InfoBytes, July 24, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Fed Issues Proposed Rules on Home-Secured Credit. On July 23, the Federal Reserve Board (Fed) issued two proposed rules that would amend Regulation Z by, among other things, modifying the disclosures provided to consumers in (i) closed-end mortgage and (ii) home equity line of credit (HELOC) transactions. Moreover, the proposed rules would significantly expand the scope of Regulation Z by effectively banning yield spread premiums and heavily regulating compensation paid to loan officers of mortgage brokers and lenders.
The proposed rule for closed-end mortgage transactions recommends changing the disclosures provided to borrowers throughout the lending process. Under the proposed rule, at the time of an application, creditors must provide borrowers with a series of streamlined disclosures, including two new single-page Fed publications. Specifically, for adjustable-rate closed-end mortgage transactions, creditors must provide plain-language disclosures describing interest rates and payment information, as well as potential additional expenses (e.g., prepayment penalties). Within three days after the submission of a closed-end loan application, the proposed rule requires disclosures that (i) calculate the finance charge and APR to include most fees and costs paid by consumers in connection with the credit transaction, (ii) illustrate to consumers how their APR compares to the APRs for borrowers with “excellent” credit and for borrowers with “impaired” credit, (iii) summarize key loan features (e.g., the loan term, amount, and type, along with the total settlement charges), as currently required for the “Good Faith Estimate” under the Real Estate Settlement Procedures Act (RESPA), and (iv) state potential changes to the interest rate and monthly payment. The proposal would also require creditors to provide “final” TILA disclosures to a consumer at least three business days before consummation. The proposed rule would further modify current post-transaction disclosure requirements by (i) increasing the advance notice period for interest rate adjustments to 60 days and for force-placed insurance to 45 days, and (ii) adding a new monthly disclosure requirement for loans with negative amortization features. According to the Fed, the Fed and the U.S. Department of Housing and Urban Development (HUD) will collaborate to develop a single disclosure form satisfying the combined requirements of TILA and RESPA.
The proposed rule for HELOCs recommends changing the disclosures provided to borrowers at application and account opening, as well as periodic statements and change-in-terms notices. The proposal also provides additional guidance and protections, as well as revised disclosure requirements, related to account terminations, line suspensions, credit-limit reductions, and to reinstatement of accounts. Among other things, the proposed rule would also (i) require that creditors provide borrowers with a new single-page Fed publication entitled “Key Questions to Ask about Home Equity Lines of Credit,” (ii) require, within three days after an application, creditors to provide the borrower with a table outlining rates and fees, payments, and risks as well as monthly payment examples based on both the current and maximum possible rates for the HELOC, and (iii) limit a creditor’s ability to change credit terms, or to terminate, suspend, or reduce a credit line.
The proposed rule would make major changes to compensation of mortgage brokers and loan originators (including those employed by mortgage lenders) by prohibiting brokers and loan originators from (i) accepting yield spread premiums or other payments based on a loan’s interest rate and other terms (including, in one option proposed by the Fed, the amount of the loan) and (ii) “steering” consumers to loans that increase originators’ compensation. Further, both proposed rules require several of the required disclosures to be displayed in a tabular, as opposed to narrative, format. Comments on the proposed rules are due 120 days after publication in the Federal Register. For a copy of the press release, containing links to the new Fed Publications and to model forms and samples, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm. For a copy of the proposed rules, please see http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/FR%20Notice%20HELOC.pdf and http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/FR%20Notice--CE.pdf.
Administration Proposes Legislation Regarding Enhanced Resolution Authority, Creation of National Bank Supervisor, Systemic Risk Resolution Plans. On July 23, the Obama Administration issued proposed legislation to (i) provide the federal government with resolution authority over the largest and most interconnected financial firms to adequately respond to a financial crisis, (ii) mitigate systemic risk, and (iii) address “regulatory arbitrage” by creating a single National Bank Supervisor (NBS) through the consolidation of the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC). The proposed legislation addressing regulatory arbitrage, the “Federal Depository Institutions Supervision and Regulation Improvements Act of 2009,” would, among other things, (i) eliminate the thrift charter and the thrift holding company framework, (ii) require the Federal Reserve Board (Fed), Federal Deposit Insurance Corporation (FDIC) and NBS to adopt joint rules on bank regulatory fees, (iii) require banks over $10 billion in assets to pay standardized examination fees, and (iv) require fee limits assessed on national banks with less than $10 billion in assets.
The Administration also announced proposed legislation to further mitigate systemic risk, the “Payment, Clearing, and Settlement Supervision Act of 2009,” which would, among other things (i) require all Tier 1 financial holding companies (FHCs) to prepare and maintain a “credible resolution plan” to respond to severe financial distress, and (ii) authorize the Fed to prescribe uniform standards for payment, clearing and settlement activities. Finally, the Administration delivered proposed legislation establishing resolution authority, the “Resolution Authority for Large, Interconnected Financial Companies Act of 2009,” which would, among other things, (i) grant the federal government resolution authority, supplemental to bankruptcy laws, to resolve disorder in large, interconnected firms when the financial system is threatened (modeled after the resolution regime under the Federal Deposit Insurance Act); the authority would be subject to a 2/3 vote by the Fed and the Board of the FDIC or the Securities and Exchange Commission (SEC), and must also be approved by Treasury, (ii) authorize Treasury to appoint the FDIC or SEC as conservator or receiver to take control of operations or necessitate the sale/transfer of assets, and to provide loans, assume liabilities, or inject capital upon a systemic risk determination, and (iii) require Tier 1 FHCs to take corrective actions if capital levels decline (this provision mirrors the requirements of insured depository institutions under the Federal Deposit Insurance Corporation Improvements Act). For a copy of the fact sheet, please see http://www.treas.gov/press/releases/tg229.htm. For a copy of the proposed legislation, please see http://www.treas.gov/press/releases/reports/title%20xii%20resolution%20authority%207232009finala.pdf, http://www.treas.gov/press/releases/reports/titleiii_natlbanksupervisor_072309.pdf, and http://www.treas.gov/press/releases/reports/titleviii_payments_072209.pdf.
