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CFPB Finalizes Rule to Supervise "Larger Participant" Consumer Reporting Agencies
On July 16, the CFPB finalized a rule that will allow it to begin supervising certain consumer reporting agencies (CRAs). Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, nonbanks offering (i) certain mortgage-related products and services, (ii) private education loans, and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, provided that it first conducts a rulemaking to define “larger participants.” Under this first “larger participant” rule, the CFPB will have supervisory authority over CRAs with more than $7 million in annual receipts from consumer reporting activities, effective September 30, 2012. The CFPB believes that the $7 million threshold will cover 30 companies that account for 94% of total industry receipts. The final rule is divided into two parts: (i) Subpart A sets the definitions and other terms applicable to the CFPB’s supervision of “larger participants” in general, and (ii) Subpart B identifies the market, terms, and “larger participant” test for the CRA industry. This latter part will be expanded for each new market the CFPB opts to supervise under its “larger participant” authority. While the rule as proposed also included a threshold for use in identifying “larger participants” in the debt collection market, the CFPB has postponed issuance of the final debt collection “larger participant” rule until the fall. The CFPB described the final rule as “the first in a series of rules to define larger participants of other markets.”
Massachusetts Federal Court Upholds Local Foreclosure Laws
On July 3, the U.S. District Court for the District of Massachusetts dismissed several banks’ challenge to a Massachusetts city’s foreclosure-related ordinances. Easthampton Savings Bank v. City of Springfield, No. 11-30280, 2012 WL 2577582 (D. Mass. Jul. 3, 2012). The banks sued to enjoin the City of Springfield from enforcing two local ordinances related to foreclosures: one that regulates the maintenance of vacant properties and properties in the foreclosure process, and another that requires mediation prior to foreclosures. The banks argued that (i) state law preempts both ordinances, (ii) the vacant property ordinance violates the Contracts Clause of the U.S. Constitution, and (iii) a provision of the vacant property ordinance that requires a cash bond constitutes a tax prohibited by state law. The court in ruling for the city held that the ordinances are not preempted by state law because neither significantly alters the foreclosure process or the mortgagee-mortgagor relationship established by state law, and the imposition of additional duties does not create a conflict with state law. With regard to the federal constitutional challenge, the court held that the vacant property ordinance does not violate the Contracts Clause because any impairment of the banks’ contracts under the ordinances is minor, and even if substantial, the ordinance falls within the city’s police powers, is appropriately tailored to protect a basic societal interest, and imposes reasonable conditions on mortgagors. Finally, the court allowed the bond requirements of the vacant property ordinance to stand, reasoning that it is a regulatory fee and not a tax because the portion of the bond retained by the city is reasonably designed to compensate the city for regulatory expenses.
First Circuit Holds Bank May Be Liable For Customer Losses from Cyber Attacks
On July 3, the U.S. Court of Appeals for the First Circuit became the first federal appellate court to address the issue of bank liability for the loss of customer funds resulting from a breach of a bank’s cyber security, reversing a district court’s holding that the bank was not liable for such losses because its security protections were commercially reasonable. Patco Const. Co., Inc. v. People’s United Bank, No. 11-2031, 2012 WL 2543057 (1st Cir. Jul. 3, 2012). Patco Construction Company, a commercial banking customer suffered losses when cyber attackers gained electronic access to its account and made a series of unauthorized withdrawals. The customer sued the bank to recover the lost funds. The district court granted summary judgment in favor of the bank, holding that the customer should bear the loss from the fraudulent transfers because the bank’s cyber security protections were commercially reasonable, and the customer agreed that the procedures were reasonable when it signed the contract to add its electronic account. On appeal the customer argued that the procedures were not commercially reasonable, that it did not agree to the procedures, and that the bank did not comply with its own procedures. Specifically, the customer argued that the bank increased the risk of compromised security when it decided to lower the threshold that triggered account verification questions from $100,000 to $1, essentially requiring that the verification questions be answered for every transaction without considering the circumstances of the customer and the transaction. The First Circuit agreed. It found that the procedure change increased the risk of fraud through unauthorized use of compromised security answers. Moreover, after it had warning that fraud was likely occurring, the bank did not monitor the transaction or provide notice to the customer. The court held that the bank’s collective security failures, when compared to the security measures employed by other financial institutions and the bank’s capacity to implement more robust protections, rendered its security procedures commercially unreasonable. The court reversed the district court’s ruling in favor of the bank and remanded for further proceedings.
