Mortgage Banking Update by the Mortgage Banking Group

CFPB Publishes Guidance Regarding RESPA-TILA Integrated Disclosure Forms

The CFPB recently published guidance (the Guide) to assist mortgage originators and settlement service providers in completing the Loan Estimate and Closing Disclosure forms required under the RESPA-TILA Integrated Disclosure Rule (the Rule).The Guide provides step-by-step instructions that industry participants can follow when completing each page of the required forms. The Rule becomes effective August 1, 2015.

The Guide is written in similar detail and style to theSmall Entity Compliance Guide issued last month.Each page of the Loan Estimate (three pages) and Closing Disclosure (five pages) receives a section-by-section breakdown of the required disclosures and provides illustrative examples of how to complete the necessary fields. Importantly, the CFPB provides guidance on how to make essential calculations.Generally, each section is accompanied by citations to the Rule and examples of various scenarios that could arise during form completion.The Guide spans 96 pages, highlighting the complexity of the Rule and its requirements for completing the Loan Estimate and Closing Disclosure.

FTC Announces Settlements with Data Brokers over Alleged FCRA Violations

The Federal Trade Commission recently announcedtwo more settlements with data brokers for alleged violations of the Fair Credit Reporting Act (FCRA). The settlements with Instant Checkmate, Inc., InfoTrack Information Services, and InfoTrack’s owner, Steve Kaplan, highlight the FTC’s continued strategy of aggressive enforcement of the FCRA against data brokers. The settlements come less than three months after the FTC’s $3.5 millionconsent order with another data broker for alleged FCRA violations.

The two companies involved provide somewhat similar services. Instant Checkmate runs a website that allows users to search public records about anyone. The company marketed this service to landlords and employers, and the data sold included information such as arrest and conviction records as well as birth, marriage, and divorce records.

Similarly, InfoTrack provides background screening reports to employers nationwide about prospective and current employees. InfoTrack’s background reports include driving records, criminal and sex offender records, and employment and education history. The FTC considers both companies to be “consumer reporting agencies” because they provide background reports and information that they expected would be used to determine eligibility for housing and employment.

According to the FTC’s complaint, Instant Checkmate allegedly violated the FCRA by failing to maintain reasonable procedures to ensure that those using its reports had a permissible purpose for accessing them, failing to follow reasonable procedures to assure that its reports were as accurate as possible, and failing to provide the consumer protection disclosures required by the FCRA. Theconsent order requires Instant Checkmate to comply with the relevant FCRA furnisher and notice requirements and assesses a $525,000 fine.

The FTC’scomplaint against InfoTrack and Mr. Kaplan alleges similar FCRA violations. The FTC alleged that InfoTrack failed to use reasonable procedures to ensure the maximum possible accuracy of consumer report information obtained from sex offender registry records, failed to provide notices and disclosures required by the FCRA, and failed to provide written notices to consumers disclosing that InfoTrack reported public record data to prospective employers when the reported data was likely to result in an adverse employment decision. In addition to prohibiting these practices and requiring FCRA compliance, theconsent order imposes a $1 million civil penalty; however, all but $60,000 of the fine is suspended, based on the inability of InfoTrack and its owner to pay.

- Sarah T. Reise

CFPB General Counsel Gives Glimpse into CFPB’s Upcoming Agenda

CFPB General Counsel Meredith Fuchs recently warned that debt collection, payday lending, prepaid cards, and privacy notices are priorities for the Bureau in the coming months. Appearing before the Practising Law Institute’s 19th Annual Consumer Financial Services Institute in New York City on April 7, Ms. Fuchs noted that the CFPB has already received more than 22,000 comments in response to its debt collection advance notice of proposed rulemaking (ANPR).

Calling “certain debt collection practices a source of concern,” Ms. Fuchs did not promise that the CFPB would issue its proposed debt collection rule in 2014. She justified the protracted process by noting that no federal agency has issued debt collection rules governing how the FDCPA should be applied to modern technology. She did suggest that the debt collection rule could cover (1) the collection or attempt to collect time-barred debt; (2) first-party collection tactics; and (3) the transfer of consumer’s information between the original creditor and the debt buyer. We are not surprised that the potential debt collection rule would go beyond the scope of the FDCPA. Indeed, we have written previously that the CFPB would invoke its UDAAP authority to cover first-party collectors in its proposed rule.

Turning to payday lending, Ms. Fuchs cited the recent CFPB report in explaining that the CFPB remains concerned with consumers’ sustained use of short-term, small-dollar loan products, the amortization of these products, and the use of these products by the elderly and others who depend on fixed government benefits. While Ms. Fuchs vacillated on the specific timing for payday lending rulemaking, she did indicate that the CFPB would continue to aggressively police the ACH, lead generators, and other “choke points” that payday lenders rely upon to reach consumers. Given that the CFPB does not intend to commission any further studies analyzing the benefits of payday loans, we anticipate that the proposed rule will impose rigid, arbitrary limits on numerous payday loan features.

