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Federal District Court Holds Ohio Post-Repossession Notice Requirements Not Preempted
On October 17, the U.S. District Court for the Northern District of Ohio held that the post-repossession notice requirements in the Ohio Retail Installment Sales Act (RISA) and the Ohio Uniform Commercial Code (OUCC) were not preempted by the National Banking Act (NBA) and OCC regulations. White v. Wells Fargo Bank, N.A., Case No. 1:12 CV 943, 2012 WL 4958516 (N.D. Ohio Oct. 17, 2012). A group of borrowers allege on behalf of a putative class that the lender violated provisions of RISA and the OUCC when it repossessed and sold borrowers’ cars after the borrowers defaulted on their auto loans. The lender filed a motion to dismiss the action, claiming that, because it is a national bank, the NBA and applicable OCC regulations preempt borrowers’ RISA and OUCC claims. Following precedent from the Ninth and Fourth Circuits, the Ohio court held that the state laws regarding repossession notice requirements fell within the savings provision of the NBA and thus were not expressly preempted. The court also held that the federal government had not occupied the field of debt collection, and that the Ohio laws at issue do not relate to the bank’s lending operations and therefore do not significantly interfere with its ability to operate as a bank. Accordingly, the court denied the lender’s motion to dismiss on preemption grounds.
Report Identifies Increased Enforcement Activity By State Securities Regulators
On October 23, the North American Securities Administrators Association (NASAA), a voluntary association whose membership consists of sixty-seven state, provincial, and territorial securities administrators in North America, published a report that indicates enforcement of state securities laws by U.S. state securities regulators is on the rise. The report reflects the results of a survey in which forty-eight U.S. NASAA members participated. According to the report, more than 2,600 administrative, civil and criminal enforcement actions involving nearly 3,700 respondents and defendants were reported by the states in 2011, including a near doubling of enforcement actions against investment adviser firms from the previous year. The report presents other summary findings and enforcement trends, including new risks related to crowdfunding and Internet offers.
OCC Provides Stress Test Guidance for Community Banks
On October 18, the OCC issued Bulletin OCC 2012-33, which provides guidance to community banks with assets of $10 billion or less on how to implement stress testing to assess risk in their loan portfolios. Stress tests are exercises designed to gauge the potentially adverse impact that a hypothetical scenario might have on earnings, loan loss reserves, and capital levels. The OCC reiterated that stress testing procedures for smaller community banks do not need to be as sophisticated as those used by larger national banks, but noted that all banks are expected to assess their capital adequacy in relation to overall risks and to have a plan for maintaining appropriate capital levels. The bulletin also included explanations of specific types of stress testing, a sample method for performing stress tests on a basic portfolio, and a table of common real estate characteristics that should be considered when evaluating the impact of a stress event on specific property types. Additionally, the OCC announced the availability of a new tool for performing stress tests on income-producing commercial real estate loan portfolios. The OCC plans to host a teleconference for bankers on December 3, 2012 to discuss this new guidance.
Fannie Mae and Freddie Mac Provide Additional Guidance on Quality Control Practices
On October 19, Fannie Mae and Freddie Mac (the GSEs) issued supplemental guidance regarding the new representation and warranty framework for mortgages sold or delivered to the GSEs on or after January 1, 2013. The GSEs originally announced the new framework on September 11, 2012. Fannie Mae Selling Guide Lender Letter LL-2012-07, Freddie Mac Bulletin 2012-22, and a related Freddie Mac Industry Letter identify new elements of and effective dates for: (i) quality control principles; (ii) quality control sample process; (iii) quality control review process; (iv) enforcement practices; and (v) ongoing communications with sellers and servicers. Additionally, the GSEs provided clarification regarding life of loan representations and warranties related to misstatements, misrepresentations, omissions, and data inaccuracies. Finally, Freddie Mac also revoked the automatic repurchase trigger it initially announced under the new framework.
Ninth Circuit Upholds Class Certification in TCPA Case
On October 12, the U.S. Court of Appeals for the Ninth Circuit upheld provisional class certification for a plaintiff debtor, who claimed that a debt collector had violated the Telephone Consumer Protection Act (TCPA) by using an automatic dialer to place calls to plaintiff and other debtors’ cellular telephone numbers obtained via skip-tracing, and where the debtors also had not expressly consented to be called. Meyer v. Portfolio Recovery Assocs. LLC, No. 11-56600, 2012 WL 4840814 (9th Cir. Oct. 12, 2012). The debt collector argued, in part, that typicality or commonality issues should preclude class certification because some debtors might have agreed to be contacted at their telephone numbers, which were obtained after the debtors incurred the debt at issue. Citing a recent FCC declaratory ruling, the court noted that prior express consent is deemed granted only if the debtor provides a cellular telephone number at the time of the transaction that resulted in the debt at issue. The court thus rejected the debt collector’s argument, and held that debtors who provide their cellular telephone numbers after the time of the original transaction are not deemed to have consented to be contacted under the TCPA. In addition, the court upheld the district court’s grant of a preliminary injunction to the plaintiff, finding that he had established a likelihood of success on his TCPA claim and had demonstrated irreparable harm based on the debt collector’s continuing violations of that statute.
