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Arizona Appellate Court Requires Further Proceedings on Whether Certain Emails Constitute Electronic Signatures Under State Law
Recently, the Arizona Court of Appeals ruled that a state trial court erred in dismissing a claim that an emailed thank-you note acknowledging the receipt of a signed agreement constituted an electronic signature. Young v. Rose, 286 P.3d 518 (Az. Ct. App. 2012). In this case, a real estate agent sued two former clients for breaching an exclusive representation contract. The clients had manually signed the contract and returned it as a PDF copy. The agent never manually signed the agreement, but claimed that her electronic business card attached to an email thanking her clients for the PDF copy constituted an electronic signature under the Arizona Electronic Transactions Act, which includes a broad definition of electronic signature. The trial court disagreed and dismissed the case, noting that the agent’s business card was included on all of her outgoing emails and therefore could not constitute an electronic signature in some cases but not others. The Arizona Court of Appeals vacated the trial court order on procedural grounds and held that further proceedings are necessary to determine whether the email at issue qualifies as an electronic signature. The court explained that in addition to proving the existence of an electronic signature, the agent must also establish that the parties intended to conduct the transaction by electronic means.
CFPB and FHFA Partner to Develop National Mortgage Database
The CFPB and the FHFA announced today an agreement to create a National Mortgage Database, the first comprehensive repository of mortgage loan information. The database primarily will be used to support the agencies’ policymaking and research efforts and help regulators better understand emerging mortgage and housing market trends. The database is intended to (i) monitor the health of mortgage markets and consumers, (ii) provide insight on consumer decision making, (iii) monitor new and emerging mortgage products, (iv) consolidate data on first and second lien mortgages for a given borrower, and (v) help policymakers understand consumer debt burden. The press release states that development of the dataset is currently underway and the agencies expect early versions of the full dataset to be complete in 2013. Once completed, the agencies plan to explore opportunities to share database information with other federal agencies, academics, and the public. The database will include information spanning the life of a mortgage loan from origination through servicing and include loan-level data about (i) the borrower’s financial and credit profile, (ii) the mortgage product and terms, (iii) the property purchased or refinanced, and (iv) the ongoing payment history of the loan. The agencies will build the database by matching a nationwide sampling of credit bureau files on borrowers’ mortgages and payment histories with informational files such as the HMDA database and property valuation models. The database will include historical data back to 1998 and will be updated on a monthly basis.
CFPB Reports Examination Findings, Updates Examination Manual, and Details Supervisory Appeals Process
The CFPB today released its first periodic Supervisory Highlights publication, along with an updated examination manual and a bulletin about the Bureau’s examination appeals process.
The Supervisory Highlights report describes the CFPB’s supervisory activity from July 2011 through September 2012, including with regard to credit cards, credit reporting, and mortgages, and “signal[s] to all institutions the kinds of activities that should be carefully scrutinized.” During its first year of conducting exams, the CFPB states that it has found compliance management system deficiencies, including with regard to fair lending compliance programs and oversight of affiliate and third-party service providers. The report also reviews nonpublic actions taken to enforce compliance with the CARD Act and FCRA, and identifies several areas of concern for mortgage originators.
Bulletin 2012-07 details the CFPB supervisory appeals process, and addresses confidentiality and the role of the CFPB Ombudsman. Finally, the updated Supervision and Examination Manual incorporates the various procedures issued since the manual first was published in October 2011, e.g. the payday lending and consumer reporting exam procedures. The updated manual also includes new references to the Code of Federal Regulations to reflect the republishing of federal consumer finance law regulations under the CFPB’s authority.
DOJ Files First Civil Fraud Suit Alleging False Claims Act And FIRREA Violations In The Sale Of Loans To Fannie Mae And Freddie Mac
On October 24, the United States Attorney’s Office for the Southern District of New York (SDNY) filed a $1 billion civil mortgage fraud lawsuit against a mortgage lender and a major financial institution in connection with loans sold to the government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Filed as a complaint-in-intervention in a pending qui tam, or whistleblower, lawsuit, the complaint alleges that the mortgage lender engaged in a scheme to defraud the GSEs in connection with the mortgage loans it sold to them, and that the financial institution that later acquired the lender was aware of and continued the misconduct. The suit seeks damages and penalties under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This is the first civil suit brought by the Department of Justice concerning mortgages sold to the GSEs, and indicates that the government might commence other suits based on the sale of conventional mortgages to those entities.
