InfoBytes Blog

Connecticut Banking Regulator Issues Virtual Currency Warning

On May 12, the Connecticut Department of Banking issued a consumer advisory about risks associated with virtual currencies. The advisory provides background information and highlights benefits of virtual currency, but cautions that: (i) virtual currency is subject to minimal regulation and is susceptible to cyberattacks; (ii) virtual currency accounts are not backed by the FDIC; (iii) investments tied to virtual currency are volatile; (iv) investors in virtual currency reply upon “unregulated companies that may lack appropriate internal controls and may be more susceptible to fraud and theft than regulated financial institutions;” and (v) investors will have to rely upon the strength of their own computer security systems, as well as security systems provided by third parties to protect from cyberattacks.

Virtual Currency

Federal District Court Rejects Putative Class Challenge To Servicer's Compliance With IFR Order

On May 12, the U.S. District Court for the Western District of Kentucky held that it lacks jurisdiction to review allegations that a mortgage servicer operating under an OCC consent order was negligent in its maintenance of records related to the order. Harris v. Citimortgage, Inc., No. 13-783, slip op. (W.D. Ky. May 12, 2014). The case stems from an amended OCC consent order entered in 2013 as part of the government’s decision to halt the Independent Foreclosure Review Process. The borrower in this action claimed, on behalf of herself and a class of similarly situated borrowers, that one of the settling servicers failed to keep up-to-date records and failed to exercise reasonable care in the maintenance of those records, resulting in the borrower’s foreclosure status being incorrectly classified and the borrower being paid less money under the order than she would have been if she her status had been properly classified. The court explained that the consent order requires the OCC to validate the categorization of borrowers, and that the payments to borrowers are established by the OCC at its discretion. To assess the borrower’s negligence claim, the court would be required to review the OCC’s validation of the borrower’s categorization and payment, which the court is prohibited from doing under federal law. The court dismissed the borrower’s action.

Foreclosure Class Action OCC

Special Alert: VA Adopts Its QM Rule

On May 9, 2014, the Department of Veterans Affairs (VA) issued an interim final rule defining what constitutes a “qualified mortgage” (QM) for purposes of the loans it guarantees, insures, or originates. The VA stated that, to quell persistent uncertainty among lenders regarding the treatment of VA loans under the temporary QM definition established by the Consumer Financial Protection Bureau, it was adopting a rule designating all VA loans as QMs and all VA loans other than a subset of VA streamlined refinancings as safe harbor QMs.

Click here to view our special alert.

CFPB Mortgage Origination Qualified Mortgage

Court Rules Commercial Real Estate Broker Can't Collect Commission Because Of Involvement Of Unlicensed Salesperson

Last month, the U.S. District Court for the Eastern District of Virginia held that a state-licensed real estate company was unable to collect its commission on a real estate lease transaction because a key employee involved in the lease transaction was not licensed as a real estate sales person. The real estate company, which is appealing the decision, sued a property owner last year for breach of contract after the property owner refused to pay a $6.6 million commission on a transaction the real estate company negotiated as the exclusive leasing agent for the property owner. The property owner originally asserted that the total commission owed was substantially lower, based on what it claimed were oral agreements that were reflected in the written submissions made to the tenant. However, during discovery in the case, the property owner learned at least one of the real estate company’s employees involved in the leasing transaction was not licensed as real estate salesperson or broker and asserted that as such, the real estate company is not entitled to receive any commission. As the court explained, Virginia law requires that “‘every employee or independent contractor who acts as a salesperson’ for a brokerage firm, such as [the real estate company in this case], ‘holds a license as a real estate salesperson or broker[]’ and that ‘[n]o individual shall act as a broker without a real estate broker's license from the Board.’” The company did not contest that the employee at issue was unlicensed, but rather argued that the employee did not engage in activities that required licensing. In the company’s view, state law requires a license only to make an offer to lease or to negotiate or enter into a lease, and that in this case the formal lease offers were made by and in the name of the property owner, not the real estate company or any of its employees. The court rejected the company’s interpretation of the statute, explaining that such a “narrow, hyper-formalistic reading of the licensing requirements would effectively eliminate the need for a license by most persons centrally involved in a leasing transaction on behalf of an owner.” The court reasoned that the statute’s definitions, as reflected in the range of activities a licensee is authorized to perform and the limited scope of services an unlicensed person can provide, “are clearly intended to capture the realities and breadth of activities that make up the leasing process, not the specific, more formal events necessary to consummate a transaction.” The court held that even though the company was licensed as a real estate broker, it was prohibited from receiving any commission it otherwise would be entitled to receive under its agreement with the property owner because the individual employee lacked the required license. The court acknowledged that there “is no explicit statute or judicial decision that imposes such a prohibition under Virginia law,” but concluded “easily” based on public policy that an individual’s failure to have a license precludes the company from receiving any commission in this case. The court explained that (i) the company’s license did not cover the individual; (ii) the company certified that its covered employees would hold the required license, and (iii) the company had a statutory duty to ensure that its services were carried out in accordance with the state licensing requirements. The company recently filed a notice that it is appealing the case to the Fourth Circuit; briefing has not yet commenced.

