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DOJ, State AGs File Civil Fraud Suits against Ratings Agency over RMBS Ratings; Buckley Offers Complimentary FIRREA Webinar
On February 5, the DOJ filed a lawsuit in the Central District of California against a major credit rating agency, alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. According to the complaint, the agency publicly represented that its ratings of RMBS and CDOs were objective and independent, notwithstanding the potential conflict of interest posed by the agency being selected to rate securities by the investment banks that sold those securities. The complaint alleges that, in fact, fear of losing market share and profits led the company to (i) weaken the ratings criteria and analytical models it used to assess credit risks posed by RMBS and CDOs, and (ii) issue inflated ratings on hundreds of billions of dollars’ worth of CDOs. When CDO’s rated by the agency failed, investors lost billions of dollars. The DOJ brings claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), alleging that the company engaged in (i) mail fraud affecting federally insured financial institutions, (ii) wire fraud affecting federally insured financial institution, and (iii) financial institution fraud, and seeks civil penalties up to the amount of the losses suffered as a result of the alleged violations. The DOJ believes such losses total $5 billion to date.
Also on February 5, the attorneys general for at least 12 states and the District of Columbia announced state court actions against a ratings agency in coordination with a parallel federal suit filed on the same day, as described above. The actions announced by the AGs for Arizona, Arkansas, California, Colorado, Delaware, the District of Columbia, Iowa, Maine, Missouri, North Carolina, Pennsylvania, Tennessee, and Washington, allege violations of various state laws related to the same general conduct outlined in the federal complaint, i.e. that the ratings agency defrauded investors, including state pension funds, by inflating ratings of certain RMBS and CDOs for private gain, while publicly maintaining that the ratings were objective assessments of the risks posed by the securities. At least three states, Connecticut, Illinois, and Mississippi, are continuing to pursue similar, previously filed, suits against the same agency.
State AGs Announce Multistate Robo-Signing Settlement
On January 31, the state attorneys general (AGs) for 45 states obtained an agreement from a mortgage servicing and foreclosure vendor, and its former subsidiary, to resolve allegations that the company “robo-signed” foreclosure documents and engaged in other improper default servicing conduct. (See, e.g., announcements from the AGs for Iowa, Massachusetts, and New York.) The agreements require the company to pay a combined $120 million and finalize substantial revisions to its business and compliance practices. The company also must (i) properly execute documents, (ii) enhance oversight of its default services, and (iii) review of all third-party fees to ensure that the fees have been earned and are reasonable and accurate. The settlement also prohibits various conduct including, for example, (i) surrogate signing of documents; (ii) notarizing documents outside the presence of a notary; (iii) improper interference with the attorney-client relationship between attorneys and services; and (iv) unreasonable mark-ups or other fees on third party providers’ default or foreclosure-related services. The company must review documents executed during the period of January 1, 2008 to December 31, 2010 to determine if any must be re-executed or otherwise corrected. Borrowers also may request review and correction of any documents executed by the company at any time. The Michigan AG announced a separate agreement with the company on the same day, and three other state AGs previously settled similar allegations against the firm (see, e.g., Missouri AG settlement).
Maryland AG Establishes Privacy Unit
On January 28, Maryland Attorney General (AG) Doug Gansler announced a new unit in his office dedicated to online privacy enforcement and policy. The AG stated that the new unit will (i) monitor companies to ensure they are in compliance with state and federal consumer privacy laws, (ii) examine weaknesses in online privacy policies and work alongside major industry stakeholders and privacy advocates to provide outreach and education to businesses and consumers to broaden awareness about privacy rights, and (iii) pursue enforcement actions where appropriate. The unit announced by the AG appears similar to one formed by California Attorney General Kamala Harris, which recently has been active with regard to mobile application privacy. Last year, AG Gansler announced “Privacy in the Digital Age” as his central initiative as President of the National Association of Attorneys General.
Florida AG Announces Settlement with Prepaid Debit Card Companies
On January 16, Florida Attorney General Pam Bondi announced that she obtained “first of their kind” settlements from the state’s five largest prepaid debit card companies. The settlements resolve claims that the companies failed to properly disclose information about fees and misled consumers with claims that use of the cards would improve credit history. While the agreements are not identical, they each require enhanced compliance measures, which generally relate to fee disclosures, use of comparison charts, and use of claims about credit improvements. Each company also agreed to make a donation to the Central Florida Chapter of Junior Achievement and pay the cost and fees for the matters investigated to the Office of the Attorney General.
California AG Issues Mobile Application Privacy Recommendations
On January 10, California Attorney General Kamala Harris (AG) issued recommended privacy practices for mobile application developers, mobile application platform providers, mobile advertising networks, operating system developers, and mobile carriers. The AG recommends a “surprise minimization” approach, which could include measures to (i) avoid collecting personally identifiable data that are not needed for basic functionality, (ii) make an app’s general privacy policy easy to understand and available before download, and (iii) supplement a legally required general privacy policy with enhanced measures to alert users and give them control over data practices that are not related to an application’s basic functionality or that involve sensitive information. Supplemental policies could include “special notices” delivered in context and “just-in-time,” or short privacy statements made readily available within an application and that highlight potentially unexpected practices and allow users to make privacy choices. The issuance of the recommendations is the latest action by the AG as part of a broader privacy initiative and follows the state’s first mobile application privacy suit filed last month.
