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  • PHH v CFPB Update: PHH and U.S. Solicitor General Respond to CFPB's Petition for En Banc Review

    Courts

    On December 22, PHH filed its brief opposing the CFPB’s petition for en banc review of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. PHH argued that the case is not worthy of review by the full D.C. Circuit because, although the majority of the panel determined that the CFPB’s structure violated the constitutionally-mandated separation of powers, that “conclusion, which horrifies the CFPB, simply means that an agency of the Executive Branch will be answerable to the Chief Executive.” With respect to the panel’s unanimous decision that the CFPB incorrectly interpreted RESPA, PHH argued that en banc review is inappropriate because, among other reasons, the D.C. Circuit could not side with the CFPB without “creat[ing] a circuit split with every other court to have considered the proper scope of RESPA.”

    At the invitation of the D.C. Circuit, the U.S. Solicitor General also filed its brief later the same day. While the Solicitor General supported the CFPB’s petition for en banc review of the constitutional question, it also suggested that, consistent with Judge Henderson’s dissent from the panel opinion, the full D.C. Circuit could simply vacate the CFPB’s order against PHH on the grounds that the Bureau misinterpreted RESPA. Doing so, the Solicitor General notes, would be consistent with the “well-established principle … that normally the Court will not decide a constitutional question if there is some other ground upon which to dispose of the case.” This ruling would vacate the panel majority’s conclusion that the CFPB’s structure was unconstitutional, although the Solicitor General noted that PHH could renew its constitutional challenge if the CFPB continues to pursue the case on remand.

    With respect to the separation of powers question itself, the Solicitor General argued that en banc review is warranted because the majority departed from the analysis used by the Supreme Court to decide such questions. Specifically, the Solicitor General suggests that the panel majority erred by concluding “that an agency with a single head poses a greater threat to individual liberty than an agency headed by a multi-member body that exercises the same powers,” noting that the President’s authority over the multi-member FTC was similarly limited and the FTC enjoyed similar powers at the time the Supreme Court upheld its constitutionality.

    Finally, after the filing of the Solicitor General’s brief, PHH requested permission to file an additional brief on the grounds that the Solicitor General had raised arguments not presented in the CFPB’s petition.

    For additional background, please see our summaries of the panel decision, the CFPB's petition for rehearing, and the D.C. Circuit’s order directing PHH to respond and the Solicitor General to provide views.

    Courts Consumer Finance CFPB FTC U.S. Supreme Court RESPA PHH v. CFPB Cordray U.S. Solicitor General Litigation Single-Director Structure

  • US Court Rejects DocuSign e-Signatures as Method to Provide Digital Authorization

    Courts

    Back in July, the United States bankruptcy court for the Eastern District of California held that under its local rules, an attorney submitting electronically signed documents for filing with the court must maintain an originally signed document in paper form bearing a “wet” signatureIn re Mayfield, No. 16-22134-D-7, 2016 WL 3958982 (U.S. Bankr. Ct. E.D. Cal.).  The United States Trustee (UST) filed a motion for sanctions against a debtor’s attorney who used the an electronic signature platform to have the debtor execute certain documents that were subsequently filed with the court.  The court’s local rules 9004-1(C) and (D) provide that if these documents were executed with a “software-generated electronic signature,” the submitting attorney is required to maintain “an originally signed document in paper form” and produce it upon request by the UST.   When asked by the UST to produce the original signed versions of the documents he filed, the debtor’s attorney was unable to do so.  In response to the motion, the debtor’s attorney argued that the requirements of 9004-1(C) and (D) did not apply because the electronic signatures were manually created by the debtor’s actions taken on the electronic signature platform.  As such, they were not “software-generated electronic signatures” within the meaning of the rule, and under the federal ESIGN Act constituted “original” signatures.

    Ultimately, the court held that: (i) the ESIGN Act was not applicable because of the express exemption for court rules at 15 USC § 7003(b)(1), thereby permitting the court to establish and interpret its own rules with respect to electronic signatures, (ii) the electronic signatures created using the platform were within the meaning of the term “software-generated electronic signature” under the local rules, and (iii) the local rule’s reference to “an originally signed document in paper form” required the attorney to also maintain a copy of the document bearing a “wet ink” signature.  Accordingly, the Court granted the UST’s motion and, as the sanction imposed, required the debtor’s attorney to certify completion of the court’s online e-filing training course.