State Issues
Minnesota Attorney General Lawsuit Precipitates Arbitration Service Providers’ Exit from Arbitration Industry. On July 20, the National Arbitration Forum (the Forum) settled a lawsuit brought by Minnesota Attorney General Lori Swanson alleging that the Forum misrepresented its impartiality to consumers by failing to disclose its financial ties to the debt collection industry. Under the terms of the settlement, the Forum has agreed to cease accepting or administering new consumer arbitrations. In addition to filing the lawsuit, Attorney General Swanson also sent a letter to the American Arbitration Association (AAA) asking it to cease accepting arbitration filings on consumer credit and collection matters arising out of mandatory pre-dispute arbitration clauses. Though the AAA denies that the Attorney General Swanson’s letter affected its decision, on July 23 the AAA announced that it was placing a moratorium on the administration of all consumer debt arbitrations until the federal government established fairness standards. For a copy of the press release from the Office of the Minnesota Attorney General announcing the settlement, please see http://www.ag.state.mn.us/Consumer/PressRelease/090720NationalArbitrationAgremnt.asp. For a copy of the AAA’s press release announcing its moratorium, please see http://www.adr.org/si.asp?id=5769.
Connecticut Bill Creates Restrictions for Nonprime Home Loans, High Cost Home Loans; Establishes Residential Mortgage Fraud as Criminal Offense. On July 7, Connecticut Governor M. Jodi Rell signed SB 949, “An Act Concerning Mortgage Practices.” The bill, among other things, establishes residential mortgage fraud as a criminal offense in Connecticut. The bill also amends the definition of “nonprime home loans” and prohibits or restricts a lender from offering nonprime home loans with certain terms and conditions (i.e., negative amortization, default rate increases, excessive late fees and acceleration clauses). Finally, under the bill, a high cost home loan cannot provide for an increase in the interest rate after default or provide for default charges in excess of five per cent of the amount in default. The bill becomes effective October 1, 2009. For a copy of the bill, please see http://www.cga.ct.gov/2009/ACT/PA/2009PA-00207-R00SB-00949-PA.htm.
Delaware Amends State Law Regarding Title, Payday Loans. On July 16, Delaware Governor Jack Markell signed SB 108, a bill that amends Delaware state law regarding title and payday loans. Regarding such loans, the bill (i) requires conspicuous disclosure of significant terms (e.g., that the loan is strictly a short-term, not long-term, extension of credit), (ii) provides for a right of rescission, and (iii) limits the duration of an extension for such loans. The bill additionally, among other things, (i) requires that a lender offer a workout agreement to a consumer, (ii) limits the duration and amount of interest that can be charged when a loan is in default, (iii) mandates compliance with certain federal and state consumer protection acts (e.g., the Fair Debt Collection Practices Act), (iv) limits a lender’s recourse on a title loan to the proceeds from the sale of the motor vehicle, and further requires the lender in all cases to provide the borrower with a written explanation of the proceeds from a sale, and (v) requires licensed lenders to pay an annual “high-cost loan license fee surcharge” of $1,500 for each licensed office making title or payday loans. The bill became effective July 16, 2009. For a copy of the bill, please see http://legis.delaware.gov/LIS/lis145.nsf/vwLegislation/SB+108/$file/legis.html?open.
Additional States Enact SAFE Act Legislation. Louisiana, Missouri, and New York are three of the latest states to enact legislation in compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), which calls for states to establish a scheme for the licensing and supervision of individuals engaging in the business of mortgage loan origination. Louisiana HB 810, Missouri HB 382, and New York AB 6924 each require mortgage loan originators to, among other things, register with the Nationwide Mortgage Licensing System, complete pre-licensing and continuing education, submit to fingerprinting for the purpose of a criminal history background check, and meet surety bond coverage requirements. Additionally, on June 30, Indiana Governor Mitch Daniels signed into law HB 1001, an omnibus bill that permits the Indiana Department of Financial Institutions to adopt emergency regulations to implement the requirements of the SAFE Act; this provision of Indiana HB 1001 became effective July 1, 2009. Louisiana HB 810 becomes effective July 31, 2009; however, the new mortgage loan originator licensing provisions become effective July 31, 2010. Missouri HB 382 became effective July 8, 2009, and New York AB 6924 became effective July 11, 2009; the loan originator licensing provisions of both Acts do not become effective until at least July 31, 2010. For a copy of Indiana HB 1001, please see http://www.in.gov/legislative/bills/1092/HE/HE1001.1.html. For a copy of Louisiana HB 810, please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=668805. For a copy of Missouri HB 382, please see http://www.house.mo.gov/billtracking/bills091/biltxt/truly/HB0382T.HTM. For a copy of New York AB 6924, please see http://assembly.state.ny.us/leg/?bn=A06924&sh=t.
New Hampshire Governor Signs Bill Amending State Consumer Credit Laws. On July 16, New Hampshire Governor John Lynch signed HB 334, a bill that, among other things, (i) allows the New Hampshire Banking Commissioner (Commissioner) to bar (in addition to existing authority to deny, suspend, or revoke) “persons,” such as individuals and corporations, from obtaining certain consumer credit licenses and registrations, (ii) expands the Commissioner’s authority to conduct criminal record checks for certain consumer credit licensees and registrants, (iii) allows the Commissioner to collect certain examination expenses, fines, and other penalties, and (iv) allows the Commissioner to examine the business records of certain consumer credit companies in various situations. Most provisions of the bill become effective September 13, 2009. For a copy of the bill, please see http://www.gencourt.state.nh.us/legislation/2009/HB0334.html.
