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Financial Services Law Insights and Observations


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  • NACHA Proposes Guidelines for Use of QR Codes for Consumer Bill Pay


    On August 30, NACHA – The Electronic Payments Association, proposed guidelines to facilitate the use of Quick Response (QR) codes for consumer bill payments. A QR code is a type of barcode readable by a mobile device equipped with a QR application. The guidelines, developed by NACHA’s Council for Electronic Billing and Payment, seek to establish a single QR code format to serve consumer bill pay needs through a variety of channels, including a biller’s website, a financial institution’s online bill pay website site, or other aggregation bill pay websites. The proposal recommends guidelines for the QR code size and format, billing data to be included, and encoding format. NACHA has requested comment from interested parties by September 19, 2012 and expects to prepare a final version of the guidelines before the end of 2012.

    Mobile Payment Systems NACHA

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  • CFPB Extends Comment Period for Finance Charge Definition Proposal


    On August 31, the CFPB extended the comment period for aspects of two recently proposed rules. On July 9, the CFPB proposed a rule to merge the TILA and RESPA mortgage loan disclosures. That proposal includes potential changes to the definition of finance charge, comments on which were due September 7, 2012.  Having heard from stakeholders that the proposed definition could impact changes proposed in other CFPB mortgage-related rulemakings, the CFPB extended the comment deadline to November 6, 2012, which matches the deadline for most of the other aspects of the proposed TILA/RESPA disclosure rule. This extension does not impact the September 7, 2012 deadline for comments on whether the CFPB should delay implementation of certain new TILA and RESPA disclosures. Also on July 9, 2012, the CFPB proposed a rule to expand the types of mortgage loans subject to HOEPA, with comments due September 7, 2012. Given the extension of the deadline for comments on the definition of finance charge, which will impact the scope of the extended HOEPA coverage, the CFPB also extended the HOEPA proposed rule comment deadline to November 6, 2012.

    CFPB TILA Dodd-Frank Mortgage Origination RESPA HOEPA

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  • Sixth Circuit Holds Computer Hacking Losses Covered by Insurance

    Consumer Finance

    Last month, the U.S. Court of Appeals for the Sixth Circuit affirmed a district court holding that the computer fraud rider to a retailer’s Crime Policy covered losses resulting from the theft of customers’ financial information by computer hackers. Retail Ventures, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No 10-4576/4608, 2012 WL 3608432 (6th Cir. Aug. 23, 2012). The retailer incurred millions of dollars in expenses and attorney fees related to a data breach in which computer hackers stole customers’ credit card and bank account information. The retailer submitted a claim for the losses under the computer fraud rider to its Blanket Crime Policy, which the insurer denied because the policy excluded third-party theft of “proprietary” or “confidential information.” The retailer filed suit and prevailed on summary judgment. On appeal, the court upheld the district court’s application of a proximate cause standard to determine that the losses were covered as losses sustained as a direct result of the theft. The court also rejected the insurer’s argument that the losses were excluded as losses of “proprietary or confidential information” because the retailer did not “own or hold single or sole right” to the stolen information and the information did not relate to the manner in which the business operated.

    Privacy/Cyber Risk & Data Security

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  • Special Feature: Report on the AARMR 23rd Annual Regulatory Conference


    The American Association of Residential Mortgage Regulators (AARMR) held its 23rd Annual Regulatory Conference in Boston, Massachusetts from August 14-17, 2012.  AARMR is the trade association of state mortgage regulators that coordinates state-level regulation of the mortgage industry and, in partnership with the Conference of State Bank Supervisors (CSBS), created the National Mortgage Licensing System & Registry (NMLS).

    The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, legal professionals, and education providers to discuss the latest developments in mortgage supervision and pressing issues confronting the industry, most notably developments regarding: (i) the SAFE Act and entity level licensing through the NMLS and (ii) the examination, enforcement and rulemaking initiatives of the Consumer Financial Protection Bureau (CFPB).

