On May 23, 2013, the Eleventh Circuit upheld an Alabama federal court’s dismissal of a proposed class action brought by a mortgage holder who claimed the servicer violated the Truth in Lending Act (“TILA”) by failing to notify her of a transfer in ownership of her mortgage loan, as required by Section 1641(g).  In an unpublished per curium opinion, a three-judge panel in Giles v. Wells Fargo Bank, N.A. (No. 12-15567)  agreed with the lower court that, under TILA’s “administrative convenience” exception,  the servicer, who was assigned an ownership interest in the mortgage loan prior to foreclosing on the loan, was not obligated to provide notice of the assignment.

Section 1641(g) of TILA provides that a creditor who is the new owner or assignee of an existing mortgage loan must provide written notice to the borrower within thirty days of the date on which the new creditor acquired the loan.  See 15 U.S.C. § 1641(g).   The 11th Circuit explained, “[b]ased on its plain language, section 1641(g)’s disclosure obligation is triggered only when ownership of the ‘mortgage loan’ or ‘debt’ itself is transferred, not when the instrument securing the debt (that is, the mortgage) is transferred.”  The Giles case involved an assignment of the security deed to the servicer prior to foreclosure that was not disclosed to the borrower.  The borrower argued that under Alabama law,  the transfer of the security deed also transfers an interest in the note secured thereby implicating the disclosure requirements of Section 1641(g).

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On May 20, 2013, the Georgia Supreme Court issued a unanimous opinion in the You v. JP Morgan Chase case (Case No. S13Q0040).  The You Opinion addresses several questions that the United States District Court for the Northern District of Georgia had certified to the Supreme Court regarding the operation of Georgia’s law governing non-judicial foreclosures.

First, the Supreme Court addressed the question: “Can the holder of a security deed be considered a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?” The Supreme Court answered “Yes” to this first question.

Second, the Supreme Court addressed the question “Does O.C.G.A. § 44-14-162.2 (a) require that the secured creditor be identified in the notice described by the statute?”  The Supreme Court answered “No” to this second question.

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Community bank lenders have responded to the CFPB’s Ability-to-Repay and Qualified Mortgage rules with questions about adjustable-rate mortgages (ARMs), balloon-payment qualified mortgages, and non-standard mortgage refinances.  The CFPB’s implementation of Dodd-Frank’s balloon-payment qualified mortgage concept, for example, turns on a narrow definition of the types of lenders that qualify to make such loans.  ARMs may be a viable alternative to balloon mortgages, but these loan products pose compliance and operational risks of their own.  Finally, lenders may still be considering the types of transactions that qualify for the special “non-standard mortgage” refinancing exemption from the general Ability-to-Pay rule.

For a uniquely focused discussion on making these types of loans in light of the CFPB’s new mortgage regulations, join attorneys John ReVeal and Barry Hester for the latest installment of Bryan Cave’s webinar partnership with compliance training leader BAI Learning & Development.  This free presentation will be held on Wednesday, May 8, from 3-4 pm Eastern.  More information and registration are available here.  Participants should walk away with a solid roadmap for managing existing portfolio balloons and ARMs now and for originating these types of mortgages once the CFPB’s rules take effect in 2014.

The Office of Associate Chief Counsel (Income Tax & Accounting) recently released a memorandum (the “Chief Counsel memorandum) that holds that a bank that acquires OREO through foreclosure proceedings (either through actual proceedings or by deed-in-lieu of foreclosure) with respect to a loan originated by the bank is not considered to acquire the OREO for resale within the meaning of §263A of the Internal Revenue Code and the applicable Treasury Regulations thereunder. This Chief Counsel Memorandum contradicts, at least in part, a memorandum issued last June by Associate Area Counsel (Detroit) (Large Business & International) (the “Area Counsel Memorandum”) that concluded that certain OREO acquired through foreclosure, which was held solely for resale and not for the production of rental or investment income, was considered to be acquired by a bank for resale within the meaning of §263A and the underlying regulations. Accordingly, the previously issued Area Counsel Memorandum concluded that acquisition costs incurred in connection with the foreclosure proceedings, such as legal fees and other direct costs incurred in connection with the foreclosure, as well as certain production costs incurred while holding the property for resale, including real estate taxes, insurance, repairs, maintenance, capital improvements, and utilities, had to be capitalized in whole or in part and in effect recovered as part of the basis of the OREO when computing gain or loss on the sale of the OREO.  (Print Version of this Alert Available.)

