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Court Limits Use of Zip Codes in Massachusetts Credit Card Transactions

Posted by Thomas I. Elkind on Posted in Class Actions; State Consumer Protection Laws; Uncategorized

In a recent decision, Tyler v. Michaels Stores, Inc., the Massachusetts Supreme Judicial Court held that zip codes are “personal identification information” and that a merchant asking for that information during a credit card transaction violates a Massachusetts statute [G.L.c. 93, Section 105(a)] designed to protect consumer privacy, becoming the second state high court, after California, to declare that merchants can no longer request zip codes in credit card transactions with their customers. The Court also made clear that its decision applies equally to electronic and paper transaction forms.

The Court reasoned that a zip code, “when combined with the consumer’s name, provides the merchant with enough information to identify through publicly available databases the consumer’s address or telephone number, the very information Section 105(a) expressly identifies as personal identification information….”

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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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Deception Alleged by Florida Attorney General

Posted by Rebecca Hanson on Posted in State Consumer Protection Laws; Uncategorized

Is your institution providing clear and conspicuous notice of fees? Are you consistently reviewing company marketing materials to ensure that all claims are accurate and supported with adequate substantiation?  

The Florida Attorney General announced that Florida has entered into settlement agreements with five prepaid debit card companies following an investigation into allegations that consumers supposedly were deceived about fees and misled into believing that using the prepaid cards would improve their credit scores. All the prepaid companies denied any wrongdoing but agreed to pay a combined total of $115,000 to a charitable organization as a part of the settlements. The prepaid card companies also paid the Attorney General’s costs and fees related to the action.
 
Notably, consumer complaints played a key role in the Florida Attorney General’s decision to take up the investigation of these prepaid card companies. This is a reminder to use consumer complaints to identify potential UDAAP issues with your advertising, products, or services.  

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.

Final Rule Issued on Ability-to-Repay/Qualified Mortgages

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

The Consumer Financial Protection Bureau (CFPB) issued its final ability to repay rule (Rule) on January 10, 2013. The Rule implements ability-to-repay provisions of the Dodd-Frank Act, which imposed strict underwriting standards upon lenders to ensure that prospective buyers have the ability to repay their mortgages. A failure to comply with these requirements will constitute a violation of the Truth In Lending Act (TILA) and subject the lender to significant penalties and possible rescission of the loan. However, loans that meet the definition of what has been termed a “qualified mortgage” (QM) are either exempt from these ability to pay requirements if the loans are viewed as prime, or will give rise to a rebuttable presumption of compliance if they are higher cost loans.

Qualified Mortgages and Treatment of Smaller Loans

In general, the Rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total debt-to-income ratio that is less than or equal to 43 percent. In order for a mortgage to be a qualified mortgage, the loan in essence must not contain certain undesirable terms or features such as negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. So-called “no-doc” loans where the creditor does not verify income or assets also cannot be qualified mortgages. Additionally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount for loans of $100,000 or more.

The Rule provides that points and fees retained by the affiliate of a creditor — such as the title insurance fees charged by an title agent or company that is affiliated with the lender — must be counted toward the 3% points and fees limit for QM, even though the same (or higher) fees of an unaffiliated company would not be counted toward this limit. This means that some lenders will be discouraged or prevented from using their affiliated title companies in many transactions because doing so may cause them to go over the 3% limit whereas if they used an independent title company, the fees would not count and they could avoid the risk of making a non-QM loan.

The CFPB raised the small loan exemption from $75,000 to $100,000. Under the Rule, the revised points and fees limits for smaller loans are a mix of percentage and flat dollar limits, as follows:

  • For a loan amount greater than or equal to $60,000 but less than $100,000, $3,000;
  • For a loan amount greater than or equal to $20,000 but less than $60,000, 5 percent of the total loan amount;
  • For a loan amount greater than or equal to $12,500 but less than $20,000, $1,000 of the total loan amount;
  • For a loan amount of less than $12,500, 8 percent of the total loan amount.

