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  • NY AG Files First RMBS Working Group Action, Expects More to Follow

    Securities

    On October 2, the Residential Mortgage-Backed Securities (RMBS) Working Group announced its first legal action. The civil complaint, filed against a major bank by New York Attorney General Eric Schneiderman on behalf of the people of that state, alleges that an underwriter acquired by the bank made fraudulent misrepresentations and omissions in the sale of RMBS to investors. The suit claims that losses resulting from the allegedly fraudulent sales total approximately $22.5 billion to date, but the complaint does not specify the damages sought. In announcing the suit, Attorney General Schneiderman, as well as Acting U.S. Associate Attorney General Tony West and other federal Working Group members, described the coordinated efforts that culminated in this filing. Specifically, Working Group members stressed the assistance provided by the SEC and the FHFA. Indeed, the allegations in the New York Attorney General’s complaint are similar to allegations previously made by the FHFA on behalf of Fannie Mae and Freddie Mac against numerous financial institutions. The allegations also parallel those made by private plaintiffs. On behalf of the RMBS Working Group, which was first announced by President Obama during his 2012 State of the Union address, Mr. Schneiderman has promised more civil, and potentially criminal, enforcement activity against other financial institutions.

    State Attorney General RMBS SEC FHFA DOJ Enforcement

  • California Governor Signs Two Auto Buy-Here-Pay-Here Dealer Bills, Vetoes A Third

    Consumer Finance

    On September 29, California Governor Jerry Brown signed AB 1447 and AB 1534, imposing new requirements on Buy-Here-Pay-Here automobile dealers (BHPH Dealers), defined as those dealers who assign less than 90% of their sale and lease contracts to an unaffiliated third party within 45 days of entering the contract unless they meet certain other criteria.  At the same time, Governor Brown vetoed a third bill, SB 956, which could have had far reaching implications for BHPH Dealers, regulators and auto finance companies who purchase loan contracts from BHPH Dealers.

    Among the new requirements affecting BHPH Dealers are:

    • BHPH Dealers will be required to provide buyers and lessees with a 30-day/1,000 mile warranty covering certain components of the vehicle;
    • When a covered warranty claim is made, the BHPH Dealer will be required to make the repairs at no cost to the consumer or refund the full amount of the purchase or lease, minus a reasonable amount for any damage to the vehicle after the lease or sale;
    • Electronic tracking of a vehicle after sale to identify the location of the vehicle, except with the consumer’s written consent and for limited purposes will be prohibited;
    • Use of starter interrupt technology must be disabled except in limited circumstances;
    • Disclosure of the reasonable market value of a used vehicle must be posted on the vehicle, including what information was used to determine that value, and a copy of any information obtained from a nationally recognized pricing guide must be provided to potential purchasers of the vehicle; and
    • Consumers can no longer be required to make required payments in person.

    In what is likely to be considered positive news for indirect auto finance companies, whose business is limited to the purchase of retail installment sales contracts from auto dealers, Governor Brown’s veto of SB 956 will allow them to continue making those purchases without the added concerns they might have otherwise had.  Some of those concerns, which have become moot for the time being, included:

    • Confirming whether the dealer from whom the purchase was being made was in fact a BHPH dealer and, if so, whether they were appropriately licensed;
    • Ensuring that the finance company did not purchase contracts in which the interest rate charged to the borrower exceeded amount permitted under the proposed law; and
    • Providing an increased grace period than is otherwise applicable before repossession.

    In vetoing SB 956, Governor Brown noted that the bill required BHPH Dealers “be regulated by the Department of Corporations under the California Finance Lender’s Law. I am not yet convinced the evidence merits the regulatory oversight of this bill.”  However, Governor Brown also made clear that if added protections are necessary after implementation of the two bills signed into law on September 29, his office would work with the legislature to “find appropriate, measured solutions.”

    Auto Finance

  • Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand

    Lending

    On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID).  The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests.  CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days.  In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.

    The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA).  In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.

