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Texas Federal Court Upholds HUD's Suspension of Mortgagee
On August 5, the U.S. District Court for the Southern District of Texas held that HUD's decisions to immediately suspend a HUD mortgagee and its CEO were not “arbitrary and capricious” and did not violate due process. Allied Home Mortg. Corp. v. Donovan, No. H-11-3864, 2014 WL 3843561 (S.D. Tex. Aug. 5, 2014). In October 2011, a U.S. Attorney’s Office sued the mortgagee, its CEO, and related parties under the False Claims Act and FIRREA for allegedly making false statements and false claims to HUD in connection with FHA-insured mortgage loans. Shortly thereafter, based on information obtained by the U.S. Attorney’s Office, HUD immediately suspended the mortgagee’s HUD/FHA origination and underwriting approvals and suspended the CEO from participation in procurement and nonprocurement transactions as a participant or principal. The mortgagee plaintiffs argued that such suspensions were “arbitrary and capricious” (and thus violated the Administrative Procedure Act) given the age of the evidence against the CEO and the limited evidence directly attributable to the mortgagee. Specifically, the mortgagee plaintiffs argued that HUD failed to follow its own standards for issuing immediate suspensions because it did not have adequate evidence of any present or imminent threat to the financial interests of the public or HUD that would warrant an immediate suspension. The court, however, held that the evidence uncovered in the investigation was sufficient to support HUD’s action, and that HUD “drew rational inferences based on the severity, persistence, and length of the [alleged] misconduct.” The court also denied the mortgagee plaintiffs’ due process claim, reasoning that the initial suspensions were temporary and could have been administratively appealed. The court denied the mortgagee plaintiffs’ motion for summary judgment and dismissed the case with prejudice.
California Federal Court Dismisses User Information Claims Against Digital Wallet Company
On August 12, the U.S. District Court for the Northern District of California dismissed for failure to state a claim a putative class action alleging that a digital wallet provider made unauthorized disclosures of user information to third-party mobile app developers. Svenson v. Google Inc., No. 13-cv-04080, 2014 WL 3962820 (N.D. Cal. Aug. 12, 2014). The named plaintiff claimed that when the digital wallet provider processed payments for apps purchased through an affiliated online store, it also provided certain customer/personally identifiable information to third-party app developers, including email address, account name, home city and state, zip code, and in some instances, telephone number. The plaintiff asserted theories of breach of contract and breach of the implied covenant of good faith and fair dealing, as well as violations of the Stored Communications Act and California’s Unfair Competition Law. The court held that the plaintiff’s breach of contract claim failed, reasoning in part that: (i) the plaintiff was not deprived of the “benefit of the bargain” given that the allegations involved free services and a $1.77 app; and (ii) there was no support for the theory that the economic value of the plaintiff’s information was diminished (because the plaintiff failed to allege that there was a market for the information). Similarly, the court held that the plaintiff’s Unfair Competition Law claims did not allege an economic injury, and that the breach of implied covenant claims were duplicative of the breach of contract claims. The court also dismissed the plaintiff’s Stored Communications Act claims.
Fair Housing Group Issues Annual Report
On August 13, the National Fair Housing Alliance (NFHA) published its annual fair housing report titled “Expanding Opportunity: Systemic Approaches to Fair Housing.” The paper summarizes 2013 fair housing enforcement actions and litigation, as well as federal policy developments, and provides fair housing-related data. NFHA reports that, overall, the number of fair housing complaints filed in 2013 remained flat compared to recent years, but notes that private fair housing organizations received more complaints of discrimination in real estate sales and homeowners insurance, as well as complaints of discriminatory housing advertisements by housing providers. According to the report, the DOJ Housing Section filed 43 cases in 2013, including 24 cases involving pattern and practice claims, compared to 36 cases in 2012, of which 21 involved pattern and practice. Of the 2013 pattern or practice cases, five alleged fair lending claims; 11 alleged rental discrimination on the basis of race, disability, sex, familial status, national origin, or religion; three alleged violations of the accessibility provisions of the Fair Housing Act; three alleged discrimination in land use and zoning practices or policies by local governments; and one alleged disability discrimination by a homeless shelter. Finally, the report provides, for the first time, an analysis of HUD data by region, which includes a breakdown of complaints by protected class within each of HUD’s 10 regions.
