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On January 19, the U.S. Sentencing Commission proposed more severe sentencing guidelines for certain securities and mortgage fraud violations. The proposal implements two directives of the Dodd-Frank Act, which require the Commission to re-evaluate penalties in cases involving (i) securities fraud and similar offenses, and (ii) mortgage fraud and financial institution fraud. Generally, the Commission seeks comment on whether the current guidelines appropriately account for potential and actual harm to the public and financial markets from securities, mortgage, and financial institution fraud. With regard to securities fraud, the Commission proposes amendments to address sophisticated insider trading and frauds conducted by individuals holding certain positions of trust. In addressing the mortgage fraud directive, the Commission proposes changes to the calculation of loss in cases of a fraud involving a mortgage loan, including that (i) the loss should be determined by the amount recovered from the foreclosure sale where the collateral has been disposed of at a foreclosure sale; and (ii) reasonably foreseeable administrative costs to the lending institution associated with foreclosing on the mortgaged property may be included as reasonably foreseeable pecuniary harm provided that the lending institution exercised due diligence in the initiation, processing, and monitoring of the loan and the disposal of the collateral. Finally, with regard to more general financial institution fraud, the proposal seeks to provide an enhancement for offenses involving specific financial harms, such as jeopardizing the financial institution. The deadline for written public comments regarding the proposed amendments is March 19, 2012.
In the February 2012 volume of The Banking Law Journal, BuckleySandler partner Jeff Naimon published "The Fair Housing Act, Disparate Impact Claims, and Magner v. Gallagher", in which the authors review the text of the Fair Housing Act, its legislative history, and past federal appellate court decisions holding that the FHA permits disparate impact claims. They argue that recent Supreme Court decisions cast doubt on the past federal appellate court decisions, and show that the statutory text of the FHA, unlike the text of some other civil rights laws, does not permit disparate impact claims. They also discuss the case currently pending before the Court in which the Court may address for the first time whether the FHA permits disparate impact claims.
On January 18, the U.S. Supreme Court unanimously held that the Telephone Consumer Protection Act (TCPA) does not require that private actions seeking redress under the TCPA be heard only by state courts. Mims v. Arrow Financial Services, LLC, No. 10-1195, 2012 WL 125429 (Jan. 18, 2012). The decision reversed an Eleventh Circuit decision upholding a district court’s finding that Congress had placed exclusive jurisdiction over private TCPA actions in state courts. In so reversing, the Supreme Court contravened prior decisions from the Second, Third, Fourth, Fifth and Ninth circuits. Unlike those decisions, the Supreme Court found no reason to convert the TCPA’s permissive grant of jurisdiction to state courts into an exclusive grant barring the federal-question jurisdiction of U.S. district courts. According to the Supreme Court, in the TCPA Congress enacted “detailed, uniform, federal substantive prescriptions” related to telemarketing and “provided for a regulatory regime administered by a federal agency.” Congress could have, but did not, seek only to fill gaps in states’ enforcement capability.
DOJ Obtains Settlement of FCPA Charges Against Japanese Trading Company, Loses Trial on FCPA Charges Related to Mexican Electricity Contract
On January 17, the Department of Justice (DOJ) announced the settlement of Foreign Corrupt Practices Act (FCPA) charges against a Japanese trading company for a bribery scheme involving Nigerian government officials in connection with a liquid natural gas project. The company agreed to pay a $54.6 million criminal penalty to resolve the charges. Concurrently, the DOJ filed a deferred prosecution agreement (DPA), as well as a criminal information that will be dismissed if the company abides by the terms of the DPA for two years.
On the same day, following a four-day jury trial, the U.S. District Court for the Southern District of Texas acquitted a former power company executive of multiple FCPA charges related to alleged bribes paid to Mexican officials in connection with an electrical equipment and services contract. The defendant still faces non-FCPA criminal charges, which previously were severed. In 2010, the company settled related charges it faced.
