InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Texas Appeals Court Affirms Holding that Certain Emails Read Together Can Be Construed as One Contract
On March 7, the Texas Court of Appeals of the Thirteenth District affirmed a trial court’s holding that the essential terms of an option contract for the purchase of real estate were present when three e-mail messages exchanged by the parties were read together. Dittman v. Cerone, No. 13-11-00196-CV, 2013 WL 865423 (Mar. 7, 2013). The defendant sued for specific performance pursuant to the terms of the three emails, and the trial court ultimately concluded that the e-mails constituted a valid option contract and ordered the plaintiffs to convey the property. The Texas Court of Appeals affirmed the trial court’s holding that the option contract complied with the statute of frauds because (i) the emails construed together provided the essential terms of the contract, (ii) the property was sufficiently identified and confirmed by extrinsic evidence, (iii) the parties’ actions evidenced an intent to conduct certain business electronically, and (iv) the real estate broker had authority to act for the sellers.
Federal Court Holds Litigation Privilege Bars SCRA Claim Based on Inaccurate Military Affidavit
Recently, the U.S. District Court for the Central District of California barred a claim for violation of Section 521 of the Servicemembers Civil Relief Act (SCRA) by holding that California’s litigation privilege applies to military affidavits. William v. U.S. Bank Nat’l Assoc., No. 12-748, 2013 WL 571844 (C.D. Cal. Feb 13, 2013). While the plaintiff was serving overseas, the defendants filed an inaccurate affidavit stating that the plaintiff was not on active military duty, and on that basis obtained a default judgment of unlawful detainer against the plaintiff. After returning from military service, the plaintiff sued the defendants for violating the SCRA by fling an inaccurate military affidavit. The court held that California’s litigation privilege, which protects communications made in the course of litigation, applied to the military affidavit and thus barred the plaintiff’s claim based on the accuracy of that affidavit. Although the borrower could—and successfully did—move to set aside the default judgment, the litigation privileged barred this secondary suit. The court also held that federal law did not preclude the state-law litigation privilege because the alleged violations occurred prior to enactment of a private right of action under the SCRA.
California Federal Court First to Outline Factors Governing FIRREA Civil Penalty Awards
On March 6, the U.S. District Court for the Central District of California identified for the first time factors for courts to consider when assessing a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). United States v. Menendez, No. CV 11-06313, 2013 WL 828926 (C.D. Cal. Mar. 6, 2013). The DOJ sued a real estate broker, alleging he committed bank fraud when he submitted a false certification on behalf of a homeowner to HUD in connection with the homeowner’s short sale. The DOJ claimed the certification was false because it represented that there were no hidden terms or special understandings with the buyer of the property, when in fact the broker himself, through a company he controlled, also was the buyer of the property and intended to immediately resell the property for a profit of nearly $40,000. Drawing upon principles applied by courts in other civil penalty contexts, the court considered eight factors to assess the civil penalty under FIRREA: (i) the good or bad faith of the defendant and the degree of scienter; (ii) the injury to the public and loss to other persons; (iii) the egregiousness of the violation; (iv) the isolated or repeated nature of the violation; (v) the defendant’s financial condition and ability to pay; (vi) the criminal fine that could be levied for the conduct; (vii) the amount of the defendant’s profit from the fraud; and (viii) the penalty range available under FIRREA.
In this case, the court found that the first three weighed in favor of a substantial civil penalty: (i) the broker acted with intent to defraud; (ii) HUD suffered a loss; and (iii) the broker’s bank fraud was egregious. The court found that the next two factors favored the broker: (iv) the admissible evidence reflected only a single instance of bank fraud, and (v) the broker recently received a discharge from bankruptcy court and had limited ability to pay. Finally, the court found that the civil penalty requested by the government — nearly $1.1 million — was excessive, considering that (vi) the amount of the criminal penalty for bank fraud was capped at $1 million, and the likely fine under the sentencing guidelines would have been “in the $20-30,000 range;” (vii) the broker’s profit was only approximately $40,000; and (viii) FIRREA precluded a penalty in excess of $1 million when the gain or loss was less than $1 million, as it was in this case. The court awarded a civil penalty of $40,000, an amount proportionate to the broker’s profit.
FTC Updates Guidance for Mobile and Internet Advertising Disclosures
Yesterday, the FTC released guidance for mobile and other online advertisers. The new guidance, “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,” adapts and expands prior FTC guidance to account for a decade’s worth of additional experience with online marketing practices, consumers’ increasing use of smartphones, and merchants’ increasing use of social media marketing.
