Financial Services Law Developments: 7/10/11

Friday, July 15, 2011

FYI: FRB/FTC Issue Final Rule on Dodd-Frank Act Changes to Risk-Based Pricing, Adverse Action Notices

The Federal Reserve Board and the Federal Trade Commission (FTC) issued
their final rules implementing the new credit score disclosure
requirements under Dodd-Frank, specifically relating to adverse actions
and risk-based pricing notices under FCRA/Regulation V and ECOA/Regulation
B.

Model forms are also provided.

Copies of the Final Rules are available at:

Regulation V:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110706a1.pdf
Regulation B:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110706a2.pdf

Under section 311 of FACTA, if a credit score is used in setting material
terms of credit or in taking adverse action, creditors must disclose
credit scores and related information to consumers in notices. Section
1100F of the Dodd-Frank Act changed the content required for risk-based
pricing notices. Accordingly, the final rules amend Regulation V to
revise the content requirements for risk-based pricing notices, and to add
related model forms that reflect the new credit score disclosure
requirements.

The final rules also amend certain model notices in Regulation B, which
combine the adverse action notice requirements for Regulation B and the
FCRA, to reflect the new credit score disclosure requirements

The rules under Regulations V and B are effective 30 days after the date
of publication in the Federal Register, which is expected shortly.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

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________________________________

Subject: FYI: FRB/FTC Issue Proposed Rule on Dodd-Frank Act Changes
to Risk-Based Pricing, Adverse Action Notices
Date: Wed, 2 Mar 2011 10:03:19 -0600
From: RWutscher@mtwllp.com
To: Ralph Wutscher <rwutscher@mtwllp.com>
CC: socaloffice@mtwllp.com, dcoffice@mtwllp.com,
chicagooffice@mtwllp.com

The Federal Reserve Board and Federal Trade Commission propose to: (1)
revise and add to the content requirements for risk-based pricing notices;
and (2) revise and add related risk-based pricing and adverse action
notice model forms to reflect the new Dodd-Frank Act credit score
disclosure requirements .

The full text of the proposed risk-based pricing rule is available at:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110301a1.pdf

The full text of the proposed adverse action notice rule is available at:
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110301a2.pdf

In January of last year, the FRB and the FTC published final rules to
implement the risk-based pricing provisions in section 311 of the Fair and
Accurate Credit Transactions Act of 2003 (FACT Act), which amends the Fair
Credit Reporting Act (FCRA).

These existing final rules generally require a creditor to provide a
risk-based pricing notice to a consumer when the creditor uses a consumer
report to grant or extend credit to the consumer on material terms that
are materially less favorable than the most favorable terms available to a
substantial proportion of consumers from or through that creditor. The
mandatory compliance date for these existing risk-based pricing rules was
January 1, 2011.

As you may recall, the Dodd-Frank Act requires creditors to also and
additionally disclose credit scores and related information to consumers
in risk-based pricing and adverse action notices under the Fair Credit
Reporting Act, if a credit score was used in setting the credit terms or
taking adverse action. The effective date of these amendments is July
21, 2011.

Section 1100F of the Dodd-Frank Act requires that a risk-based pricing
notice include: (1) a numerical credit score used in making the credit
decision; (2) the range of possible scores under the model used; (3) the
key factors that adversely affected the credit score of the consumer in
the model used; (4) the date on which the credit score was created; and
(5) the name of the person or entity that provided the credit score.

Accordingly, in order to prepare for the effective date of the Dodd-Frank
Act amendments, the FRB and FTC propose to amend their respective
risk-based pricing rules to require disclosure of credit scores and
information relating to credit scores in risk-based pricing notices, if a
credit score of the consumer is used in setting the material terms of
credit.

In addition, the Federal Reserve Board proposes to amend the adverse
action model notices under Regulation B (Equal Credit Opportunity Act),
which combine the adverse action notice requirements for both Regulation B
and the FCRA. The proposed amendments would revise the model notices to
incorporate the new credit score disclosure requirements.