    In denying the petition, the Bureau began by explaining that CIDs play a “crucial role” in the Bureau’s ability to carry out its duty to enforce consumer financial laws.  It stated that the purpose of CIDs are to “close the [information] gap” between the Bureau and the subject company and/or individual in order for the Bureau to determine whether the investigation is worth pursuing, and if so, to what extent.

    The CFPB then set forth the standard it will use to consider and resolve petitions to modify or set aside CIDs, adopting the deferential standard of review relied upon by Circuit Courts of Appeals in proceedings to enforce administrative subpoenas.  That standard provides that a CID will be enforced if it satisfies the following requirements:  (i) the investigation is for a lawfully authorized purpose; (ii) the information requested is relevant to the investigation; and (iii) procedural requirements are followed.  If the Bureau establishes these factors, the CID will be enforced unless the petitioner demonstrates the CID imposes an “undue burden” or constitutes an abuse of process.

    With respect to the Company’s first issue, that the CID failed to state the nature of the conduct at issue, the Company argued that the CID’s description of the purpose of the investigation was so broad as to encompass every aspect of mortgage lending, and thus did not satisfy the notice requirement established by the Dodd-Frank Act.  The Bureau rejected this contention and found that “notice was provided from the outset and repeatedly thereafter” beginning as early as January 3 and through to May 22 in the CID’s “Notification of Purpose.”  In support of this finding, the CFPB cited cases standing for the proposition that the subject matter of investigations can be provided generally.

    With respect to the Company’s assertion that the CID was an overly broad and unduly burdensome fishing expedition, the Bureau noted that the petition “offered little or no detail to make the kind of showing required to substantiate these claims.”  It explained that in order to meet its legal burden, the petitioner needed to show the specific nature and the magnitude of the hardship and state specifically how compliance will harm its business.  The Bureau further noted that it already had made substantial modifications to the CID through the meet-and-confer process, and the Bureau’s enforcement team had stated that it was willing to consider other potential limitations.

    Finally, with respect to the Company’s objection that the CID sought documents, items, and information exceeding the applicable limitations period, the CFPB maintained that the relevant issue was not whether the information itself was actionable but rather whether that information was relevant to conduct that was actionable.  It cited other authority which allowed discovery beyond the statute of limitations and noted the importance of collecting relevant information in order to accurately and completely investigate a matter.

    Petitioning a newly-founded government agency in unchartered territories always is a difficult exercise.  With the increasing number of CFPB investigations and enforcement actions, that exercise will become even more challenging.  In light of the Bureau’s first determination of a petition to modify or set aside a CID, potential CID recipients will be left to wonder:  how is the CFPB likely to respond to future petitions of this type?  Given its precedential value for potential petitioners, it is important to determine what, if anything, can be gleaned from the CFPB’s determination.

    First, the Bureau makes clear that it is incumbent on petitioners to be specific in their objections to a CID.  Petitioners must specifically describe the burdens that supplying requested information imposes on the company and how the information sought is irrelevant to the investigation.  In fact, the Bureau criticized the petition’s use of “general objections” and summarily dismissed the arguments associated with those objections.

    Second, given the deferential standard of review which will be applied to such petitions, the meet-and-confer sessions take on increased importance.  The meet-and-confer session is intended as an opportunity to narrow the scope of the requests and close the information gap between the CFPB and the subject of the investigation.  As a prerequisite to filing a petition, CID recipients are obligated to confer with the Bureau in a good-faith effort to resolve issues and concerns.   In fact, the CFPB’s Rules of Investigations provide that “[t]he Bureau will not consider petitions to set aside or modify civil investigative demands unless the recipient has meaningfully engaged in the meet and confer process described in this subsection and will consider only issues raised during the meet and confer process.”  12 C.F.R. part 1080.6(c)(3) (emphasis added).  While the CFPB did not decide whether the Company met this obligation, the Bureau did express its concern to future parties about the importance of approaching this obligation affirmatively and engaging in “a productive discussion that can resolve issues or concerns more effectively.”

