Financial Services Litigation & Investigation Monitor

CFPB Referral Results in DOJ Criminal Action

Fred Rivera — Wed, 15 May 2013 10:35:45 -0500

On May 7, the U.S. Attorney for the Southern District of New York announced the filing of criminal mail and wire fraud charges against a debt settlement firm (Mission Settlement Agency), along with the firm's owner and three employees. The government alleges that the defendants engaged in a multi-million dollar scheme involving more than 1,200 customers who paid the company fees for its services. The charges include allegations that the company lied to prospective customers about fees charged for the company’s debt relief products; about the company's purported affiliation with the federal government and credit bureaus; and about the results the company had achieved for its customers.

On the same day the Consumer Financial Protection Bureau (CFPB) announced that a civil complaint had also been filed against the same company and its owner, along with another debt settlement company. The CFPB complaint alleges that the firms violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by charging consumers illegal advance fees for debt-settlement services. The CFPB seeks an order enjoining the operations, an assessment of civil penalties, and relief for the companys' customers.

According to the CFPB's press release, the agency initiated its investigation into these matters in July 2012, and thereafter made a criminal referral to the U.S. Attorney's Office. The release states that the CFPB "is required by the Dodd-Frank Act to refer evidence of criminal activity to the Department of Justice. In connection with these actions, the CFPB has also received substantial assistance from the New York Office of the U.S. Postal Inspection Service."

CFPB Releases Unverified Consumer Complaint Database

Fred Rivera — Fri, 29 Mar 2013 10:07:34 -0500

On March 28, 2013, the Consumer Financial Protection Bureau (CFPB) published a database containing over 90,000 consumer complaints lodged with the agency. According to the CFPB press release announcing the publication, the public may search the complaints through the CFPB's website database portal. The database includes more than 1 million data points covering 450 companies. The information in the database includes the nature of the complaint, the company’s response, and whether the consumer disputed the company’s response.

The CFPB, however, does not substantiate or in any way attempt to verify whether the consumer's allegations have any merit before it is publicly posted, according to the CFPB press release. Instead, the CFPB only verifies that "a commercial relationship between the consumer and the company is substantiated before the complaint is added to the database," according the the CFPB.

David Stevens, the Mortgage Bankers Association's President and CEO, expressed industry concern about the CFPB publishing unverified complaints, stating in letter to MBA members that while the "MBA supports transparency in customer service, and reasonably holding institutions accountable for material mistakes they make. However, we have raised concerns about the unverified nature of the complaints and the ultimate impact that such a database could have on consumer confidence and public perceptions about financial institutions."

According to the database "Fact Sheet" published by the CFPB, 55% of all complaints concern mortgages and 21% concern credit cards. Interestingly, student loans--a recent CFPB focus--account for only 3.8% of the complaints received by the agency.

Consumer Financial Protection Bureau Plans to Increases Student Lending Oversight

Fred Rivera — Fri, 15 Mar 2013 10:50:32 -0500

On March 14, 2013, the Consumer Financial Protection Bureau (CFPB) announced that it had proposed a new regulation that, if it becomes final, will give the CFPB authority to directly supervise non-bank entities that service over one million student loans. According to a legaltimes.com article, the new rule would cover seven companies that combined service 70% of the student loan market - approximately forty-nine million federal and private student loans. The CFPB currently has authority to supervise student loan servicing at larger banks already within its supervisory jurisdiction.

In a press release, CFPB director Richard Corday said, "[t]he student loan market has grown rapidly in the last decade, and servicers are now facing the stress of an increasing number of delinquent borrowers. Our rule would bring new oversight to the student loan market and help ensure that tens of millions of borrowers are not treated unfairly by their servicers.”