Massachusetts Regulator Issues Advisory Opinion On Debt Validation
Last month, the Massachusetts Division of Banks (DOB) issued an advisory opinion addressing whether an oral request by a debtor for certain records to validate a debt (pursuant to 209 CMR 18.18(3)) triggers a debt collector’s obligation to provide such documents within five business days. The DOB advised that a debt collector’s receipt of an oral request for such records from a consumer (or a consumer’s attorney) is sufficient to trigger the debt collector’s obligation and may serve to commence the five business day period in which the required response must be returned to the consumer.
HUD Announces Disability Income Fair Housing Conciliation Agreement
On August 13, HUD announced that a nonbank mortgage lender agreed to pay $104,000 to resolve allegations that the lender’s underwriting practices resulted in discrimination against mortgage applicants who rely on disability income. HUD filed a complaint claiming the lender required loan applicants to submit medical and other documentation related to an applicant’s disability income that it did not require from non-disabled applicants, in violation of the Fair Housing Act. Working with HUD, the lender identified 69 applicants whose loan files contained evidence of a request for additional disability documentation or evidence that a loan may have been denied on the failure or inability of the applicant to provide such documentation. The lender agreed to compensate those applicants using a tiered system, under which each applicant will receive $1,000, $2,000, or $5,000 in damages. The lender did not admit to any fault, guilt, or liability, and denied that it discriminated against any loan applicant on the basis of disability. The lender also submitted to a monitoring requirement and implemented a modified fair lending training program for its employees.
Federal Reserve Bank Paper Analyzes Credit Card Fair Lending Issues
The Federal Reserve Bank of Philadelphia recently published a discussion paper on credit card fair lending risks. The paper reviews qualitative fair lending risk assessment methods and potential quantitative analysis that may be performed to assess fair lending risk exposure in each of the following areas: (i) marketing; (ii) underwriting; (iii) credit line assignment; (iv) pricing; (v) servicing and collection; (vi) secured cards; and (vii) affinity partners. The authors note that the methods discussed are also applicable to other consumer credit products that utilize credit scoring models. The paper states that although statistical testing can be an important component of fair lending compliance management for credit card lending, “statistical analysis approaches in this area—and particularly disparate impact testing approaches—are not well established, and there are no formal regulatory guidelines for conducting such analysis.” With regard to quantitative risk assessments, the authors discuss the utility of proxy testing and explain the likelihood of false positives and false negatives as well as unassigned consumers. The authors state that “these limitations suggest that results derived from a proxy-based analysis should be treated with an appropriate degree of caution.”
Consumer Protection Organization Petitions FTC To Enforce U.S.-EU Safe Harbor Framework
On August 14, the Center for Digital Democracy (CDD) announced that it filed a complaint with the FTC claiming that 30 U.S. companies are compiling, using, and sharing EU consumers’ personal information without their awareness and meaningful consent, in violation the U.S.-EU Safe Harbor Framework. The U.S.-EU Safe Harbor Framework established a self-certification program that allows a company to collect information from European consumers without strictly following the EU’s more stringent data protection standards, provided the company (i) provides clear notice of their data-collection practices and data uses; and (ii) allows consumers to “opt-out” of data collection practices to which they did not previously agree. According to its press release, the CDD wants the FTC to investigate the companies for “relying on exceedingly brief, vague, or obtuse descriptions of their data collection practices, even though [U.S.-EU] Safe Harbor requires meaningful transparency and candor.” The complaint identifies several broad concerns that the CDD claims illustrate the inadequacy of the U.S.-EU Safe Harbor Framework, including: (i) the failure of U.S.-EU Safe Harbor declarations and required privacy policies to provide accurate and meaningful information to EU consumers; (ii) a lack of transparency by companies about their data collection; and (iii) the failure of companies to provide meaningful opt-out mechanisms. The FTC has already taken more than a dozen actions this year to enforce the U.S.-EU Safe Harbor Framework.
CFPB Fines Online Mortgage Company And Its Owner For Alleged Deceptive Rate Advertising
On August 12, the CFPB announced a consent order with a nonbank mortgage lender, its affiliated appraisal management company (AMC), and the individual owner of both companies to resolve allegations that the lender deceptively advertised mortgage rates to consumers, improperly charged fees before providing consumers with Good Faith Estimates (GFE), and failed to disclose its affiliation with the AMC while allowing the AMC to charge inflated fees.
