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Vehicle Financing Company Owners Plead Guilty to $11 Million Fraud
On May 25, the Massachusetts U.S. Attorney’s Office announced that two vehicle financing company owners (Defendants) entered guilty pleas admitting to counts of mail and wire fraud. The Defendants’ company raised capital by securing investments from individuals to fund its operations. In 2015, the DOJ filed a criminal complaint alleging the Defendants represented to investors that retirement account funds could be rolled over into investments held by the company without triggering the payment of income taxes on the transferred monies. Investors allegedly transferred retirement funds based on these representations, and the Company ultimately lost more than $11 million of the investors’ money. However, the Defendants allegedly never obtained approval from Treasury for the company to act as an authorized custodian or trustee of retirement funds as required in order for the rules permitting tax-free transfers to apply, and therefore solicited the investment funds based on “deceptive acts, false and fraudulent statements and misrepresentation of material facts.” The company ultimately filed for bankruptcy. The plea agreements stipulate maximum penalties of “20 years in prison, three years of supervised release, a fine of $250,000 or twice the gross gain or loss, whichever is greater, a mandatory special assessment of $100, restitution, and forfeiture to the extent charged in the Indictment” and can be accessed here and here. Sentencing is set for September 20, 2017.
Financial Services Associations Comment on CFPB’s HMDA Proposal
As previously covered in an InfoBytes Special Alert, the CFPB issued a request for comment on its proposal to amend the 2015 HMDA rule, which would incorporate changes primarily for the purpose of clarifying data collection and reporting requirements. The request, which closed for public comment on May 25, received 46 public comments from several banking and credit union industry associations.
Mortgage Bankers Association (MBA). On May 25, the MBA—a national association representing the real estate financial industry—submitted a comment letter outlining outstanding issues and calling upon the Bureau to provide clarifying and technical corrections to Regulation C, which implements HMDA. The MBA outlined the following points, among others, for consideration:
- delay the effective date of the Final Rule and amendments pending completion of key actions in the following areas: “HMDA data collection portals; publication and implementation of data quality edits; geocoder production release and integration specs; data privacy concerns; resubmission expectations; updated filing instructions guides; guidance on reporting and collection issues; impacts of the proposed amendments; uniform residential loan application; government monitoring information”;
- address recommendations pertaining to multifamily lending: (i) “multifamily loans should not be subject to HMDA reporting”; (ii) “purchases and assumptions of multifamily loans should be exempt from introductory rate period reporting”; (iii) “the CFPB should accept simplified reporting from smaller-volume HMDA reporters, particularly smaller-volume multifamily reporters”; and (iv) “further consideration and clarification of the multifamily definition is needed”; and
- a one-year delay would allow the CFPB to address privacy concerns that “might dictate that certain data not be disclosed publicly,” thereby giving the Bureau time to “reconsider whether the many data points required under Dodd-Frank . . . should be required.”
According to the CFPB’s request for comment, most of the amendments in the Final Rule are to go into effect January 1, 2018; however, the MBA noted that data collection must commence in 2017 for loan applications that may become reportable in 2018. Therefore, the MBA urged the Bureau to delay implementation for at least one year to allow sufficient time for data collection and reporting which would give the CFPB “time to provide much-needed information and materials, and to allow HMDA reporters more time to finalize and implement the changes effectively.”
American Bankers Association (ABA). Separately, on May 25, the ABA submitted a comment letter opining that many of the Bureau’s “technical corrections, clarifying amendments or minor changes” are “substantive in nature” and require a more comprehensive and formal process to “identify industry questions and proposed solutions.” Specifically, among other things, the ABA emphasized the following recommendations:
- the January 1, 2018 effective date of the Final Rule should be “suspended immediately” in order to “promote the orderly, coordinated, and thorough consideration and resolution of all the interrelated issues presented and to make sure that all of the privacy and security issues are adequately addressed”;
- the CFPB should consider updating, rather than discontinuing, its reference tool for lenders entitled A Guide to HMDA: Getting it Right;
- several categories require further clarification: loans in process or loans originated before but purchased after the rule’s effective date; multifamily dwellings; home improvement loans; temporary financing; the threshold for reporting; counteroffers; applicant or borrower’s reported income; the annual percentage rate; rate spreads and rate set dates; reporting when there are no closing disclosures; corrected disclosures; the unique loan identifier; the geocoding tool’s use; and information pertaining to ethnicity and race; and
- pending guidance on error resolution and software required for reporters should be finalized “as soon as possible,” and regulations on privacy and data security should be proposed “with the utmost speed.”
