CFSL Bulletin The latest Consumer Financial Services Litigation news, developments, and legal thinking

Tag Archives: Consumer Financial Services Litigation

FTC Releases 2012 Annual Report of Consumer Complaints

Posted by Rebecca Hanson on Posted in Uncategorized

Consumer complaints are playing a big role in the federal government’s identification of and investigations into violations of consumer protection laws. The Federal Trade Commission (“FTC”) recently released its 2012 annual report of consumer complaints, which revealed that consumer fraud complaints make up over half of all the 2012 complaints received by the FTC.

The FTC enters complaints into the Consumer Sentinel Network (“CSN”), which is a secure online database of consumer complaints that is available only to law enforcement. The CSN contains consumer complaints received by the FTC, the Consumer Financial Protection Bureau (“Bureau”), the Federal Bureau of Investigation’s Internet Crime Complaint Center, the Council of Better Business Bureaus, state law enforcement organizations, and a number of other state and federal entities.

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CFPB Proposes Amendments to New Final Ability-to-Repay Rule, Solicits Comment on Calculating Loan Originator Compensation

Posted by Jennifer M. Keas on Posted in Bureau of Consumer Financial Protection; Consumer Financial Protection Act; Consumer Financial Protection Agency; Consumer Financial Protection Bureau; Truth in Lending Act; Uncategorized

On January 10, 2013, the CFPB issued its final ability-to-repay rule (Rule), which implements Dodd-Frank mortgage reforms requiring creditors to make a reasonable and good faith determination that a consumer will have a reasonable ability to repay the loan according to its terms. Failure to comply with these requirements may give rise to various damages under TILA, and consumers also may assert an ability-to-repay violation as a defense to a foreclosure action. There is no time limit on the use of this defense (although there is a cap on the recoupment or setoff of finance charge and fees), which applies against assignees of the loan in addition to the original creditor.

Loans that meet the criteria to be a “qualified mortgage” (“QM”) are entitled to either safe harbor or a rebuttable presumption of compliance with the ability-to-repay requirements.

Qualified mortgage criteria prohibit certain risky features and practices such as negative amortization. A loan also cannot be a QM unless the consumer has a total debt-to-income ratio of less than or equal to 43 percent (although the CFPB has provided a temporary QM definition softening the debt-to-income ratio). In addition, the transaction’s total “points and fees,” cannot exceed specified thresholds. For a loan of $100,000 or more, the QM threshold is 3% of the total loan amount. 

Many in the industry are currently examining the loans they make loans to assess what percentage are expected to exceed the 3% threshold when the Rule becomes effective on January 10, 2014. The element of loan originator compensation remains an important — and unresolved — factor in this analysis.

Loan originator compensation as an element of “points and fees”

Under the Ability-to-Repay Rule, points and fees includes, among other things, all compensation paid directly or indirectly by a consumer or creditor to a loan originator that can be attributed to that transaction at the time the interest rate is set.” A “loan originator” includes mortgage broker firms and individual employees hired by either brokers or creditors, but generally excludes creditors themselves. 

Before the CFPB issued the final Rule, many in the industry commented that including all loan originator compensation in points and fees makes little sense.  Commenters pointed out that as a practical matter, compensation paid to individual employee originators is already included in the cost of the loan in the form of origination fees or as part of the interest rate.  Furthermore, including loan originator compensation in points and fees will often result in “double-counting.”  For example, points and fees include mortgage broker fees, including fees paid directly to the broker or the lender for delivery to the broker.  But also included is compensation paid to individual loan originators (i.e., loan officers who are employed by mortgage brokerage firms) to the extent their compensation can be attributed to the transaction at the time the interest rate is set.  Similarly, money collected by a creditor in up-front charges from consumers (which is already counted toward the points and fees thresholds as items in the finance charge) would be counted a second time as loan originator compensation if the creditor passed it on to its employee loan officer.

The CFPB proposes amendments on this issue

The CFPB is still considering exactly how it should require the inclusion of loan originator compensation under the Ability-to-Repay Rule.  The agency has expressed its belief that Congress did intend the Dodd-Frank statute to literally require that loan originator compensation be treated as “additive” to the other elements of points and fees.  Nonetheless, the CFPB is not convinced that “an automatic literal reading of the statute in all cases would be in the best interest of either consumers or industry…”  In particular, the CFPB does not believe that it is necessary or appropriate to count the same payment between a consumer and a mortgage broker firm twice, simply because it is both part of the finance charge and loan originator compensation. 

Therefore, concurrent with the final Ability-to-Repay Rule, the CFPB issued proposed amendments to the Rule that would provide that loan originator compensation is not necessarily always counted against the QM points and fees threshold if it is already counted elsewhere in points and fees.

