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  • 4th Circuit: Borrower must return loans proceeds to rescind reverse mortgage

    Courts

    On July 14, the U.S. Court of Appeals for the Fourth Circuit held that a borrower has three years to rescind a reverse mortgage loan if a lender fails to provide required TILA disclosures, but that in order for the cancellation of the loan to be complete the proceeds must be returned. The borrower attempted to rescind a reverse mortgage she took out on her home after discovering the lender allegedly did not provide required TILA disclosures at closing. She notified the lender seeking to rescind the mortgage, but later sued after the lender failed to honor her rescission rights as required by Section 1635(b) of TILA. At trial, a jury sided with the lender, finding that it did not fail to honor the borrower’s attempt to rescind the loan. However, the district court issued judgment as a matter of law for the borrower, holding that the lender violated TILA’s requirements following the borrower’s notice of rescission, and ruling that because of this failure, the borrower was not required to return $60,000 in loan proceeds. The lender appealed.

    In vacating the district court’s order granting judgment as a matter of law, the appellate court held that the district court’s ruling violated TILA’s recission provisions, which are intended to return all parties to their status prior to the loan agreement. “To decide otherwise would bestow a remarkable windfall on a borrower and penalty on the lender divorced from the text of TILA and the entire purpose of rescission,” the Fourth Circuit wrote. Moreover, the appellate court concluded that while a lender’s obligations in response to a rescission notice are mandatory, nothing in Section 1635(b) “specifies that if the lender fails to take these actions, it loses its right to the monies it loaned to the borrower.”

    Courts Consumer Finance Reverse Mortgages Mortgages Appellate Fourth Circuit TILA Disclosures

  • 11th Circuit: Statements indicating accrual of debt balance following settlement are enough to state a claim

    Courts

    On July 1, the U.S. Court of Appeals for the Eleventh Circuit overturned a district court’s dismissal of an FDCPA case, holding that statements sent to plaintiffs indicating that a debt balance was accruing after a settlement had been reached is enough to state a claim. According to the opinion, the plaintiffs defaulted on a mortgage and a servicer sued for foreclosure. While the foreclosure suit was pending, the defendant took over servicing of the loan. A “disagreement” arose, which led the plaintiffs to sue the defendant. A settlement was reached and it was agreed that the plaintiffs owed $85,790.99, which was to be paid in one year. However, four months later, the defendant sent a mortgage statement notifying the plaintiffs that their loan had “been accelerated” because they were “late on [their] monthly payments.” On the defendant’s “fast-tracked timetable,” the plaintiff owed $92,789.55 to be paid in a month, and if they did not pay, the defendant’s statement stated that they risked more fees and “the loss of [their] home to a foreclosure sale.” The plaintiffs continued to receive statements and the amount due increased monthly. The plaintiffs sued, saying the defendant violated the FDCPA by sending statements with incorrect balances. A district court ruled the periodic statements were unrelated to debt collection because the defendant was required to send monthly updates under TILA. The district court further determined that the plaintiffs failed to state an FDCPA claim, declined to exercise supplemental jurisdiction over the Florida law claims, and dismissed the complaint.

    On appeal, the 11th Circuit ruled that statements must comply with the FDCPA, even if they are not required to be sent under the statute. The 11th Circuit reiterated that the respective requirements of TILA and the FDCPA can be approached in a “harmonized” fashion, stating that “a periodic statement mandated by [TILA] can also be a debt-collection communication covered by the FDCPA.” The appellate court reversed the district court’s dismissal because “the complaint here plausibly alleges that the periodic statements sent to the plaintiffs aimed to collect their debt.”

    Courts Appellate Eleventh Circuit FDCPA TILA State Issues Florida Debt Collection

  • CFPB ends EWA sandbox

    Federal Issues

    On June 30, the CFPB issued an order terminating a financial services company’s sandbox approval order related to its earned wage access (EWA) lending model. As previously covered by InfoBytes, the Bureau issued a two-year approval order to the company in December 2020, which provided the company safe harbor from liability under TILA and Regulation Z (to the fullest extent permitted by section 130(f) as to any act done in good faith compliance with the order). The company’s product allowed employees access to their earned but unpaid wages prior to payday and granted employees of a participating employer the ability to download the company’s app and agree to the company’s terms prior to engaging in an EWA program. The Bureau said in its announcement that it had informed the company earlier in June “that it was considering terminating the approval order in light of certain public statements the company made wrongly suggesting a CFPB endorsement of its products.” According to the Bureau, the company then requested termination of the order in order, citing the need to make changes to its fee model that would have required modifying the existing approval order. The Bureau noted that the company “requested termination of the order so it could make fee model changes quickly and flexibly.” The Bureau’s announcement indicated that it plans to issue guidance “soon” regarding earned wage access products and the definition of “credit” under TILA and Regulation Z.

