Financial Services Law

CFPB Fines Real Estate Company $500,000 For RESPA Violations

The Consumer Financial Protection Bureau (CFPB) ordered the largest real estate company in Alabama to pay $500,000 for allegedly inadequate disclosures to consumers during the home-buying process.

According to the agency, RealtySouth failed to inform purchasers of the right to choose their service providers, resulting in illegal benefits for TitleSouth, a service provider affiliated with RealtySouth. Instead, for a 14-month period, RealtySouth’s preprinted form purchase contract explicitly directed consumers to TitleSouth for title and closing services. A modification to the form in 2012 presented borrowers with a choice between TitleSouth and an unnamed “other” company.

The CFPB noted that while the Real Estate Settlement and Procedures Act (RESPA) allows real estate companies to refer customers to affiliated businesses (called “affiliated business arrangements” or “AfBAs”), they must provide an AfBA disclosure form that explains home buyers’ rights, including the power to shop around and choose a service provider.

RealtySouth’s AfBA disclosure was inadequate, the agency alleged, failing to properly highlight consumers’ rights by not tracking the format recommended by the CFPB and burying the required language in a section that also contained marketing claims about the benefit and value of its affiliated entities (“We at RealtySouth believe our affiliates provide superior service, value, and convenience,” for example).

In addition to the $500,000 civil penalty, RealtySouth has already updated its AfBA forms and procedures to ensure compliance with RESPA, including additional training to prevent agents from requiring the use of affiliates going forward and adoption of the CFPB-recommended format for AfBA forms.

To read the consent order, click here.

Why it matters: RESPA generally prohibits payment of a fee or other thing of value in return for the referral of mortgage loan business, but AfBAs are a significant exception to the general rule. RESPA was previously enforced by HUD, but RESPA has been transferred to the CFPB as part of the Dodd-Frank Act. This enforcement action shows that the CFPB is beginning to focus on the antikickback provisions of RESPA. And in addition to attacking “sham” AfBAs, CFPB is also reviewing AfBAs to make sure that all technical requirements, including proper disclosures, are satisfied. Mortgage lenders, real estate brokerage firms and others involved in AfBAs should revisit their arrangements to ensure that they comply with all RESPA requirements.

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FTC’s Data Broker Report: Transparency And Consumer Control

Calling for greater transparency and an increase in consumer control, the Federal Trade Commission has released its report on the data broker industry.

Based on a study of nine data brokers, “Data Brokers: A Call for Transparency and Accountability” reported that the industry operates with a “fundamental” lack of transparency and recommended the enactment of federal legislation to regulate data brokers. Consumers should be given greater control over their personal information, the agency said, suggesting the creation of a centralized portal to provide access as well as the ability to opt out from the use of their data.

While the report did acknowledge some of the benefits provided by the collection and use of consumer data, the FTC said the industry’s control over “vast amounts of consumer information” raised privacy concerns.

“The extent of consumer profiling today means that data brokers often know as much – or even more – about us than our family and friends, including our online and in-store purchases, our political and religious affiliations, our income and socioeconomic status, and more,” Chairwoman Edith Ramirez said in a statement about the report. “It’s time to bring transparency and accountability to bear on this industry on behalf of consumers, many of whom are unaware that data brokers even exist.”

The report documented the size of brokers’ data collections, noting that a single broker held information on more than 1.4 billion consumer transactions, while another adds upwards of 3 billion new data points each month. Other findings in the report: data brokers collect consumer data from both online (social media activity) and offline (magazine subscriptions) sources and often share data with each other.

Much of the data collection is done without consumers’ knowledge, the FTC said. Information is combined and analyzed to make inferences about consumers, “including potentially sensitive inferences” related to ethnicity, income, religion, or health conditions, with the categorization of consumers into groups such as “Rural Everlasting” (single adults over age 66 with low educational attainment) and “Urban Scramble” (low-income Latinos and African-Americans).

The compiled data poses risks to consumers for unanticipated uses, the agency said. For example, “Bike Enthusiasts” could receive offers for discounts on motorcycles but could also be on the receiving end of higher insurance rates because of their identified risky behavior.

Concluding that federal legislation to regulate the industry would improve transparency and consumer control, the report recommended the creation of a “centralized mechanism” where data brokers could identify their company and explain their practices to consumers, who would be given access to their data and the ability to opt out of the use of their data.

