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Financial Stability Board Enhances Compensation Practices Monitoring
On April 30, the Financial Stability Board established a new group of national experts from member jurisdictions to monitor and report to the FSB on implementation of the Principles and Standards on Sound Compensation Practices adopted by the FSB in 2009. The FSB also announced a new mechanism for member jurisdictions to bilaterally report, verify, and address specific compensation-related complaints by financial institutions.
CFPB Begins Study of Arbitration Clauses, Extends Comment Period for Overdraft Inquiry
On April 24, the CFPB released a request for information to inform its study of the use and impact of arbitration clauses in consumer financial services agreements. Through June 23, 2012, the CFPB is seeking information from the public regarding (i) the prevalence of use of these arbitration clauses, (ii) what claims consumers bring in arbitration against financial services companies, (iii) whether claims are brought by financial services companies against consumers in arbitration, and (iv) how consumers and companies are affected by actual arbitrations and outside of actual arbitrations. The study is required by the Dodd-Frank Act and must be completed before the CFPB can begin exercising its Dodd-Frank authority to conduct rulemakings regarding arbitration agreements. Therefore, at this time the CFPB is not seeking comments on whether and how the use of such agreements should be regulated.
The CFPB also this week extended through June 29, 2012, the comment period for its inquiry into overdraft programs and their costs, benefits, and risks to consumers.
Fannie Mae Alters Policies for Preforeclosure Sale Process, Delinquency Management, Default Prevention
On April 25, Fannie Mae issued Servicing Guide Announcement SVC-2012-06, which sets new policies and clarifies several delinquency management and default prevention requirements related to (i) electronic submission of borrower response package documents, (ii) income documentation for employed borrowers, (iii) determining monthly gross income, (iv) modifications of loans secured by leasehold estates, (v) property valuation, and (vi) executing and recording modification agreements. The majority of the changes are effective immediately. The new requirements for determining income are effective for loans evaluated on or after July 1, 2012.
On the same date, Fannie Mae also published Announcement SVC-2012-07 to establish new policies to expedite the preforeclosure sale process. For all conventional mortgage loans held in Fannie Mae's portfolio, those purchased for Fannie Mae's portfolio but subsequently securitized into Fannie Mae MBS pools, and those originally delivered as part of an MBS pool, the policies (i) establish maximum required response times for preforeclosure sale offers submitted for consideration, (ii) require servicers to provide borrowers with status updates during the evaluation process, and (iii) allow servicers to respond to unsolicited preforeclosure sale offers without first requiring an evaluation for a HAMP modification. Servicers are encouraged to adopt these policies immediately, but must do so no later than June 25, 2012. The Announcement reminds servicers that Fannie Mae may pursue any of its available remedies for failure to comply with these new policies.
Seventh Circuit Dismisses FACTA Truncation Class Action
On April 18, the U.S. Court of Appeals for the Seventh Circuit dismissed a class action seeking damages against Shell under the Fair and Accurate Credit Transactions Act (FACTA) for displaying four digits of customers’ credit card numbers on receipts printed at Shell gas stations. Van Straaten v. Shell Oil Products Co. LLC, No. 11-8031, 2012 WL 1340111 (7th. Cir. Apr. 18, 2012). FACTA requires that such receipts truncate card numbers to display no more than the last five digits of the card number. Shell’s practice was to print the last four digits of what it calls the “primary account number,” which is the number appearing before the last five digits of the sequence of numbers appearing on the front of the credit card. The plaintiffs did not allege that Shell’s practice created a risk of identity theft, but that Shell violated FACTA by printing the wrong four numbers. Writing for a three-judge panel, Chief Judge Frank Easterbrook indicated that FACTA does not define the term “card number,” but the panel did not have to define the term, “because we can’t see why anyone should care how the term is defined.” He added that ”[a] precise definition does not matter as long as the receipt contains too few digits to allow identity theft.” As to FACTA’s authorization of $100 to $1,000 for each willful violation, Judge Easterbrook noted that “[a]n award of $100 to everyone who has used a Shell Card at a Shell station would exceed $1 billion, despite the absence of a penny’s worth of injury.” Because Shell now prints no such digits on its receipts, “the substantive question in this litigation will not recur for Shell or anyone else; it need never be answered.”
