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Large International Bank Discloses Involvement in "Sons and Daughters" Investigation
A large international bank on Monday became the latest bank to disclose requests for information from the SEC related to the long-running “Sons and Daughters” investigation into the hiring of “candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific.” The bank noted that it “is cooperating with the SEC’s investigation.” Prior coverage of other aspects of the “Sons and Daughters” investigation around the world is available here.
London-Based Global Building and Infrastructure Company Ordered to Pay £2.25 Million in First UK Section 7 Conviction
Following its December guilty plea in the UK, a London-based global building and infrastructure company on Friday was ordered by a UK court to pay £2.25 million (including a fine of £1.4 million) for violating Section 7 of the UK Bribery Act of 2010. This was the first-ever conviction and sentence for a company under Section 7, which in essence penalizes companies for failing to prevent bribes made on their behalf. The conduct at issue related to a three-year arrangement in the UAE to secure contracts related to large building contracts.
Spotlight Article: California Supreme Court Holds that Borrowers Have Standing to Challenge an Allegedly Void Assignment of the Note and Deed of Trust in an Action for Wrongful Foreclosure
Yesterday, the California Supreme Court held in Yvanova v. New Century Mortgage Corp, Case No. S218973 (Cal. Sup. Ct. February 18, 2016) that borrowers have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure. In reaching this decision, the Court reversed the rule followed by the overwhelming majority of California courts that borrowers lacked such standing. The Court’s decision may have broad ramifications for lenders, investors, and servicers of California loans.The Court’s Holding
In Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loan was assigned into a securitized trust after the trust closing date set forth in the applicable pooling and servicing agreement, allegedly rendering the assignment void. To date, California courts have rejected hundreds of similar claims. In Yvanova, the Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.” Slip. Op. at 2. The Court’s ruling thus breathes new life into this favorite theory of the foreclosure defense bar.
The Court’s Reasoning
The Court acknowledged that the majority of California courts have held that borrowers do not have standing to challenge an allegedly void assignment because they are neither parties to, nor intended beneficiaries of, the assignment. Rather than adopt the majority approach, the Court based much of its decision on Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), in which the Fifth District Court of Appeal, on substantially similar facts, held that the question of standing turned on whether the alleged defect in the assignment, if proven, would render the assignment void altogether or merely voidable. Slip. Op. at 12. The parties to a voidable assignment have the power to ratify the defective assignment; parties to a void assignment have no such power. Id., at 10. In the former case, the Court would deny standing because the borrower would be asserting interests belonging solely to the parties to the assignment: only they have the power to ratify the assignment. Id. In the latter case, involving an allegedly void assignment, there would be no power of ratification, and thus the borrower would not be “asserting the interests of parties to the assignment; she [would be] asserting her own interest in limiting foreclosure on her property to those with legal authority to order a foreclosure sale.” Id., at 21.
Potential Impact of the Court’s Decision
Although a borrower’s standing to challenge an allegedly void assignment now appears settled under California law, the full impact of the decision will likely take some time to discern. By recognizing standing to challenge allegedly void assignments, the Court has clearly invited a substantial amount of wrongful foreclosure litigation. The statute of limitations for wrongful foreclosure is at least three years and, possibly longer, if a borrower can invoke the discovery rule or equitable tolling. See Cal. Code of Civ. Proc. § 338(d). Given the large number of securitized loans that have been foreclosed upon in California within the last several years, the number of possible claimants is potentially very large.
It remains to be seen whether California’s trial courts will be receptive on the merits to wrongful foreclosure suits based on the now reinvigorated void-assignment theory. There are a number of key legal and factual questions that the California Supreme Court expressly left unanswered.
The California Supreme Court explicitly did not decide whether a transfer of a note and deed of trust into a securitized trust in violation of the trust instrument renders the assignment void or voidable under governing New York law. Importantly, the Court acknowledged a conflict between Glaski’s construction of New York law on this issue and a decision of the United States Court of Appeals for the Second Circuit in Rajamin v. Deutsche Bank Nat’.l Trust Co., 757 F.2d 79 (2d Cir. 2014). Slip. Op. at 27. In Glaski, the Court of Appeal found that the alleged violation of the trust instrument, if proven, would render the assignment void. Rajamin considered and expressly rejected Glaski’s construction of New York law. Nevertheless, the California Supreme Court, in Yvanova, left it to California’s lower courts to determine whether to follow Glaski or Rajamin. If the lower California courts follow Rajamin then the uptick in wrongful foreclosure cases will likely prove short-lived and muted. Also important will be how California courts resolve similar issues under Delaware law, which, like New York law, governs many securitization trusts. Given this split in appellate authority under New York law, certification of the question to the New York Court of Appeals may prove an efficient way to address the uncertainty created by Yvanova. See New York Court of Appeals Rule 500.27 (authorizing New York Court of Appeals to hear determinative questions of New York law in cases pending before federal courts or the highest court of another state).
