Consumer Compliance Outlook: Second Quarter 2008

On the Docket: Recent Federal Court Opinions

Regulation Z - Truth in Lending Act (TILA)

Lender's failure to identify payment period on disclosure statement violates Regulation Z.Hamm v. Ameriquest Mortgage Co. External Site (104 KB, 12 pages), 506 F.3d 525 (7th Cir. 2007). The Seventh Circuit held that a lender's failure to state on a TILA disclosure statement that payments were due monthly violates §18(g)(1) External Site of Regulation Z, which requires creditors to disclose "the number, amount, and timing of payments scheduled to repay the obligation." The court relied on ¶18(g)(4) of the Official Staff Commentary External Site and noted that while it might be possible to determine monthly payments by carefully reading the disclosure statement, that did not constitute compliance. This case underscores the importance of adhering to Regulation Z's technical requirements.

Right of rescission. Vermurlen v. Ameriquest Mortgage Co. External Site External Link (39 KB, 14 pages), 2007 WL 2963637 (W.D. Mich. Oct. 9, 2007). After the plaintiffs defaulted on their mortgage, they entered into a forbearance agreement, which contained a release of claims. When they defaulted on the forbearance agreement, the lender foreclosed, and the plaintiffs invoked rescission because the lender used the wrong model rescission form. Whether rescission rights are triggered because a lender uses the wrong form has not been decided in the Sixth Circuit, where the trial court is located. The court looked to conflicting cases from the Seventh External Site External Link (105 KB, 10 pages) and First External Site External Link (76 KB, 15 pages) Circuits. The Seventh Circuit allows rescission when the wrong form is used because it believes Regulation Z requires hypertechnical compliance, while the First Circuit examines whether the consumer was notified of the right to rescind and its effects, even though the wrong form was used. The court predicted that the Sixth Circuit would adopt the First Circuit's rule and held that the lender's rescission notice satisfied that standard. The court also had to determine whether the release waived rescission rights. The court held that statutory rights affecting the public interest, like TILA, cannot be waived unless the statute or regulation itself permits waiver, and TILA's limited waiver of the rescission waiting period for bona fide emergencies did not apply here.

Fair Credit Reporting Act (FCRA)

Large damage award for failing to correct credit report after identity theft reported. Sloane v. Equifax Information Services External Site External Link (86 KB, 17 pages), 510 F.3d 495 (4th Cir. 2007). After suffering identity theft, the plaintiff asked the credit bureaus and CitiFinancial to correct erroneous information in her credit report, but they failed to do so. She sued them for violating the FCRA. Equifax went to trial, while the other parties settled. The plaintiff won $351,000 in damages and $181,083 in attorney's fees against Equifax in the district court. The Fourth Circuit reduced the damage award to $150,000 and ordered reconsideration of the attorney's fees on procedural grounds. The court noted that Equifax took 21 months to correct the errors in the credit report, a period during which the plaintiff experienced difficulties in her marriage and suffered severe emotional distress. While lawsuits under the FCRA are typically against consumer reporting agencies, it is important to recognize that §623(b) External Site of the FCRA may impose liability on a furnisher of credit information, like CitiFinancial, if it fails to investigate a dispute about information it furnishes after receiving notice from a consumer reporting agency and fails to correct the information if it is found to be inaccurate or incomplete in accordance with §623(b) of the FCRA. It is important for financial institutions and consumer reporting agencies to act promptly when a consumer files a credit report dispute, particularly in identity theft cases where the potential harm to the consumer is great.

Regulation X - Real Estate Settlement Procedures Act (RESPA)

RESPA §8(b) violation for single party to charge a fee without performing services in a single-party transaction. In two separate cases, Cohen v. JP Morgan Chase External Site External Link (158 KB, 30 pages), 498 F.3d 111 (2d Cir. 2007) and Busby v. JRHBW Realty, Inc. External Site External Link (112 KB, 23 pages), 513 F.3d 1314 (11th Cir. 2008), the Second and Eleventh Circuits ruled that §8(b) External Site of the Real Estate Settlement Procedures Act (RESPA) prohibits a single party from collecting a fee without performing services (known as an unearned, undivided fee). In Cohen, the bank charged a borrower a "post-closing fee," while in Busby, a class action, a real estate agent charged the borrower an administrative brokerage commission fee. In both cases, the plaintiffs alleged that no services were provided for the fee. The federal appeals courts are divided on whether §8(b) applies to a single-party fee. The Fourth External Site External Link (54 KB, 9 pages), Eighth External Site (40 KB, 13 pages), and Seventh External Site External Link (72 KB, 15 pages) Circuits hold that the language in §8(b) ("No person shall give and no person shall accept…") limits its scope to multiple-party transactions, where a party performs services and splits or kicks back a fee with someone who did not perform services (known as an unearned, divided fee). The Eleventh and Second Circuits hold that §8(b) applies to a single-party fee based on HUD's 2001 policy statement External Site External Link (62 KB, 27 pages) and §14(c) External Site of HUD's Regulation X ("A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section"). The other circuits reject HUD's interpretation as contrary to RESPA's statutory language. The Eleventh Circuit emphasized a distinction between charging a fee without providing services, which RESPA prohibits, and providing services and charging a fee that seems high in relationship to the services, which, according to the Eleventh Circuit, RESPA does not prohibit. Regardless of the outcome of this circuit split, when making loans subject to RESPA, it makes good business and legal sense for banks to charge fees only when they provide services.

Increasing fees for credit reports does not violate RESPA. Krupa v. Landsafe, Inc. External Site External Link (51 KB, 9 pages), 514 F.3d 1153 (11th Cir. 2008). The Eleventh Circuit affirmed the dismissal of a RESPA class action alleging prohibited referrals. Countrywide charged a $25 fee to obtain a credit report from Landsafe, an affiliated company, when a loan applicant applied for and accepted a loan. Unsuccessful applicants were not charged a fee. To offset the expense of obtaining credit reports for unsuccessful applicants, Landsafe agreed to increase the fee to $35. The issue was whether the increased fee was a prohibited markup. The Eleventh Circuit held that Countrywide had not marked up the fee because it turned over all fees to Landscape, which performed services. The court also rejected an illegal referral theory because Landsafe was not referred any more business, and the total value of business referred to Landsafe remained the same after the price increase.

Regulation E - Electronic Fund Transfer Act (EFTA)

Liability for failing to post notice of ATM fee. Savrnoch v. First Am. Bankcard, Inc. External Site External Link (79 KB, 10 pages), (E.D. Wis. Oct. 26, 2007). The plaintiff in this class action under the EFTA and Regulation E sought damages because the bank imposed a $3.25 ATM fee without providing the proper notice about the fee on the ATM, in violation of §1693(d)(3)(c) External Site of EFTA and §16(c)(1) External Site of Regulation E. The bank sought to dismiss the case, relying, in part, on the holding in Brown v. Bank of America External Site External Link (51 KB, 19 pages), 457 F.Supp.2d 82 (D. Mass. 2006). The court found that Brown concerned a violation of §1693(d)(3)(b) for a defective notice, whereas in Savrnoch the plaintiff alleged a violation of §1693(d)(3)(c). The court found this distinction to be crucial in denying the bank's motion to dismiss.