    On August 14, recently appointed NMLS Ombudsman Timothy Siwy, Deputy Secretary for Non-Depository Institutions, Pennsylvania Department of Banking, presided over his first bi-annual NMLS Ombudsman Meeting, which allows NMLS users an opportunity to raise concerns and questions regarding the NMLS.  Specifically, the session addressed the following topics, among others:

    • Continued discussion of the states potentially issuing (1) “reciprocal licenses” for mortgage loan originators (MLOs) based on similar state education and testing standards, or (2) a 90- to 120-day “transitional license” for MLOs needing additional time to complete a state’s specific MLO requirements;
    • “Inactive licenses” for federally registered MLOs, which would allow MLOs not currently employed by a state-licensed entity to obtain and maintain an “Approved-Inactive” status in the NMLS if the MLO otherwise satisfies the state’s MLO licensing requirements;
    • The Uniform State Test for MLOs, which is expected to launch in Spring 2013;
    • Alleviating “home state” licensure for MLOs, which is where a state requires the MLO to secure a license not because the MLO makes loans to borrowers in the state or secured by property in the state, but rather because the MLOs office is located in the home state;
    • Issues facing exempt companies, such as insurance companies, that may be required to obtain entity level approval via NMLS because of certain non-lending activities performed by its employees, e.g., underwriting activities;
    • States compelling submission of information from depository institutions to authorize state exemptions via the NMLS when such depository institutions may otherwise be exempt from a state’s mortgage lending law;
    • The April 2012 NMLS amendments, including a request for uniformity among states regarding recently-implemented requirements to upload documentation to the NMLS; and
    • Suggestions on how to improve the user interface of the NMLS.

    Subsequent panel discussions provided more detailed information on several of these topics, and also examined related NMLS issues.

    Details regarding the specific issues submitted for comment, as well as accompanying exhibits and an audio recording, will be made available on the NMLS Ombudsman website.

    The Conference included several CFPB focused panels, which included presentations from high ranking CFPB officials.

    First, on August 15, Edwin Chow, Regional Director, CFPB, West Region, discussed the CFPB’s supervision process for both banks and non-bank lenders with a focus on the recently launched non-bank exams.  Mr. Chow stated that the general intention of a CFPB examination is to evaluate a company’s ability to manage its compliance.  An entity’s ability to manage its compliance is assessed through the CFPB’s examination approach, which at a macro level includes:

    • The CFPB initiating the first point of contact through a preliminary meeting by phone or in-person with the entity;
    • Prior to an examination, issuing a letter to the entity requesting information to facilitate fast and efficient review of the entity;
    • Throughout the process, coordinating with state regulators of the entity; and
    • Following the examination, performing an “exit interview” prior to any finalized action to discuss tentative findings and conclusions and to address how issues may be corrected.

    Regardless of the region in which the examination is being conducted, Mr. Chow indicated that the CFPB will strive for uniformity and consistency in its examination approach.

    Also, on August 16, Steven Antonakes, Associate Director for Supervision, Enforcement, and Fair Lending, CFPB, and David Bleicken, Acting Deputy Associate Director for Supervision, Enforcement, and Fair Lending, CFPB, provided an update on the CFPB’s Supervision, Enforcement, and Fair Lending division and provided an overview of the CFPB’s enforcement approach.  Specifically, the officials indicated that during examinations the CFPB will:

    • Focus on harm to consumers, as it weighs heavily into whether the CFPB takes a “punitive” or “instructive” approach in a particular examination, (e.g., the CFPB may consider on a case-by-case basis whether consumer reimbursements are appropriate when there was no actual harm to a particular consumer);
    • Continue its efforts to maintain any relevant attorney-client privilege for information disclosed by entities.  Following the issuance of its January bulletin and June 28 final rule, the CFPB has asserted that a party may submit information to the CFPB in the supervisory or regulatory process without waiving any applicable privileges;
    • Utilize a product-based, rather than institution-based, focus; and
    • Utilize real-time information sharing.

    While the CFPB touched on the process for making decisions about what constitutes an “abusive” practice under the CFPB’s Unfair, Deceptive or Abusive Acts or Practices (UDAAP) authority, the officials declined to comment regarding mortgage-specific practices that the CFPB would generally deem to be “abusive.”

