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Federal, State Authorities Obtain Another Major RMBS Settlement
On July 14, the DOJ, the FDIC, and state authorities in California, Delaware, Illinois, Massachusetts, and New York, announced a $7 billion settlement of federal and state RMBS civil claims against a large financial institution, which was obtained by the RMBS Working Group, a division of the Obama Administration’s Financial Fraud Enforcement Task Force. Federal and state law enforcement authorities and financial regulators alleged that the institution misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. They claimed, among other things, that the institution received information indicating that, for certain loan pools, significant percentages of the loans reviewed as part of the institution’s due diligence did not conform to the representations provided to investors about the pools of loans to be securitized, yet the institution allowed the loans to be securitized and sold without disclosing the alleged failures to investors. The agreement includes a $4 billion civil penalty, described by the DOJ as the largest ever obtained under FIRREA. In addition, the institution will pay a combined $500 million to settle existing and potential claims by the FDIC and the five states. The institution also agreed to provide an additional $2.5 billion in borrower relief through a variety of means, including financing affordable rental housing developments for low-income families in high-cost areas. Finally, the institution was required to acknowledge certain facts related to the alleged activities.
Illinois AG Sues Student Debt Relief Firms
On July 14, Illinois Attorney General (AG) Lisa Madigan announced that her office filed separate civil lawsuits (here and here) in state court against two student debt relief firms and their principals. The lawsuits allege that the defendants violated several state consumer protection statutes relating to their deceptive student debt relief practices and collection of improper fees. The AG claims that the unlicensed companies and their sole principals improperly accepted upfront fees from student borrowers while claiming to have enrolled them in sham loan forgiveness programs or other legitimate loan relief programs that were available to borrowers free of charge. The lawsuits also allege that the defendants engaged in extensive false and misleading advertisements that misrepresented their expertise, affiliation with the U.S. Department of Education, and the debt relief programs available to borrowers.
The AG maintains that these practices violate several state consumer protection statues, including:
- The Illinois Consumer Fraud and Deceptive Business Practices Act, prohibiting unfair and deceptive business practices, including making false representations and failing to disclose material facts to consumers;
- The Credit Services Organizations Act, prohibiting unlicensed parties from acting as “debt settlement providers” or accepting illegal fees; and
- The Debt Settlement Consumer Protection Act, prohibiting parties from accepting upfront payment for debt relief services.
The lawsuits seek injunctive and non-monetary relief in the form of permanent injunctions against each defendant and a rescission of all contracts with Illinois residents. The AG is also pursuing a variety of monetary damages and penalties, including restitution, costs of prosecution and investigation, and civil penalties of $50,000 for each statutory violation with additional penalties for those conducted with the intent to defraud or perpetrated against elderly victims.
New York AG Civil Suit Targets International Bank's "Dark Pool", Relationships With High-Frequency Traders
On June 25, New York Attorney General (AG) Eric Schneiderman announced the filing of a civil suit against a large international bank alleging that, from 2011 to the present, the bank violated the Martin Act by making false statements to clients and the investing public about how, and for whose benefit, the bank operates its private securities trading venue, i.e. its dark pool. The AG claims that the bank actively sought to attract high frequency traders to its dark pool, and provided such traders advantages over others trading in the pool, while telling clients and investors that it implemented special safeguards to protect them from such high-frequency traders. Specifically, the AG alleges that the bank: (i) falsified marketing materials purporting to show the extent and type of high frequency trading in its dark pool; (ii) falsely marketed the percentage of high frequency trading activity in its dark pool; (iii) made a series of false representations to clients about its “Liquidity Profiling” service; (iv) falsely represented that it routed client orders for securities to trading venues in a manner that did not favor its own dark pool; and (v) secretly provided high frequency trading firms informational and other advantages over other clients trading in the dark pool. The suit seeks an order requiring the bank to pay damages, disgorge amounts obtained in connection with the alleged activities, and make restitution of all funds obtained from investors in connection with the alleged acts.
Florida Strengthens Data Breach Law
On June 20, Florida Governor Rick Scott signed SB 1524, which significantly revises and strengthens the state’s data breach notice law, making it among the toughest in the country. The bill shortens the timeline for providing notice of a data breach to require notice to consumers within 30 days of the “determination of a breach.” The bill also adds a parallel requirement to notify the state attorney general’s office for an incident affecting more than 500 state residents. The bill also provides that consumer notice by email will no longer require an E-SIGN consent. The new law clarifies the application of data breach requirements by amending the definition of “covered entity” to mean “a sole proprietorship, partnership, corporation, trust, estate, cooperative, association, or other commercial entity that acquires, maintains, stores, or uses personal information.” The bill also expands the definition of “personal information” to add, as was done in California last year, user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account. The bill requires covered entities to take reasonable measures to (i) protect and secure data in electronic form containing personal information and (ii) dispose, or arrange for the disposal, of customer records containing personal information within its custody or control when the records are no longer to be retained. Finally, the bill revised the risk of harm provision in two noteworthy ways: (i) like Connecticut and Alaska, law enforcement must be consulted to employ the exemption to noticeand (ii) the exemption appears to cover only consumer notice, not AG notice. The changes take effect July 1, 2014.
