiss, determining that Congress intended to make creditors vicariously liable for a servicers failure to provide information to the borrower upon request.
CFPB Issues Guidance On Loan Originator Compensation
In response to questions it has received from loan originators and their firms seeking to comply with compensation rules issued under TILA Regulation Z, the CFPB today issued Bulletin 2012-02. The Bulletin states that employers of loan originators may make contributions to employees’ qualified profit sharing, 401(k), and stock ownership plans (qualified plans) out of a profit pool derived from loan originations. The Federal Reserve Board previously had indicated that any compensation—even contributions to a qualified retirement plan—to a loan originator that derived from the profits of mortgage loan originations was “problematic” and likely prohibited by Regulation Z.
While the Bulletin expands the ability of lenders to contribute to their employees’ qualified plans, the Bulletin does not provide guidance about other types of profit-sharing arrangements, noting that such issues are “fact-specific.” According to the Bulletin, the CFPB will address these and other loan originator compensation issues in more detail in a proposed rule, which it plans to release in the “near future.” Under the Dodd-Frank Act, the CFPB is required to finalize loan originator compensation rules by January 21, 2013, and these rules must take effect by January 21, 2014.
Pursuant to rules issued by the Federal Reserve Board in September 2010 that became effective April 6, 2011, loan originators may not receive, either directly or indirectly, compensation that is based on any terms or conditions of a mortgage transaction, subject to certain limited exceptions. Commentary issued as part of that rulemaking describes compensation to include salaries, commissions, and annual or periodic bonuses, while covered transaction terms and conditions include the interest rate, loan-to-value ratio, or prepayment penalty. Moreover, compensation may not be tied to proxies for such transaction terms, such as credit scores.
In July 2011, administration of TILA Regulation Z was transferred to the CFPB, and employers have since been expressing their concern to the CFPB and asking for clarification. This CFPB guidance, issued almost exactly one year after the loan originator compensation rules became effective, signals a shift from the Federal Reserve's guidance, and employers should now be able to make contributions to qualified plans, even if the contributions derive from mortgage-origination profits. Originators and their employers also should look for the CFPB’s planned loan origination compensation rule, which may provide further clarification and guidance on these issues, but likely also will provide new general requirements for originator compensation.
CFPB Files Amicus in TILA Rescission Case
On March 27, the CFPB announced that it recently filed an amicus brief in the U.S. Court of Appeals for the Tenth Circuit in a case involving the Truth in Lending Act (TILA) right to rescind a transaction, Rosenfield v. HSBC Bank, No. 10-1442 (10th Cir.). The CFPB argued that borrowers who do not receive the material disclosures required by TILA can rescind the transaction as long as they notify the lender of the cancellation within three years of consummation, even if they do not file suit within the three-year period. The CFPB urged the Tenth Circuit to reject the view of the majority of courts that the borrower must both notify the lender and file suit within three years. Citing both the statute and the CFPB’s implementing Regulation Z, the CFPB argued that the holding in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), that the right to rescind expires completely after three years, simply means that “consumers [must] exercise their rescission right by providing notice to their lender within three years of obtaining the loan,” and that consumers could file suit after three years if the lender failed to honor the rescission notice. As an indication of the Bureau’s intense interest in this issue, it noted that it plans to file amicus briefs on the same question in at least three other circuits in which briefing is still pending.
New Jersey Supreme Court Holds That Foreclosures Can Proceed Despite Notice Defects
On February 27, the New Jersey Supreme Court held in U.S. Bank, N.A. v. Guillaume, No. 068176, 2012 WL 603307 (N.J. Feb. 27, 2012), that state trial courts are not required to dismiss foreclosure actions if there are defects in the notice of foreclosure, and affirmed the denial of the borrowers motion to vacate a default judgment of foreclosure. The decision overturned an August ruling from a New Jersey appeals court, Bank of New York v. Laks, 422 N.J. Super. 201 (App. Div. 2011), holding that dismissal was mandatory if a notice did not strictly comply with the requirements of the New Jersey Fair Foreclosure Act. In Guillaume, the borrowers sought to avoid foreclosure in part because the Notice of Intention to Foreclose identified only the servicers name and contact information and not the name and address of the lender. At the trial level, the court gave the lender an opportunity to cure the defects in the Notice in lieu of dismissal. A panel of the New Jersey Appellate Division affirmed the trial court outcome based on its analysis that listing the name of the loan servicer rather than the name of the lender substantially complied with the statutory requirements. The New Jersey Supreme Court disagreed and held that the Fair Foreclosure Act requires that a Notice of Intention to Foreclose include the name and address of the actual lender, in addition to contact information for any loan servicer with responsibility to collect payments and negotiate resolution of a dispute between the lender and homeowner. Nonetheless the New Jersey Supreme Court determined that dismissal without prejudice was not the exclusive remedy for service of a defective notice and upheld the trial's court authority to craft an appropriate remedy for notice defects. The New Jersey Supreme Court also rejected the homeowners argument that their original lender's $120 fee overcharge was a TILA violation that entitled them to rescission and held that courts adjudicating TILA claims have discretion to deny rescission if the homeowner cannot tender the full amount due on the loan.