CFPB Announces First Joint Enforcement Action with State Authorities
On December 21, the CFPB announced that it obtained an order from a federal district court in Florida that requires a nationwide payday debt relief services company to refund up to $100,000 to consumers who were charged advance fees for promised debt-settlement services that the company never actually rendered. While the amount of the refund obtained through the order is relatively small, the action is notable as the first joint enforcement action by the CFPB and certain state partners. The CFPB was joined in the suit by the attorneys general of New Mexico, North Carolina, North Dakota, and Wisconsin, as well as the State of Hawaii Office of Consumer Protection. Following an investigation into the payday debt solution firm, the CFPB alleged that the company violated the FTC’s Telemarketing Sales Rule, the Dodd-Frank Act, and various state laws, by telemarketing debt-relief services and requesting or receiving fees from consumers for those services before renegotiating, settling, reducing, or otherwise altering the terms of at least one of the consumer’s debts. The CFPB announcement notes that the company cooperated with the CFPB and halted the allegedly illegal operations, and that in addition to the customer refunds the firm will pay a $5,000 civil penalty to the CFPB.
CFPB Provides Additional Details about Certain Information-Sharing Activities
On December 11, the CFPB announced plans to share consumer complaint data with state regulatory agencies. The CFPB explained that it is providing “real-time access” to its database of consumer complaints in a manner that will protect any personally-identifiable information. Further, the CFPB plans in the future to accept such information from state agencies, and to make data available to other federal agencies, state attorneys general, local agencies, congressional offices, and other governmental organizations like the California mortgage settlement monitor and the national mortgage settlement monitor. This announcement follows a December 6, 2012 Statement of Intent issued by the CFPB in which it describes how it is coordinating broader information-sharing efforts with state banking and financial services regulators, including with regard to enforcement matters.
California AG Files First Mobile Application Privacy Suit
On December 6, California Attorney General Kamala Harris (AG) announced an enforcement action against Delta Airlines for allegedly failing to comply with the state’s Online Privacy Protection Act. This is the first action brought by the AG’s office under this law and follows other efforts by the AG’s office to require enhanced mobile privacy disclosures. In October, the AG’s office sent letters to 30 companies, including Delta, advising those entities that their mobile applications failed to comply with the state privacy law and providing them 30 days to remedy the alleged failure. The complaint alleges that since at least 2010, Delta has operated a mobile application that may be used to, for example, check-in online for an airplane flight, view reservations for air travel, or rebook cancelled or missed flights. The AG claims that the Delta application collections substantial personally identifiable information but does not have a privacy policy. The suit seeks to enjoin Delta from distributing its application without a privacy policy and penalties of up to $2,500 for each violation.
Residential Mortgage-Backed Securities Working Group Announces Several New Cases
On November 20, New York Attorney General Eric Schneiderman, one of the Co-Chairs of the federal-state Residential Mortgage-Backed Securities (RMBS) Working Group, announced a new case filed in the New York State Supreme Court alleging Martin Act violations by a securities firm and several of its affiliates in connection with the offering of RMBS. The complaint charges that the firms made fraudulent misrepresentations and omissions to promote the sale of RMBS to private investors and deceived investors regarding the care with which the firms evaluated the quality of loans included in certain RMBS offerings. The suit claims that investors suffered cumulative losses over $11 billion on RMBS sponsored and underwritten in 2006 and 2007. The DOJ’s Financial Fraud Enforcement Task Force, of which the RMBS Working Group is a part, noted the significant federal-state coordination that led to the filing, including the “significant” contributions of the FHFA’s Inspector General, as well as assistance from the SEC and Assistant U.S. Attorneys from across the country.
On November 16 the SEC announced that it had obtained more than $400 million from two firms alleged to have misled investors in RMBS. In cases coordinated with the RMBS Working Group, the SEC charged that both firms failed to fully disclose their bulk settlement practices, which involved retaining cash from the settlement of claims against mortgage loan originators for problem loans that the firms had sold into RMBS trusts, and which they no longer actually owned. The SEC also claimed, among other things, that one of the firms misstated information concerning the delinquency status of loans that served as collateral for an RMBS offering it had underwritten, while the second firm allegedly applied different quality review procedures for loans that it sought to put back to originators and instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them.
FTC and States Target "Cardholder Services" Robocalls
On November 1, the FTC announced that courts have granted temporary restraining orders in five cases in which the FTC alleged that the defendants placed automated calls to consumers to make allegedly deceptive “no-risk” offers to substantially reduce the consumers’ credit card interest rates in exchange for an upfront fee. The telemarketers claimed to be calling from the consumers’ credit card company, or otherwise used the generic “Cardholder Services” title to suggest a relationship with a bank or credit card company, the FTC says. Each complaint alleges that the defendants violated the FTC Act by misrepresenting that consumers who buy their services will have their credit card interest rates reduced substantially and will save thousands of dollars as a result. Four of the five complaints also charge that the defendants violated the FTC Act by making other misrepresentations, such as promises of faster debt payoff. The FTC also charges that the defendants violated the Telemarketing Sales Rule (TSR) by misrepresenting their services, calling numbers on the Do Not Call Registry, making illegal robocalls, and collecting up-front fees. The FTC coordinated with multiple state entities, including the attorneys general of Arizona and Arkansas and the Florida Department of Agriculture and Consumer Services, each of which took separate actions against other companies for similar alleged activities.