Borrowers Need Not File Suit to Rescind Mortgage Loan Under TILA, U.S. Supreme Court Holds
Why it matters
In a victory for consumers, the U.S. Supreme Court unanimously ruled that the Truth in Lending Act (TILA) does not require borrowers to file suit to rescind a mortgage loan transaction within the statute’s three-year period. Instead, written notice within the time limit will suffice, the justices concluded. The dispute arose after a married couple mailed a letter rescinding the loan within the three-year statutory period but filed a lawsuit four years and one day after the loan’s consummation. The bank argued the suit was time-barred. Both a federal court judge and the Eighth U.S. Circuit Court of Appeals agreed, dismissing the suit as untimely. But in a terse opinion authored by Justice Antonin Scalia, the Court reversed. All that TILA requires is timely written notice, he wrote, as the statute itself says nothing about filing suit. The opinion resolves a split among lower courts regarding the interaction between the one-year limitations period for TILA violations and the three-year rescission period, although it leaves lenders with some practical concerns where notices are received more than three days after the loan is consummated. Lenders may be forced to file suit upon receipt of written notice past the first three days in order to clarify the status of the loan, namely, to determine whether the lender failed to provide the requisite disclosures and therefore whether it must then release the mortgage.
Detailed discussion
On February 23, 2007, Larry and Cheryle Jesinoski refinanced the mortgage on their home by borrowing $611,000 from Countrywide Home Loans. Exactly three years later, the Jesinoskis mailed Bank of America (following its acquisition of Countrywide) a letter purporting to rescind the loan.
The bank replied with a letter refusing to acknowledge the validity of the rescission.
Four years and one day after closing, the Jesinoskis filed suit in federal court seeking a declaration of rescission and damages pursuant to TILA. The statute provides an unconditional right to rescind the transaction unilaterally within three days of the loan closing. If the lender fails to comply with TILA’s disclosure requirements, the statute extends the time period for rescission for “three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first.” 15 U.S.C. Section 1635(f).
Section 1635(a) of the statute explains how the right to rescind is to be exercised, granting a borrower “the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.”
The Court held that the statutory language is unequivocal.
“The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind,” Justice Scalia wrote. “It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.”
The Court rejected the bank’s interpretation of Section 1635(f) that written notice does not suffice if the parties dispute the adequacy of the disclosures and thus the continued availability of the right to rescind.
“Although Section 1635(f) tells us when the right to rescind must be exercised, it says nothing about how that right is exercised,” the justices explained. “Section 1635(f) nowhere suggests a distinction between disputed and undisputed rescissions, much less that a lawsuit would be required for the latter.”
Language in Section 1635(g) allowing courts to “award relief” “in addition to rescission” simply makes clear that a court has options when fashioning remedies for borrowers, Justice Scalia said, and has “no bearing” on whether and how rescission under Section 1635(a) may occur.
Invoking common law, the bank also argued that rescission traditionally required that the rescinding party return what he received before a rescission could be effected or that a court affirmatively decree rescission. Although TILA disclaimed the former, “the negation of rescission-at-law’s tender requirement hardly implies that the Act codifies rescission in equity,” the Court said.
“The clear import of Section 1635(a) is that a borrower need only provide written notice to a lender in order to exercise his right to rescind,” the justices concluded. “To the extent Section 1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice.”
back to top
FTC Settles With Payday Lenders for $21M Plus $285M in Waived Charges
Why it matters
Continuing the regulatory crackdown on payday lenders, the Federal Trade Commission (FTC) reached a proposed settlement with two lenders – AMG Services, Inc. and MNE Services, Inc. – for a $21 million payment and $285 million in waived charges. According to a complaint filed in Nevada federal court, the defendants violated the FTC Act, Truth in Lending Act (TILA), and the Electronic Funds Transfer Act (EFTA). To settle the suit, the defendants agreed to the payment and the waived charges, as well as a prohibition on future violations of TILA, EFTA, and the FTC Act by changing their practices. The deal – which the FTC said is the largest recovery in a payday lending case in the agency’s history – is the latest example of regulatory scrutiny of the payday lending industry, following other actions such as a $10 million settlement between a Texas-based lender and the Consumer Financial Protection Bureau last July and a consent agreement requiring a bank to pay $1.2 million to the Department of Justice for facilitating alledgedly fraudulent payday loan transactions.
