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  • CFPB Outlines Potential Mortgage Loan Originator Compensation and Qualification Rules

    Lending

    On May 9, the Consumer Financial Protection Bureau (CFPB) outlined in its outreach materials to small business representatives its proposals to implement the loan originator compensation provisions of the Truth in Lending Act (TILA). These proposals will amend the rules applicable to compensation in mortgage loan transactions, and they would also "help level the playing field" in connection with regulation of mortgage loan originators under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The CFPB intends to finalize rules on these topics by January 21, 2013.

    Under the Dodd-Frank Act, restrictions were placed on the ability of creditors and consumers to compensate mortgage loan originators (which includes employee loan officers, mortgage brokerages, and employees of mortgage brokerages). This restriction is similar to the restrictions implemented by the Federal Reserve Board (Board), effective April 2011, that prohibit a creditor from compensating a loan originator based on the terms and conditions of the transaction.

    The Dodd-Frank Act generally provides that loan originators may be compensated only by consumers, unless two conditions are met: (i) the loan originator must not receive any compensation directly from a consumer; and (ii) the consumer must not make an upfront payment of discount points, origination points, or fees, other than bona fide third-party fees that are not retained by the creditor, the loan originator, or either company's affiliates.

    The CFPB has the authority to create exemptions to the second "points and fees" provision if it finds that an exemption is "in the interest of consumers and in the public interest." In its proposal, the CFPB states that it is considering using this exemption authority to permit consumer payment of upfront points and fees under certain circumstances, and the CFPB is further considering whether to propose particular conditions for payments to affiliates. The CFPB is considering a number of proposals that would carry out this restriction:

    • No-Discount-Point Loan Option: Under the CFPB's proposal, the loan originator would be required to offer a no-discount-point transaction. Offering this option, according to the CFPB, would enable the homebuyer to better compare competing offers from different lenders.

    • Interest-Rate Reductions When Consumers Pay Discount Points: The CFPB's proposal would mandate that any "discount point" be a "bona fide" discount point that actually reduces the interest rate by at least a minimum amount.

    • Origination Charges Must Not Vary with the Size of the Loan: The CFPB proposes that mortgage brokerage firms and creditors would be allowed to charge only flat origination fees instead of fees that vary with the size of the loan. The CFPB proposes that upfront fees may be paid to affiliates, provided that these fees are likewise flat and so do not vary with the size of the loan (except for title insurance payments).

    In connection with these proposals, the CFPB indicates that it may allow (i) certain payments and bonuses to loan originator based on profitability, (i) certain payments to mortgage brokerage employees when the consumer pays the brokerage, and (iii) certain types of pricing concessions to be covered by the loan originator's compensation. The CFPB's proposal also considers whether to permit certain types of "point banks," and whether to impose record-retention requirements on loan originators directly. Further, the CFPB is considering whether to "sunset" any potential partial exemption from the statute that it implements.

    Significantly, the CFPB's proposal would restrict the ability of a lender to charge its own up-front origination fees, except for a fixed fee that does not vary based on loan size. Under the Board's rules, compensation to loan originators is restricted, but lenders may charge origination fees and discount points without restriction. This proposal, if implemented, would require lenders to make significant adjustments to their fee schedules. Further, the CFPB interprets the Dodd-Frank Act's amendments as imposing a ban on loan originator compensation that varies based on loan terms (except principal balance) even in transactions in which the consumer pays compensation directly.

    Although the Dodd-Frank Act requires the CFPB to draft rules related to the anti-steering provisions of the loan originator compensation rules, the CFPB indicates that it will address those provisions at a later date.

    In a second major aspect of the outline, the CFPB indicates its intention to carry out its authority under TILA to ensure that loan originators be "qualified." Currently, the SAFE Act imposes registration or licensing requirements on loan originators, but these requirements vary widely based on whether the loan originator is an employee of a depository institution or of a non-bank institution.

    Under the CFPB's proposal, loan originators-regardless of employer-would be subject to certain qualifications:

    • All loan originators would be subject to the same standards for character, fitness,

      and financial responsibility;

    • Loan originators would be subject to a criminal background check; and

    • Loan originators would be required to undertake training commensurate with the size and mortgage lending activities of the employer. This training would be analogous to the continuing education requirement that applies to individuals who are subject to SAFE Act licensing.

    As a result of these proposals, registered mortgage loan originators would be subject to some of the same requirements as licensed loan originators.

    The CFPB proposal was created in connection with the CFPB's compliance with the Small Business Regulatory Enforcement Fairness Act (SBREFA), which mandates that the CFPB convene a Small Business Review Panel anytime a proposed rule may have a significant impact on a substantial number of small entities. This panel meets with selected representatives of small businesses, and these representatives provide feedback to the panel on the potential economic impact of the proposal. In addition to the outline, the CFPB also issued a press release, a fact sheet, and a set of discussion questions for the panel.

