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House Financial Services Committee: CFPB Removed Safeguards to Achieve Political Goals
On January 20, Republicans on the House Committee on Financial Services issued a report alleging that the CFPB removed a number of safeguards from the claims process after it secured its first settlement with an auto finance company and the company’s subsidiary bank in 2013. The Committee’s most recent report follows a November 2015 report in which the Republican staff (i) criticized the CFPB’s approach for determining discrimination in the auto lending industry; and (ii) questioned the CFPB’s authority to bring claims against banks involved in indirect auto lending under ECOA on a disparate impact theory. According to the more recently published report, the CFPB failed to confirm that funds from the 2013 settlement would be distributed to eligible recipients. Specifically, the report states that when CFPB Director Cordray announced that $80 million would be paid to consumers affected by the auto finance company’s practices, he “did not know the race of a single borrower in any vehicle finance contract purchased by [the company].” The report further comments that, “Bureau officials knew that in order to generate a sufficient number of check recipients, they would have to remove a number of safeguards from the claims process, including confirming the race of claimants alleged to have been discriminated against, thus making it more likely that non-minority consumers would receive remuneration.”
CFPB Takes Action Against Colorado-Based "Buy-Here Pay-Here" Auto Dealer
On January 21, the CFPB filed a consent order to resolve allegations that a Colorado-based subprime auto dealer violated the TILA and the CFPA by engaging in abusive financing and marketing schemes. Specifically, the CFPB alleged that, from January 2012 through May 2014, the auto dealer (i) failed to make purchase prices available to credit consumers until the very end of the transaction; (ii) hid finance charges and improperly disclosed the resulting APRs; (iii) refused to negotiate car prices with credit consumers; and (iv) used abusive marketing tactics by failing to disclose to purchasers the “complete and accurate credit terms” of the automobile financing. The CFPB’s consent order requires the auto dealer to (i) pay $700,000 in redress to consumers affected by its practices; (ii) clearly and prominently post the purchase price on all automobiles; (iii) stop misrepresenting interest rates, finance charges, amounts financed, other credit terms, or any other fact material to the financing of a motor vehicle; and (iv) disclose in writing to the consumer information concerning the terms of the financing offer (including the APR), the purchase price of the car, the total number of payments required before the consumer owns the car, and the duration of the purchase financing contract. The CFPB suspended its civil money penalty of $100,000 as long as redress is paid.
FDIC Seeks Comments on Revised Proposed Rule That Would Amend How Small Banks are Assessed for Deposit Insurance
On January 21, the FDIC issued a Notice of Proposed Rulemaking that would amend how FDIC-insured banks with less than $10 billion in assets are assessed for deposit insurance. Specifically, the proposed rule would “update the data and revise the methodology that the FDIC uses to determine risk-based assessments for these institutions to better reflect risks and to help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts.” The proposal, which is intended to be revenue neutral, revises an initial June 2015 proposal to, among other things, (i) use a brokered deposit ratio, as opposed to a core deposit ratio, to calculate assessment rates; (ii) remove the existing brokered deposit adjustment for established small banks; and (iii) revise the one-year asset growth measure. The comment period will be open for 30 days upon publication in the Federal Register.
SEC Announces Settlement with Loan Servicer for Misstating Financial Results
On January 20, the SEC announced a settlement with a residential and commercial loan servicer for allegedly misstating its financial results for the last three quarters of 2013 and the first quarter of 2014, the consequence of “an internal accounting controls failure that caused the company to rely on a valuation methodology that did not conform to U.S. Generally Accepted Accounting Principles (GAAP).” According to the SEC, the servicer relied on a related party’s improper valuation of mortgage servicing rights that had been acquired from the servicer itself. In addition, the servicer falsely represented in its Form 10-K that it had policies, procedures, and practices to ensure that its Executive Chairman was recused from approving related party transactions when, in fact, it had no such written policies or procedures: “[A]lthough the Executive Chairman had a practice of recusing himself from negotiations and certain approvals of related party transactions, that practice was inconsistent and ad hoc.” Without admitting or denying the SEC’s findings, the servicer agreed to pay a $2 million civil money penalty to settle the charges.
Supreme Court: Settlement Offers Do Not Moot Class Actions, But...
The United States Supreme Court on Wednesday resolved the long-standing circuit split on whether an offer to satisfy the named plaintiff’s individual claims is sufficient to render a case moot when the complaint seeks relief on behalf of the plaintiff and a class of similarly situated individuals. In a 6-3 decision authored by Justice Ginsburg, the Supreme Court held that an unaccepted settlement or Rule 68 offer cannot moot a class action. However, the Court refused to address and explicitly left open the question of whether its ruling would be different if a defendant deposited the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then entered judgment for the plaintiff in that amount. By leaving this question open, defendants in a position to unilaterally provide complete relief may still be able to “pick off” putative class representatives and avoid class action suits.
In Campbell-Ewald Co. v. Gomez, No. 14-857 (Jan. 20, 2016), the United States Navy contracted with Campbell-Ewald Company to develop a multimedia recruiting campaign that included sending text messages to young adults, but only those who had opted in to receiving these type of marketing solicitations. Campbell’s subcontractor generated a list of cellular phone numbers and transmitted the Navy’s message to over 100,000 recipients, allegedly including some people who had not opted into receiving such solicitations. The plaintiff filed a nationwide putative class action alleging that Campbell violated the Telephone Consumer Protection Act (TCPA) and seeking treble statutory damages, attorneys fees and costs, and an injunction. Campbell attempted to moot the claim by offering (i) treble statutory damages for each unsolicited text it sent to the sole plaintiff; and (ii) a stipulated injunction that it would no longer violate the TCPA. Campbell actually made two offers, one in writing conveyed to the plaintiff, and the other substantively the same but under the auspices of Rule 68. Under Rule 68, if the judgment is not more favorable than the unaccepted settlement offer, the offeree must pay the costs incurred after the settlement offer was made. Both offers were made prior to the plaintiff moving for class certification. The plaintiff did not accept the offers and allowed Campbell’s Rule 68 submission to lapse after the 14 day deadline specified in the Federal Rules. Campbell then moved to dismiss under Rule 12(b)(1), arguing that its offers mooted the plaintiff’s individual claim by providing him complete relief and that because the plaintiff had not moved for class certification prior to his claim becoming moot, the putative class action claims also were moot. The district court denied the motion and the Ninth Circuit affirmed.
