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Financial Services Law Insights and Observations

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  • District Court: Bank originating mortgage loans is not a debt collector under FDCPA

    Courts

    On January 23, the U.S. District Court for the Middle District of Florida dismissed a putative class action suit, ruling that a national bank did not qualify as a debt collector under the FDCPA. According to the order, the three plaintiffs defaulted on loans that were originated (or acquired via merger) by the bank. The loans were ultimately satisfied by the proceeds of related short sales of the plaintiffs’ homes. Following the satisfaction of the loans, the bank sent the plaintiffs letters that stated it would not report any negative information regarding the plaintiffs’ loans to the credit bureaus or charge any late fees for a period of 90 days due to the plaintiffs’ residences being located in a FEMA-declared disaster area. The plaintiffs alleged that these letters violated the FDCPA and the Florida Consumer Collection Practices Act (FCCPA) because the bank “systematically misrepresent[ed] the status” of the plaintiffs’ satisfied loans as well as the plaintiffs’ “obligations under the loans.” The bank moved to dismiss arguing, among other things, that the FDCPA claims should be dismissed because the bank—as originator and owner of the loans—is not a debt collector under the FDCPA, and the complaint failed to contain any allegations supporting the assertion that the bank’s principal purpose as a business is the collection of debts. Moreover, the bank argued that the letters were sent purely for informational purposes, and as such, did not constitute an attempt to collect a debt under the FDCPA or FCCPA.

    The court agreed with the bank, finding that the bank was “exempt from the definition of a debt collector” due to its status as the originator of the loans, and dismissed the FDCPA claims with prejudice. The court also dismissed plaintiffs’ FCCPA claims, finding that it lacked original jurisdiction over these claims because the plaintiffs failed to file a motion for class certification within 90 days of filing the complaint, as required under local rules.

    Courts Mortgage Origination Debt Collection FDCPA State Issues

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  • DOJ settles with mortgage company for alleged SCRA violations

    Federal Issues

    On February 7, the DOJ announced a $750,000 settlement with a New Jersey-based mortgage company resolving allegations that the company violated the Servicemembers Civil Relief Act (SCRA) by foreclosing on homes owned by servicemembers without first obtaining the required court orders. The complaint, which was filed on the same day as the settlement, alleges that between 2010 and 2012 the company foreclosed on six homes of SCRA-protected servicemembers. Under the SCRA, lenders must obtain a court order before foreclosing on a servicemember’s home during, or within one year after, active military service, provided that the mortgage originated before the servicemember’s period of military service. The settlement requires the company to, among other things, (i) pay $125,000 to each affected servicemember; (ii) provide staff training to prevent unlawful foreclosures in the future; and (iii) notify the DOJ of future SCRA complaints.

    Federal Issues DOJ Foreclosure Mortgages Servicemembers Settlement SCRA

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  • NYDFS issues title insurance guidance following Appellate Division ruling on Regulation 208

    State Issues

    On January 31, NYDFS issued Supplement No. 2 to Insurance Circular Letter No. 1 (2003), which provides guidance to the title insurance industry following a January 15 unanimous decision by the Appellate Division of the New York State Supreme Court to uphold Insurance Regulation 208. The Appellate Division’s decision vacated the majority of a trial court order annulling Regulation 208, which limits title insurers’ ability to offer inducements to obtain business. (See previous InfoBytes coverage here.)

    The NYDFS supplement highlighted three critical holdings from the Appellate Division’s decision. First, the court upheld Regulation 208’s ban on inducements for future title insurance business, recognizing that NYDFS had found that lavish gifts were routinely offered to intermediaries such as lawyers in anticipation of receiving business. Second, the appellate court held that Insurance Law § 6409(d), which prohibits a commission, rebate, fee, or “other consideration or valuable thing,” is not limited to a prohibition on quid pro quo exchanges for specific business. Third, the court annulled Regulation 208’s ban on certain closer fees and fees for ancillary searches.