Detailed discussion
The FTC filed suit against AMG Services, Inc. and MNE Services, Inc. and related entities in Nevada federal court charging the payday lending companies with violations of three federal laws.
According to the complaint, the defendants violated the FTC Act by misrepresenting how much a loan would actually cost. In one example, a contract stated that a $300 loan would cost a borrower $390 to repay. In reality, the defendants charged the borrower $975, the agency contended.
TILA requirements – such as accurately disclosing the annual percentage rate (APR) and other terms – were not followed by the defendants, the agency also alleged. In the example of the $300 loan, the defendants would typically withdraw partial payments on multiple days, assessing a finance charge each time, but nowhere was the APR, finance charge, total number of payments, or the payment schedule disclosed, the FTC alleged.
Finally, the FTC said the defendants made preauthorized debits from borrowers’ bank accounts a condition of the loans, which according to the FTC violated the EFTA.
“The settlement requires these companies to turn over millions of dollars that they took from financially-distressed consumers, and waive hundreds of millions in other charges,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a press release about the action. “It should be self-evident that payday lenders may not describe their loans as having a certain cost and then turn around and charge consumers substantially more.”
The settlement comes after a federal court judge agreed with the FTC that the agency had the authority to bring suit against the lenders, which are affiliated with American Indian tribes.
To settle the suit, without admitting fault, the defendants agreed to pay $21 million, the largest FTC recovery to date in a payday lending case. In addition, $285 million in charges the defendants had assessed but not collected will be waived pursuant to the proposed consent order.
Changes to the defendants’ business practices are also included in the settlement. Going forward, for example, they are prohibited from misrepresenting the terms of any loan product, including the payment schedule, the total amount owed by a borrower, the interest rate, the APR or finance charges, and any other material facts. Also banned are violations of TILA and the EFTA.
To read the complaint and the stipulated order in FTC v. AMG Services, click here.
back to top
Pass Or Fail? CFPB Seeks to Grade Financial Institutions Working With Schools
Why it matters
Under a new proposal from the Consumer Financial Protection Bureau (CFPB), financial companies would be graded on a “scorecard” for their offerings to students. The “Safe Student Account Scorecard” would provide colleges and universities information on the product features and fees when selecting a financial company to partner with, the Bureau explained, although use of the scorecard would not be mandatory. The proposed format includes four sections with information on features provided without charge and details about fees charged for services, as well as information about the financial institution’s marketing practices. “The scorecard is not designed to be a set of minimum standards – schools would be free to modify it to meet their unique needs,” CFPB director Richard Cordray said in a press call about the proposal. “But by increasing transparency this scorecard would represent important progress on safe student accounts.” Although not mandatory, it is highly likely that schools would refuse to do business with financial companies not receiving a high grade from CFPB on the scorecard.
Detailed discussion
In 2009 the Credit CARD Act imposed restrictions on financial institutions from using certain types of marketing practices on college campuses and required that agreements between credit card issuers and colleges be publicly available. Because of these changes, the nature of offerings from issuers to college students has changed over the last five years, the CFPB said, increasingly focusing on debit and prepaid cards.
To help colleges and universities compare proposals from financial institutions, the Bureau developed a “Safe Student Account Scorecard” to evaluate the student costs and benefits for products that are offered, including fees, features, and marketing practices.
Four sections highlight important considerations, the Bureau said. First, the financial institution would disclose information on product features such as fees and costs (including the amount of any fees), access to mobile banking and electronic statements, balance inquiry fees, or a charge to reload a prepaid card. Nonstandard fees and the availability of in-network ATMs must also be described.
Marketing practices are discussed in the second section. Financial institutions would be asked to explain “how they ensure that a college has the ability to approve certain marketing materials using its brand or logo” as well as how they “ensure that students receive objective and neutral information on their choices.”
