Financial Services Litigation & Investigation Monitor

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.

Number of FDIC Professional Liability Suits Against Failed Bank Execs Soars

Fred Rivera — Thu, 22 Mar 2012 12:42:05 -0500

According to a Law360 report, since 2009 the FDIC has authorized the filing of suits against 369 directors and officers of 54 failed banks, claiming a total of $8 billion in damages in professional liability lawsuits. The FDIC released the statistics in March 2012 report.

Professional liability suits are only pursued if they are both meritorious and cost-effective. Before seeking recoveries from professionals, the FDIC conducts a thorough investigation into the causes of the failure. Most investigations are completed within 18 months from the time the institution is closed. Prior to filing the claim, staff will attempt to settle with the responsible parties. If a settlement cannot be reached, however, a complaint will be filed, typically in federal court.

The FDIC is likely entering a period of time in which it will authorize an even larger number of professional liability lawsuits. As it pointed out in its recent report, the peak of bank failures occurred in 2010, when there were 157 bank failures. The FDIC's position is that, as receiver, it has three years for tort claims and six years for breach-of-contract claims to file suit from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed.

The FDIC report is a strong reminder of liability issues that face bank--and other financial institutions--officers and directors. Officers and directors should be vigilant about in ensuring the enterprise has a robust compliance program and proper insurance coverage in connection with professional liability claims.

SEC Speaks 2012 - Early Reports from SEC Whistleblower Office's Launch Year

Fred Rivera — Fri, 09 Mar 2012 12:10:36 -0500

By Caryn L. Trombino

At the annual “SEC Speaks” conference convened in Washington, D.C. from February 24-25, 2012, Sean McKessy, chief of the SEC’s Office of the Whistleblower, reported that the new Whistleblower Program from Dodd-Frank has resulted in hundreds of high-quality tips, as well as prodded numerous untold companies to enhance their own internal compliance programs. Responding to widespread criticism that the whistleblower program will undermine internal corporate reporting, McKessy defended the program’s approach as "balanced" because it includes “built-in incentives” that enable whistleblowers to report internally first and still remain eligible for the bounty. McKessy also anecdotally observed that a “significant majority“ of the tips received were—according to the whistleblowers themselves—reported first internally within their respective companies. According to McKessy, the Office has successfully returned more than 2,000 calls within 24 business hours of receiving a tip on the hotline.

Late last year, the SEC released tip data generated during the first months following the program's implementation in August 2011. The most common complaint categories among the initial 334 whistleblower tips received broke down as follows: market manipulation (16.2%); corporate disclosures and financial statements (15.3%); and offering fraud (15.6%).

For a more fulsome summary of the SEC's enforcement priorities outlined at SEC Speaks 2012 beyond the Whistleblower Report, click here.

ABA Urges Congress to Protect Privileged Information Given to CFPB

Fred Rivera — Fri, 24 Feb 2012 13:03:49 -0500

The American Bar Association (ABA) has sent letters to the United States Congress advocating for passage of legislation requiring the Consumer Financial Protection Bureau (CFPB) to protect privileged information that the agency receives from banks. The letter from the ABA to Senate and House leaders raises the same concerns expressed by banks that now fall under the new bureau's regulatory regime. The ABA's letter argues that the CFPB should be governed by the same rules regarding protections of privileged information that other federal banking regulators must follow.

There are pending bills in both the Senate and House (H.R. 4014 and S. 2099) that, if passed, will categorize the CFPB as a federal banking regulator, thus subjecting them to the same rules as other banking regulating agencies regarding privileged information received from banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, did not include such a provision, leading to bank concerns that sensitive information will be improperly provided to the public or competitors if produced to the CFPB. Under current law, federal banking agencies may share with other similar agencies privileged information received from banks without a waiving the confidentiality of the information. Sharing privileged information with another third party--which may include the CFPB-- waives the confidential nature of the information.