“Piecemeal corrections based on informal and anecdotal evidence only adds to regulatory burden, which adds costs to borrowers and reduces access to mortgage credit,” the ABA noted.
Department of Education Releases Phase II Amending the Federal Student Loan Servicing Solicitation
On May 19, the U.S. Department of Education (Department) announced the formal amendment of Phase II of the federal student loan servicing solicitation. According to a fact sheet issued by the Department, the amendment outlines plans to select a single student loan servicer that all borrowers will interact with on a unified platform. This is a departure from the current system in which nine servicing companies handle borrowers’ payments of their federal student loans. The amendment further clarifies and lists the Department's expectations of the eventual servicer. U.S. Secretary of Education Betsy DeVos commented on the announcement, “[w]ith changes in the new amendment, we have simplified the process to ensure meaningful borrower protections while saving taxpayers more than $130 million over the next five years. Savings are expected to increase significantly over the life of the contract. Borrowers can expect to see a more user-friendly loan servicing interface, shorter email and call response times and an improved payment application method that will maximize the benefit of each payment the borrower makes. Our amendment makes no changes to repayment plan requirements.”
As previously covered in InfoBytes, DeVos also rolled back Obama administration policies developed to guide the way in which the federal government contracts with outside servicers.
National Fair Housing Alliance Settles Lending Discrimination Claims Brought Against National Bank
On May 19, the National Fair Housing Alliance (NFHA) announced it had reached an agreement with a major national bank (Bank) related to a housing discrimination complaint the NFHA filed with HUD in 2014. The complainant alleges that NFHA conducted a series of tests over a period of several months revealing a “pattern of discriminatory conduct.” Latino prospective qualified borrowers were often quoted higher monthly payment and closing costs and were denied opportunities to speak with loan officers. The complainants also cited data showing that the number of purchase loan applications received from Latinos had declined over the past few years. While the Bank denied all allegations in the complaint, it agreed to contribute more than $400,000 towards fair housing efforts in South Carolina and nationwide. Separately, the original complaint led to HUD filing charges against the Bank last December on behalf of the NFHA for lending discrimination—citing, in particular, that prospective Latino borrowers were treated less favorably than non-Latinos, in violation of the Fair Housing Act.
City of Philadelphia Sues National Bank for Discriminatory Lending Practices
On May 15, the City of Philadelphia filed a lawsuit against a national bank (Bank) alleging that it violated the Fair Housing Act by engaging in discriminatory lending practices that targeted minority borrowers. (See City of Phila. v. Wells Fargo & Co., Case No. 2:17-cv-02203-LDD, 2017 WL 2060317 (E.D. Pa.).) The complaint alleges that beginning in 2004 and continuing through the present, the Bank engaged in “a continuous and unbroken discriminatory pattern and practice of issuing higher cost or more onerous mortgage loans to minority borrowers” while offering better terms to similarly situated non-minority borrowers. The City’s complaint alleges discrimination under both disparate treatment and disparate impact theories. The City claims that the Bank has a long history of both redlining (the practice of refusing to make loans in minority neighborhoods) and reverse redlining (the practice of targeting higher cost loans or loans with less favorable terms to minority neighborhoods). The complaint further describes a pattern of knowing and intentional discrimination by the Bank, relying on statistical analyses finding, among others, that: (i) a loan for a home in a predominantly minority neighborhood was 4.7 times more likely to go into foreclosure than a loan on a home in a mainly white neighborhood; (ii) African American and Latino borrowers were more than twice as likely to receive a high-cost loan as white borrowers; and (iii) when credit scores were factored in for borrowers with FICO scores of more than 660, African American borrowers were more than 2.5 times more likely than white borrowers to receive a high cost loan, and Latino borrowers more than twice as likely. As a result of the foreclosures and vacant homes, the City says it suffered a suppression of property tax revenue and increased cost of providing services such as police, fire fighting, and other municipal services.