Federal, State Authorities Announce Substantial Mortgage Settlement
On June 17 the DOJ, the CFPB, HUD, and 49 state attorneys general and the District of Columbia’s attorney general announced a $968 million consent judgment with a large mortgage company to resolve numerous federal and state investigations regarding alleged improper mortgage origination, servicing, and foreclosure practices. The company agreed to pay $418 million to resolve potential liability under the federal False Claims Act for allegedly originating and underwriting FHA-insured mortgages that did not meet FHA requirements, failing to adhere to an effective quality control program to identify non-compliant loans, and failing to self-report to HUD the defective loans it did identify. The company also agreed to measures similar to those in the National Mortgage Settlement (NMS) reached in February 2012. In particular, the company will (i) provide at least $500 million in borrower relief in the next three years, including by reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates for current but underwater borrowers, and other relief; (ii) pay $50 million to redress its alleged servicing violations; and (iii) implement certain changes in its servicing and foreclosure activities to meet new servicing standards. The agreement is subject to court approval, after which compliance with its terms, including the servicing standards, will be overseen by the NMS Monitor, Joseph A. Smith Jr.
New York AG Obtains Agreement From Bank To Alter Customer Account Screening
On June 16, New York Attorney General (AG) Eric Schneiderman announced that a national bank agreed to adopt new policies governing its use of a credit bureau that screens individuals seeking to open checking or savings accounts. The agreement is the first to come out of the AG’s ongoing investigation of the use of credit bureaus by major American banks. As the basis for its investigation, the AG’s office asserts that individuals who are deemed by one of these credit bureaus to present a credit or fraud risk are typically denied the opportunity to open an account, and that these credit bureau databases “disproportionately affect lower-income Americans, often punishing them for relatively small financial errors and forcing them to resort to fringe banking services that are more costly than mainstream checking and savings accounts.” According to the AG’s press release, under the terms of the agreement, the bank will continue screening customers for past fraud but will no longer seek to predict whether customers present credit risks. The bank also committed to expand its support for the Office of Financial Empowerment (OFE)—a New York City agency that provides financial education and counseling to low-income New Yorkers—by donating $50,000 to help OFE provide counseling for applicants who are rejected by the bank on the basis of a credit bureau report. The bank plans to implement the changes nationwide.
Massachusetts AG Requires Mortgage Servicer To Provide Foreclosure-Related Relief
On June 16, Massachusetts Attorney General (AG) Martha Coakley announced that a large mortgage servicer agreed to provide $3 million in borrower relief and pay $700,000 to the Commonwealth to resolve allegations that the servicer failed to provide certain notices to homeowners, as required by state law, and that it unlawfully foreclosed on certain properties. Specifically, the AG alleged that the servicer failed to send state-mandated notices to homeowners in default, and failed to execute proper mortgage assignments, filed in the Massachusetts Registry of Deeds, as required by Massachusetts law. The agreement also resolves claims that a servicer acquired by the settling servicer allegedly initiated foreclosures when it did not hold the actual mortgages, a violation of Massachusetts law, as established by a 2011 state supreme court decision. As described in the AG’s announcement, the agreement requires the servicer to properly execute documents filed in connection with foreclosure proceedings, and to mail to residents notices that are in compliance with applicable statutes and regulations.
Massachusetts AG Sues FHFA Over Foreclosure Policies
On June 2, Massachusetts Attorney General (AG) Martha Coakley filed a lawsuit against the FHFA, Fannie Mae, and Freddie Mac for allegedly violating the state’s 2012 foreclosure prevention law, which, among other things, prohibits creditors from blocking home sales to non-profits that intend to resell the property back to the former homeowner. The AG claims that the FHFA has refused to require Fannie Mae and Freddie Mac to comply with the law, and as a result the companies’ “arm's length transaction” policies, under which the parties proposing to purchase a property must attest that there are no agreements that the borrower will remain in the property as a tenant or later obtain title or ownership, restrict the sale of properties in violation of the law. In addition to the alleged violation of the foreclosure prevention law, the AG claims that by illegally applying the arm’s length transaction policies, the companies engaged in unfair or deceptive acts or practices. The AG seeks an order enjoining the companies from applying policies in violation of the foreclosure law, and penalties of up to $5,000 for each unfair or deceptive act or practice. The AG recently notified the FHFA of the potential suit in a letter that also renewed the AG’s calls for the FHFA to allow Fannie Mae and Freddie Mac to include principal reductions as part of their loan modification alternatives.
CA AG Publishes Guide On Online Privacy Policies
On May 21, California AG Kamala D. Harris issued a guide providing recommendations to businesses affected by the 2013 amendments to the California Online Privacy Protection Act (CalOPPA). Those amendments require website operators to disclose how they respond to “do not track” signals or other mechanisms that provide consumers a choice regarding the collection of personally identifiable information (PII) over time and across different sites or online services. In developing an online privacy policy, the guide advises companies to use plain language, in an easily readable format, and to clearly and conspicuously identify and explain its online tracking and PII collection and sharing practices. Additionally, the guide recommends that policies provide (i) the choices a consumer has regarding the collection, use, and sharing of PII; (ii) a link to any privacy policy maintained by third parties receiving PII; and (iii) contact information for questions or concerns.
Massachusetts AG Urges FHFA Action On REO Sale Restrictions And Principal Reduction Options
On May 14, Massachusetts Attorney General (AG) Martha Coakley sent a letter to FHFA Director Mel Watt threatening legal action if the FHFA does not direct Fannie Mae and Freddie Mac, when they sell a foreclosed property, to comply with a state law that prohibits a creditor from conditioning that sale on a requirement that the new owner cannot resell or rent the property back to the former homeowner. The letter explains that the law allows non-profits in the state to purchase REO and sell them back to the same borrower with more favorable financing terms and at a lower value. The AG states that her office is “considering all available legal avenues – including litigation – to ensure compliance” with the state law. The letter also reasserts the AG’s view that Fannie Mae and Freddie Mac should include principal reductions as a loan modification option. Under its former Acting Director Edward DeMarco, the FHFA decided in July 2012 not to direct Fannie Mae or Freddie Mac to offer principal reductions.