Consumer Compliance Outlook: Third Quarter 2012

On the Docket: Recent Federal Court Opinions


The Supreme Court rules that RESPA’s prohibition on unearned fees applies only to fees split between two or more parties. Freeman v. Quicken Loans, Inc., PDF External Link 132 S. Ct. 2034 (2012). The federal appeals courts have been divided over the requirements for a violation of RESPA section 8(b) for an unearned fee. Section 8(b) states that “[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service … other than for services actually performed.” Several courts have interpreted this language to mean that a section 8(b) violation occurs only when a settlement service provider shares a part of a fee with one or more persons who did nothing to earn that part. Other courts have held that all unearned fees for settlement services violate section 8(b), whether or not the fees are split. In Freeman, the Supreme Court reviewed a class-action lawsuit alleging an unearned fee violation because the plaintiffs were charged discount points to reduce their mortgage loan rates but claimed they did not receive rate reductions. In a unanimous decision, the court held that section 8(b) applies only to an unearned fee that is split between two or more persons. Because the plaintiffs did not allege that Quicken Loans split the discount fees with anyone else, the court affirmed the Fifth Circuit’s dismissal of the lawsuit.

It is important to note that while an unearned, undivided fee does not violate section 8(b) of RESPA, such a fee could still violate other consumer protection laws. This issue is discussed in detail in the article “Compliance Risks for Unearned Discount Points.”


The Fourth and Tenth Circuits issue conflicting decisions on whether a lawsuit is necessary to the timely exercise of the right of rescission. Gilbert v. Residential Funding LLC, PDF External Link 678 F.3d 271 (4th Cir. 2012) and Rosenfield v. HSBC Bank, USA, External Link PDF 681 F.3d 1172 (10th Cir. 2012). In the Second Quarter issue, Outlook discussed the Ninth Circuit’s decision in McOmie-Gray v. Bank of America Home Loans, 667 F.3d 1325 (9th Cir. 2012), which held that to exercise the right of rescission in a timely manner, a borrower must file a lawsuit within three years of consummation and that sending written notice of rescission to the creditor during that period is insufficient to satisfy the three-year rescission period in section 1635(f) of TILA. (Ordinarily, a borrower has three business days after consummation to rescind the transaction, but if the creditor fails to provide notice of the right to cancel or the material disclosures, the period is extended to three years.)

The Fourth and Tenth Circuits have now addressed this issue with conflicting decisions. In Gilbert, the borrowers notified the lender within three years of consummation that they were exercising the right of rescission, but the lender rejected the request. The borrowers then filed a lawsuit, but it was more than three years after consummation. The Fourth Circuit held that the lawsuit was timely because the borrower had previously sent a written rescission notice to the creditor within three years of consummation. The court noted that the rescission provisions of TILA and Regulation Z do not require the filing of a lawsuit to exercise the right to rescind. Instead, Regulation Z states: “To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication.” The court was careful to note, however, that it was not stating that a timely notice automatically rescinds a loan. For example, a borrower may be mistaken in his belief that he is entitled to rescind. If a creditor rejects a written request to rescind, a borrower would have to file a lawsuit to obtain a judicial determination, but the lawsuit would be timely if the written request had been made within three years of consummation.

The Tenth Circuit, on the other hand, held in Rosenfield that a borrower’s written rescission notice to the creditor within three years of consummation is not sufficient to exercise or preserve the right of rescission. The court, relying on the Supreme Court’s decision in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), concluded that section 1635(f) of TILA requires borrowers to send written notice of rescission and file a lawsuit within three years of consummation. Because the borrower filed her lawsuit more than three years after consummation, the court affirmed the dismissal of the case.


