Consumer Financial Services Alert - March 9, 2010

The Ninth Circuit Court of Appeals handed down a ruling with favorable implications for residential mortgage providers.  In Martinez v. Wells Fargo Home Mortgage, Inc., et al., slip op. (9th Cir. Mar. 9, 2010), the Court ruled that (1) the Real Estate Settlement Procedures Act does not regulate what a lender may charge for providing a settlement service, and so does not give a right to sue the lender for charging an allegedly-excessive fee; and (2) the National Bank Act preempts California law claims based on fee overcharges and alleged failure to disclose that the fee was not the actual cost of the settlement service. 

Martinez involved a putative class action brought by a California couple who refinanced their home mortgage loan through Wells Fargo.  Plaintiffs alleged that Wells Fargo charged them an $800 underwriting fee that allegedly was excessive, because it was not “reasonably related” to Wells Fargo’s actual costs of performing the underwriting, in violation of Section 8(b) of RESPA and California law.  The district court granted Well Fargo’s motion to dismiss, and that order was affirmed in all respects by the Ninth Circuit.

In deciding the RESPA claim, the Ninth Circuit joined a number of other circuit courts in rejecting HUD’s position that RESPA regulates overcharges.  The Court concluded that plaintiffs’ California law claim, that Wells Fargo’s conduct was “unfair” when it allegedly overcharged for underwriting fees and marked-up tax service fees, is preempted by the National Bank Act.  The Court held that OCC regulations implementing the National Bank Act, which empower national banks to set fees in their discretion and permit national banks to make real estate loans without regard to state laws concerning disclosures and advertising, independently barred the claim.  The Court also rejected plaintiffs’ claim that Wells Fargo violated California law by knowingly making a false statement on the HUD-1 Settlement Statement by listing the amounts charged to the borrower for  services, instead of what it cost Wells Fargo to perform or subcontract those services.  The Court rejected this claim, in part, because there is no requirement to disclose actual costs on the HUD-1, but only the “charges” to the borrower.

Goodwin Procter LLP attorneys Thomas M. Hefferon and William F. Sheehan represented Wells Fargo in the district court case and before the Ninth Circuit.  Click here for Martinez.

The FRB issued a proposed rule that would impose new obligations on credit card issuers concerning penalty fees and raising interest rates. Among other things, the proposal would place limitations on penalty fees that a credit card issuer may assess. Specifically, an issuer could only charge a penalty fee if the fee represents a "reasonable proportion" of the costs incurred due to that type of violation. The proposal would require issuers to re-evaluate such costs at least annually. Alternatively, an issuer could charge a penalty fee for a violation if the issuer has determined that the amount of the fee is “reasonably necessary” to deter that type of violation, using an “empirically derived, demonstrably and statistically sound model.” In addition, the proposal would (1) prohibit the penalty fee from exceeding the dollar amount associated with the violation, (2) prohibit imposing multiple fees based on a single transaction, (3) require issuers that use risk-based pricing to increase the annual APR on an account to periodically consider changes in factors and, if appropriate, reduce the APR within 30 days, and (4) require issuers to inform customers of the reasons for their rate increases. Comments on the proposal are due 30 days after publication in the Federal Register, which is expected soon. Click here for a copy of the proposal.

The FTC issued a final rule that requires certain advertisements for “free credit reports” to include prominent disclosures to prevent confusion with federally-mandated free annual credit reports. The rule also prohibits credit reporting agencies from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibits other practices that may interfere with the free credit report process. The rule becomes effective April 1, 2010, except for certain disclosure requirements, which take effect September 1, 2010. Click here for a copy of the rule.

The FTC announced that it intends to request public comment on the Preservation of Consumers' Claims and Defenses Rule, also known as the FTC Holder Rule. Under the rule, if a seller provides financing for the customer or refers the customer to a lender, the loan contract must include a notice that allows the consumer to assert claims or defenses against the lender or subsequent holder of the contract. The FTC specifically requests comment on (1) the economic impact of and continuing need for the rule, (2) possible conflict between the rule and other laws or regulations, and (3) the effect of any technological, economic, or other industry changes on the rule. Click here for a copy of the notice.

FinCEN, the federal bank regulatory agencies, and the SEC, in consultation with the CFTC, issued guidance that clarifies and consolidates existing regulatory expectations regarding the information financial institutions must obtain regarding beneficial owners for certain accounts and customer relationships. The guidance does not alter or supersede previously issued regulations, rulings, or guidance related to Customer Identification Program requirements.

The guidance emphasizes that financial institutions should follow a risk-focused approach that enables the institution to conduct appropriate customer due diligence on customers, particularly those customers that present a high risk of money laundering or terrorist financing. In particular, the guidance notes that beneficial owners of accounts may present heightened risks because the use of nominal account holders can conceal the identity of the true owner of assets or property. The guidance also encourages financial institutions to consider adopting procedures to address the risks presented by beneficial owners on an enterprise-wide basis, such as by sharing and obtaining beneficial ownership information across business lines, separate legal entities within an enterprise, and affiliated support units.

The guidance states that financial institutions should establish and maintain customer due diligence procedures that are reasonably designed to identify and verify the identity of an account’s beneficial owners, as appropriate, based on the risk associated with the account. The guidance lists the following as examples of such procedures:

• Determining whether the customer is acting as agent for or on behalf of another, and, if so, obtaining information regarding the capacity in which and on whose behalf the customer is acting;
• Where the customer is an entity not publicly traded in the United States, such as an unincorporated association, a private investment company, trust or foundation, obtaining information about the structure or ownership of the entity to allow the institution to determine whether the account poses heightened risk; and
• Where the customer is a trustee, obtaining information about the trust structure to allow the institution to establish a reasonable understanding of the trust structure and to determine the provider of funds and any persons or entities that have control over the funds or have the power to remove the trustees.

If the financial institution identifies an account with heightened risk, the guidance instructs the institution to perform enhanced due diligence appropriate for the level of risk, such as steps to identify and verify beneficial owners, to reasonably understand the sources and uses of funds in the account, and to reasonably understand the relationship between the customer and the beneficial owner.

The guidance also highlights particular due diligence requirements concerning beneficial owners of private banking and foreign correspondent accounts. The guidance observes that financial institutions may need to apply enhanced due diligence to obtain beneficial ownership information for private banking accounts, including whether a beneficial owner is a senior foreign political figure.

Click here for the guidance.