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Financial Services Law Insights and Observations


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  • Appellate Court Holds Secondary Market Mortgage Investor Not Liable Under ECOA for Discriminatory Conduct of Unaffiliated Originator


    On February 16, the U.S. Court of Appeals for the Fifth Circuit issued an opinion addressing whether Section 8 mortgage applicants may claim discrimination under the Equal Credit Opportunity Act (ECOA) by both a mortgage originator and a subsequent investor in the secondary mortgage market. See Alexander v. AmeriPro Funding, Inc. No. 15-20710, 2017 WL 650193 (5th Cir. Feb. 16, 2017). At issue before the Appellate Court were claims alleging that both the mortgage originator that interacted with borrowers, made credit decisions, and actually gave mortgages to home buyers, and the investor, engaged in the business of investing in or buying mortgages originated by the mortgage originator, were subject to liability for discriminatory conduct in violation of ECOA based upon plaintiffs’ allegations that “they applied for mortgages through [the mortgage originator] and that [the mortgage originator] did not consider their Section 8 income in processing the application because it intended to sell the mortgages to [the investor].”

    Ultimately, the Court denied all but a small subset of the various claims asserted by plaintiffs.  Among other things, the Court held: (i) that the record did not support a claim that the investor—having purchased the mortgages at issue in the secondary market after execution—discriminated against and/or failed to consider Section 8 income in assessing the creditworthiness of any plaintiff; (ii) that plaintiffs’ allegations concerning their application with the mortgage originator could not also be applied to a subsequent secondary mortgage investor such as the investor; and (iii) that the record similarly did not support a finding that  the investor was a “creditor” with respect to the plaintiffs and/or the mortgage agreements entered into with the mortgage originator.

    The Appellate Court did, however, side with plaintiffs as to those claims against the mortgage originator that set forth facts plausibly alleging conduct on the part of the mortgage originator that might constitute improper discounting of Section 8 income in assessing their creditworthiness. The Appellate Court reversed the district court’s dismissal as to those claims and remanded for further proceedings.

    Notably, the Court expressly disagreed with the CFPB’s argument (as amicus) for a broader definition of “creditor” under ECOA and Regulation B’s definition of the term because it determined that “a potential assignee who establishes underwriting guidelines for its purchases but does not influence individual credit it not a creditor,” and that Regulation B’s definition would not include “those who have no direct involvement whatsoever in an individual credit decision.”

    Courts Lending Discrimination ECOA Regulation B

  • FTC and 10 States Settle Charges with Remaining Defendants in Illegal Telemarketing Campaign


    On February 21, the FTC announced that, along with 10 state attorneys general, it has entered a Stipulated Order for Permanent Injunction and Civil Penalty Judgment against defendants who were allegedly part of an illegal robocall campaign that ran from October 2011 through July 2012. According to the joint complaint filed by the FTC and the states in 2015, the campaign averaged approximately 12 to 15 million illegal sales calls a day asking consumers to complete a political research survey and then connecting them to a live telemarketer who sold cruise packages. The FTC’s 2015 press release noted that while “do-not-call and robocall rules do not prohibit political survey robocalls, the defendants’ robocalls violated federal law because they incorporated a sales pitch.” The 2017 settlement order imposed a $1.35 million fine, to be suspended after they pay $2,500 based on ability to pay, and bars the defendants from: (i) “initiating, or causing anyone else to initiate, any robocalls or helping anyone else make robocalls”; and (ii) “engaging in illegal telemarketing practices.” Certain other defendants reached settlements in 2015, which, in addition to imposing various civil money penalties, prohibited them also from engaging in abusive telemarketing practices.

    Courts FTC State Attorney General Telemarketing Sales Rule

  • U.S. Companies Settle FTC Charges that They Deceived Consumers About International Privacy Program Participation


    On February 22, the FTC announced that it had reached settlements with three U.S. companies over charges that the companies falsely represented their participation in the Asia-Pacific Economic Cooperation Cross-Border Privacy Rules (APEC CBPR) system in their online privacy policies. Participation requires an official review and certification, a process none of the three companies underwent according to the three complaints. The complaints alleged violations of the FTC Act due to deceptive statements made by the companies that they participated in the APEC CBPR system. The settlement terms bar the defendants from “misrepresenting their participation, membership or certification in any privacy or security program sponsored by a government or self-regulatory or standard-setting organization.”