Printing the last four digits of an account number, instead of the card number, on a receipt did not constitute an intentional FCRA violation justifying statutory and punitive damages. Van Straaten v. Shell Oil Prod. Co. LLC, External Link PDF 678 F.3d 486 (7th Cir. 2012). The Seventh Circuit dismissed a class-action lawsuit against Shell Oil seeking punitive and statutory damages for an alleged FCRA violation. The plaintiff purchased gasoline with a Shell credit card on which Shell designates the first nine digits as the “account number” and the last five as the “card number.” The receipt for the purchase displayed the last four digits of the account number rather than the last four digits of the card number. Under the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the FCRA, merchants’ credit and debit card receipts cannot display a card’s expiration date or more than the last five digits of the card number. See 15 U.S.C. §1681c(g)(1). External Link The plaintiff alleged that Shell violated the FACT Act by disclosing the wrong four digits; it should have disclosed the last four digits of the card number as outlined in the statute. The court concluded that regardless of whether Shell should have used the last four digits of the card number, the lawsuit should be dismissed because the plaintiff did not allege she suffered any damages. Instead, the lawsuit sought punitive and statutory damages, which are available only for a willful FCRA violation. Under Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), a willful FCRA violation requires the showing of an objectively unreasonable interpretation of the FCRA. The court determined that Shell’s interpretation was not objectively unreasonable because the statute does not define “card number,” and consumers were not at greater risk for identity theft because Shell printed the last four digits of the account number rather than the last four digits of the card number.

Court rejects challenge to risk-based pricing notice requirements for automobile dealers in third-party financing transactions. National Auto. Dealers Ass’n v. Federal Trade Commission, PDF External Link 2012 WL 1854088 (D.D.C. 2012). A federal court in Washington, D.C. ruled against the National Automobile Dealers Association (NADA) in its lawsuit challenging a specific provision in the risk-based pricing regulations issued by the Federal Trade Commission and the Federal Reserve Board under the FACT Act. In multi-party credit transactions requiring a risk-based pricing notice, the regulation specifies that the person to whom the obligation is initially payable must provide the risk-based pricing notice, even if the obligation is immediately assigned after consummation. This frequently occurs in indirect auto lending when the dealer is the party whose name is on the credit agreement. NADA’s lawsuit argued that the FACT Act required the funding creditor that purchased the obligation to provide the notice. The FACT Act specifies that the person who “uses a credit report” must provide the risk-based pricing notice. The court concluded that the statute was ambiguous about the meaning of this phrase and deferred to the agencies’ interpretation, which the court found reasonable.


A loan servicer and loan assignee can be subject to the FDCPA if the loan was in default when acquired. Bridge v. Ocwen Fed. Bank, FSB, PDF External Link 681 F.3d 355 (6th Cir. 2012). The Sixth Circuit reversed the dismissal of a lawsuit under the FDCPA against Ocwen, a loan servicer, and Deutsche Bank, which had purchased the loan. The lawsuit filed by a husband and wife, concerning a mortgage on which only the wife was liable, alleged that the defendants violated the FDCPA by attempting to collect payment when it was not in default and by attempting to collect the loan from the husband, who was not an obligor. At issue in the appeal was whether the defendants, who had not originated the loan, were debt collectors or creditors. The FDCPA generally does not apply to creditors. The court concluded that under the FDCPA, a person acquiring a loan or loan servicing rights is a debt collector if the loan was in default when acquired and a creditor if the loan was not in default. Because the plaintiffs alleged that the defendant treated the loan as if it were in default when it was acquired, the court held that the plaintiffs had stated a valid claim. The court also determined that the husband could have a claim under the FDCPA against the defendants for attempting to collect a debt he did not owe because the FDCPA covers consumers who are mistakenly alleged to have owed a debt. The case was remanded for further proceedings.

The Eleventh Circuit rules that the FDCPA can apply in foreclosure proceedings. Reese v. Ellis, Painter, Ratterree & Adams, LLP, PDF External Link678 F.3d 1211 (11th Cir. 2012). The Eleventh Circuit reversed the dismissal of a lawsuit against a law firm under the FDCPA. After the plaintiffs defaulted on a mortgage loan, a law firm representing the creditor sent them a dunning notice and threatened foreclosure unless the loan was satisfied. The plaintiffs alleged that the law firm’s communication violated the FDCPA because it contained deceptive and misleading representations. The lower court dismissed the case because it concluded that the law firm was enforcing a security interest, which does not constitute debt collection under the FDCPA. On appeal, the Eleventh Circuit reversed the decision because it determined that the law firm was both trying to enforce a security interest and attempting to collect a debt owed under the Promissory note. For example, the law firm’s dunning letter stated: “Lender hereby demands full and immediate payment of all amounts due…. THIS LAW FIRM IS ACTING AS A DEBT COLLECTOR ATTEMPTING TO COLLECT A DEBT.” The case was remanded for further proceedings.