InfoBytes, January 2, 2009
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Federal Issues
Fed Plans to Begin Buying Mortgage Backed Securities in January. On December 30, the Federal Reserve Board (Fed) announced further details on its plan to purchase mortgage backed securities (as originally reported in the November 25, 2008 edition of InfoBytes.) The Fed announced that it expects to begin operations in early January and that it has selected private investment managers to act as its agents in implementing the program. Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae. For a copy of Frequently Asked Questions regarding the program, please see http://www.newyorkfed.org/markets/mbs_faq.html.
OCC, OTS Release Joint Mortgage Metrics Report for the Third Quarter of 2008. On December 22, the Office of the Comptroller of the Currency and the Office of Thrift Supervision issued their second joint report on mortgage performance. The conclusion of the report is that delinquencies continued to rise, foreclosures and other actions leading to home forfeiture also continued to rise, and loan modifications were associated with high levels of re-default. Loan modifications continued to increase more quickly than other loss mitigation strategies, as the number of new loan modifications increased by more than 16 percent from the second to the third quarter to more than 133,000. However, the number of loans modified in the first quarter that were 30 or more days delinquent was 37 percent after three months and 55 percent after six months. The number of loans modified in the first quarter that were 60 or more days delinquent was 19 percent at three months and nearly 37 percent after six months. Other findings of the report include: (i) the number of delinquent loans increased during the third quarter across all loan categories—prime, Alt-A, and subprime; (ii) more than nine out of 10 mortgages remained current, but the percentage of current and performing mortgages fell from 93.33 percent at the end of the first quarter to 91.47 percent at the end of the third quarter; and (iii) loans held on the books of servicing banks and thrifts had the lowest re-default rates at 35.06 percent after three months, and 50.86 percent after six months, compared with loans serviced on behalf of third parties, which may suggest that there is greater flexibility to modify loans in more sustainable ways when loans are held on a servicer’s own books than when loans have been sold to third parties. For a copy of the report, please see http://www.occ.gov/ftp/release/2008-150a.pdf.
HUD Issues Interpretive Guidance on Implementation of SAFE Mortgage Licensing Act. The Department of Housing and Urban Development (HUD) has posted on its website new guidance on how it will interpret state compliance with the SAFE Mortgage Licensing Act (Act). The guidance provides that HUD has reviewed the state model bill prepared by the Conference of State Bank Supervisors (CSBS) and American Association of Residential Mortgage Regulators (AARMR) and found that states adopting that bill will be in compliance with the SAFE Act requirements. Of note in the guidance are HUD’s expansive interpretation of the Act’s definition of “loan originator” as well as its deadlines for compliance. On loan originators, HUD considers the definition of loan originator to encompass any individual who, for compensation or gain, offers or negotiates loan terms pursuant to a request from and based on the information provided by the borrower. Such an individual would be included in the definition of loan originator, regardless of whether the individual takes the request from the borrower for an offer (or positive response to an offer) of residential mortgage loan terms directly or indirectly from the borrower. Individuals offering loan terms to family members, attorneys offering loan terms as part of their legal representation, if not compensated by a lender, mortgage broker, originator, or an agent of these, and sellers offering loan terms on seller-financing would not be covered, however. Regarding deadlines, the guidance provides that, with respect to individuals who do not already possess a valid loan originator license, July 31, 2010 is the date by which loan originators must be licensed in a state. For individuals who possess licenses granted under a system that was in place prior to the SAFE Act-compliant system, HUD has set December 31, 2010 as the final date for obtaining a license to comply with the SAFE Act. See the full guidance at http://www.hud.gov/offices/hsg/sfh/mps/smlicact.cfm.
FTC Reports to Congress on Credit Report Complaint Referral Program. On December 30, the Federal Trade Commission (FTC) issued a report to Congress on the credit report complaint referral program under the Fair Credit Reporting Act (FCRA). Section 611(e) of the FCRA requires the FTC to establish a program to refer certain consumer complaints to the three nationwide consumer reporting agencies (CRAs) and to report to Congress on the information gathered in the program. The complaints covered by the program are those received by the Commission from consumers who have disputed the accuracy of information in their credit report with a CRA and are dissatisfied with the results of the process. The report found that that the program needs to better fulfills its purpose, giving consumers a second chance to resolve their disputes after they have exhausted the normal dispute process and remain dissatisfied, and not to supplant the dispute process in the first instance. The FTC plans intake process changes to improve the quality of information available in the consumer’s complaints, which will assist staff and the CRAs in better identifying the precise nature of the consumer’s complaint and in determining whether the consumer has in fact previously filed a dispute with the CRA. In addition, staff will be contacting the CRAs to adjust their reporting obligations. For a copy of the report, please see http://www.ftc.gov/os/2008/12/P044807fcracmpt.pdf.
