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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

September 17, 2004

FEDERAL ISSUES

OCC Issues Guidance on Unfair or Deceptive Credit Card Practices. On September 14, 2004, the OCC issued an advisory letter to national banks regarding three credit card practices: marketing "up to" credit limits, marketing promotional annual percentage rates, and changing credit terms. The OCC warned that these practices may constitute unfair or deceptive acts or practices or expose a bank to compliance and reputation risks. The OCC advised national banks to make certain the marketing of credit limits corresponds to the limits actually granted. The OCC also advised banks to fully and prominently disclose in promotional materials and credit agreements: the material limitations on and fees associated with promotional rates; the penalty rate or other repricing triggers (the letter expressed a particular concern for cross-default triggers); and the bank's unilateral right to change terms. See http://www.occ.treas.gov/scripts/newsrelease.aspx?Doc=LHMID9OG.xml

STATE ISSUES

CA Bill Amending Laws Pertaining to Credit Unions Signed. On August 27, 2004, California Governor Schwarzenegger signed Assembly Bill 2014 (the "Bill) into law. The Bill will allow for smaller credit unions (those with assets of $10,000,000 or less) to file "alternative procedures audits" which are presumably less stringent than those required of larger firms, and also amends current law so that credit unions no longer have to maintain "allowance-for-loan-losses" accounts or adjust "allowance-for-loan-losses" expense accounts at the end of their accounting periods. The Bill also repeals the California Home Mortgage Act, among other things. See http://www.leginfo.ca.gov/pub/03-04/bill/asm/ab_2001-2050/ab_2014_bill_20040830_chaptered.pdf

COURTS

Second Circuit Rules RESPA Applies to "Upcharges." In Kruse v. Wells Fargo Home Mortgage, Inc. (September 10,2004, Docket No. 03-7665,) plaintiff homeowners (the "Plaintiffs") brought a putative class action against Wells Fargo seeking treble damages under sections 8(b) and (d) of RESPA. Plaintiffs alleged that Wells Fargo (i) charged excessive and unreasonable fees for settlement services that Wells provided directly to the Plaintiffs, and (ii) "marked up" fees when charging the Plaintiffs for real estate settlement services performed for the Plaintiffs by third parties. Specifically, the plaintiffs alleged that (i) the lender performed underwriting services using automated software obtained from Fannie Mae and Freddie Mac at a cost of $20 per loan underwritten, and charged the borrower more than 25 times that amount, and (ii) that the lender paid third parties for tax, flood and document preparation services and then, without providing additional services, charged the plaintiff substantially more than the amounts paid to the third parties.

With respect to the first claim, on September 10, 2004, the U.S. Court of Appeals for the Second Circuit ruled that RESPA does not prohibit excessive fees (or "overcharges") where the lender provides the settlement service. The Court rejected HUD's Policy Statement (which states that charging "unreasonably" high prices for certain settlement services provided by the lender violates RESPA), concluding that RESPA does not prohibit excessive fees where the lender provides the settlement services because nothing in section 8(b) authorizes courts (or HUD) to "divide a 'charge' into what they or some other person or entity deems to be its 'reasonable' and 'unreasonable' components." According to the Court, "[w]hatever its size, such a fee is 'for' the services rendered by the institution and received by the borrower." Thus, the prohibition in section 8(b) "clearly and unambiguously does not extend to overcharges."

With respect to the second claim, however, the Court found RESPA ambiguous as to whether it limits "mark-ups" (i.e., fees that lenders charge for settlement services provided by a third-party in excess of the fees that the third-party vendors charged to such lenders for those services), and focused on whether HUD's Section 8(b) policy statement should be accorded deference. The Court accorded Chevron deference to HUD with respect to its Policy Statement analysis of the application of section 8(b) to mark-ups, and thus held that RESPA applied to mark-ups. The Court returned this putative class action to the district court for the purpose of determining unresolved questions of fact, including whether Wells marked-up third party fees without providing additional services. A copy of the case is attached to this edition of InfoBytes .

FCRA "Adverse Action" Claim Against Lender and Mortgage Insurer Survives. On September 2, 2004, the U.S. District Court for the Northern District of Illinois, in Karwo v. CitiMortgage, Inc., denied the lender's motion to dismiss, holding that the plaintiff borrower stated a claim that he may have suffered an "adverse action" by both the lender and the mortgage insurer under the Fair Credit Reporting Act when he (and other similarly situated individuals) did not receive the lowest premium available for private mortgage insurance as a result of information contained in consumer credit reports, which entitled the borrower to receive a statutorily-required notice. The substance of this decision is contrary to two Oregon state court decisions on the same issue made last year, which are currently on appeal in the Ninth Circuit. Interestingly, the court held that the "less than best" price for the MI was adverse action under the FCRA's "catch-all" provision, which defines an adverse action as any action or determination that is made in connection with an application that was made by, or a transaction that was initiated by any consumer and is adverse to the interests of the consumer. The court relied on a Seventh Circuit case, Treadway v. Gateway Chevrolet Oldsmobile Inc., 362 F.3d 971 (7th Cir. Apr. 2, 2004), in which the appellate court noted that the FCRA definition of "adverse action" is broader than the ECOA definition because it includes the "catch-all" provision. The Treadway court, however, also held that adverse action occurred under ECOA. This means that, if a credit report affected the action, adverse action would also have occurred under FCRA's credit prong, which incorporates the ECOA definition by reference. Therefore, the Treadway court's discussion of the applicability of the catch-all prong, cited by the court in Karwo , appears to be an obiter dictum, i.e., a discussion by the court that is not essential to the decision and is not binding precedent. The Treadway court also noted legal commentary arguing that applying the catch-all provision to actions involving products that are specifically addressed in the FCRA definition, such as credit and insurance, would render the specifically-enumerated types of adverse action in FCRA superfluous. Karwo v. CitiMortgage, Inc., 2004 WL 2033445 (N.D. Ill. Sept. 2, 2004). A copy of the Memorandum Opinion and Order is attached to this edition of InfoBytes.

