cfpb examinationsare you prepared?



The mortgage industry is a top priority of the Consumer Financial Protection Bureau. Comments from Director Richard Cordray and others signal that the CFPB’s examination process is already in full swing—and that it is making efforts to increase its examination capacity even further.

When the CFPB examines your institution—most likely with your home state regulator and perhaps others in tow—it will take a comprehensive look at your operations, your policies and procedures, any results of examinations by other regulators, your complaint history, and how you have responded to those complaints to assess your commitment to consumer compliance.

Use our CFPB Exam Checklist to see if your institution is ready for an examination.

borrower cannot sue after three years to rescind mortgage loan



A borrower cannot bring a lawsuit seeking rescission more than three years after loan consummation, the U.S. Court of Appeals for the 10th Circuit has ruled.

In its June 11, 2012, decision in Rosenfield v. HSBC Bank, USA, the 10th Circuit rejected the borrower’s argument that her lawsuit was timely because, before the three-year period ended, she had sent a notice of rescission to the holder of her mortgage loan.

The borrower’s position—that she needed only to send notice of rescission within the three-year period to validly exercise her rescission right—was not compelled by the plain language of the Truth in Lending Act or Regulation Z and conflicted with TILA Section 1635(f), which provides that the right to rescind expires after three years, the 10th Circuit concluded.

The borrower in Rosenfield had sent her rescission notice following the filing of a foreclosure action by her mortgage holder. In doing so, she employed a tactic that borrowers have routinely used since the mortgage foreclosure crisis began to delay a foreclosure. This tactic is used even when the borrower has no real intention of rescinding—and perhaps even when the borrower does not know if he or she has any basis for rescinding or the ability to tender back the principal.

Perhaps recognizing this reality, the 10th Circuit observed that the borrower’s position “could work to cloud the title of the property for an indefinite period of time” and that “allowing uncertainty of title to drag on past the already-generous three-year repose period would run counter to the commercial-certainty concerns…that led Congress to establish the fixed and limited repose period of § 1635(f) in the first place.”

The 10th Circuit has now joined the Third and Ninth circuits in holding that notice alone within the three-year period is insufficient to validly exercise a right to rescind.

By contrast, the Fourth Circuit, in its decision in Gilbert v. Residential Funding LLC, is the only federal appeals court to hold to the contrary. Commenting on Gilbert, the 10th Circuit stated that it “simply [could not] square the Fourth Circuit’s view with the Supreme Court’s strong pronouncement in Beach [v. Ocwen Federal Bank] that the TILA rescission right is extinguished if it is not exercised within the three-year statutory period.” (For more information on Gilbert, see our prior legal alert and  blog post.)

In Rosenfield, the 10th Circuit referred to the amicus brief filed by the Consumer Financial Protection Bureau supporting the borrower’s position that notice within the three-year period was sufficient. The CFPB argued in its brief that rescission may be exercised other than by filing a lawsuit.

While observing that the CFPB’s arguments had “superficial appeal,” the 10th Circuit found them to be  inconsistent with Beach, which, in the 10th Circuit’s view, mandated the conclusion that litigation is necessary to assert a rescission claim. The CFPB had also filed amicus briefs in a Fourth Circuit case other than Gilbert involving the same rescission issue and in cases before the Third and Eighth Circuits. (For more information on the CFPB’s amicus brief in Rosenfield, read our blog posts on March 29 and March 30, 2012.)

Ballard Spahr attorneys are currently acting as co-counsel to the defendants in Gilbert in filing a petition with the Fourth Circuit asking for a rehearing by the panel or before the full court.

- Barbara S. Mishkin

to violate fdcpa, collection letter must 'expressly' require written debt dispute

A collection letter that implicitly requires a debtor to dispute a debt in writing does not violate the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Ninth Circuit has ruled.In its June 8, 2012, decision in Riggs v. Prober & Raphael, the Ninth Circuit held that the “validation notice” in a collection letter violates Section 1692g(a)(3) of the FDCPA only if it “expressly” requires a consumer to dispute a debt in writing.

FDCPA Section 1692g(a) requires a debt collector to send a written notice known as a “validation notice” to a consumer within five days of the collector’s initial attempt to collect a debt and specifies what information the notice must contain.

In its analysis, the Ninth Circuit considered two items of information required by Section 1692g(a). Section 1692g(a)(4) requires a statement that if a consumer disputes a debt in writing, the collector will obtain verification. But while Section 1692g(a)(3) requires a statement that the debt will be assumed to be valid unless the consumer disputes the debt within 30 days, it is silent as to what form the dispute must take to avoid that assumption.

The Ninth Circuit observed that when these requirements are read together, they could be read to imply that a debtor must dispute a debt in writing. “If the FDCPA itself can be read to imply” that a written dispute is required, the court wrote, a validation notice “cannot be unlawful merely because it allows for the same implication.”

In Riggs, after informing the plaintiff that the defendant would provide written verification if she notified him in writing that she disputed the debt, the defendant’s validation notice stated that he would assume the debt was valid if he did not “hear from [the plaintiff] within 30 days.” The Ninth Circuit rejected the plaintiff’s argument that the notice’s use of the phrase “[i]f I do not hear from you” violated the FDCPA because it could be interpreted in more than one way.

The Ninth Circuit found “it would be untenable to read the FDCPA to prohibit validation notices that simply mimic the statute’s own shortcomings.”

The court also observed that in all of the published cases it was aware of, the courts had found a violation of Section 1692g(a)(3) only based on a validation notice that expressly required a written dispute.

As summarized in a prior legal alert, the Consumer Financial Protection Bureau has issued a proposal to supervise certain debt collectors and debt buyers as “larger participants.” The CFPB will soon be examining debt collectors and debt buyers who qualify as “larger participants” or who act as service providers to entities supervised by the CFPB, such as payday and private student loan lenders. We are currently conducting compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations.