    Courts Privacy/Cyber Risk & Data Security FTC APEC CBPR

  • FTC Returning $436,000 to Consumers Scammed in Non-Existent Money-Lending Scheme


    On February 17, the FTC announced that it is mailing checks to 2,031 consumers who lost money as part of a business opportunity scheme that cheated consumers out of more than $7 million. The compensation follows a 2013 complaint filed by the Commission focused on 20 individuals and eight companies who, according to the Commission’s allegations, “falsely claimed consumers would earn up to $3,000 per month by referring small businesses to the defendants to obtain an average loan or cash advance of $20,000, and that they could operate a profitable business from their home.”  The defendants were charged with engaging in unlawful conduct by: (i) falsely claiming consumers would earn substantial income; (ii) repeatedly calling consumers who told them not to call, often times using obscenities and threats, as well as calling numbers listed on the National Do Not Call Registry; and (iii) failing “to provide specific information to help consumers evaluate a business opportunity…and making earnings claims without substantiation,” in violation of the FTC’s Business Opportunity Rule.

    The FTC obtained judgments and settlements in 2015 totaling over $7.3 million, and banned 18 defendants from similar telemarketing activities.

    Courts Consumer Finance Financial Crimes FTC Business Opportunity Rule

  • Eleventh Circuit Rules Managing Member of Debt Collection Company Personally Liable for FTC Act Violations


    In a ruling handed down on February 10 by an Eleventh Circuit panel in FTC v. Williams, Scott & Associates, LLC, 16-10063, an appellate panel held that a district court acted within its discretion in finding that the managing member of a debt collection company was jointly and severally liable for the amount of net revenue that the company had received while he was involved with the company. The Appellate Court noted, among other things, that the managing member had posed as a law enforcement official seeking payments for debts that consumers did not owe or debts that the company had no authority to collect. Furthermore, in determining the amount for which the individual defendant should be liable, the Appellate Court affirmed the district court’s holding that the total amount of net revenue earned—as opposed to profit—is the correct measure of unjust gains under section 13(b). The Appellate Court noted further that “the disgorgement amount must be limited to the time frame for which the party seeking disgorgement presented evidence of the defendant’s bad acts.”

    A copy of the Amended Complaint filed with the district court can be found here.

    Courts Consumer Finance FTC Debt Collection

  • FTC Fines Large Debt Collector $700,000 for Unlawful Collection Calls


    On February 14, the FTC announced that it has entered a Stipulated Order for Permanent Injunction and Civil Penalty Judgment of $700,000 with a debt collector that allegedly used unlawful tactics to collect on federal student loans and other debts. According to the complaint, filed by the DOJ on behalf of the FTC in the District Court for the Southern District of Texas, agents working for the defendant-debt collectors (i) left messages that illegally disclosed purported debts to individuals other than the debtors without permission to do so; and (ii) contacted consumers multiple times despite being told they had the wrong number or that the person answering did not owe the debt. Furthermore, the company was alleged to have falsely represented to regulators that it would take steps to prevent its employees from making such unlawful calls. In addition to the $700,000 fine, the Stipulated Order also enjoined the company from continuing such practices going forward.

    Courts Financial Crimes FTC Debt Collection Student Lending

  • 7th Circuit Orders District Court to Consider Bank’s Responsibility for Losses Due to Fraud


    On February 10, the U.S. Court of Appeals for the Seventh Circuit issued an opinion, in which it held that a District Court had erred in failing to consider a bank’s responsibility for nearly $900,000 in losses resulting from a scheme in which defendants persuaded the bank to issue mortgage loans to borrowers who, the defendants knew, were unable to repay the loans. See U.S. v. Litos, et al., Nos. 16-1384, -1385, -2248, -2249, -2330 (7th Cir. Feb. 10, 2017) (Posner, R.). At issue before the appellate court was the propriety of the restitution, in the amount of $893,015. The district judge had ordered the defendants to pay such restitution to the bank, on the ground that they had misled the bank by pretending that the buyers were the source of the down-payment, when it was defendants themselves who had supplied the money.