A copy of the proposed rule can be found at: http://files.consumerfinance.gov/f/201303_cfpb_nprm_larger-participants-student-loan-servicing.pdf

Justice Department Settles Discrimination Claim Involving Unsecured Loans

Fred Rivera — Tue, 05 Mar 2013 11:36:20 -0500

On February 19, 2013, the U.S. Department of Justice's Civil Rights Division announced that it had reached a settlement with Texas Champion Bank to resolve allegations that the bank discriminated against Hispanic borrowers by charging them higher prices for unsecured consumer loans. Under the agreement, Texas Champion will pay $700,000 in compensation to Hispanic borrowers of unsecured loans. The settlement, filed as a proposed consent decree, marks an expansion of the Justice Department's recent fair lending cases, which has primarily focused on mortgage lending. In announcing the settlement, Civil Rights Division Assistant Attorney General Thomas Perez proclaimed that the Texas Champion Bank case shows that federal regulators are prepared to pursue lending discrimination cases in various credit markets.

“The complaint filed today demonstrates that the Civil Rights Division is committed to fair lending enforcement across the entire spectrum of credit markets,” said Thomas E. Perez, Assistant Attorney General for the Justice Department’s Civil Rights Division. “We commend Texas Champion for working cooperatively with the Justice Department in reaching an appropriate resolution of this case.”

According to the government's press release, Texas Champion will make payments to approximately 2,000 borrowers. The bank also agreed to revise its policies, providing training to employees, and monitor its lending activity.

The case originated from a 2010 referral by the Federal Deposit Insurance Corp., according to the DOJ's news release.

Read more: DOJ Press Release; U.S. v. Texas Champion Bank Complaint and Proposed Consent Order; NBClatino.com.

$9B Foreclosure Settlement Finalized

Fred Rivera — Fri, 01 Mar 2013 11:17:46 -0500

On February 28, 2013, federal regulators announced the completion of a $9.3 billion deal with 13 banks that will end the foreclosure review settlement process in favor of cash payments and mortgage assistance. According to Law360, the agreement will cover 4.2 million borrowers. Each borrower is expected to receive compensation ranging from a few hundred dollars up to $125,000, with direct compensation to borrowers totaling $3.6 billion and an additional $5.7 billion tagged for loan modifications and forgiving deficiency judgments.

The settlement ends the involvement of 13 banks with the Independent Foreclosure Review body, which was originally organized in 2009 to review foreclosures to determine if borrowers were subjected to wrongful foreclosure activity. That process was criticized on a number of basis, including the length of time it had been taking to complete the review and high expenses associated with the review process. Further, according to WSJ.com, the Office of Comptroller of Currency confirmed that only 4.2% of the files reviewed by the Independent Foreclosure Review body suggested foreclosure errors requiring compensation to borrowers.

Thursday’s deal covers Aurora Bank FSB, Bank of America, Citibank N.A., Goldman Sachs Group, HSBC North America Holdings Inc., JPMorgan Chase & Co., MetLife Inc., Morgan Stanley & Co., PNC Bank NA, Sovereign Bank NA, SunTrust Banks Inc., U.S. Bank NA and Wells Fargo Bank. GMAC Mortgage LLC, EverBank Financial Corp. and OneWest Bank FSB did not sign on to the accord and will remain subject to the Independent Foreclosure Review.

Read more at: USA Today; WSJ.com; FederalReserve.gov; OCC.gov

GAO Report: Only 48% of Dodd-Frank Rules Issued

Fred Rivera — Mon, 28 Jan 2013 14:42:52 -0500

According to a January 23, 2013 report from the U.S. Government Accountability Office (GAO), as of December 2012 federal regulators had finalized less than half of the new rules called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The report is based on private and regulatory data, including interviews with regulatory agencies.

(The Report is available at the following ling: "Financial Regulatory Reform - Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risk")

"The implementation of many of these reforms remains ongoing and the effectiveness of some remains an open questions," the GAO stated. "Although regulators have established mechanisms to facilitate coordination and believe coordination efforts have improved the quality of rulemaking, several regulators indicated that coordination increased the amount of time needed to finalize rulemaking."

The GAO report identified 236 provisions of Dodd-Frank that require regulators to issue rulemakings across nine key areas. According to the report, as of December 2012, regulators had issued final rules for about 48 percent of these provisions.

