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DOJ Obtains Settlement In FHA False Claims Act Case
On February 4, the DOJ announced the filing and simultaneous settlement of a complaint by the U.S. Attorney for the Southern District of New York (SDNY) against a mortgage lender alleged to have violated the False Claims Act (FCA) by submitting false loan-level certifications to HUD that fraudulently induced HUD to insure ineligible mortgage loans. The complaint makes similar claims with respect to loans insured by the Department of Veterans Affairs (VA). This is the first FCA case brought by the SDNY to assert claims based on VA loans. Although the complaint was filed in a whistleblower qui tam case under seal in January 2013, it indicates the U.S. Attorney’s investigation of fraudulent lending practices has been on-going since 2011. In addition to allegations concerning reckless origination practices, the complaint also alleges that the lender’s underwriters manipulated the data entered into the AUS/TOTAL Scorecard system, repeatedly entering hypothetical data that lacked a factual basis with the goal of determining the lowest values that would generate an “accept/approve” recommendation. The U.S. Attorney claims this practice violated HUD guidance and encouraged fraud by both loan officers and borrowers, and also that the lender made false statements in its loan-level certifications when it falsely certified to the “integrity” of the data entered by underwriters into AUS/TOTAL. To resolve the matter, the lender agreed to pay a total of $614 million; $564.6 million to resolve the HUD claims and $49.4 million to resolve the VA claims. Consistent with the SDNY’s recent practice of requiring admissions in civil fraud cases, the settlement stipulation recites that the lender admits responsibility for certain specified allegations. The settlement also requires the lender to implement “an enhanced quality control program,” the terms of which are to be memorialized in a separate agreement still to be negotiated.
Ninth Circuit Holds Alleged Statutory Violations Sufficient For Standing Under FCRA
On February 4, the U.S. Court of Appeals for the Ninth Circuit held that a plaintiff’s claim against a data broker alleged to have published inaccurate information about him has standing by virtue of the alleged violation of his statutory rights and need not demonstrate injury. Robins v. Spokeo, Inc., No. 11-56843, 2014 WL 407366, (9th Cir. Feb. 4, 2014). The district court held that the plaintiff failed to allege an injury in fact because his claims that the inaccurate information harmed, among other things, his ability to obtain employment did not sufficiently allege any actual or imminent harm. Applying its own precedent established in a long-running RESPA case that the U.S. Supreme Court declined to review in 2012, the court held that the violation of a statutory right usually is a sufficient injury to confer standing and that statutory causes of action do not require a showing of actual harm. The court determined that violations of statutory rights created by FCRA are concrete injuries that Congress can elevate to the status of legally cognizable injuries and are therefore sufficient to satisfy Article III’s injury-in-fact requirement. Further, the plaintiff adequately pled causation and redressability because (i) an alleged violation of a statutory provision caused the violation of a right created by that provision; and (ii) FCRA provides for monetary damages to redress the violation. The court reversed the trial court and remanded.
Senate Commerce Committee Expands Data Broker Inquiry
On February 3, Senate Commerce Committee Chairman Jay Rockefeller (D-WV) again expanded his investigation of data brokers when he asked six brokers for information on the compilation and sale of products that identify consumers based on their financial vulnerability or health status. The issue was raised recently in a majority staff report, which was released in connection with a December 2013 committee hearing. The Chairman cited “serious concerns regarding the sale and dissemination of lists identifying a consumer’s fragile health or financial circumstances without the consumer’s knowledge or permission,” which Mr. Rockefeller believes can be used by businesses seeking to target vulnerable customers for financially risky lending products or fraud schemes. The Chairman seeks a broad range of information about the companies’ data collection and sales practices conducted over a five year period. The letters are the latest in an ongoing review by the Committee, which previously expanded the scope of the review in September 2013.
Fourth Circuit Holds FDCPA Allows For Oral Disputes Of Debt
On January 31, the U.S. Court of Appeals for the Fourth Circuit held that the FDCPA does not impose a requirement that debt disputes be presented in writing and permits debtors to orally dispute the validity of a debt. Clark v. Absolute Collection Serv., Inc., No. 13-1151, 2014 WL 341943 (4th Cir. Jan. 31, 2014). A debt collector moved to dismiss a suit in which the debtor sought to invalidate a debt because the debt collection notice required the debtor’s dispute to be in writing. The debtor argued the notice violated FDCPA section 1692g(a)(3), which provides the basic right to dispute a debt. The debtor also claimed that the writing requirement was a false or deceptive means of collection in violation of section 1692e(10). Considering only the first argument on appeal, the Fourth Circuit joined the Second and Ninth Circuits, but split from the Third Circuit, and held that the “FDCPA clearly defines communications between a debt collector and consumers” and section 1692g(a)(3) “plainly does not” require a written communication to dispute a debt. The court rejected the debt collector’s argument that 1692g(a)(3) imposes an inherent writing requirement.
Nevada Judge Sanctions State AG In Robosigning Suit
On January 30, Nevada’s Clark County District Court ordered the State AG to pay attorneys’ fees in connection with a mortgage servicing vendor’s attempts to obtain discovery in the state’s case alleging the company facilitated fraudulent residential foreclosures, including through so-called “robosigning” tactics. Nevada v. Lender Processing Svcs., Inc., No. A-11-653289-B, (Nev. Dist. Ct. Jan. 30, 2014). The company asserted that the AG abused the discovery process by repeatedly failing to produce materials sufficient to support its claims under the Nevada Deceptive Trade Practices Act. The court rejected the AG’s defense, among others, that the alleged discovery deficiencies simply reflect disagreements between the parties over the evidence necessary to support a claim under state law. Although not a direct issue in this case, the company’s brief repeatedly calls out the AG’s use of outside counsel and notes a challenge to the AG’s use of an outside firm on a contingency fee basis, which is pending before the state supreme court.