The Board proposes to amend these model notices in Regulation B to include
the disclosure of credit scores and information relating to credit scores
if a credit score is used in taking adverse action. These proposed
amendments reflect the new content requirements in section 615(a) of the
FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform
and Consumer Protection Act.

Public comments on the proposed rules are due 30 days after publication in
the Federal Register, which is expected shortly.

Our updates are available on the internet, in searchable format, at:
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Wednesday, July 13, 2011

FYI: Ind Sup Ct Holds Failure to Name Second-Lienholder in Foreclosure May Result in Buyer Taking Subject To

The Indiana Supreme Court recently held that a mortgage lender who failed
to make a junior lienholder a party to a foreclosure action could not
institute a new and subsequent foreclosure action against the junior
lienholder, because the first mortgage lender's lien was extinguished by
the doctrine of merger.

A copy of the opinion is available at:
http://www.in.gov/judiciary/opinions/pdf/06291102rdr.pdf

Countrywide Home Loans, Inc. ("Countrywide") foreclosed on a property, bid
its judgment and took title to the property by way of a sheriff's deed.
In error, Countrywide did not make Citizens State Bank of New Castle
("Citizens") a party to the foreclosure action, although Citizens held a
judgment lien on the property. Countrywide then conveyed title to the
property to Federal National Mortgage Association ("FNMA").

When Countrywide discovered Citizens' judgment lien, Countrywide filed an
action titled "Complaint for Strict Foreclosure," seeking to foreclose
Citizens' interest in the subject property. Citizens filed a separate
action against FNMA attempting to foreclose on its judgment lien. The two
actions were consolidated, each side moved for summary judgment, and the
trial court granted the motion brought by Countrywide and FNMA.

Citizens appealed and the appellate court reversed, on the grounds that
through the doctrine of merger, Countrywide's lien was extinguished. The
Indiana Supreme Court granted transfer, vacating the opinion of the
appellate court.

As you may recall, the doctrine of merger provides that when one party
acquires both a lien on and legal title to a property, the two interests
merge, and the lien is extinguished. However, merger may produce an
arguably unfair result where it operates to give a junior lienholder
priority over a senior lienholder. Therefore, an exception to the
doctrine of merger provides that merger will not take place if it is
against the best interests of the party in whom the interests merge.

The Court began its analysis by nothing that, under Indiana law, a junior
lienholder not made a party to a foreclosure action is not bound by the
foreclosure. In such circumstances, a purchaser at a foreclosure sale
takes the property subject to the junior lienholder's interest.

Next, the Court scrutinized the merger and anti-merger doctrines. It
concluded that although courts must presume that the mortgagee intended
the result that it was in its best interest, that presumption can be
rebutted by evidence finding that a merger had been expressly agreed to.

The Court found such evidence here. When Countrywide conveyed its
interest in the property to FNMA, it used language which indicated that
the title conveyed was free from all encumbrances. The Court reasoned
that Countrywide could only make such a conveyance if Countrywide's lien
had been extinguished through merger.

Because "Countrywide demonstrated that it intended a merger of its
interests," the Court held that Countrywide was not entitled to the remedy
of strict foreclosure. Thus, the decision of the trial court was
reversed.

FYI: 11th Cir Affirms FDCPA Ruling in Favor of Debt Collector in Telephone Message Case

In an unfortunately unpublished opinion, the U.S. Court of Appeals for the
Eleventh Circuit recently held that a debt collector's telephone messages
did not violate the federal Fair Debt Collection Practices Act ("FDCPA"),
15 U.S.C. § 1692, where the message identified the name of the caller,
which included the term "Collection Bureau," and specifically referenced
the debtor's personal file number.

A copy of the opinion is available at:
http://www.ca11.uscourts.gov/unpub/ops/201110560.pdf

Plaintiff-debtor ("Debtor") brought suit against defendant-debt collector,
Gulf Coast Collection Bureau, Inc. ("Gulf Coast"), alleging violations of
the FDCPA and the Florida Consumer Collections Practices Act ("FCCPA").
The Debtor's allegations arose from a series of identical or nearly
identical telephone messages from Gulf Coast which stated:

"This message is intended for Eric H. Beeders (Debtor). If you
are not Eric H. Beeders please hang up or disconnect. If you are Eric H.
Beeders please continue to listen to this message. By continuing to
listen to this message you acknowledge that you are Eric H. Beeders.
Please return this call to Roy Dillard from Gulf Coast Collection Bureau.
Please call 877-827-4820 and ask for file number G31852."