On January 17, the FDIC approved a final rule establishing the requirements for submission and content of plans to assist the FDIC in the orderly resolution of insured depository institutions with total assets of at least $50 billion. The rule aims to help mitigate risks presented by insolvency of large and complex institutions by enhancing the FDIC’s ability to reduce losses to the Deposit Insurance Fund and limit disruption to the broader financial system. The $50 billion asset threshold means that thirty-seven institutions currently will be required to submit resolution plans (also known as “living wills”). This final rule follows and amends an interim final rule published in September 2011 (see InfoBytes, September 23, 2011). Some amendments are designed to more closely align the rule with a similar rule issued jointly by FDIC and the Federal Reserve Board in October 2011 to require resolution plans for certain bank holding companies. (See InfoBytes, October 21, 2011). Other changes to the interim final rule address comments submitted by stakeholders, including changes to (i) require plans to identify potential barriers or other material obstacles to an orderly resolution, (ii) allow for recapitalization as a resolution option, and (iii) require the FDIC in its plan review process to consult with a covered institution’s regulator before finding that an institution’s data production capability is unacceptable. Resolution plans will be submitted in phases to address the largest institutions first. For example, the first phase requires covered institutions whose parent company had at least $250 billion of nonbank assets as of November 30, 2011 to submit plans on July 1, 2012. Each covered institution must submit plans annually on the anniversary date of their initial submission.
On January 17, the FDIC approved a proposed rule to implement annual capital-adequacy stress tests for FDIC-insured state nonmember banks and state-chartered savings associations with over $10 billion of total consolidated assets. As of September 30, 2011, there were twenty-three such institutions. Required by the Dodd-Frank Act, the stress tests would assist the FDIC in assessing risk presented by an institution’s capitalization and help ensure the bank’s financial stability. Under the proposal, the FDIC would annually provide covered banks with at least three sets of conditions – baseline, adverse, and severely adverse – that must be used in conducting an annual stress test. The tests would include calculations, for each quarter-end within a defined planning horizon, of the impact on the covered bank’s (i) potential losses, (ii) pre-provision revenues, (iii) loan loss reserves, and (iv) pro forma capital positions, including the impact on capital levels and ratios. Covered banks also would be required to establish an oversight and documentation system to ensure that stress testing procedures are effective. Following a test, a covered bank would be required to submit the results to the FDIC and later release a summary to the public. Under the proposed timeline, each year (i) the FDIC would provide scenarios no later than mid-November, (ii) covered banks would submit their stress test reports by January 5, and (iii) by early April covered banks would publicly release a summary of results. Public comments on the rule will be accepted sixty days following publication of the rule in the Federal Register.
FTC Enhances Confidentiality of Investigations and Proposes Rule to Expedite Investigatory Processes
On January 13, by a vote of 5-0, the FTC adopted a new rule of practice (Rule 2.17) that streamlines internal procedures for staff seeking a court order to prevent investigation targets from learning about subpoenas and civil investigative demands issued by the FTC. The rule allows individual FTC Commissioners or the FTC’s general counsel to authorize the filing of a court action to delay notification to individuals required under the Right to Financial Privacy Act and the Electronic Communications Privacy Act when the FTC is seeking records from financial institutions or service providers.
Also on January 13, the FTC proposed additional changes to Parts 2 and 4 of its Rules of Practice to expedite Commission investigations and ensure that the FTC’s investigatory processes keep pace with electronic discovery advances. Among the proposed changes is a requirement for an accelerated meet-and-confer schedule to resolve electronic discovery disputes, as well as a proposal to relieve parties of their obligations to preserve documents after a year passes with no written communication from the FTC. The public can comment on the proposed rule changes through March 23, 2012.
