Consumer Compliance Outlook: Second Quarter 2009

On the Docket: Recent Federal Court Opinions


Finance charge disclosure for inflated title insurance fee. McCutcheon v. America's Servicing Co. External Site, 560 F.3d 143 (3d Cir. 2009). The Third Circuit held that when a creditor charges an inflated fee for title insurance in a mortgage loan, the amount of the overcharge must be disclosed as a finance charge. The borrower was charged $2,383 for title insurance, $668 of which was an overcharge. Under §226.4(c)(7) of Regulation Z, a fee for title insurance is not a finance charge unless the fee is not "bona fide and reasonable in amount." The court had to determine when analyzing an inflated title insurance fee whether the entire fee should be considered a finance charge or only the amount of the overcharge. The Third Circuit concluded that only the portion of a title insurance fee constituting an overcharge must be disclosed as a finance charge because §1605(e)(1) of TILA specifically states that a title insurance fee is not a finance charge.

Change-in-terms notice for discretionary rate increase applied retroactively. Swanson v. Bank of America, N.A. External Site 559 F.3d 653 (7th Cir. 2009) and McCoy v. Chase Manhattan Bank, U.S.A., N.A. External Site 559 F.3d 963 (9th Cir. 2009). The Seventh and Ninth Circuits recently published conflicting decisions in considering whether a credit card issuer has a duty to provide consumers with notice before applying a penalty rate increase that is specified in the account agreement. In Swanson, the cardholder agreement authorized Bank of America (BOA) to increase the periodic rate applicable to Swanson's account if her outstanding balance exceeded her credit limit at the end of two months in any rolling 12-month period. BOA later amended the contract terms to provide that the increased penalty rate would become effective at the beginning of the billing cycle to which the overlimit penalty applied. The Seventh Circuit noted that the plaintiff agreed to these terms by continuing to use her card. BOA later raised the plaintiff's rate when she exceeded her credit limit and applied the increased rate at the beginning of the billing cycle in which the default occurred. Swanson claimed that under Regulation Z, the rate increase could not become effective until the date that BOA mailed or delivered a notice informing her of the increase. The Seventh Circuit affirmed the trial court's dismissal of the plaintiff's claim. The court held that card issuers are not required to provide separate notice before applying a rate increase that has been pre-authorized under the contract terms. The Seventh Circuit indicated that this holding was in agreement with the decisions of several other courts. The court also noted that the Federal Reserve Board recently revised Regulation Z to prohibit this practice precisely because the existing regulation does not prohibit creditors from applying penalty rates at the start of the billing cycle in which the default occurs.

Reaching the opposite conclusion, the Ninth Circuit in McCoy concluded that a card issuer must provide a separate change-in-terms notice at or before the effective date of the penalty rate increase. Chase Manhattan Bank (Chase) had raised the cardholder's rate retroactively to the beginning of the billing cycle as a result of a late payment. McCoy alleged that the rate increase violated TILA because Chase gave no notice of the increase until the next periodic statement, after the increase had already taken effect. The court agreed with the plaintiff and stated its belief that the Staff Commentary to Regulation Z and the Federal Reserve's recent regulatory revisions reflect the Board's intent to require contemporaneous notice when rates are raised because of a consumer's delinquency or default on the account.

It should be noted that this issue will become moot when the Board's recent amendments to Regulation Z become effective. Under §226.9(g) External Link, as amended, creditors must provide a change-in-terms notice 45 days in advance before applying a penalty rate increase.

Rescission period extended to three years because lender asked borrowers to sign false statement. Rand Corporation v. Moua External Site, 559 F.3d 842 (8th Cir. 2009). The Eighth Circuit held that a creditor who required borrowers to sign a statement at loan closing acknowledging receipt of the rescission notice and falsely confirming that the three-day rescission period had passed and that the borrowers had not rescinded the transaction violated TILA and extended the rescission period from three business days to three years. Section 226.23(b)(1) of Regulation Z requires lenders to disclose to borrowers, clearly and conspicuously, notice of their right to rescind a loan secured by their primary residence until midnight of the third business day following consummation or delivery of the material disclosures and rescission forms, whichever occurs later. The Eighth Circuit found that asking borrowers to sign a statement at closing that falsely stated that the three-day period had passed and that they were not rescinding the loan on the same day they signed a statement acknowledging receipt of the rescission notice violated the clear and conspicuous requirements. "Requiring borrowers to sign statements which are contradictory and demonstrably false is a paradigm for confusion. … The average borrower would be confused when instructed to certify a falsehood, and as to the effect of the falsehood." As a result of the violation, the court held that the three-day rescission period was extended to three years, as provided in §226.23(a)(3).


Overhead is not a compensable settlement service under RESPA. Cohen v. J.P. Morgan Chase External Site, 2009 U.S. Dist. LEXIS 5823 (E.D.N.Y. Jan. 28, 2009). In Cohen v. J.P. Morgan Chase, 498 F.3d 111 (2d Cir. 2007), which was discussed in the Second Quarter 2008 issue of Outlook, the Second Circuit reversed and remanded a trial court's ruling that RESPA does not apply to unearned, undivided fees. On remand, the trial court wrote a decision in response to a motion for summary judgment by J.P. Morgan Chase to dismiss the case. At issue in this case is whether J.P. Morgan Chase provided any RESPA compensable settlement services for a "post processing fee" it imposed on all mortgages. The court denied J.P. Morgan Chase's motion after concluding that the fee was not in exchange for specific settlement services but represented a fee to cover overhead expenses, which the court found is not a compensable settlement service under RESPA. The court created a legal test for "settlement services" under RESPA: The service either must benefit the borrower or be performed at or before closing. The court concluded that the post-closing service was not done for the benefit of a particular borrower and rejected J.P. Morgan Chase's alternative argument that the borrowers benefited because the service helped ensure the salability of the mortgage on the secondary market. The court found this argument too tenuous and would allow lenders to charge for all of their overhead.


U.S. Supreme Court agrees to review enforcement preemption case under the National Bank Act (NBA). Cuomo v. Clearing House Association, L.L.C. External Site, 129 S. Ct. 987 (2009). In 2005, after the Board of Governors of the Federal Reserve System released loan data under the Home Mortgage Disclosure Act showing that African-American and Hispanic borrowers had a significantly higher percentage of higher-cost loans than white borrowers, New York's attorney general sought loan data from several large national banks using his legal authority to enforce New York's fair lending laws. In response, the Office of the Comptroller of the Currency (OCC) and the Clearing House Association obtained an injunction in federal district court halting the investigation based on the OCC's visitorial powers preemption regulation, 12 C.F.R. §7.4 External Site, which prevents state officials from enforcing federal or state laws for activities permitted under the NBA. A divided panel of the Second Circuit affirmed the district court's ruling in Clearing House Association, L.L.C. v. Cuomo, 510 F.3d 105 (2d Cir. 2007) External Site. The New York attorney general sought review in the U.S. Supreme Court, which has agreed to review the case on an expedited basis. A decision is expected by the end of the court's current term in June 2009.