InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
OCC and DOJ Announce SCRA Enforcement Action Against a National Bank
On July 26, the OCC and the DOJ announced resolution of actions brought against a national bank for alleged violations of the Servicemembers Civil Relief Act (SCRA). The DOJ filed a complaint and consent order in the U.S. District Court for the Eastern District of Virginia, simultaneously bringing and resolving allegations that over a roughly five year period the bank failed to provide sufficient protections to servicemembers (i) denying valid requests for interest rate reductions because the servicemembers’ military orders did not include specific end dates for the period of military service, (ii) foreclosing without a court order, (iii) repossessing motor vehicles without a court order, and (iv) obtaining default judgments without first filing accurate affidavits. Under the DOJ settlement, the bank must pay $12 million in damages to servicemembers. Concurrently, the OCC released consent orders resolving similar allegations. Under both the DOJ and OCC orders, the bank must take specific actions to enhance compliance with SCRA, including with regard to vendor management, training, and internal reporting. The OCC also is requiring that the bank report periodically to the OCC, and conduct a look-back review of its servicemember accounts. The DOJ notes that the bank already has adopted enhanced SCRA policies on its own initiative, including extending a four percent interest rate to qualifying servicemembers and giving an additional one-year grace period before de-enrolling servicemembers from the reduced interest rate program.
FSOC and OFR Publish Annual Reports
This week, the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) each published annual reports to Congress, as mandated by the Dodd-Frank Act. This is the first such report the OFR has prepared. The FSOC annual report surveys the macroeconomic environment within which the U.S. economy exists, identifies risks to U.S. financial stability, reports on implementation of the Dodd-Frank Act and activities of FSOC, and provides a series of recommendations for policymakers. The FSOC’s recommendations fall into four categories: (i) reforms to address structural vulnerabilities, (ii) heightened risk management and supervisory attention, (iii) housing finance reforms, and (iv) implementation and coordination of financial reform. Within the housing finance category, the FSOC notes recent efforts to encourage private capital to re-enter the market in the near term but stresses the continued need for long-term housing finance reform. This section also reviews federal efforts to alter mortgage servicing standards and recommends that federal agencies finalize comprehensive servicing standards. The OFR report summarizes the OFR’s efforts to (i) analyze threats to financial stability, (ii) conduct research on financial stability, (iii) address data gaps, and (iv) promote data standards. According to the report, over the next year, the OFR will focus on the migration of financial activities into the so-called shadow banking system, and will continue to build on research related to threats to financial stability, stress tests, and risk management.
Eleventh Circuit Holds Loan Servicer May Be Debt Collector Subject to FDCPA
On July 18, the U.S. Court of Appeals for the Eleventh Circuit held that a mortgage servicer may be a debt collector subject to the FDCPA where it attempts to both enforce a security interest and collect a debt. Birster v. American Home Mortgage Servicing, Inc., No. 11-13574, 2012 WL 2913786 (11th Cir. July 18, 2012). The borrowers alleged that the servicer harassed them with phone calls and home inspections in connection with trying to collect mortgage payments. The district court granted summary judgment to the servicer, holding that the servicer’s actions constituted efforts to enforce a security interest, and not to collect a debt. As such, the borrower’s claims under the FDCPA could not survive. The appellate court reversed and remanded, relying on its decision in Reese v. Ellis, Painter, Rattertree & Adams, LLP, No. 10-14366, 2012 WL 1500108 (11th Cir. May 1, 2012), which came after the district court ruled in favor of the servicer, and which provides that an entity can both enforce a security interest and collect a debt. The court held that the borrowers sufficiently alleged facts to support a claim under the FDCPA, citing a letter the servicer sent in which it stated that it was attempting to collect a debt.
State Law Update: Illinois, Michigan, Oregon Enhance Borrower Protections
Illinois Enhances Borrower Protections. On July 25, Illinois enacted SB 1692, which enhances consumer protections related to mortgages and tax refund anticipation loans. The bill amends the state’s High Risk Home Loan Act to (i) update the definition of “high risk home loan” to be consistent with the federal standard, and prohibit prepayment penalties, balloon payments and modification fees for such loans, (ii) revise the definition of “points and fees” and clarify the prohibition on the financing of such fees in connection with high risk loans, and (iii) limit late payment fees to 4% of the amount past due. The bill also amends the state’s Tax Refund Anticipation Loan Disclosure Act to (i) revise certain definitions, (ii) limit the fees that can be charged in connection with tax refund loans and establish other prohibited activities, and (iii) amend the disclosures required for creditors making such loans. These and other changes in the bill are effective January 1, 2013.
Michigan Updates Guidance on Return Check Fees on Installment Sales Contracts. On July 19, the Michigan Office of Financial and Insurance Regulation (OFIR) published a letter to installment seller/sales finance licensees clarifying the regulator’s position on the use of return check fees in installment sales contracts. Previously, the OFIR had taken the position that inclusion of an NSF fee in a vehicle installment sales contract was not permitted because such a fee was not expressly permitted under the state’s Motor Vehicle Sales Finance Act (MVSFA). However, in its July 19 letter the OFIR clarified that the OFIR considers it a violation of state law for a licensee under the MVSFA to charge a fee for returned checks if the motor vehicle installment sales contract does not specifically provide for the assessment of such a fee. The OFIR states that the MVSFA requires a contract contain all of the terms of the agreement between a buyer and a seller, including any default charges. Although the state Credit Reform Act permits regulated lenders to charge return check fees up to a maximum of $25, because a returned check constitutes a default under the contract, a return check fee is considered a default charge and can only be assessed if disclosed in the agreement.