Supreme Court of Pennsylvania Eastern District Vacates Judgment In Favor Of Ex-Warehouse Lenders. In 1998, Pioneer Commercial Funding Corp., a former warehouse lender, was awarded a $350 million verdict – later reduced to $56 million – in connection with allegedly illegally converted funds owed to Pioneer by CoreStates Bank, N.A. for funding a package of mortgages originated by American Financial Mortgage Corp. At issue in the case was whether CoreStates' seizure of funds for the purpose of limiting the liability of a check kiting scheme by an American Financial Mortgage Corp principal was an illegal conversion of funds owed to Pioneer. In its ruling, the Supreme Court concluded that Pioneer could not lawfully maintain its claim of conversion; in addition, the Court found that the trial court incorrectly stripped CoreStates of relevant defenses. We will keep you informed of any future appeals filed by Pioneer in this matter in future additions of InfoBytes. See http://www.courts.state.pa.us/OpPosting/Supreme/out/J-62-2004mo.pdf

National City Sues Maryland Regulator. On August 20 th , 2004, National City Corp., one of the nation's largest financial holding companies, and its subsidiaries filed a lawsuit against Maryland Commissioner of Financial Regulation Charles Turnbaugh, arguing that Maryland law limiting prepayment penalties on adjustable-rate mortgages is preempted by federal laws governing national banks. Turnbaugh's office commenced an investigation of National City 's subsidiaries in response to customer complaints about prepayment fees. National City maintains, however, that its subsidiaries should be permitted to charge such fees pursuant to federal law. See http://baltimore.bizjournals.com/baltimore/stories/2004/09/13/story3.html

MISCELLANY

FDIC Extends Comment Period for CRA Proposed Rule. On September 16, 2004, the FDIC announced that it is extending the deadline for the comment period on proposed changes to the CRA regulations from September 20, 2004 to October 20, 2004. The new CRA regulations would increase the small bank threshold to $1 billion, and amend the community development criteria for institutions valued between $250 million and $1 billion. See: http://www.fdic.gov/news/news/press/2004/pr9904.html

FTC To Launch Campaign to Increase Consumer Fraud Awareness Among Spanish Speakers. On September 8, 2004, the FTC announced that it will launch a consumer fraud awareness program to educate Latino audiences on how to spot and report fraud. The program will consist of a series of banner ads on internet sites and radio public service announcements. The campaign followed the results of a survey which found that Spanish speaking consumers were two times as likely to become victims of fraud as were non-Hispanic whites. See http://www.ftc.gov/opa/2004/09/scampaign.htm

Study Suggests New Jersey Home Ownership Law Makes it More Difficult for Consumers to Obtain Loans. On September 15, 2004, the NHEMA (National Home Equity Mortgage Association) released a study conducted by two University of Virginia professors on the effect that the New Jersey Home Ownership Security Act of 2002 has had on mortgage lending in the state. The study compared mortgage lending in New Jersey in Q1 of 2004 to mortgage lending in Pennsylvania during the same time period. The results of the study were: (i) a lower percentage of borrowers were able to obtain nonprime loans in New Jersey, (ii) fewer nonprime loans were made in New Jersey than Pennsylvania (21% vs. 28%), (iii) three times the amount of nonprime loans were made in Pennsylvania than in New Jersey, even though Pennsylvania's economy is only 12% larger, and (iv) applicants in New Jersey needed a higher credit rating than those in Pennsylvania to qualify for a mortgage. A spokesperson for the NHEMA said that the study provided evidence of the damaging effects that an ill-conceived state regulation can have on mortgage lending, and urged federal lawmakers to enact a law to protect access to mortgages. For a copy of the study, see: http://www.nhema.org/press.asp?bid=649

Study Suggests North Carolina Anti-Predatory Lending Law Reduced Lending to Minorities and Low Income Neighborhoods. On September 14, 2004, the Mortgage Bankers Association (MBA) released a study on the effects of the 1999 North Carolina Anti-Predatory Lending Law. The study, conducted by Abt Associates in Massachusetts, compared lending volumes and activity in North Carolina before and after the law was enacted, and compared those results to what occurred in the neighboring states of Tennessee and South Carolina. The study found that: (i) lending decreased in minority neighborhoods in N.C. while increasing in neighboring states during the period, (ii) loans by subprime lenders decreased in N.C. by 8.1% but increased by 4.6% in neighboring states, (iii) subprime loans to purchase homes grew at a slower rate in N.C. than in neighboring states, and (iv) subprime loans to refinance homes decreased in N.C. but increased in neighboring states. The study also concluded that lending in North Carolina would have been even further decreased had there not been an increase in loans made by bank and thrift–owned subprime firms, who were essentially exempt from the Anti-Predatory Law. See: http://www.mortgagebankers.org/news/index.cfm?STRING=http://www.mortgagebankers.orgnews/2004/pr0914.html

© Buckley Kolar, LLP 2004. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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