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Ohio Enacts Cyber Fraud Enforcement Legislation
On March 9, Ohio Governor Kasich signed SB 223, which will give the Ohio Attorney General the authority investigate suspected cyber fraud cases, and to subpoena phone records, IP addresses, payment information, and witness testimony when the AG has reasonable cause to believe that a person or enterprise has engaged in, is engaging in, or is preparing to engage violations of state cyber fraud laws. The bill also alters the thresholds for determining the severity of cyber fraud charges, creating a new charge of first degree felony for frauds involving $1 million or more. The changes will take effect on June 7, 2012.
Seventh Circuit Rejects Class Certification for RESPA Section 8 Action
On March 6, the United States Court of Appeals for the Seventh Circuit concluded that borrower claims against a title insurance company for alleged kickbacks and fee splitting, in violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), were not appropriate for class treatment because an individual determination of liability would be required for each class member. Howland v. First American Title Ins. Co., Nos. 11-1816, 11-1817, 2012 WL 695636 (7th Cir. Mar. 6, 2012). The case involves the sale of title insurance in Illinois by First American Title Insurance Company. First American typically sells title insurance to borrowers by contracting with the borrower’s real estate attorney to conduct a title examination. As part of that contract, First American provides the real estate attorney with a substantial amount of information about the property, including a summary sheet that includes legal description of the property, the last known grantee, and any open liens. The borrowers alleged that this summary sheet was itself a preliminary title examination. Because much of the title examination work was provided by First American to the attorney as title agent, the borrower sought to certify a class based on two related alleged violations of RESPA: (i) that the fees charged were excessive and unreasonable given the small amount of work performed and (ii) that the attorney title agents were paid to compensate for referrals and not actual services. The court concluded class certification was not appropriate in this instance. It held that while kickbacks and referral fees to the real estate attorney title agents based on compensation for nominal or duplicative services were banned by Section 8 of RESPA, “the existence or the amount of the kickback in these cases generally requires an individual analysis of each alleged kickback to compare the services performed with the payment made.” Furthermore, the court found that claims attorney title agents were being overcompensated for a pro forma clearance of the title based on the title company’s property summary sheet required a specific case-by-case inquiry. The court concluded that “RESPA Section 8 kickback claims premised on an unreasonably high compensation for services actually performed are inherently unsuitable for class action treatment.”
Federal District Court Holds New York's EIPA Does Not Permit Private Right of Action for Judgment Debtors to Sue Their Banks
On March 2, the U.S. District Court for the Southern District of New York dismissed a putative class action brought by judgment debtors seeking money damages from their bank for allegedly violating New York’s Exempt Income Protection Act (EIPA), holding that the statute does not support a private right of action. Cruz v. TD Bank, N.A., No. 10-8026, 2012 WL 694267 (S.D.N.Y. Mar. 2, 2012). The EIPA provides a special exemption from satisfaction of money judgments for certain amounts and types of a debtor’s income, including income derived from social security, public assistance, and disability benefits. In Cruz, the judgment debtor plaintiffs alleged that their bank failed to provide them and other members of the putative class with the notices and exemptions forms as required by the EIPA, and asserted that the bank unlawfully restrained their accounts and charged them various fees in violation of the statute. After examining the plain text, legislative history, and purpose of the EIPA, the court held that judgment debtors had neither an express nor implied right to sue their bank for money damages under the statute. Instead of creating a right of action for suing a bank, the court concluded that the EIPA merely permitted judgment debtors and creditors to bring claims against each other. In addition to dismissing the EIPA claim, the court dismissed the plaintiffs’ common law fraud, fiduciary duty, unjust enrichment, negligence, and conversion claims.