    State Issues Courts Appellate NYDFS Title Insurance

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  • 2nd Circuit: Bank’s suit to recover RMBS losses is untimely

    Courts

    On February 6, the U.S. Court of Appeals for the 2nd Circuit affirmed the judgment of the district court dismissing, as untimely, a trustee’s breach of contract and indemnity claims related to losses resulting from alleged defects in mortgage loans. At issue are three pools of residential home mortgages that at the time of sale had an aggregate principal balance exceeding $3.4 billion. These loans were sold by a mortgage company to Lehman Brothers Holding Inc. and Lehman Brothers Bank FSB in 2006 and subsequently securitized into three trusts. In addition to the representations and warranties made and the remedies provided in the Mortgage Loan Purchase Agreements (MLPAs) and Trust Agreements, the mortgage company, Lehman, and the depositor entered into a separate Indemnification Agreement for each trust, which contained its own representations and warranties indemnification provision. Investors, including Freddie Mac, purchased certificates in the trusts.

    According to the court, Freddie Mac conducted a forensic review of the trusts six years after the sale, which allegedly revealed that an “overwhelming percentage” of the loans in the trusts breached the mortgage company’s representations and warranties (R&W). Shortly after discovery, the trustee submitted breach notices to the mortgage company, which did not cure or repurchase the loans.

    The Federal Housing Finance Agency (FHFA), as conservator for Freddie Mac, filed a complaint against the mortgage company asserting breach of contract and indemnification claims. After the FHFA dropped out of the litigation, the trustee filed an amended complaint that included two breach of contract counts and two indemnification counts—one seeking indemnification based on the MLPAs and Trust Agreements and another seeking indemnification based on the Indemnification Agreements.

    The mortgage company moved for summary judgment on the first three claims and moved to dismiss the fourth claim. The district court granted the motion. It found that the breach of contract claims were time-barred because the FHFA filed the summons with notice more than six years after the limitations period at issue, which begins to run on the effective date of the R&Ws. The court also found the trustee’s indemnification claim based on the MLPAs and Trust Agreements to be time-barred because it was “merely a reformulation of its breach-of-contract claims.” The district court dismissed the other indemnification claim based on the Indemnification Agreements as time-barred because it involved a new set of operative facts and thus could not relate back to the original complaint filed by the FHFA.

    On review, the 2nd Circuit affirmed the lower court’s decision. As to the breach of contract claims, the 2nd Circuit relied on two New York Court of Appeals cases: Ace Securities Corp. v. DB Structured Products, which held that the six year statute of limitations begins to run on the effective date of R&Ws, and Deutsche Bank National Trust v. Flagstar Capitals Market Corporation which held that an express accrual clause in a contract cannot delay the start of a limitations period under New York law. With respect to the third cause of action for indemnification under the MLPAs and Trust Agreements, the 2nd Circuit stated that absent unmistakably clear language in an indemnification agreement that demonstrates that the parties intended this clause to cover first-party claims as opposed to third-party claims, an agreement between two parties to indemnify each other does not mean that one party’s failure to perform gives rise to an indemnification claim. In reviewing the claim at issue in count three, the court found that the claim sought payment to the trustee arising from the mortgage company’s alleged breach of R&Ws, which is a breach of contract claim. The trustee argued that the indemnification section provided an independent remedy, but the 2nd Circuit rejected that argument stating that a claim is not independent if its success directly depends on the breach of the R&Ws in the MLPAs outlined in the contract claims. Finally, with respect to the fourth clause of action for indemnification, the 2nd Circuit held that this claim filed in 2016, would only be timely if it related back to the facts of the earlier claims, but since it arose out of different contracts it therefore could not relate back.

    Courts RMBS Second Circuit Appellate Indemnification

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  • Former oil-services sales executive pleads guilty in U.K. to bribery charges

    Financial Crimes

    On February 6, the U.K. SFO announced that a former sales executive of an oil-services company had pleaded guilty in the U.K. to 11 counts of bribery regarding payments made in exchange for winning oil-services contracts in Iraq and Saudi Arabia. The executive – a British citizen and the former global head of sales for a subsidiary of the company – pleaded guilty to participating in payments of more than $6 million to agents to win contracts worth more than $4 billion in Iraq and Saudi Arabia. The SFO’s investigation of the company regarding suspected bribery and money laundering, which was announced in May 2017, is ongoing, but no other officers or employees are currently charged.