Oregon Adopts Rules to Implement Foreclosure Avoidance Program. Recently, the Oregon Department of Justice adopted temporary rules to implement the Foreclosure Avoidance Mediation Program established earlier this year. The rules establish (i) the accepted methods of notice required to be provided to the state Attorney General, (ii) the minimum training and qualifications for mediators, (iii) the fees and timing of fee payments, and (iv) the form of mediation notice for use in seeking nonjudicial foreclosure. The rules took effect July 11, 2012, and expire January 6, 2013.
FDIC Finalizes Rule and Guidance Regarding Assessment of Risk Capital Requirements
On July 24, the FDIC published a final rule that prohibits any insured savings association from acquiring or retaining a corporate debt security unless the association first determines that the issuer has adequate capacity to meet its obligations through the projected life of the security. An issuer would satisfy this requirement if it presents a low risk of default and is likely to make a full and timely repayment of principal and interest. The final rule is largely identical to the rule as proposed, but makes one change to clarify the rule and harmonize it with parallel OCC regulations. In conjunction with the final rule, the FDIC also finalized guidance meant to assist savings associations in conducting due diligence to determine whether a security is eligible under the final rule. The finalized guidance is substantially similar to the proposed version. The final rule took effect July 21, 2012.
OCC Releases Bank Accounting Advisory Series Update
On July 25, the OCC released an update to its Bank Accounting Advisory Series, which provides accounting guidance for financial institutions. The updates are intended to address industry questions related to acquired loans, other real estate owned, troubled debt restructurings, nonaccrual, allowance for loan and lease losses, insurance claims, and debt discharged in bankruptcy.
NCUA Reorganizes Examination and Supervision Offices
On July 26, the NCUA announced the creation of the Office of National Examinations and Supervision, effective January 1, 2013. The new office will focus on consumer credit unions with more than $10 billion in assets. The NCUA is making the change to alter what it identifies as an imbalance in its current examination and supervision program by shifting resources from examination of smaller credit unions to the largest credit unions.
Ninth Circuit Reverses Dismissal of Pricing Discrimination Suit Against Auto Dealers
On July 13, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s dismissal of a Department of Justice suit alleging that two automobile dealers violated the Equal Credit Opportunity Act by charging non-Asian customers higher "overages" or "dealer mark-ups" than similarly-situated Asian customers. United States v. Union Auto Sales, Inc. No. 9-7124, 2012 WL 2870333 (9th Cir. Jul. 13, 2012). A bank within whose network the automobile dealers operated, settled related charges concurrent with the filing of the case. The automobile dealers chose to litigate, eventually succeeding on a motion to dismiss. On appeal, the court reversed the district court’s holding that the complaint lacked sufficient supporting detail to give the defendants fair notice of the claim. Instead, the divided appeals court held that the government need not demonstrate discrimination at the pleading stage, but merely allege facts sufficient to make a discrimination claims plausible, a threshold met by the government’s complaint. One judge dissented from the majority opinion and argued that the government’s conclusory allegations do not meet the plausibility threshold established in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and a subsequent Ninth Circuit decision. The majority also held that the district court erred in dismissing the complaint for failing to articulate intent, noting that under both disparate impact and disparate treatment theories, intent is irrelevant. Further, the court held that the link between names and racial categorization for the purposes of discriminatory conduct is well-established. The case was remanded for further proceedings.
CFPB Announces First Public Enforcement Action; Issues Related Compliance Bulletin
On July 18, the CFPB announced its first public enforcement action - a Consent Order entered into by a major credit card issuer to resolve allegations that the issuer’s vendors deceptively marketed ancillary products such as payment protection and credit monitoring. The OCC made a corresponding enforcement announcement and released a Cease and Desist Order and Civil Money Penalty to resolve related charges. Under the CFPB order, the issuer will refund approximately $140 million to roughly two million customers, and will pay a $25 million penalty. The OCC order requires restitution of approximately $150 million (of which $140 million overlaps with the CFPB order) and an additional $35 million civil money penalty. Under both agencies’ actions, the issuer is prohibited from selling and marketing certain ancillary products until it obtains approval to do so from the regulators, and the issuer must take specific actions to enhance compliance with consumer financial laws.
Concurrently, the CFPB issued Bulletin 2012-06, which states that the CFPB expects supervised institutions and their vendors to offer ancillary products in compliance with federal consumer financial laws. The guidance cites “CFPB supervisory experience [that] indicates that some credit card issuers have employed deceptive promotional practices when marketing” such products, including (i) failing to adequately disclose terms and conditions, (ii) enrolling customers without their consent, and (iii) billing for services not performed. The Bulletin reviews applicable federal law and outlines the compliance program components that the CFPB expects supervised institutions to maintain.
CFPB Releases Semiannual Regulatory Agenda
On July 16, the CFPB announced the release of its spring 2012 rulemaking agenda. The agenda lists the regulatory matters that the CFPB anticipates pursuing during the period June 1, 2012 through May 31, 2013. It also updates the CFPB’s first-ever such agenda, published as part of the fall 2011 Unified Agenda. For example, the updated agenda indicates that the CFPB expects to issue by January 2013, an Advance Notice of Proposed Rulemaking regarding the registration of certain nonbank entities, whereas the fall 2011 agenda anticipated a Notice of Proposed Rulemaking on this topic by March 2012. Similarly, the new rulemaking agenda updates the date by which the CFPB expects to take further action on developing regulations concerning the expanded HMDA data collection required by the Dodd-Frank Act from October 2012 to April 2013.