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DOD Seeks Input on Military Lending Act Regulations; State AGs Seek Expansion of Covered Loans
Last week, the Department of Defense (DOD) issued an advanced notice of proposed rulemaking to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the Military Lending Act (MLA). Currently, the MLA regulations cover certain payday, car title, and refund anticipation loans to servicemembers and their dependents. The DOD notice seeks (i) comment on whether the definition of “consumer credit” should be revised to cover other small dollar loans and (ii) examples of alternative programs designed to assist servicemembers who need small dollar loans. Responses to the DOD notice are due by August 1, 2013. On June 24, a bipartisan group of 13 state attorneys general submitted a comment letter urging the DOD to amend the MLA regulations to close loopholes in the definitions of covered loans and to cover any other type of consumer credit loan presenting similar dangers, such as overdraft loans.
SEC Approves FINRA Rule Change to Publicly Release Additional Disciplinary Action Information
On June 21, the SEC approved a change to FINRA’s rules that will allow the self-regulatory organization to publish greater information about FINRA’s disciplinary actions. Under existing rules, FINRA only releases disciplinary actions upon request, unless the action meets specified criteria established for use in determining whether an action is worthy of publication. Once the new rules take effect – likely several months from now – those publication criteria will be removed, and most FINRA disciplinary actions will be released as a matter of course. FINRA will retain authority to redact information to protect privacy of individuals. The new rules also update and codify FINRA’s practices related to the publication of other FINRA actions, including temporary cease and desist orders, statutory disqualification decisions, expedited proceeding decisions, summary actions, and others.
Freddie Mac Makes Loan Quality Advisor Available to Sellers
On June 24, Freddie Mac issued Bulletin 2013-11, which announced that a new web-based risk and eligibility assessment tool, Loan Quality Advisor (LQA), is now available to sellers. It is designed to help sellers identify loan eligibility issues both pre- and post-closing. The Bulletin provides information regarding a new agreement that provides the terms and conditions for sellers using the LQA. In addition, effective immediately, sellers are permitted to resubmit construction conversion and renovation mortgages to Loan Prospector after the note date or the effective date of permanent financing.
FinCEN Announces Functional Reorganization
On June 24, FinCEN announced its new organizational structure, effective immediately. The new structure organizes employees based on their job function, whereas previously employees were organized based on the stakeholder that they served. FinCEN believes the change will maximize its ability to efficiently further its anti-money laundering and counterterrorist financing efforts.
Nevada Alters Foreclosure Mediation Program
Recently, Nevada enacted AB 273, which altered the state’s foreclosure mediation program to require a trustee under a deed of trust to send certain information concerning the foreclosure mediation program to a borrower concurrently with, but separately from, the copy of the notice of default and election to sell that also must be sent to the borrower. The bill also requires that a borrower facing foreclosure be automatically enrolled in the foreclosure mediation program unless the borrower elects to waive mediation or fails to pay his or her share of the program fee. The bill also adds, among other things, certain procedural requirements for mediators and trustees. These changes become effective on October 1, 2013.
Texas Adds Flexibility to Increase Fees and Charges on Consumer Loans, Cash Advances
On June 14, Texas enacted SB 1251, which grants the state Finance Commission authority to set maximum amounts for (i) administrative fees charged on consumer loans and (ii) acquisition charges on cash advances. Those maximum amounts have not been updated in the state in more than 10 years and 20 years, respectively. The bill makes certain other changes related to the computation of interest charges on cash advances and the application of an alternate interest charge computation methodology to a borrower’s account. The bill takes effect on September 1, 2013.