 According to the CFPB, it intended its revised points and fees limits for loans under $100,000 to include more transactions in the exemption for smaller loans, which it believes will allow creditors making such loans a reasonable opportunity to recover their costs through points and fees and still originate qualified mortgages. The CFPB chose not to enlarge the exemption for smaller loans. It noted that in 2011, slightly under 21% of first-lien home mortgages were below $100,000 and another 22% were between $100,000 and $150,000. “Thus, increasing the threshold to $150,000 would more than double the number of loans entitled to an exception to the congressionally-established points and fees cap and would capture over 40 percent of the market,” which the CFPB believed “would be an overly expansive construction of the term ‘smaller loans’ for the purpose of the exception to the general rule capping points and fees for qualified mortgages at three percent.”  

The effective date of the Rule is January 10, 2014, one year from the date of issuance. Under the Rule, all points and fees limits will be indexed for inflation. The CFPB declined to adopt a tolerance that would allow creditors to exceed the points and fees limits by small amounts.

Safe Harbor or Rebuttable Presumption?

With respect to the issue of what legal protection a QM will provide against a challenge based upon a violation of the ability to repay requirement — i.e., a safe harbor or a rebuttable presumption — the CFPB split the baby. The Rule distinguishes between two types of QMs based on the mortgage’s Annual Percentage Rate (APR) relative to the Average Prime Offer Rate (APOR). For loans that exceed APOR by a specified amount — loans denominated as “higher-priced mortgage loans” — the Rule provides a rebuttable presumption. In that instance, although the lender will be presumed to have determined that the borrower had an ability to repay the loan, the consumer can challenge that presumption by making certain showings. For all other loans, i.e., loans that are not “higher-priced,” the Rule will afford the creditor a safe harbor, which in essence provides the lender with an exemption from the ability to repay rules and accords far more protection than the rebuttable presumption.

Temporary Alternative QM Definition

Because the CFPB viewed implementation of its 43 percent debt-to-income ratio threshold as potentially harsh, it opted to provide a “temporary alternative” definition as a substitute for the general qualified mortgage definition. The temporary definition will apply to loans that meet the prohibitions on certain risky loan features (e.g., negative amortization and interest only features) and the limitations on points and fees and are eligible for purchase or guarantee by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) or eligible to be insured or guaranteed by certain federal agencies such as the U.S. Department of Housing and Urban Development and the Department of Veterans Affairs.

Looking Forward

In the days to come, lender and brokers — particularly those with affiliated settlement service providers — will be examining the intricacies of the “points and fees” test and assessing what percentage of the loans they are making would run afoul of the 3% test under the Rule and at what loan amount. Legislative and business solutions (such as the possible use of no cost loans) will likely be fully explored during the coming year.

At the same time it issued the final QM Rule, the CFPB has released proposed amendments to the Rule that would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers, make exceptions for certain homeownership stabilization programs, and provide QM status for certain loans made and held in portfolio by small creditors. The proposed amendments also seek comment on how to calculate loan origination compensation under the QM points and fees test.

Developments in Law, Factual Discovery Lead Federal Judge to Decertify Class Action

Posted by Jennifer M. Keas on Posted in Class Actions; Uncategorized

In Campbell v. First American, a federal judge in Maine has issued a ruling decertifying a class action involving claims that First American Title Insurance Co. overcharged refinance customers for their title insurance.

As members of the financial services industry may be all too aware, class certification is a critical point in litigation. A decision to grant class certification places great pressure on the defendant to settle — often without regard for the actual merits of the case. On the other hand, a certification denial can be the “death knell” of the case because the claim of the named plaintiff alone may be too small to justify the expense of going forward. In general, a court will certify a class if it is persuaded that many related individual claims can be decided together, with a key element being the predominance of “common” issues. Class treatment is generally inappropriate where resolution of the claims would require individualized review.

In the Campbell case, Judge George Z. Singal originally had certified a class of homeowners that included all persons who had refinanced a prior mortgage on residential property in Maine that was issued within two years of the refinancing and who had purchased title insurance from First American and paid more than the statutorily approved refinance rate. Two years later, however, Judge Singal was willing to re-examine — and reverse — that ruling. He explained that courts remain free to revisit class certification order at any time prior to final judgment. Citing stricter class certification standards in the wake of the Supreme Court’s 2011 Wal-Mart Stores, Inc. v. Dukes decision, as well as developments in the factual record, Judge Singal found that there was no longer sufficient commonality to justify class certification.