  • The CFPB proposes a new comment that would provide that mortgage broker fees already included in the points and fees as items included in the finance charge need not be counted again as loan originator compensation. 
  • Another proposed comment would clarify that compensation paid by a mortgage broker to its individual loan originator employee is not loan originator compensation.
  • With regard to the creditor context, the CFPB has proposed two alternatives. 
    • The first alternative would enshrine double-counting by creditors, specifying that a creditor must include compensation paid by a consumer or creditor to a loan originator in points and fees in addition to any fees or charges paid by the consumer to the creditor.  
    • Under the second alternative, the CFPB would permit all consumer payments of up-front fees and points to offset creditor payments to the loan originator.  This alternative would provide that a creditor should reduce the amount of loan originator compensation included in the points and fees calculation by any amount paid by the consumer to the creditor and included in the points and fees calculation as part of the finance charge. For example, if the consumer paid a creditor a $3,000 origination fee and creditor paid the loan originator $1,500 in compensation attributed to the transaction, points and fees would include the $3,000 origination fee but not the $1,500 in loan originator compensation.  However, if the consumer paid the creditor a $1,000 origination fee and the creditor paid the loan originator $1,500 in compensation, then the points and fees would include the $1,000 origination fee as well as $500 of the loan originator compensation.

Comments on these important issues are due by February 25, 2013.  A link for submitting comments to the CFPB may be found here.

Bank Sued Over “Unfair” and “Deceptive” Overdraft Fees

Posted by Rebecca Hanson on Posted in Class Actions

A large bank was sued in federal court in New York last week by a putative nationwide class alleging that the bank engaged in “unfair, deceptive, and unconscionable assessment and collection of excessive overdraft fees.” 

The complaint accuses HSBC Bank and other companies of manipulating the order of customers’ debit card transactions to maximize overdraft penalties by depleting the customer’s account faster with larger transactions and then charging multiple overdraft fees on smaller transactions that were actually made when the account had sufficient funds to cover those purchases. The compliant also accuses HSBC of failing to advise its debit card customers that they have the right to “opt out” of HSBC’s overdraft program, as required by Federal Reserve, and alleges that HSBC could have simply declined to process a debit or point-of-sale transaction when a customer had insufficient funds to cover the purchase or could have warned the customer that he or she was about to overdraw their account. 

Now is a good time to review some of the available regulatory guidance on overdraft protection programs, including that provided by the FDIC and the Department of the Treasury. These agencies have suggested certain practices with respect to overdraft programs, including: 1) informing customers of different ways to handle overdrafts, such as lines of credit or automatic transfers, that would avoid overdraft fees; 2) educating customers about choices they have with respect to overdrafts and giving them an opportunity to “opt-out” before the overdraft program is implemented; 3) monitoring customer activity to track customers who incur multiple overdrafts and educating them about the costs and alternatives to overdrafting; 4) communicating frequently with customers to ensure their understanding of the program.

The HSBC suit is yet another warning to banks against aggressive marketing campaigns. As we know from the Bureau’s credit card settlements this past summer and its recent warning to mortgage lenders, marketing practices are under scrutiny – now is the time to review your procedures!

An Assessment of Security Procedures – Eleventh Circuit Reversal of Safe Harbor Application Finding

Posted by Jennifer N. Toussaint on Posted in Uncategorized

For banks operating in Florida (or other jurisdictions with similar provisions regarding security procedures for payment orders), the Eleventh Circuit has recently issued an opinion that may call into question the validity of existing security procedures and the corresponding applicability of the safe-harbor risk shifting provision of Fla. Stat. §670.202.

In Chavez v. Mercantil CommerceBank, N.A., No. 11-15804 (11th Cir. Nov. 27, 2012) Plaintiff Chavez filed suit seeking recovery of funds fraudulently transferred from his account with Mercantil to a third party. Under §670.202(2), banks are relieved from liability for fraudulent payment orders if the bank follows established (and agreed upon) security procedures in good faith and the procedure is considered commercially reasonable. While Mercantil succeeded in asserting §670.202(2) as an affirmative defense on the district court level, the Eleventh Circuit reversed – finding that the established security procedure did not meet the standards articulated by Fla. Stat. §607.201. According to the Eleventh Circuit, the established procedure agreed upon by Mercantil and Chavez – delivery to the bank of a written payment order containing the proper signatures by an authorized representative, and, in the event of delivery via electronic means, a telephone call back by the bank to identify the identity of the representative – did not meet the requirements of §670.201, which at a minimum expressly states that “the comparison of a signature or the communication with an authorized specimen signature is not by itself a security procedure.”

The Eleventh Circuit’s analysis and interpretation of Fla. Stat. §§607.201 – 670.202 may prove helpful in evaluating the existing security measures of financial institutions facing similar obligations and ensure the applicability of safe-harbor provisions that prove to greatly limit risk and liability.