A law should also require data brokers to inform consumers about the inferences derived from their data and provide consumers with information about their sources and whom they share their information with. Affirmative opt-in consent to collect and share sensitive information – like health data – should also be mandated, the FTC said.

The 110-page report concluded with three best practices for the data broker industry: implement privacy-by-design principles as set forth in the agency’s consumer privacy report, “implement better measures” to refrain from collecting information from children and teens, and take “reasonable precautions” to ensure that downstream users don’t use data for eligibility determinations or unlawful discriminatory purposes.

To read the FTC’s report, click here.

Why it matters: With the data broker industry already under scrutiny and the subject of multiple federal reports (from the Government Accountability Office as well as Sen. Jay Rockefeller (D-W.Va.), the FTC report produced few revelations or surprises. However, similar concerns in the 1970s led to the adoption of the Fair Credit Reporting Act (FCRA), which heavily regulates credit bureaus and users of consumer reports and credit scores. Although the information handled by data brokers is typically used for less significant purposes than consumer data covered by the FCRA (e.g., marketing purposes, in contrast to the credit, employment and insurance purposes that are the primary focus of the FCRA), this increased scrutiny, and general concerns today with privacy, could lead to regulation similar to the FCRA unless the industry aggressively self-regulates.

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Regulators Seek Comment On “Outdated, Unnecessary” Regs

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Federal Financial Institutions Examination Council started their spring cleaning a little late this year.

As required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, the regulators launched the first of a four-part series of requests for public comments in an effort “to identify outdated, unnecessary, or unduly burdensome regulations imposed on insured depository institutions.” The Act mandates that the agencies review their regs at least every 10 years. Any changes must be consistent with the agencies’ statutory mandates, many of which require the issuance of regulations. In some cases, legislative changes may be required.

The regulators divided the regulations into 12 subject-matter categories and identified the regulations within each category. At regular intervals over the next two years, three additional Federal Register notices will open a new batch of regs for review and comment.

First up: Regulations from the categories of Applications and Reporting, International Operations, and Powers and Activities. The other nine categories identified by the agencies are Banking Operations; Capital; Community Reinvestment Act; Consumer Protection; Directors, Officers and Employees; Money Laundering; Rules of Procedure; Safety and Soundness; and Securities.

The regulators suggested specific issues for commenters to consider, including whether changes in the financial services industry have impacted the regulations and whether statutory change is required or the industry would be better served by an alternative approach. Additional questions posted by the agencies: Are there specific regulations or underlying statutes in need of clarification? And do any of the regs impose unduly burdensome requirements on community banks or other smaller insured depository institutions?

Comments will be accepted until September 2.

To read the Federal Register notice, click here.

To submit a comment, click here.

Why it matters: The agencies’ review provides them and the public with an opportunity to consider how to reduce the regulatory burden on community banks and other small insured depository institutions or holding companies in a manner that is compatible with the safety and soundness of insured depository institutions, their affiliates, and the financial system as a whole. Once the public comment period is complete, the agencies will report to Congress any “significant issues” and identify specific areas of the regulations that the lawmakers may need to eliminate or tweak. In addition to accepting public comments, the regulators announced their intent to schedule roundtable discussions with bankers and other interested parties about the regulations under review. Depository institutions, particularly smaller institutions, should consider participating in the public comment process and the roundtable discussions to assist the agencies in identifying and targeting regulatory changes that will hopefully reduce some of the burden on these institutions.

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Out-Of-State Bank Fees Permissible Under Federal Law, Eleventh Circuit Rules

Out-of-state bank fees are permitted under federal law, the Eleventh U.S. Circuit Court of Appeals recently concluded.

A pair of Florida customers – Derek Pereira and Camila De Freitas – presented checks at a Florida branch of Regions Bank in July 2012. The checks were drawn on Alabama-based Regions, for which the bank charged each a fee.

Florida Statute Section 655.85 provides that a financial institution “may not settle any check drawn on it otherwise than at par.” Pereira and De Freitas filed a putative class action suit against Regions in Florida federal court, alleging that because of the fee they received less than the full amount of their checks and therefore less than par value.

Regions relied on a preemption defense, arguing that regulations promulgated by the Office of the Comptroller of the Currency pursuant to the National Bank Act trumped this Florida statute with respect to out-of-state state banks.

