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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.
Federal Reserve Board Repeals Duplicative Regulations, Finalizes Red Flag Rule Amendments
On May 22, the Federal Reserve Board repealed its Regulation DD, which implements TISA, and Regulation P, which implements Section 504 of the GLBA because the Dodd-Frank Act transferred rulemaking authority for those laws to the CFPB, and the CFPB has already issued rules implementing them. The Board also finalized amendments to the definition of “creditor” in its Identity Theft Red Flags rule, which implements Section 615 of FCRA. Generally, the Red Flags rule requires each financial institution and creditor that holds any consumer account to develop and implement an identity theft prevention program. The revision excludes from the foregoing requirements businesses that do not regularly and in the ordinary course of business (i) obtain or use consumer reports in connection with a credit transaction; (ii) furnish information to consumer reporting agencies in connection with a credit transaction; or (iii) advance funds to or on behalf of a person. The repeals and Red Flags rule amendments take effect June 30, 2014.
Maryland Expedites Licensing For Certain Mortgage Loan Originators
On May 15, Maryland Governor Martin O’Malley signed SB 1091, which expedites mortgage loan originator licensing in that state by requiring the Commissioner of Financial Regulation to waive the state’s criminal history records check for any applicant who was employed as a registered mortgage loan originator within 45 days before the date of application for a Maryland license. The change takes effect October 1, 2014. The bill is less sweeping than the version initially introduced, which would have allowed the Commissioner to issue transitional licenses to individuals licensed under the laws of another state.
Maryland Alters Conditions For Refinancing Without Junior Lienholder Permission
On May 15, Maryland Governor Martin O’Malley signed HB 1045, which alters the conditions for refinancing without junior lienholder permission. Under current law, a mortgagor or grantor may refinance the full unpaid balance at a lower interest rate without the permission of the junior lienholder if (i) the principal amount secured by the junior lien does not exceed $150,000; and (ii) the principal amount secured by the refinance mortgage does not exceed the unpaid outstanding principal balance of the first mortgage or deed of trust plus an amount to pay closing costs of up to $5,000. The bill alters this threshold requirement for refinance mortgages to bypass junior lien holder permission by amending the second factor to include closing costs and escrow costs of up to $5,000. The bill defines “escrow costs” as money to pay property taxes, hazard insurance, mortgage insurance, and similar costs associated with real property secured by a refinance mortgage that a lender requires to be collected at closing and held in escrow. The change takes effect October 1, 2014.
New Jersey Allows Localities To Levy Fines For Failure To Maintain Vacant Properties
On May 15, New Jersey Governor Chris Christie signed AB 347, which authorizes municipalities to impose penalties on a creditor that fails to timely remedy violations related to the maintenance of vacant residential property in foreclosure for which the creditors are responsible under current law. A municipality must provide at least 30 days for the creditor to remedy the violation, and must include a description of the conditions that gave rise to the code violation as part of the notice of violation already required under state law. If the creditor fails to remedy the violation within that time period, the municipality may impose penalties allowed for the violation of municipal ordinances under current state statute. The new authority becomes effective July 14, 2014, 60 days after enactment.
Michigan Modifies Foreclosure Sale Redemption Period Property Inspection Provisions
On May 20, Michigan Governor Rick Snyder signed HB 5277, which, among other things, modifies the state’s procedures for property inspections during the redemption periods of foreclosure sales. The bill requires a purchaser of foreclosed property to issue a notice before conducting an interior inspection of the property during the redemption period. It allows a purchaser to conduct exterior inspections during the redemption period and to request information on the condition of the interior of any structures on the property. If the mortgagor refuses to provide the requested information, the purchaser may schedule an interior inspection. The bill also, among other things, requires a purchaser to notify the mortgagor that the purchaser intends to commence summary proceedings if damage to, or a condition on, the property is not repaired or corrected in seven days, and prohibits a purchaser from commencing such summary proceedings if the damage or condition is repaired, or the mortgagor and purchaser agree on a procedure and timeline to repair the damage or condition. The changes take effect June 19, 2014.
California Supreme Court Agrees To Hear Tribe-Affiliated Payday Lending Case
On May 21, the California Supreme Court granted the state’s appeal of an appellate court decision that short-term, small-dollar credit businesses owned by certain federally recognized Indian tribes are sufficiently related to their respective tribes to be protected under the doctrine of tribal immunity from state regulation. California v. Miami Nation Enterprises, S216878 (Cal. May 21, 2014). Earlier this year, the California Court of Appeals, Second District, affirmed dismissal of a civil action filed by the Commissioner of the California Department of Corporations seeking to enforce a cease and desist order against five tribe-affiliated online lenders, holding that a business functions as an arm of the tribe if it: (i) has been formed by tribal resolution and according to tribal law, for the purpose of tribal economic development and with the clearly expressed intent by the sovereign tribe to convey its immunity to that entity; and (ii) has a governing structure both appointed by and ultimately overseen by the tribe.
CFPB Fines Realty Firm $500K Over RESPA Disclosures
On May 28, the CFPB ordered the largest real estate company in Alabama to pay a $500,000 civil penalty to settle claims that the company provided inadequate disclosures of its relationship with an affiliated title insurance company. The CFPB alleged that the realty company failed to comply with the disclosure-related provisions of RESPA in connection with affiliated business arrangements (AfBAs). Under RESPA, AfBAs do not violate the prohibition on the exchange of referral fees if, among other things, the party referring a consumer to its affiliate gives the consumer a disclosure clearly stating that the consumer may shop for other, lower-cost providers and that the consumer is not required to use the affiliate.
The CFPB alleged that, over a 14-month period in 2011 and 2012, the realty company provided consumers a document explicitly directing that title and closing services would be performed by the affiliate. Then, in 2012, the realty company changed its document to allow the consumer to choose the affiliate or another provider. During all of these periods, the realty company also provided an AfBA disclosure, but the CFPB alleged that the disclosure did not comply with RESPA’s Regulation X because it was not in the format required by Appendix D to Regulation X.
The CFPB charged that the realty company’s AfBA disclosure deviated from the format set forth in Regulation X and thus did not comply with RESPA. For instance, the CFPB claimed that the AfBA disclosure did not use capital letters or otherwise highlight the fact that consumers could obtain services from other providers and that the disclosure language was “hidden” among other statements. Further, the CFPB raised concerns that the AfBA disclosure “included marketing statements touting the benefit and value of the affiliated entities,” such as by saying that the affiliates are “in a unique position to provide you with exceptional value and service.”
The CFPB concluded that, based on these disclosures, the realty company and its affiliates violated RESPA’s prohibition on the exchange of referral fees by affirmatively referring consumers to the affiliates and then collecting profits from the affiliated entities, without satisfying the “safe harbor” under RESPA for AfBAs. The CFPB ordered the company to use AfBA disclosures that do not materially deviate from the model disclosure in Appendix D, to update its training and guidance documents on AfBAs, and to pay a civil money penalty of $500,000 to the CFPB. HUD, which previously had authority over RESPA, initially referred this matter to the CFPB.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB's supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
President Obama Nominates New FHFA Inspector General, HUD Secretary
On May 22, President Obama announced the nomination of Laura Werthheimer, a securities lawyer in private practice, to serve as Inspector General for the FHFA. That position currently is being filled on an acting basis by Michael Stephens following Steve Linick’s departure last year to serve as State Department Inspector General. The President also is expected to announce the nomination of San Antonio Mayor Julian Castro to serve as Secretary of Housing and Urban Development. Mr. Castro would replace Secretary Shaun Donovan, who the President is expected to nominate to serve as OMB Director.