In the third section the CFPB provided a format for colleges to request information about the cost of Safe Student Checking and Prepaid Accounts, including how much the financial institutions receive for each account that is opened, how much the institution receives for each transaction with its financial product, and how much financial support the institution provides to the school.
The final section is an explanation of the annual summary of fees charged to account holders at the college. The number of student account holders the previous year, the average and median fees paid by a student account holder per year, the three most frequently incurred fees per year, and the average and median fees paid by a student for each fee imposed would all be provided by the financial institution.
Comments on the draft scorecard will be accepted by the Bureau until March 16.
To view the CFPB’s sample scorecard, click here.
To read the comments from the Federal Register, click here.
back to top
Compliance Failures Result in Million-Dollar Fines and a Jail Sentence for AML Compliance Officers
Why it matters
In two separate actions in a two-day period at the end of 2014, one former BSA/AML compliance officer was sentenced to two years in prison and forfeited almost $1 million and another was fined $1 million and threatened with a permanent ban from the financial services industry. In both cases, while the alleged facts were seemingly egregious, the underlying themes prove instructional for understanding the evolving expectations of BSA/AML compliance officers.
The failure to implement and maintain an effective anti-money laundering (AML) and Bank Secrecy Act (BSA) program will cost the former Chief Compliance Officer of a money services business $1 million – and potentially his future employment in the financial industry. The Financial Crimes Enforcement Network (FinCEN) assessed a civil money penalty against Thomas E. Haider, alleging that over a five-year period as chair of the Fraud and Compliance Departments at MoneyGram, he failed to implement and maintain an effective AML program and neglected to comply with BSA requirements to report suspicious activity despite numerous complaints about scams being operated through the company’s system. Haider’s “inaction led to thousands of innocent individuals being duped out of millions of dollars,” the regulator said. Concurrently with FinCEN’s announcement, the U.S. Attorney’s Office in the Southern District of New York filed a complaint to enforce the penalty and enjoin Haider from future employment in the financial industry.
Detailed discussion
Thomas E. Haider served as the Chief Compliance Officer for MoneyGram International from 2003 to 2008. During that time, Haider oversaw both the Fraud and Compliance Departments for the company.
In his position with the Fraud Department, Haider was aware of “thousands of complaints” from consumers who were victims of fraudulent schemes, FinCEN said. For example, customers reported sending money through MoneyGram as a result of solicitations informing them they had won a lottery, been hired for a “secret shopper” program, been approved for a guaranteed loan, or won a cash prize.
The scams operated by having consumers send up-front fees (ostensibly to pay for shipping or taxes) to a fictitious payee using MoneyGram’s money transmission network. Although Haider could have suspended or terminated any agent participating in illegal activity, he failed to implement a discipline policy, conduct effective audits, or terminate known high-risk agents or outlets, the regulator said. As a result, consumers lost millions of dollars.
Charged with ensuring compliance under the BSA in his role as head of the Compliance Department, Haider again failed in his responsibilities, FinCEN said. He did not ensure the filing of suspicious activity reports (SARs) on agents that he knew or had reason to suspect were engaged in fraud, money laundering, or other criminal activity.
“By failing to file SARs, despite having extensive information regarding complicit MoneyGram outlets and the evident victimization of MoneyGram’s customers, he denied critical information to law enforcement which could have been used to combat the fraud and dismantle the criminal networks,” according to FinCEN.
For his willful violations, FinCEN assessed a $1 million civil money penalty against Haider. The complaint filed in New York federal court seeks enforcement of the penalty as well as a judicial order enjoining “Haider from participating, directly or indirectly, in the conduct of the affairs of any ‘financial institution.’”
The Haider case is likely the last phase of this multiyear matter that saw MoneyGram fined $18 million by the Federal Trade Commission in 2009 for unfair and deceptive practices due to unacceptable oversight and management of its agents. In 2013 the company subsequently entered into a deferred prosecution agreement with the U.S. Department of Justice for aiding and abetting wire fraud and failure to maintain an effective AML compliance program. The company paid a fine of $100 million in connection with that agreement.