    CFPB Nonbank Supervision Mortgage Servicing Mortgage Insurance Enforcement Investigations

  • CSBS Proposes Uniform Reporting of Authorized Delegates for Money Service Businesses

    Consumer Finance

    On September 28, the Conference of State Bank Supervisors (CSBS) proposed a system for state-licensed money service businesses (MSBs) to report information concerning authorized delegates through NMLS. Licensed MSBs are permitted to contract with third-parties-authorized delegates-to perform the function of receiving and dispensing funds on behalf of the MSB. Most state regulators require that MSBs report information regarding their authorized delegates. NMLS currently is expanding to allow state agencies to manage filings by non-mortgage companies, including MSBs. To date, nine states have started to manage or have announced their intent to manage MSB licenses through NMLS. An NMLS working group has determined that the reporting of authorized delegate information is not supported by NMLS' existing platform. The instant proposal (i) identifies new NMLS functionality to facilitate reporting of authorized delegate information, (ii) outlines policies to implement such reporting, and (iii) describes the process by which an MSB would report such information through NMLS. The CSBS has requested comment from licensees and regulatory agencies by November 1, 2012.

    Nonbank Supervision NMLS Money Service / Money Transmitters

  • CFPB Announces Enforcement Action Against Credit Card Issuer

    Fintech

    On September 24, the CFPB announced that it resolved an investigation initiated by the FDIC and subsequently joined by the CFPB into telephone sales of certain ancillary or “add on” products marketed and sold by a major credit card issuer. The products related to (i) payment protection, (ii) credit monitoring, (iii) identity theft protection, and (iv) protection in the event of wallet loss. Pursuant to the Joint Consent Order released by the CFPB, the bank will pay a $14 million penalty and provide approximately $200 million in restitution to eligible consumers who purchased one or more ancillary products over a period of approximately four years. The order also calls for certain changes to the bank’s marketing and sales practices in connection with the products. During a press call to announce the consent order, CFPB Director Richard Cordray explained that the CFPB “expect[s] that more such actions will follow.” The CFPB is publishing the orders from its various actions on its administrative adjudication docket. Mr. Cordray also stated that “[i]n the meantime, [the CFPB is] signaling as clearly as [it] can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.” In July, the CFPB issued Bulletin 2012-06, which outlines the CFPB’s expectations for the institutions it supervises, and their vendors, with regard to offering ancillary products in compliance with federal consumer financial laws. BuckleySandler represented the bank in this joint CFPB-FDIC investigation and enforcement action.

    Credit Cards CFPB Enforcement Ancillary Products

  • Sixth Circuit Allows Private FCRA Action To Proceed Against Bank

    Consumer Finance

    On September 27, the U.S. Court of Appeals for the Sixth Circuit revived an individual’s private action under FCRA against a bank, alleging that the bank failed to adequately investigate and respond to notices it received from several consumer reporting agencies regarding disputed car loan. Boggio v. USAA Fed. Savings Bank, No 11-4040, slip op. (6th Cir. Sep. 27, 2012). After experiencing credit problems caused by his ex-wife’s failure to make payments on a car she purchased during their marriage by signing both of their names to a check, the plaintiff wrote to several consumer reporting agencies to dispute his responsibility for the loan in light of the forgery, as well as the parties’ separation and divorce agreements that stated the ex-wife would be responsible for the car payments. The plaintiff alleges that the reporting agencies notified the bank of the dispute, which the bank refused to investigate without a police report or fraud affidavit from the plaintiff, as required by the bank’s fraud policy. The district court granted summary judgment in favor of the bank, holding that the bank reasonably investigated the notices it received from credit reporting agencies, and that the plaintiff had ratified the debt. On appeal, the circuit court reversed and remanded the district court’s decision, holding that there is a genuine dispute of material fact with regard to the sufficiency of the bank’s investigation. The court added that the plaintiff’s failure to comply with the bank’s fraud policy does not alter its finding of a genuine dispute of material fact, holding that FCRA does not permit the bank to require independent confirmation of the reporting agencies’ notices before conducting an investigation. The court also held that the dispute over ratification requires resolution by a trier of fact given the ambiguity of the separation agreement, among other issues.