UK FSA Fines Bank for Inaccurate Mortgage Records
On October 19, the UK FSA announced that it fined a bank £4.2 million ($6.7 million) for failing to keep accurate records regarding 250,000 mortgages it was servicing. In monitoring a consumer forum website, the FSA found that certain of the bank’s borrowers had complained of being excluded from a bank program meant to remedy a separate problem. Upon investigation, the FSA determined that the bank held its mortgage information on two separate unaligned systems. The FSA also identified problems with two other processes where manual updates were not always carried out. The FSA claimed that, as a result of its recordkeeping practices, the bank relied on incorrect records for certain of its mortgages over a seven-year period. Because the bulk of the alleged misconduct occurred before the FSA’s new penalty framework came into force in March 2010, the penalty was assessed under the prior regime. Further, since the bank agreed to settle at an early stage of the investigation, it qualified for a 30% discount pursuant to the FSA’s executive settlement procedures.
South Carolina Supreme Court Holds Web-Based Emails Not Protected Under The Stored Communications Act
On October 10, the South Carolina Supreme Court held that emails opened and retained by the recipient in a web-based email system are not protected under the Stored Communications Act (SCA), because they are not stored for the purposes of backup protection. Jennings v. Jennings, No. 27177, 2012 WL 4808545 (S.C. Oct. 10, 2012). The plaintiff sued an individual that gained unauthorized access to the plaintiff’s web-based email system, alleging, among other things, that the hacker violated the SCA. The SCA proscribes the unauthorized accessing of an electronic communication while it is in “electronic storage,” which in relevant part means that it is stored by an electronic communication service for the purpose of backup protection. The state supreme court noted that the plaintiff had opened the emails and retained them, but had not made any other copy of them. The court held that such emails, therefore, were not in “electronic storage” for the purposes of “backup” protection, reasoning that the plain meaning of “backup” does not apply to a single copy of a communication, i.e. web-based emails that are not downloaded to a computer or stored elsewhere.
CFPB Report Likens Student Loan Complaints to Mortgage Servicing Problems
On October 16, CFPB Student Loan Ombudsman Rohit Chopra published the first annual report on student loans, as required by the Dodd-Frank Act. According to the report, the CFPB has received nearly 3,000 complaints regarding private student loans since it began accepting such complaints in March 2012. Based on the complaints and other data obtained by the CFPB, the report describes issues in the student loan market as similar to those seen in the mortgage servicing market including (i) improper application of payments, (ii) untimeliness in error resolution, and (iii) inability to contact appropriate personnel when facing economic hardship. Further, the report notes problems reported in the application of the Servicemembers Civil Relief Act, including obstacles to obtaining the available interest rate cap. The CFPB Student Loan Ombudsman recommends that the Treasury Secretary, the CFPB Director, and the Education Secretary assess whether efforts to remedy problems in mortgage servicing can be applied to improve student loan servicing. The Ombudsman also invites lenders to develop creative programs to help borrowers restructure debt, and recommends that the relevant Senate and House committees identify opportunities to spur the availability of loan modification and refinance opportunities. Additionally, on October 18, the CFPB released a report that expands on the servicemember-related issues presented in the Ombudsman's annual report.
CFPB Proposes Change to Credit Card Ability to Pay Rules
On October 17, the CFPB proposed a rule to amend the current Regulation Z requirement that credit card issuers consider an applicant's independent ability to pay regardless of age. The current regulation, as amended by the Federal Reserve Board, and which took effect October 1, 2011, has received criticism from members of Congress and other stakeholders that the rule limits access to credit for stay-at-home spouses and partners. The CFPB's proposed revision would remove the ability to pay requirement for consumers who are twenty-one and older and permit issuers to consider income to which such consumers have a "reasonable expectation of access." The proposed rule would not change the independent ability to pay requirement for individuals under the age of twenty-one. Comments on the proposed rule will be accepted for sixty days following publication in the Federal Register.
California Appeals Court Reinstates Challenge to Allegedly Deceptive ARMs
On October 11, the California Court of Appeal, Sixth District, reinstated a case in which borrowers claim fraudulent omission and violation of the unfair competition law (UCL) based on lenders' alleged failure to disclose the essential terms of certain mortgage loans. Thibault v. Am. Mortg. Network, Inc., No. H036620, 2012 WL 4881541 (Cal. Ct. App. Oct. 11, 2012). The borrowers claim the lenders did not disclose that the option adjustable rate mortgage loans (ARMs) were guaranteed to cause negative amortization under the minimum payments required under the loans, as set forth in the only payment plan presented to the borrowers. The trial court dismissed the case, holding that the ARMs at issue do not necessarily cause negative amortization as the loan documents clearly disclose that negative amortization occurs only if the minimum payment fails to cover the interest due, and the borrowers chose not to make more than the minimum payment. The appellate court, relying on a prior California appellate decision, Boschma v. Home Loan Ctr., Inc., 198 Cal. App. 4th 230 (2011), disagreed and held that the borrowers adequately pleaded that material facts were concealed by inaccurate representations and half-truths; the court reasoned that the actual interest rates and monthly payment amounts necessary to amortize the loan were hidden in the complexity of the loan terms. The court further noted that the loans disclosed the use of "teaser" interest rates to calculate the minimum payments without showing how those payments compare to the interest accruing on the loan. With regard to the borrowers' potentially duplicative UCL claim, the court found no reason to force the borrowers to choose between that claim and their common law fraud claim at this stage of the proceedings. The appellate court reversed the trial court's judgment.