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Financial Services Law Insights and Observations


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  • The CFPB's Mortgage Originations Agenda in 2016

    Consumer Finance

    John Kromer captionMichelle Rogers captionNow more than ever, financial services firms need to proactively focus on issues of concern identified by the CFPB and ensure that they are engaged in industry best practices that are clearly identified and carefully monitored. In the mortgage originations sphere, the new TRID/ KBYO rule, MSAs, LO compensation, UDAAP, and fair lending are all issues for companies to focus on in the coming year.


    Compliance with the new TILA-RESPA Integrated Disclosure/Know Before You Owe (TRID/KBYO) rule will likely be an area of Bureau concern in 2016. The rule took effect on October 3, 2015 and does not include a “hold harmless” period for errors as lenders implement the new disclosure requirements, although letters from the OCC, FDIC, and CFPB have clarified that regulators will focus in the beginning on institutions’ implementation plans, training, and handling of early technical problems. It is likely that the CFPB will require remediation back to the rule’s compliance date when it identifies tangible consumer harm, but it is unlikely that the Bureau will bring enforcement actions initially based on technical issues where there is no tangible consumer harm.

    GSEs have also issued letters stating they will not perform TRID/KBYO compliance file reviews at the beginning of the implementation period. The GSEs further stated that it will not exercise its repurchase and other remedies unless (1) a required form is not used or (2) a practice would impair its enforcement of its rights against borrowers.  In contrast, the FHA has stated that it expects lenders to comply with “all federal, state, and local laws, rules, and requirements applicable to the mortgage transaction as outlined in [the] FHA Handbook….”

    MSAs and RESPA Enforcement

    The CFPB set forth a strong position in October 2015 regarding Section 8 of RESPA, which generally prohibits kickbacks in connection with the referral of settlement services.  Through enforcement actions, the CFPB has taken a broad interpretation of the term “thing of value,” finding that the opportunity to participate in a business—even if market rates are paid for services—can itself constitute a thing of value sufficient to create Section 8 liability for kickbacks.

    This calls into question the legality of marketing services agreements (MSAs) generally.  While the CFPB has stated that it does not view MSAs as per se illegal and has acknowledged that it does not have the authority to declare them per se illegal without a formal rulemaking process, it is possible that the Bureau may pursue further public enforcement actions regarding MSAs if it does not see institutions pulling back from using them. State examiners are also aware of the issue and may refer nonbank entities that they supervise to the CFPB if they see issues with MSA usage. Courts are getting the opportunity to weigh in on these RESPA issues, through the appeal to the D.C. Circuit of the PHH enforcement action and the 9th Circuit’s reversal of the district court’s refusal to certify the class in Edwards v. FAC.

    LO Compensation Rule

    The CFPB has been aggressive in applying the Federal Reserve Board’s LO Compensation rule, as amended by the CPFB. While the rule was passed to avoid steering of borrowers into certain products, the CFPB does not need to establish steering to prove a violation and instead tends to build cases based on technical non-compliance with the rule.  In bringing cases under the rule, the CFPB often names individuals as well as companies. It should be noted that the CFPB views payments to LLCs controlled by producing branch managers based on mortgage profits as illegal compensation under the rule.  In examinations, the CFPB typically looks for a written compensation plan and cites institutions that do not reflect their compensation practices in their plan, even if those practices are legal.

    Examination Enforcement Trends and UDAAP

    The CFPB has heighted its focus on vendor management, scrutinizing vendor products and services during examinations (including the marketing of these products and services as well as the value they add), and will bring enforcement actions or court cases where it finds issues.  Biweekly payments are one area of heighted scrutiny, as the CFPB has been skeptical of the value added by this service. The Bureau has also focused on loss mitigation contracts that suggest that a borrower has waived rights in connection with receiving the modification.

    Fair Lending

    “What’s old is new again” in 2016 fair lending – issues such as pricing, discretion, and the charging or waiving of fees remain important.  Regulators will remain focused on redlining and access to credit. The September 24, 2015 Hudson City Savings Bank enforcement action, requiring the bank to pay $27 million, focused on the role of brokers in redlining.  The CFPB’s Office of Fair Lending and Equal Opportunity is a hybrid examination and enforcement division, which provides insight into the CFPB’s approach to fair lending. The CFPB also will look at nonbanks’ fair lending and bring enforcement actions against these institutions to the extent it finds problems.