City of Miami Suit. As previously covered in InfoBytes, the Supreme Court recently ruled that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the Fair Housing Act (FHA) against lenders for injuries allegedly flowing from discriminatory lending practices, although the five-justice majority held that such injuries must be proximately caused by the FHA violations. The Supreme Court returned the City’s lawsuit to the U.S. Court of Appeals for the Eleventh Circuit because, while the Court found that the City’s injuries appeared to be a foreseeable result of the lender’s practices, this was not enough to establish proximate cause. Therefore, it remains to be seen whether the City can show proximate cause.
CFPB Issues Report Finding That 90 Percent of Student Borrowers Are Not Enrolled in Income Driven Repayment Plans
On May 16, the CFPB published analysis of a student loan industry data sample, which indicates that nine out of ten of the highest-risk borrowers are not enrolled in federal affordable repayment plans. The report, entitled Update from the CFPB Student Loan Ombudsman, is based on data the Bureau received in response to a voluntary request (Appendix C) for information it sent to several student loan servicers seeking information regarding practices used on borrowers transitioning from default to income-driven repayment plans (IDR). As previously reported in InfoBytes, the 2016 report highlighted the fact that “the majority of borrowers who cure a default and seek to enroll in IDR do so by first rehabilitating their defaulted debt. However, these borrowers describe a range of communication, paperwork processing, and customer service breakdowns at every stage of the default-to-IDR transition.” The Bureau found that data provided in response to its request support the following preliminary observations:
- More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making IDR payments within the first nine months after “curing” a default.
- Borrowers were five times more likely to default for a second time if they did not enroll in an IDR.
- As previously projected in 2016, nearly 30 percent of borrowers who exited default through rehabilitation defaulted for a second time within 24 months and more than 40 percent of borrowers re-defaulted within three years.
- More than 75 percent of borrowers who default for a second time did not successfully pay a single bill to their student loan servicers. The CFPB estimates that “as many as four out of every five borrowers who rehabilitate a student loan could be eligible for a zero dollar ‘payment’ under an IDR plan, suggesting many of these defaults were preventable, even for the most economically vulnerable consumers.”
- Borrowers who used the consolidation option, which requires borrowers to enroll in an IDR plan (except in rare circumstances) to resolve their student loan defaults, are more likely to immediately begin to repay their debts successfully.
According to the CFPB, the data reinforce the Bureau’s concern that “hundreds of thousands of borrowers who recently cured their default through rehabilitation are unable to successfully access a stable and affordable repayment plan and soon end up back in default.” Further, the Bureau found support for its position that “borrowers who cure default through consolidation appear to fare much better, particularly in the first months after exiting default.”
DOJ Enters $89 Million Settlement with Texas-Based Bank in False Claims Act Matter
On May 16, the U.S. Department of Justice (DOJ) announced that a Texas-based bank (Bank) agreed to settle the DOJ’s allegations that it violated the False Claims Act and FIRREA by wrongfully seeking payments from a federally insured reverse mortgage program. To protect lenders, HUD provides mortgage insurance through a program administered by the Federal Housing Administration (FHA) on reverse mortgage loans, in which seniors borrow money against the equity they have in their homes. The DOJ alleged that the Bank sought to obtain insurance payments for interest from the FHA despite failing to properly disclose on the filed insurance claim forms that the mortgagee was not eligible for such interest payments because it had failed to meet various deadlines relating to appraisal of the property, submission of claims to HUD, and pursuit of foreclosure proceedings. As a result, from approximately 2011 to 2016, the mortgagees on the relevant reverse mortgage loans serviced by Bank “allegedly obtained additional interest that they were not entitled to receive.” The Bank agreed to pay more than $89 million to resolve the allegations, of which $1.6 million will be paid to the individual who filed the lawsuit under the whistleblower provisions of FIRREA.
