No Lazy Days of Summer for the Consumer Credit Industry
By: Steven M. Kaplan, Kerri M. Smith
The consumer credit industry has been subject to legislative and regulatory changes occurring at a dizzying velocity.
On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009 became law, amending the Truth in Lending Act (“TILA”) to establish fair and transparent practices relating to the extension of open-end consumer credit plans and gift cards. TILA also was amended in the Helping Families Save Their Homes Act of 2009, signed two days prior. Further, on that May 20, 2009 date, President Obama issued a Memorandum for the Heads of Executive Departments and Agencies directing federal agencies to take appropriate action if preemption regulations do not meet certain requirements, which could affect almost every segment of the consumer finance industry.
Federal regulators have also been active. For example, the Federal Trade Commission initiated rulemaking proceedings on June 1, 2009 to address unfair and deceptive practices in the mortgage industry, as required by Congress’ 2009 Omnibus Appropriations Act. Concurrently, the federal financial institution regulatory agencies are issuing proposed rules requiring mortgage loan originators who are employees of agency-regulated institutions to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.
While the industry scrambles to come to grips with the array of new requirements, two of the issues garnering much attention are the residential mortgage loan servicer safe harbor and the new TILA disclosure obligations on purchasers of residential mortgage loans, found in the Helping Families Save Their Homes Act of 2009 (“the Act”).
The servicer safe harbor, as discussed in section 201 of the Act, provides that a mortgage loan servicer will be shielded from liability from any party to whom it owes a duty “to maximize the net present value,” based solely on its implementation of a “qualified loss mitigation plan” (“QLMP”), so long as that QLMP is deemed to be in the best interest of all investors or other parties. The Act determines that a servicer acts in the best interest of all investors (again, when it has an express duty to maximize net present value) if it makes a QLMP where: (1) default has occurred, is imminent, or reasonably foreseeable, as those terms are defined in the Department of Treasury’s Home Affordable Modification Plan guidelines (“HAMP”); (2) the property is occupied by the debtor as a primary residence; and (3) the servicer reasonably determines, consistent with HAMP, that a QLMP for a particular property or a class of properties will result in greater principal recovery than foreclosure of that property. Further, the Act defines a QLMP as a plan described or authorized by the HAMP, or a refinancing under the federal Hope for Homeowners program. It may surprise some, but the new servicer safe harbor contains no express provisions regarding the superseding of contractual restrictions. The ambiguity is even more pronounced when compared to the House’s safe harbor provision in H.R. 1106, which was not enacted into law, but which did contain such express provisions.
Meanwhile, the Act also provides that purchasers of residential mortgage loans have affirmative disclosure obligations to consumers, and subjects them to civil liability if they fail to comply. The statute provides that it is effective upon enactment, which means that the first disclosures are required by Friday, June 19, 2009. One of the fundamental questions regarding this obligation, however, is which purchasers are subject to this new disclosure obligation.
Section 404 of the Act amends TILA to provide that “a creditor that purchases or is assigned a mortgage loan must notify the borrower in writing of a sale or transfer of his or her mortgage loan, not later than 30 days after the transaction’s completion.” The notice must include the following information:
- the identity, address, and telephone number of the new creditor;
- the transfer date;
- how to reach an agent or party having authority to act on behalf of the new creditor;
- the location of the place where transfer of ownership of the debt is recorded; and
- any other relevant information regarding the new creditor.
The Act’s use of the term “creditor” to describe the “new owner” conflicts with TILA’s preexisting definition of creditor as the one to whom the loan was “originally payable.” This conflict in statutory terms makes it very difficult for the mortgage industry to know who must comply with the new law. Additionally, there are several other ambiguities contained in the new disclosure requirement, including whether the obligation should apply to so-called short-term transfers and the specific information that must be included in the disclosure.
Some might say that in the policy makers’ wish to enact legislation, clarity was compromised. Thus, we hope that future laws and regulations will be clearer than those recently enacted. If federal policymakers continue regulating at this fast pace, credit industry participants may need to swap their beach reading for copies of the Federal Register and the Congressional Record.