Licensing

House Financial Services Committee Approves Points-and-Fees Bill, To Vote Soon on Other Measures

On May 7, the House Financial Services Committee passed by voice vote H.R. 3211, which would remove additional items from TILA’s definition of “points and fees” for purposes of the CFPB’s “Ability to Repay” and HOEPA rules. The legislation would exclude from the definition insurance as well as taxes (which are excluded under current law) held in impound accounts and would also exclude amounts received by affiliated companies as a result of their participation in an affiliated business arrangement. The committee agreed to hold recorded votes on numerous other bills the week of May 19, 2014, including (i) H.R. 1779, which would amend TILA’s definition of a “mortgage originator” to exclude manufactured housing sales representatives, set higher HOEPA APR triggers and a minimum HOEPA points and fees trigger of the greater of 5% of the transaction amount or $3,000 for loans under $75,000 secured by personal property; (ii) H.R. 2673, which would provide that loans retained on an institution’s balance sheet automatically qualify for qualified mortgage (QM) treatment under the Ability-to-Repay rule; and (iii) H.R. 4521, which would exempt loans secured by a first lien on a consumer’s principal dwelling that are held in portfolio by creditors with assets of $10 billion or less from mandatory escrow requirements, and would instruct the CFPB to provide regulatory relief for mortgage servicers that annually service 20,000 or fewer mortgage loans. The Committee did not hold a planned vote on the issuance of document subpoenas to Treasury and the DOJ regarding prosecution of financial institutions, agreeing instead to first work to obtain the requested information through other means.

Mortgage Origination Mortgage Servicing U.S. House

House Passes Financial Services Bills

On May 6, the U.S. House of Representatives passed by voice vote three financial services bills: (i) H.R. 2672, which would require the CFPB to allow individuals and businesses to apply to have an area designated as “rural” for purposes of exemptions to the CFPB mortgage rules; (ii) H.R. 3329, which would require the Federal Reserve Board to allow bank holding companies and savings and loan holding companies with assets of less than $1 billion to incur higher amounts of debt when acquiring other banks than are allowed for larger holding companies—the current asset ceiling for that special allowance is $500 million and applies only to bank holding companies; and (iii) H.R. 4386, which would permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs that provide international remittance transfer services and other non-bank financial institutions such as gaming establishments and jewel merchants.

CFPB Mortgage Origination FinCEN Money Service / Money Transmitters U.S. House

HUD Proposes Amendments To FHA ARM Regulations

On May 8, HUD proposed a rule to amend the FHA’s single family adjustable rate mortgage (ARM) program regulations to align those regulations with the interest rate adjustment and notification periods required for ARMs under the CFPB’s new TILA mortgage servicing rules. The proposed rule would require that an interest rate adjustment resulting in a corresponding change to the mortgagor’s monthly payment for an ARM be based on the most recent index value available 45 days before the date of the rate adjustment. FHA’s current regulations provide for a 30-day lookback period. The proposed rule also would require that the mortgagee of an FHA-insured ARM comply with the disclosure and notification requirements of the CFPB’s TILA servicing rules, including at least a 60-day but no more than 120-day advance notice of an adjustment to a mortgagor’s monthly payment. FHA’s current regulations provide for notification at least 25 days in advance of an adjustment to a mortgagor’s monthly payment. Comments on the proposal are due by June 9, 2014.

