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California Enacts Fair Debt Buying Bill
On July 11, California Governor Jerry Brown signed into law SB 233, the Fair Debt Buyers Practices Act, which establishes numerous new rules related to the purchase and collection of consumer debts, including five key protections for debtors. First, the Act prohibits a debt buyer from making any written statement in an attempt to collect a consumer debt unless the debt buyer can verify certain information, such as the amount of the debt balance at charge off, the date of default or last payment, and the name and address of the charge-off creditor at the time of charge off. Second, the Act prohibits a debt buyer from making any written statement to a debtor in an attempt to collect a consumer debt unless the debt buyer has access to a copy of a contract or other document evidencing the debtor's agreement to the debt. In instances where no signed debt contract exists, the debtor must obtain sufficient evidence to demonstrate that the debt was incurred by the debtor. Third, the Act requires a debt buyer to provide a written notice with its initial written communication to the debtor that, among other things, informs the debtor of his or her right to request certain records from the debt buyer. Fourth, the Act prohibits a debt buyer from bringing suit, initiating another proceeding, or taking any other action to collect a consumer debt if the applicable statute of limitations on the cause of action to enforce the debt has expired. Finally, the Act establishes new requirements for default judgments, such as a requirement that a debt buyer submit business records to confirm a debt prior to seeking a default judgment against a debtor. Additionally, the debt buyer must authenticate the records it submits via a sworn declaration to the court. The new rules will apply to debt buyers with respect to all consumer debt sold or resold on or after January 1, 2014.
California Federal District Court Allows Government's FIRREA-Based RMBS Suit to Proceed
On July 16, the U.S. District Court for the Central District of California denied a major credit rating agency’s motion to dismiss a DOJ complaint alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. U.S. v. McGraw-Hill Cos., Inc., No. 13-779, slip. op (C.D. Cal. Jul. 16, 2013). The court held that the government met its initial pleading burden, in part, because it sufficiently had alleged that the rating agency “engaged in a ‘scheme to defraud investors in RMBS and CDOs tranches’ and ‘to obtain money from these investors by means of material false and fraudulent pretenses, representations, and promises, and the concealment of material facts’ with ‘intent to defraud.’” In doing so, the court allowed the government to pursue its $5 billion claims grounded in the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The court did not, however, consider the weight of the government’s evidence, specifically whether the rating agency’s alleged statements and conduct were part of an actual “scheme to defraud,” a key element to any FIRREA claim.
CFPB, Federal Reserve Board, DOJ Plan Indirect Auto Fair Lending Compliance Event
On July 15, the Federal Reserve Board announced that it will co-host an upcoming consumer compliance webinar with the CFPB and the DOJ entitled “Indirect Auto Lending – Fair Lending Considerations.” The event, which will be held August 6, 2013, 11:30 a.m. – 12:30 p.m. (ET), will feature Maureen Yap, special counsel and manager of the Federal Reserve’s Fair Lending Enforcement Section; Coty Montag, deputy chief of the DOJ’s Housing and Civil Enforcement Section of the Civil Rights Division; and Patrice Ficklin, assistant director of the CFPB’s Office of Fair Lending and Equal Opportunity. The panelists plan to discuss (i) the CFPB’s indirect auto lending bulletin and compliance with ECOA; (ii) supervisory guidance; (iii) examination procedures; (iv) public settlements; and (v) “emerging issues.” Following their presentations, the panelists will take audience questions, which may be submitted in advance.
Senate Banking Leaders Offer Bipartisan FHA Reform Bill
On July 15, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released a discussion draft of a bill intended to improve the solvency of the FHA’s Mutual Mortgage Insurance Fund (MMI Fund). As with legislation recently passed by the House, the bill would allow HUD to manage its HECM program through mortgagee letters. Unlike the House bill, this draft further would require that, whenever HUD issues a HECM mortgagee letter, it also initiate a proposed rulemaking that addresses the subject of the mortgagee letter. The bill also would require that, for a mortgage to be eligible for insurance under the HECM program, the mortgage must contain terms and provisions for ensuring property maintenance, establishing escrow accounts, performing financial assessments, or limiting the amount of any payment made available under the mortgage.