    Courts Digital Commerce ESIGN Electronic Signatures Sanctions Payments UST

  • Shaw v. United States - Supreme Court Holds That Fraud Against Customer Can Be Fraud Against Bank

    Courts

    In Shaw v. United States, No. 15-5991 (Dec. 12, 2016), the Supreme Court ruled 8-0 that Lawrence Eugene Shaw had defrauded a national bank when he used a customer’s personal details to transfer more than $275,000 from that bank’s customer’s account to his own PayPal account. In an opinion written by Justice Breyer, the Court rejected Shaw’s arguments that the conviction was inappropriate because prosecutors could not prove that Shaw intended to defraud the bank. The Court held, among other things, that: (i) the bank had a property interest in the customer’s deposits; (ii) the defendant’s ignorance of the application of property laws to bank deposits was not a defense; and (iii) the bank fraud statute does not require the government to prove that the defendant intended that the bank would suffer a loss; rather, his knowledge that the bank likely would suffer a loss was sufficient.

    Despite this finding, the Supreme Court ultimately vacated the Ninth Circuit’s decision affirming the conviction and remanded it to the appellate court for consideration of whether a claimed defect in the jury instructions was properly preserved for appeal, whether the instructions were defective, and whether any resulting error was harmless.

    Courts Banking Fraud U.S. Supreme Court

  • FINRA Fines Credit Suisse over Anti-Money Laundering Policies

    Courts

    In a December 5 press release, FINRA announced that it has fined Credit Suisse Securities (USA) LLC $16.5 million for anti-money laundering (AML), supervision and other violations. FINRA’s determination and penalty were based primarily on two deficiencies in the investment bank’s suspicious activity monitoring program. First, Credit Suisse relied too heavily on its registered representatives “to identify and escalate potentially suspicious trading, when, in practice, such high-risk activity was not always escalated and investigated, as required.” And, second, FINRA found that the firm failed to properly implement its automated surveillance system to monitor for potentially suspicious money movements.

    Courts Banking FINRA Anti-Money Laundering

  • Jury Finds Mortgage Company and CEO Liable for Fraud; Awards $92 Million in Damages

    Courts

    A federal jury has ordered two Texas-based home mortgage entities and their chief executive to pay nearly $93 million for defrauding the U.S. government into insuring thousands of risky loans, the Department of Justice announced on November 30.

    The mortgage companies and their former CEO were found liable for violating the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by, among other things, failing to maintain an adequate quality control program; and submitting false annual certifications regarding quality control requirements. Specifically, the government contended that defendants operated over 100 “shadow” branch offices that originated FHA-insured mortgage loans without obtaining the necessary HUD approval, and which were therefore not subject to HUD oversight.

    Ultimately, the jury awarded $92,982,775 in total damages, including $7,370,132 against the CEO specifically—a sum that is subject to mandatory tripling. Further penalties relating to the FIRREA violations are expected, which U.S. District Judge George Hanks will set at a later date.

    Courts Mortgages HUD DOJ False Claims Act / FIRREA Mortgage Fraud

  • ABA Sues Credit Union Regulator Over Field of Membership Rule

    Courts

    On December 7, the American Bankers Association (ABA) filed a lawsuit in federal court seeking to overturn a final rule published by the National Credit Union Administration (NCUA) in that morning’s Federal Register. The final rule purports to “implement changes in policy affecting: The definition of a local community, a rural district, and an underserved area; the chartering and expansion of a multiple common bond credit union; the expansion of a single common bond credit union that serves a trade, industry or profession; and the process for applying to charter, or to expand, a federal credit union.”

    ABA’s law suit contends, among other things, that by “fail[ing] to adhere to the limitations on federal credit unions established by Congress,” the NCUA’s final rule “upsets the balance Congress struck between granting federal credit unions tax-favored status and limiting their operations to carefully circumscribed groups or localities that share a common bond.” Under the final rule, scheduled to take effect Feb. 6, Federal Credit Unions (FCUs) can apply to serve entire geographic regions, so-called “rural districts” up to 1 million people (which include the entirety of Alaska, North Dakota, South Dakota, Vermont or Wyoming), and areas contiguous to their existing service areas. NCUA is also facilitating easier conversions to community charters.

