InfoBytes
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
California District Court Unseals FCA Complaint Filed Against Numerous Banks
Last week, after the government declined to intervene in the case, the U.S. District Court for the Central District of California unsealed a qui tam False Claims Act (FCA) complaint filed by a whistleblower in April 2012 against numerous banks. U.S. ex rel Hastings v. Wells Fargo Bank, N.A., No. 12-3624, Complaint (C.D. Cal. Apr. 26, 2012). The relator claims that the banks knowingly endorsed for FHA-insurance mortgage loans originated in transactions where down payment gift programs were used fraudulently. According to allegations in the complaint, the banks’ programs generated gift funds by manipulating the sales price to pass FHA down payment assistance fees onto the buyer. Further, the alleged system forced the borrower to repay the down payment gift, a violation of FHA policy. The relator alleges that the banks then submitted to HUD false certifications for the non-compliant endorsed loans, upon which HUD relied to issue FHA mortgage insurance. The relator claims that the government was required to pay, and will continue to have to pay, FHA benefits on defaulted loans that contained material violations, and seeks treble damages and penalties under the FCA, a cease and desist order against the lenders, and a civil penalty of $5,500 to $11,000 for each alleged violation of the FCA.
Federal Regulators Announce Additional Monetary Settlements in Lieu of Independent Foreclosure Review
On January 16, the Federal Reserve Board announced that two additional mortgage servicers subject to consent orders issued in April 2011 agreed in principle to a monetary resolution of allegations that the firms engaged in improper mortgage servicing and foreclosure practices. As described, the agreements in principle mirror those obtained by the Federal Reserve Board and the OCC from 10 other servicers, which were announced last week. Together the two firms will provide $232 million in direct payments to more than 220,000 borrowers whose homes were in foreclosure during 2009 and 2010. The companies also will provide $325 million in other assistance, such as loan modifications and forgiveness of deficiency judgments. On January 18, the Federal Reserve Board and the OCC announced an agreement in principle with another servicer that will provide $96 million in direct payments to more than 112,000 borrowers, and $153 million in other assistance. Under all three agreements, borrowers will be contacted by the end of March about their exact payout, which could range from hundreds of dollars to $125,000, depending upon the type of alleged servicing error.
California District Court Holds Assignee Indirect Auto Finance Company Not Subject to FDCPA
On January 9, the U.S. District Court for the Central District of California held that an indirect auto finance company that took assignment of a retail installment sales contract from an automobile dealer is not a debt collector subject to the FDCPA. Tu v. Camino Real Chevrolet, No. 12-9456, 2013 WL 140278 (C.D. Cal. Jan. 9, 2013). As the court explained, FDCPA Section 1692a(6) defines a “debt collector” to include any person who uses any instrumentality of interstate commerce or the mails for the principle purpose of enforcing security interests. In this case, a customer purchased and financed a car with a dealer who subsequently assigned the retail installment sales contract to an auto finance company. When the borrower fell behind on his payments and the finance company tried to collect the debt, the borrower sued the finance company, alleging violations of the FDCPA. The court held that the finance company was primarily in the business of accepting installment sales contracts with its debt collection activities ancillary to its financing activities. Therefore, the finance company is not a debt collector as defined by the FDCPA. The court dismissed the borrower’s claims.
DOJ Announces Redlining Enforcement Action against Community Bank
On January 15, the Department of Justice (DOJ) announced that it reached a settlement with a Michigan community bank regarding alleged redlining practices. In its complaint, the DOJ charged that between 2006 and 2009, the bank served the credit needs of white neighborhoods in the Saginaw and Flint, Michigan metropolitan areas to a significantly greater extent than it served the credit needs of majority African-American neighborhoods. Under the terms of the consent order, the bank is required to open a loan production office in an African-American neighborhood in Saginaw, invest $75,000 in a special financing program to increase the amount of credit the bank extends to majority African-American neighborhoods in and around Saginaw, invest $75,000 in partnerships with organizations that provide credit, financial, homeownership, and/or foreclosure prevention services to the residents of those neighborhoods, and invest $15,000 in outreach that promotes the bank’s products and services to potential customers in those neighborhoods.
Federal Regulators Announce BSA/AML and Derivatives Trading Enforcement Actions Against Large Bank.
On January 14, the Federal Reserve Board and the OCC issued two consent orders against a large international bank and its trust company over alleged deficiencies in its Bank Secrecy Act and Anti-Money Laundering (BSA/AML) compliance programs. Under the Federal Reserve Board Order, the bank is required to conduct a full review of its compliance program and submit written reports to the Federal Reserve Bank of New York regarding the review’s findings and recommendations. Any proposed improvements are subject to approval by the Federal Reserve Bank of New York. The OCC Order identifies “critical deficiencies” in the bank’s BSA/AML compliance programs with respect to suspicious activity reporting, transaction monitoring, customer due diligence, and internal control implementation and requires specific corrective actions in response. Neither order requires a civil money penalty. On the same day, the Federal Reserve Board and the OCC issued consent orders concerning the bank’s derivatives trading activity. Under those orders, the bank must take corrective action as to its risk-management program, finance and internal audit functions, and Chief Investment Office, but the orders do not include a monetary settlement. The Federal Reserve Board stated that the corrective actions are necessary in light of disclosed, significant losses in a large synthetic credit portfolio managed by the Chief Investment Office. An OCC report found that the bank lacked adequate oversight to protect itself from such material risk, and had other inadequate risk management processes, trade valuation controls, and audit processes.