Mortgage Origination HUD FHA

New York Plans Targeted Bank Cybersecurity Examinations

On May 6, New York Governor Andrew Cuomo released a report on bank cybersecurity preparedness and directed the New York State Department of Financial Services (DFS) to conduct targeted cybersecurity preparedness assessments of the DFS-regulated banks. The DFS is revising its examination procedures to add questions to assess IT management and governance, incident response and event management, access controls, network security, vendor management, and disaster recovery. DFS plans to release additional details about the timing and content of these examination procedures in the coming weeks. The report follows a year-long survey of 154 DFS-regulated banks, which revealed that “most institutions experienced intrusions or attempted intrusions into their IT systems over the past three years.” The review revealed that third-party payment processor breaches were reported by 18% and 15% of small and large institutions, respectively, and that large institutions also cited mobile banking exploitation, ATM skimming/point-of-sale schemes), and insider access breaches. Last year, the DFS announced a similar inquiry into cyber preparedness at insurance companies it regulates.

Examination Bank Supervision Privacy/Cyber Risk & Data Security NYDFS

Third Circuit Denies Rehearing of Class Certification Denial In Class Ascertainability Case

On May 2, the U.S. Court of Appeals for the Third Circuit denied a petition for rehearing en banc in Carrera v. Bayer, 727 F.3d 300 (3d Cir. 2013), a closely-watched case on class ascertainability. Last year, a three-judge panel of the Third Circuit reversed a district court’s certification of a Rule 23(b)(3) class, holding that plaintiffs must present far better evidence of class member ascertainability to achieve certification than “[a] party’s assurance to the court that it intends or plans to meet the requirements [of Rule 23].” 727 F. 3d at 306, quoting In re Hydrogen Peroxide Antitrust Litigation, 552 F.3d 305, 318 (3d Cir. 2008). The plaintiff in the case proposed to ascertain members of a class of purchasers of defendant’s over-the-counter drug product through company sales records that plaintiff assumed (with some support) existed. The district court certified the class, holding although the company lacked records to identify purchasers, class members could be ascertained through loyalty card records, online sales, or affidavits of class members attesting they purchased the product and stating the amount they purchased. Reversing class certification, the three-judge panel rejected plaintiff’s proposal to allow absent class members to self-identify by affidavit. In a 9-4 ruling, the full Third Circuit refused to re-hear the case but the four dissenters criticized the denial. Although Carrera is technically binding only on the federal courts of Pennsylvania, New Jersey, and Delaware, the decision may have broad national impact in that the original appeals decision was already being cited in courts across the country.  The end result may be that (i) in the absence of adequate defendant records, class action plaintiffs must take far more significant pre-certification discovery, including subpoenas to third parties, to prove in some detail that records provide the data needed to ascertain class members; and (ii) courts are far less likely to accept class actions or settlements thereof that rely on affidavits alone to prove class membership.

Class Action

Federal Reserve Board Proposes Liability Concentration Limit

On May 8, the Federal Reserve Board released a proposed rule that would prohibit certain financial companies from combining with another company if the resulting financial company's liabilities would exceed 10% of the aggregate consolidated liabilities of all financial companies. The rule is required by section 622 of the Dodd-Frank Act and would apply to insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies subject to Federal Reserve Board supervision pursuant to FSOC designation. The proposal generally defines liabilities of a financial institution as the difference between its risk-weighted assets, as adjusted to reflect exposures deducted from regulatory capital, and its total regulatory capital, though firms not subject to consolidated risk-based capital rules would measure liabilities using generally accepted accounting standards. Under the proposal, the Board would measure and disclose the aggregate liabilities of financial companies annually, and would calculate aggregate liabilities as a two-year average. Comments on the proposal are due by July 8, 2014.

Dodd-Frank Federal Reserve Bank Supervision