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Financial Services Law Insights and Observations

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  • Senators Ask Regulators to Halt Bank Payday Lending

    Consumer Finance

    On January 2, a group of Democratic Senators sent a letter to the Federal Reserve Board, the FDIC, and the OCC seeking action to stop banks from making payday loans. The letter cites the agencies’ “long history of appropriately prohibiting . . . banks from partnering with non-bank payday lenders,” but claims that several banks are currently making payday loans directly to their customers. The products at issue are actually deposit advance loans, which the Senators claim are structured the same as traditional payday loans and put customers in a cycle of debt. The Senators call on the regulators to take “meaningful regulatory action” in response to the problem as they present it, but stop short of identifying specific banks or outlining potential federal legislation.

    FDIC Payday Lending Federal Reserve OCC U.S. Senate

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  • Ohio Creates Temporary Loan Originator License

    Lending

    Last month, Ohio enacted a bill, S.B. 333, to allow the Division of Financial Institutions to offer a transitional loan originator license to assist an originator licensed by another state to transition to employment with an Ohio-regulated firm. The new license allows a transitioning out-of-state originator to originate loans on a temporary basis—120 days—while the originator completes the requirements of obtaining a state-issued annual license. A transitioning originator must have a sponsor that meets certain criteria and must pay a fee as set by the state regulator. In addition, the law directs the state regulator to adopt regulations allowing an originator from a federally regulated institution to obtain a temporary state license after federal law is changed to allow such transitional licenses. The CFPB has interpreted current federal law to prohibit such transitional licenses.

    Mortgage Licensing Mortgage Origination

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  • Fourth Circuit Holds State Auto Debt Cancellation Requirements Not Preempted for Certain Assigned Loans

    Consumer Finance

    On December 26, the U.S. Court of Appeals for the Fourth Circuit held that federal law does not preempt Maryland’s debt cancellation requirements for an auto retail installment sales contract (RISC) when a national bank is the assignee, and not the originator, of the loan. Decohen v. Capital One, N.A., No. 11-2161, 2012 WL 6685767 (4th Cir. Dec. 26, 2012). In this case, a dealer sold and financed a used vehicle and subsequently assigned the loan to a national bank. The financing included a charge for a debt cancellation agreement in the RISC, which under the Maryland Credit Grantor Closed End Credit Provisions (CLEC) requires a lender to cancel any remaining loan balance when a car is totaled and insurance does not cover the full loss. After the buyer totaled his car and was left with a loan balance, he sought to enforce the debt cancellation agreement. In dismissing the case, the district court held, in relevant part, that the agreement at issue was a "debt cancellation contract" covered by the National Bank Act, and that because such contracts are governed by federal law and regulations, including regulations regarding debt cancellation agreements, state regulation of such contracts is preempted. The district court also found that the purchaser failed to state a claim for breach of contract because the bank did not agree to cancel the remaining debt. The appeals court disagreed and held that because the OCC regulations regarding debt cancellation agreements apply only to agreements entered into by national banks, “the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank.” The court also held that the purchaser stated a claim for breach of contract because the parties voluntarily elected to be governed by the CLEC in the RISC, which cannot be undone by assignment of the loan. The court vacated the district court’s judgment and remanded the case for further proceedings.

    Auto Finance Preemption National Bank Act

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  • Eleventh Circuit Holds Management Company Collecting HOA Fees Exempt from FDCPA

    Consumer Finance

    Recently, the U.S. Court of Appeals for the Eleventh Circuit held that a management company collecting debts for a homeowners association was exempt from the FDCPA because collecting the unpaid assessments was incidental to the company’s bona fide fiduciary obligations. Harris v. Liberty Cmty. Mgmt., Inc., No. 11-14362, 2012 WL 6604518 (11th Cir. Dec. 19, 2012). In Harris, a homeowners association contracted with a management company to perform various tasks, including collecting past due assessments from homeowners. After warning the plaintiffs that their water service would be disconnected if they did not pay their outstanding association dues, the management company had their water service suspended. The plaintiffs asserted that the company was a debt collector under the FDCPA and violated the Act by terminating their water service. Under Section 1692a(6)(F)(i) of the FDCPA, an individual or entity is exempt from the Act when “collecting or attempting to collect any debt owed…another to the extent such activity is incidental to a bona fide fiduciary obligation.” The Eleventh Circuit held that the management company fell within this exemption. Because the company was the homeowners association’s agent, it owed a fiduciary duty to the association. The court also found that collecting the debts was “incidental” to the company’s fiduciary obligation, noting that the company did many other tasks for the association other than collect assessments, such as obtaining utilities, purchasing insurance, and assisting the association with its tax filings. In addition, the Eleventh Circuit affirmed the district court’s dismissal of the plaintiffs’ claims under the Georgia Fair Business Practices Act. The court explained that the management company’s decision to stop the water service after providing the plaintiff notice was not unfair or deceptive.

    FDCPA

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  • HUD Obtains First Settlement Under Rule Requiring Sexual Orientation and Gender Identity Equal Access

    Lending

    On January 2, HUD announced that a lender agreed to settle a claim that it refused to provide FHA financing to a lesbian couple. HUD noted that the agreement is the first enforcement action taken under a rule finalized in January 2012 that aims to provide equal access to housing, regardless of sexual orientation, gender identity, or marital status, including by prohibiting lenders from determining FHA-insured financing eligibility based on sexual orientation or gender identity. The lender denies the allegations, but HUD required the lender to pay $7,500 so the parties could avoid additional costs associated with the administrative proceedings. The agreement also requires the lender to update its fair lending training program to support compliance with the new rule.