    CFPB TILA Dodd-Frank Mortgage Origination

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  • FTC, CFPB, DOJ File Brief in Suit Challenging FCRA Constitutionality

    Consumer Finance

    On May 8, the FTC announced that it had joined the CFPB and the DOJ to file a brief supporting the constitutionality of the Fair Credit Reporting Act (FCRA). The brief was filed in a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania in which a consumer alleged that a consumer reporting agency (CRA) violated FCRA by reporting on arrest records that were more than seven years’ old. Responding to these allegations, the CRA argued that the Supreme Court’s decision in Sorell v. IMS Health, Inc., 131 S. Ct. 2653 (2011), rendered FCRA’s seven-year limitation unconstitutional under the First Amendment. The federal entities’ brief counters that Sorell does not alter the test for commercial speech restrictions established in Central Hudson Gas and Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980). It goes on to argue that, under this test, the government has a substantial interest in protecting individuals’ privacy and that FCRA protects this interest while accommodating businesses’ competing interest in obtaining complete information about potential borrowers.

    CFPB FTC FCRA Consumer Reporting Privacy/Cyber Risk & Data Security

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  • Tenth Circuit Permits Trade Group Challenge to New Mexico Fair Credit Reporting Act

    State Issues

    On May 7, the U.S. Court of Appeals for the Tenth Circuit published an opinion that a trade group has standing to sue the Attorney General of New Mexico over that state’s credit reporting and identify theft requirements. Consumer Data Industry Assoc. v. King, No. 11-2085, 2012 WL 1573563 (10th Cir. May 7, 2012). In 2010, New Mexico enacted the Fair Credit Reporting and Identity Security Act, which, among other things, requires consumer reporting agencies (CRAs) to oblige a consumer’s request to remove credit report information resulting from identify theft until told otherwise by a court or the requesting consumer. The Consumer Data Industry Association challenged the law on behalf of its members, arguing that the state law is preempted by the federal Fair Credit Reporting Act (FCRA). Under FCRA, a CRA can deny a consumer request to remove information based on identify theft if the CRA reasonably determines that the request is fraudulent or erroneous. The district court held that the CDIA failed to prove redressability and therefore lacked constitutional standing to sue. The Tenth Circuit vacated the district court holding and ordered further proceedings. It found that federal courts consistently have found a case or controversy in suits between private parties subject to enforcement and the state entity responsible for enforcement and that if a plaintiff faces a credible threat of enforcement, redressability is established. Here, the court held, the threat of enforcement faced by the CDIA members is sufficient to provide standing to sue for both injunctive and declaratory relief.

    FCRA Consumer Reporting Privacy/Cyber Risk & Data Security

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  • FTC Affirms Holder in Due Course Rule

    Consumer Finance

    On February 10, 2016, Dutch oilfield company SBM Offshore announced that the U.S. DOJ has now re-opened its investigation into allegations that SBM paid bribes to secure contracts in various countries around the world.   SBM stated that the DOJ has made “information requests” in connection with the bribery investigation and that SBM is “seeking further clarification about the scope of the inquiry.”

    SBM previously had reached a $240 million settlement with Dutch authorities in November 2014 to resolve allegations involving bribes to government officials in Angola, Brazil, and Equatorial Guinea between 2007 and 2011.  At the time, SBM announced that the DOJ had simultaneously closed its investigation into the same matter.  Its most recent announcement, however, shows that the U.S. government has rekindled its inquiry.

    SBM also announced that it has reserved $245 million to cover a possible settlement with Brazilian authorities.  This announcement comes on the heels of a January 2016 settlement between the Ministerio Publico Federal (MPF), Brazil’s Public Prosecutor’s Office, and SBM’s CEO and a member of SBM’s supervisory board apparently tied to the ongoing Petrobras scandal in Brazil.

    Click here to view previous FCPA Scorecard coverage of the SBM investigation.

    FTC Auto Finance

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  • New York Federal Court Denies Motion to Dismiss FHFA Mortgage-Backed Securities Case

    Lending

    On May 4, the U.S. District Court for the Southern District of New York denied, in large part, a motion to dismiss one of the many pending mortgage-backed securities (MBS) cases brought by the Federal Housing Finance Agency (FHFA). Federal Housing Finance Agency v. UBS Americas, Inc., No. 11-5201, 2012 WL 1570856 (S.D.N.Y. May 4, 2012). The court’s decision allows FHFA’s federal securities action to proceed while dismissing related state law negligent misrepresentation claims. In July 2011, as conservator for Fannie Mae and Freddie Mac (the GSEs), FHFA initiated multiple lawsuits alleging that billions of dollars of MBS purchased by the GSEs were based on offering documents that “contained materially false statements and omissions.” Defendants in the instant case argued that these claims were time-barred. FHFA countered that the Housing and Economic Recovery Act of 2008 (HERA) controlled questions of timeliness, a point on which the court agreed in refusing to dismiss related federal claims. In this regard, the court concluded that a reasonably diligent plaintiff (here, the FHFA) could not have “discovered” the underlying federal claim within the year before the GSEs were placed into conservatorship. Rather, such a plaintiff could only have “discovered” this claim when the securities were “downgraded from investment grade to near-junk status,” which was less than a year before conservatorship.