New York Attorney General Files Suit Against Debt Collectors, Law Firms. On July 21, New York Attorney General Andrew M. Cuomo filed suit against 35 law firms and two debt collectors to throw out approximately 100,000 default judgments obtained against New York consumers. According to the complaint, the consumers were not properly served with documentation regarding debt-related lawsuits and false affidavits were used to obtain the default judgments. Among other things, the suit seeks to have the improperly obtained default judgments vacated, and for the defendants to pay restitution to debtors who made payment on an improperly obtained default judgment. For a copy of the press release, please see http://www.oag.state.ny.us/media_center/2009/july/july22a_09.html. For a copy of the complaint, please see http://www.oag.state.ny.us/media_center/2009/july/pdfs/5015%20Suit.pdf.
Illinois Attorney General Files Suit Against Four Loan Modification Companies. On July 15, Illinois Attorney General Lisa Madigan announced lawsuits against four foreclosure assistance companies. The suits allege that the defendants violated the Illinois Mortgage Rescue Fraud Act by fraudulently obtaining upfront payments from homeowners seeking foreclosure relief and failing to negotiate or perform any services on their behalf. Attorney General Madigan seeks (i) permanent injunctions against the defendants, (ii) to bar the defendants from engaging in loan modification efforts, (iii) full restitution for all customers, and (iv) penalties, fees, and reimbursement costs. The suits are in conjunction with the Federal Trade Commission and Department of Justice’s nation-wide crackdown on loan modification fraud schemes. To date, Attorney General Madigan has filed 28 suits against loan modification companies and has collected over $1.8 million in restitution for homeowners. For a copy of the press release, please see http://www.illinoisattorneygeneral.gov/pressroom/2009_07/20090715b.html.
Florida Attorney General Sues Four Loan Modification Companies. On July 21, Florida Attorney General Bill McCollum filed suit against four Florida companies that allegedly charged up to $1 million dollars a month in illegal up-front fees from customers solicited through the internet and telemarketing calls. The suits further allege that the four companies charged up to $5,000 per customer for foreclosure-related loan modification services that were not provided and falsely promised that an attorney was on staff to assist homeowners. Attorney General McCollum seeks (i) permanent injunctions against all four companies to prevent the collection of up-front fees, (ii) restitution for all victims, (iii) civil penalties of $15,000 for each Foreclosure Fraud Prevention Act violation, and (iv) reimbursement of fees related to the investigation. For a copy of the press release, please see http://www.myfloridalegal.com/newsrel.nsf/newsreleases/7E5B57BBC6DBCFDF852575FA00664042.
Indiana Attorney General Files Suit Against Credit Card Interest Rate Reduction Service Companies. On July 9, Indiana Attorney General Greg Zoeller announced two lawsuits against telemarketing companies that allegedly used pre-recorded messages and auto-dialers to offer credit card interest rate reduction services. The companies named in the complaints are Florida-based Sapphire Marketing, Inc. and California-based Genesis Capital Management, Inc. The complaint against Genesis Capital Management Inc. further alleges that consumers paid for services that were not actually provided. For a copy of the press release, please see http://www.in.gov/attorneygeneral/press/Releases.BogusReduction.Consumer.html. For a copy of the complaints, please see http://www.in.gov/attorneygeneral/press/ComplaintforInjunction-5191SapphireMarketingInc.pdf and http://www.in.gov/attorneygeneral/press/ComplaintforInjunction-5144GenesisCapitalManagement.pdf.
Courts
Eighth Circuit Holds Mortgage Not Void Under Equitable Estoppel Doctrine. On July 17, the U.S. Court of Appeals for the Eighth Circuit held that plaintiff borrowers were equitably estopped from arguing that their mortgage loan violated state law, and was thus void, because only one spouse singed it. Karnitz v. Wells Fargo Bank, N.A., No. 08-2100, 2009 WL 2065797 (8th Cir. July 17, 2009). This case arose when, four years after obtaining a home loan, and facing foreclosure, the borrowers sought declaratory judgment that the mortgage loan obtained from the defendant lender was void. The borrowers argued that the loan violated a Minnesota law requiring that both spouses sign a mortgage secured by a married couple’s homestead. The district court found that the mortgage was void because the mortgage was only signed by one spouse, even though the lender argued that the borrowers should be estopped from challenging the validity of the mortgage. The lender appealed, and a panel of the Eighth Circuit reversed, finding that the district court erred in concluding that equitable estoppel was not appropriate. Specifically, the Eighth Circuit found that the underlying facts – the borrowers intended to convey the mortgage to the lender; the non-signing spouse knew about and was benefited by the mortgage; the borrowers made no offer to return the consideration they received and were seeking to retain their homestead for free only after facing foreclosure – supported a finding of equitable estoppel. Looking to the policy behind the Minnesota law – to ensure a secure homestead for families – the Eighth Circuit held that “[s]trict compliance with the statute in these circumstances does not further the policy behind the statute; rather, it flaunts it by converting what the [Minnesota] Legislature intended as a shield into a sword.” For a copy of the opinion, please see http://www.buckleysandler.com/Karnitz_v_Wells.pdf.
Firm News
Andrew Sandler will be presenting at the American Bar Association’s Annual Meeting in Chicago on August 1. The title of his presentation is “Subprime Redux: Recent Developments in Subprime Enforcement and Litigation.”