In another action one day before this case was made public, a federal judge sentenced a 25-year-old Bitcoin entrepreneur for his role in aiding and abetting an unregistered money services business. Charlie Shrem, who was both Founder and BSA/AML Compliance Officer for BitInstant, a New York-based Bitcoin exchange, had appropriately registered his company as a money services business but was allegedly helping another, unregistered company in its operations. Although he had implemented an AML compliance program, he had allegedly failed to file SARs on the illegal activity being conducted by the company he was aiding and abetting. The prosecution requested the court to “send a clear message to other digital currency exchange businesses” that flouting AML rules comes with consequences. He was sentenced to two years in prison.
To read the complaint in U.S. Department of Treasury v. Haider, click here.
back to top
First State Regulator Case Under Dodd-Frank Yields $12M Deal in New York
Why it matters
The first case brought by a state regulator under Section 1042 of the Dodd-Frank Wall Street Reform and Consumer Protection Act resulted in a consent judgment, with an auto lender agreeing to pay up to $12 million to New York’s Department of Financial Services (DFS). The federal statute grants states the power to bring civil actions in federal court for violations of Dodd-Frank’s consumer protection provisions. Superintendent of the DFS Benjamin Lawsky alleged that Condor Capital Corporation and its sole shareholder overcharged borrowers interest, failed to notify borrowers who made overpayments on their accounts and kept the money, and lacked appropriate data security measures. In addition to fines and penalties, the consent judgment requires that the defendants liquidate all remaining loans and surrender their licenses in all states. While a handful of other state attorneys general have similarly flexed their Dodd-Frank muscles in court (lawsuits have been filed by the Attorneys General in Connecticut, Florida, Illinois, and Mississippi), Superintendent Lawsky is the first state banking or other regulator to utilize this tool, and he encouraged other state regulators to take action. “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain restitution for consumers who were abused,” he said in a statement about the case. “We hope other regulators across the country will consider taking similar actions when warranted.” State bank regulators and other licensing authorities have become increasingly active in enforcing consumer protection laws, and likely will consider using Section 1042 in the future.
Detailed discussion
According to the DFS, Long Island-based Condor Capital and sole shareholder Stephen Baron engaged in a host of illegal activity, including violations of state law, the Truth in Lending Act (TILA), and Dodd-Frank.
Specifically, Condor did not inform “thousands” of customers that they had overpaid on their accounts. Instead, the company kept the money and engaged in a policy of failing to refund a positive credit balance absent an express request by a customer.
Condor did not notify customers when a positive credit balance remained in their account at the end of a loan period. To help conceal the positive balance, the company programmed its system to terminate customer access to their account information once a loan was terminated – even if a positive balance remained. The defendants also reported to the New York State Comptroller that they had no unclaimed property despite the positive credit balances, the DFS said.
Violations of TILA occurred when Condor calculated the interest it charged customers based on a 360-day year, applying the daily interest rate to customers’ loan accounts each of the 365 days. As a result, customers’ annual percentage rate (APR) was in excess of the one-eighth of 1 percent permitted under the federal statute, the regulator said. Making matters worse, the defendants “on multiple occasions” attempted to add the one-eighth of 1 percent interest back to customers’ accounts even after being informed by regulators that the practice violated TILA.
As for its improper data security, the DFS said that Condor left “stacks” of hard copy customer loan files lying around the common area of its offices and failed to establish policies, procedures, and controls to protect its information technology systems, leaving customer information vulnerable.
To settle the charges, the defendants admitted to violating the state and federal laws at issue. Pursuant to the final consent judgment, they agreed to pay a $3 million fine to the regulator and provide borrowers nationwide with restitution plus 9 percent interest, estimated to be between $8 million and $9 million. If the Department determines that any customer suffered identity theft as a result of Condor’s mishandling their private information, the judgment also requires Baron to pay damages.
An appointed receiver will finish the process of liquidating Condor’s loan portfolio and paying customers restitution. The defendants will then surrender their licenses in all states.
back to top