The new guidance highlights several key considerations for businesses as they develop advertisements for online and mobile media:
- The same consumer protection laws – e.g. UDAP – that apply to commercial activities in other media apply online and in the mobile marketplace.
- Limitations and qualifying information should be incorporated into any underlying claim, rather than provided as a separate disclosure qualifying the claim.
- Marketing materials that may be viewed on a variety of platforms, including handheld devices, should be designed so that required disclosures are effectively delivered on all of the platforms.
- Required disclosures must be clear and conspicuous, as determined by numerous factors.
- If a disclosure is necessary to prevent an advertisement from being deceptive, unfair, or otherwise violative of a FTC rule, and it is not possible to make the disclosure clearly and conspicuously, then that ad should not be disseminated.
To meet the clear and conspicuous standard, the FTC reminds advertisers that, generally, a disclosure should be placed as close as possible to the trigger claim, and that they should take account of the devices and platforms consumers may use to view the advertisement and disclosure. The FTC offers other specific guidance, with corresponding examples, for complying with the clear and conspicuous standard in online and mobile advertisements:
- When a space-constrained ad requires a disclosure, incorporate the disclosure into the ad whenever possible. When it is not possible it may be acceptable to make the disclosure clearly and conspicuously on the page to which the ad links.
- Hyperlinks used to lead to a disclosure should (i) be obvious, (ii) be labeled appropriately to convey the importance and relevance of the information it leads to, and consistently formatted, (iii) be placed as close as possible to the relevant information it qualifies, (iv) take consumers directly to the disclosure on the click-through page, and (v) be monitored for effectiveness and changed, if necessary.
- Avoid requiring consumers to “scroll” in order to find a disclosure, or, when necessary, use text or visual cues to encourage consumers to scroll to view the disclosure.
- Determine screen placement based on empirical research about where consumers do and do not look.
- Recognize and respond to any technological limitations or unique characteristics of a communication method.
- Display disclosures before consumers make a decision to buy, and consider repeating disclosures before a purchase is finalized.
- Repeat disclosures, as needed, on lengthy websites and in connection with repeated claims.
- For products intended or able to be purchased from “brick and mortar” stores or from online retailers other than the advertiser itself, the disclosure should be presented in the ad itself.
- Prominently display disclosures, based on an evaluation of the size, color, and graphic treatment of the disclosure in relation to other parts of the webpage. Do not relegate disclosures to “terms of use” and similar contractual agreements.
- Review the entire ad to assess whether the disclosure is effective in light of other elements that might distract consumers’ attention from the disclosure.
- Use audio disclosures when making audio claims, and present them in a volume and cadence so that consumers can hear and understand them.
- Display visual disclosures for a duration sufficient for consumers to notice, read, and understand them.
- Use plain language and syntax so that consumers understand the disclosures.
The updated guidance, and especially the FTC’s emphasis on the ability of marketing materials to effectively deliver disclosures across multiple platforms, should lead businesses with online marketing programs to carefully review and re-assess their marketing materials and methods of presentation.
Regulators, Lawmakers Scrutinize BSA/AML Compliance and Enforcement
On March 7, the Senate Banking Committee held a hearing entitled “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement,” which featured testimony from representatives of the Treasury Department, the Comptroller of the Currency; and the Federal Reserve Board. During the hearing, Senators challenged the regulators on what they view as insufficient civil and criminal enforcement of the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules, and pressed them to act more aggressively in bringing criminal actions against banks. Senators also pressed lawmakers on comments made by Attorney General Holder at a hearing the day before where he expressed concern that some of the world’s biggest banks have become “too big to jail” because a potential punishment could negatively impact the broader economy. With regard to possible regulatory and legislative changes, Comptroller of the Currency Thomas Curry stated that the OCC is drafting guidance for banks on BSA/AML compliance, in part, to make it easier for the OCC to remove bank officers who violate federal anti-money laundering laws. Curry said the OCC also would support expanded safe harbors for banks submitting and sharing Suspicious Activity Reports. Comptroller Curry’s comments at the hearing follow remarks he made earlier in the week when he called on banks to devote more resources to BSA/AML compliance. Mr. Curry stressed that controls with regard to international activities – e.g., foreign correspondent banking and remote deposit capture – need to be commensurate with risk. He also directed banks to focus on third-party relationships and payment processors. Finally, the Comptroller cautioned banks to understand risks presented by deployment of new technologies and payment activities, including prepaid access cards, mobile banking, and mobile wallets.