The rationale for the conclusion in the Area Counsel Memorandum is that the bank clearly acquired the foreclosed property for resale since the federal and state regulations generally restrict the period that OREO may be held by a bank (although extensions can be granted) and also require that banks make good faith efforts to dispose of the OREO. The Area Counsel Memorandum reached this conclusion even though federal and state regulations would not have allowed the bank to otherwise acquire and deal in such property as a business carried on to make a profit. The Chief Counsel Memorandum takes a different view of the activities that generally must be carried on in order for a taxpayer to fall under the capitalization provisions of §263A, which is whether the bank is acquiring property with a view to re-sell it at a profit as part of the bank’s normal business activities. The Chief Counsel Memorandum concludes that the bank is acting in its capacity as a lender and not a traditional reseller of real property. The bank is economically compelled to acquire the property as a last resort to recover funds that it originally loaned in order to minimize its losses.

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CFPB Finds Limited Preemption; Gift Card Issuers Must Honor Cards
Even After Funds Have Escheated to the State

The Consumer Financial Protection Bureau (“CFPB”) recently published a final determination regarding whether the unclaimed property laws of Maine and Tennessee relating to unredeemed gift cards (“Applicable State Law”) are inconsistent with and preempted by the gift card provisions of the  Electronic Fund Transfer Act and Regulation E (“Federal Law”).  The applicable laws of Maine and Tennessee are quite similar for the issues at hand.  In its ruling, the CFPB determined that Maine’s unclaimed property law as applied to gift cards is not inconsistent with Federal Law, and therefore no preemption was found.  However, with respect to Tennessee’s unclaimed property law, the CFPB ruled in favor of preemption but only with respect to the provision permitting issuers to choose whether to honor an unclaimed gift card after the underlying funds have been escheated to the state.  (A Print Version of this Alert is available.)

Background

The specific issue involves Federal Law vis à vis the abandoned property laws of Maine and Tennessee.  Federal Law prohibits a gift card from containing an expiration date that is less than five years from the date of issuance or date of last load, whichever is later; Applicable State Law, however, generally requires escheatment of unused balances on certain types of gift cards after two years of card inactivity.

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The Consumer Financial Protection Bureau has just released its much anticipated revisions to the Regulation E provisions governing international remittance transfers.

According to the bureau’s press release, the revised rule makes optional the requirement to disclose foreign taxes and recipient institution fees (unless the recipient institution is the remittance transfer provider’s agent). It also makes clear that a remittance transfer provider does not bear the cost of funds deposited into the wrong account because the sender provided the wrong account number or routing number and certain other conditions are satisfied, although the provider is required to attempt to recover such funds.

The final rule will become effective October 28, 2013.

We are reviewing the full text of the revisions and will provide a more detailed analysis in the coming days.

The revised rule is available here.

Two recent Georgia Court of Appeals en banc decisions issued on March 29 have weighed in on one aspect of the MERS fallout, holding in favor of the secured lender.

In Montgomery v. Bank of America et al., No. A12A0514, 2013 WL 1277830 (Ga. App. March 29, 2013) and LaRosa v. Bank of America, N.A., et al., No. A12A2393, 2013 WL 1286692 (Ga. App. March 29, 2013), the Court of Appeals was asked whether a security deed which includes a non-judicial power of sale is transferable without evidence of the transfer of the underlying debt instrument. Montgomery at *2; LaRosa at *1.  Without discussing the myriad legal issues on both sides of this debate, the Court of Appeals upheld the trial court’s ruling in favor of the mortgagee, citing the lack of statutory authority or case law supporting the mortgagor’s theory that the note and deed must “travel together” for an assignment of the foreclosure remedy to be valid. Montgomery at *2; LaRosa at *2.  See also O.C.G.A.  §44-14-64(b).

But secured lenders and their servicers initiating non-judicial power of sale foreclosure in Georgia should not breathe a collective sigh of relief just yet.  As the dissents in both decisions point out, the Georgia Supreme Court has yet to issue its ruling in You v. JP Morgan Chase Bank, N.A., No. 1:12-cv-202-JEC-AJB (N.D. Ga. Sept. 7, 2012) where the federal court certified the question of note/mortgage severability, along with two related foreclosure notice questions  to the Supreme Court of Georgia, citing the “substantial need of federal courts to obtain enlightenment [from the Georgia Supreme Court] on these questions.” (The district court also certified the questions of whether (i) O.C.G.A. § 44-14-162.2(a) requires a secured creditor to be specifically identified in the foreclosure notice and, if yes, whether (ii) “substantial compliance” with the preceding statute suffices.)

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Bryan Cave attorneys discuss guidance from the Federal Trade Commission and its impact on banks.

Banks have an important role to play in development of mobile banking and mobile payment technologies. Although nearly 45 percent of all mobile phone users have a smartphone, only 12 percent are using mobile devices to make payments, according to a new report from the Federal Trade Commission (FTC).  The primary reason for not using mobile payments is security concerns (42 percent).

Currently, the Federal Trade Commission is leading the charge to explore the need for mobile payments regulation. For banks interested in mobile banking, its actions and publications are very instructive.