- Barbara S. Mishkin

online data seller settles with ftc



The Federal Trade Commission’s willingness to exercise its enforcement authority under the Fair Credit Reporting Act was evident again last week in its $800,000 settlement with data broker Spokeo, Inc., described in an FTC release as “the first Commission case to address the sale of Internet and social media data in the employment screening context.”

In a complaint filed in federal court in California, the FTC alleged that Spokeo created consumer “information profiles” using data collected from various sources—including social networking and other online sites—and sold the profiles to persons who used them as an employment screening tool. By doing so, the suit alleged, the data broker was providing “consumer reports” and was therefore operating as a “consumer reporting agency” under the FCRA.

The profiles allegedly included such information as name, address, age range, e-mail address, and, in some cases, hobbies, ethnicity, religion, participation on social networking sites, and photos.

Spokeo was accused of violating the FCRA by failing to:

  • maintain reasonable procedures to ensure profiles were provided only to users with a permissible purpose
  • ensure the maximum accuracy of the information in the profiles
  • provide the notice the FCRA requires consumer reporting agencies to provide to users of consumer reports

The complaint also challenged the data broker’s attempt to avoid the FCRA by changing the terms of service on its website to state that it was not a consumer reporting agency and that its website or information could not be used for FCRA purposes.

According to the complaint, the disclaimers were ineffective because the data broker did not revoke access to companies using the website or information for FCRA purposes or otherwise ensure that existing users did not use the broker’s website or information for FCRA purposes. (As discussed in our prior legal alert, the FTC also rejected the use of website disclaimers to avoid FCRA liability in letters warning of possible FCRA violations sent to marketers of mobile applications that provided background screening reports.)

Interestingly, the FTC’s complaint included an additional allegation that Spokeo had violated Section 5 of the FTC Act by posting, on news and technology websites, endorsements drafted by its employees that falsely gave the impression the endorsements came from independent users of the profiles.

In addition to barring future FCRA violations or endorsements that fail to disclose the broker’s connection with the endorser, the settlement requires the data broker to pay an $800,000 civil penalty, to create certain records relating to compliance for a 20-year period, and to maintain those same records for five years from the date they were created.

Lawyers in Ballard Spahr’s Consumer Financial Services Group and Privacy and Data Security Group regularly provide advice to clients on FCRA compliance and defend clients in FCRA lawsuits. The groups include experienced lawyers who help clients navigate the many laws designed to safeguard health, financial, and other private information; counsel clients on compliance, data mining, online marketing, and mobile privacy; and assist clients in responding to security breaches.

- Barbara S. Mishkin

federal reserve moves to implement more rigourous capital regulation

Moving to amend the risk-based capital rules for banks, the Federal Reserve Board has issued three notices of proposed rulemaking that, if adopted, would substantially track the requirements of the Basel III accord.

Basel III is the regulatory standard on bank capital adequacy, stress testing, and market liquidity risk agreed upon in 2011 by the members of the 27-nation Basel Committee on Banking Supervision.

The three notices of proposed rulemaking in the area of Regulatory Capital Rules are:

At the same time, the Fed also approved final amendments to the market risk capital rules (the Market Risk Amendments), often referred to as Basel II.5. The changes to capital regulation that would be affected by these issuances represent the most dramatic overhaul of capital rules since the inauguration of risk-based capital rules in the legislation that arose out of the S&L crisis of the 1980s.

The Basel III accord itself will be phased in between 2013 and 2019 and will require banks to maintain a top-level capital ratio of 7 percent of risk-weighted assets. This level is approximately three times what banks have been required to hold under the existing regime.

The Fed’s approach has largely been to adhere to the Basel III minimum capital ratio requirements except where a more rigorous approach is required by the Dodd-Frank legislation or is otherwise deemed appropriate by the Fed. These Fed issuances are intended to become joint rulemakings with the Office of the Comptroller of the Currency and the FDIC and will be published in the Federal Register after they receive approvals from the latter two agencies. Those approvals are expected during the next several weeks.

For a detailed analysis of the proposed rulemaking, see our June 20 legal alert.

- Keith R. Fisher

new york exempts incidental or ocasional mortgage originations from licensing requirements

The state of New York has added an exemption for fewer than three loans in a calendar year and five loans in two calendar years. Anyone who does not exceed this threshold is not required to be licensed as a Mortgage Loan Originator. This exemption becomes effective on January 1, 2013.

Maryland modifies various mortgage licensing provisions

The state of Maryland modified provisions requiring an applicant for a mortgage lender license or a mortgage loan originator license to complete, sign, and submit an application in accordance with the process that the Commissioner requires. The amendments also make specified mortgage lender and mortgage loan originator license fees nonrefundable. Maryland further altered the specified reporting requirements for mortgage lender licensees, including requiring that the licensee show satisfaction of minimum net worth requirements within 90 days after the end of the licensee’s fiscal year. Licensed mortgage lenders must also submit quarterly call reports to the NMLS. These provisions are effective on July 1, 2012.

utah revises various licensing regulations

The Utah Division of Real Estate adopted various revisions to licensing regulations in order to comply with modifications to the NMLS. These revisions involve: rules governing supervision of mortgage offices and employees, recordkeeping, and experience requirements for individuals applying for lending manager licensure. The revisions deleted provisions about division certification of continuing education courses and instructors. The hour requirement for the Utah-specific mortgage loan originator pre-licensing course was modified as well. Moreover, the revisions specified circumstances when an individual can act as a loan processor, and provided rules governing employee incentive programs. These regulation revisions are effective on June 7, 2012.

- Matthew Saunig

Copyright © 2012 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.