First Circuit Finds Waiver of Rescission Rights Through Loan Modification, Affirms District Court Dismissal for Failure to State a Claim Under Massachusetts' TILA Equivalent
On January 6, the U.S. Court of Appeals for the First Circuit affirmed two prior court rulings against a plaintiff for failure to state a claim for relief under the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), Massachusetts' equivalent of the Truth in Lending Act (TILA). The First Circuit also concluded that execution of a loan modification meant that plaintiff waived any rescission rights under the MCCCDA, an issue which the district court did not reach. DiVittorio v. HSBC Bank USA, N.A., No. 11-1188, 2012 WL 33063 (1st Cir. Jan. 6, 2007). In DiVittorio, plaintiff sought to rescind a loan agreement on the ground that the disclosures made at closing did not comply with the MCCCDA. Plaintiff argued that he was entitled to rescission, damages and attorneys' fees because (i) the APR was not calculated in conformity with applicable regulations, (ii) the disclosure significantly underestimated the finance charge for the loan, and (iii) the disclosure failed to specify explicitly that payments were to be made monthly. The First Circuit, however, found that plaintiff, following repeated defaults on the loan obligation, knowingly and willingly entered into a loan modification agreement that contained a release by plaintiff with a waiver provision which waived any rescission rights he may have had. The modification had been entered into with the assistance of counsel and approved by the bankruptcy court. Independent of the modification agreement, the First Circuit concluded that plaintiff failed to state a claim for relief under TILA or the MCCCDA because (i) the performance-based reduction in interest rate was used in APR calculations, reflecting the parties' legal obligations, and was adequately set forth in the loan documents; (ii) there was no need to include in the disclosures any "unanticipated" additional interest charged as a result of late payments, as such falls outside the definition of "finance charge"; and (iii) the disclosure that there would be 360 payments spanning thirty years was sufficient such that a reasonable person would have understood that payments were to be made on a monthly basis, despite the form's failure to use the term "monthly" or to refer to the life of the loan over "360 months."
Ninth Circuit Clarifies TILA Delivery Requirements
The U.S. Court of Appeals for the Ninth Circuit recently held that lender compliance with the Truth In Lending Act’s (TILA) delivery obligation requires that the borrower be permitted to keep written copies of the right-to-rescind notice. Balderas v. Countrywide Bank, N.A., No. 10-55064, 2011 WL 6824977 (9th Cir. Dec. 29, 2011). In this case, the borrowers allege that the lender improperly pressured them into a loan and then refused to grant their request to rescind the loan, which allegedly occurred within the three-day rescission period. The borrowers claim that the lender provided defective copies of the Notice of Right to Cancel, which did not include the closing date or the expiration date for the rescission period. TILA requires that when the rescission notice is provided in writing, as it was in this case, the lender must deliver to the borrower two copies including the rescission expiration date. The district court ruled that a copy of the Notice of Right to Cancel attached to the complaint proved that the rescission notice was delivered to the borrowers, and on that basis dismissed the case. The Ninth Circuit disagreed, holding that the Notice of Right to Cancel in the record proves only that borrowers signed the document possessed by the lender. To “deliver” the notice in compliance with TILA requires a “permanent physical transfer from one party to another”; momentary delivery does not suffice. While the document in the record provides the lender with a rebuttable presumption of delivery, it does not prove that two copies were delivered to the borrowers as required. The court held that the borrowers should be permitted to attempt to rebut the presumption and prove their allegations of improper delivery to a trier of fact.
FFIEC Approves Revised Regulation Z Interagency Examination Procedures
In late December, The Federal Financial Institutions Examination Council's (FFIEC) Consumer Compliance Task Force approved revised interagency examination procedures for Regulation Z, Truth in Lending. The new procedures reflect changes to rules implementing the Credit Card Accountability Responsibility and Disclosure Act, as well as revisions required by the Dodd-Frank Act, including an increased threshold for exempt consumer credit transactions.