New York Investigates Post-Sandy Mortgage Servicing Practices
On March 7, New York Governor Andrew Cuomo announced that the New York Department of Financial Services (DFS) is investigating certain bank and servicer practices related to Hurricane Sandy relief. Specifically, the DFS is looking into complaints that homeowners impacted by Hurricane Sandy and allowed to forgo mortgage payments are now being burdened by requests to make up all past payments in an immediate lump sum amount. In November and December of 2012, the DFS reached agreements with major banks and servicers for borrowers who were struggling to make mortgage payments after Hurricane Sandy. Under the agreement, the banks and servicers agreed to offer forbearance on mortgage payments to certain homeowners for three to six months without a lump sum balloon payment at the end of such period. The DFS is now receiving reports that homeowners at the end of their forbearance period are being asked for these lump sum payments. In addition, some homeowners are receiving pre-foreclosure notices based on missed payments during the forbearance period. The DFS sent letters to banks and servicers that seek by March 12, 2013 information on (i) the number of homeowners who asked for and received forbearance, (ii) lenders’ forbearance-related policies and practices, (iii) how the institutions implemented forbearances internally, and (iv) whether and under what circumstances they would consider offering forgiveness of principal and interest payments for up to 12 months post-storm.
Federal Reserve Board Releases Stress Test Results
On March 7, the Federal Reserve Board (FRB) released summary results of stress tests conducted for the 18 largest banks. This is the third round of stress tests conducted by the FRB, but the first conducted under new Dodd-Frank Act stress test requirements. According to the FRB, under the severe, nine-quarter hypothetical scenario, projected losses at the 18 bank holding companies would total $462 billion, and the aggregate tier 1 common capital ratio would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014. The FRB assures that despite the large hypothetical declines, the aggregate post-stress capital ratio exceeds the actual aggregate tier 1 common ratio of approximately 5.6 percent prior to the government stress tests conducted in the midst of the financial crisis.
FinCEN Reminds Financial Institutions about E-Filing Reports
On March 7, FinCEN issued a notice reminding institutions that they must use FinCEN’s new electronic reports to file most Bank Secrecy Act Reports, including Suspicious Activity Reports, Currency Transaction Reports, Registration of Money Services Business, and Designation of Exempt Person Reports. In February 2012, FinCEN issued a final notice requiring electronic filing of most reports by July 1, 2012. Shortly thereafter, FinCEN made available new formats for those reports, which all institutions must begin using by April 1, 2013. The new forms will support the agency’s enforcement efforts. For example, FinCEN Director Jennifer Shasky Calvery explained recently that in 2012 more than 23 percent of SAR filers selected “other” as the type of suspicious activity. The new form expands the number of options for type of activity being reported from 21 to 70 and adds a text field, allowing filers to described activities more accurately. FinCEN warned that companies that fail to comply with the electronic filing mandate may be subject to civil money penalties.
U.K. FSA Seeks Comments on New Consumer Credit Regulatory Regime
On March 6, the U.K. Financial Services Authority (FSA) issued a consultation paper (CP) to outline the regulatory regime for consumer credit markets after its regulatory powers transfer to the Financial Conduct Authority (FCA). The FCA is a new regulatory body that will succeed the FSA later this year, and will assume regulatory responsibility over the U.K.’s consumer credit and retail markets regulatory responsibilities. In addition to those markets, the FCA also will regulate conduct in wholesale markets, supervise the trading infrastructure that supports retail and wholesale markets, and prudentially regulate firms not regulated by the new Prudential Regulatory Authority. The CP outlines (i) the supervision of and reporting by covered firms, (ii) the interim permission for OFT license holders to continue operations, (iii) the supervision of credit advertising being subject to the Financial Services and Markets Act financial promotions regime, (iv) prudential requirements for debt management firms, (v) the Consumer Credit Act provisions that survive under the new FCA credit regime, and (vi) the sources of funding for the regime. Comments on the proposal are due by May 1, 2013.
U.K. OFT Takes Broad Action against Payday Lenders
On March 6, the U.K. Office of Fair Trading (OFT) announced that it will institute enforcement actions and seek to revoke the licenses of payday lenders that do not change certain business practices within 12 weeks. The action applies to the leading 50 payday lenders who account for 90 percent of the U.K. payday market. The OFT action comes in a final report on a broad payday lending investigation, which revealed widespread irresponsible lending and a failure to comply with the standards set out in the OFT’s Irresponsible Lending Guidance. The OFT also proposed to refer the payday lending market to the Competition Commission to investigate competition in that market.