In addition, the bill includes changes to the broader FHA insurance program, including provisions similar to those in a bill passed by the House last year with overwhelming bipartisan support. It would, for example, (i) set a minimum annual mortgage insurance premium of at least 55 basis points and increase existing up-front and annual premium caps by 50 basis points, (ii) direct HUD to establish underwriting standards using criteria similar to the CFPB’s criteria for Qualified Mortgages, and (iii) require that the MMI Fund achieve a capital reserve ratio of 3% within 10 years of enactment and establish escalating reporting requirements and program evaluations that take effect immediately if the capital ratio falls below required levels. Further, the bill would, among other things, (i) enhance HUD’s ability to seek indemnification from FHA-approved mortgagees approved to originate loans under the lender insurance program or the direct endorsement program, (ii) expand the criteria HUD uses to compare mortgagee performance and to allow HUD to terminate a mortgagee’s approval on a national basis, and (iii) require HUD to develop a single resource guide for lenders and servicers regarding the requirements, policies, processes, and procedures that apply to loans insured by FHA.
The committee has scheduled a legislative hearing on the bill for July 24, 2013.
New York Financial Regulator Issues Guidance on Determination of Subprime Home Loans Under State Law
On July 3, the New York Department of Financial Services (DFS) sent a letter to regulated institutions and issued a temporary order relating to the determination of thresholds for “subprime home loans” under Section 6-m of the New York Banking Law. Due to recent increases in interest rates, many lenders who utilize a loan’s closing date as the time period for determining the “fully indexed rate” feared that they may be originating loans that meet the definition of subprime home loans under Section 6-m. The letter reminds lenders that in 2009, DFS amended Section 6-m of the Banking Law to instruct lenders to use the date that they provide good faith estimates to borrowers as the date for calculating the “fully indexed rate.” The letter also states that the DFS believes that calculating the “fully indexed rate” properly should allay many lenders fears that they may be triggering Section 6-m. Relatedly, recent changes to the calculation of Mortgage Insurance Premiums mandated by the FHA in Mortgagee Letter 2013-04 has increased the annual percentage rate on subject loans and is causing them to fall under Section 6-m’s definition of subprime home loan. To address the issue, the DFS issued a temporary order that, for 60 days from the date of the order, directs lenders not to use the MIP changes effectuated by FHA when calculating the APR and fully indexed rates for purposes of Section 6-m.
Ninth Circuit Holds FAA Preempts Montana's Public Policy Against Enforcing Contracts of Adhesion
On July 15, the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act (FAA) preempts Montana’s public policy invalidating adhesive agreements running contrary to the reasonable expectations of a party. Mortensen v. Bresnan Comms. LLC, No. 11-35823, 2013 WL 3491415 (9th Cir. Jul. 15, 2013). In this case, the plaintiffs filed a putative class action against an internet service provider (ISP) that participated in a trial program in which the ISP’s customer’s personal information allegedly was passed on to an advertising company in violation of the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, and state privacy and property laws. The ISP moved to compel arbitration, arguing that the welcome kit’s its service technicians delivered included mandatory arbitration provisions that required application of New York law to any disputes. The court vacated a trial court’s order declining to enforce arbitration, holding that AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), requires that the FAA preempt Montana’s reasonable expectations/fundamental rights rule, despite the state’s interest in protecting its consumers from unfair agreements, because that rule has a disproportionate impact on arbitration agreements. As a result, the court also held that the district court erred in not applying New York law because a state’s preempted public policy was an impermissible basis on which to reject the parties’ choice-of-law selection. The court vacated the district court’s order declining to enforce the arbitration clause and choice-of-law clause and remanded with instructions to apply New York law to the arbitration agreement.