    HUD Fair Lending FHA

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  • President Signs Bill Enhancing Enforcement of the Military Lending Act

    Consumer Finance

    On January 2, President Obama signed H.R. 4310, the National Defense Authorization Act (NDAA) for Fiscal Year 2013, which includes provisions that enhance federal enforcement of the Military Lending Act (MLA). The MLA (i) caps the annual interest on certain loans to servicemembers at 36 percent, (ii) prohibits such loans from being secured with a personal check, debit authorization, car title, or wage allotment, and (iii) includes other servicemember protections related to the offering of consumer credit. The MLA generally covers short-term, small dollar loans, including payday, car title, and refund anticipation loans, but, pursuant to DOD regulations, excludes credit cards, overdraft loans, military installment loans, and all forms of open-end credit. By amending the MLA to state that the same regulators that enforce the Truth in Lending Act now have administrative authority to enforce consumer credit protections for servicemembers and their dependents under the MLA, the NDAA (Secs. 661-663) makes clear that the CFPB has enforcement authority under the MLA. Further, the bill gives the CFPB an opportunity to influence implementation of the MLA regulations, including their scope, by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections, and by requiring that such consultation occur at least every two years. These changes add new force to the MLA and provide additional legislative support for the CFPB and DOD to collaborate on servicemember protection issues. The CFPB and DOD already have collaborated on issues related to, for example, fraud protection and student lending. The bill also adds a civil liability section to the MLA, which permits private actions to obtain actual damages (but not less than $500 per violation), as well as punitive damages. Finally, the bill simplifies the definition of dependents protected under the MLA.

    CFPB Servicemembers Military Lending Act

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  • California Corrects Homeowner Bill of Rights Summary

    Lending

    On January 1, the California Department of Corporations reissued Release No. 65-FS regarding implementation of key parts of the Homeowner Bill of Rights that established new foreclosure requirements. Originally published on December 4, the new version clarifies certain requirements for mortgage servicers, and corrects the operative date of provisions enacted by AB 1599, a bill requiring translated summaries of notices of default and sale.

    Foreclosure Mortgage Servicing

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  • CFPB Increases HMDA Asset Size Exemption Threshold

    Lending

    On December 31, the CFPB published a final rule to amend the official commentary that interprets the requirements of Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), to increase the asset-size exemption threshold for financial institutions. HMDA and Regulation C require most mortgage lenders located in metropolitan areas to collect and report data about applications for, and originations and purchases of, home loans and refinancings, which the CFPB uses to identify possible discriminatory lending patterns and to assess whether financial institutions are serving the housing needs of their communities. Effective immediately, banks, savings associations, and credit unions with assets of $42 million or less as of December 31, 2012, are exempt from collecting data in 2013. Regulation C requires the CFPB to adjust the asset threshold based on the year-to-year change in the average of the CPI–W, not seasonally adjusted, for each 12-month period ending in November, rounded to the nearest million. During the 12-month period ending in November 2012, the CPI–W increased by 2.23 percent, resulting in an increase in the threshold from $41 million to $42 million.

    CFPB HMDA

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  • Senate Confirms FHA Commissioner and Other Key Agency Nominees

    Consumer Finance

    On December 30, the Senate confirmed Carol Galante as Assistant Secretary of Housing and Urban Development and Federal Housing Administration Commissioner. Ms. Galante, who was nominated for the position in October 2011, has been serving in an acting role. Her confirmation was made possible after certain Senators, including Bob Corker (R-TN), who had expressed concerns about the pace of reforms at the FHA, secured a commitment from Ms. Galante to (i) place a moratorium on the full drawdown reverse mortgage program, (ii) substantially increase underwriting criteria for borrowers with FICO scores between 580 and 620 by establishing a meaningful maximum debt-to-income ratio, (iii) increase the down payment requirement and the insurance pricing for loans between $625,000 and $729,000, and (iv) increase underwriting requirements for borrowers who have been foreclosed upon within the last seven years. On January 1, as described in media reports, the Senate confirmed Joshua Wright as FTC Commissioner and Mignon Clyburn as FCC Commissioner, and also confirmed Richard Berner for the new position of Director of the Treasury Department’s Office of Financial Research.

    FTC HUD FCC Department of Treasury FHA

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  • Fourth Circuit Holds Bankruptcy Trustee Cannot Pursue Former Directors of Bankrupt Holding Company for Alleged Mismanagement of Subsidiary Bank

    Consumer Finance

    On December 28, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court holding that a bankruptcy trustee lacked standing to sue former directors of an insolvent bank holding company for alleged mismanagement of a failed subsidiary bank. In re Beach First Nat’l Bancshares, Inc., No. 11-2019, 2012 WL 6720911 (4th Cir. Jan. 2, 2013). The district court determined previously that the directors and officers of the holding company and the subsidiary bank were one and the same, and that the harm caused to the bankrupt holding company was the direct result of the failure of the subsidiary bank. As such, the district court held that the trustee’s claims on behalf of the holding company are derivative claims that can only be pursued by the FDIC as receiver for the failed subsidiary. On appeal, the trustee argued that the claims are direct, not derivative, claims that fall outside of the FDIC’s purview, and, in the alterative, the claims are proper even if derivative because the FDIC has declined to act. The appeals court agreed with the district court and held that the trustee pled mainly claims deriving from defalcations at the subsidiary bank level, and not a distinct and separate harm specific to the holding company. Further, the appeals court held that the FDIC retains its statutory authority to act, and, in any event, has no statutory authority to transfer to another party its right to act on behalf of the failed subsidiary. The appeals court reversed the district court with regard to one of the trustee’s claims, holding that the trustee’s claim that the directors caused the holding company to improperly subordinate its equity interest in a company that owned real property could proceed on remand as a direct claim against the directors because the alleged actions caused damages unique to the holding company.

    FDIC Directors & Officers

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