Jonice Gray Tucker will be speaking at the ABA’s Annual Conference on August 2 in Chicago; the title of her presentation is “Anticipated Litigation Related to the Mortgage Disclosure Improvement Act.” She will also be giving a presentation entitled “Trends in Enforcement Actions Against Mortgage Servicers and Recommended Best Practices” at the CMBA’s Loan Servicing Conference on August 10 in Las Vegas.
Joe Kolar and Benjamin Klubes will be speaking at the Lenders One Conference on August 3; the name of their presentation is "An Expert View from Washington: Top Issues in Mortgage Finance—Introduction and Overview - Consumer Financial Services Protection Agency."
John Kromer will be speaking on a panel addressing “The Changing Standards in the Regulation of the Mortgage Industry” at the American Association of Residential Mortgage Regulator’s annual conference in Savannah, Georgia on August 12. See http://www.aarmr.org for additional information.
An interview of Andrew Sandler was featured in the July 21 American Banker article “Next Consumer Backlash: Arbitration.” The interview discusses the National Arbitration Forum pulling out of credit card arbitration and how this will affect the credit card industry. Andrew was also interviewed for a July 21 article by Karen Freifeld for Bloomberg regarding auction-rate securities. To view the full article, please see http://www.bloomberg.com/apps/news?pid=20601110&sid=a2mfbkO74rDI.
Jerry Buckley was recently quoted in a BankInfoSecurity.com article regarding the proposed regulatory reform by the Obama Administration. See http://www.bankinfosecurity.com/articles.php?art_id=1560 for the text of the article.
Andrea Lee Negroni delivered an audio conference on foreclosure rescue scams through Sheshunoff/A.S. Pratt Audio Conferences on June 30.
Miscellany
PCI Security Standards Council Issues PCI DSS Wireless Security Standard. On July 16, the PCI Security Standards Council released guidance regarding wireless standards for credit card processors that require the Payment Card Industry’s Data Security Standard (PCI DSS) v1.2. According to the press release, the guidance “provides the first, highly specific, actionable wireless operational guide for complying with PCI DSS.” For a copy of the press release, please see https://www.pcisecuritystandards.org/pdfs/pr_090716_wireless_sig.pdf. For a copy of the guidance, please see https://www.pcisecuritystandards.org/pdfs/PCI_DSS_Wireless_Guidelines.pdf.
Mortgages
Fed Issues Proposed Rules on Home-Secured Credit. On July 23, the Federal Reserve Board (Fed) issued two proposed rules that would amend Regulation Z by, among other things, modifying the disclosures provided to consumers in (i) closed-end mortgage and (ii) home equity line of credit (HELOC) transactions. Moreover, the proposed rules would significantly expand the scope of Regulation Z by effectively banning yield spread premiums and heavily regulating compensation paid to loan officers of mortgage brokers and lenders.
The proposed rule for closed-end mortgage transactions recommends changing the disclosures provided to borrowers throughout the lending process. Under the proposed rule, at the time of an application, creditors must provide borrowers with a series of streamlined disclosures, including two new single-page Fed publications. Specifically, for adjustable-rate closed-end mortgage transactions, creditors must provide plain-language disclosures describing interest rates and payment information, as well as potential additional expenses (e.g., prepayment penalties). Within three days after the submission of a closed-end loan application, the proposed rule requires disclosures that (i) calculate the finance charge and APR to include most fees and costs paid by consumers in connection with the credit transaction, (ii) illustrate to consumers how their APR compares to the APRs for borrowers with “excellent” credit and for borrowers with “impaired” credit, (iii) summarize key loan features (e.g., the loan term, amount, and type, along with the total settlement charges), as currently required for the “Good Faith Estimate” under the Real Estate Settlement Procedures Act (RESPA), and (iv) state potential changes to the interest rate and monthly payment. The proposal would also require creditors to provide “final” TILA disclosures to a consumer at least three business days before consummation. The proposed rule would further modify current post-transaction disclosure requirements by (i) increasing the advance notice period for interest rate adjustments to 60 days and for force-placed insurance to 45 days, and (ii) adding a new monthly disclosure requirement for loans with negative amortization features. According to the Fed, the Fed and the U.S. Department of Housing and Urban Development (HUD) will collaborate to develop a single disclosure form satisfying the combined requirements of TILA and RESPA.
The proposed rule for HELOCs recommends changing the disclosures provided to borrowers at application and account opening, as well as periodic statements and change-in-terms notices. The proposal also provides additional guidance and protections, as well as revised disclosure requirements, related to account terminations, line suspensions, credit-limit reductions, and to reinstatement of accounts. Among other things, the proposed rule would also (i) require that creditors provide borrowers with a new single-page Fed publication entitled “Key Questions to Ask about Home Equity Lines of Credit,” (ii) require, within three days after an application, creditors to provide the borrower with a table outlining rates and fees, payments, and risks as well as monthly payment examples based on both the current and maximum possible rates for the HELOC, and (iii) limit a creditor’s ability to change credit terms, or to terminate, suspend, or reduce a credit line.
The proposed rule would make major changes to compensation of mortgage brokers and loan originators (including those employed by mortgage lenders) by prohibiting brokers and loan originators from (i) accepting yield spread premiums or other payments based on a loan’s interest rate and other terms (including, in one option proposed by the Fed, the amount of the loan) and (ii) “steering” consumers to loans that increase originators’ compensation. Further, both proposed rules require several of the required disclosures to be displayed in a tabular, as opposed to narrative, format. Comments on the proposed rules are due 120 days after publication in the Federal Register. For a copy of the press release, containing links to the new Fed Publications and to model forms and samples, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm. For a copy of the proposed rules, please see http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/FR%20Notice%20HELOC.pdf and http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/FR%20Notice--CE.pdf.
