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  • 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.

    Freddie Mac Fannie Mae Mortgage Origination

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  • Ninth Circuit Upholds Class Certification in TCPA Case

    Consumer Finance

    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.

    TCPA Debt Collection FCC

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  • UK FSA Fines Bank for Inaccurate Mortgage Records

    Federal Issues

    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.

    Mortgage Origination UK FSA

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  • 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.

    Privacy/Cyber Risk & Data Security

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  • "Red Flags" for Fair Lending Risk - How Banks Can Identify and Resolve Them


    Anyone who has been following enforcement activity in consumer financial services knows that fair lending is a key focal point for federal regulators, with recent huge monetary settlements and more likely to occur.  It’s not just a large bank issue; community banks have also been targeted. What can bank boards of directors and management do to avoid or mitigate such regulatory actions?  Identify the risks and address and resolve them before they become big risks.

    Over the past year, the U.S. Department of Justice (DOJ) has entered into the three largest fair lending settlements in history – all of which carried multimillion dollar price tags to resolve allegations of discrimination in retail and wholesale mortgage lending by major lenders. The DOJ, Consumer Financial Protection Bureau (CFPB), U.S. Department of Housing and Urban Development (HUD) and prudential banking regulators (FDIC, Federal Reserve, and OCC) are all aggressively pursuing, and in some cases actively soliciting, fair lending cases. Many of these cases are based on the controversial “disparate impact” theory of discrimination, which narrowly escaped review by the U.S. Supreme Court in early 2012, to determine whether this legal theory is even cognizable under federal fair lending laws. Notwithstanding the unresolved question over the use of disparate impact in the fair lending context, the federal banking regulatory and enforcement agencies have uniformly stated that they will prosecute fair lending cases under this legal theory.

    Fair lending allegations are not limited to large national retail banks. Community banks have also been targeted in these investigations and complaints. For example, in June 2011, DOJ reached a settlement with Nixon State Bank to resolve allegations that the bank had violated the Equal Credit Opportunity Act (ECOA) by charging higher prices on unsecured consumer loans made to Hispanic borrowers, which required Nixon to pay approximately $100,000 in restitution. Nixon State Bank did not maintain written loan pricing guidelines for its unsecured consumer loans; instead, the bank’s loan officers were granted broad discretion in handling all aspects of the unsecured consumer loan transaction. DOJ alleged that this policy had a disparate impact on Hispanic borrowers. In a more recent case from September 2012, Luther Burbank Savings Bank (discussed below) agreed to settle with DOJ for $2 million for setting a minimum residential mortgage loan amount that adversely impacted African American and Hispanic borrowers.

    Regulators or plaintiffs typically demonstrate “disparate impact” through a burden-shifting test that begins with an allegation that a lender applies a facially neutral policy or practice consistently to all credit applicants, but the policy or practice has a disproportionately adverse impact on members of a group protected under ECOA or the Fair Housing Act, the federal fair lending laws (protected class group).* If the first prong of the analysis is satisfied, the burden shifts to the lender who must prove that there was a legitimate, non-discriminatory business justification for the policy at issue. If this prong is satisfied by the lender, the burden shifts back to the regulator or plaintiff to prove that there is a less discriminatory alternative that achieves the same result. Under the disparate impact theory, no evidence of intentional discrimination is required.

    Example of disparate impact:

    • A community bank maintains a residential mortgage lending policy that precludes mortgages on homes that are more than 50 years old. The area of town where homes tend to be over 50 years in age is predominantly Hispanic. As a result, the bank’s lending policy, which appears facially neutral, has a disproportionately adverse impact on Hispanic borrowers as a protected class group and has the effect of restricting access to credit for Hispanic borrowers. The bank is unable to offer a legitimate, nondiscriminatory business justification for the policy.

    Set forth below are six “red flags” for fair lending risk that you should be aware of so you can determine whether your institution is taking appropriate action.

    Red Flag #1: Disparate impact that may not be readily apparent.

    • Potential disparate impact is often difficult to detect, so it is important to proactively review your institution’s policies and procedures to determine if a risk of disparate impact may exist.
    • To mitigate the risk of a disparate impact case against your institution, review marketing, advertising, underwriting, pricing, compensation and other related policies and procedures to evaluate whether they could have a disproportionately adverse impact on a protected class, even if the policy or procedure is facially neutral. If there is a potential disparate impact, you should determine whether the level of risk merits performing a formal, documented disparate impact analysis, which would include a determination of whether an adequate business justification for the policy or procedure exists and whether there is a less discriminatory alternative that could achieve the same results.