    Freddie Mac Fannie Mae RMBS

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  • Fannie Mae Announces New Document Custodian Requirements

    Lending

    On February 4, 2016, the SEC announced a settlement with the CEO of Chile-based LAN Airlines S.A. and its holding company Latam Airlines Group SA, Ignacio Cueto Plaza, regarding his approval of the payment of over $1.15 million to an Argentinian consultant in connection with LAN Airline’s attempts to settle disputes over wages and work conditions with employees in Argentina.  According to the SEC, Cueto knew that a portion of these payments might be passed on to union officials in Argentina and that the actual services agreed to in the underlying consulting agreement would not be performed.  Without admitting or denying the SEC’s findings, Cueto agreed to pay a $75,000 penalty and "certify his compliance with his airline’s policies and procedures by attending anti-corruption training among other undertakings." In its administrative cease and desist order, the SEC found that Cueto violated both the FCPA’s internal accounting controls and books and records provisions.

    The company has said that this was an isolated matter, that it cooperated with the SEC’s investigation, and strengthened its accounting controls since the incident took place.

    Fannie Mae Mortgage Servicing

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  • Fourth Circuit Reverses Dismissal of TILA Claim

    Lending

    On February 4, 2016, the SEC settled FCPA allegations with California-based SciClone Pharmaceuticals with a cease and desist order finding that SciClone violated the FCPA’s anti-bribery, books and records, and internal controls provisions related to activities in China.  The SEC found that from at least 2007 to 2012, employees of SciClone subsidiaries gave money and gifts to Chinese officials (including employees of state-owned hospitals) in order to boost sales.  The SEC further found that SciClone failed to devise and implement a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program.

    SciClone consented to the SEC’s order without admitting or denying the charges and agreed to pay $12.8 million to resolve the charges, including a $2.5 million penalty, the disgorgement of $9.426 million in profits, and $900,000 in prejudgment interest.  SciClone will also provide status reports to the SEC for the next three years regarding remediation efforts and new anti-corruption compliance measures.  SciClone simultaneously announced that the DOJ had declined to pursue any additional action.

    CFPB TILA Mortgage Servicing

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  • State Courts Requiring More Proof to Obtain Affidavit Judgments in Debt Collection Cases

    State Issues

    On February 1, 2016, the SEC agreed to a $3.7 million settlement with software company SAP SE regarding allegations that it violated the FCPA regarding the payment and offer of bribes to senior Panamanian government officials.  The settlement, stemming from the actions of former SAP executive Vincente Garcia who pleaded guilty last August to one count of conspiracy to violate the FCPA, found that SAP lacked appropriate internal controls to detect the illegal activity.  According to the SEC, Garcia arranged the sale of heavily discounted software licenses and used the savings to create a “slush fund.”  The money in this fund was then used to pay bribes and kickbacks.

    The SEC order also found that SAP lacked sufficient internal controls to prevent the violations.  While SAP did not admit or deny the findings, it consented to the cease-and-desist order and agreed to disgorge $3.7 million in profits plus prejudgment interest of $188,896.

    Debt Collection

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  • FTC Settles Privacy Claims Against Myspace

    Fintech

    On January 22, 2016, the Ministerio Publico Federal (MPF), Brazil’s Public Prosecutor’s Office, reportedly entered into a settlement with Dutch drilling company SBM Offshore’s CEO and a member of its supervisory board, resolving misdemeanor allegations apparently tied to the ongoing Petrobras probe in Brazil.  If the settlement is approved by the Brazilian judge handling the case, both individuals will be fined approximately $60,000 each, with no admission of guilt.

    SBM Offshore stated in response that while it “believes that accepting the settlement offers a pragmatic opportunity to expeditiously resolve this matter that avoids long and costly legal proceedings,” it remains of the opinion that the accusations are without merit and that it stands behind both individuals.  While SBM Offshore declined to comment on the specific accusations of misconduct in this case, the settlement comes a little over a year after SBM Offshore resolved an enforcement action in the Netherlands involving alleged bribes in Angola, Brazil, and Equatorial Guinea between 2007 and 2011.

    Click here to view previous FCPA Scorecard coverage of SBM Offshore and Brazil’s Petrobras investigation.

    FTC Privacy/Cyber Risk & Data Security

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  • FinCEN Extends Proposed Customer Due Diligence Program Comment Period, Issues Electronic Filing Reminder

    Consumer Finance

    On May 4, FinCEN extended the comment period for its proposal to establish a customer due diligence regulation that would require covered financial institutions to institute defined programs to identify the real or beneficial owners of customer accounts. The proposed regulation is designed to enhance federal anti-money laundering and counterterrorism efforts. Interested parties will have an additional thirty days to comment from the time the extension is published in the Federal Register.  On May 7, FinCEN reminded financial institutions subject to the Bank Secrecy Act that certain BSA-required filings must be filed electronically beginning July 1, 2012.

    FinCEN Bank Secrecy Act

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