    In remanding the matter with instructions to re-sentence defendants based on the bank’s role in allowing the fraud to occur, the appellate panel determined that the bank’s professed ignorance as to the source of the down payments and the creditworthiness of the loan applicants was “reckless” in light of the information that was available at the time of the transaction. Specifically, the appellate court held that, based on the record, the fraud evident in the loan applications was “transparent,” and that the bank had “ignored clear signs” of problems with the loans. The appellate court held that, as a result, the lower court needed to determine whether the bank’s lack of clean hands rendered it partially responsible for the losses. Among other things, the appellate panel noted statements by the district judge that the loan applications were “a joke on their face” and “laughable,” as well as the fact that the bank had approved multiple loans to the same individuals in short spans of time. Accordingly, the court ordered the district judge to consider whether the bank is entitled to restitution.

    Courts Financial Crimes Mortgage Fraud

  • SEC Settles Fraud Charges in Investment Scheme, Issues Fine of Over a Half-Million Dollars

    Financial Crimes

    On February 14, the SEC announced a settlement with a real estate investment manager based in Arizona over allegations that he defrauded investors. According to the complaint, the investment manager allegedly told investors he would make personal investments in real estate projects which he failed to do, instructed some investors to “falsely state that they were ‘accredited investors’” to avoid registration requirements for the offerings, and falsely represented that he would personally manage the projects when, instead, he entrusted management to a real estate broker who was later imprisoned for other crimes. The settlement requires the investment manager to disgorge $51,358 plus interest of $4,893.98 and pay a penalty of $450,000.

    Financial Crimes Courts SEC Securities

  • Decades-Old Fraud Case Settled After Over 12 Years


    On February 10, the New York Attorney General’s office announced it had reached a settlement in a securities fraud suit filed in 2005 by then-Attorney General Eliot Spitzer. The lawsuit was filed after the company admitted to engaging in improper reinsurance transactions that materially misrepresented loss reserves and misstated underwriting results. The original settlement in 2006 resulted in the company paying $1.6 billion to settle the matter; however, the two individuals involved refused responsibility for the transactions. Now, over 12 years later, and after the two defendants’ arguments were “substantially rejected by the New York Supreme Court, the New York Supreme Court Appellate Division, First Department and the New York Court of Appeals,” the defendants have acknowledged their role in the transactions and agreed to collectively relinquish over $9.9 million they had received as performance bonuses from 2001 through 2004.

    Courts Consumer Finance Fraud Securities State Attorney General

  • Federal Judge Sentences Hacker to Eight Years for Cyber Heists that Caused More than $55 Million in Losses


    On February 10, the United States Attorney for the Eastern District of New York announced that the Honorable Kiyo A. Matsumoto levied an eight year prison sentence against a Turkish citizen charged with organizing and carrying out three cyber-attacks on global financial institutions between 2011 and 2013 which resulted in more than $55 million in losses. Last March, the defendant pleaded  guilty to “computer intrusion conspiracy, access device fraud conspiracy, and effecting transactions with unauthorized access devices.” Specifically, the defendant and his associates were alleged to have repeatedly hacked into debit card processing systems, manipulated account balances, stole customers’ PINs, and transferred that information to associates who then encoded debit cards with the stolen data in order to make fraudulent ATM withdrawals. The DOJ further alleged that the hackers targeted databases companies maintained for prepaid debit cards and effectively eliminated the card accounts’ withdrawal limits in what are called “unlimited operations.” The defendant was also ordered to pay $55,080,226.14 in restitution as part of his sentence. 

    Courts Privacy/Cyber Risk & Data Security Financial Crimes