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Financial Services Law Insights and Observations

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  • Bills Introduced on Regulation of Short Term, Small Dollar Lending

    Consumer Finance

    On July 18, Representatives Luetkemeyer (R-MO) and Baca (D-CA) introduced H.R. 6139, a bill that would create a national charter for qualified non-depository creditors, to be known as National Consumer Credit Corporations (NCCCs). The bill would task the OCC with assessing applications with a focus on the applicant institution’s ability to offer products that provide credit to underserved consumers, and developing a process for approving financial products to be offered by NCCCs.  The OCC would be able to establish an annual fee for a charter, but it would not be permitted to restrict the method by which an NCCC offers its products, or to establish usury limits. NCCCs would be subject to certain restrictions, including a prohibition on consumer loans with terms of 30 days or less. The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing to consider H.R. 6139 on July 24, 2012.

    On July 24, Senators Merkley (D-OR), Udall (D-NM), and Durbin (D-IL) introduced a bill, first revealed by Senator Merkley in March 2012, and now formalized as S. 3426, the Stopping Abuse and Fraud in Electronic Lending Act. According to a press release, the bill seeks to  (i) ensure that a third party doesn’t gain control of a consumer’s account through remotely created checks, (ii) allow consumers to cancel a debit in connection with a small-dollar loan, (iii) require all lenders, including banks, to abide by a state’s rules for small-dollar, payday-like loans they offer customers in the state, (iv) ban lead generators and anonymously registered payday lending websites, and (v) give the CFPB authority to shut down payment processing for lenders that are violating state and other consumer lending laws through the Internet.

    CFPB Payday Lending Nonbank Supervision

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  • OCC and DOJ Announce SCRA Enforcement Action Against a National Bank

    Consumer Finance

    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.

    Credit Cards Foreclosure OCC Servicemembers Debt Collection SCRA DOJ Enforcement

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  • FSOC and OFR Publish Annual Reports

    Consumer Finance

    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.

    Dodd-Frank FSOC Department of Treasury

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  • House Members Seek Information from Data Brokers

    Fintech

    On July 24, a bipartisan group of members of the House of Representatives, led by Representatives Barton (R-TX) and Markey (D-MA), sent letters to nine firms the members identified as “major data brokerage companies.” The letters ask each firm to provide information about how it collects, assembles, and sells consumer information.  Among the series of specific inquiries, the letters seek information about collection processes and sources, data security measures, and consumer fees and notices. The House members asked each company to respond by August 15, 2012.

    Consumer Reporting Privacy/Cyber Risk & Data Security

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  • Senators Unveil Bill to Increase SEC Civil Penalties; House Members Propose Competing Bills to Enhance the SEC's Investment Adviser Oversight

    Securities

    On July 23, Senators Reed (D-RI) and Grassley (R-IA) unveiled legislation to increase statutory limits on SEC civil monetary penalties to $1 million per violation for individuals, and $10 million per violation for entities. The bill, S. 3416, would also allow for the size of penalties to be linked to the scope of harm and associated investor losses, and provide substantially higher penalties for repeat offenders. The legislation follows a letter SEC Chairman Shapiro sent to Senators Reed and Crapo (R-ID) in November 2011, seeking reforms to the SEC’s authority to impose civil penalties.

    On July 24, Representatives Waters (D-CA), Frank (D-MA), and Capuano (D-MA) announced new legislation, H.R. 6204, that would provide the SEC with the authority to impose user fees on investment advisers for the purpose of funding an increase in the number and frequency of SEC examinations. This bill follows an earlier bill from Reps. Bachus (R-AL) and McCarthy (D-NY), H.R. 4624, which also seeks to improve oversight of investment advisers, but through the establishment of self-regulatory organizations overseen by the SEC that investment advisers with retail customers would be required to join.

    SEC

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  • Eleventh Circuit Holds Loan Servicer May Be Debt Collector Subject to FDCPA

    Consumer Finance

    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.

    FDCPA Mortgage Servicing

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  • State Law Update: Illinois, Michigan, Oregon Enhance Borrower Protections

    Consumer Finance

    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.

    Foreclosure Mortgage Servicing Auto Finance Consumer Lending

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  • Fannie Mae Announces Numerous Servicing Policy Changes; ULDD Mandate Takes Effect

    Lending

    On July 25, Fannie Mae issued Servicing Guide Announcement SVC-2012-12, which provides notice of miscellaneous changes to the Fannie Mae Servicing Guide related to (i) the MERS Rule 14 Notice, (ii) approved title company requirements for certain states, and (iii) allowable attorney fees.  With respect to the MERS Rule 14 notice, servicers will now be required to notify Fannie Mae whenever they are required to send MERS notice of certain MERS-related legal challenges.  Fannie Mae announced that it is eliminating the requirement that servicers select a Fannie Mae-approved title company for work performed inArizona,California andWashington. Instead, servicers may select the title company of their choice.  Fannie Mae also announced changes to the allowable amount of attorney’s and trustee’s fees in several jurisdictions.

    On July 23, the Uniform Loan Delivery Dataset (ULDD) mandate took effect for loans delivered to Fannie Mae and Freddie Mac. Fannie Mae recently provided a notification, and Freddie Mac recently published a Bulletin, outlining updates to their ULDD resources.

    Freddie Mac Fannie Mae Mortgage Origination Mortgage Servicing Servicing Guide

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  • FDIC Finalizes Rule and Guidance Regarding Assessment of Risk Capital Requirements

    Consumer Finance

    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.

    FDIC OCC Bank Compliance

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  • OCC Releases Bank Accounting Advisory Series Update

    Consumer Finance

    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.

    OCC Bank Compliance

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