FinCEN Reports Increased Mortgage Fraud SARs
On April 23, the Financial Crimes Enforcement Network (FinCEN) released an update on mortgage loan fraud suspicious activity reports (SARs) for 2011. The report indicates that mortgage fraud SARs increased 31 percent in 2011 compared to 2010, a spike that FinCEN states is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Based on a sample analysis, FinCEN found that in 40 percent of cases resulting in a SAR, the institution turned down the subject’s loan application, short sale request, or debt elimination because of the suspected fraud, indicating improvement in mortgage lending due diligence. Among other things, the report highlights short sales, appraisals, and identity theft as new fraud patterns in 2011 SARs.
Freddie Mac Adjusts Residential Loan Mitigation Options
On April 23, Freddie Mac issued Servicer Guide Bulletin 2012-10, which expands and adjusts certain loss mitigation options to offer additional assistance to struggling borrowers. With regard to state housing finance agency borrower assistance programs, the Bulletin provides requirements for servicer participation in programs funded by the Hardest Hit Fund, and consolidates all requirements related to participation in such programs. Among other things, the Bulletin also implements a previously announced extension of the HAMP and HAFA programs through December 2013, and revises HAMP eligibility requirements for permanent modifications.
Banking Regulators Clarify Volcker Rule Compliance Timeline, Senators Push for Final Rule
Recently, the Federal Reserve Board approved a statement clarifying that an entity covered by the Volcker Rule, section 619 of the Dodd-Frank Act, has until July 21, 2014 to comply unless the Board extends the conformance period. The clarified compliance date reflects the full two-year period provided by the statute for covered institutions to fully conform activities and investments. Generally, the Volcker Rule imposes certain prohibitions and requirements on banking entities and nonbank financial companies supervised by the Board that engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. The Federal Reserve Board and other federal banking regulators continue their efforts to adopt regulations implementing the statutory restrictions. In October 2011, the Federal Reserve Board sought comment on a proposed rulemaking, as did the Commodities Futures Trading Commission in January 2012, but no final rules have emerged. On April 26, 22 Senators sent a letter to the regulators urging that they adopt a strong clear rule this summer.
New York Appellate Court Holds that Federal Law Does Not Preempt State Contract and Consumer Protection Laws in Gift Card Suit
On April 17, 2012, the Appellate Division of the New York Supreme Court held that federal laws and regulations do not preempt state contract and consumer protection laws, reversing an earlier trial court decision dismissing a lawsuit concerning gift card expiration dates and renewal fees. Sharabani v. Simon Property Group, Inc., No. 2010-07552, 2012 WL 1320067 (N.Y. App. Div. Apr. 17, 2012). The plaintiff filed an action based on New York state law to recover damages arising out of a gift card that required a reactivation fee for use after its expiration date. The defendant, a federally chartered thrift that managed the gift card program, and its co-defendant moved to dismiss the lawsuit on various grounds, including that all of the plaintiffs state law claims were preempted by federal law. The court held that although Office of Thrift Supervision (OTS) regulations permitted the issuance of gift cards with administrative fees, the OTS has explicitly stated that its regulations do not preempt state contract law, commercial law, tort law, or criminal law to the extent those laws are consistent with the OTSs intent to occupy the field of federal savings associations deposit-related regulations. Based on this regulatory guidance, the court determined that only the claim based on New Yorks abandoned property law was preempted by federal law because the OTS has specific regulations regarding abandoned accounts. The court affirmed dismissal of the abandoned property claim and remanded the remaining claims based on state contract and consumer protection laws to the trial court for evaluation under the remaining prongs of the defendants motion to dismiss.