    Federal Issues CFPB Regulatory Sandbox Earned Wage Access TILA Regulation Z Consumer Finance

  • FTC shares 2021 enforcement report with CFPB

    Federal Issues

    On June 3, the FTC announced that it submitted its 2021 Annual Financial Acts Enforcement Report to the CFPB. The report covers FTC enforcement activities regarding the Truth in Lending Act (TILA), the Consumer Leasing Act (CLA), and the Electronic Fund Transfer Act (EFTA). Highlights of the enforcement matters covered in the report include, among other things:

    • Automobile Credit and Leasing. The report discussed the FTC’s July 2021 settlement with the owners of car dealerships in Arizona and New Mexico (collectively, “defendants”) resolving claims that the defendants misrepresented consumer information on finance applications and misrepresented financial terms in advertisements in violation of TILA and CLA (covered by InfoBytes here).
    • Payday Lending. The report highlighted the FTC’s settlement against a payday lending enterprise for allegedly overcharging consumers millions of dollars, deceiving them about the terms of their loans, and failing to make required loan disclosures. According to the report, the owners and operators of the settling entities are banned from making loans or extending credit, nearly all debt held by the company will be deemed paid in full, and the companies involved are being liquidated, with the proceeds to be used to provide redress to consumers harmed by the company.
    • Credit Repair and Debt Relief. The report discussed the FTC’s settlement with the operators of a student loan debt relief scheme, who were charged with falsely promising consumers the company could lower or eliminate student loan balances, illegally imposing upfront fees for credit repair services, and signing consumers up for high-interest loans to pay the fees without making required loan disclosures in violation of TILA. The order bans the defendants from providing debt relief services and collecting any further payments from consumers who purchased the services, and requires the defendants to return money to be used to refund consumers.

    Additionally, the report addressed the FTC’s research and policy efforts and highlighted the FTC’s Military Task Force’s work on military consumer protection issues.

    Federal Issues FTC CFPB Enforcement TILA CLA EFTA Consumer Finance UDAP

  • CFPB’s UDAAP claims to proceed against mortgage lender

    Courts

    On March 31, the U.S. District Court for the District of Columbia mostly denied motions to dismiss filed by a mortgage lender and four executives (collectively, “defendants”) sued by the CFPB for allegedly engaging in unlawful mortgage lending practices. As previously covered by InfoBytes, the Bureau filed a complaint last year against the defendants alleging violations of several federal laws, including TILA and the CFPA. According to the Bureau, (i) unlicensed employees allegedly offered and negotiated mortgage terms; (ii) company policy regularly required consumers to submit documents for verification before receiving a loan estimate; (iii) employees denied consumers credit without issuing an adverse action notice; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of FHA streamlined refinance loans. 

    The mortgage lender had argued in its motion to dismiss that neither TILA nor the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) required the lender to ensure that its individual employees were licensed under state law. In denying the motions to dismiss, the court disagreed with the lender’s position stating that in order for a mortgage originator to comply with TILA, it must also comply with Bureau requirements set out in Regulation Z, including a requirement that “obligates loan originator organizations to ensure that individual loan originators working for them are licensed or registered as required by state and federal laws.”

    The court also concluded that the individual defendants must face claims for allegedly engaging in unfair or deceptive practices. The Bureau contended that the company’s chief compliance officer had warned the individual defendants that certain unlicensed employees were engaging in activities requiring licensure, and that the company’s owners approved the business model that permitted the underlying practices. According to the court, an individual “engages” in a UDAAP violation if the individual “participated directly in the practices or acts or had authority to control them” and “‘had or should have had knowledge or awareness’ of the misconduct.” The court rejected defendants’ arguments that it was improper to adopt this standard, and stated that “the fact that a separate theory of liability exists for substantially assisting a corporate defendant’s UDAAP violations has no bearing on how courts evaluate whether an individual defendant himself engaged in a UDAAP violation.”

    While the court allowed the count to continue to the extent that it was based on allegations of unlicensed employees performing duties that would require licensure, it found that the complaint did not support an inference that the individual defendants knew that the employees were engaging in activities to make it appear that they were licensed. The court provided the Bureau an opportunity to replead the count to provide a stronger basis for such an inference.