    FCRA Consumer Reporting

  • FHFA IG Clears Freddie Mac's Use of Inverse Floating-Rate Bonds

    Securities

    On September 26, the FHFA Inspector General (IG) reported that neither Freddie Mac nor the FHFA purposefully limited refinancing opportunities to influence the yields of Freddie Mac inverse floating-rate bonds (inverse floaters). Inverse floaters are a by-product of other variable rate bonds carved out of Freddie Mac’s securitized mortgages to capitalize on increasing investor demand. Because the value of inverse floaters decreases when the underlying mortgages are refinanced, U.S. lawmakers and others argued that inverse floaters created a conflict of interest for Freddie Mac’s investment and refinancing policies because Freddie Mac could intentionally limit refinances to protect the value of its retained inverse floaters. The FHFA IG reviewed the practice and Freddie Mac’s portfolio and determined that (i) inverse floaters represent a small portion of Freddie Mac’s capital markets portfolio, (ii) inverse floaters pose no greater conflict than do any other mortgages held by Freddie Mac, and (iii) Freddie Mac employs an “information wall” to prevent the use of nonpublic information—including information about refinancing activity—from being used in investment decisions.

    Freddie Mac RMBS FHFA

  • CFPB Releases Five Year Strategic Plan

    Consumer Finance

    On September 25, the CFPB released a draft strategic plan for 2013-2018. The draft plan outlines the CFPB’s four strategic goals and desired outcomes, as well as its broad strategies for achieving those objectives. The CFPB states that it will strive to (i) “prevent financial harm to consumers while promoting good practices that benefit them,” (ii) “empower consumers to live better financial lives,” (iii) inform the public and policymaking with “data-driven analysis,” and (iv) advance the CFPB’s performance “by maximizing resource productivity and enhancing impact.” For each goal, the plan identifies metrics the CFPB will use to measure its performance. For example, to assess its progress in preventing financial harm to consumers and promoting good practices, the CFPB will consider, among other indicators, the number of fair lending supervision activities opened during the fiscal year and the percentage of fair lending cases filed that were “successfully resolved” through litigation, settlement, or default judgment. The CFPB has asked for comments by October 25, 2012.

    CFPB Fair Lending

  • California Enacts Remaining Parts of Homeowner Bill of Rights

    Financial Crimes

    On September 25, California Governor Jerry Brown signed the three outstanding bills proposed as part of the state’s Homeowner Bill of Rights. First, under Assembly Bill 2610, purchasers of foreclosed properties must provide ninety days’ written notice to quit before removing the tenant or subtenant from the property. Except in limited circumstances, tenants or subtenants holding possession of a rental housing unit under a fixed-term residential lease entered into before the purchase at foreclosure is permitted would have the right to possession until the end of the lease term. Second, Senate Bill 1474 allows the state attorney general to use a statewide grand jury to investigate and indict the perpetrators of financial crimes involving victims in multiple counties. Finally, Assembly Bill 1950 extends the statute of limitations for prosecuting mortgage related crimes from one year to three years.

    Mortgage Servicing

  • FDIC Announces New Violations Classification System

    Consumer Finance

    On September 25, the FDIC issued Financial Institution Letter FIL-41-2012, which revises the classification system used to cite violations of consumer financial laws identified during compliance examinations. The new system features three levels of severity and will replace the current two-level system on October 1, 2012. The FDIC letter states that the change is intended to provide greater clarity regarding the severity of a violation by focusing on the most significant issues identified during an examination. For example, the new “Level 3/High Severity” classification will cover violations that result in significant harm to consumers or members of a community. These violations typically result in restitution in excess of $10,000 (in aggregate), and include any pattern or practice violations of anti-discrimination provisions.

    FDIC Examination Bank Compliance

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