Regions Bank moved to dismiss, which the district court granted on the grounds that, among other things, federal law preempts Section 655.85. On appeal, the unanimous federal appellate panel noted that an earlier decision – Baptista v. JPMorgan Chase Bank – found such claims pursuant to Section 655.85 to be preempted with regard to national banks. The court also looked to 12 U.S.C. § 1831a(j), which provides that “[t]he laws of a host State . . . shall apply to any branch in the host State of an out-of-State State bank to the same extent as such State laws apply to a branch in the host State of an out-of-State national bank. To the extent host State law is inapplicable to a branch of an out-of-State State bank in such host State pursuant to the preceding sentence, home State law shall apply to such branch.”

Applying the statute and Baptista together, the court “readily conclude[d]” that the plaintiffs’ causes of action were preempted.

“Assuming for the sake of argument that [Florida law] would prohibit Florida branches of an out-of-state state banks from charging a fee to cash a check presented in person, that law would apply ‘to the same extent’ that it applies to out-of-state national banks. And, as explained previously, federal law preempts [Florida law] with respect to national banks,” the panel wrote. “Therefore, even if [Florida law] would otherwise apply to Regions, federal law preempts its application.”

Further support for the court’s conclusion was found in the legislative history of the federal statute, amended in 1997 by Congress “to alter how states regulate out-of state banks; from treating them the same as in-state banks to treating them as out-of-state national banks are treated.”

“The plain language of § 1831a(j)(1), along with its legislative history, combined with binding circuit precedent, convince us that [Florida law] is preempted as to out-of-state state banks,” the panel wrote. Additional claims for unjust enrichment were premised on the same facts as those alleging violations of Florida state law, requiring dismissal of the entire suit on federal preemption grounds.

To read the decision in Pereira v. Regions Bank, click here.

Why it matters: Although the Eleventh Circuit panel based its decision on several grounds – from federal statute to circuit precedent to legislative history – counsel for the plaintiffs told Law360 that his clients intend to appeal the decision, which he contends directly conflicts with rulings from Florida state courts. “We will likely petition the U.S. Supreme Court to resolve [the split],” he said.

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California Senate Amends Bill Mandating Microchip Cards; Bill May Reemerge In Next Legislative Session

In an effort to make the legislation more amenable to the banking industry and retailers alike, California lawmakers tweaked a bill that requires the use of microchip technology in payment cards.

Previously, Senate Bill 1351 would have required card issuers to use microchip-embedded payment cards and retailers to adopt the necessary processing technology by April 1, 2016. Small retailers and gas station pump payment terminals have a later deadline of October 1, 2017.

After January 1, 2015, any contract between a financial institution and a payment card network must include a provision requiring that 75 percent of new or replacement cards issued to California residents after the April 2016 effective date must have microchip technology.

Facing opposition from both the retail industry and financial institutions, legislators made multiple changes to the law.

First, they removed a requirement from the proposal that would have required retailers to embed microchips in store-specific cards. Unlike debit and credit cards, no evidence of fraudulent activity was associated with store-specific cards lacking a credit card logo, the legislators said.

A second revision would permit the use of alternative technology so that payment cards could be “equipped with embedded microchips or any other technology that is more secure than static magnetic stripe technology for card-present fraud prevention.”

In a third adjustment, the bill now explicitly states that if enacted, it will not affect liability contracts – both existing and future – between financial institutions and retailers.

According to the legislation, over 80 countries now utilize microchip technology for credit cards, leaving the United States as one of the few holdouts relying on magnetic stripe technology. Microchip technology is preferable to magnetic stripe “because identifying information is encrypted on an embedded microchip, which is more difficult to counterfeit than a magnetic stripe.” The authors of the bill cited a report that merchants and banks lost $11.3 billion in 2012 due to credit card fraud.

Although the bill failed to come to the full state Senate for a vote, and accordingly must be reproposed in a new legislative session, Visa and MasterCard’s implementation of EMV still stands.

To read the amended legislation, click here.

Why it matters: The California Bankers Association had spoken out against the proposed legislation, arguing that the April 2016 deadline does not allow banks enough time to transition to the microchip technology. “CBA believes this measure negatively impacts banks of all sizes, creates substantial costs to the industry and our customers, increases compliance risk and heightens legal exposure,” the group said in a statement. Because this legislation may emerge in the next legislative session, the legislation requires careful monitoring, since its impact, even as amended, may be significant on card issuers and retailers.

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