The court observed that the Dukes decision has transformed the class certification commonality standard from a “low bar” to “a far more searching inquiry.” Under Dukes, class certification requires not just a common question, but also common answers. Moreover, a defendant retains a right to litigate defenses to individual claims.

In Campbell, it became clear to the court that there was no common cause for the alleged title insurance overcharge, but rather that “each class member presents unique facts as to what was presented in connection with their purchase of the title insurance and what steps were taken to ascertain whether they qualified for First American’s published refinance rate.” First American also had different defenses as to why individual class members had not received this lower rate. Thus, “neither liability nor damages can be established on a class wide basis,” the court found.

The record supported this analysis. At the time of the initial class certification, First American largely relied on declarations that it submitted to the court. However, the court was under the impression that if a borrower had previously received a title policy from First American, then it was entitled to a re-issue rate and that the failure to receive this rate could be attributed in some common way to First American’s failure to ascertain or assume the existence of the prior policy. Two years later, when First American moved to decertify, the parties had conducted significant additional discovery, which revealed that the plaintiffs’ claims could not be resolved without reviewing each of their individual transactions. First American had conducted a detailed review of 230 title policies (and their underlying files) identified by the plaintiffs as overcharges. The review showed that about one-third involved no overcharge at all.  Some plaintiffs had, in fact, received the refinance rate. For various reasons, others were ineligible. In yet other instances, the file contained insufficient information to determine whether the homeowner was entitled to the refinance rate.  

The case is Campbell v. First American Title Insurance Co., No. 2:08-cv-003119-GZS, in the U.S. District Court for the District of Maine. As a practical matter, a decertification order may have a particularly deterrent effect on class counsel who risk investing massive resources pursuing a case post-certification only to have the judge change his or her mind down the road. Judge Singal’s ruling joins a number of recent decisions reflecting a legal climate where it may be increasingly difficult to secure class certification. Of note is a decision earlier this year in Howland v. First American Title Insurance Co., 672 F.3d 525 (7th Cir. 2012), in which the Seventh Circuit affirmed the denial class certification in a RESPA case.

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.

Chicago Joins CFPB in Information-Sharing Partnership; City Takes Additional Measures

Posted by Timothy S. Crisp on Posted in Consumer Financial Protection Bureau; Uncategorized

In a first-of-its-kind partnership with a municipality, CFPB Director Richard Cordray and Chicago Mayor Rahm Emanuel jointly announced a framework for sharing of information between the City and the CFPB. Under the agreement, Chicago becomes the first city in the nation to agree to directly report alleged violations of federal consumer financial protection laws and regulations to the CFPB.

Director Cordray’s prepared remarks noted that the CFPB “want[s] to know what you are seeing and how that informs what we should be doing – where our supervision and enforcement teams should focus their attention, and what problems our policymakers should undertake to fix.” Cordray suggested that similar agreements with other municipalities may be forthcoming, noting that “[c]ollaborations like this one are at the heart of our efforts to improve how consumer financial markets work for people…. By working together, we can succeed in educating, empowering, and protecting our citizens.”

In his prepared remarks, Mayor Emanuel announced additional actions that the City is taking:

  • On December 12, 2012, the City Council will introduce new proposed ordinances (a) to regulate and license debt collectors and to enforce compliance with fair debt collection laws and (b) to give its Department of Business Affairs & Consumer Protection enhanced supervision and enforcement powers against businesses for alleged violations of federal and state consumer financial protection laws.
  • The City will collect information on “predatory and deceptive acts associated with home repair loans, payday loans, small dollar loans, reverse mortgage products, and mortgage origination and servicing.”
  • The City plans to tighten zoning regulations to “limit the proliferation” of payday lenders, auto-title lenders, and “other predatory financial services.”

CFPB Issues Final Rules Governing Enforcement Actions at the Bureau

Posted by Michael S. Lawrence on Posted in Uncategorized

This past Wednesday, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued Final Rules which provide greater clarity into the process by which it will adjudicate consumer protection provisions set forth in Title X of the Dodd-Frank Act. The Bureau summarized its primary goal of “creat[ing] an adjudicatory process that provides for the expeditious resolution of claims while ensuring that parties who appear before the Bureau receive a fair hearing.” The Bureau modeled its process after that of the Federal Trade Commission and the Securities Exchange Commission; processes that were previously implemented with a similar stated purpose.

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