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Financial Services Law Insights and Observations

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  • Ninth Circuit Reinstates HAMP Class Action

    Lending

    On August 8, the U.S. Court of Appeals for the Ninth Circuit held that HAMP Trial Period Plans (TPPs) create a contractual obligation that the servicer offer a permanent modification to borrowers who complete the TPP. Corvello v. Wells Fargo Bank, N.A., Nos. 11-16234, 11-16242, 2013 WL 4017279 (9th Cir. Aug. 8, 2013). Borrowers seeking to represent putative classes in consolidated actions appealed a district court’s dismissal of their claims that a mortgage servicer breached its contracts when it failed to offer, without prior notice, permanent loan modifications to borrowers who complied with the terms of TPPs offered under HAMP. Citing the Seventh Circuit’s holding in Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), the Ninth Circuit held that once the servicer determined that a borrower had complied with the TPP and the borrower’s representations remained accurate, then the servicer was required to offer a permanent modification. The Ninth Circuit, like the Seventh Circuit in Wigod, rejected the servicer’s argument that the TPP does not create a contractual obligation because under the TPP there can be no contract unless the servicer sends the borrower a signed modification agreement. The court did not address the merits of the borrowers’ claims, i.e., whether the borrowers actually complied with the terms of their TPPs, and the bank still can offer such a defense on remand. The court reversed the district court’s dismissal and remanded for further proceedings.

    Class Action HAMP

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  • Fannie Mae Updates Servicer Disaster Assistance Policies

    Lending

    On August 7, Fannie Mae issued Servicing Guide Announcement SVC-2013-16, which updates assistance policies for borrowers affected by earthquakes, floods, hurricanes, or other catastrophes caused by a person or event beyond the borrower’s control. The announcement provides a table of new pre-approved forbearance terms for borrowers affected by a disaster. Fannie Mae reminds servicers that while they have discretion to determine the appropriate duration of forbearance, any forbearance that exceeds the set terms must be approved in writing by Fannie Mae. The announcement also (i) updates requirements for insurance claim settlements, (ii) requires that income documentation be no more than 180 days old at the time of the post-disaster foreclosure prevention alternative evaluation, (iii) directs servicers to suspend credit reporting for a disaster-impacted borrower during a repayment plan or Trial Period Plan if the borrower is making the required payments, (iv) reduces eligibility requirements for streamlined modifications for borrowers completing a disaster-related forbearance plan in a FEMA-declared disaster area, (v) introduces a new modification, the Cap and Extended Modification for Disaster Relief, and (vi) addresses escrow analysis requirements prior to offering a Trial Period Plan for certain disaster-related modifications. All of these policy changes took effect immediately.

    Fannie Mae Mortgage Servicing Disaster Relief Mortgages Mortgage Modification Servicing Guide

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  • Investors Sue to Preempt Locality's Planned Seizure of Mortgages Using Eminent Domain; FHFA Outlines Potential Responses

    Lending

    On August 7, trustees representing the interests of investors in mortgage backed securities filed two separate suits to halt the planned use of eminent domain by the city of Richmond, California to seize a group of mortgages. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663 (N.D. Cal., complaint filed Aug. 7, 2013); Bank of NY Mellon v. City of Richmond, No. 13-3664 (N.D. Cal., complaint filed Aug. 7, 2013). The city recently threatened to seize 626 mortgages if the owners and servicers of those debts do not agree to sell the mortgages to the city. The complaints allege that the city is seeking to use its eminent domain power impermissibly to generate profits for private investors. The trustees explain that the city’s plan primarily involves performing loans and would value those loans at steeply discounted prices rather than the loan balance, under the guise of seizing “underwater” mortgages to prevent future defaults and foreclosures. The complaints assert that the vast majority of the loans are not at imminent risk of default and are located outside of the city, and, as such, the seizure plan will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. The trustees seek a declaration that the eminent domain plan violates the U.S. Constitution, the California Constitution, and other state laws, and an order enjoining the city from implementing the program.

    On the same day, the FHFA released a memorandum prepared by its general counsel regarding eminent domain, based in part on public input solicited last year. In a separate statement, the FHFA states that it could: (i) initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; (ii) act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or (iii) take such other appropriate actions to respond to market uncertainty or increased costs created by any movement to put in place such programs.

    FHFA Eminent Domain

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  • RMBS Task Force Announces New Suits Over Sale of Jumbo Prime RMBS

    Securities

    On August 6, the DOJ and the SEC announced parallel civil fraud actions filed in the U.S. District Court for the Western District of North Carolina. The DOJ alleged that a national bank and related entities misled investors about the residential jumbo prime mortgage loans backing an $850 million RMBS the bank offered for sale, made false statements after failing to perform proper due diligence, and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers. The DOJ action represents the enforcement agency’s latest effort to employ the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to seek civil penalties. The SEC is seeking an order requiring disgorgement and civil penalties under the Securities Act. The complaints were announced as part of the Financial Fraud Enforcement Task Force’s RMBS Working Group, and Task Force participants Attorney General Eric Holder, Associate Attorney General Tony West, and New York Attorney General Eric Schneiderman all promised additional investigations and actions, using every tool and resource available to the group.

