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State Law Update: Montana Adopts Mortgage Servicer Regulations
On September 6, the Montana Department of Administration published final rules governing mortgage servicers. In 2011, Montana enacted House Bill 90, which made numerous revisions to the Montana Mortgage Broker, Mortgage Lender, and Mortgage Loan Originator Licensing Act concerning the licensing and regulation of mortgage servicers. The bill also updated licensing and other requirements for brokers, lenders and originators. The new regulations implement these amendments, addressing mortgage servicer (i) quarterly reporting requirements, (ii) record keeping requirements and electronic record keeping rules, (iii) renewal application deadlines, and (iv) escrow fund requirements. The final rules also amend existing regulatory definitions and other provisions impacting all mortgage licensees. The adopted regulations largely track the proposed versions, with the exception of changes made in response to comments or to address technical issues.
Federal Regulators Host Webinar on SCRA Compliance
On September 10, federal banking regulators, the CFPB, and the FHFA conducted a webinar on federal servicemember financial protections, recent changes to the Servicemembers' Civil Relief Act (SCRA), and recent changes to Fannie Mae and Freddie Mac short sale procedures for servicemembers and loan modification options for servicemembers. The event featured compliance and enforcement updates from the CFPB, the DOJ, and the OCC. Ann Thompson from the CFPB Office of Nonbank Supervision described recent joint agency guidance regarding servicemembers with Permanent Change of Station (PCS) Orders as an extension of the CFPB's mortgage servicing exam procedures. Ms. Thompson explained that the CFPB will look at bank and nonbank servicers' policies and procedures to determine their adequacy for handling servicemembers with PCS orders. If there are deficiencies, the CFPB may take supervisory or enforcement actions to support implementation of the guidance. Eric Halperin from the DOJ's fair lending unit provided an update on enforcement activity and described a recent SCRA enforcement action against a national bank that covered all aspects of SCRA, not just foreclosure protections, as the model for the DOJ moving forward. Finally, Kimberly Hebb from the OCC offered some considerations for institutions seeking to comply with SCRA. She explained that the SCRA compliance process need not stand alone. For example, with regard to the law's rate reduction requirements, compliance steps could be incorporated into existing processes for error resolution. Ms. Hebb also stressed documentation and record keeping, pointing out that while the law does not include a specific record retention requirement, examiners will want to see the full scope of compliance processes documented for use in determining compliance.
Federal District Court Holds TILA Supports Vicarious Liability for Creditors
On August 30, The U.S. District Court for the Southern District of Florida held that a creditor may be vicariously liable for certain Truth in Lending Act (TILA) violations committed by its servicer. Kissinger v. Wells Fargo Bank, N.A. No. 12-60878, 2012 WL 3759034 (S.D. Fla. Aug. 30, 2012). In this case, a creditor sought to dismiss two borrowers' complaint alleging that the creditor was liable for its servicer's failure to provide information the borrowers requested about the owner of the promissory note. In response to the borrowers' request, the servicer had provided the name of the owner of the note, along with the servicer's address and telephone number. The borrowers claimed that the servicer's failure to provide the owner's address and telephone number constituted a violation of TILA. The creditor argued the case should be dismissed because TILA does not support vicarious liability, and in any event, the servicer was acting as a master servicer and was allowed under TILA to provide its own contact information. The court rejected the latter argument as one not suited to a decision on the law at this stage, ruling that the creditor must reserve the argument as a defense to be raised later. With regard to vicarious liability, the court relied in part on Davis v. Greenpoint Mortg. Funding, Inc., No 09-2719, 2011 WL 7070221 (N.D. Ga. Mar. 1, 2011), which held that a finding of no vicarious liability for creditors would render TILA's private right of action clause superfluous. The court thus held that TILA allows the application of agency principles so that creditors can be held liable for the actions of their servicers. Declining to follow another Florida case, Holcomb v. Fed. Home Loan Mortg. Corp., No 10-81186, 2011 WL 5080324 (S.D. Fla. Oct. 26, 2011) -- which held Congress did not intend to apply agency principles to TILA -- the court denied the creditor's motion to dismiss.
Federal District Court Declines to Enforce Browsewrap Arbitration Agreement
On August 28, the U.S. District Court for the Central District of California held that a retailer's so-called browsewrap agreement failed to provide the consumer with constructive notice of an agreement to arbitrate disputes and declined to enforce arbitration. Nguyen v. Barnes & Noble, Inc., No 12-0812, WL 3711081 (C.D. Cal. Aug. 28, 2012). The consumer filed suit under New York's and California's unfair competition and false advertising laws and other state statutes, alleging that the retailer canceled his online purchase of two sale items, causing him to have to later purchase substitute products at more expense. The retailer responded that by making the purchase through the company's website, the consumer accepted the website's Terms of Use, which contained an agreement to arbitrate any claims arising out of the use of that website. On the retailer's motion to compel arbitration, the court explained that the website's browsewrap agreement stated that any user of the site is deemed to have accepted its terms by, among other things, making a purchase. The court held that the retailer cannot show that the consumer had constructive notice of the Terms of Use because the site did not require that the consumer affirmatively assent to the terms. The court denied the retailer's motion to compel arbitration and allowed the litigation to proceed.