Virginia Federal District Court Dismisses Shareholder Derivative Action Related to Credit Card Issuer's Settlements with OCC, CFPB
On June 21, the U.S. District Court for the Eastern District of Virginia dismissed a shareholder derivative action against a national bank’s officers and directors that was based on the bank’s settlements with the CFPB and OCC over allegedly deceptive marketing of ancillary products. In re Capital One Derivative S’holder Litig., No. 1:12-cv-1100 (E.D. Va. June 21, 2013). The shareholders, relying on Delaware law, alleged that the officers and directors breached their fiduciary duty of loyalty, committed corporate waste, and were unjustly enriched by failing to prevent the allegedly deceptive sales practices at the bank’s third-party call centers which led to the consent orders. The court held that the shareholders did not adequately allege corporate waste because the bank’s settlement payments were not “transfers of assets with no corporate purpose” but instead achieved final resolution of the investigations. The unjust enrichment claim failed because the shareholders did not allege any facts indicating a relationship between the officers and directors’ compensation and the settlements with the agencies. With respect to the duty of loyalty claim, the shareholders alleged two theories: (i) that the officers and directors failed to implement controls that would have prevented the alleged misconduct, and (ii) that defendants ignored numerous “red flags” that should have alerted them to the alleged misconduct. First, the controls theory failed because the shareholders could not satisfy the demanding Caremark standard, which requires an utter failure to implement any controls. Second, most of the alleged red flags were either not actually red flags at all or there were no allegations that the individual officers and directors were aware of them. However, as to a small number of the alleged red flags, the court found the claims sufficiently plausible to allow the shareholders an opportunity to amend their complaint to add additional facts.
Texas Supreme Court Holding Requires Lender-Retained Fees To Be Factored into Home Equity Loan Fee Cap
On June 21, the Texas Supreme Court invalidated state regulations that defined “interest” with regard to home equity loans to exclude lender-retained fees and allowed home equity loan closings through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2013 WL 3119481 (Tex. Jun. 21, 2013). The state constitution caps home equity loan fees at three percent of principal, but excludes “interest” from the definition of “fees.” The Texas Supreme Court held that a state regulation that defined “interest” for the purpose of home equity lending by referencing a state code definition that excludes lender-retained fees effectively rendered the constitutional fee cap meaningless by giving the state legislature authority to modify the cap. The legislature’s broader definition of interest was designed to prohibit usury, a function inversely related to the constitutional cap for home equity loans, the court explained. The court held that the constitutional definition of interest means the amount determined by multiplying the loan principal by the interest rate, and therefore does not include lender-retained fees. The court also invalidated a regulation that allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent, reasoning that a constitutional provision designed to prohibit the coercive closing of a home equity loan at the owner’s home requires that execution of consent or a power of attorney must occur at one of the locations specified in the provision – the office of the lender, an attorney, or a title company. Finally, the court upheld a regulation that created a rebuttable presumption that a specific home equity loan consumer disclosure required by the state constitution is received three days after it is mailed.
Special Alert: CFPB Enforcement Action Targets Marketing of Auto Loans, Add-On Products to Servicemembers
This morning, the Consumer Financial Protection Bureau (CFPB) announced enforcement actions against a national bank and its service provider related to alleged deceptive marketing of auto loans and add-on products to active-duty servicemembers. The CFPB claims that the companies failed to disclose or mischaracterized certain fees charged and ancillary products offered through a program developed to finance auto loans to servicemembers. These are the first public enforcement actions by the CFPB related to auto finance, and according to CFPB Director Richard Cordray, were precipitated by a complaint received from an individual servicemember’s relative. The actions demonstrate the CFPB’s focus on auto finance and its increasing coordination with the Department of Defense (DOD) and the individual branches of the military on servicemember protection issues.
Scope of Alleged Violations
The CFPB charges that the bank violated Regulation Z (TILA) by failing to accurately disclose the finance charge, annual percentage rate, payment schedule and total of payments for the subject loans, and also violated the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices by (i) failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for the subject loans; and (ii) deceptively marketing the prices and coverage of add-on service contracts. Specifically, the bank allegedly failed to inform servicemembers that they would be charged a monthly processing fee for automatic payroll allotments; (ii) failed to disclose that the allotments would be deducted from servicemember paychecks twice per month, but only credited once a month; and (iii) failed to regularly review and validate its vendor’s marketing related to the cost and coverage of add-on service contracts. As with the CFPB’s actions last year related to certain add-on products marketed by credit card issuer vendors, the CFPB focused on the marketing of the products and did not directly address their value. This action also applies the CFPB’s guidance on vendor management, which outlines the CFPB’s expectations for oversight and management of third-party vendors involved in the offering of ancillary products.