    The CFPB expects to issue the first summary of its examination findings this fall.

    Finally, during a separate panel on August 16, Peter Carroll, Assistant Director of Mortgage Markets, CFPB provided an overview of the CFPB’s widely-reported rulemakings on the combined TILA/RESPA disclosure form, HOEPA, appraisals, ability to repay and qualified mortgages, mortgage servicing guidelines, and MLO compensation and qualification.  Mr. Carroll indicated that next year the CFPB plans to focus on HMDA reporting and reverse mortgages.

    In addition to the above, the Conference covered other various federal and state regulatory issues, including the following:

    • In the panel “Mortgage Fraud and Other Trends Affecting Housing Finance Federal Housing Finance Agency (FHFA) Office of Inspector General,” representatives of the FHFA-OIG provided an overview of its ongoing audits of mortgage fraud;
    • “Mortgage Loan Servicing: Aftermath of National Servicer Settlement/Updates & Lessons” provided an overview of the widely-reported mortgage servicing settlement announced earlier this year.  Notably, Joseph Smith, Monitor of the Office of Mortgage Settlement Oversight, provided several comments regarding the settlement and fair lending concerns.  Specifically, while some have expressed a concern regarding the application of principal reductions for protected classes, the Monitor noted that violations of state fair lending laws were specifically reserved in the settlement, and the Monitor takes the position that the consumer relief provisions do not authorize him to assess whether principal reductions are being equally applied with respect to protected classes;
    • In the panel “Multistate Mortgage Committee Overview of Examination Procedures: Risk Scoping to Post-Exam Enforcement,” the Multistate Mortgage Committee (MMC), which coordinates examination and supervision of mortgage lenders, servicers and brokers operating in more than one state, gave an overview of its activities that (i) emphasized a risk-based approach to examinations, and (ii) outlined an examinations process that strives for uniformity, modernization, and effectiveness;
    • “A Look at Foreclosure Prevention, Loan Modification Scams and the Role of the Regulators” provided an overview of loan modification and foreclosure-related concerns,  including issues affecting low-income borrowers and protected classes; and
    • “FinCEN, Updates on AML for Mortgage Lenders and Originators” provided an overview of anti-money laundering, specifically the recently-effective requirement for non-banking entities, including residential mortgage lenders and originators, to file suspicious activity reports.

    CFPB Mortgage Licensing Nonbank Supervision Mortgage Origination NMLS CSBS

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  • FHFA Increases Mortgage Guarantee Fees


    On August 31, the FHFA announced that Fannie Mae and Freddie Mac will attempt to bring more private capital into the secondary mortgage market by increasing guarantee fees (g-fees) on single-family mortgages by an average of ten basis points. The increases will be effective on December 1, 2012 for loans exchanged for mortgage-backed securities, and on November 1, 2012 for loans sold for cash. The increases are designed to decrease the difference between g-fees charged to large volume lenders and those charged to small volume lenders, and to reduce cross-subsidies between higher-risk and lower-risk mortgages. With the announcement the FHFA released a report on guarantee fees charged in 2010 and 2011. The FHFA also stated that it soon will seek public comment on a proposal to develop risk-based pricing at the state level.

    Freddie Mac Fannie Mae RMBS FHFA

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  • Second Circuit Applies "Least Sophisticated Consumer" Test In Student Loan Debt Collection Case

    Consumer Finance

    On August 30, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s representation to a debtor that her student loans were “ineligible” for bankruptcy discharge is a “false, misleading, or deceptive” debt collection practice in violation of the FDCPA. Easterling v. Collecto, Inc., No. 11-3209, 2012 WL 3734389 (2nd Cir. Aug. 30, 2012). The debt collector sent a collection letter to the debtor with a notice that the account was ineligible for bankruptcy discharge. The debtor sued the collector on her own behalf and on behalf of nearly 200 borrowers who also received such notices. The district court granted summary judgment in favor of the debt collector, concluding that because the debtor had previously filed for bankruptcy without seeking to discharge her student loan debt, and because student loan debt is presumptively non-dischargeable, her debt was, in fact, not eligible to be discharged. The appeals court disagreed and held that the district court erred in focusing on the borrower’s circumstances instead of applying the “least sophisticated consumer” standard. In applying that standard on appeal, the court reasoned that while the bar for bankruptcy discharge is high, it is not impossible and the “least sophisticated consumer” might not seek the advice of counsel for pursuing discharge through bankruptcy after receiving the debt collector’s inaccurate notice. The court held that the debt collector’s notice did violate the FDCPA and reversed and remanded the case for further proceedings.

