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Federal Banking Agencies Disclose Reported 2015 CRA Lending Data
On August 18, the OCC, the FDIC, and the Federal Reserve announced the availability of a 2015 data fact sheet on small business, small farm, and community development lending as reported by certain commercial banks and savings associations pursuant to the Community Reinvestment Act (CRA). Less comprehensive than the data reported pursuant to the Home Mortgage Disclosure Act, the CRA data includes the number and dollar amount of community development loans and small business and small farm loans originated or purchased. It also indicates whether a small business or farm loan is extended to a borrower with yearly revenues of $1 million or less and combines those loans into three categories based on size, which are reported at a census tract level. CRA data does not cover loan applications that were denied or applicant demographic information, and it is not completed on a loan-by-loan basis. According to the data fact sheet, “caution should be used in drawing conclusions from analyses using only CRA data, as differences in loan volume across areas may reflect differences in local demand for credit.”
FTC Orders Auto Dealers to Pay $85,000 Civil Penalty over Allegedly Deceptive Advertising Practices
On August 18, the FTC announced that three Texas-based auto dealers will pay an $85,000 civil penalty to resolve allegations that they violated a 2014 administrative order prohibiting them from deceptively advertising the cost of buying or leasing a car. The FTC complaint alleges, among other things, that since receiving the 2014 order, the auto dealers frequently misrepresented offers to finance or lease motor vehicles by “focusing only on a few attractive items, such as a low monthly payment or annual percentage rate, while concealing material terms that add significant extra costs or that limit who can qualify for the advertised prices.” In addition to the $85,000 civil penalty, the proposed consent order bars the defendants from (i) deceptively advertising a vehicle’s cost of purchase with financing, the cost of leasing, or any other material fact regarding price, sale, financing or leasing; (ii) misrepresenting who is likely to receive financing or leasing and who qualifies for specific finance or lease terms; and (iii) violating the Truth in Lending Act’s and the Consumer Leasing Act’s requirements to clearly and conspicuously disclose credit and lease terms.
State Attorneys General Issue Letter in Support of CFPB's Proposed Arbitration Rule
On August 12, Massachusetts AG Healey, alongside 17 other state attorneys general, sent a letter to CFPB Director Cordray in support of the agency’s proposed rule seeking to impose restrictions on the use of mandatory pre-dispute arbitration clauses by covered providers of certain consumer financial products and services. Although the letter supports the CFPB’s proposed rule, it encourages the CFPB to consider regulations that would prohibit such clauses outright. According to the letter, class action litigation would provide consumers with “real and meaningful benefits,” such as monetary and injunctive relief through settlements, and may further spur industry-wide reforms as well as regulatory and legislative action. The letter further supports the CFPB’s “effort to increase transparency in the arbitration process by requiring covered entities to submit initial claim filings and written awards in arbitration proceedings to the Bureau,” and encourages the agency to (i) publish the information publicly on its website; (ii) enforce timing obligations for reporting the information; and (iii) establish strict penalties, including fines and loss of arbitration privileges, against entities that do not comply with the reporting requirements.
New York Supreme Court Appellate Division Affirms Six-Year Statute of Limitations Applicable to Breach of Contract Action
On August 11, the Appellate Division of the New York Supreme Court First Department affirmed a trial court’s decision that the statute of limitations bars a breach of contract action brought more than six years after the seller (defendant) of mortgage loans made allegedly false representations and warranties to the purchaser (plaintiff) regarding the characteristics, quality, and risk profile of the loans. Deutsche Bank Nat’l Trust Co. v. Flagstar Capital Mkts. Corp., 2016 NY Slip Op. 05780 (N.Y. App. Div. Aug. 11, 2016). In this case, the plaintiff purchased loans from defendant with closing dates between December 7, 2006 and May 31, 2007. Through various assignments, the loan pool was conveyed to a Trust, of which the plaintiff was a trustee, securitized, and sold to investor certificateholders on October 2, 2007. In 2013, at the request of one of the certificateholders, an underwriting firm performed a forensic review of the loans underlying some of the certificates and found that “a large number of the loans breached representations and warranties made by defendant regarding the quality and characteristics of the loans.” Although the defendant was notified of the breaches, it failed to comply with the repurchase protocol set forth in the agreement between the seller and purchaser.