Washington Enacts Multiple Amendments to Consumer and Mortgage Lending Laws
On March 8, Washington enacted HB 2255, which alters state regulation of consumer loan companies, including mortgage originators, check cashers and sellers, and payday lenders. Under the Consumer Loan Act, which covers nonbank consumer lenders including nonbank mortgage originators, consumer lenders are prohibited from making a loan from an unlicensed location. The Director of the Department of Financial Institutions can, among other things, order refunds to customers, informally settle complaints and enforcement actions, and issue subpoenas. Entities offering retail installment sales using open loop prepaid cards are no longer exempt from the Consumer Loan Act. Under the Check Cashers and Sellers Act, which covers entities that cash or sell checks, drafts, money orders, or other commercial paper, as well payday lenders, the definition of “licensee” is amended to include out-of-state entities, as well as those that should have a small loan endorsement. The Director can informally settle complaints and enforcement actions regarding covered entities. The bill includes new prohibited practices for check cashers and sellers, including (i) selling open loop prepaid access in a retail installment loan, (ii) advertising a statement that is false or deceptive, (iii) failing to pay annual assessments on time, and (iv) failing to pay other monies due to the Director. The law allows for the transition of check cashers and sellers, escrow agents, and money transmitters to the National Mortgage License System and Registry. HB 2255 also eliminates the requirement that mortgage originators provide a state disclosure form, so long as the originator offers disclosures in compliance with federal Regulation X. All of the above changes take effect June 7, 2012.
Multi-Party Mortgage Servicing Settlement Filed in Court
On March 12, federal and state officials filed documents in the United States District Court for the District of Columbia formalizing a previously announced settlement (the Settlement) of various government probes into alleged mortgage-related violations by the five largest residential mortgage servicers (collectively the Servicers). The Settlement resolves investigations and inquiries by numerous federal regulators and 49 state Attorneys General (AGs). The federal agencies that have signed on to the settlement include: the Department of Justice, the Department of Housing and Urban Development, the Department of Treasury, the Department of Agriculture, the Department of Veterans Affairs, the Federal Trade Commission, the Consumer Financial Protection Bureau, and the U.S. Trustee. With the filing of a consolidated complaint and a separate consent judgment for each Servicer, the details of the Settlement have been made available, including its provisions regarding: (i) restitution and other relief, (ii) new servicing standards, (iii) the scope of its releases, and (iv) implementation and enforcement. For a detailed analysis of the Settlement, please see BuckleySandler LLP’s recent Special Alert.
Federal Circuit Courts Issue More Rulings Enforcing Arbitration Agreements
On March 7, the U.S. Court of Appeals for the Ninth Circuit held that a national bank could compel arbitration of a dispute involving student loans. Kilgore v. KeyBank, Natl Assn, No. 09-16703, 2012 WL 718344 (9th Cir. Mar. 7, 2012). A group of students filed a class action in state court alleging that KeyBank violated state law in its offering of loans to students of a helicopter pilot school, which subsequently misappropriated the student loan funds. KeyBank removed the action to federal court and moved to compel arbitration. The district court denied the motion and KeyBank appealed. While the case was on appeal, the Supreme Court in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), set a new standard for assessing the enforceability of arbitration clauses. That new standard required the Ninth Circuit to hold in KeyBank that the Federal Arbitration Act preempts Californias rule prohibiting arbitration of claims for broad, public injunctive relief. The court also held that the arbitration clause was not procedurally unconscionable because it clearly provided a sixty-day opt-out provision and a conspicuous and comprehensive explanation of the arbitration agreement. The court did not address the issue of whether the arbitration agreement was substantively unconscionable. The U.S. Court of Appeals for the Eleventh Circuit recently issued two separate, but substantively similar, opinions regarding arbitration agreements, both in cases consolidated in the multidistrict overdraft fee litigation pending in the U.S. District Court for the Southern District of Florida. Hough v. Regions Financial Corp., No. 11-14317, 2012 WL 686311 (11th Cir. Mar. 5, 2012); Buffington v. SunTrust Banks, Inc., No. 11-14316, 2012 WL 660974 (11th Cir. Mar. 1, 2012). In both cases, based on Concepcion, the court previously vacated district court rulings that the banks arbitration clauses were substantively unconscionable under Georgia law because they contained a class action waiver. On remand, the banks renewed their motions to compel arbitration. The district court denied the motions again, this time on the ground that the arbitration clauses were substantively unconscionable under Georgia law because a provision granting the banks the unilateral right to recover their expenses for arbitration allocated disproportionately to the plaintiffs the risks of error and loss inherent in dispute resolution. The Eleventh Circuit held that, under Georgia law, an agreement is not unconscionable because it lacks mutuality of remedy. It also rejected the district courts holding that the clauses were procedurally unconscionable because the contract did not meet the Georgia standard that for an agreement to be procedurally unconscionable it must be so one-sided that no sane man not acting under a delusion would make [it] and no honest man would participate in the transaction. The Eleventh Circuit vacated the district courts orders and remanded both cases with specific instructions to compel arbitration.