    Courts CFPB Mortgages UDAAP Deceptive Enforcement TILA FCRA ECOA MAP Rule CFPA Regulation Z Unfair

  • District Court rejects borrower’s RESPA, TILA mortgage servicing claims

    Courts

    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.

    Courts RESPA FDCPA TILA Regulation X Consumer Finance Mortgages Mortgage Servicing

  • 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.

    Bank Regulatory Federal Issues FDIC Supervision Compliance Examination Overdraft Consumer Finance TILA Flood Disaster Protection Act EFTA Truth in Savings Act RESPA Fair Lending

  • FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees

    Federal Issues

    On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.

    According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.

    FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”

    Federal Issues FTC Enforcement Fees State Issues Illinois State Attorney General Discrimination Auto Finance Fair Lending ECOA FTC Act TILA Disparate Impact

  • CFPB may revisit EWA guidance

    Federal Issues

    On January 18, acting CFPB General Counsel Seth Frotman sent a letter to consumer advocates responding to their concerns that the Bureau’s November 2020 advisory opinion on earned wage access (EWA) products was being misused as justification for passage by proponents of a pending New Jersey bill that would permit third-party earned wage access companies to charge fees or permit “tips” for their products without having to abide by the state’s 30 percent usury cap. As previously covered by InfoBytes, the Bureau issued an advisory opinion on EWA products to address the uncertainty as to whether EWA providers that meet short-term liquidity needs that arise between paychecks “are offering or extending ‘credit’” under Regulation Z, which implements TILA. The advisory opinion stated that “‘a Covered EWA Program does not involve the offering or extension of ‘credit,’” and noted that the “totality of circumstances of a Covered EWA Program supports that these programs differ in kind from products the Bureau would generally consider to be credit.” In December 2020, the Bureau approved a compliance assistance sandbox application, which confirmed that a financial services company’s EWA program did not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z. The Bureau noted that various features often found in credit transactions were absent from the company’s program, and issued a two-year approval order, which provides the company a safe harbor from liability under TILA and Regulation Z, to the fullest extent permitted by section 130(f) as to any act done in good faith compliance with the order (covered by InfoBytes here). 

    In his letter, Frotman stated that “[i]t appears from your recounting of the legislative history that the advisory opinion has created confusion, as proponents of the bill seem to have misunderstood the scope of the opinion. The CFPB’s advisory opinion, by its terms, is limited to a narrow set of facts—as relevant here, earned wage products where no fee, voluntary or otherwise, is charged or collected.” Frotman acknowledged that the Bureau’s advisory opinion has also received pushback from consumer groups who sent a letter last year urging the Bureau to rescind the advisory opinion and sandbox approval and regulate fee-based EWA products as credit subject to TILA (covered by InfoBytes here). “Given these repeated reports of confusion caused by the advisory opinion due to its focus on a limited set of facts, I plan to recommend to the Director that the CFPB consider how to provide greater clarity on these types of issues,” Frotman wrote. He further stated that the advisory opinion did not purport to interpret whether the covered EWA products would be “credit” under other statutes other than TILA, including the CFPA or ECOA, or whether they would be considered credit under state law.

    Federal Issues CFPB Earned Wage Access State Issues State Legislation Regulatory Sandbox TILA Regulation Z Advisory Opinion

  • 3rd Circuit vacates TILA/RESPA judgment in favor of mortgage lender

    Courts

    On January 12, the U.S. Court of Appeals for the Third Circuit vacated an order granting summary judgment in favor of a mortgage lender (defendant) for alleged violations of TILA and RESPA, among other claims. The plaintiff, a retired disabled military veteran, contracted with a home builder to purchase a home and used the defendant to obtain mortgage financing, which was later transferred to a servicing company. The plaintiff contended that the defendant allegedly (i) provided outdated TILA and RESPA disclosures; (ii) misrepresented that the plaintiff would not have to pay property taxes; (iii) failed to make a reasonable and good faith determination of the plaintiff’s ability to pay; and (iv) failed to provide notice of the transfer of servicing rights. On appeal, the 3rd Circuit determined that the defendant did not meet the initial burden to show no genuine dispute as to any material fact related to the plaintiff’s claims, and remanded the action. Without assessing the evidentiary value of the testimonies and materials submitted by each party in support of their own version of events, the appellate court reasoned that “these materials do not foreclose a reasonable jury from crediting [the plaintiff’s] testimony over [the defendant’s] account and finding [the defendant] liable.”

    Courts Appellate Third Circuit TILA RESPA Consumer Finance Mortgages State Issues Regulation Z Regulation X

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