Connecticut Bill Creates Restrictions for Nonprime Home Loans, High Cost Home Loans; Establishes Residential Mortgage Fraud as Criminal Offense. On July 7, Connecticut Governor M. Jodi Rell signed SB 949, “An Act Concerning Mortgage Practices.” The bill, among other things, establishes residential mortgage fraud as a criminal offense in Connecticut. The bill also amends the definition of “nonprime home loans” and prohibits or restricts a lender from offering nonprime home loans with certain terms and conditions (i.e., negative amortization, default rate increases, excessive late fees and acceleration clauses). Finally, under the bill, a high cost home loan cannot provide for an increase in the interest rate after default or provide for default charges in excess of five per cent of the amount in default. The bill becomes effective October 1, 2009. For a copy of the bill, please see http://www.cga.ct.gov/2009/ACT/PA/2009PA-00207-R00SB-00949-PA.htm.
Additional States Enact SAFE Act Legislation. Louisiana, Missouri, and New York are three of the latest states to enact legislation in compliance with the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), which calls for states to establish a scheme for the licensing and supervision of individuals engaging in the business of mortgage loan origination. Louisiana HB 810, Missouri HB 382, and New York AB 6924 each require mortgage loan originators to, among other things, register with the Nationwide Mortgage Licensing System, complete pre-licensing and continuing education, submit to fingerprinting for the purpose of a criminal history background check, and meet surety bond coverage requirements. Additionally, on June 30, Indiana Governor Mitch Daniels signed into law HB 1001, an omnibus bill that permits the Indiana Department of Financial Institutions to adopt emergency regulations to implement the requirements of the SAFE Act; this provision of Indiana HB 1001 became effective July 1, 2009. Louisiana HB 810 becomes effective July 31, 2009; however, the new mortgage loan originator licensing provisions become effective July 31, 2010. Missouri HB 382 became effective July 8, 2009, and New York AB 6924 became effective July 11, 2009; the loan originator licensing provisions of both Acts do not become effective until at least July 31, 2010. For a copy of Indiana HB 1001, please see http://www.in.gov/legislative/bills/1092/HE/HE1001.1.html. For a copy of Louisiana HB 810, please see http://www.legis.state.la.us/billdata/streamdocument.asp?did=668805. For a copy of Missouri HB 382, please see http://www.house.mo.gov/billtracking/bills091/biltxt/truly/HB0382T.HTM. For a copy of New York AB 6924, please see http://assembly.state.ny.us/leg/?bn=A06924&sh=t.
Illinois Attorney General Files Suit Against Four Loan Modification Companies. On July 15, Illinois Attorney General Lisa Madigan announced lawsuits against four foreclosure assistance companies. The suits allege that the defendants violated the Illinois Mortgage Rescue Fraud Act by fraudulently obtaining upfront payments from homeowners seeking foreclosure relief and failing to negotiate or perform any services on their behalf. Attorney General Madigan seeks (i) permanent injunctions against the defendants, (ii) to bar the defendants from engaging in loan modification efforts, (iii) full restitution for all customers, and (iv) penalties, fees, and reimbursement costs. The suits are in conjunction with the Federal Trade Commission and Department of Justice’s nation-wide crackdown on loan modification fraud schemes. To date, Attorney General Madigan has filed 28 suits against loan modification companies and has collected over $1.8 million in restitution for homeowners. For a copy of the press release, please see http://www.illinoisattorneygeneral.gov/pressroom/2009_07/20090715b.html.
Florida Attorney General Sues Four Loan Modification Companies. On July 21, Florida Attorney General Bill McCollum filed suit against four Florida companies that allegedly charged up to $1 million dollars a month in illegal up-front fees from customers solicited through the internet and telemarketing calls. The suits further allege that the four companies charged up to $5,000 per customer for foreclosure-related loan modification services that were not provided and falsely promised that an attorney was on staff to assist homeowners. Attorney General McCollum seeks (i) permanent injunctions against all four companies to prevent the collection of up-front fees, (ii) restitution for all victims, (iii) civil penalties of $15,000 for each Foreclosure Fraud Prevention Act violation, and (iv) reimbursement of fees related to the investigation. For a copy of the press release, please see http://www.myfloridalegal.com/newsrel.nsf/newsreleases/7E5B57BBC6DBCFDF852575FA00664042.
Eighth Circuit Holds Mortgage Not Void Under Equitable Estoppel Doctrine. On July 17, the U.S. Court of Appeals for the Eighth Circuit held that plaintiff borrowers were equitably estopped from arguing that their mortgage loan violated state law, and was thus void, because only one spouse singed it. Karnitz v. Wells Fargo Bank, N.A., No. 08-2100, 2009 WL 2065797 (8th Cir. July 17, 2009). This case arose when, four years after obtaining a home loan, and facing foreclosure, the borrowers sought declaratory judgment that the mortgage loan obtained from the defendant lender was void. The borrowers argued that the loan violated a Minnesota law requiring that both spouses sign a mortgage secured by a married couple’s homestead. The district court found that the mortgage was void because the mortgage was only signed by one spouse, even though the lender argued that the borrowers should be estopped from challenging the validity of the mortgage. The lender appealed, and a panel of the Eighth Circuit reversed, finding that the district court erred in concluding that equitable estoppel was not appropriate. Specifically, the Eighth Circuit found that the underlying facts – the borrowers intended to convey the mortgage to the lender; the non-signing spouse knew about and was benefited by the mortgage; the borrowers made no offer to return the consideration they received and were seeking to retain their homestead for free only after facing foreclosure – supported a finding of equitable estoppel. Looking to the policy behind the Minnesota law – to ensure a secure homestead for families – the Eighth Circuit held that “[s]trict compliance with the statute in these circumstances does not further the policy behind the statute; rather, it flaunts it by converting what the [Minnesota] Legislature intended as a shield into a sword.” For a copy of the opinion, please see http://www.buckleysandler.com/Karnitz_v_Wells.pdf.