The lower court granted Gulf Coast's motion for directed verdict following
a bench trial. On appeal, the Debtor argued that the telephone message
failed to comply with the FDCPA and FCCPA "because it did not adequately
satisfy the disclosure requirement in that it did not identify the nature
of the calling company's business, the fact that the caller was a debt
collector, and the fact that the call was being made with respect to the
collection of a debt."

The Eleventh Circuit affirmed, reasoning that "taking this message as a
whole, even an unsophisticated consumer would not be misled as to the
purpose of this call, as the message identified the name of the caller,
which includes the term 'Collection Bureau,' and specifically referenced a
personal file number." Accordingly, the Court found "no reversible error
in the district court's conclusion that Gulf Coast satisfied the
disclosure requirements of the FDCPA."

The Court also noted that, having found against the Debtor on his FDCPA
claim, the Court "need not address Debtor's arguments that the failure to
comply with these requirements constitute a per se violation of the
FCCPA." Therefore, the Court also affirmed the lower court's grant of
summary judgment as to Debtor's FCCPA claim.

Monday, July 11, 2011

FYI: Ill App Ct Allows Negligence Claim Against Flood Determination Company

The Illinois Appellate Court for the Third District recently held that a
borrower's common law negligence action against a flood determination
company was not barred by the National Flood Insurance Act ("NFIA"), 42
U.S.C. § 4012a, that the flood determiner owed the plaintiff-borrowers a
duty of care in preparation of their flood determination, and therefore
that the plaintiff-borrowers could proceed with their common law
negligence claim against the flood determiner.

A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2011/3rdDistrict/June
/3100084.pdf

The plaintiff-borrowers ("borrowers") refinanced their home through
Countrywide Home Loans, Inc. ("Countrywide"). As part of the refinancing,
Countrywide engaged its subsidiary, Landsafe Flood Determination, Inc.
("Landsafe"), to determine whether the borrowers' home was located in
special flood hazard area, as required by the NFIA. Landsafe determined
that the home was not in a special flood hazard area, and therefore
Countrywide did not require the borrowers to purchase flood insurance.
The borrowers' home was later damaged by widespread flooding in 2008 and,
after asking Countrywide for coverage, the borrowers learned that
Countrywide did not require them to purchase flood insurance. The
borrowers were otherwise uninsured.

The borrowers brought suit, alleging that Countrywide was negligent for
not requiring them to obtain flood insurance, and that Landsafe was
negligent when it determined their home was not in a flood zone. The
borrowers eventually conceded that their cause of action against
Countrywide was barred by the NFIA. However, they maintained that their
claim against Landsafe was not barred, but the trial court nevertheless
dismissed the borrowers entire complaint.

The borrowers appealed, and the appellate court reversed and remanded,
holding that the NFIA does not bar a state common law negligence claim
against a third-party flood determiner.

As you may recall, the NFIA "requires federally insured lenders of
mortgage real estate loans to determine if the borrower's property is
located in a special flood hazard area." 42 U.S.C. § 4012a(e)(1). In
addition, a "lender may delegate its flood determination duties to a
third-party flood determiner provided the flood determiner 'guarantees the
accuracy of the information.'" 42 U.S.C. § 4104b(d).

The Court first held that the NFIA "does not bar a common law negligence
claim brought by a borrower against a flood determiner." The Court
reasoned that the "plain language of the Flood Act authorizes lenders to
rely on a third-party flood determiner's findings without incurring
liability for the determiner's mistakes." See 42 U.S.C. §§ 4104b(d), (e).
"However, the Flood Act does not extend similar immunity to suits by
borrowers against flood determiners."