The service provider is alleged to have violated the CFPA’s prohibition on unfair, deceptive, or abusive practices by (i) deceptively marketing the prices of an add-on vehicle service contract and an add-on GAP insurance product; and (ii) deceptively marketing the scope of the coverage of a vehicle service contract. The CFPB asserts that the company understated the costs of the vehicle service contract and insurance product and overstated the reach of their coverage.
Resolution
The orders require the companies to cease the alleged practices, improve disclosures, and pay combined restitution of approximately $6.5 million - $3.2 million by the bank, $3.3 million by the vendor. Neither order includes a civil money penalty.
In addition, the bank must (i) develop a comprehensive compliance plan within 60 days; (ii) submit compliance progress reports within 90 days and after one year, as well as within 14 days of receiving a request from the CFPB after the one-year report; and (iii) implement certain recordkeeping requirements. The service provider has 15 days to retain an independent consultant to develop a compliance plan. Within 90 days of when the CFPB approves the consultant, the service provider must submit a compliance management system and written compliance plan. It also is subject to similar reporting and recordkeeping requirements.
Application of “Responsible Conduct” Guidance
Earlier this week, as detailed in our prior Special Alert, the CFPB issued guidance setting forth its expectations for companies subject to enforcement activity. Among other things, the CFPB stated that “responsible conduct” may be rewarded by the exercise of its discretion to resolve an investigation with no public enforcement action or to reduce any sanction or penalty imposed. According to the CFPB, in the actions announced today, the companies proactively addressed aspects of the loan program at issue and worked cooperatively with the Bureau to provide refunds to servicemembers. While the matters nonetheless resulted in public enforcement actions, the Bureau states expressly that this “responsible conduct” was one of several factors it considered in electing not to impose civil money penalties.
CFPB’s Focus on Auto Finance & Servicemember Protection
In addition to marketing of loans and add-on products, the CFPB has continued to focus on the fair lending implications of certain practices of indirect auto lenders. Just last week, the CFPB sought to explain to members of Congress its rationale for pursuing auto fair lending claims, largely reiterating the information set forth in the guidance issued in CFPB Bulletin 2013-02, and the CFPB reportedly has several ongoing auto finance investigations. We expect to see additional auto finance actions from the Bureau addressing the marketing and pricing of auto loans and add-on products.
Today’s CFPB announcement notes that the DOD and the Judge Advocate General Corps of each of the service branches assisted the CFPB in this matter. Concurrent with the announcement, the CFPB published information for servicemembers related to military allotments, announced that the DOD has established a working group that will consult with the CFPB and other federal regulators to look at the use of military discretionary allotments, and reiterated the Bureau’s general commitment to working with the DOD on protecting servicemembers in the consumer financial marketplace.”
Special Alert: CFPB Proposes Additional Changes to Mortgage Rules
On June 24, 2013, the Consumer Financial Protection Bureau ("CFPB") issued another set of proposed amendments to its January 2013 mortgage rules. Whereas the proposed and final amendments issued by the CFPB in April and May focused largely on the Ability-to-Repay/Qualified Mortgage rule, this proposal primarily addresses several important questions that have emerged during the implementation process regarding the Mortgage Servicing and Loan Originator Compensation rules.
Even with this additional guidance from the CFPB, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they seek to implement the numerous rules by January 2014.
Comments on the proposed amendments are due July 22, 2013.
Key Proposed Amendments
Mortgage Servicing
Start of Foreclosure Process. The current rule prohibits a servicer from making the first notice or filing required for foreclosure unless the loan is more than 120 days delinquent. The proposed rule would clarify what servicer actions are prohibited during the first 120 days of delinquency. In short, the CFPB is proposing to adopt the literal meaning of "first notice or filing required by applicable law" and prohibit servicers from filing any document that "would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law" during the 120-day period. Thus, a breach letter required by Fannie Mae or any other debt collection activity should not be prohibited during the 120-day pre-foreclosure period provided such documents are not to be used as evidence of complying with requirements applicable to state law foreclosure processes.