The government’s allegations focus on a loan origination system initiated by the lender in 2006 that allegedly eliminated checkpoints on loan quality and led to fraud and other defects in the loans. The complaint alleges that the lender and the financial institution sold these loans to the GSEs but misrepresented that the loans complied with GSE requirements. The GSEs pooled the loans into mortgage backed securities and sold them to investors, subject to guarantees on principal and interest payments. As the allegedly defective loans defaulted, the GSEs suffered over $1 billion in losses through the payment of guarantees to investors.
These allegations set forth a theory of liability that the government had not previously articulated. Previous cases brought by the government primarily involved loans made by government program participants and alleged misrepresentations made directly to government agencies, whereas the complaint in this case is based on conventional loans and alleged misrepresentations to the GSEs. Moreover, unlike previous cases, defendants did not receive federal funds directly from the government, but rather only may have received such funds indirectly based on the government’s funding of the GSEs.
In addition, the complaint also represents another use by the government of FIRREA. Here, FIRREA is used to pursue the alleged profits made by defendants from the challenged loan origination system. See “Understanding FIRREA’s Reach: When Does Fraud ‘Affect’ a Financial Institution.” The case also marks yet another financial fraud qui tam action filed in New York. Both the FCA and FIRREA provide substantial rewards for whistleblowers and the government’s relatively quick decision to intervene, along with its fast response in other recent matters, may encourage other such suits in the SDNY. See “Whistle-Blower Bounties May Encourage Residential Mortgage-Backed Securities Fraud Reporting.”
In short, this action is another example of the government’s increasingly aggressive efforts to recoup losses stemming from the financial meltdown, as well as a reminder of the significance of the whistleblower provisions in both the FCA and FIRREA. Most importantly, it is a clear sign that government loan program participants are no longer the only targets for financial fraud recovery, and that the government may challenge the conduct of any lender who sold loans to the GSEs.
CFPB Finalizes Debt Collector "Larger Participant" Rule
On October 24, the CFPB issued a final rule that will allow the Bureau to supervise certain debt collectors. Under this rule, debt collectors will be required to provide certain disclosures, provide accurate information, maintain a consumer complaint and dispute-resolution process, and communicate civilly and honestly with consumers. Beginning January 2, 2013, the CFPB will be able to examine and take enforcement actions against any entity that has more than $10 million in annual receipts from consumer debt collection activities. The CFPB anticipates that the rule will cover approximately 175 third-party debt collectors, debt buyers, and collection attorneys. The final rule retains the proposed annual receipts threshold used to identify “larger participants” but excludes from the definition of annual receipts those receipts that result from collecting debts originally owed to a medical provider. The final rule also limits covered consumer debt collection activities to those conducted by “debt collectors,” which are defined as persons whose principal business activity is debt collection or that “regularly” engage in debt collection. The CFPB declined to provide a blanket exemption to attorneys, as some commenters argued was required by the Dodd-Frank Act. Concurrent with the release of the final rule, the CFPB published procedures for use in examining covered debt collectors. This rule is the second “larger participant” rule, and it follows the July 2012 consumer reporting rule. The Dodd-Frank Act requires the CFPB to promulgate a rule to define “larger participant” nonbanks in certain consumer financial services markets.
Nevada AG Obtains Multi-Million Dollar Settlement of MBS Investigation
On October 24, Nevada Attorney General (AG) Catherine Cortez Masto announced the resolution of an investigation into a financial institution’s purchasing and securitization of subprime and payment option adjustable rate mortgages. The Nevada AG’s investigation concerned potential misrepresentations by lenders with regard to loans with such terms as adjustable rates, stated income, 100 percent financed, extended amortization periods, prepayment penalties, and/or initial teaser rate. The Nevada AG was examining whether the securitizer knowingly purchased such loans and substantially assisted the lenders by financing and purchasing their potentially deceptive loans. To resolve the investigation, the securitizer agreed to pay $42 million and to abstain from financing, purchasing, or securitizing Nevada subprime mortgage loans in the future unless it has engaged in a “reasonable review” of such loans and determined that the loans comply with the Nevada Deceptive Trade Practices Act.