Mortgage Servicing Settlement Reached

Fred Rivera — Thu, 09 Feb 2012 11:35:30 -0500

February 9, 2012. Today government officials, including Attorney General Eric Holder, announced a $26 billion settlement with five banks to settle allegations of mortgage servicing and foreclosure processing errors. The agreement, reached with Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., and Ally Financial Inc., resolves allegations related to foreclosure practices in 2009 and 2010. According to a New York Times article, under the settlement, the banks will provide $17 billion in loan modifications for delinquent borrowers. The deal also includes about $3 billion for “underwater” borrowers to refinance their home and approximately $1 billion paid to the Federal Housing Administration. Another $5 billion includes cash payments to states and federal authorities.

The settlement, which largely provides for loan modification incentives, provides banks certainty about resolving the government's allegations in connection with paperwork errors during foreclosures initiated after borrowers defaulted on their mortgage. Additional detail about the settlement and its implication will soon follow.

Read U.S. Department of Justice Press Release.

Read Servicing Standards

Read Wells Fargo Press Release

Perkins Coie's Financial Services Bulletin: CFPB and FTC Issue MOU Regarding Consumer Protection Enforcement Efforts

Fred Rivera — Thu, 02 Feb 2012 18:32:26 -0500

On February 2, 2012, Perkins Coie issued its weekly Financial Services Bulletin, including an article discussing the Memorandum of Understanding between the Federal Trade Commission and the Consumer Financial Protection Bureau regarding coordinated efforts to enforce consumer protection laws. Section 1024(c)(3) of the Dodd-Frank Act requires the CFPB and the FTC to work together to coordinate their enforcement activities and promote consistent regulatory treatment of consumer financial products and services.

Read the Perkins Coie Bulletin

Read the FTC Press Release

Read the MOU

CFPB Publishes Rules for Nonbank Mortgage Lenders

Fred Rivera — Thu, 12 Jan 2012 12:15:17 -0500

On January 11, 2012, the Consumer Financial Protection Bureau (CFPB) released new procedures for regulating nonbank mortgage lenders. The Mortgage Origination Examination Procedures apply to independent lenders, brokers, servicers, and others unaffiliated with banks and depository institutions, the bureau said in a statement.

The rules are a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and were published one week after the January 4, 2012 recess appointment of Richard Cordray as the bureau's first director. The appointment of a director was a precondition to the CFPB enforcing regulations on certain sectors, including the nonbanking financial industry such as mortgage lending.

In a statement issued with the release of the new procedures, the CFPB said that the bureau's supervision of the nonbank financial sector will be rolled out in phases. Effective immediately, the CFPB will begin regulating nonbank entities involved in mortgage lending, including originators, brokers, servicers, and loan modification services; payday lenders; and private education lenders.

For other nonbank financial sectors, including debt collections, consumer credit reporting, and auto financing, the CFPB may supervise "larger participants" after that term is defined.

The bureau's publication of the rules of the game for nonbank mortgage lenders is a watershed moment for the agency. The agency now has authority to oversee entities that were a main target of the Dodd-Frank financial reform legislation, and it intends to immediatly begin its supervision program.

The bureau took little time to issue these regulations after the director's appointment, and significant enforcement has already begun with the announcement that the CFPB is investigating New Jersey-based PHH, Corp. in connection with how the company handled mortgage insurance premiums. (Read more here.)

Read more about the CFPB's new regulations for nonbank mortgage lenders: Wall Street Journal Online ; Law360.

Justice Department Settles Lending Discrimination Suit Against Countrywide

Fred Rivera — Wed, 21 Dec 2011 18:11:31 -0500

On December 21, 2011 the U.S. Department of Justice announced it had reached a $335 million settlement with Countrywide, now owned by Bank of America, to resolve allegations of lending discrimination. The settlement resolves claims that Countrywide charged Hispanics and African-American borrowers higher prices for credit compared to similarly situated non-Hispanic and white borrowers. The Justice Department announced that the settlement is the largest fair lending settlement in the Department's history.

The settlement, which is subject to court approval, was filed today in the U.S. District Court for the Central District of California in conjunction with the department’s complaint which alleges that Countrywide discriminated by charging more than 200,000 African-American and Hispanic borrowers higher fees and interest rates than non-Hispanic white borrowers in both its retail and wholesale lending. The complaint alleges that these borrowers were charged higher fees and interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.