Banking
Administration Proposes Legislation Regarding Enhanced Resolution Authority, Creation of National Bank Supervisor, Systemic Risk Resolution Plans. On July 23, the Obama Administration issued proposed legislation to (i) provide the federal government with resolution authority over the largest and most interconnected financial firms to adequately respond to a financial crisis, (ii) mitigate systemic risk, and (iii) address “regulatory arbitrage” by creating a single National Bank Supervisor (NBS) through the consolidation of the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC). The proposed legislation addressing regulatory arbitrage, the “Federal Depository Institutions Supervision and Regulation Improvements Act of 2009,” would, among other things, (i) eliminate the thrift charter and the thrift holding company framework, (ii) require the Federal Reserve Board (Fed), Federal Deposit Insurance Corporation (FDIC) and NBS to adopt joint rules on bank regulatory fees, (iii) require banks over $10 billion in assets to pay standardized examination fees, and (iv) require fee limits assessed on national banks with less than $10 billion in assets.
The Administration also announced proposed legislation to further mitigate systemic risk, the “Payment, Clearing, and Settlement Supervision Act of 2009,” which would, among other things (i) require all Tier 1 financial holding companies (FHCs) to prepare and maintain a “credible resolution plan” to respond to severe financial distress, and (ii) authorize the Fed to prescribe uniform standards for payment, clearing and settlement activities. Finally, the Administration delivered proposed legislation establishing resolution authority, the “Resolution Authority for Large, Interconnected Financial Companies Act of 2009,” which would, among other things, (i) grant the federal government resolution authority, supplemental to bankruptcy laws, to resolve disorder in large, interconnected firms when the financial system is threatened (modeled after the resolution regime under the Federal Deposit Insurance Act); the authority would be subject to a 2/3 vote by the Fed and the Board of the FDIC or the Securities and Exchange Commission (SEC), and must also be approved by Treasury, (ii) authorize Treasury to appoint the FDIC or SEC as conservator or receiver to take control of operations or necessitate the sale/transfer of assets, and to provide loans, assume liabilities, or inject capital upon a systemic risk determination, and (iii) require Tier 1 FHCs to take corrective actions if capital levels decline (this provision mirrors the requirements of insured depository institutions under the Federal Deposit Insurance Corporation Improvements Act). For a copy of the fact sheet, please see http://www.treas.gov/press/releases/tg229.htm. For a copy of the proposed legislation, please see http://www.treas.gov/press/releases/reports/title%20xii%20resolution%20authority%207232009finala.pdf, http://www.treas.gov/press/releases/reports/titleiii_natlbanksupervisor_072309.pdf, and http://www.treas.gov/press/releases/reports/titleviii_payments_072209.pdf.
Consumer Finance
Fed Issues Proposed Rules on Home-Secured Credit. On July 23, the Federal Reserve Board (Fed) issued two proposed rules that would amend Regulation Z by, among other things, modifying the disclosures provided to consumers in (i) closed-end mortgage and (ii) home equity line of credit (HELOC) transactions. Moreover, the proposed rules would significantly expand the scope of Regulation Z by effectively banning yield spread premiums and heavily regulating compensation paid to loan officers of mortgage brokers and lenders.
The proposed rule for closed-end mortgage transactions recommends changing the disclosures provided to borrowers throughout the lending process. Under the proposed rule, at the time of an application, creditors must provide borrowers with a series of streamlined disclosures, including two new single-page Fed publications. Specifically, for adjustable-rate closed-end mortgage transactions, creditors must provide plain-language disclosures describing interest rates and payment information, as well as potential additional expenses (e.g., prepayment penalties). Within three days after the submission of a closed-end loan application, the proposed rule requires disclosures that (i) calculate the finance charge and APR to include most fees and costs paid by consumers in connection with the credit transaction, (ii) illustrate to consumers how their APR compares to the APRs for borrowers with “excellent” credit and for borrowers with “impaired” credit, (iii) summarize key loan features (e.g., the loan term, amount, and type, along with the total settlement charges), as currently required for the “Good Faith Estimate” under the Real Estate Settlement Procedures Act (RESPA), and (iv) state potential changes to the interest rate and monthly payment. The proposal would also require creditors to provide “final” TILA disclosures to a consumer at least three business days before consummation. The proposed rule would further modify current post-transaction disclosure requirements by (i) increasing the advance notice period for interest rate adjustments to 60 days and for force-placed insurance to 45 days, and (ii) adding a new monthly disclosure requirement for loans with negative amortization features. According to the Fed, the Fed and the U.S. Department of Housing and Urban Development (HUD) will collaborate to develop a single disclosure form satisfying the combined requirements of TILA and RESPA.
The proposed rule for HELOCs recommends changing the disclosures provided to borrowers at application and account opening, as well as periodic statements and change-in-terms notices. The proposal also provides additional guidance and protections, as well as revised disclosure requirements, related to account terminations, line suspensions, credit-limit reductions, and to reinstatement of accounts. Among other things, the proposed rule would also (i) require that creditors provide borrowers with a new single-page Fed publication entitled “Key Questions to Ask about Home Equity Lines of Credit,” (ii) require, within three days after an application, creditors to provide the borrower with a table outlining rates and fees, payments, and risks as well as monthly payment examples based on both the current and maximum possible rates for the HELOC, and (iii) limit a creditor’s ability to change credit terms, or to terminate, suspend, or reduce a credit line.