Allegations
As explained in the consent order, the lender primarily conducts business online through its own website, and also advertises its mortgages through display ads on independent websites and the website of an unaffiliated third-party rate publisher. The CFPB asserts that, over a roughly two-year period, a “systemic problem” caused the lender to list on the rate publisher’s website lower rates for certain mortgages than the lender was willing to honor, and that the lender supplied other rates to the rate publisher that were unlikely to be locked for the majority of the lender’s borrowers. The CFPB claims that the lender failed to perform systematic due diligence or quality control to ensure the accuracy of listed rates, even though the lender was made aware through consumer complaints that certain rates were inaccurate.
The CFPB also claims that, over a period of more than two years, the lender advertised in its display ads on independent websites rates that were based on (i) a consumer profile that included an 800 credit score, although most of the lender’s borrowers had scores below 800; and (ii) payment of high discount points, without adequate disclosure of the bases for the rates. In addition, the CFPB asserts that, over a nearly four-year period, the lender generated inaccurate personal loan quotes for certain consumers because the design of the lender’s website prevented those consumers from changing the model’s credit score from 800 to a more applicable lower score. The CFPB asserts these practices violated the Mortgage Advertising and Practices (MAP) Rule by misleading consumers.
The CFPB also alleges that the lender violated RESPA and TILA by overcharging for credit reports and by requiring consumers to schedule and give payment authorization information for appraisals before providing a GFE and receiving indication that the consumers intended to proceed with a loan from the lender, thereby restricting consumers’ ability to shop for alternatives. In addition, the CFPB claims that the lender violated RESPA by failing to properly disclose its affiliate relationship with the AMC and making numerous deceptive statements that led consumers to believe that the lender had no relationship with the AMC and that the AMC’s fees were reasonable third-party fees, and violated the MAP Rule by inflating prices for certain of the AMC’s services, including “appraisal validations.”
According to the CFPB, much of the alleged conduct was directed by, and provided a financial benefit to, the companies’ individual owner.
Redress, Penalties, and Corrective Actions
The consent order requires the lender to pay nearly $14.9 million to the CFPB, which will distribute the funds to consumers who: (i) viewed the lender’s misleading rates on the rate publisher’s website on or after July 21, 2011 and then took out a mortgage with the lender with higher than advertised rates; (ii) received misleading mortgage quotes on the lender’s website based on an inapplicable 800 FICO score on or after July 21, 2011 and then took out a mortgage with the lender at a rate higher than that quoted; (iii) on or after November 1, 2009 paid more than the actual costs of credit reports before the lender provided a GFE; (iv) paid an appraisal fee on or after January 1, 2011 without receiving a proper affiliated business disclosure; and (v) closed loans during or after December 2010 and paid for appraisal review fees.
The order also: (i) requires the lender to pay a $4.5 million penalty; (ii) regulates the way the lender is permitted to advertise interest rates; (iii) mandates numerous other corrective actions related to the alleged activity; and (iv) requires the lender to hire an independent consultant to assess the lender’s advertising and disclosure practices and report to the CFPB’s Enforcement Director.
Under the consent order, the individual owner is jointly and severally liable for the nearly $14.9 million redress judgment, and must pay a $1.5 million civil money penalty.
CFPB Announces Two Actions Related To Virtual Currencies
On August 11, the Consumer Financial Protection Bureau (the CFPB or Bureau) issued a "consumer advisory" concerning virtual currency and also announced that it would begin accepting consumer complaints about virtual currency or virtual currency companies. These actions are the consumer agency’s first foray into virtual currencies, and they follow a recent GAO report that recommended the CFPB play a larger role in the development of federal virtual currency policy.
Consumer Advisory
The advisory describes virtual currencies, briefly notes their potential for innovation, and cautions consumers about the numerous and significant risks the CFPB believes virtual currencies present for consumers. Specifically, the CFPB cautions virtual currency consumers that there are risks related to hackers, fewer consumer protections, costs, and scams. The advisory elaborates on the risks for each stage of a virtual currency transaction: purchasing, storing, or transacting in virtual currencies. For example:
- Purchasing: Warns consumers purchasing virtual currencies to beware of cost fluctuations and potential scams.