On January 13, Illinois enacted SB 1259, thereby amending the Code of Civil Procedure to require a mortgagee to respond within ninety days to a residential mortgagor’s request to engage in a “short sale,” which the amendment defines as “the sale of real estate that is subject to a mortgage for an amount that is less than the amount owed to the mortgagee on the outstanding mortgage note.” In order to trigger the mortgagee’s response requirement, the mortgagor must present a bona fide written offer from a third party to purchase the property as a short sale. A mortgagee’s failure to accept the offer does not impair or abrogate its rights or affect the foreclosure proceedings, and the ninety-day response period does not stay the foreclosure proceedings. The bill became effective immediately upon passage.
First Circuit Finds Waiver of Rescission Rights Through Loan Modification, Affirms District Court Dismissal for Failure to State a Claim Under Massachusetts' TILA Equivalent
On January 6, the U.S. Court of Appeals for the First Circuit affirmed two prior court rulings against a plaintiff for failure to state a claim for relief under the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), Massachusetts' equivalent of the Truth in Lending Act (TILA). The First Circuit also concluded that execution of a loan modification meant that plaintiff waived any rescission rights under the MCCCDA, an issue which the district court did not reach. DiVittorio v. HSBC Bank USA, N.A., No. 11-1188, 2012 WL 33063 (1st Cir. Jan. 6, 2007). In DiVittorio, plaintiff sought to rescind a loan agreement on the ground that the disclosures made at closing did not comply with the MCCCDA. Plaintiff argued that he was entitled to rescission, damages and attorneys' fees because (i) the APR was not calculated in conformity with applicable regulations, (ii) the disclosure significantly underestimated the finance charge for the loan, and (iii) the disclosure failed to specify explicitly that payments were to be made monthly. The First Circuit, however, found that plaintiff, following repeated defaults on the loan obligation, knowingly and willingly entered into a loan modification agreement that contained a release by plaintiff with a waiver provision which waived any rescission rights he may have had. The modification had been entered into with the assistance of counsel and approved by the bankruptcy court. Independent of the modification agreement, the First Circuit concluded that plaintiff failed to state a claim for relief under TILA or the MCCCDA because (i) the performance-based reduction in interest rate was used in APR calculations, reflecting the parties' legal obligations, and was adequately set forth in the loan documents; (ii) there was no need to include in the disclosures any "unanticipated" additional interest charged as a result of late payments, as such falls outside the definition of "finance charge"; and (iii) the disclosure that there would be 360 payments spanning thirty years was sufficient such that a reasonable person would have understood that payments were to be made on a monthly basis, despite the form's failure to use the term "monthly" or to refer to the life of the loan over "360 months."
On January 6, the U.S. District Court for the District of Massachusetts found that a retailer’s collection of ZIP codes during a credit card transaction can constitute a violation of Mass. Gen. Laws ch. 93, §105(a) (the Act), but held that a plaintiff must allege actual harm. Tyler v. Michaels Stores, Inc., No. 11-10920, 2012 WL 32208 (D. Mass. Jan. 6, 2012). The complaint, filed on behalf of a putative class, alleged that a retailer’s request for customer ZIP codes when processing credit card transactions violates the Act because ZIP codes constitute protected personal identification information (PII). Noting that the plaintiff alleged only that she had received unwanted mail, not that the information was sold or otherwise exposed her to an increased risk of fraud, the court agreed with the retailer and held that the plaintiff failed to allege actual injury. However, the court found that ZIP codes are PII under the Act, and that plaintiff had alleged a per se statutory violation. The court warned that "[s]ince retailers so routinely request a customer's ZIP code at the point-of-sale in a credit card transaction, they ought note here that this Court holds [the retailer] potentially to have violated [the Act] if such request was made during a transaction in which the credit card issuer did not require such disclosure.” The court’s decision also distinguished the Act as "much narrower in scope” than California’s Song-Beverly Act, which is intended not only to prevent fraud like the Act, but also to "prevent retailers from directly or indirectly obtaining personal identification information for marketing purposes," which was the subject of the California Supreme Court’s holding in Pineda v. Williams Sonoma, Inc., 246 P.3d 612 (Cal. Sup. Ct. 2011). On January 13, plaintiff moved the court to certify the question of law at issue in this case to the Massachusetts Supreme Court.