The Court next held that the borrowers could "maintain their common law
negligence complaint against Landsafe under Illinois law." Relying on six
factors set forth by the Illinois Supreme Court for determining whether a
duty exists where a relationship is not contractual, the Court held that
"Landsafe owed the Borrowers a duty of care in preparation of their flood
determination." See Rozy v. Marnul, 43 Ill.2d 54 (1969). In addition,
the Borrowers alleged that "Landsafe purportedly breached this duty when
it determined that the Borrowers' property was not located within special
flood hazard area," and that as a result of that breach, "the Borrowers
contend that they suffered damages in excess of $50,000."

Accordingly, the appellate court held that the borrowers' common-law
negligence action against the third-party flood determiner should not have
been dismissed.

FYI: 1st Cir Reverses MSJ Ruling in Favor of Lender Under MGL 93A, Even Where Borrower Lied on Mortgage Loan Application

The U.S. Court of Appeals for the First Circuit recently reversed an order
granting summary judgment in favor of a mortgage lender in a "predatory
lending" lawsuit, because the borrower managed to raise factual issues
regarding whether the lender allegedly knew that information on two loan
applications was false and allegedly intended for the borrower to default.

A copy of the opinion is available at:
http://www.ca1.uscourts.gov/pdf.opinions/10-2193P-01A.pdf.

Plaintiff-borrower ("borrower") entered into two home loans with defendant
Countrywide Home Loans, Inc. ("Countrywide"). The borrower's applications
for these loans each overstated his income. The applications also recited
that the signer had read the documents, and that the information set forth
was correct.

After the borrower defaulted, Countrywide initiated foreclosure
proceedings. The borrower sued Countrywide, alleging a violation of Mass.
Gen. Laws ch. 93A ("Ch. 93A") in addition to numerous other causes of
action.

All of the borrower's causes of action were based on the allegation that
Countrywide fraudulently inflated his income on the loan applications, and
therefore knew that the borrower could not afford the loans and would
eventually default. The district court granted Countrywide's motion for
summary judgment, on the grounds that borrower did not produce any
evidence that Countrywide knew or intended that borrower would default.
The borrower appealed.

As you may recall, Ch. 93A has been interpreted by the Massachusetts
Supreme Judicial Court to hold that a lender who makes a loan knowing that
the borrower is not likely to be able to pay it back may be engaging in an
"unfair or deceptive" practice, which gives borrowers a cause of action.
Commonwealth v. Fremont Inv. & Loan, 897 N.E. 2d 548 (Mass. 2008).

Countrywide argued that it had no reason to know that the borrower would
default, because the terms of the refinanced loan required similar
payments as the borrower's previous loan. In addition, the borrower
testified that his default was due to a job change and the rising
incidental expenses, which Countrywide argued it could not have foreseen.

The appellate court found neither argument convincing. It noted that the
borrower argued that his circumstances were different when he applied for
the refinance loan, in that his previous mortgage listed two borrowers
(borrower and borrower's ex-wife) whereas for the refinance he was the
sole borrower.

Further, the First Circuit reasoned that although the changes in
borrower's financial condition might not have been foreseeable by
Countrywide, this did not preclude the possibility that Countrywide
nevertheless should have known that the borrower was likely to default.
If Countrywide knew the borrower's actual income, for example, then it
also knew that the mortgage would require him to pay "about half of his
income to Countrywide alone."

Although the borrower did sign both applications, thereby verifying their
content, the Court noted that Massachusetts does not always find
signatories responsible for the contents of documents they sign, "at least
where deliberate fraud by the other side confronts mere negligence by the
signer."

Therefore, the First Circuit held that whether the borrower or Countrywide
was responsible for the inaccurate figures on the borrower's loan
applications was a question of fact suitable for trial.

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The Editor's Bio

Ralph T. Wutscher
Maurice Wutscher LLP
20 N. Clark Street, 33rd Floor
Chicago, Illinois 60602
Direct: (312) 493-0874
RWutscher@MauriceWutscher.com
https://www.MauriceWutscher.com/

Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.