State Law Update: Oregon Updates Check Cashing Regulations, Adopts Rules Allowing Bank Interest Rate Swaps
Recently, the Oregon Department of Consumer and Business Services published final rules to update certain rules applicable to check cashing businesses. The adopted regulations simplify reporting requirements and reduce the data that licensees must include in annual reports. In the same publication, the Department adopted temporary rules granting Oregon commercial banks authority to engage in interest rate swap transactions as intermediary with and on behalf of the bank's customers, provided the bank receives prior written approval from the Director of the Department of Consumer and Business Services and other specified conditions are satisfied.
FinCEN Launches New Data Portal for Law Enforcement Authorities
On September 10, FinCEN announced that its new search application providing access to data collected and maintained by FinCEN is now available for use by authorized users from other state and federal law enforcement and regulatory authorities. FinCEN has completed a series of meetings with other law enforcement officials to introduce them to FinCEN Query, a tool that will allow those authorities to access and analyze eleven years of data collected by FinCEN through its enforcement of the Bank Secrecy Act. The new tool replaces the existing database with updated technology to provide more complex search and analysis capabilities.
FHFA Outlines Next Steps for Conservatorship, Announces Close of First REO Pilot Purchase
On September 10, FHFA Director Edward DeMarco, in a speech made to an industry conference, provided a progress report on his agency's role as conservator for Fannie Mae and Freddie Mac and outlined several next steps the conservator will take to alter the GSEs' operations in the mortgage market. Further to the FHFA's recent increases of guarantee fees, Mr. DeMarco announced that the FHFA plans to release a paper outlining a pricing approach that would better capture the costs associated with state and local policies by imposing an upfront fee on newly acquired single-family mortgages originated in states where default-related costs are higher than the national average. The FHFA plans to seek public comment on the proposal. In addition, Mr. DeMarco provided an update on the FHFA's work, with Fannie Mae and Freddie Mac, to develop a shared securitization platform. This secondary market infrastructure project, which was announced earlier this year and is expected to take multiple years to build and implement, is being designed not only to serve Fannie Mae and Freddie Mac while in conservatorship, but also a broader multiple-issuer market post-conservatorship. The infrastructure would include new standards for a variety of contractual agreements, including a model pooling and servicing agreement. The FHFA plans to issue a white paper on the platform in October and will seek public input. Also announced as part of the speech, as well as in a separate FHFA release, was the FHFA's completion of the first sale of REO properties in the pilot program through which the FHFA is selling foreclosed properties to be transitioned into rental housing.
Second Circuit Reinstates MBS Class Action, Loosens Requirements for Pleading Damages
On September 6, the U.S. Court of Appeals for the Second Circuit held that a plaintiff has class standing to assert the claims of purchasers of securities backed by mortgages originated by the same lenders that originated the mortgages backing the named plaintiff’s securities, even when the securities were purchased from different trusts. NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., No 11-2762, 2012 WL 3854431 (2nd Cir. Sep. 6, 2012). In this case, the plaintiff, an institutional purchaser of certain mortgage-backed securities, filed suit on behalf of a putative class alleging that the offering documents contained material misstatements regarding the mortgage loan originators’ underwriting guidelines, the property appraisals of the loans, and the risks associated with the certificates. The district court dismissed the case, holding the named plaintiff lacked standing to bring claims on behalf of proposed class members that purchased securities from trusts other than the trusts from which the plaintiff bought securities. The district court also held that the plaintiff failed to allege a cognizable loss because the plaintiff knew the certificates might not be liquid and therefore could not allege injury based on a hypothetical price. On appeal, after acknowledging that putative class members purchased certificates issued through seventeen separate offerings backed by separate pools of loans, the court held that the named plaintiff raises a “sufficiently similar set of concerns” to allow it to seek to represent proposed class members who purchased securities backed by loans made by common originators. In overturning the district court with regard to the plaintiff’s ability to plead a cognizable injury, the court reasoned that while it may be difficult to value illiquid assets, “the value of a security is not unascertainable simply because it trades in an illiquid market.” The court reversed in favor of the plaintiff and remanded the case for further proceedings.
CFPB Releases Examination Procedures for Consumer Reporting Agencies
On September 5, the CFPB released procedures to guide its staff in examining “larger participant” consumer reporting agencies (CRAs). In July, the CFPB adopted a rule that will allow it to supervise CRAs with more than $7 million in annual receipts from consumer reporting activities starting September 30, 2012. The procedures outline how examiners should assess a CRA’s compliance with federal requirements, primarily under the Fair Credit Reporting Act, relating to (i) using and providing accurate consumer information, (ii) handling consumer disputes, (iii) providing disclosures to consumers, and (iv) preventing fraud and identity theft. While the procedures focus on issues specific to consumer reporting, they include a module that directs examiners to consider whether a CRA offers any other consumer financial product or service that creates other risks to consumers, particularly with regard to Gramm-Leach-Bliley privacy requirements and potential unfair, deceptive, or abusive acts or practices (UDAAP violations).
Idaho and Pennsylvania Transition Certain Non-Mortgage Businesses to NMLS
Beginning September 1, 2012, Idaho and Pennsylvania transitioned to NMLS the state licensing process for certain non-mortgage consumer financial service providers. In Idaho, all money transmitters now have the option of using the NMLS to obtain or renew their licenses. In Pennsylvania, all debt management services, money transmitter, and accelerated mortgage payment providers can begin to use the NMLS for all licensing-related transactions as of September 1, 2012. Effective November 1, 2012, all new applications must be processed through NMLS, and all current license holders must submit a transition request by December 31, 2012.