Federal Reserve Releases Additional Servicer Action Plans
On March 8, the Federal Reserve Board released action plans for three additional supervised financial institutions. The plans are designed to correct alleged deficiencies in mortgage servicing and foreclosure procedures. The release also included an additional engagement letter between one financial institution and a third-party foreclosure review firm retained by the financial institution to review foreclosures that were in process in 2009 and 2010. The action plans and engagement letters are required by formal enforcement actions issued by the Federal Reserve last year. The Federal Reserve first released a group of action plans and engagement letters on February 27, 2012.
CFPB Director Addresses State Attorneys General, Spotlight on Payday Lenders, Debt Collectors, and Servicing Rules
The National Association of Attorneys General (NAAG) met this week in Washington, DC. Among the topics covered at the annual meeting was the ongoing and future coordination between federal and state law enforcement with regard to financial services. CFPB Director Cordray, a former state attorney general, noted that NAAG and the CFPB already have several working groups organized to address payday loans, foreclosure scams, auto loans, and debt collection. These efforts will be supported through a formal Memorandum of Understanding that is expected to be finalized soon. In his remarks and in follow up questioning, Director Cordray specifically addressed enforcement and supervision with regard to payday lenders and debt collectors. It was reported that Director Cordray indicated that the CFPB and the FTC are “zoning in” on issues related to payday lenders associated with Native American tribes. Regarding debt collectors, the Director stated that aggressive enforcement by the FTC and states is not enough, and that the CPFB would like federal and state regulators and enforcement agencies to develop a national strategic plan that leverages the CFPB’s supervision and enforcement capabilities. Finally, on planned rulemaking by the CFPB, the Director noted ongoing efforts to develop rules governing mortgage servicing, including force-placed insurance products and hybrid ARMs.
New York Extends Emergency Rules Regarding Mortgage Originator Licensing
On March 7, the New York Department of Financial Services extended through May 16, 2012 existing emergency rules regarding the licensing of mortgage loan originators. New York intends to adopt the rules as permanent at some future date.
FHFA IG Recommends Improved Freddie Mac Servicer Oversight
On March 7, the Inspector General (IG) of the FHFA published a report related to the FHFA’s supervision of Freddie Mac’s controls over mortgage servicing contractors. The report found areas in which the FHFA could enhance its supervision of Freddie Mac’s controls over those contractors. Specifically, the report found with regard to servicer oversight that the FHFA has not (i) clearly defined its role, (ii) sufficiently coordinated with other federal banking agencies, or (iii) addressed emerging risks in a timely manner. The IG recommends that the FHFA (i) promulgate comprehensive regulations or guidance regarding servicer oversight, (ii) direct Freddie Mac to implement servicer performance metrics more broadly, and (iii) improve existing procedures for coordinating with other federal agencies. The report includes a response letter from the FHFA, which highlights the FHFA servicing oversight initiatives to date and indicates whether and how the FHFA plans to implement the IG’s recommendations.