State Law Update: Vermont and Nebraska Address Mortgage Licensing
Vermont Adjusts Mortgage Licensing Law. On April 20, Vermont enacted H 565, which, in relevant part, amends definitions and exceptions related to the licensing of mortgage loan originators, mortgage brokers, and other consumer lenders to (i) permit owner financing without obtaining a license, (ii) expand the types of properties that can be sold and financed by the owner without having to obtain a license, and (iii) expand exceptions applicable to practicing attorneys.
Nebraska Issues Interpretation of Mortgage Originator, Processor, and Underwriter Licensing Rules. Recently, the Nebraska Department of Banking and Finance issued several interpretive opinions relating to mortgage loan originator, processor, and underwriter licensing. For mortgage loan originator licensing, one opinion provides examples of activities or situations that would and would not require licensure as a mortgage loan originator. A separate opinion identifies the factors and documentation the Department will consider when evaluating the “financial responsibility” of a person seeking a mortgage loan originator license. Additional separate guidance (i) clarifies the licensing responsibilities of clerical employees of licensed or registered mortgage bankers or installment loan companies, (ii) asserts that loan processing and underwriting activities are essential to origination and therefore entities performing those services must register as mortgage bankers, and (iii) establishes requirements pertaining to the use of the NMLS unique identifier on solicitations and advertisements. All of the interpretive opinions took effect April 16, 2012.
SEC Announces $28 Million RMBS Settlement
On April 24, the U.S. Securities and Exchange Commission announced that it filed and simultaneously settled a suit alleging that an H&R Block subsidiary engaged in the fraudulent sale of subprime residential mortgage-backed securities (RMBS). The complaint alleges that during a short period at the beginning of 2007, Option One Mortgage, now known as Sand Canyon Corporation, sponsored over $4 billion of RMBS and represented to investors that it would repurchase or replace any pooled mortgage for which there was a breach of a representation or warranty. The SEC alleges that at the time it sponsored the RMBS at issue, Option One was experiencing financial difficulties related to the broader decline of the subprime mortgage market and faced substantial margin calls from its creditors. As such, Option Ones condition would have prevented the company from meeting its obligations to repurchase faulty loans. Further, according to the SEC, (i) Option One failed to disclosure that it was reliant on a line of credit from its parent, (ii) H&R Block was under no obligation to provide that funding, and (iii) Option Ones losses threatened H&R Blocks credit rating at a time when the parent was negotiating the sale of Option One. The SEC did not immediately make the settlement available, but it announced that without admitting or denying the allegations Option One agreed to (i) disgorge over $14 million, (ii) pay prejudgment interest of nearly $4 million, and (iii) pay a $10 million penalty. The SEC touts this latest action as part of financial crisis-related enforcement efforts that collectively have obtained more than $1.98 billion in penalties, disgorgement, and other monetary relief. Though the investigation likely precedes the state-federal Residential Mortgage-Backed Securities Working Group and appears to have been conducted by the SEC alone, the SEC notes its role as co-chair of that group, which seeks to leverage resources to pursue alleged misconduct in the RMBS market. This settlement, comments from the SEC, and the still developing efforts of the RMBS Working Group indicate that institutions should expect continued aggressive pursuit of alleged wrongdoing in the RMBS market. This was made clear by comments from Kenneth Lench, Chief of the SEC Division of Enforcements Structured and New Products Unit that the SEC intends to "take action against those who fail to disclose or downplay important facts that make an investment riskier, even if those risks do not materialize. We remain committed to uncovering misconduct involving complex financial instruments including RMBS. Also of note, the SEC has shown a continued willingness to employ so-called "no-admit" settlements, notwithstanding a challenge to that long-standing practice issued last year by Judge Rakoff of the Southern District of New York. Last month, the U.S. Court of Appeals for the Second Circuit issued an interim decision staying Judge Rakoff's order that denied a significant no-admit settlement and required the SEC to pursue its claims at trial. In doing so, the circuit court stated that it had a significant problem with the district court's decision to dictate policy to an executive administrative agency. Instead, the Second Circuit stated, courts should defer to the agency's judgment on discretionary policy. A final decision on the district court's ruling is still pending with the Second Circuit.