Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

On July 15, 2010 the U.S. Senate passed, and on July 21 the President signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Included in the new legislation are a number of provisions that will impact consumer lenders, and in particular, residential mortgage lenders:

• Lenders Must Ensure a Borrower’s Ability to Repay.  Establishes federal minimum underwriting standards for mortgages, including a requirement that lenders consider borrowers ability to repay. (Section 1411) 
• Prohibits Unfair Lending Practices.  Prohibits a number of lending practices that are commonly associated with "predatory lending," including the payment of “yield spread premiums” that lenders pay to brokers, and pre-payment penalties.  (Section 1403) 
• Establishes Penalties for Lending Violations.  Significantly increases penalties for lenders and mortgage brokers that violate new standards.  Also expands the statute of limitations for certain claims brought under TILA from one year to three years.  (Section 1416) 
• Expands Consumer Protections for "High-Cost Mortgages." Expands the number of loans subject to the enhanced disclosures and protections required for high-cost loans by lowering the interest rate and the points and fees that trigger those protections.  (Section 1431) 
• Requires Additional Disclosures. Additional disclosures are required by lenders and servicers, including disclose of the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost home ownership and rental housing counseling.  (Section 1441-1445)

The Act also creates the Consumer Finance Protection Bureau, which will have broad rulemaking, enforcement and regulatory authority:

• Independent Rule Writing.  The Bureau has rule making authority for consumer protections governing all financial institutions — banks and nonbanks — offering consumer financial services or products.
• Examination and Enforcement. The Bureau has authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion, and all mortgage-related businesses, including lenders, servicers, mortgage brokers, in addition to student lenders and other large non-bank financial companies. Banks and Credit Unions with assets of $10 billion or less will be examined for consumer complaints by their appropriate regulator.
• Education.   Creates a new Office of Financial Literacy.
• Consumer Hotline. Creates a national consumer complaint hotline for consumers to  report problems with financial services.
• Consolidation.  Makes one office accountable for consumer protections over large banks and nonbank financial institutions.

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 A June 18, 2009 class action lawsuit filed against Washington Mutual Bank (“WAMU”) and its new parent, JPMorgan Chase (“Chase”), alleges that the banks violated the Truth-in-Lending Act by reducing or suspending millions of dollars of Home Equity Lines of Credit (HELOC) accounts by falsely claiming that customers' incomes had been reduced.   A similar class action filed a week earlier in federal district court in Los Angeles asserted similar claims against the banks.  An article posted on Seattle's King5.com reported that in the Los Angeles case, the banks are accused of relying on flawed automated valuation models to intentionally understate home values and create a pretext for freezing customers' HELOC accounts.  

Creditors are allowed to freeze or reduce a HELOC account in certain situations. Regulation Z, which implements TILA, lists three primary bases for doing so:  (1) if the value of the collateral declines significantly below the appraised value; (2) if the creditor reasonably believes that the consumer will be unable to make payments as agreed because of a material change in the consumer's financial circumstances; or (3) if the consumer is in default on a material term of the HELOC agreement. 12 C.F.R. 226.5(b)(f)(3)(vi).  Whether Chase and WAMU met these standards will be the focus of the lawsuits.  And it remains to be seen whether these cases signal the beginning of a wave of similar suits against other lenders that made similar decisions on HELOC accounts in the wake of the financial market crisis.

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The Federal Reserve's December 2008 revisions to Regulation Z (Truth in Lending Act) closed-end mortgage early disclosure requirements were to take effect October 1, 2009.  However, these changes were superseded by the enactment of the Mortgage Disclosure Improvement Act of 2008 (MDIA). As a result, the Federal Reserve has revised Regulation Z to incorporate the MDIA amendments.  Compliance with the revised early disclosure requirements is mandatory on July 30, 2009. 

According to the FDIC's release, the revisions will include provisions that:

• Expand Reg Z's disclosure requirements to all mortgage loans secured by any dwelling of a consumer, not only a consumer's "principal" dwelling, as wells as refinancings and home equity loans.
• Require lenders to deliver corrected disclosures at least three business days before loan consummation if the APR provided in the early disclosures changes beyond the tolerances provided in Section 226.22.
• Prohibit lenders from charging a consumer any fee, except to obtain a credit report, until after the early disclosures have been provided.
• Permit consumers to expedite the closing of a mortgage loan subject to the early disclosure provisions to address a personal financial emergency, such as foreclosure.
• Require lender to inform a consumer that he or she is not required to complete the transaction because the consumer has received the early disclosures or applied for a loan.

In the wake of the financial crisis, lawsuits alleging violations of consumer protection laws (such as TILA) and other subprime-related litigation, are at all time highs.  According to a report by Navigant Consulting, the number of subprime-related court filings reached an unprecedented level in 2008--totaling 576.  Many of these cases alleged improper disclosures and charges under TILA and RESPA.  Revised Reg Z provisions, including additional disclosures for more loan types, will present additional opportunities for single-plaintiff and class-action litigation.

 (Special thanks to Perkins Coie attorney Veronica McGregor for assisting with this posting)

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