    CFPB Mortgage Origination Michelle Rogers TRID John Kromer Fair Lending Redlining Loss Mitigation

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  • Spotlight on the False Claims Act: Wartime Suspension of Limitations Act Suspends Statute of Limitations in False Claims Act Cases

    Federal Issues

    The False Claims Act (FCA), which allows both the government and whistleblowers to seek treble damages for claims of civil fraud on the United States, is a powerful tool. In the past two years, the government has aggressively used the FCA to target financial institutions for claims of reckless lending and improper servicing. (e.g. FCA, FHA Lending, and US v. Deutsche Bank).  As events leading to the financial crisis have approached - and in some cases exceeded - the FCA’s statute of limitations, financial institutions have increasingly responded to such claims by arguing that the government did not assert them in a timely manner.

    A recent Fourth Circuit decision interpreting the Wartime Suspension of Limitations Act (WSLA), an obscure act first enacted during World War II, however, threatens to make it significantly more difficult for financial institutions to assert a statute of limitations defense to FCA claims.  The case, United States ex rel. Carter v. Halliburton, came before the Fourth Circuit after a lower court dismissed an FCA lawsuit brought against Halliburton and related entities (collectively “KBR”) as barred by the FCA’s six-year statute of limitations.  In a critical decision, the Fourth Circuit reversed the dismissal on the grounds that the FCA’s statute of limitations was tolled by the WSLA.

    The holding is significant as the Fourth Circuit held that the WSLA applies regardless of whether the government or a private plaintiff prosecutes the case or the case involves the defense industry.  The case, therefore, has the potential to reach any FCA defendant in any civil case — from financial institutions to healthcare providers.

    The WSLA, enacted in 1942, extended the time to bring charges related to “indictable” fraud against the U.S. when “at war.”  An amendment in 1944 deleted the term “indictable.”  In 2008, the Wartime Enforcement of Fraud Act further amended the WSLA to allow it to apply whenever “Congress has enacted specific authorization for the use of the Armed Forces,” and extend the tolling period until “five years after the termination of hostilities.”

    In a novel interpretation, the Fourth Circuit held that the WSLA applies to both civil and criminal fraud claims against the U.S., regardless of whether the U.S. has intervened, and even without a formal declaration of war.  The Fourth Circuit first held that a formal declaration of war is not required under the WSLA, and that the U.S. was “at war” in Iraq from the date that Congress authorized the use of military force in 2002.

    The court also held that the U.S. was still “at war” for the purposes of the WSLA when the alleged fraud occurred because neither Congress nor the President had met the formal requirements of the act for ending the tolling period.  The Fourth Circuit then held that the WSLA applies to both criminal and civil cases because the 1944 amendments removed the word “indictable.”

    Finally, the Fourth Circuit held that whether the U.S. – or a plaintiff – brings an FCA claim under the qui tam provisions is “irrelevant” because the WSLA’s tolling provision hinges not on who brings the claim, but when the claim is brought. Accordingly, the Fourth Circuit held that the relator’s FCA claims against KBR were not time-barred.

    As Dietrich Knauth, a reporter with Law 360, recently noted, “The Fourth Circuit's decision in Carter v. Halliburton caused consternation among many FCA defense attorneys, who said that the decision effectively eviscerates the FCA's time limits.”  Indeed, while the Fourth Circuit’s decision is remarkable, the theory advanced by the relator is gaining traction, including in cases outside of the defense industry.  In mid-2012, the Department of Justice successfully made the same arguments in United States v. BNP Paribas SA, when it brought civil claims against under the FCA, alleging that the defendants had defrauded the U.S. in connection with commodity payment guarantees provided by the Department of Agriculture.

    Collectively – and with broad interpretation - the Halliburton and BNP Paribas decisions could be invoked to suspend the limitations period for a wide-range of FCA claims and are certain to spur increased litigation as the government, relators and defendants alike join the fast-growing debate about the WSLA’s proper application.

    For more information, see:

    Andrew Schilling WSLA Michelle Rogers False Claims Act / FIRREA

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