FinCEN Issues Guidance on Filing SARs related to Payment Processors
On October 22, FinCEN issued advisory guidance to financial institutions for filing Suspicious Activity Reports (SARs) on conduct related to third-party payment processors. The FinCEN guidance lists several potential red flags with regard to these payment processors, including (i) fraud, (ii) accounts at multiple financial institutions, (iii) money laundering, (iv) enhanced risk, (v) solicitation for business, and (vi) elevated rate of return of unauthorized debit transactions. To identify suspicious activity involving payment processors, FinCEN suggests that financial institutions review and update their anti-money laundering programs, monitor whether legal actions are pending against payment processors, and verify that payment processors have all required state licenses and registrations. In addition, financial institutions may be required to file SARs if they know or suspect that a payment processor has conducted a transaction involving funds derived from illegal activity, or where a payment processor has attempted to disguise funds derived from illegal activity. When completing SARs related to payment processors, FinCEN requests that financial institutions (i) check the appropriate box on the SAR form indicating the type of suspicious activity, and (ii) include the term “Payment Processor” in the narrative and the subject occupation portions of the SAR.
Puerto Rico Federal District Court Denies Motions to Dismiss FDIC Suit Against Former Bank Officers and Directors
On October 23, the U.S. District Court for the District of Puerto Rico denied motions to dismiss gross negligence claims against former directors and officers brought by the FDIC as receiver for a failed bank. The court further held that the FDIC as receiver is not precluded from recovering under the directors and officers’ insurance policies. W Holding Co. v. Chartis Ins. Co.-Puerto Rico, No. 11-2271, slip op. (D. Puerto Rico Oct. 23, 2012). The FDIC sued former officers and directors of the bank, alleging that they were grossly negligent in approving and administering commercial real estate, construction, and asset-based loans and transactions and seeking over $176 million in damages. The court concluded that the FDIC could not maintain claims for ordinary negligence against the former officers and directors because of the business judgment rule, but that the FDIC had stated sufficient facts to allege a plausible claim for gross negligence. The court held that (i) the FDIC’s complaint adequately specified which alleged misconduct was attributable to each director or officer, (ii) the claims should not be dismissed on statute of limitations grounds, and (iii) separate claims against certain former officers and directors concerning fraudulent conveyances should not be dismissed. In addition, the court denied the insurers’ motions to dismiss the FDIC’s claims for coverage under the directors and officers’ liability policies. The court held that the policies’ “insured versus insured” exclusion did not apply to an action by the FDIC as receiver because the FDIC was suing on behalf of depositors, account holders, and a depleted insurance fund.
CFPB Begins Accepting Consumer Reporting Complaints
On October 22, the CFPB announced that it has begun accepting consumer complaints regarding the activities of consumer reporting agencies (CRAs). In July 2012, the CFPB issued a rule that granted the Bureau authority, effective September 30, 2012, to supervise firms with more than $7 million in annual receipts from consumer reporting activities. As part of its new supervision activities, the CFPB is seeking consumer complaints with regard to (i) incorrect information on a credit report, (ii) a consumer reporting agency’s investigation, (iii) the improper use of a credit report, (iv) being unable to get a copy of a credit score or file, and (v) credit-monitoring or identity-protection services. The CFPB encourages consumers to attempt to resolve any problems directly with the CRA before submitting a complaint to the CFPB in order to take full advantage of certain rights afforded by federal consumer financial laws.
FTC Obtains Consumer Privacy Consent Order From Web Analytics Company
On October 22, the FTC announced a proposed consent order with an Internet tracking and analytics company that allegedly gathered personal data without consumer consent and failed to honor its promises to protect personal data. According to the FTC, Compete Inc. encouraged consumers to download its tracking software by promising rewards and information about the websites that customers visited. After installation, Compete’s software automatically collected information that consumers entered into websites, including usernames, passwords, search terms, and credit card and Social Security numbers. The FTC stated that Compete violated promises to consumers to collect only the names of websites that consumers visited, to remove personally identifiable information, and to protect consumer information. The proposed consent order requires Compete to (i) fully disclose what information it collects, (ii) obtain consumers’ express consent prior to collecting data, (iii) delete or anonymize previously collected information, and (iv) implement an information security program with regular third-party audits for the next twenty years.