    RMBS Civil Fraud Actions DOJ Enforcement False Claims Act / FIRREA

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  • President Obama Outlines Housing Finance Reform Principles

    Lending

    On August 6, President Obama delivered remarks on federal housing policy, which included the President’s four core principles for single-family housing finance reform: (i) creating a larger role for private capital in the mortgage market, (ii) protecting taxpayers from future mortgage market bailouts, (iii) preserving access to safe and simple mortgage products like the 30-year, fixed-rate mortgage, and (iv) ensuring affordability for first-time buyers. In connection with the speech, the White House released a housing fact sheet with more detail on those principles and other administration housing policy positions. On August 7, the President participated in a question and answer session on housing in which he expressed support for the concepts included in the bipartisan Senate housing finance reform bill introduced in June. The President did not comment on the bill passed last month by the House Financial Services Committee.

    Housing Finance Reform

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  • New York Seeks to Halt Online Payday Loans, Collections; Federal Agencies Issue Subpoenas

    Consumer Finance

    On August 6, the New York Department of Financial Services (DFS) sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.

    The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.

    Payment Systems Payday Lending Debt Collection DOJ Enforcement Internet Lending

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  • Federal District Court Holds Bitcoin is Money, SEC Can Pursue Bitcoin-Based Securities Charges

    Fintech

    On August 6, the U.S. District Court for the Eastern District of Texas held that the court has subject matter jurisdiction over the SEC’s claims that a Texas man and his company defrauded investors in a Ponzi scheme involving Bitcoin. SEC v. Shavers, No. 13-416, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013). The SEC filed suit last month alleging that the man misled investors with false assurances about the investment opportunity in Bitcoin-denominated investments he offered and sold through the Internet, while actually using Bitcoin payments received from new investors to make purported interest payments and to cover investor withdrawals. In addressing subject matter jurisdiction, the court held that the institution’s investments meet the definition of investment contract, and are securities because, among other things, Bitcoin is within the definition of “money” for purposes of the rules governing investment contracts – Bitcoin can purchase goods or services, and can be exchanged for conventional government-backed currencies. Therefore, the court held that investors who provided Bitcoin investments provided “money,” and the court has jurisdiction to hear the case under the Securities Act of 1933 and the Exchange Act of 1934.

    Virtual Currency

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  • Federal Government, Illinois AG Team Up to Bring First TARP Criminal Charges

    Financial Crimes

    On August 6, the Special Inspector General for the Troubled Asset Relief Program (TARP), the FDIC Office of Inspector General, and Illinois Attorney General Lisa Madigan announced criminal charges against former members of the board of directors and senior executives at a bank that received funds under the TARP program. The authorities allege that the former directors and officers concealed the bank’s financial condition from state regulators, while the board chairman allegedly solicited and demanded bribes in exchange for business loans and lines of credit. The authorities charge that over a six year period, the officers submitted numerous fraudulent reports to their Illinois regulator and used money from third parties to make payments on several bank loans that were pasts due. During this period, the bank applied for and obtained TARP funds that were used to further the officers’ criminal scheme.

    FDIC State Attorney General Department of Treasury TARP

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  • FDIC Provides Technical Assistance on Interest Rate Risk for Community Banks

    Consumer Finance

    On August 6, the FDIC released a technical assistance video intended to provide community bank management teams with information about regulatory issues and proposed regulatory changes related to interest rate risk. The FDIC plans to release five additional videos over the next five months that will cover fair lending, appraisals and evaluations, troubled debt restructurings and the allowance for loan and lease losses, evaluation of municipal securities, and flood insurance coverage.

    FDIC Community Banks

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  • White House Outlines Potential Cybersecurity Incentives

    Fintech

    On August 6, the White House released proposed incentives to drive participation in the cybersecurity program framework under development by the National Institute of Standards and Technology. Both the framework and the incentives were directed by an Executive Order (EO) issued earlier this year by President Obama. The administration notes that while some of the proposed incentives can be adopted soon after the voluntary framework is established, others will require legislative action. The policy options under consideration include, among others, (i) encouraging cybersecurity insurance, (ii) offering critical infrastructure grants, (iii) limiting liability of participating companies, (iv) streamlining regulations, and (v) providing public recognition.

    Privacy/Cyber Risk & Data Security NIST

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