Ms. Fuchs also indicated that prepaid cards are a high priority for the CFPB in 2014. Noting that Regulation E is not applicable to prepaid cards, she insinuated that a proposed rule could be issued in 2014 and feature model disclosures and mandatory error resolution procedures.

Lastly, Ms. Fuchs reiterated the CFPB’s intention to streamline privacy notice rules. The General Counsel indicated that the CFPB is inclined to eliminate the annual privacy notice in certain circumstances (e.g., if an institution’s internal policy has not changed in that year). We would applaud such a move as neither the institution nor the consumer benefits from excessive paperwork.

-Justin Angelo

Guilty Pleas Entered in CFPB’s First Criminal Referral

The CFPB’s first publicly announced criminal referral has resulted in the entry of guilty pleas by a debt settlement company and its principal, according to a Reuters report. The referral, which was made to the U.S. Attorney for the Southern District of New York (SDNY), arose out of the CFPB’s investigation of two debt-relief service providers and related entities and was announced by Director Richard Cordray at a May 2013 press conference.

The CFPB had also filed a civil complaint in the SDNY federal district court against the debt settlement company and its principal alleging that the defendants had charged advance fees in violation of the FTC’s Telemarketing Sales Rule and engaged in deceptive and unfair practices in violation of the Consumer Financial Protection Act of 2010 (meaning Title X of Dodd-Frank).

The guilty pleas were reported to have been entered on conspiracy charges of mail and wire fraud. According to Reuters, the company and its principal agreed to forfeit $2.2 million as part of the plea agreement. The principal reportedly faces up to 10 years in prison, although the actual sentencing guidelines range is likely lower than 10 years,while the company reportedly faces an additional fine of up to $4.39 million. It was also reported that four other employees of the company had previously pleaded guilty and charges against a fifth employee are still pending. The principal’s attorney is reported to have told the judge assigned to the criminal case that the CFPB plans to dismiss the civil lawsuit.

The CFPB has also named individuals as defendants in a number of other enforcement actions it has filed. Based on reported statements by Director Cordray that the CFPB is committed to pursuing individuals, and not just companies, when exercising its enforcement authority, the CFPB can be expected to continue to name individual defendants in enforcement actions. In addition, given that Director Cordray stated when he announced the CFPB’s first criminal referral that the CFPB would be looking for more opportunities “to coordinate and collaborate” with the U.S. Attorney, more criminal referrals by the CFPB of both companies and individuals can also be expected.

- Marjorie J. Peerce

W.Va. Requires Time-Barred Debt Disclosures in ‘Initial Written Communication’

The West Virginia Legislature recently passed H.B. 4360, which amended Section 46A-2-128 of the West Virginia Code,that defines what constitutes unfair or unconscionable debt collection activities. The amendments are effective June 6, 2014. Significantly, the amended code section requires collectors to disclose to consumers if the debt on which they are attempting to collect is time-barred and what that means for the consumer.

In making this amendment, which does not ban attempts to collect on time-barred debts, West Virginia joins a small but growing number of jurisdictions in requiring these types of disclosures. In fact, the collection industry anticipates that these very types of disclosures will soon be required on a national basis by the Consumer Financial Protection Bureau once it completes its debt collection rulemaking. We anticipate this will likely occur no sooner than early in 2015.

The specific language regarding such disclosures in the West Virginia legislation, contained in Section 46A-2-128(f), reads:

ARTICLE 2. CONSUMER CREDIT PROTECTION

§46A-2-128. Unfair or unconscionable means.

No debt collector may use unfair or unconscionable means to collect or attempt to collect any claim. Without limiting the general application of the foregoing, the following conduct is deemed to violate this section:

* * *

(f) When the debt is beyond the statute of limitations for filing a legal action for collection, failing to provide the following disclosure informing the consumer in its initial written communication with such consumer that:

(1) When collecting on a debt that is not past the date for obsolescence provided for in Section 605(a) of the Fair Credit Reporting Act, 15 U.S.C. 1681c: “The law limits how long you can be sued on a debt. Because of the age of your debt, (INSERT OWNER NAME) cannot sue you for it. If you do not pay the debt, (INSERT OWNER NAME) may report or continue to report it to the credit reporting agencies as unpaid”; and

(2) When collecting on debt that is past the date for obsolescence provided for in Section 605(a) of the Fair Credit Reporting Act, 15 U.S.C. 1681c: “The law limits how long you can be sued on a debt. Because of the age of your debt, (INSERT OWNER NAME) cannot sue you for it and (INSERT OWNER NAME) cannot report it to any credit reporting agencies.”