Securities and Exchange Commission chairman Elisse Walter said in response to the report that implementing Dodd-Frank has been a "major undertaking" but that the SEC has made progress implementing the law.

CFPB Issues Reg Z Ability-to-Repay. Qualified Mortgage Rules

Fred Rivera — Mon, 21 Jan 2013 12:54:48 -0500

On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued a final "Ability-to-Repay" rule amending Regulation Z, which implements the Truth in Lending Act. The new rule implements Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally require creditors to make reasonable, good faith efforts to determine a consumer's ability to repay a loan secured by a dwelling (with exclusions, including open-ended credit; timeshares; and reverse mortgages). The final rule also establishes certain protections from liability for lenders that make mortgages meeting the "Qualified Mortgages" (QM) standard. Under the QM rule, lenders will be presumed to have complied with the Ability-to-Repay rule if the loans meet certain requirements relating to upfront points and fees; loan terms that the CFPB refers to as "toxic loan features;" and debt-to-income ratios. The final rules also implement Section 1414 of the Dodd-Frank Act, which limits certain prepayment penalties.

Federal Regulators Close to $10B Foreclosure Settlement, Replacing Independent Foreclosure Review

Fred Rivera — Wed, 02 Jan 2013 14:49:59 -0500

The New York Times Jessica Silver-Greenberg reports that federal regulators, led by the Office of the Comptroller of the Currency, are close to a $10 billion settlement with 14 banks that would address the government's allegations of improper foreclosure practices. The settlement would also scrap the existing Independent Foreclosure Review, which was included in 2011 consent orders resolving enforcement actions against 14 large residential mortgage servicers and two third-party vendors for allegedly improper residential mortgage servicing and foreclosure practices. The foreclosure review process was intended to identify examples of wrongful foreclosures and compensate harmed individuals, but had produced few results and unexpectedly high costs for the reviews . The Wall Street Journal reported that banks have spent $1.3 billion on consultants to complete the review process, with an additional $2 to $3 billion estimated to complete the process.

According to The New York Times article, $6 billion of the pending settlement will be earmarked for relief to existing homeowners, including principal reductions and help with refinancing. Meanwhile, $3.75 billion will go to borrowers who have already lost their home.

CFPB, FTC Targeting "Misleading" Mortgage Ads

Fred Rivera — Tue, 20 Nov 2012 11:27:30 -0500

On November 19, 2012, the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) warned mortgage lenders and brokers about publishing "misleading" mortgage advertisements. According to a CFPB press release, the two agencies have been working together to evaluate compliance with the 2011 Mortgage Acts and Practices Advertising Rule. The rule prohibits companies from making misleading advertising claims concerning government affiliation, interest rates, costs, the amount of cash or payment available to the borrower, or payments associated with the loan. As part of its compliance sweep, the agencies reviewed approximately 800 mortgage advertisements from a wide range of media sources, including web sites, Facebook, and news papers, according to the FTC's press release.

Law360 reported that the CFPB issued 12 "warning letters" and opened six investigations, according to CFPB Assistant Director of Enforcement Kent Markus. The FTC announced that it had sent 20 warning letters to homebuilders, realtors and mortgage lead originators, and had opened 13 investigations.

It is unclear if the two agencies will coordinate their respective investigations. A lack of coordination may lead to uneven determinations and investigation processes, including how the agencies interpret what is an "unfair or deceptive" practice. Most likely, the recent announcement signals the beginning of an increase in the number of false advertisement cases brought against mortgage lenders by the federal agencies.

Justice Department Files $1B Suit Over Countrywide Loans Sold to Fannie Mae and Freddie Mac

Fred Rivera — Thu, 25 Oct 2012 10:14:41 -0500

On October 24, 2012, the U.S Department of Justice filed a $1 billion False Claims Act lawsuit against Bank of America alleging that its Countrywide unit sold loans to Fannie Mae and Freddie Mac that ended up in default. The lawsuit is the first by the department to allege fraud concerning mortgages sold to the Government Sponsored Enterprises, and the sixth in the past 18 months to allege a major bank engaged in "reckless" lending practices.