    Financial Crimes UK SFO Bribery Anti-Money Laundering Of Interest to Non-US Persons

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  • District Court dismisses MDL claims against national bank for failure to state a claim

    Courts

    On February 5, the U.S. District Court for the District of Massachusetts issued an order granting a national bank’s motion to dismiss a multidistrict litigation complaint for failure to state a claim. Plaintiffs, in an attempt to recover losses from an internet phone service company’s pyramid scheme that ran from 2012 to 2014, alleged that the bank assisted the company’s pyramid scheme by, among other things, maintaining depository accounts for the company, receiving interest on funds held in the accounts, processing transactions, and receiving fees for wire transfers. However, the court found that the investors failed to adequately allege that the bank had any actual knowledge of the underlying fraud. “The complaint is devoid of any allegation that the fees, interest, and charges received by [the bank] were anything more than payments for banking services,” the court wrote, and thus “have failed to allege that they were ‘unjust.’”

    Courts MDL Fraud

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  • Federal Reserve releases CCAR scenarios; “less-complex” firms exempt from 2019 stress tests

    Agency Rule-Making & Guidance

    On February 5, the Federal Reserve Board (Fed) released the scenarios banks and supervisors will use to conduct the 2019 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress tests exercises for large bank holding companies and large U.S. operations of foreign firms. Each of the three scenarios—baseline, adverse, and severely adverse—include 28 variables that cover domestic and international economic activity. The Fed noted that “less-complex” firms with total consolidated assets between $100 billion and $250 billion have been moved to an extended stress test cycle for the 2019 cycle. (See related InfoBytes coverage here.) Capital plan and stress testing submissions are due by April 5.

    In addition, the Fed finalized enhanced disclosures of the stress testing models used in annual CCARs beginning in 2019, which will be updated each year. The Fed also amended its policy regarding the economic scenario design framework for stress testing, and adopted a policy statement on prior disclosures, which outlines the Fed’s approach to model development, implementation, and validation. The changes are designed to increase the transparency of the stress testing exercises and provide significantly more information for firms.

    In related news, also on February 5, the OCC released its own stress testing scenarios for OCC-supervised institutions.

    Agency Rule-Making & Guidance Federal Reserve CCAR Stress Test OCC EGRRCPA Of Interest to Non-US Persons

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  • CFPB announces settlement with payday lending operation

    Federal Issues

    On February 6, the CFPB announced a settlement with an Indiana-based payday retail lender and affiliates (companies) in seven states to resolve alleged violations of the Consumer Financial Protection Act (CFPA), Truth in Lending Act (TILA), and Gramm-Leach-Bliley Act (GLBA) privacy protections. The CFPB alleges that the companies engaged in unfair acts or practices, failed to properly disclose annual percentage rates, and failed to provide consumers with required initial privacy notices.

    Specifically, the Bureau alleges that the companies violated CFPA’s UDAAP provisions by, among other things, (i) failing to implement processes to prevent unauthorized charges, including those resulting from unauthorized draws on borrowers’ bank accounts; (ii) requiring loan applicants to provide contact information for their employers, supervisors, and four personal references, and then repeatedly calling employers to seek payments when borrowers became delinquent; (iii) disclosing the borrower’s financial information during those calls and, in certain instances, asking the third party to make payments on the loan; (iv) misusing personal references for marketing purposes; and (v) advertising check-cashing and telephone reconnection services they were no longer providing.

    The Bureau also asserts that the companies violated the GLBA by only providing initial privacy notices when consumers opened their first loan. GLBA requires financial services firms to provide borrowers a privacy policy each time a new customer relationship is established, which in this instance the CFPB claims, occurred each time a borrower paid off an outstanding loan and subsequently took out a new loan. Finally, the Bureau alleges that because the payday loans extended by the companies constitute as closed-end credit under TILA and Regulation Z, the companies were required to disclose a payday loan database fee charged to Kentucky customers in the APR but failed to do so. This resulted in, among other things, inaccurate APR disclosures in advertisements.