    FDCPA Student Lending

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  • SEC Releases Dodd-Frank Financial Literacy Study


    On August 30, the SEC published a study of financial literacy. The Dodd-Frank Act required the SEC to examine (i) existing financial literacy among retail investors, (ii) methods to improve disclosures, (iii) information needed to make informed investment decisions, (iv) disclosure improvements related to expenses and conflicts of interest, (v) existing efforts to educate investors, and (vi) options for increasing investor financial literacy. The report’s findings reveal that currently investors lack knowledge of elementary financial concepts. The SEC staff reports that investors (i) prefer to receive disclosures before making a decision on whether to engage a financial intermediary, (ii) consider information about fees, conflicts of interest, and investment strategy essential, (iii) have mixed preferences on method of delivery for disclosures, but generally prefer that they be written in clear and concise language presented in summary and detailed form. The study concludes that transparency about conflicts of interest may be improved through the use of specific examples, among other things.

    SEC Investment Adviser Financial Literacy

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  • National Mortgage Settlement Monitor Issues Progress Report


    On August 29, National Mortgage Settlement Monitor Joseph Smith, Jr. issued a progress report “intended to inform the public about the nature of the settlement, the steps that have been taken to implement it and the results to date.” The report, which was not required by the settlement, summarizes the terms of the several consent judgments that make up the national settlement, reviews the Monitor’s progress in implementing the administrative aspects of the settlement, describes relief extended to borrowers as of June 30, 2012, and updates the status of servicing standards implementation. For example, the Monitor states that as of July 5, 2012, all five servicers subject to the agreement had incorporated at least fifty-six servicing standards into their business processes, while four of the five banks reported that they had implemented more than half of all of the standards.

    Mortgage Servicing

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  • State Law Update: California Enacts Blight Bill As Part of Homeowner Bill of Rights, Broadens Servicemember Protections


    On August 27, California enacted Assembly Bill 2314, another bill included as part of the state’s proposed Homeowner Bill of Rights. The bill extends indefinitely portions of existing state law that (i) require property owners maintain vacant property obtained in foreclosure, (ii) authorize local enforcement of vacant property maintenance requirements, and (iii) provide for notice and processes to correct or contests violations. The extended provisions were due to sunset on January 1, 2013. The bill also provides a sixty day period for purchasers of foreclosed properties to remedy any violations of state housing law or building codes. Current law only requires a thirty day period for all properties in violation. Finally, the bill requires that an entity that releases a lien on a property subject to corrective action for maintenance violations must provide notice to the enforcement agency within thirty days of releasing the lien. These changes take effect on January 1, 2013.

    Also on August 27, California enacted Assembly Bill 2475, which extends from three to nine months the period following military service within which it is unlawful to sell, foreclose upon, or seize a servicemember’s mortgaged property. These changes also take effect on January 1, 2013.

    Foreclosure Mortgage Servicing Servicemembers

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  • CFPB Corrects Student Loan Report

    Consumer Finance

    On August 29, the CFPB released an updated and corrected report on private student loans. Although the updated report provides the same findings and recommendations as the original report, the revised report attempts to address concerns about some of the study’s methodologies. The CFPB’s summary of updates states that the new report includes revised methodologies for determining the extent to which private student loan borrowers exhausted their Federal Stafford Loan options before taking on a private student loan and the extent to which private student loans were originated without certification of borrower need by the institution of higher education. Specifically, the revised report provides updated results showing a higher percentage of students who took out a private loan without exhausting the individual Stafford maximum, and a higher level of school certification of private loans.

    CFPB Student Lending

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