Bank of American denies the accusation of wrongdoing. CNNMoney.com reported that Bank of America spokesman Lawrence Grayson stated "Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters," he said. "The claim that we have failed to repurchase loans from Fannie Mae is simply false. At some point Bank of America can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."

As reported by Bloomberg.com columnist Jonathan Weil, while the False Claims Act imposes liability only on those that defraud the federal government, the lawsuit concerns the sale of loans to Fannie Mae and Freddie Mac before the GSEs were seized by the government. The lawsuit raises interesting legal issues that will likely be played out in the action.

In October, the DOJ filed a False Claims Act lawsuit against Wells Fargo, alleging that the bank "recklessly" originated and underwrote retail FHA loans under the FHA's Direct Endorsement Program. However, Wells Fargo contends that these matters were settled as part of the $25B national mortgage servicing settlement reached last year. On November 1, 2012, Wells Fargo filed a motion asking the court to dismiss the case because the lawsuit violates the conditions of the settlement. The result of the motion may have broad implications for the parties that were involved in the servicing settlement.

Read more at Marketplace.org; CNNMoney; DOJ Press Release;

New York Appellate Court Bars MBS Investor Claims Against Loan Originators

Fred Rivera — Tue, 02 Oct 2012 18:35:00 -0500

In June 2012, the New York Supreme Court's Appellate Division issued a short but insightful decision affirming a lower court's dismissal of a derivative action filed by mortgage-backed securities certificate holders against loan originators based on allegations that the originators misrepresented the risk and quality of the residential mortgage loans sold to the trust.

Plaintiff Walnut Creek sued Bank of America's Countrywide Home Loans, accusing it of making false representations and warranties in connection with loans that backed over a $1 billion in securities. The appellate court in Walnut Place LLC v. Countrywide Home Loans, Inc. affirmed the trial court's ruling that such claims belong to the securitization trustee, not the certificate holders of the mortgage-backed securities. In reaching its decision, the court held that the "no action" clause in the governing Pooling and Servicing Agreement barred the action. The "no action" clause limited the claims that a certificate holder may bring to "Events of Default," involving only the duties of the master servicer.

Read more at Bloomberg.com and Reuters.com.

Three State AGs Join Constitutional Challenge to Dodd-Frank

Fred Rivera — Fri, 21 Sep 2012 10:39:44 -0500

Oklahoma, South Carolina and Michigan have joined a lawsuit challenging the 2010 Dodd-Frank Act. The three states claim in the action that the Orderly Liquidation Authority (OLA) provision in the act, which attempts to deal with troubled financial institutions, is a threat to financial stability. The OLA allows the Treasury secretary to seize a financial firm if the secretary determines its failure would cause instability in the financial system.

The three states joined a June 2012 suit filed by a Texas bank and two groups that challenges the constitutionality of the Consumer Financial Protection Bureau created by the Dodd-Frank Act. In an amended complaint filed on September 21, 2012, the three states are added as plaintiffs, asserting that the OLA could put state funds at risk should the Treasury secretary seize and liquidate a bank.

Read more at Law360 and BloombergBusinessweek.com.

DOJ Settles Another Lending Discrimination Case

Fred Rivera — Thu, 30 Aug 2012 10:58:15 -0500

On August 28, 2012, the U.S. Department of Justice announced that it had reached a settlement with New York-based GFI Mortgage Bankers Inc. on claims that the lender engaged in discriminatory lending practices. Under the settlement filed in the Southern District of New York, GFI agreed to pay $3.5 million to settle the claims.

The Complaint alleges that GFI engaged in a pattern or practice of discrimination by pricing residential mortgage loans for qualified African-American and Hispanic borrowers higher than those for similarly qualified non-Hispanic white borrowers between 2005 and 2009. The settlement includes compensation to approximately 600 African-American and Hispanic GFI borrowers, in addition to a $55,000 civil penalty. GFI also agreed to implement new policies that limit the pricing discretion of its loan officers, require documentation of loan pricing decisions, and monitor loan prices for potential disparities.

