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Financial Reform Group Files Suit Challenging Largest DOJ RMBS Settlement
On February 10, Better Markets, a public interest non-profit organization, announced the filing of a lawsuit in the U.S. District Court for the District of Columbia challenging a November 2012 settlement obtained by the DOJ and several state attorneys general, which resolved allegations that a large bank and certain institutions it acquired misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. The suit claims, in short, that by resolving the allegations through a civil settlement without seeking any judicial review and approval, the DOJ violated the Constitution’s separation of powers doctrine. In addition, the suit claims, the DOJ’s failure to commence a civil action (i) violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and (ii) constituted an arbitrary and capricious action in violation of the Administrative Procedures Act. The complaint asks the court to declare the agreement unlawful and invalid and to issue an injunction that would prevent the DOJ from enforcing the agreement until the agreement is reviewed and approved by a court.
SDNY Rejects SEC's Proposed Alternative Service For Two Chinese Nationals
On January 30, the U.S. District Court for the Southern District of New York denied the SEC’s motion for an order authorizing alternative means of service for two Chinese nationals residing in the People’s Republic of China. SEC v. China Intelligent Lighting & Electronics, Inc., No. 13 CIV. 5079, 2014 WL 338817 (S.D.N.Y. Jan. 30, 2014). The SEC moved for the order after it was unable to serve two individual defendants in a securities fraud case by means of the Hague Convention on the Service Abroad of Judicial and Extra-Judicial Documents in Civil and Commercial Matters. The court agreed that alternative service would be appropriate, but rejected the SEC’s proposed method of alternative service: publication in the International New York Times and via email. The court held that alternative service is acceptable if it (i) is not prohibited by international agreement, and (ii) if it comports with constitutional notions of due process. Although no international agreement would prevent the SEC’s proposed methods of service, the court held the SEC failed to demonstrate such service was “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” The court held that the SEC failed to provide evidence that either method of service would actually reach the defendants—it did not provide any information about the distribution of the newspaper and failed to provide evidence the email addresses were accurate and in use by the defendants. The court denied the SEC’s motion without prejudice.
Texas Supreme Court Clarifies HELOC Fee Cap Decision
On January 31, the Texas Supreme Court released a January 24 supplemental opinion clarifying a June 2013 opinion in which it invalidated state regulations that (i) defined “interest” with regard to home equity loans to exclude lender-retained fees, and (ii) would have allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2014 WL 349790 (Tex. Jan. 24, 2013). The Texas Bankers Association sought clarification as to whether interest paid at closing falls outside the definition of interest, noting (i) that interest can be paid at closing for part of a payment period, calculated per diem, until the regular payment date, and (ii) that a borrower may pay discount points at closing to lower the interest rate for the term of the loan. In its supplemental opinion, the court held that per diem interest is still interest, even if prepaid, and that legitimate or “bona fide” discount points to lower the loan interest rate are, in effect, a substitute for interest. The court further explained that true discount points are not fees “necessary to originate, evaluate, maintain, record, insure, or service,” but are an option available to the borrower and thus are not subject to the three percent cap. The court also reaffirmed its holding requiring borrowers to be present at closing. It rejected the bankers’ argument that requiring a power of attorney, like other closing documents, to be executed “at the office of the lender, an attorney at law, or a title company” can be a hardship on certain borrowers for whom such locations are not readily accessible, explaining that such hardships are a public policy issue that should be addressed by the framers and ratifiers of the state Constitution.
Ninth Circuit Affirms Dismissal Of Credit Card Fee Constitutional Challenge
On January 21, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a constitutional challenge to certain credit card fees. In re Late Fee and Over-Limit Fee Litig., No. 08-15218, 2014 WL 211729 (9th Cir. Jan. 21, 2014). A group of credit card holders filed a class action suit claiming that credit card overlimit fees and late fees are analogous to punitive damages imposed in the tort context, and therefore such fees are subject to substantive due process limits. The card holders asserted that because banks are compensated through high penalty interest rates for the lost time value and collection costs associated with any breach of the credit contract, the other charges are duplicative and therefore punitive. The court explained that its decision hinged on the similarities and differences between liquidated damages and punitive damages, and determined that the penalty clauses at issue originate from the parties’ private credit card contracts, and are distinct from the jury-determined punitive damages awards. The court held, therefore, that the “jurisprudence developed to limit punitive damages in the tort context does not apply to contractual penalties, such as the credit card fees at issue in this case.”