The Court also left for future development whether borrowers bringing a wrongful foreclosure action can obtain an order setting aside a completed foreclosure based on the void-assignment theory and whether borrowers will be required to allege tender of the outstanding loan balance to state a cause of action for wrongful foreclosure. Slip. Op. at 9 n. 4. Numerous California decisions hold that tender is required to set aside a completed foreclosure. If the lower courts continue to enforce the tender requirement, then the impact of Yvanova may be lessened.
Another significant question that no doubt will arise is whether borrowers can bring pre-foreclosure actions to enjoin ongoing nonjudicial foreclosures based on void assignment allegations. The Court explicitly left undisturbed, as “not within the scope of review,” a lower court decision “disallowing the use of a lawsuit to preempt a nonjudicial foreclosure.” Id., at 16–17 (citing Jenkins, 216 Cal.App.4th at 513). However, a number of courts have carved out exceptions to the rule disallowing judicial preemption of ongoing nonjudicial foreclosure proceedings. It remains to be seen whether Yvanova will provide an impetus to broaden these exceptions.
Finally, under California’s Homeowner Bill of Rights, borrowers must be given notice that they are entitled to request “a copy of any assignment, if applicable, of the borrower’s mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose.” Cal. Civ. Code § 2923.55(B)(iii). Yvanova will likely inspire a substantial increase in such requests. And that may lead to an increased number of wrongful foreclosure claims.
What Happens Next
Apart from preparing to defend against the expected increase in volume of wrongful foreclosure litigation, servicers and investors may wish to consider steps to reduce their exposure to Yvanova and further unfavorable developments in the law. Depending on the volume of wrongful foreclosure litigation that Yvanova creates and whether California’s trial courts begin enjoining ongoing foreclosures based on this theory, lenders, investors, and servicers may need to consider revising their foreclosure processes to focus on possession of the note at the relevant time and thereby render irrelevant the validity of the assignment of the deed of trust. Further, lenders, investors and servicers may wish to explore the use of estoppel certificates obtained from borrowers in loan modification or other loss mitigation relief, where permissible, to establish authority to foreclose.
CFPB Issues Policy on No-Action Letters
On February 18, the CFPB finalized its policy on No-Action Letters, which was originally proposed in October 2014. The No-Action Policy is intended to create a process for companies to apply for a No-Action Letter (NAL) from the CFPB in “instances involving innovative financial products or services that promise substantial consumer benefit” where provisions of the statutes implemented or regulations issued by the CFPB are vague. According to CFPB Director Cordray, the new policy is “designed to improve access to consumer financial products and services that promise substantial consumer benefits.” Denial of applications will be made at the discretion of the CFPB staff, who will not be required to “provide specific reasons for declining to provide NALs.” According to the policy statement, the CFPB has “limited resources to devote to NALs” and anticipates receiving approximately “one to three actionable applications per year.”
Washington Proposes Amendments to Money Transmitters Rules
Recently, the Washington Department of Financial Institutions (DFI) announced that on March 29, 2016 it will hold a hearing regarding proposed amendments to the 2015 Uniform Money Services Act. New sections to the proposal include requiring that money services licensees establish and maintain (i) an effective cybersecurity program; (ii) a written customer information security program; and (iii) a written privacy policy that complies with Regulation P of the Gramm-Leach-Bliley Act.
Fourth Circuit Reverses District Court's Decision; Rules Debt Collector's Arbitration Provisions Unenforceable
Recently, the U.S. Court of Appeals for the Fourth Circuit reversed a District Court’s decision that a debt collector’s arbitration provisions in loan agreements were enforceable. Hayes v. Delbert Services Corp., No. 15-1170 (4th Cir. Feb. 2, 2016). The defendant collected on loans that were transferred from an online payday lender owned by a member of the Cheyenne River Sioux Tribe. The loan agreements for the transferred loans provided that disputes between the borrower and the payday lender, or any assignee, would be resolved by binding arbitration “conducted by the Cheyenne River Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” The loan agreement also provided that the agreement “IS MADE PURSUANT TO A TRANSACTION INVOLVING THE INDIAN COMMERCE CLAUSE OF THE CONSTITUTION OF THE UNITED STATES OF AMERICA, AND SHALL BE GOVERNED BY THE LAW OF THE CHEYENNE RIVER SIOUX TRIBE. The arbitrator will apply the laws of the Cheyenne River Sioux Tribal Nation and the terms of this Agreement.” The agreement went on to state that the arbitrator would not apply “any law other than the law of the Cheyenne River Sioux Tribe of Indians to this Agreement.”