FTC Directs Nine Insurers to Submit Data for Credit-Based Insurance Score Study. On December 23, the Federal Trade Commission (FTC) issued a press release announcing that it has ordered the nine largest homeowners insurance companies to submit information about credit-based insurance scores for a study concerning the use and effect of such scores on consumers of homeowners insurance. The FTC is required to conduct the study pursuant to section 215 of the Fair and Accurate Credit Transactions Act of 2003. The orders request, among other items, data related to policy origination and renewal, premiums, and coverage. The FTC issued the orders after receiving public comment on its draft model order (reported in InfoBytes, May 23, 2008). The affected companies, which include Nationwide Mutual Insurance Company, State Farm Mutual Automobile Insurance Company, and The Allstate Corporation, are required to respond on or before April 24, 2009. For a copy of the FTC press release and the orders, please see http://www.ftc.gov/opa/2008/12/facta.shtm.
State Issues
Connecticut DOB Sets Deposit Index for 2009 Lower Than Statutorily Permitted. On Wednesday, December 31, 2008, the Connecticut Department of Banking (DOB) announced the deposit index for the 2009 calendar year at 0.60%, but Connecticut state law prohibits the rate from ever dropping below 1.5%. Thus, the rate for the 2009 calendar year, commencing January 1, 2009 and ending December 31, 2009, will be 1.5%. This interest rate applies to any and all property, funds, or money delivered to the Connecticut State Treasurer, as well as security deposits for mortgage escrow accounts, public service companies, certified telecommunications providers, and electric suppliers. For more information, please contact .
Washington Amends Rules Implementing Mortgage Broker Practices Act. On December 23, the Washington Department of Financial Institutions amended the rules in Washington Administrative Code section 208-660-005 et seq. The amendments: (i) define, with greater specificity than in the Washington Mortgage Broker Practices Act, the term “mortgage broker;” (ii) reiterate that a broker has a fiduciary relationship with borrowers; (iii) define Nationwide Mortgage Licensing System and Registry (NMLSR) and specify that broker and loan originator license applications, and other license-related matters (i.e., change of address, branch office application, etc.), must be submitted through the NMLSR; (iii) specify that licensed loan originators must work from a licensed location (i.e., company office or licensed branch) of the mortgage broker; (iv) specify that failure by the broker to properly disclose the yield spread premium to the borrower is a violation of the Washington Mortgage Broker Practices Act and the Real Estate Settlement Procedures Act, and (v) specify that mortgage brokers must adopt written policies and procedures implementing the federal guidelines applicable to their mortgage broker business, and must make such policies and procedures available to the Washington Department of Financial Institutions upon request. The rules become effective January 23, 2009. For a copy of the amended rules, please see http://dfi.wa.gov/cs/pdf/rulemaking/mbpa-208-660-adopted-amendments.pdf.
Courts
Ninth Circuit Court Finds Flat Fees Charged on Refund Anticipation Loans are not “Unearned Interest” under TILA. On December 24, the Court of Appeals for the Ninth Circuit held that a creditor imposing a finance charge, which does not vary with the term of a refund anticipation loan, need not refund any portion of the charge as “unearned interest” under 15 USC § 1615, if the loan is repaid earlier than anticipated in the loan agreement. Davis v. Pacific Capital Bank, No. 07-56236, slip op. 16771 (9th Cir. Dec. 24, 2008). The plaintiff, Felicia Davis, obtained a refund anticipation loan from the defendant, Pacific Capital Bank. Under the loan’s terms, Davis was required to pay a flat $85 fee. This fee was nonrefundable, meaning that if Davis repaid the loan early, Pacific had no obligation to return any part of the fee. However, the loan’s terms also provided that even if the refund check was late, Pacific was not entitled to any additional payment from Davis. After her check arrived earlier than anticipated, Davis demanded a refund of $17.74, which she alleged was the pro-rated portion of Pacific’s fee. When Pacific refused, Davis sued, alleging that Pacific’s refusal to refund the fee violated 15 USC § 1615. Section 1615 states that “[i]f a consumer prepays in full the financed amount under any consumer credit transaction, the creditor shall promptly refund any unearned portion of the interest charge to the consumer.” Davis claimed that Pacific’s fee constituted unearned interest and therefore Pacific’s refusal to grant a refund violated § 1615. The court disagreed. First, the court noted that § 1615 was originally introduced as an amendment to the Truth in Lending Act (TILA), but that language indicating that the provision would amend TILA was later removed. The court argued that despite the removal of this language, § 1615 is so closely related to TILA that TILA and its implementing regulation, Regulation Z, can provide additional guidance on how to interpret it. Next, the court analyzed TILA and Regulation Z, ultimately finding that the fee Pacific charged would not be considered interest under either TILA or Regulation Z. Finally, the court looked to see if it could apply its TILA analysis to § 1615. To do this, the court analyzed § 1615’s legislative history. After studying § 1615’s history, the court found that the original text of the bill would have required creditors to refund unearned portions of any finance charge for prepayment. However, Congress amended this language so that the section would only cover unearned portions of an interest charge. According to the court, this change in terminology suggests that the drafters considered applying § 1615 to all finance charges, but then intentionally excluded finance charges that did not vary according to the loan’s term. As a result, the court held that flat fees were not covered by the statute, and that Davis’ claim must be dismissed. For a copy of the opinion, please contact .