Seventh Circuit Affirms Summary Judgment in FDCPA Action, Criticizes Survey Evidence, and Suggests District Courts Appoint Neutral Survey Experts

Posted by Miki Vucic Tesija on Posted in Fair Debt Collection Practices Act

The Seventh Circuit Court of Appeals recently issued an opinion in two related class action suits involving the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692-1692p) – DeKoven v. Plaza Assoc. and Kubert v. Aid Assoc. Plaintiffs complain about “dunning letters” sent to them by debt collectors. The letters state in relevant part: (1) that the debt collectors are authorized to offer the debtor the opportunity to settle the account for 65% of the balance due and that the offer is valid for a period of 35 days, and (2) if the debtor disputes the validity of the debt, the debtor may provide “satisfactory proof” that the account is in error. Plaintiffs claim that the statement that “the offer is valid for 35 days” would be understood by many consumers to mean that it is their last chance to settle, i.e., that it is final offer. 

As to the second statement, Plaintiffs claim that it is misleading because it implies that to “dispute” a claim, a debtor must furnish “proof” which is not required under the FDCPA. The district court granted summary judgment to the Defendants after having rejected the survey evidence of Plaintiffs and the Seventh Circuit affirmed. Specifically, the “survey evidence” was confusing, unclear and in some instances, did not have enough persons in the control group from which a reliable extrapolation could be made. The Seventh Circuit reiterated the “vital” importance of control groups in surveys to determine whether a debt collector is confusing debtors and noted that FDCPA suits “repeatedly come to grief” due to flaws in the surveys conducted by plaintiff’s experts. Therefore, the Seventh Circuit suggested that district courts consider exercising their authority to appoint a neutral expert to conduct FDCPA surveys, but also stated that it was not suggesting that defendants should be made to contribute to the cost of such a survey.

Second Circuit: Lawsuit During FDCPA Validation Period Overshadows Notice

Posted by Katherine Licup on Posted in Fair Debt Collection Practices Act

A recent case out of Connecticut waves a yellow flag at debt collectors who file lawsuits within 30 days of sending a consumer a validation notice under the Fair Debt Collections Practices Act (“FDCPA”). On January 13, 2010, the Second Circuit Court of Appeals held that a law firm and two of its lawyers violated the FDCPA, 15 U.S.C. § 1692 et. seq., when it filed suit against a debtor during the 30-day validation period without providing additional explanation to the debtor about how the lawsuit affected the notice. Ellis v. Solomon and Solomon, P.C., et. al., No. 09-1247-cv (2d Cir. Jan. 13, 2010).

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United States Supreme Court Recongizes Rise In Consumer Credit Litigation

Posted by Martin J. Bishop on Posted in Fair Credit Reporting Act

Each year, Chief Justice John Roberts. Jr. issues a report about the state of the federal judiciary. For 2009, Justice Roberts reported a 6% year-to-year decline in filings in the Supreme Court and federal courts of appeals. The federal district courts saw a 3% increase in filings over 2008 filings, up to 276,397 filings in 2009. Particularly relevant to the consumer federal services industry (and this blog), Justice Roberts found that, in 2009:

Filings of cases involving consumer credit, such as those filed under the Fair Credit Reporting Act, increased 53% (up 2,143 cases), fueled in part by the current economic downturn, particularly in the nation’s most populous districts.

Justice Roberts concluded that “[t]he courts are operating soundly, and the nation’s dedicated federal judges are conscientiously discharging their duties.” You can read the entirety of his report here.

Breaking News

Posted by Martin J. Bishop on Posted in Class Actions

Law360 is reporting this morning that JPMorgan Chase & Co. has settled out of a class action suit brought against it and other credit card companies in the Southern District of New York. The plaintiffs allege, among other things, that credit card companies conspired to mandate arbitration to settle disputes against credit cardholders.

Third Circuit Holds Overcharges Not Required in RESPA Actions

Posted by Thomas R. Mikrut on Posted in Real Estate Settlement Procedures Act

The Third Circuit just issued an opinion, Alston v. Countrywide Financial Corp., holding that plaintiffs are not required to have suffered an overcharge to bring a cause of action under the Real Estate Settlement Procedures Act (“RESPA”).

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Senator Chris Dodd Introduces New Bill To Immediately Freeze Credit Card Interest Rates

Posted by Martin J. Bishop on Posted in Credit CARD Act

Senate Banking Committee Chairman Chris Dodd introduced a bill today that seeks to freeze interest rates on existing credit card balances. The Credit Card Accountability, Responsibility, and Disclosure Act (the “Credit CARD Act”), passed by Congress in May, currently allows interest rate increases on existing balances under limited circumstances. The new bill, if passed by Congress, would force credit card companies to freeze rates on existing balances until the remaining provision of the Credit CARD Act go into effect in February 2010.

Dodd’s new bill comes just days before the House of Representatives is expected to vote on accelerating to December 1, 2009 the new rules under the Credit CARD Act.