The plaintiff commenced action against the defendant on August 30, 2013, subsequently filing a complaint on February 3, 2014 “seeking specific performance, damages and/or rescission, and asserting a cause of action for breach of contract and a cause of action for breach of the implied covenant of good faith and fair lending.” The defendant moved to dismiss the case on the ground that the action was time barred, since it began more than six years after the plaintiff’s accrual date of the loans. The trial court ruled in favor of the defendant, reasoning that in the Court of Appeal’s recent decision in ACE, it “held that a breach of contract claim in an RMBS put-back action accrues on the date the allegedly false representations and warranties were made.” ACE Sec. Corp. v DB Structured Products, Inc., 36 N.E.3d 623 (N.Y. June 11, 2015). The Appellate Division affirmed, holding that “New York's statutes of limitation codify the public policies of ’finality, certainty and predictability that [our] contract law endorses’ (ACE, 25 NY3d at 593). The parties' accrual provision runs afoul of these important policies.”
Ninth Circuit Holds Nevada HOA Statute Unconstitutional
On August 12, the Ninth Circuit vacated a district court’s summary judgment and held that Nevada Revised Statutes section 116.3116 et seq. (the Statute) violates the Fourteenth Amendment’s Due Process Clause. Bourne Valley Court Trust v. Wells Fargo Bank, No. 15-15233 (9th Cir. Aug. 12, 2016). In a 2-1 decision, the Ninth Circuit held that the Statute’s “opt-in notice scheme” unconstitutionally degraded the mortgage lender’s interest in the property because it required an HOA to alert a mortgage lender of its intention to foreclose only if the lender had affirmatively requested notice.
New York Supreme Court Appellate Division Reverses Trial Court Ruling in RMBS Case
On August 11, the Appellate Division of the New York Supreme Court First Department reversed a trial court’s decision and held that the trustee plaintiff’s allegations against a financial institution were sufficient to support breach of contract and negligence claims arising from the securitization and sale of residential mortgages. Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital, 2016 NY Slip Op. 05781 (N.Y. App. Div. Aug. 11, 2016). According to the plaintiff, the defendant’s alleged breach of its contractual duty to notify the trustee of defective loans resulted in the sale of “virtually worthless” residential mortgage-backed securities (RMBS) to outside investors. The plaintiff further alleged that the defendant failed to “adhere to the barest minimum of underwriting standards,” claiming that many of loans had incorrect and/or unsatisfactory debt-to-income ratios and that the defendant represented the loans to appear less risky than they actually were. In reversing the lower court’s ruling that the “complaint did not contain facts to sufficiently support” an independent, separate claim for breach of contract, the court cited its recent decision in Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital, Inc., stating that “under similar RMBS agreements, a seller’s failure to provide a trustee with notice of material breaches it discovers in the underlying loans states an independently breached contractual obligation, allowing a plaintiff to pursue separate damages” (internal citation omitted).
British Columbia Labour Relations Board Accepts Application Using E-Signed Union Membership Cards
Recently, the British Columbia Labour Relations Board (Board) issued a decision accepting a trade union’s application under the Labour Relations Code, which was submitted using electronically signed membership cards. Although the Board found that the union’s use of the Adobe E-Sign software was in compliance with the Electronic Transactions Act, it only accepted three of the four e-signed cards that were submitted. The three cards it approved were completed using the “draw function” of Adobe E-Sign, which allows the user to use a finger or stylus to physically sign a touch screen device. In contrast, the Board did not accept the fourth card because it used the “type function” of the software instead, analogizing it to “a pen and paper printed block signature in quotation marks.”
According to the Board, the fact that the E-sign software contained mandatory fields for the employee’s name, signature, and date provided assurance that the cards were signed and dated at the time of signature. In the event that E-sign programs other than Adobe are used, the Board cautioned that it “will expect a similar demonstration of [membership signatures’] reliability and authenticity with regard to date and signing of the cards before the application for certification process is completed.” It further cautioned that e-sign applicants will be expected to identify the audit trail for electronic signatures at the time applications are filed.