CFPB Suit Against Debt Settlement Firm Will Proceed
On January 10, a federal judge denied a debt settlement company's motion to dismiss a CFPB enforcement action pending in the Central District of California, in which the company challenged the constitutionality of the CFPB’s powers. Consumer Fin. Protection Bureau v. Morgan Drexen, Inc., No. 13-1267, slip op. (C.D. Cal. Jan. 10, 2014). The CFPB action asserts violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA), alleging that the company disguised illegal upfront fees assessed for debt settlement services as bankruptcy-related charges and deceived consumers into believing they would become debt free when only “a tiny fraction” of its customers actually do. In denying the company's motion to dismiss, the California court found that the CFPB’s lawsuit asserts valid claims under both the TSR and the CFPA, and that the agency’s formation and exercise of authority is constitutionally permissible under Articles I, II, and III. The debt settlement company previously raised in a separate lawsuit the constitutional claims and claims that the CFPB had “grossly overreach[ed] its authority” in the investigation on which the enforcement action is based, asserting that the agency lacks authority to regulate the law firms supported by the debt settlement service provider and that the information demanded by the CFPB—disclosed to lawyers by clients seeking advice regarding bankruptcy—was protected by the attorney-client privilege. That suit was dismissed in October 2013 in favor of the CFPB’s California-filed action.
Texas Reverse Mortgage Constitutional Amendment Takes Effect
On November 22, an amendment to the Texas constitution took effect to permit the use of a reverse mortgage for the purchase of a homestead property. The amendment was approved by Texas voters on November 5. Under the amendment, a borrower must (i) occupy the homestead property as a principal residence within a specified time after the reverse mortgage closing and (ii) complete financial counseling before the reverse mortgage closing. The amendment requires a lender to provide to a prospective borrower a detailed disclosure of conduct that could lead to foreclosure, including among other things, the failure to pay property taxes.
Sixth Circuit Rejects HUD Test For RESPA Affiliated Business Safe Harbor
On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
CFPB Weighs In On New York Tribal Lending Case
On November 13, the CFPB filed an amicus brief in a Second Circuit case stemming from efforts of the New York Department of Financial Services (DFS) to crack down on lenders offering allegedly illegal payday loans. Certain online lenders affiliated with Native American tribes sought to enjoin the DFS from interfering with their payday lending activities, claiming that the state’s actions violate the tribes’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. The federal district court denied relief last month, holding that the plaintiffs failed to identify an applicable “express federal law” prohibiting the state’s activity and that the tribes are subject to the state’s anti-usury laws, which the plaintiffs’ appealed.
In its amicus brief, the CFPB urges the court to reject the plaintiffs’ contention that the Consumer Financial Protection Act (CFPA) prevents the state from applying its consumer-protection laws to tribally-affiliated lenders, arguing instead that the CFPA “expressly preserves states’ varying consumer-protection laws as applied here, including those that would outlaw loans with certain terms.” According to the CFPB, “[a]lthough the CFPA recognizes that tribes, like states, have a role in regulating consumer financial products and services, and that the CFPB will coordinate with tribes and states in protecting consumers, that has no bearing on whether tribally affiliated lenders must comply with state laws.”
Second Circuit Revives Terrorism Victims' Suit Against Foreign Bank
On October 18, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s judgment and held that subjecting a foreign bank to personal jurisdiction in New York was within the reach of New York’s long-arm statute and comported with due process protections provided under the U.S. Constitution. Licci v. Lebanese Canadian Bank SAL, No. 10-1306, 2013 WL 5700963 (2d Cir. Oct. 18, 2013). The complaint, brought by individuals who were harmed by rocket attacks in Israel carried out by the terrorist group Hezbollah, alleges that the foreign bank used its correspondent bank account in New York to wire millions of dollars to Hezbollah, knowing that the money would enable the group to carry out terrorist attacks. The New York Court of Appeals had accepted the Second Circuit’s certification question concerning the scope of New York’s long-arm statute and explained that a foreign bank’s use of a New York correspondent account to execute dozens of wire transfers is sufficiently purposeful conduct to constitute a “transaction of business” under the state’s long-arm statute. After resolving the question of personal jurisdiction under state law, the Second Circuit also held that subjecting the defendant bank to personal jurisdiction did not violate due process under the Constitution, finding that the alleged conduct—the deliberate and “repeated use of New York’s banking system” for the purpose of “repeated, intentional execution of U.S.‐dollar‐denominated wire transfers”—satisfied the minimum contacts test established by the Supreme Court in International Shoe. The court further noted that the bank should have foreseen that “it might be subject to the burden of a lawsuit” in that same forum for wrongs related to, and arising from, that use. The Second Circuit specifically noted that a foreign defendant’s “mere maintenance” of a correspondent account in the U.S. is not by itself sufficient to support the constitutional exercise of personal jurisdiction over the account-holder.
D.C. Federal Court Dismisses Lawyer, Service Provider Challenge to CFPB Probe
On October 17, the U.S. District Court for the District of Columbia granted the CFPB’s motion to dismiss an attorney and service provider’s lawsuit challenging the authority of the CFPB. The court declined to exercise jurisdiction in the case and did not reach the merits of the service provider’s constitutional challenge. The court agreed with the CFPB’s argument that the service provider could obtain complete relief on its constitutional claim in an enforcement action currently pending in the Central District of California, and thus, injunctive and declaratory relief in the D.C. District Court was inappropriate. The court also held that the attorney, who is not a party to the Central District of California action, lacked standing to raise her claim, because she had failed to demonstrate a substantial probability of being forced to produce privileged information to the Bureau.