This interpretation is expected to have significant implications for state foreclosure processes, particularly those states with pre-foreclosure mediation requirements and right to cure notices. For example, a notice of default in the District of Columbia may not be mailed to borrowers until after the 120-day pre-foreclosure period because the District of Columbia marks the notice of default as the "first notice or filing required by applicable law." Similarly, servicers in California and other states with pending or effective "Homeowners Bill of Rights" statutes (e.g., Alabama, Florida, Nevada, and Utah) may not fulfill those statutes' requirements to contact or provide borrowers with information regarding servicemember protections or foreclosure alternatives until after the pre-foreclosure period. In addition, it would appear that servicers in Massachusetts would have to wait 120 days before mailing borrowers a 150-day notice of right to cure, which would mean that a servicer may not begin the foreclosure process until 270 days after delinquency begins. By contrast, because Kentucky does not have additional pre-foreclosure statutory requirements, servicers would need only to wait the CFPB's minimum period of 120 days of delinquency to file a foreclosure complaint in Kentucky.
Incomplete Loss Mitigation Applications. The current rule requires servicers to review a borrower's loss mitigation application within five business days and provide a notice informing the borrower that the application is either: (1) complete; or (2) identifying the specific information needed to complete the application and stating that the borrower should provide that information by the earliest of four specific dates. The current rule also generally prohibits a servicer from offering a loss mitigation option based on an incomplete application.
The proposed amendments would:
- Allow servicers who initially describe an application as complete based on the five-day review to request additional information in some circumstances;
- Allow servicers to select a "reasonable date" by which an incomplete application should be completed; and
- Allow servicers to offer a borrower the option of a short-term forbearance program (i.e., forbearance of payments for up to two months) even if the application is not complete, subject to certain requirements.
Notice of Denial. The proposed amendments would clarify that, when notifying a borrower that he or she has been denied for a loss mitigation option, the servicer need only disclose the actual reasons for the denial and not other potential reasons.
Loan Originator Compensation
Effective Date. The CFPB proposed to modify the effective date for portions of this rule. Specifically, the proposed rule would: (1) move the effective date for most provisions forward from January 10, 2014 to January 1, 2014; and (2) generally apply the revised restrictions on compensation to transactions consummated and for which the employer paid compensation on or after January 1, 2014. These revisions are intended to permit employers of loan originators to make changes to their compensation, registration, licensing, and training practices at the start of the calendar year.
Definition of Loan Originator. The proposed amendments would provide a number of clarifications about who is and is not covered by the rule. In particular, the CFPB would clarify that employees of a creditor or loan originator in certain administrative or clerical roles (such as tellers or greeters) do not become loan originators solely by providing an application form or discussing general credit terms with consumers (e.g., "We offer rates as low as 3% to qualified consumers."). Instead, to be a loan originator, the employee would need to discuss particular credit terms that are or may be available from the creditor to that consumer selected based on the consumer's financial characteristics.
Other Rules
Points and Fees for Qualified Mortgages and High-Cost Mortgages. The proposed amendments would clarify the treatment of: (1) charges paid by parties other than the consumer - in particular, the amendments make clear that seller's points and charges paid by the creditor are excluded from the finance charge component of points and fees; and (2) loan originator compensation to retailers of manufactured homes and their employees.
Rural and Underserved Areas. The proposed amendments would revise the exceptions available to small creditors (creditors with no more than $2 billion in assets that, along with affiliates, originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year) operating in predominantly "rural" or "underserved" areas while, as announced in May, the CFPB re-examines the underlying definitions of "rural" or "underserved" over the next two years. Specifically, the CFPB would allow all small creditors, regardless of whether they operate predominantly in "rural" or "underserved" areas, to continue originating balloon high-cost mortgages if the loans meet the requirements for balloon qualified mortgages. In addition, the CFPB would allow more small creditors to take advantage of the exemption from the requirement to establish escrow accounts for higher-priced mortgage loans.
Prohibition on Financing Credit Insurance. For purposes of the prohibition on financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, the proposed amendments would clarify what constitutes financing of premiums by a creditor and, for purposes of the statutory exclusion for certain credit insurance premium calculation and payment arrangements, when credit insurance premiums are considered to be calculated and paid on a monthly basis.