While it is hard to be surprised by this amendment, given the current regulatory trends and comments surrounding time-barred debt disclosures, the specific reference to the "initial written communication" with the consumer was unexpected. The amendment arguably seems to imply that these disclosures only need to be made to a consumer if the consumer’s debt is time-barred at the time the collector begins its collection attempts. The amendment says nothing about whether these disclosures are required if a debt becomes time-barred once the debt collection process is underway. In such a scenario, it would be impossible for a collector to comply if the debt was not time-barred when the collector made its “initial written communication” with the consumer about the debt.

It is difficult to believe that the West Virginia Legislature intended this sort of result as it would exclude an entire class of consumers from receiving these disclosures at the time their debts became time-barred during a collector’s active collection process. However, this oversight underscores the importance of regulators and legislators avoiding knee-jerk reactions and instead, taking sufficient time to consider and investigate the entire issue and related consequences before enacting any legislation or regulation that might have unintended adverse effects or ambiguities.

Debt collection, albeit a seemingly straightforward concept, can become very complicated in practice due to the various factual and legal situations that confront the collection industry. Regulators and legislators must provide clear, workable guidance to collectors on compliance and legal issues to enable collectors to continue to provide their services and avoid making collection efforts too costly and difficult to carry out. Any collection obstacles arising from a lack of clear guidance risk curtailing the availability of consumer credit in the long term.

To minimize any potential risk from this apparent oversight by the West Virginia Legislature, we recommend that collectors continue to scrub and monitor their active debt accounts to identify those that are about to become time-barred. Doing so will ensure that collectors are aware of that change in status as soon as it occurs. Once a debt that a collector previously was attempting to collect becomes time-barred in West Virginia, the collector should provide the disclosures required by H.B. 4360 in its next written communication with the consumer.

Further, we suggest that collectors consider proactively sending these disclosures to consumers as soon as a debt becomes time-barred to avoid any subsequent collections efforts or communications that might contradict these disclosures. Any such notice should be made before any further written or verbal consumer communication is made on these now time-barred debt accounts. While this may not be expressly required by the statute, we believe this is the spirit of the West Virginia amendment and the safest course of action regarding the collection of any time-barred debt from West Virginia consumers.

Finally, we note that the West Virginia amendment perpetuates a common misunderstanding about credit reports. Section 605(a) of the Fair Credit Reporting Act (FCRA) prohibits a consumer reporting agency from issuing a consumer report that includes information about accounts placed for collection or charged to profit and loss more than seven years earlier (these accounts are often called obsolete accounts). It does not prohibit a debt collector or any other company from reporting information about obsolete accounts because of an important exception to this restriction on reporting.

Under Section 605(b) of the FCRA, a consumer reporting agency may include information about those obsolete accounts in any report that will be used in connection with any of the following:

• A credit transaction with a principal amount of $150,000 or more
• The underwriting of life insurance in a face amount of $150,000 or more
• The employment of any individual at an annual salary of $75,000 or more

In fact, even if the amendment were to be read as an independent restriction on such reporting, it would be preempted by Section 625(b)(1)(E) of the FCRA. Consequently, the required disclosure about so-called “reporting-barred” accounts appears to misstate the law in a way that could be problematic for at least some consumers.

-Stefanie H. Jackman

Utah Amends Residential Mortgage Licensing Laws, Exempts Underwriters from Licensing

Recently, the State of Utah enacted into law House Bill 332, which amends numerous provisions to Title 61, Securities-Real Estate Division. Among changes the rules make to the practice of mortgage lending and licensing, the amendment creates a procedure for the voluntary surrender of a license issued under the Residential Mortgage Practices Act, Real Estate Licensing and Practices Act, and the Real Estate Appraiser Licensing and Certification Act. These changes take effect May 12, 2014.

The bill also modifies the scope of the "business of residential mortgage loans" to expressly exclude the following persons from licensing as an MLO:

• Loan underwriters working under the direction and control of employers licensed by the Utah Division of Real Estate
• Loan underwriters working exclusively for depository institutions

In short, House Bill 332 makes clear that an individual loan processor or loan underwriter is not required to be licensed as an MLO as long as he or she works under the direction and control of a company licensed under the Residential Mortgage Practices Act, or for a depository.

NMLS Adds New Money Transmitter License from Nebraska

On April 14, the Nebraska Department of Banking and Finance began receiving new applications and transitional filings for the Money Transmitter License through NMLS.

- Marc D. Patterson

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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.