SDNY Rejects SEC's Proposed Alternative Service For Two Chinese Nationals
On January 30, the U.S. District Court for the Southern District of New York denied the SEC’s motion for an order authorizing alternative means of service for two Chinese nationals residing in the People’s Republic of China. SEC v. China Intelligent Lighting & Electronics, Inc., No. 13 CIV. 5079, 2014 WL 338817 (S.D.N.Y. Jan. 30, 2014). The SEC moved for the order after it was unable to serve two individual defendants in a securities fraud case by means of the Hague Convention on the Service Abroad of Judicial and Extra-Judicial Documents in Civil and Commercial Matters. The court agreed that alternative service would be appropriate, but rejected the SEC’s proposed method of alternative service: publication in the International New York Times and via email. The court held that alternative service is acceptable if it (i) is not prohibited by international agreement, and (ii) if it comports with constitutional notions of due process. Although no international agreement would prevent the SEC’s proposed methods of service, the court held the SEC failed to demonstrate such service was “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” The court held that the SEC failed to provide evidence that either method of service would actually reach the defendants—it did not provide any information about the distribution of the newspaper and failed to provide evidence the email addresses were accurate and in use by the defendants. The court denied the SEC’s motion without prejudice.
FinCEN Director Reinforces Enforcement And Compliance Themes, Highlights Risks For Securities Firms
On January 30, in remarks to SIFMA’s AML and Financial Crimes Conference, FinCEN Director Jennifer Shasky Calvery stressed the importance of establishing a “culture of compliance” at financial institutions to support effective AML safeguards. The Director’s comments reinforce similar remarks made in recent months by both the Deputy U.S. Attorney General and Comptroller Curry. And like Comptroller Curry, Ms. Shasky Calvery highlighted the need for better information sharing not only within institutions but between institutions. FinCEN agrees with industry feedback that the agency needs to improve its own ability to share information. Also part of a broader theme among enforcement authorities, the Director explained that financial institutions should take responsibility when their actions violate the BSA, not only by admitting to the facts alleged by FinCEN but also by acknowledging a violation of the law. She highlighted specific risks in the securities sector including those related to the use of cash, and explained that securities firms that provide bank-like services need to consider the vulnerabilities associated with engaging in such services and must ensure that their compliance programs are commensurate with those risks.
Missouri AG Action Indicates Focus On Auto Service Contracts
On January 28, Missouri Attorney General Chris Koster announced a settlement with the owners of a vehicle extended-service-contract seller alleged to have marketed limited-time extend warranty programs for vehicles. The AG alleged that the company attempted to sell vehicle breakdown coverage with a generalized and often misleading description of the coverage, and that many customers later discovered their contracts were actually provided by a third party and did not contain the coverage promised. The AG stated that consumers who asked for refunds faced numerous objections and delays. The settlement requires the owners to pay $60,000 to resolve claims of deception, unfair practices, and unlawful insurance practices, and also permanently prohibits them from selling “additive contracts” in Missouri. The AG stated that the settlement "highlights [his office’s] efforts to clean up the auto service contract industry in Missouri and protect consumers from future deceptive sales practices."
Fourth Circuit Holds Fannie Mae, Freddie Mac Exempt From Local Transfer, Recordation Taxes
On January 27, the U.S. Court of Appeals for the Fourth Circuit upheld a district court decision and held that Fannie Mae and Freddie Mac are exempt from state and local real estate transfer taxes. Montgomery County, Md. v. Fed. Nat. Mortg. Ass’n, No.13-1691/1752, 2014 WL 279852 (4th Cir. Jan. 27, 2014). In this case, as in other similar cases around the country, Maryland and South Carolina counties sued to recover state and local real estate transfer taxes from Fannie Mae, Freddie Mac, and FHFA for property transfers made by those entities. The court held that Congress expressly exempted Fannie Mae and Freddie Mac from “all taxation,” including all state and local taxation, when it chartered those institutions and, in a footnote, explained that, as conservator stepping into the shoes of Fannie Mae and Freddie Mac, the same exemption applies to FHFA. The court rejected the counties’ argument that the state and local taxes imposed on transfer and recordation of real property fell within the real property tax exclusions from the general tax exemption provision of Fannie Mae and Freddie Mac's respective charters. The court added that Congress specifically carved out real property taxes from the “all taxation” exemption, but that the types of transfer taxes at issue in this case were distinguishable from a real property tax. The court affirmed the district court’s judgment in favor of Fannie Mae, Freddie Mac, and FHFA.
New Jersey Bill Regulates Vehicle Service Contracts, Ancillary Products
Last month, New Jersey Governor Chris Christie signed SB 854, which will regulate, among other things, motor vehicle service contracts and motor vehicle ancillary protection products. For example, the new law (i) requires service contract providers or sellers to provide to the purchaser receipts or other written evidence of a contract, and copies of such contracts within a reasonable period of time following the date of purchase; (ii) specifies the form and contents of service contracts, including plain language requirements and certain disclosures; and (iii) grants purchasers the right to return a contract and obtain a full refund of the contract's purchase price. In addition, providers must meet certain financial security requirements. A violation of the new provisions constitutes an unlawful practice under to the states consumer fraud act, which provides for fines of up to $10,000 for the first offense and up to $20,000 for any subsequent offense. The bill exempts, among other things, warranties and mechanical breakdown insurance policies offered by licensed insurers. The bill takes effect on 180 days following enactment, i.e. July 16, 2014.