Debt Collection Settlement Offer Does Not Violate FDCPA By Bearing Name of Senior Executive. The U.S. Court of Appeals for the Third Circuit reversed a Pennsylvania District Court’s granting of summary judgment to the consumer plaintiffs finding that the debt collection company defendant did not violate the Fair Debt Collection Practices Act (FDCPA) by sending debtors settlement offers that contained the name of a senior executive of the company. Campuzano-Burgos v. Midland Credit Management, Inc., No. 07-3770 (3d Cir. Dec. 16, 2008). The plaintiffs alleged that the defendant’s collection notices were false, misleading, or deceptive from the perspective of the least sophisticated debtor, in violation of §§ 1692e and 1692e(9) of the FDCPA, because they implied that the defendants’ officers had reviewed the debts and authorized the sending of the letters. The court disagreed, noting that although the least sophisticated debtor standard is less demanding than a reasonable debtor standard, “the least sophisticated standard safeguards bill collectors from liability for ‘bizarre or idiosyncratic interpretations of collection notices’ by preserving at least a modicum of reasonableness, as well as ‘presuming a basic level of understanding and willingness to read with care [on the part of the recipient].’” The court found that, viewed as a whole, the settlement letters were not deceptive from the perspective of the least sophisticated debtor as they were formatted in a manner consistent with a form notice and were worded so as to give the impression that the notices came from the corporation, not personally from the executives whose names were on the notices. For a copy of this opinion, please see .
Seventh Circuit Approves Class Action Settlement. On December 30, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court judgment approving a class action settlement agreement between Fleet Mortgage and a number of its customers. Mirfasihi v. Fleet Mortgage Corp., No. 07-3402 (7th Cir. Dec. 30, 2008). Two plaintiff classes sued Fleet Mortgage Corporation for transmitting their personal financial information to telemarketing companies without their authorization. One class was known as the "pure information sharing class," because it consisted of 1.4 million Fleet customers "whose financial information Fleet transmitted to the telemarketers but who did not buy anything from them." The other class was known as the "telemarketer class," because it consisted of 190,000 Fleet customers who did make purchases from telemarketers, after Fleet transmitted their information. The current appeal to the Seventh Circuit arose after the lower court approved a settlement agreement that awarded the "pure information sharing class" nothing for their claims and only $18,750 in legal fees. The members of the "pure information sharing class" challenged the lower court’s findings that their claims were worthless, arguing that, though they could not prove actual damages, they should still be awarded statutory damages under state consumer protection statute and the Fair Credit Reporting Act (FCRA). The Seventh Circuit disagreed. First, it noted that even if Fleet’s actions violated various state consumer protection laws, those statutes do not permit damage awards in class actions, and, though federal courts are not necessarily bound by this limitation, the appellants’ failed to preserve the issue. Next, the court turned to the appellants’ FCRA claims. The court rejected these claims for two reasons. First, the appellants had waived the claim, because they had failed to apply it until after the case’s first remand. Second, as a bank, Fleet did not fall under FCRA’s definition of a credit reporting agency under § 1681a (d)(1). As a result, Fleet could not violate the act, because it would not impose any obligations on Fleet regarding the type of information it revealed to telemarketers. Since neither the state law claims nor the FCRA claim could result in any damages payable to the appellants, the court upheld the lower court’s order approving the settlement agreement. For a copy of the opinion, please see .
Firm News
John Kromer will be moderating a panel entitled “The New Frontier of Housing Finance” at the ABA’s Committee on Consumer Financial Services Winter Meeting in Scottsdale, Arizona on January 12.
Jeff Naimon and Grant Mitchell presented an audioconference on the new RESPA Reform rule on December 17 for the American Bankers Association, with Rod Alba.
Joe Kolar presented, with HUD officials and others, an audioconference titled, “How the Final RESPA Rule Will Impact the Mortgage Market” sponsored by Inside Mortgage Finance on December 17.
Joe Kolar made a presentation with HUD officials in an online webinar sponsored by the Consumer Bankers Association discussing the RESPA rule on December 9.
Jonathan Jerison was a speaker for a "Compliance Tune-Up" presented by the Regulatory Risk Monitor on December 9. For more information, click here.
Clint Rockwell spoke on RESPA and Appraisals at the California Mortgage Bankers Association Conference in Anaheim, CA on December 8.
Joe Kolar spoke on the RESPA Rule LIVE Online Conference sponsored by the Mortgage Bankers Association on December 2.