Over the last two years, the FTC’s actions include: bringing law enforcement actions, obtaining high-profile settlements with Google and Facebook and issuing policy reports for mobile businesses and policymakers. Although financial institutions are not directly regulated by the FTC in this area, the FTC does regulate all other mobile providers including merchants, payment card networks, and payment processors. Further, the FTC will likely influence and coordinate with other regulators, particularly with respect to data security and privacy.

 During a teleconference on February 1, 2013, discussing the FTC report, “Mobile Privacy Disclosures Building Trust through Transparency,” the outgoing FTC Chairman, Jon Leibowitz, called on the industry to adopt strong privacy and data security measures for mobile technologies or face increased regulation.  Most recently, the FTC issued a Staff Report on March 8, 2013, entitled “Payments,” which outlines a number of key concerns and recommendations for businesses implementing mobile payments:

(1)  develop clear policies for disputes for fraudulent or unauthorized mobile payments that address:

• the confusing landscape for consumers when selecting a payment method since each product has a different means, as well as different levels of protection, for disputing payments;
• the potential need to incorporate FTC Act and potential Consumer Financial Protection Bureau protections. At this time, unless Regulation E applies to a payment method, Reg E type protections for fraudulent or unauthorized payments are offered on a contractual or voluntary basis only; and
• mobile “cramming,” where companies place unauthorized charges on mobile phone bills.

(2)  adopt strong security measures throughout the mobile payment process to:

• receive, transmit and store financial data using “end-to-end” encryption;
• incorporate security measures such as dynamic data authentication and separate secure element storage of data to prevent hackers from accessing financial information on mobile devices;
• comply with federal and state data security laws such as the FTC Safeguards Rule 16 C.F.R. § 314.1 et seq. and the FTC Act prohibition against unfair, deceptive and abusive practices;
• require strong data security measures by all companies in the mobile payments chain; and
• implement additional consumer security protections such as second level passwords and a means to immediately disable apps if a phone is lost or stolen.

(3)  Implement “privacy by design” as set forth in the FTC’s report “Protecting Consumer Privacy in an Era of Rapid Change,” including at a minimum:

• strong privacy practices at every stage of product development covering:
  —reasonable security
  —data collection limited to the context of consumer interaction with your business (e.g., no geolocation data unless needed)
• simplified consumer choice:
  —allowing consumers to restrict unnecessary information disclosure
  —discouraging “pre-checked” boxes to obtain consumer consent for the use of data for non-processing purposes
• transparency regarding data collection, storage and use to strengthen consumer trust.

To enable mobile to reach its full potential, financial institutions can play a lead role, including by responding to the FTC chairman’s call for industry self-regulation and the recommendations noted in the Staff Report. Taking the security and privacy obligations that already exist under the Gramm-Leach-Bliley Act, with further guidance from sources like the FTC, financial institutions can move the industry forward by developing meaningful mobile disclosures and transparent privacy policies and practices and by requiring similar compliance of their mobile payment service providers.

Banks should implement, and require their service providers to implement, data security safeguards for sensitive financial information at all segments of the payment chain and allocate responsibilities and liability among them. Banks should develop data breach response plans including notifications and consider purchasing cyber-security insurance.

This article was originally published on BankDirector.com.

The mortgage servicing rules issued by the CFPB in January, 2013, implement another wave of Dodd-Frank reforms and outline best practices even for institutions not subject to these new requirements.  Join Bryan Cave attorneys Barry Hester and Karen Neely Louis on Tuesday, April 9, from 3-4 pm Eastern, as they dissect these new rules and outline the higher servicing, foreclosure and eviction management expectations that follow. 

More information and registration information for this free event, entitled “Servicing, Foreclosure and Eviction Management:  Best Practices in the CFPB Era,” is available here.

A collection of new banking resources from around the internet:

• Common Financial Reporting Issues Facing Smaller Reporting Issuers (PDF) – SEC Corporate Finance Staff address common issues faced by smaller reporting companies.
• Comptroller Curry speaks at ICBA on Community Bank Supervision – Announces forthcoming booklet on a “Common Sense Approach to Community Banking.”
• OCC Proposes Annual Stress Testing Rulemaking – OCC proposal for annual stress testing of banks between $10 and $50 billion in total assets.
• 2013 Stress Test Results -Federal Reserve publishes detailed results of 2013 stress tests.
• March 2013 Beige Book Commentary – Federal Reserve Bank of Atlanta offers commentary on the commentary of the economy provided by the Beige Books.
• The Federal Reserve is on Flickr – Need a picture of a Federal Reserve Governor, Federal Reserve testimony or the Federal Reserve hard at work?  That’s what the internet is for.

For banking-related content from around the web on a real-time basis, follow @RobertKlingler on Twitter.