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CFPB Suit Against Debt Settlement Firm Will Proceed
On January 10, a federal judge denied a debt settlement company's motion to dismiss a CFPB enforcement action pending in the Central District of California, in which the company challenged the constitutionality of the CFPB’s powers. Consumer Fin. Protection Bureau v. Morgan Drexen, Inc., No. 13-1267, slip op. (C.D. Cal. Jan. 10, 2014). The CFPB action asserts violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA), alleging that the company disguised illegal upfront fees assessed for debt settlement services as bankruptcy-related charges and deceived consumers into believing they would become debt free when only “a tiny fraction” of its customers actually do. In denying the company's motion to dismiss, the California court found that the CFPB’s lawsuit asserts valid claims under both the TSR and the CFPA, and that the agency’s formation and exercise of authority is constitutionally permissible under Articles I, II, and III. The debt settlement company previously raised in a separate lawsuit the constitutional claims and claims that the CFPB had “grossly overreach[ed] its authority” in the investigation on which the enforcement action is based, asserting that the agency lacks authority to regulate the law firms supported by the debt settlement service provider and that the information demanded by the CFPB—disclosed to lawyers by clients seeking advice regarding bankruptcy—was protected by the attorney-client privilege. That suit was dismissed in October 2013 in favor of the CFPB’s California-filed action.
Federal Reserve Board Seeks Comment On Designated Utilities' Risk Management Standards, Payment System Risk Policy
On January 10, the Federal Reserve Board proposed revisions to the Regulation HH risk-management standards for certain financial market utilities that have been designated as systemically important by the Financial Stability Oversight Council, and for which the Federal Reserve Board is the Supervisory Agency pursuant to Title VIII of the Dodd-Frank Act. The Board also requested comment on related revisions to part I of the Federal Reserve Policy on Payment System Risk (PSR policy), which applies to financial market infrastructures more generally, including those operated by the Federal Reserve Banks. The Federal Reserve states that both sets of proposed changes are based on and generally are consistent with the April 2012 Principles for Financial Market Infrastructures developed jointly by the international standard-setting bodies, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions. Among other things, the revisions: (i) establish separate standards to address credit risk and liquidity risk, (ii) add a standard on general business risk, and (iii) heighten requirements on transparency and disclosure. Comments on both proposals must be submitted by March 31, 2014.
SEC National Examination Program Outlines 2014 Priorities
On January 9, the SEC National Examination Program (NEP) published its examination priorities for 2014. The NEP’s market-wide priorities include (i) fraud detection and prevention; (ii) corporate governance and enterprise risk management; (iii) technology controls; (iv) issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations; and (v) retirement investments and rollovers. The NEP also identifies priorities for specific program areas, including (i) investment advisers and investment companies; (ii) broker-dealers; (iii) clearing and transfer agents; (iv) market oversight program areas; and (v) clearance and settlement. For example, for the investment advisers and investment companies program area, the NEP plans to focus on certain emerging risks including (i) advisers who have never been previously examined, including new private fund advisers, (ii) wrap fee programs, (iii) quantitative trading models, and (iv) payments by advisers and funds to entities that distribute mutual funds.
Eleventh Circuit Holds Collection Fee Based On Percentage Of Principal Owed In Violation Of Contract Terms Violated FDPCA
On January 2, the U.S. Court of Appeals for the Eleventh Circuit held that a debt collector violated the FDCPA by collecting a fee based on a percentage of the principal owed when the contract allowed a fee only for the actual cost of collection. Bradley v. Franklin Collection Serv., Inc. No. 10-1537, 2014 WL 23738 (11th Cir. Jan. 2, 2014). The debtor filed suit claiming, among other things, that the collector violated FDCPA Section 1692f, which prohibits unfair or unconscionable means of collection, including “collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law,” when it charged a fee that was not the actual cost of collection but rather liquidated damages. The court found that the contract only obligated the debtor to pay “all costs of collection,” i.e. the actual costs of collection and not a percentage-based fee where that fee did not correlate to the costs of collection. The court explained that the collector failed to prove that the percentage-based collection fee—which the collector assessed before attempting to collect the balance due—correlates to the actual cost of its collection effort. Addressing the issue for the first time, the Eleventh Circuit held that because the fee breached the agreement that obligated the debtor to pay only the “costs of collection”, the fee violated FDCPA Section 1692f. The court did not hold that the FDPCA prohibits the use of percentage-based collection fees, provided the contracting parties agree to such an arrangement.
VA Issues Statement On ATR/QM Rule
On January 9, the Department of Veterans Affairs (VA) issued Circular 26-14-1, which clarifies lender requirements for home loans guaranteed by the VA under the TILA and the CFPB’s Ability to Repay and Qualified Mortgage (ATR/QM) rule. Given that the CFPB’s ATR/QM rule took effect on January 10, 2014, and the VA has not yet finalized its own ATR/QM requirements for VA-guaranteed loans, the circular states that all lenders must comply with the requirements of TILA, as established by CFPB’s ATR/QM Rule. Further, all loans made in compliance with existing VA requirements will continue to be guaranteed by VA, regardless of their QM status. The VA expects to publish its ATR/QM rule in the “near future.”