    Courts Banking NCUA Federal Register Agency Rule-Making & Guidance

  • Mortgage Companies Penalized for Deceptive Reverse Mortgage Ads; Must Take Corrective Action

    Courts

    On December 7, the CFPB announced that it had entered into consent orders with three reverse mortgage companies to settle claims that their advertisements for those mortgages were deceptive under the Mortgage Acts and Practices Advertising Rule. The alleged misconduct included deceptive advertising campaigns that misrepresented, among other things: (i) the risk of losing home and the right to remain in the home; (ii) expected costs and mortgage payments; (iii) government affiliations of the mortgage company; and (iv) the effectiveness of a reverse mortgage credit product to eliminate debt.

    The consent orders require the companies to make clear and prominent disclosures in their reverse mortgage advertisements and implement systems to ensure they are following all laws. One of the three firms also cannot imply affiliation with the government and must maintain complete and accurate records. In addition, the consent orders impose civil penalties ranging from $65,000 up to $400,000.

    Courts Mortgages Consumer Finance CFPB Reverse Mortgages Mortgage Advertising

  • Federal District Court Holds Claims Brought by CFPB Alleging Deceptive Conduct Must Meet Heightened Rule 9(b) Standard

    Courts

    In a recent case, a California District Court held that CFPB’s claims alleging deceptive conduct under the Telemarketing Sales Rule (“TSR”) against a credit repair company failed to meet the heightened pleading requirement under Fed. R. Civ. P. 9(b), under which a plaintiff must “state with particularity the circumstances constituting fraud” – including pleading “the time, place, and specific content of the false representations.” CFPB v. Prime Marketing Holdings, LLC, CV 16-07111-BRO, Dkt. No. 32 (C.D. Cal. Nov. 15, 2016).

    Specifically, the court in Prime Marketing Holdings concluded that the CFPB’s general allegations of deception “failed to identify any specific instances where the defendant made such a misrepresentation” including, for instance, “what representations were made, when these representations were made and to whom they were made.” Id. at 12-13. Based on this finding, the court dismissed without prejudice the four deception-based claims. Id.

    Courts Consumer Finance Fraud CFPB Telemarketing Sales Rule

  • Supreme Court Weighs in on Insider Trading in Salman v United States

    Courts

    In its first insider trading decision in nearly two decades, the US Supreme Court ruled unanimously to uphold an insider trading conviction of an individual who traded while aware of material non-public information received from a friend who received no financial benefit in exchange. Salman v. United States, No. 15-628, 2016 WL 7078448 (U.S. Dec. 6, 2016).

    The defendant in Salman was convicted in 2013 for trading on confidential information obtained through his brother-in-law even though Salmon he gained no tangible financial benefit. The appeal thus presented the Justices with the central question of how to define a “personal benefit” garnered from insider information. In upholding Salman’s conviction, the Supreme Court affirmed that a user of financial tips breaches fiduciary duty with respect to “insider information” from a relative, whether or not the person giving the information receives a tangible financial benefit. In so holding, the Court also undercuts a narrower interpretation in a case decided by the Second Circuit in 2014 that held that the person who provides the tips must receive something of value in exchange for inside information given to family or friends.

    Courts Criminal Enforcement U.S. Supreme Court

  • PHH Response Due Date Pushed Back as Solicitor General Permitted to Respond to CFPB's Petition in PHH Corp. v. CFPB by December 22

    Courts

    As discussed previously, the D.C. Circuit ordered PHH to respond to the CFPB’s petition for en banc review of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. In an Unopposed Motion for Leave to file the United States' Response, filed December 1, the Office of the Solicitor General sought permission to file its own responsive briefing on or before December 22. In an Order issued December 1, the D.C. Circuit granted the Solicitor General’s request, but also moved back the due date for PHH’s responsive papers so that both responses are now due on December 22.

    Earlier in the week, on November 30, two groups filed amicus briefs in support of the CFPB’s petition together along with motions requesting an invitation from the court. The first brief was submitted by a group of leading consumer protection organizations, while the second brief was filed by a group of 21 current and former members of Congress.

    Courts Consumer Finance CFPB U.S. Senate U.S. House PHH v. CFPB

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