FTC Announces Agenda for Ransomware Event
On September 7, the FTC will host its first in a series of events to look at emerging technologies raising consumer privacy and security concerns. Scheduled to take place in Washington, D.C., the first event will focus on ransomware, “one of the most challenging cybersecurity problems affecting consumers and businesses.” Panelists will discuss the scope and state of ransomware, the best defenses against it, and how victims should respond to hacker demands. The FTC will host the second and third events in the series on October 13 and December 7 with emphases on drones and smart TVs, respectively.
Houston-Based Company Disgorges $5 Million to Settle SEC Enforcement Action
In an SEC cease and desist order filed on August 11, Key Energy Services, Inc., a Houston-based provider of rig-based oil well services, agreed to disgorge $5 million to settle charges that the company violated the books and records and internal control provisions of the FCPA. According to the order, from August 2010 through at least April 2013, Key Energy’s Mexican subsidiary paid bribes of at least $229,000 to a contract employee at Petroleos Mexicanos (Pemex), the Mexican state-owned oil and gas company. In exchange, the subsidiary received Pemex non-public information, advice and assistance on contracts with Pemex, and lucrative amplifications or amendments to those contracts. The funds were allegedly funneled through an entity purporting to provide consulting services, but for which there was no evidence of appropriate authorization of the relationship, and no supporting documentation regarding the purported consulting work performed. According to the SEC, the subsidiary improperly recorded the transfers to the consulting firm as legitimate business expenses, which were consolidated into Key Energy’s books and records. Key Energy allegedly failed to implement and maintain sufficient internal controls, including within the subsidiary relating to interactions with Pemex officials, and failed to respond to indications that the subsidiary was improperly using consultants.
It is notable that Key Energy was not required to pay a civil fine in addition to disgorgement. The SEC identified three reasons for accepting Key Energy’s offer of settlement and not imposing a separate civil penalty. First, the SEC praised Key Energy for cooperating with and assisting in its investigation. Key Energy was first contacted by the SEC in January 2014 concerning possible FCPA violations. In April 2014, Key Energy was informed by employees of its subsidiary of possible bribes, at which time the company reported the allegations to the SEC and “undertook a broad internal investigation and risk assessment of [its] international operations.” The SEC specifically noted that, “to the extent the internal investigation identified additional issues of concern, Key Energy provided updates to the Commission staff.”
Second, the SEC considered not only the “cooperation Key Energy afforded to the Commission staff,” but also the “remedial acts undertaken by [the company].” The SEC noted that Key Energy, during its internal review, “promptly and simultaneously undertook significant remedial measures including … a renovation and enhancement of [its] compliance program.” Specific remedial measures included (i) stronger vendor oversight; (ii) enhanced financial controls; (iii) increased training of all international employees; (iv) developing and/or reviewing policies and procedures pertaining to the FCPA, codes of business conduct, and more; and (v) a coordinated wind-down and exit from all markets outside of North America, including a commitment to exit Mexico by the end of 2016.
Finally, “in determining the disgorgement amount and not to impose a penalty,” the SEC “considered Key Energy’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.” This third justification indicates the SEC is not only aware of the current financial strains within the oil and gas services sector, but is uninterested in unnecessarily putting companies out of business. It is also possible that Key Energy’s cooperation and remediation, coupled with its tenuous financial condition, factored into the DOJ’s decision in April to close its investigation of the same conduct without bringing charges.
GAO Report Finds CFPB Meets Requirements for Conducting SBREFA Panels; Panelists Say There's Room for Improvement
On August 10, the GAO released a report titled “Consumer Financial Protection Bureau: Observations from Small Business Review Panels.” The report summarizes the findings from the GAO’s review of the four Small Business Regulatory Enforcement Fairness Act (SBREFA) panels that resulted in final rulemakings as of April 2016. Specifically, GAO conducted a performance audit from October 2015 through August 2016 to examine the “extent to which CFPB solicited, considered, and incorporated small entity inputs into its rulemakings.” GAO interviewed 57 of the 69 small entity representatives who participated in the SBREFA panels. Although the report concludes that the CFPB completed the statutory requirements for conducting SBREFA panels, it also identifies certain areas where panelists voiced needs for improvement. While panelists voiced a panoply of concerns, including concerns that they did not have adequate time to prepare responses to CFPB information requests, a majority of representatives felt like their views were at least partially considered in the rulemaking process. However, according to the report, only seven of the 57 expressed satisfaction with the CFPB’s final rules.