Boston Fed President Speaks on Trends and Risks in Commercial Real Estate and GSE Exposure
On May 9, Boston Fed President Eric S. Rosengren delivered a speech entitled “Trends in Commercial Real Estate” at a conference in New York. Mr. Rosengren’s remarks addressed a variety of factors influencing the market, analyzing favorable conditions as well as potential concerns.
Mr. Rosengren noted the “tailwinds” that have allowed for rising commercial real estate valuations, including low and stable inflation, accommodative monetary policy, and the relative economic strength in the U.S. compared with the rest of the world. In addition, with respect to multifamily commercial real estate in particular, Mr. Rosengren discussed the positive impact of several broader societal trends – including later marriage age, “greater urbanization and a preference among the large cohort of millennials to seek multifamily accommodations.” The Boston Fed President cautioned, however, that the conditions may not warrant the extent of the price increase in the market, and pointed to the “significant exposures” that leveraged institutions and the GSEs—whose holdings include significant guarantees of multifamily loans— have to commercial real estate. He also noted that the commercial real estate market could suffer further shock if regulatory and legislative proposals require the GSEs to reduce their holdings of multifamily loans.
Eleventh Circuit Rules that Return of a Certified Mail Receipt Satisfies Regulation X of RESPA
In a per curiam opinion issued on March 1, 2017, the Eleventh Circuit Court of Appeals affirmed the dismissal of a complaint alleging that a mortgage servicer had violated Regulation X of the Real Estate Settlement Procedures Act (“RESPA”) by failing to “correctly or timely acknowledge receipt of his [written request for information (“RFI”)].” See Meeks v. Ocwen Loan Servicing LLC, [Order] No. 16-15536 (11th Cir. Mar. 1, 2017). Regulation X requires that, within five days of receiving an RFI, mortgage servicers must “provide to the borrower a written response acknowledging receipt of the information request.” 12 C.F.R. § 1024.36(c). Plaintiff alleged that the mortgage servicer violated 12 C.F.R. § 1024.36(c) when it signed and sent a Certified Receipt on the same day as receiving the RFI and when it sent a substantive response nine days later. Plaintiff sought actual damages of less than $100 and attorneys’ fees and costs.
The Eleventh Circuit ruled, as a matter of first impression, that the mortgage servicer’s return of the Certified Receipt , which the plaintiff’s attorney “unquestionably received,” satisfied Regulation X. Alternatively, the Court affirmed the district court’s decision because the plaintiff “did not suffer any compensable damages from [the] alleged violation” and plaintiff’s counsel’s notice of error “falsely question[ed] the servicer’s receipt in order to create a claim for damages.” As to the claim for statutory damages, the Eleventh Circuit held that the plaintiff lacked Article III standing because he did not suffer a concrete injury-in-fact. Rather, because the plaintiff (and his attorney) “had undisputed actual knowledge of receipt of the RFI,” plaintiff “suffered at most ‘a bare procedural violation.’”
Massachusetts AG Announces Settlement with Student Loan Debt Relief Company
On April 28, Massachusetts Attorney General Maura Healey announced a settlement with a student loan debt relief company to resolve allegations that the company charged consumers illegal upfront fees to receive debt relief assistance and falsely led customers to believe it was affiliated with the federal government. According to the Attorney General’s office, this is the fourth in a series of enforcement actions brought against student loan debt relief companies in the state. Under the terms of the April settlement, the company is required to refund $6,500 to 18 affected borrowers, must agree to discontinue providing student loan services, and is prohibited from selling or disseminating Massachusetts customer information collected. Previously in 2015 and 2016, Healey announced settlements with three debt relief companies, bringing the overall recovery total to-date to more than $260,000. In November 2015, the state launched the Student Loan Assistance Unit to assist borrowers unable to repay their loans (see previous InfoBytes summary).