GFI denied the allegations. "Notwithstanding its strong denial of DOJ's discrimination claims in this lawsuit, GFI has always preferred to settle this case provided it could do so on affordable terms," said Andrew L. Sandler, chairman of BuckleySandler LLP, counsel to GFI Mortgage. "Last week DOJ offered such terms and the case quickly settled. GFI can now return its full focus to its mortgage lending business."

The lawsuit continues the recent pattern by the Justice Department to pursue disparate impact lending discrimination cases based solely on statistical disparities. The case also highlights the importance of lender compliance programs, including strong internal controls over pricing and regular fair lending training and reviews, to mitigate against potential government enforcement activity.

FURTHER RESOURCES:

Read Wall Street Journal article here.

Read DOJ's press release here.
Read the Consent Order here.

CFPB Files First Court Enforcement Action--Targets Loan Modification Law Firm

Fred Rivera — Tue, 31 Jul 2012 20:08:12 -0500

On July 23, the U.S. District Court for the Central District of California unsealed the first ever enforcement complaint filed by the Consumer Financial Protection Bureau. The complaint (PDF)alleges that a Los Angeles law firm charged borrowers advance fees for loan modification services and then did "little or nothing to assist consumers."

Kent Markus, the CFPB's assistant director for enforcement, said in a written statement: “Based on the results of our initial investigation, the court has halted a loan modification scheme that we believe has been unlawfully preying on vulnerable homeowners in multiple states. This action allows us to prevent further harm to consumers and lawfully gather additional evidence and data as the case moves forward.”

Perkins Coie Update: LIBOR Rate-Fixing Scandal Deepens as Potential Plaintiffs Consider Legal Options

Fred Rivera — Tue, 17 Jul 2012 22:33:50 -0500

In the wake of the recent admissions by Barclays Bank PLC that its traders sought to manipulate the London Interbank Offered Rate ("LIBOR"), corporations and other investors are only now beginning to appreciate the magnitude of the scandal and to consider how it might impact their own investments. To date, governmental investigators and private litigants have accused at least 12 international banks of manipulating, and in some instances colluding to set LIBOR rates. With the nominal value of derivative financial instruments alone estimated at $450 trillion, Robert Shapiro, former Under Secretary of Commerce for Economic Affairs in the Clinton administration has warned that "the LIBOR mess could be the biggest financial fraud in history."

Review the full Perkins Coie Update here.

Supreme Court Refuses to Decide Key RESPA Case

Fred Rivera — Mon, 02 Jul 2012 16:01:02 -0500

On the final day of its term, the U.S. Supreme Court dismissed First American Financial Corp. v. Edwards, a purported class action case brought by borrowers under the Real Estate Settlement Procedures Act (RESPA). The dismissal leaves in tact a Ninth Circuit decision holding that a plaintiff may sue under RESPA even if the plaintiff suffered no direct harm from the violation. The Supreme Court heard oral arguments in the case on November 28. But on Thursday June 28, it issued a one-sentence opinion reversing its decision to take the case and allowing the 9th Circuit ruling to stand. “The writ of certiorari is dismissed as improvidently granted,” the court stated.

Read the Perkins Coie Update: Unexpected Dismissal by Supreme Court Leaves Ninth Circuit Decision Holding that Violation of a Statutory Right, Without Actual Damage, Confers Article III Standing.

SEC's Dodd-Frank Whistleblower Hotline Receives Eight Tips Per Day

Fred Rivera — Wed, 27 Jun 2012 11:09:37 -0500

Since the Dodd-Frank Act's creation of bounties for whistleblowers — 10 to 30 percent of SEC awards greater than $1 million — the SEC has seen an uptick in the number of "tips," according to an SEC official. Law360 reports that SEC deputy director of the SEC's Enforcement Division George Canellos said at a recent conference that the SEC is receiving more tips from "insiders"--about eight per day--since Dodd-Frank. Canellos also reported that the "quality" of the tips has improved. The SEC regularly receives extensive reports including documents purportedly supporting the whistleblower's allegation.