The proposed rule would make major changes to compensation of mortgage brokers and loan originators (including those employed by mortgage lenders) by prohibiting brokers and loan originators from (i) accepting yield spread premiums or other payments based on a loan’s interest rate and other terms (including, in one option proposed by the Fed, the amount of the loan) and (ii) “steering” consumers to loans that increase originators’ compensation. Further, both proposed rules require several of the required disclosures to be displayed in a tabular, as opposed to narrative, format. Comments on the proposed rules are due 120 days after publication in the Federal Register. For a copy of the press release, containing links to the new Fed Publications and to model forms and samples, please see http://www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm. For a copy of the proposed rules, please see http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/FR%20Notice%20HELOC.pdf and http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/FR%20Notice--CE.pdf.
Minnesota Attorney General Lawsuit Precipitates Arbitration Service Providers’ Exit from Arbitration Industry. On July 20, the National Arbitration Forum (the Forum) settled a lawsuit brought by Minnesota Attorney General Lori Swanson alleging that the Forum misrepresented its impartiality to consumers by failing to disclose its financial ties to the debt collection industry. Under the terms of the settlement, the Forum has agreed to cease accepting or administering new consumer arbitrations. In addition to filing the lawsuit, Attorney General Swanson also sent a letter to the American Arbitration Association (AAA) asking it to cease accepting arbitration filings on consumer credit and collection matters arising out of mandatory pre-dispute arbitration clauses. Though the AAA denies that the Attorney General Swanson’s letter affected its decision, on July 23 the AAA announced that it was placing a moratorium on the administration of all consumer debt arbitrations until the federal government established fairness standards. For a copy of the press release from the Office of the Minnesota Attorney General announcing the settlement, please see http://www.ag.state.mn.us/Consumer/PressRelease/090720NationalArbitrationAgremnt.asp. For a copy of the AAA’s press release announcing its moratorium, please see http://www.adr.org/si.asp?id=5769.
Delaware Amends State Law Regarding Title, Payday Loans. On July 16, Delaware Governor Jack Markell signed SB 108, a bill that amends Delaware state law regarding title and payday loans. Regarding such loans, the bill (i) requires conspicuous disclosure of significant terms (e.g., that the loan is strictly a short-term, not long-term, extension of credit), (ii) provides for a right of rescission, and (iii) limits the duration of an extension for such loans. The bill additionally, among other things, (i) requires that a lender offer a workout agreement to a consumer, (ii) limits the duration and amount of interest that can be charged when a loan is in default, (iii) mandates compliance with certain federal and state consumer protection acts (e.g., the Fair Debt Collection Practices Act), (iv) limits a lender’s recourse on a title loan to the proceeds from the sale of the motor vehicle, and further requires the lender in all cases to provide the borrower with a written explanation of the proceeds from a sale, and (v) requires licensed lenders to pay an annual “high-cost loan license fee surcharge” of $1,500 for each licensed office making title or payday loans. The bill became effective July 16, 2009. For a copy of the bill, please see http://legis.delaware.gov/LIS/lis145.nsf/vwLegislation/SB+108/$file/legis.html?open.
New Hampshire Governor Signs Bill Amending State Consumer Credit Laws. On July 16, New Hampshire Governor John Lynch signed HB 334, a bill that, among other things, (i) allows the New Hampshire Banking Commissioner (Commissioner) to bar (in addition to existing authority to deny, suspend, or revoke) “persons,” such as individuals and corporations, from obtaining certain consumer credit licenses and registrations, (ii) expands the Commissioner’s authority to conduct criminal record checks for certain consumer credit licensees and registrants, (iii) allows the Commissioner to collect certain examination expenses, fines, and other penalties, and (iv) allows the Commissioner to examine the business records of certain consumer credit companies in various situations. Most provisions of the bill become effective September 13, 2009. For a copy of the bill, please see http://www.gencourt.state.nh.us/legislation/2009/HB0334.html.
New York Attorney General Files Suit Against Debt Collectors, Law Firms. On July 21, New York Attorney General Andrew M. Cuomo filed suit against 35 law firms and two debt collectors to throw out approximately 100,000 default judgments obtained against New York consumers. According to the complaint, the consumers were not properly served with documentation regarding debt-related lawsuits and false affidavits were used to obtain the default judgments. Among other things, the suit seeks to have the improperly obtained default judgments vacated, and for the defendants to pay restitution to debtors who made payment on an improperly obtained default judgment. For a copy of the press release, please see http://www.oag.state.ny.us/media_center/2009/july/july22a_09.html. For a copy of the complaint, please see http://www.oag.state.ny.us/media_center/2009/july/pdfs/5015%20Suit.pdf.
Indiana Attorney General Files Suit Against Credit Card Interest Rate Reduction Service Companies. On July 9, Indiana Attorney General Greg Zoeller announced two lawsuits against telemarketing companies that allegedly used pre-recorded messages and auto-dialers to offer credit card interest rate reduction services. The companies named in the complaints are Florida-based Sapphire Marketing, Inc. and California-based Genesis Capital Management, Inc. The complaint against Genesis Capital Management Inc. further alleges that consumers paid for services that were not actually provided. For a copy of the press release, please see http://www.in.gov/attorneygeneral/press/Releases.BogusReduction.Consumer.html. For a copy of the complaints, please see http://www.in.gov/attorneygeneral/press/ComplaintforInjunction-5191SapphireMarketingInc.pdf and http://www.in.gov/attorneygeneral/press/ComplaintforInjunction-5144GenesisCapitalManagement.pdf.