Retail Customers Obtain Unusually Favorable Settlement in Zip Code Collection Case
On January 11, the U.S. District Court for the Northern District of California approved a settlement between a retailer and a class of customers to resolve allegations that the retailer violated the California Song-Beverly Credit Card Act by collecting customer zip codes as part of credit card purchase transactions and storing that information in a customer databases. Burdewick v. Kohl’s Dep’t Stores, Inc., No. 12-119, Final Order and Judgment (Jan. 11, 2013). The settlement is the most recent in a series following the California Supreme Court’s 2011 decision in Pineda v. Williams-Sonoma Stores Inc. that zip codes constitute "personal identification information" under the Act. In this case, class members can submit claims to obtain a gift card from a common $650,000 fund. The exact amount of the gift card will depend upon the number of valid claims, but actual payments are expected to far exceed the $10-$20 amounts typically provided by most similar settlements to date. Moreover, the settlement places no restriction on the use or transferability of the cards. The court also approved a $215,000 award to class counsel, and a $7,500 incentive award to the class representative.
State Law Update: Michigan Amends Rental-Purchase Agreement Act
Last month, Michigan enacted HB 5892, which makes several amendments to the state’s Rental-Purchase Agreement Act. Effective January 3, 2013, a lessor is prohibited from requiring numerous fees, including (i) any processing fee, (ii) a periodic payment or late fee for a rental period beginning after the lessee has returned or surrendered the leased property to the lessor or the lessor’s agent, and (iii) any charge or fee for reinstatement of the rental-purchase agreement in addition to or in excess of those expressly permitted by the Act. The bill also revised the conditions under which a lessee who fails to make timely periodic payments may reinstate a rental-purchase agreement without losing any rights or options. The bill included a revised sample rental-purchase agreement form to reflect the enacted changes.
President Signs Video Privacy Protection Act Amendments
On January 10, President Obama signed H.R. 6671, which amends the Video Privacy Protection Act to facilitate compliance for modern video service providers. The Act was originally passed in 1988 to limit the disclosure of information about consumers’ “video tape rental or sales records,” and its application to certain modern video service providers (e.g. Netflix) is not clear. The amendments allow such providers to obtain consumer consent to disclosure through electronic means using the Internet. Such consent must be in a form distinct and separate from any form setting forth other legal or financial obligations of the consumer. Consumers can provide consent in advance, but not for more than two years or until consent is withdrawn by the consumer, and service providers must provide an opportunity for the consumer to withdraw consent on a case-by-case basis or to withdraw from ongoing disclosures, at the consumer's election.
OFAC Issues Advisory on Efforts to Evade Iran Sanctions
On January 10, the Office of Foreign Assets Control (OFAC) issued an advisory to highlight practices being used to evade sanctions on Iran, including the use of third-country exchange houses or trading companies that are acting as money transmitters to process funds transfers through the United States in support of unauthorized business with Iran. According to the advisory, the transactions at issue omit references to Iranian addresses and omit the names of Iranian persons or entities in the originator or beneficiary fields. Funds are then transmitted from an exchange house or trading company located in a third country to or through the United States on behalf of an individual or company located in Iran or on behalf of a U.S.-designated person without referencing the involvement of Iran or the designated persons. OFAC urged U.S. financial institutions to (i) monitor payments involving the third-country exchange house or trading company that may be processing commercial transactions related to Iran, and requesting additional information from correspondents on the nature of such transactions and the parties involved, (ii) conduct account and/or transaction reviews for individual exchange houses or trading companies that have repeatedly violated or attempted to violate U.S. sanctions against Iran, and (iii) contact their correspondents that maintain accounts for, or facilitate transactions on behalf of, a third-country exchange house or trading company that engages in any of the practices identified in the advisory.
Two California Appellate Courts Invalidate Auto Installment Contract Arbitration Clauses
Recently, the California Court of Appeals for the First and Second Appellate Districts affirmed lower court orders denying two automobile dealerships’ petitions to compel arbitration, holding that the arbitration clause in the vehicle retail installment sales contracts (RISC) was procedurally and substantively unconscionable. Norton v. Ford of Santa Monica, B237273, 2012 WL 6721400 (Cal. Ct. App. Dec. 28, 2012); Natalini v. Import Motors, Inc., A133236, 2013 WL 64611 (Cal. Ct. App. Jan. 7, 2013). Both trial courts rejected the dealerships’ motions to compel arbitration of complaints alleging multiple causes of action, including violations of the California Consumer Legal Remedies Act, Automobile Sales Finance Act, and Business and Unfair or Deceptive Acts or Practices Act, holding that the arbitration clauses in the RISCs were unconscionable. On appeal, the courts agreed that the arbitration provisions were substantively unconscionable because they were systematically structured to provide only the dealer a right and opportunity to appeal and, because the arbitration agreement provided no fee waiver for the consumer, the financial ramifications of the clause favored the corporate dealership over the individual consumer. Both courts also held that the arbitration clauses were procedurally unconscionable because they contained elements of surprise, with the First Appellate District also holding that the RISC contained elements of oppression since the contract was one of adhesion. Applying a “sliding scale” to the relative importance of each element, the courts found the arbitration clauses sufficiently substantively and procedurally unconscionable and upheld the trial courts’ denial of the dealerships’ petitions to compel arbitration.