Arkansas Amends Fair Mortgage Lending Act Regulations
On January 10, the Arkansas Securities Department finalized amendments to certain sections of the rules that implement the Fair Mortgage Lending Act. The regulations were adopted as proposed. The regulations were amended to expand disclosure requirements for new and transferred loans to include: (i) any notice required under federal law; (ii) a schedule of the ranges and categories of the servicer’s costs and fees for its servicing-related activities; and (iii) a notice that the servicer is licensed in the state and that complaints can be submitted to the Securities Department. The rule also prohibits advertising that indicates a consumer’s ability or likelihood to obtain any new mortgage credit product or term, or a refinancing or modification, has been preapproved or guaranteed. Finally, the rule, among other things, (i) expands payment processing requirements to include payments made via electronic transfer; and (ii) amends record keeping rules to require licensees to maintain records in a format compatible with electronic examination software, and to expand the types of documents servicers must maintain. The new rules take effect February 9, 2014.
Northern District of California Decision Highlights Growing Divide Within Ninth Circuit Over HOLA Preemption
On January 14, the U.S. District Court for the Northern District of California held that the federal Home Owners’ Loan Act (HOLA) preempts all of a borrower’s state law claims related to a loan originated by a thrift but held by a national bank at the time the suit was filed. Kenery v. Wells Fargo, N.A., No. 13-2411, 2014 WL 129262 (N.D. Cal. Jan. 14, 2014). In this case, a delinquent borrower sued a national bank loan servicer after the bank allegedly wrongly denied the borrower’s loan modification application and moved to foreclose on the property. The servicer argued that all of the borrower’s state law claims were preempted by HOLA, which provides for preemption of state laws purporting to impose requirements regarding the terms of credit of a loan and the processing, origination, sale, or servicing of mortgages. The borrower asserted that HOLA preempts state laws only with regard to thrifts and does not apply to the activities of the current note holder national bank, notwithstanding that the loan was originated by a thrift. The court explained that the Ninth Circuit has yet to provide clear guidance on the issue, and district courts within the circuit have diverged, holding that (i) HOLA preemption applies to all conduct related to the loan, whether by a federal thrift or a national bank, (ii) HOLA preemption does not apply to national banks, or (iii) HOLA preemption depends on whether the action at issue was taken by the federal thrift or the national bank, with only claims deriving from thrift actions subject to federal preemption. Here, the court, based on prior Northern District of California decisions, held that HOLA preemption applies to all conduct related to a loan originated by a thrift and dismissed the borrowers state law claims, with leave to amend certain of those claims.
Basel Committee Finalizes AML/CFT Risk Management Guidance
On January 15, the Basel Committee on Banking Supervision issued final guidance regarding anti-money laundering/combating the financing of terrorism (AML/CFT) risk management. The Committee states that the guidelines are consistent with and supplement the 2012 International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued by the Financial Action Task Force. The guidelines supersede two previously-issued Basel Committee publications: Customer due diligence for banks (October 2001) and Consolidated KYC management (October 2004). The final guidelines detail the “essential elements” of sound AML/CFT risk management, including those related to (i) assessing and understanding risks; (ii) customer acceptance policies; (iii) customer and beneficial owner identification; (v) ongoing monitoring; (vi) information management and record keeping; and (vii) reporting suspicious transactions and asset freezing. The guidelines also address AML/CTF in the group-wide and cross-border context, and outlines expectations for banking supervisors.
CFPB Takes Action Against Small Lender, President For RESPA Violations
On January 16, in the CFPB’s first settlement of 2014, the agency ordered a non-depository mortgage lender and its former owner to pay $81,076 for violating section 8 of the Real Estate Settlement Procedures Act (RESPA). The lender and its former owner—who currently serves as the company’s president—allegedly provided illegal kickbacks to a bank in exchange for loan referrals, disguised as inflated lease payments for renting office space within the bank. RESPA prohibits, among other things, the receipt or payment of kickbacks for settlement referrals involving federally-related mortgages. The consent order requires the company and its president to forfeit all proceeds from the allegedly unlawfully referred business—a total of $27,076 in origination fees related to 20 loans—and pay a $54,000 civil penalty.
The action extends two of the CFPB’s most recently-active enforcement patterns: RESPA section 8 and individuals. The CFPB press release announcing the action warns that the Bureau will “continue to enforce RESPA’s anti-kickback provisions” and “take action against schemes that steer consumers to lenders through unscrupulous and illegal business practices.”
New York AG Announces Chief Of New Financial Crimes Bureau
On January 17, New York Attorney General (AG) Eric Schneiderman announced that Gary Fishman will lead a new Criminal Enforcement and Financial Crimes Bureau. The bureau, which expands the Attorney General’s former Criminal Prosecutions Bureau, will focus on combating complex financial crimes in (i) bank and financial institution fraud; (ii) securities and investment fraud; (iii) money laundering; (iv) tax crimes; (v) mortgage fraud; (vi) investment schemes; and (vii) insurance fraud. The bureau also intends to form a Financial Intelligence Section that will review banking, regulatory, law enforcement, and open-source data to identify trends that will enhance the investigation and prosecution of financial crime schemes. Mr. Fishman has served as Senior Investigative Counsel since joining the AG’s office in 2012. Prior to joining the AG’s office, Mr. Fishman was the Managing Director of Investigative Group International and before that served as a New York County District Attorney’s Office prosecutor for more than 15 years, including as the Principal Deputy Chief of the Major Economic Crimes Bureau in the Investigation Division.