Litigation
Eighth Circuit Holds Mortgage Not Void Under Equitable Estoppel Doctrine. On July 17, the U.S. Court of Appeals for the Eighth Circuit held that plaintiff borrowers were equitably estopped from arguing that their mortgage loan violated state law, and was thus void, because only one spouse singed it. Karnitz v. Wells Fargo Bank, N.A., No. 08-2100, 2009 WL 2065797 (8th Cir. July 17, 2009). This case arose when, four years after obtaining a home loan, and facing foreclosure, the borrowers sought declaratory judgment that the mortgage loan obtained from the defendant lender was void. The borrowers argued that the loan violated a Minnesota law requiring that both spouses sign a mortgage secured by a married couple’s homestead. The district court found that the mortgage was void because the mortgage was only signed by one spouse, even though the lender argued that the borrowers should be estopped from challenging the validity of the mortgage. The lender appealed, and a panel of the Eighth Circuit reversed, finding that the district court erred in concluding that equitable estoppel was not appropriate. Specifically, the Eighth Circuit found that the underlying facts – the borrowers intended to convey the mortgage to the lender; the non-signing spouse knew about and was benefited by the mortgage; the borrowers made no offer to return the consideration they received and were seeking to retain their homestead for free only after facing foreclosure – supported a finding of equitable estoppel. Looking to the policy behind the Minnesota law – to ensure a secure homestead for families – the Eighth Circuit held that “[s]trict compliance with the statute in these circumstances does not further the policy behind the statute; rather, it flaunts it by converting what the [Minnesota] Legislature intended as a shield into a sword.” For a copy of the opinion, please see http://www.buckleysandler.com/Karnitz_v_Wells.pdf.
E-Financial Services
PCI Security Standards Council Issues PCI DSS Wireless Security Standard. On July 16, the PCI Security Standards Council released guidance regarding wireless standards for credit card processors that require the Payment Card Industry’s Data Security Standard (PCI DSS) v1.2. According to the press release, the guidance “provides the first, highly specific, actionable wireless operational guide for complying with PCI DSS.” For a copy of the press release, please see https://www.pcisecuritystandards.org/pdfs/pr_090716_wireless_sig.pdf. For a copy of the guidance, please see https://www.pcisecuritystandards.org/pdfs/PCI_DSS_Wireless_Guidelines.pdf.
Privacy/Data Security
PCI Security Standards Council Issues PCI DSS Wireless Security Standard. On July 16, the PCI Security Standards Council released guidance regarding wireless standards for credit card processors that require the Payment Card Industry’s Data Security Standard (PCI DSS) v1.2. According to the press release, the guidance “provides the first, highly specific, actionable wireless operational guide for complying with PCI DSS.” For a copy of the press release, please see https://www.pcisecuritystandards.org/pdfs/pr_090716_wireless_sig.pdf. For a copy of the guidance, please see https://www.pcisecuritystandards.org/pdfs/PCI_DSS_Wireless_Guidelines.pdf.
Credit Cards
Minnesota Attorney General Lawsuit Precipitates Arbitration Service Providers’ Exit from Arbitration Industry. On July 20, the National Arbitration Forum (the Forum) settled a lawsuit brought by Minnesota Attorney General Lori Swanson alleging that the Forum misrepresented its impartiality to consumers by failing to disclose its financial ties to the debt collection industry. Under the terms of the settlement, the Forum has agreed to cease accepting or administering new consumer arbitrations. In addition to filing the lawsuit, Attorney General Swanson also sent a letter to the American Arbitration Association (AAA) asking it to cease accepting arbitration filings on consumer credit and collection matters arising out of mandatory pre-dispute arbitration clauses. Though the AAA denies that the Attorney General Swanson’s letter affected its decision, on July 23 the AAA announced that it was placing a moratorium on the administration of all consumer debt arbitrations until the federal government established fairness standards. For a copy of the press release from the Office of the Minnesota Attorney General announcing the settlement, please see http://www.ag.state.mn.us/Consumer/PressRelease/090720NationalArbitrationAgremnt.asp. For a copy of the AAA’s press release announcing its moratorium, please see http://www.adr.org/si.asp?id=5769.
Indiana Attorney General Files Suit Against Credit Card Interest Rate Reduction Service Companies. On July 9, Indiana Attorney General Greg Zoeller announced two lawsuits against telemarketing companies that allegedly used pre-recorded messages and auto-dialers to offer credit card interest rate reduction services. The companies named in the complaints are Florida-based Sapphire Marketing, Inc. and California-based Genesis Capital Management, Inc. The complaint against Genesis Capital Management Inc. further alleges that consumers paid for services that were not actually provided. For a copy of the press release, please see http://www.in.gov/attorneygeneral/press/Releases.BogusReduction.Consumer.html. For a copy of the complaints, please see http://www.in.gov/attorneygeneral/press/ComplaintforInjunction-5191SapphireMarketingInc.pdf and http://www.in.gov/attorneygeneral/press/ComplaintforInjunction-5144GenesisCapitalManagement.pdf.
PCI Security Standards Council Issues PCI DSS Wireless Security Standard. On July 16, the PCI Security Standards Council released guidance regarding wireless standards for credit card processors that require the Payment Card Industry’s Data Security Standard (PCI DSS) v1.2. According to the press release, the guidance “provides the first, highly specific, actionable wireless operational guide for complying with PCI DSS.” For a copy of the press release, please see https://www.pcisecuritystandards.org/pdfs/pr_090716_wireless_sig.pdf. For a copy of the guidance, please see https://www.pcisecuritystandards.org/pdfs/PCI_DSS_Wireless_Guidelines.pdf.