    Red Flag #2: Lending policies that require a minimum loan amount.

    • Underwriting guidelines that impose minimum loan amounts have been an area of fair lending scrutiny. Although these policies are facially neutral, they have been the subject of numerous fair lending complaints and settlements because of the perception that minimum loan amounts have a disparate impact on minority borrowers who are more likely to live in neighborhoods and communities with lower property values and, therefore, require lower loan amounts.
    • For example, on September 12, 2012, DOJ entered into a $2 million settlement with Luther Burbank Savings Bank for setting a minimum loan amount of $400,000 for its single-family residential mortgage lending program, which resulted in very few mortgage loan originations to African American or Hispanic borrowers. Despite being aware that the low level of lending to minorities was attributable to the minimum loan amount, the bank continued to enforce the policy, which restricted credit to those protected class groups.
    • Although most complaints involving minimum loan amounts involved mortgage lending, the same principle applies to all consumer lending if the minimum loan amount makes a product inaccessible to members of a protected class. To understand your fair lending risk in this area, you should review your lending policies and procedures to identify any minimum loan amounts.

    Red Flag #3: Credit overlays to underwriting guidelines.

    • Another area of fair lending scrutiny by both regulators and consumer advocacy groups has been credit overlays that go beyond the minimum credit standards or underwriting guidelines established by Fannie Mae and Freddie Mac (for conforming loans) and HUD (for Federal Housing Administration (“FHA”) guaranteed loans). Examples of such practices that have resulted in fair lending complaints, investigations and settlements include:
      • Imposing higher minimum FICO scores for FHA loans than what is required by HUD;
      • Requiring female applicants on maternity leave to return to work before closing a mortgage loan (even when the applicant satisfies the income requirements while she is on maternity leave); and
      • Requiring applicants receiving permanent disability benefits from the Social Security Administration to provide proof of continuation of the disability with a letter from a physician attesting to the nature of the disability and the expected duration of the disability.
    • To understand your fair lending risk in this area, you should review your underwriting policies and procedures to identify any credit overlays and assess the likelihood that such modifications would have a disparate impact on members of a protected class. Where risk is identified, determine whether a formal, documented disparate impact analysis is appropriate.

    Red Flag #4: Lack of periodic risk assessments to evaluate level of consumer compliance risk (including fair lending risk).

    • Federal regulators expect depository institutions of all sizes to conduct periodic risk assessments of its operations to evaluate its level of compliance with applicable laws and regulations. Not conducting such risk assessments may cause the regulators to do a more in-depth assessment during examinations and raise questions about a bank’s commitment to consumer compliance. Among the areas that should be covered in these periodic risk assessments is fair lending. Fair lending risk assessments should not only include the technical requirements under ECOA and Regulation B (e.g., adverse action notices, spousal signature), but also the prohibitions on discriminatory practices.
    • The methodology for the risk assessment should be reviewed periodically to include changes to applicable laws and regulations and your own operations, products or services. The fair lending risk assessment should be used to ensure that proper controls are in place (especially for high-risk areas) and to help allocate your compliance staff, budget and resources.

    Red Flag #5: Use of discretion in consumer lending.

    • Policies and procedures often permit loan officers, underwriters or agents (e.g., auto dealers) to exercise discretion in pricing or credit decisioning. Discretionary practices may also arise in areas such as account maintenance (e.g., fee waivers), collections, and loan modifications.
    • Wherever discretion is afforded in the loan origination process, it is important to ensure that appropriate controls are in place and to perform ongoing monitoring and testing of the discretionary activity. Controls, monitoring and testing help ensure that discretion is exercised consistently; if not, appropriate remedial action can then be taken so that the consumer is not harmed.

    Red Flag #6: Failure to evaluate fair lending risks and controls for non-HMDA loans.