Texas Revises Residential Mortgage Loan Originator and Mortgage Banker Regulations
Recently, the Texas Department of Savings and Mortgage Lending finalized revisions and updates to its regulations governing residential mortgage loan originators and mortgage bankers. The final rules took effect July 5, 2012 and mirror the rules as proposed on May, 4, 2012. In addition to clarifying and updating the regulations, the new rules alter disclosure forms for loans originated by mortgage companies or brokers. However, the department will not begin citing violations for use of an outdated form until September 1, 2012.
Key Parts of California "Homeowner Bill of Rights" Signed Into Law
On July 11, California Governor Jerry Brown signed into law two bills (AB 278 and SB 900) that form part of the state’s proposed “Homeowner Bill of Rights.” Effective January 1, 2013, the two substantively identical bills will (i) codify a number of protections similar to those contained in the Multistate Servicer Settlement between 49 state attorneys general, the Federal Government, and the nation’s five largest mortgage servicers announced in February, (ii) amend the mechanics of California’s foreclosure processes, and (iii) provide borrowers with new private rights of action. Several other parts of the Homeowner Bill of Rights remain pending, as described in a fact sheet prepared by the California Attorney General.
Freddie Mac Names New General Counsel
On July 9, Freddie Mac named William H. McDavid as executive vice president, general counsel and corporate secretary beginning July 16, 2012. Mr. McDavid will replace Alicia Myara who has served as interim general counsel since November 2011. Mr. McDavid previously was general counsel and co-general counsel for JPMorgan Chase & Co.
SEC Announces Additional Senior Appointments
On July 5, the SEC announced Norm Champ as the new Director of the SEC’s Division of Investment Management. Mr. Champ has been serving as Deputy Director of the SEC’s Office of Compliance Inspections and Examinations. Prior to joining the SEC in 2010, Mr. Champ was general counsel and a partner at investment management firm Chilton Investment Company. On July 9, the SEC announced that beginning August 6, 2012, Paula Drake will serve as Associate Director, Chief Counsel and Chief Compliance and Ethics Officer. Ms. Drake joins the SEC from Oechsle International Advisors, LLC, where she served as General Counsel and Chief Operating Officer.
U.S. Eases Sanctions on Burma to Allow U.S. Investment and Export of Financial Services
On July 11, President Obama announced that the U.S. is easing sanctions on Burma to allow U.S. companies to responsibly conduct business in Burma. The revised sanctions permit the first new U.S. investment in Burma in nearly 15 years and broadly authorize the exportation of financial services to Burma. Any person that engages in new investment in Burma pursuant to the revised sanctions that exceeds $500,000 is subject to new reporting requirements.
Medical Device Manufacturer Resolves FCPA Violations Related to Conduct in Mexico
On July 10, medical device manufacture Orthofix International N.V. became the latest in a string of companies in the medical device sector to resolve an FCPA matter with the U.S. government. The settlement adds Orthofix to the list of device manufacturers that have settled FCPA matters in 2012, along with Smith & Nephew and Biomet, who settled in February and March 2012, respectively. The Orthofix FCPA resolution calls for the company to pay a criminal fine to the DOJ of $2.22 million, and a civil monetary sanction (including disgorgement and interest) of $5.2 million to the SEC. The DOJ resolved the matter through a Deferred Prosecution Agreement, which was attached to the company’s 8-K of July 10, 2012, reporting the resolution. According to the allegations in the SEC’s Complaint, Promeca S.A. de C.V, a subsidiary based in Mexico, paid bribes to employees of the government-operated health care system, referring to the payments as “chocolates” and booking inaccurate reimbursement requests as meals, car tires or training expenses. The Mexico subsidiary made approximately $317,000 in improper payments over a 7-year period, according to the SEC. The FCPA resolution follows a June 7, 2012 guilty plea by the U.S. subsidiary, Orthofix Inc., on a False Claims Act-related matter, resulting in $7.8 million fine and payment of over $34 million to resolve a civil action.
FinCEN Announces Public Hearing on Customer Due Diligence Proposal, Releases First Report on Real Estate Title and Escrow Industry SARs
On July 10, FinCEN announced the first in a series of public hearings to collect information related to its proposed rule on customer due diligence requirements for financial institutions. The public hearing, to be held July 31, 2012 at the Treasury Department, is designed to obtain input from the law enforcement and regulatory communities, as well as industry representatives.
On July 11, FinCEN released its first targeted study analyzing Suspicious Activity Reports (SARs) involving the real estate and title escrow industry. As part of its efforts to better understand criminal risks impacting related those industries, FinCEN studied thousands of SARs involving title and escrow companies, often filed in connection with mortgage fraud. The FinCEN release notes that the agency does not currently require title and escrow companies themselves to file SARs, but many such companies have reported suspicious activities to FinCEN. The agency plans to use this and future studies to identify regulatory gaps and assess appropriate solutions to close those gaps and mitigate risk.