Consumer Compliance Outlook: Second Quarter 2015

On the Docket: Recent Federal Court Opinions

Regulation Z — Truth in Lending Act (TILA)

Seventh Circuit addresses when electronic mortgage payments must be credited to borrowers’ accounts. Fridman v. NYCB Mortgage Co., LLC, PDF External Link 780 F.3d 773 (7th Cir. 2015). A divided panel held that a borrower’s electronic mortgage payment initiated on a loan servicer’s ebsite must be credited on the date that the electronic authorization to debit a borrower’s bank account is received. The plaintiff’s mortgage payment was due on the first day of each month with a 15-day grace period before a late fee would be imposed. The plaintiff sent her December 2012 payment electronically through the defendant loan servicer’s website using the automated clearing house (ACH) network on either December 13, 2012 (after the 8:00 p.m. cutoff) or on the morning of December 14, 2012 (a Friday). The servicer’s policy was to credit an ACH payment authorization two business days after it was received, so the payment was not credited until December 18, 2012 (a Tuesday), the ame day the plaintiff’s bank account was debited and three business days after the grace period expired.

Because the payment was deemed late as of this date, the bank imposed a late fee of $88.54. The plaintiff’s lawsuit alleged that the payment was timely under Regulation Z’s mortgage payment crediting rules, and therefore, the servicer violated the TILA by imposing the late fee. As the court explained, the “TILA generally requires mortgage servicers to credit payments to consumer accounts ‘as of the date of receipt’ of payment, unless delayed crediting has no effect on either late fees or consumers’ credit reports.” 15 U.S.C. §1639f(a), 12 C.F.R. §1026.36(c)(1)(i).

The court focused on Comment 1026.36(c)(1)(i)-3 of the Regulation Z Official Staff Commentary to decide this issue: “The ‘date of receipt’ is the date that the payment instrument or other means of payment reaches the mortgage servicer. For example, payment by check is received when the mortgage servicer receives it, not when the funds are collected.” The court interpreted this to mean that electronic payments must be credited on the date — the “date of receipt” — that the servicer receives the electronic authorization (i.e., the payment instrument or other means of payment) to collect the payment. The court noted that this rule applies only to electronic payments initiated directly on a servicer’s website. It would not apply to electronic payments initiated through third parties, such as a bill-payment service provided by a consumer’s bank. In those other situations, the rule is that the electronic payment need not be credited until the consumer’s electronic fund transfer (and not solely the consumer’s electronic authorization) is actually received.

Regulation X — Real Estate Settlement Practices Act (RESPA)

Eleventh Circuit rejects RESPA claims alleging nominal and marked-up settlement services. Clements v. LSI Title Agency, Inc., PDF External Link 779 F.3d 1269 (11th Cir. 2015). The plaintiff refinanced a mortgage, and defendant LSI Title Agency (LSI) was hired by the lender to perform closing services, including providing a closing attorney. The plaintiff later filed a class action lawsuit alleging two RESPA violations: 1) that LSI provided only nominal services because it merely hired the attorney who performed the closing, for which it charged a $300 settlement fee; and 2) that LSI violated the prohibition against giving or accepting any portion, split, or percentage of any settlement charge when it charged the borrower $125 for government recording, a service for which it only paid $40 to a Georgia state government agency. The RESPA 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.” 12 U.S.C. §2607(b).

Although the RESPA prohibits charging an unearned fee, the court held that LSI performed a service by retaining the attorney to conduct the closing because under RESPA “‘arranging for [a] third party contractor[ ] to perform [a service]’ is itself a service.” With respect to the markup, the court — explaining that “a markup of a charge to the consumer violates [RESPA] when [a] mortgage service provider accepts an unearned portion of that charge” — ruled that LSI neither gave nor accepted any portion, split, or percentage of any charge other than for services that it actually performed. In so doing, it concurred with the majority of federal appeals courts that have addressed the issue by concluding that Congress, in RESPA Section 2607(b), neither prohibited markups nor required that “a mortgage lender shall only charge the consumer what is paid to a third party for a real estate settlement service.”

Fair Credit Reporting Act (FCRA)

Seventh Circuit clarifies meaning of “willful noncompliance” for purposes of awarding FCRA damages. Redman v. RadioShack Corp., PDF External Link 768 F.3d 622 (7th Cir. 2014). In a consolidated appeal involving two class action lawsuits, the Seventh Circuit clarified the standard of willful noncompliance under the Fair Credit Reporting Act (FCRA). The lawsuits involved two retailers, RadioShack and Shoe Carnival, that violated the prohibition in the Fair and Accurate Credit Transactions Act (FACTA) against printing a credit card expiration date on a receipt provided to a cardholder at the point of the sale or transaction. 15 U.S.C. §1681c(g)(1). RadioShack printed the entire expiration date, while Shoe Carnival printed the expiration month (but not the year). RadioShack settled the case, but certain class members objected to the lower court’s approval of the settlement. In both cases, the Seventh Circuit had to determine if the violations were willful.

Determining if the FCRA violations were willful was relevant to calculating a plaintiff’s damages. For a negligent violation, a plaintiff can recover only actual damages and attorney’s fees. However, per 15 U.S.C. §1681n(a)(1), for a willful violation, a court must award either actual damages or statutory damages for a minimum amount of $100 or a maximum amount of $1,000. Punitive damages may also be imposed for a willful violation.

The Seventh Circuit stated that acting “willfully” refers to conduct that creates “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” RadioShack’s conduct was deemed to be willful because it had been sued in 2008 for the same conduct under an Ohio state law similar to the FCRA, but it failed to take adequate precautions to prevent a repeat violation. However, the court found that Shoe arnival’s violation was not willful because the retailer believed that the statute prohibited printing the entire expiration date, and it printed only the expiration month. The court found that this interpretation, while legally incorrect, was plausible because the statute does not define the “expiration date.” The court therefore affirmed the district court’s finding that Shoe Carnival did not act willfully.

Consumer reporting agency’s duty to reinvestigate disputed information. Collins v. Experian Information Solutions, Inc., PDF External Link 775 F.3d 1330 (11th Cir. 2015). A consumer filed a lawsuit against Experian, a consumer reporting agency, claiming that it had failed to conduct a reasonable reinvestigation of his dispute for a debt that a debt collector had acquired. When the consumer first saw the debt on his Experian credit report, he disputed it, noting that a court had previously ruled in his favor in a collection lawsuit filed by the debt collector. Experian asked the debt collector to investigate, and the debt collector wrongly responded that the debt was still valid.

When the consumer later checked his Experian credit report and saw that the debt was still listed, he sued Experian for violating 15 U.S.C. §1681i(a), which requires a consumer reporting agency to conduct a reasonable “reinvestigation” of disputed information in a consumer’s credit file to determine whether the disputed information is inaccurate. (The Fair Credit Reporting Act (FCRA) creates a private right of action against consumer reporting agencies for negligent or willful violations of duties imposed by the statute.) The trial court granted Experian summary judgment on the plaintiff’s FCRA claims, holding that the consumer could only recover against Experian if the disputed debt had been published to a third party, which it had not done. But the Eleventh Circuit reversed and remanded the matter for further hearings, finding that when a consumer disputes information in his credit “file” — as distinguished from a “consumer report, which requires communication to a third party, while a ‘file’ does not” — and a consumer reporting agency fails to conduct a reasonable reinvestigation, the consumer is entitled to actual damages regardless of whether the disputed information was furnished by the consumer reporting agency to a third party.