    While the companies have not admitted to the allegations, they have agreed to pay a $100,000 civil money penalty and are prohibited from continuing the illegal behavior.

    Federal Issues CFPB Enforcement Settlement Payday Lending CFPA Gramm-Leach-Bliley Regulation P Privacy Notices TILA Regulation Z APR UDAAP

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  • District court orders TCPA suit to mediation, states FCC’s interpretation of autodialer may take years

    Courts

    On February 1, the U.S. District Court for the Eastern District of Missouri issued an order referring the parties in a putative TCPA class action to mediation. The plaintiff’s complaint alleges that the defendant’s insurance company sent her text messages without her consent using an automatic telephone dialing system (autodialer). In response, the defendant argued that the software it used to send the text messages does not qualify as an autodialer because it calls numbers from a pre-set list, instead of one that is randomly or sequentially generated. The defendant further argued that the case should be stayed because the FCC is currently considering whether systems such as the one at issue qualify as autodialers under the TCPA following the D.C. Circuit’s March 2018 ruling in ACA International v. FCC, which set aside the FCC’s 2015 interpretation of an autodialer as “unreasonably expansive.” (Covered by a Buckley Special Alert.) The decision to refer the case to mediation comes after the court’s August 2018 order denying the defendant’s motion to stay the proceeding. In that order the court explained that, although the FCC issued a notice in May 2018 (covered by InfoBytes here) seeking comments on the interpretation of the TCPA, the rulemaking process would likely take years and may not even resolve the issue in the case.

    Courts TCPA Autodialer Mediation FCC Privacy/Cyber Risk & Data Security

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  • Senator Crapo unveils plan for housing finance reform

    Federal Issues

    On February 1, Chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo (R-ID) released an outline for a sweeping legislative overhaul of the U.S. housing finance system. Most notably, the plan would end the Fannie Mae and Freddie Mac (GSEs) conservatorships, making the GSEs private guarantors while also allowing other nonbank private guarantors to enter the market. Highlights of the proposal include:

    • Guarantors. The GSEs would be private companies, competing against other nonbanks for mortgages, subject to a percentage cap. The multifamily arms of the GSEs would be sold and operated as independent guarantors. Consistent with current GSE policy, the eligible mortgages would, among other things, be subject to loan limits set by FHFA and would be required to have an LTV of no more than 80 percent unless the borrower obtains private mortgage insurance.
    • Regulation of Guarantors. FHFA, structured as a bi-partisan board of directors, would charter, regulate, and supervise all private guarantors, including the former GSEs. FHFA would be required to create prudential standards that include (i) leverage requirements; (ii) if appropriate, risk-based capital requirements; (iii) liquidity requirements; (iv) overall risk management requirements; (v) resolution plan requirements; (vi) concentration limits; and (vii) stress tests. Guarantors would be allowed to fail.
    • Ginnie Mae. Ginnie Mae would operate the mortgage securitization platform and a mortgage insurance fund. Additionally, Ginnie Mae would provide a catastrophic government guarantee to cover tail-end risk, backed by the full-faith and credit of the U.S.
    • Transition. In addition to a cap on the percent of all outstanding eligible mortgages, the legislation would require guarantors to be fully capitalized within an unspecified number of years after enactment.
    • Affordable housing. Current housing goals and duty-to-serve requirements would be eliminated and replaced with a “Market Access Fund,” which is intended to address the homeownership and rental needs of underserved and low-income communities.

    As previously covered by InfoBytes, on January 29, Chairman Crapo released the Senate Banking Committee’s agenda, which also prioritizes housing finance reform.

    Federal Issues Senate Banking Committee Housing Finance Reform Fannie Mae Freddie Mac Ginnie Mae Mortgages GSE FHFA Securitization

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