The Fourth Circuit held that existing Supreme Court precedent makes it clear that the freedom to contract for arbitration does not extend to using an arbitration provision or choice of law clause to create a “substantive waiver of federally protected civil rights.” Essentially, the Fourth Circuit found the arbitration provisions in the loan agreement purported to create a prospective waiver of substantive rights under federal law, which rendered the arbitration provisions unenforceable. The Fourth Circuit observed that “a party… may not flatly and categorically renounce the authority of the federal statutes to which it is and must remain subject.” The Fourth Circuit also found that the arbitration provisions addressing governing law were not severable, because they went to the essence of the contract.
On February 16, the defendant filed a petition for rehearing arguing that the Fourth Circuit’s ruling (i) conflicts with past Supreme Court and Fourth Circuit decisions; and (ii) “will lead to the invalidation of countless arbitration agreements with foreign choice-of-law clauses on the ground that explicitly providing for the application of foreign law violates the prospective waiver doctrine.”
FTC Reports to CFPB on 2015 Activities to Combat Illegal Debt Collection Practices
On February 17, the FTC sent the CFPB a letter summarizing its 2015 efforts to stop allegedly illegal debt collection practices. According to the letter, in 2015, the FTC’s FDCPA activities included “aggressive law enforcement activities and public outreach to address new and troubling issues in debt collection,” such as (i) coordinating the first federal-state-local enforcement initiative, Operation Collection Protection, that targets deceptive and abusive debt collection practices; (ii) prosecuting various cases involving the use of purportedly unlawful text messages to collect debts; (iii) publishing a list of every company and individual that has been banned from engaging in debt collection activities because of the FTC’s work; and (iv) hosting three Debt Collection Dialogues “to promote a more robust exchange of information between the debt collection industry and the state and federal governmental agencies that regulate their conduct.” The letter highlights various actions against debt collectors taken jointly by the FTC and the CFPB, and the offices of the New York and Illinois Attorneys General. Under the FDCPA, the FTC shares enforcement responsibilities with the CFPB. The FTC’s recent letter is intended to assist the CFPB in preparing its annual report to Congress about its administration of the FDCPA, as required by Dodd-Frank.
FTC Settles with Bitcoin Mining Operation Over Alleged Deceptive Practices
On February 18, the FTC announced that a Kansas-based bitcoin mining operation and two of its operators had agreed to settle allegations that their marketing practices for bitcoin mining machines and services were deceptive, and that they failed to deliver their product or mining services in a timely fashion, or at all, to consumers who were charged upfront fees ranging from $149 to $29,899. Under the terms of the FTC’s two orders – one of which was issued to the company and its part-owner and the other to the company’s general manager – the company and individuals are prohibited from (i) misrepresenting to consumers aspects of their bitcoin mining products or services, including speed, efficiency, operational cost, performance, or efficacy; (ii) collecting upfront payments from consumers, unless the product can be shipped or the service started within 30 days of payment; and (iii) keeping consumers’ payments if the product delivered was damaged, or the service provided did not meet the promised specifications. The orders impose judgments of $38,615,161 against the company and its part-owner and $135,878 against the company’s general manager. The FTC partially suspended the judgments due to inability to pay, but commented that the judgments “will become due should the defendants be found to have misrepresented their financial condition.”
California AG Harris Issues Data Breach Report
On February 16, California AG Kamala Harris released a report analyzing data breaches reported to her office from 2012 through 2015. During that time period, the report identifies 657 data breaches that compromised more than 49 million Californians’ personal information. The report summarizes the scope of California’s existing breach notice law and notes that notification laws in 46 other states were modeled after California’s original law. According to the report, federal data breach proposals currently under consideration in Congress would, among other things, (i) set the consumer protection bar very low; (ii) infringe on state-based innovation; (iii) encroach on enforcement by state attorneys general; (iv) narrowly define harm and personal information; and (v) set “overly rigid timelines for notification.” The report provides recommendations for organizations and state policymakers on how to improve data security. Specifically, the report recommends that organizations: (i) adopt the Center for Internet Security’s Critical Security Controls relevant to the organization’s specific environment; (ii) use multi-factor authentication to protect critical systems and data, and make the multi-factor authentication available on consumer-facing online accounts containing sensitive personal information; (iii) consistently use strong encryption to protect personal information on laptops and other portable devices; and (iv) encourage persons affected by a breach of Social Security or driver’s license numbers to place a fraud alert on their credit files. Finally, the report recommends that state policymakers “collaborate in seeking to harmonize state breach laws on some key dimensions.”
CFPB Announces Consumer Advisory Board Meeting
On Thursday, February 25, the CFPB will hold its next Consumer Advisory Board meeting in Washington, DC. According to the meeting’s agenda, after opening remarks from Director Cordray, Chris D’Angelo, Director Cordray’s Chief of Staff, will discuss the Bureau’s strategic outlook. Later in the afternoon, CFPB Assistant Director for Financial Education Janneke Ratcliffe and Senior Financial Education Research Analyst Genevieve Melford will speak on the topic of Measuring Financial Well-Being. The event is open to the public.