Read more about the Dodd-Frank Whistleblower program in a summary of the March 2012 "SEC Speaks" Conference here.

Lawyers Paying Referral Fees for Plaintiffs to Sue Banks, American Banker Reports

Fred Rivera — Fri, 25 May 2012 11:06:02 -0500

A May 24, 2012 article in the American Banker reports that lawyers at The Litigation Compliance Center are paying mortgage brokers up to $5,000 to find plaintiffs to sue banks and other mortgage industry participants. The article authored by American Banker's consumer finance reporter Kate Berry details a Los Angeles law firm's efforts to find mortgage litigation plaintiffs, including arranging a web seminar in which the firm invited mortgage brokers to attend and learn about the "increasingly profitable area of mortgage litigation." The seminar's email invitation included the subject line "Why mortgage litigation is the next refi boom," according the the American Banker report.

As the law center explained during the May 10 webinar, it was offering to pay finders' fees to mortgage brokers for recruiting homeowners who themselves paid a $5,000 up-front "retainer" to affiliated attorneys.

The sales pitch appears to be the latest tactic in a cat-and-mouse game between plaintiffs' attorneys and debt-modification firms on one side and regulators on the other.

Litigation expense and risk is a significant issue for existing and potential participants in the mortgage industry. Plaintiff solicitations such as those detailed in the American Banker report are a sharp reminder of the continued industry litigation risk, and the importance of a strong and efficient mortgage compliance program to mitigate such risk.

CFPB Reviews Dodd-Frank Compliance Costs

Fred Rivera — Fri, 18 May 2012 16:07:07 -0500

On May 15, 2012, the Consumer Financial Protection Bureau (CFPB) published a Notice and Request for Comment regarding its collection of data about industry compliance costs associated with Dodd-Frank rules and regulations promulgated by the CFPB.

A number of Federal laws require agencies to consider the benefits, costs and impacts of rulemaking actions. ... Furthermore, Section 1022(b)(2)(A) of the Dodd-Frank Act calls for the Bureau to consider the potential benefits and costs of certain rules to consumers and "covered persons," including depository and non-depository providers of consumer financial products and services... As part of its analysis of benefits and costs of certain rulemaking, the Bureau will consider, among other things, the potential ongoing costs for a provider as well as the implementation costs the provider may incur in order to comply with a regulation.

The regulated industry has been outspoken about the resource drain caused by compliance with Dodd-Frank. A report by members of the House Financial Services Committee ("One Year Later: The Consequences of the Dodd-Frank Act") estimates that regulated entities will spend over 2 million labor hours per year complying with the Dodd-Frank that have been implemented thus far. The CFPB is obligated under Dodd-Frank to consider these important concerns as it continues to promulgate and implement rules. The CFPB will accept comments through June 19, 2012.

Busy CFPB Studying Mandatory Arbitration Clauses

Fred Rivera — Wed, 25 Apr 2012 11:22:32 -0500

April 24, 2012-- The Consumer Financial Protection Bureau announced a study into mandatory arbitration clauses in consumer financial product contracts. The CFPB is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act to submit a study to Congress regarding the use of arbitration clauses in credit agreements, including contracts for credit and debit cards, bank accounts and other consumer financial products.

CFPB Director Richard Cordray said "Arbitration clauses are found in many contracts for consumer financial products, We want to learn how arbitration clauses affect consumers, and how effective arbitration is in resolving consumers' issues. This inquiry will help the bureau assess whether rules are needed to protect consumers.”

The public and industry has until June 23 to provide their views on arbitration clauses, according to the CFPB release.

Long a source of criticism from consumer advocacy groups, in 2011 the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion gave deference to contractual arbitration clauses in consumer contracts that bar plaintiffs from proceeding in a class action. Industry advocates argue that arbitration is an efficient method to resolve customer disputes, which keep costs down and result in timely resolution of disputes.

Read the CFPB announcement here.
Read the Federal Register announcement here.
Read Los Angeles Times article regarding arbitration review here.