According to the DOJ press release, the settlement also resolves allegations that Countrywide violated the Equal Credit Opportunity Act by discriminating on the basis of marital status against non-applicant spouses of borrowers by encouraging them to sign away their home ownership rights.

For the last three years, the Civil Rights Division has warned of its stepped-up enforcement efforts in the fair lending arena. While case filings were slow to come, the Countrywide settlement, along with recent fair lending activity out of the Division and by members of the interagency Financial Fraud Enforcement Task Force, suggests that government enforcement of fair lending laws may continue to impact the consumer finance industry during 2012.

Read the DOJ's Press Release here; the Complaint here; and the proposed Consent Order here.

Read MarketWatch's article here and Bloomberg's article here.

Poll finds that majority willing to "blow whistle" following Dodd-Frank

Fred Rivera — Mon, 12 Dec 2011 11:53:33 -0500

A December 12, 2011 Reuters report states that a recent poll found that three-quarters of Americans are willing to blow the whistle under the protections and incentives offered by the Dodd-Frank Wall Street Reform and Consumer Act.

"According to the poll released on Monday, 78 percent of Americans said they would report wrongdoing in the workplace as long as they could do it anonymously, without retaliation, and claim a monetary report" the article stated.

Under the Dodd-Frank whistleblower provisions, individuals who provide original information that leads to an SEC enforcement action with penalties of more than $1 million are eligible to receive a 10%-30% cut of the penalties. In its November 15, 2011 Annual Report on Dodd-Frank Whistleblower Program, the SEC stated that it had received 334 whistleblower tips in the seven weeks immediately following the August 12 effective date of the whistleblower bounty rules.

Federal Agencies Issue Joint Statement on Responsibility for Federal Consumer Financial Laws

Fred Rivera — Mon, 28 Nov 2011 13:16:27 -0500

On Thursday, November 17, 2011, the Board of Governors of the Federal Reserve System the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency issued a joint statement describing how the total assets of an insured bank, thrift or credit union will be measured for purposes of determining supervisory and enforcement responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under Dodd-Frank, the CFPB has exclusive authority to examine, and primary authority to enforce, compliance with federal consumer financial laws for institutions with total assets of more than $10 billion. The statement attempts to explain how asset size is measured for this purpose.

For a summary of the statement, read the Perkins Coie Financial Services Bulletin: New Rules at the CFTC and Fed and a Multi-Agency Joint Statement on Federal Consumer Financial Laws.

Michigan Supreme Court Approves MERS Foreclosures

Fred Rivera — Thu, 17 Nov 2011 11:45:48 -0500

In a 4-3 decision, the Michigan Supreme Court approved non-judicial foreclosures instituted in the state by Mortgage Electronic Registration Systems (MERS). The high court's order overturns an April 2011 lower court decision that determined MERS could not use the state's non-judicial foreclosure mechanism because it had no real interest in the underlying debt.

In the written decision, the Michigan Supreme Court stated that the lower court ruling "is inconsistent with established legal principles governing Michigan's real property law, and specifically foreclosure by advertising." It continued that the Michigan Legislature did not create "a new legal framework in which an undisputed record holder of a mortgage, such as MERS, no longer possesses the statutory authority to foreclose."

MERSCorp's president and CEO Bill Beckmann stated that the ruling "affirms MERS' business model and will allow the Michigan real estate industry to get back to business and usual."

Read more at Bloomberg Businessweek: MERS Wins Appeal of Decision Limiting Michigan Foreclosures and Housingwire.com: Michigan Supreme Court gives green light to MERS

Read the Michigan Supreme Court Order here.

Perkins Coie Financial Services Bulletin: New Proposed Rules from OCC, Fed, FDIC, SEC and FSOC

Fred Rivera — Fri, 14 Oct 2011 11:21:32 -0500

Read the latest edition of the Perkins Coie Financial Services Bulletin, covering the following new proposed rules impacting the financial industry:

The OCC, Fed, FDIC and SEC issue Volker Rule Proposals
The Financial Stability Oversight Council Takes Steps Towards Regulation of "Systemically Important" Nonbank Financial Companies
The SEC Proposed Registration Rules for Security-Based Swap Dealers and Participants

Link to full article here.