- Storage: Expresses concerns about data security risks and the lack of federal insurance for virtual currencies.
- Transactions: Advises consumers transacting in virtual currencies to read their agreement with their wallet provider and be mindful of the risks of linking their digital wallet account to their bank account or payment card.
Consumer Complaints
The Bureau announced that it is working on a new form for virtual currency complaints, but in the meantime will accept such complaints using its money transfer complaints form.
Virtual currency complaints will be subject to the CFPB’s standard complaint process. As described in the CFPB’s most recent consumer complaint report, once a complaint is submitted, the CFPB sends the complaint to the appropriate company and works with the company to get a response within 15 calendar days. Each complaint is published in a public database after the company responds to the complaint or after the company has had the complaint for 15 days, whichever comes first. If a company can demonstrate within the 15-day period that it has been wrongly identified, no data for that complaint will be posted unless and until the correct company is identified. The CFPB states that if it receives a complaint about an issue outside its jurisdiction, the Bureau will forward the complaint to the appropriate federal or state regulator.
Jurisdictional issues notwithstanding, the Bureau promises to use all virtual currency complaints it receives to better understand the virtual currency market and its effect on consumers. The CFPB also asserts that it will use complaints to help enforce federal consumer financial laws and, if appropriate, take consumer protection policy steps. The Bureau has demonstrated through its examination and enforcement activity in other areas that consumer complaints play a significant role in the Bureau’s risk-based approach to supervision and enforcement. Moreover, the CFPB recently proposed to publish consumer complaint narratives with other complaint data already made public, noting in its proposal that by increasing consumer complaint volume, publication of narratives would benefit “the many Bureau functions that rely, in part, on complaint data to perform their respective missions including the Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking."
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Our Digital Commerce & Payments Practice group is experienced in regulatory matters arising at the intersection of digital payments, financial institutions, and technology providers, and is uniquely positioned to assist virtual currency and related companies whose business brings them into contact with the CFPB.
Our Consumer Financial Protection Bureau group has advised clients in dozens of CFPB examinations, investigations, and enforcement actions and frequently represents clients in connection with CFPB supervision preparedness and matters pertaining to compliance with CFPB rulemakings and regulatory expectations, including consumer complaint issues.
Please contact one of the attorneys listed below if you would like to discuss the CFPB advisory or complaints announcement.
- Manley Williams, (202) 349-8060
New York Virtual Currency Proposal Could Capture Bank Products, Card Rewards Programs
On July 17, the New York Department of Financial Services (NYDFS) proposed a rule intended to govern the virtual currency marketplace. The proposed rule is extremely broad and as currently drafted would appear to capture products provided by traditional brick and mortar banks and other regulated financial institutions. For example, as proposed, the rule could regulate:
- Reward programs, "thank you" offers, or digital coupons that offer cash back or statement credits;
- Generated numbers that access cash;
- Prepaid access and other cards that will allow customers to receive cash, including those customarily exempt such as government funded transfers;
- P2P transfers; and
- Wallet providers where the customer can access cash.
If left unaddressed, these apparent unintended consequences could create a confusing regulatory environment for certain bank and card products. It is also noteworthy that the rule does not provide any customary exclusions for chartered entities, raising substantial preemption questions.
Businesses engaging in activities covered by the proposed rule would be required to apply for a license from the NYDFS within 45 days of the effective date of the regulation. The proposed rule also sets out comprehensive compliance obligations involving consumer protection, cybersecurity, anti-money laundering, and anti-fraud, and the rule would subject licensed institutions to examination by the NYDFS. Failure to obtain a license could result in disciplinary action by the NYDFS.
The comment period on the proposed rule ends on September 6, 2014.
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Our Digital Commerce & Payments Practice group is experienced in regulatory matters arising at the intersection of digital payments, financial institutions, and technology providers, and is uniquely positioned to assist virtual currency and related companies whose business brings them into contact with the CFPB and/or the NYDFS.
Please contact one of the attorneys listed below if you would like to discuss the scope of the obligations set forth in the NYDFS proposed rule.
- Manley Williams, (202) 349-8060