FTC Extends Time to Comment on Proposed TSR Changes
On July 12, the FTC extended the comment deadline on proposed changes to its Telemarketing Sales Rule (TSR). In May, the FTC proposed to prohibit the use of certain payment methods it believes are favored by “fraudulent telemarketers,” and sought comments by July 29, 2013. Because a slightly modified version of the original proposal was published in the Federal Register on July 9, 2013, the FTC now will accept comments through August 8, 2013.
HUD Seeks Comments on Potential Changes to FHA's Quality Assurance Process
Recently, HUD published a notice seeking public comments on “ways to improve the efficiency and effectiveness” of FHA’s quality assurance process (QAP). In the notice, HUD explains that it is seeking to enhance its oversight of FHA single-family lenders by evaluating single family quality assurance alternatives that would better align with FHA’s mission. Specifically, HUD aims to ensure that it maintains and improves a quality assurance framework that (i) does not hinder or dissuade lending to FHA-targeted populations; (ii) enhances the efficiency and effectiveness of the QAP; (iii) ensures compensation to FHA for defects resulting from the lender manufacturing process; and (iv) applies fairly to all lenders. In addition, HUD also endeavors to establish a framework that ensures that loans are reviewed within a reasonable time period, post-endorsement; in order to allow FHA to use loan quality findings to improve credit policy and to allow lenders to improve their FHA origination practices. HUD particularly seeks public comments on (i) the types of loan manufacturing or compliance defects found in the QAP that should be subject to indemnification or other administrative remedies or a combination of responses; (ii) how the FHA’s review and comparison of early defaults and claims may achieve an improved assessment of a mortgagee’s performance – for example, HUD is considering establishing a specific standard of defaults and claims which mortgagees should not exceed within a given construct; (iii) whether FHA should establish a threshold manufacturing (or loan deficiency) risk tolerance; and (iv) whether FHA should establish a process to review a statistically significant random sample of loans for each mortgagee within a prescribed time frame after loan endorsement to estimate defect rates. Comments on the potential changes are due by September 9, 2013.
FinCEN Creates CTR Exemption for Armored Car Transactions
On July 12, FinCEN issued a ruling to exempt financial institutions from collecting data about certain armored car transactions required for Currency Transaction Reports (CTR). Under a 2009 ruling, FinCEN clarified that when a financial institution customer hires an armored car service (ACS) to conduct business on its behalf, the customer’s financial institution is subject to the same CTR requirements as it would be with any other third-party facilitating a transaction for a customer. FinCEN now recognizes that the 2009 ruling created practical issues in application – financial institutions have had difficulty differentiating transactions conducted by a given ACS on behalf of the institution from those the ACS conducted on behalf of a customer, and have had trouble obtaining drivers’ personal information required for the CTR. With its current ruling, FinCEN authorized an exception to the CTR data collection and aggregation requirements that applies only to deposits or withdrawals conducted by an ACS employee pursuant to instructions from the financial institution’s customer or from a third party.
Federal, State Officials Focus on Employee Payroll Cards
On July 11, a group of Democratic Senators urged the CFPB and the Department of Labor to “take swift action” regarding prepaid payroll cards. The Senators expressed concern that workers do not understand the “excessive fees” and “harmful practices” associated with such cards, and suggested that those fees and practices - specifically, those relating to ATM use, balance inquiry, swipe purchases, overdraft, and inactivity, among others – may violate the Electronic Fund Transfer Act and its implementing regulation, Regulation E. The lawmakers asked the CFPB to conduct a study to better understand these fees and their impact on workers, and to clarify through a rulemaking or other supervisory action the options employers must provide to their employees under Regulation E. The Senators’ letter follows reports of an investigation by New York Attorney General Eric Schneiderman into potential state law violations related to employers’ use of payroll cards.