The Supreme Court affirmed. Writing for the majority, Justice Ginsburg held that the unaccepted settlement offers did not moot the case. Relying upon language from Justice Kagan in a dissenting opinion, the majority reasoned that an unaccepted settlement offer, like any unaccepted contract offer, is a legal nullity with no operative effect. “In short, with no settlement offer still operative, the parties remained adverse; both retained the same stake in the litigation they had at the outset.”
Justice Thomas wrote a concurring opinion relying on the common-law history of formal tenders, i.e., deposit of the entire claim amount in trust for the plaintiff. However, his opinion seems to suggest that such formal tenders would suffice to moot the action. The conservative dissenters would have held any offer, tender or unilateral transfer that fully satisfies the plaintiff’s claims would moot the action. Indeed, even the majority distinguished actual transfer and tender cases from the case here. Thus, there still remains some avenues for attempting to moot consumer lawsuits.
CFPB Seeks Applications for Advisory Board and Advisory Councils
On January 15, the CFPB announced that it is accepting applications for membership on its Consumer Advisory Board (Board) and two other advisory groups, the Community Bank Advisory Council, and the Credit Union Advisory Council (collectively, Advisory Councils). The Board and Advisory Councils are intended to give small financial institutions the opportunity to provide the CFPB with information regarding emerging trends and practices in the consumer financial products and services industries. In the fall of 2016, seven seats on the Board will become vacant, and eight seats on each of the Advisory Councils will become vacant. Applications are due February 29, 2016, according to the CFPB’s publication in the Federal Register.
FDIC Issues Letter Announcing Nationwide Seminars for Bank Officers and Employees
On January 19, the FDIC issued FIL-6-2016 announcing that, between February 23, 2016 and December 5, 2016, it will conduct six identical live seminars regarding FDIC deposit insurance coverage for bank employees and bank officers. In addition to the live seminars, the FDIC posted to its YouTube channel three separate seminars, entitled (i) Fundamentals of Deposit Insurance Coverage; (ii) Deposit Insurance Coverage for Revocable Trust Accounts; and (iii) Advanced Topics in Deposit Insurance Coverage. Both the live seminars and the seminars readily available on the YouTube channel will provide bank employees and officers with an understanding of how to calculate deposit insurance coverage.
Iran Sanctions: Treasury Comments on JCPOA Implementation Day
On January 16, the Department of the Treasury issued a statement regarding Implementation Day under the Joint Comprehensive Plan of Action (JCPOA), the plan reached between the P5+1 (the United States, China, France, Russia, the United Kingdom, and Germany), the European Union, and Iran concerning Iran’s nuclear program. In response to Iran taking the appropriate nuclear-related measures, the United States followed through on lifting nuclear-related “secondary sanctions” on Iran, which included certain financial and banking-related sanctions. To summarize the effect of Implementation Day, OFAC issued guidance and FAQs. As outlined in the FAQs and in addition to lifting the nuclear-related “secondary sanctions,” the United States removed more than 400 individuals and entities from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List). Still, as Treasury Secretary Lew noted, “other than certain limited exceptions provided for in the JCPOA, the U.S. embargo broadly remains in place, meaning that U.S. persons, including U.S. banks, will still be prohibited from virtually all dealings with Iranian entities.”
FinCEN Updates FATF AML/CFT Deficient Jurisdictions List
On January 19, FinCEN issued an advisory, FIN-2016-A001, to provide financial institutions with guidance on reviewing their obligations and risk-based approaches with respect to certain jurisdictions. According to the advisory, on October 23, the Financial Action Task Force (FATF) updated two documents identifying the following: (i) jurisdictions that are either subject to the FATF’s call to apply countermeasures, or to Enhanced Due Diligence (EDD) due to their AML/CFT deficiencies; and (ii) jurisdictions with AML/CFT deficiencies. FinCEN’s recently issued advisory summarizes the changes made to the respective lists and reiterates that a financial institution must file a Suspicious Activity Report if it “knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation.”
FHFA Issues Final Rule Amending Regulations Governing Eligibility for FHLBank Membership
On January 12, the FHFA issued a final rule amending membership eligibility in the Federal Home Loan Bank (FHLBank) system. The final rule, which follows the FHFA’s September 2014 proposal to revise the requirements for financial institutions applying for and retaining membership in the FHLBank system, removes two provisions from the proposal “that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.” In addition, the final rule defines “insurance company” to exclude captive insurers, rendering such entities ineligible for FHLBank membership. According to the FHFA, a captive insurer’s primary business is to underwrite insurance for its “parent company or for other affiliates, rather than for the public at large.” According to the FHFA, “REITs and other entities have been forming captives solely for the purpose of providing ineligible institutions access to Bank advances,” and the FHFA’s final rule is “intended to prevent further use of captives to circumvent the membership eligibility of the Bank Act.” The final rule allows current captive insurer members who joined prior to the 2014 proposal up to five years to terminate their membership, and captive insurers who joined after the issuance of the 2014 proposal have one year to terminate. The final rule becomes effective 30 days from publication in the Federal Register.