    • Although fair lending exams and enforcement actions have historically focused on mortgage lending, regulatory and enforcement agencies have begun to direct their fair lending scrutiny to non-HMDA lending (e.g., indirect auto lending, student lending, credit cards, and unsecured consumer lending). In the absence of any HMDA data to serve as the basis of a fair lending claim, the government has relied on “proxy” data (e.g., geocoding, surname) to conduct quantitative analyses.
    • Although it is unclear whether it is a regulatory expectation to conduct your own fair lending testing of non-HMDA loan data using proxy data, it is important to understand your fair lending risk in this area. If your institution conducts periodic fair lending risk assessments, you could rely on the findings to determine which non-HMDA products present the greatest fair lending risk. Depending on the level of risk and availability of suitable proxy data, you can determine whether it is appropriate to perform some preliminary testing. At a minimum, all institutions should review their preventive and detective controls for its non-HMDA lending channels to determine whether proper controls are in place.

    All of the fair lending risks noted above lead to the overarching recommendation that institutions develop a comprehensive and robust Fair Lending Program that is part of its compliance risk management program. Depending on the size and risk profile of your institution, it may be appropriate to designate a Fair Lending Officer to manage and oversee implementation of your Fair Lending Program. Whether your institution has a Fair Lending Officer or other compliance professional assigned to manage your Fair Lending Program, the individual should be vested with the experience, resources and authority to effect change when needed.

    The board of directors should provide oversight for your institution’s Fair Lending Program and its overall compliance risk management program. At minimum, the board should dedicate one of its standing committees, such as the audit committee or risk management committee, to routinely discuss matters and receive reports related to consumer compliance risk. That committee’s agenda should also periodically include items related to fair lending issues, risks and controls.

    * ECOA and the Fair Housing Act prohibit discrimination in lending on specified bases. Both ECOA and the Fair Housing Act prohibit discrimination on the basis of race, color, religion, national origin, and sex. ECOA further prohibits discrimination on the basis of marital status, age, receipt of public assistance, or good faith exercise of a right under the Consumer Credit Protection Act. The Fair Housing Act includes familial status and handicap as additional prohibited bases.

    This posts was adapted from an article written by BuckleySandler attorneys Andrea Mitchell and Lori Sommerfield for the American Association of Bank Directors.

    CFPB HUD Fair Housing Fair Lending ECOA DOJ Disparate Impact

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  • CFPB Report Likens Student Loan Complaints to Mortgage Servicing Problems

    Consumer Finance

    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 Servicemembers Student Lending SCRA

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  • 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.

    Credit Cards TILA

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  • 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.

    Mortgage Origination

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  • FHFA Plans to Improve Efforts to Recover Losses from Certain Defaulting Borrowers


    On October 17, the FHFA Office of Inspector General (OIG) reported that the FHFA does not currently oversee the deficiency management programs of Fannie Mae and Freddie Mac (the Enterprises) and that some oversight is necessary. When borrowers default on mortgage loans held by Fannie Mae and Freddie Mac, the Enterprises absorb the losses. To date, the Enterprises have only recovered a small fraction of losses by pursuing defaulting borrowers that may have the ability to repay, such as strategic defaulters, including those defaulting on vacation homes or investment properties. The FHFA OIG recommended, and the FHFA agreed, that the FHFA should collect from the Enterprises data about their deficiencies, their efforts to target defaulting borrowers who have the ability to repay their loans, and other related data. The FHFA also agreed with the OIG that with such information in hand, the FHFA can proactively oversee the Enterprises’ deficiency management programs and provide supervisory guidance on managing deficiency collections.

    Foreclosure Freddie Mac Fannie Mae FHFA

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  • FTC Announces Two Privacy Events


    On October 15, the FTC announced that it will host a workshop to examine the practices and privacy implications of comprehensive collection of consumers' online activities. On December 6, 2012, consumer protection organizations, academics, business and industry representatives, privacy professionals, and other stakeholders will review Internet data collection methods, identify those companies currently capable of comprehensive Internet data collection, consider what new legal protections are needed, and explore other related topics. The workshop is one step the FTC promised to pursue in a March 2012 report that urged companies to implement certain consumer privacy protections. On October 17, the FTC announced an upcoming forum on using enforceable industry codes of conduct to protect consumers in cross-border commerce. The forum will focus on the use of systems, like the Asia-Pacific Economic Cooperation Cross-Border Privacy Rules system which was created earlier this year, when information moves between countries with different privacy rules. The forum will bring together government officials, academics, industry members, and consumer groups to discuss the increasing use of such codes.

    FTC Privacy/Cyber Risk & Data Security

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