AZ Court Dismisses 72 Lawsuits Against MERS; Confirms Its Role as Beneficiary

Fred Rivera — Thu, 06 Oct 2011 11:04:32 -0500

October 3, 2011. Arizona U.S. District Judge James Teilborg dismissed 72 lawsuits, including six class actions, against Mortgage Electronic Registration Systems Inc. (MERS) that challenged MERS' role as a beneficiary on deeds of trust. The plaintiffs in the consolidated actions claimed that because MERS is not a proper beneficiary the deeds of trust to which they agreed are unenforceable, leaving the underlying loan unsecured. Relying largely on a recent 9th Circuit Court of Appeals Decision (Cervantes v. Countrywide Home Loans), Judge Teilborg wrote in his decision that "'[t]his court does not find legal support for the proposition that the MERS system of securitization is so inherently defective so as to render MERS deed of trust completely unenforceable and unassignable."

A MERS press release said

"The Court's dismissal of these 72 cases against MERS, including six class actions, is an extremely significant ruling and shows that claims being made against MERS and MERSCORP alleging fraud, or that security interests are unenforceable, or alleging that foreclosures are inappropriate due to MERS’ presence as a party, are meritless,” said Janis Smith, MERSCORP Vice President for Corporate Communications. “The Court's clearly-worded order affirms the validity of the MERS business model and the exercise of powers associated with it."

IN RE Mortgage Electronic Registration Systems (MERS) Litigation, MDL Docket No. 09-2119-JAT

OSHA Orders BofA to Compensate and Rehire Countrywide Whistleblower

Fred Rivera — Thu, 15 Sep 2011 10:51:34 -0500

On September 14, 2011, Law360 reported that the U.S. Department of Labor's Occupational Safety and Health Administration has ordered Bank of America to pay $930,000 to a former employee allegedly fired for exposing fraud at Countrywide Financial Corp. before its merger with the bank. OSHA also ordered that the bank rehire the employee, according to an OSHA News Release. According to the Law360 report, the whistleblower led internal investigations at Countrywide (before the BofA merger) regarding its business practices.

OSHA found that the employee's firing violated the whistleblower protections included in the Sarbanes-Oxley Act (SOX), Law360 reported. OSHA is the federal agency responsible for investigating complaints under SOX's whistleblower protections. BofA may appeal the decision.

The OSHA decision is a strong reminder of the importance of SOX policies and procedures regarding the handling of internal complaints and non-retaliation policies.

(For further information: OSHA News Release; LA Times Blog; CNBC.com)

SEC Close to Settling Subprime Mortgage Risk Disclosure Claims Against Fannie and Freddie

Fred Rivera — Fri, 09 Sep 2011 12:44:14 -0500

On September 8, 2011, the New York Times reported that the Securities and Exchange Commission is close to settling claims that Fannie Mae and Freddie Mac failed to adequately disclose their subprime mortgage risk. The SEC investigation centers on whether the GSEs misled its regulators and the public regarding the nature and extent of risk they carried in connection with subprime mortgage purchases. According to the report, the civil settlement under discussion would not include any monetary penalty or admission of fraud.

The report of the settlement comes one week after Fannie and Freddie's regulatory, the Federal Housing Finance Agency, sued 17 firms to recover losses allegedly tied to mortgage-backed securities packed with subprime loans that were sold to Fannie and Freddie. (See FHFA press release.) A significant issue in the FHFA's case is whether Fannie and Freddie were aware of the risk associated with the subprime loans purchased from the 17 firms. As attorney Andrew Sandler recently noted in a Wall Street Journal article ("What Did Fannie, Freddie Know?", 9/6/2011), the firms sued by the FHFA will likely argue that Fannie and Freddie knew that the loans were risky when they were acquired, and that losses were due to economic conditions, not faulty underwriting. "It will become clear that the plaintiffs knew as much as the defendants about the quality of these loan portfolios," Sandler said in the article.

It remains to be seen whether the SEC settlement, which may include terms suggesting that Fannie and Freddie were aware of subprime loan risk in their portfolio, will impact or conflict with the FHFA's case.

Summary of Consumer Financial Protection Bureau's New Authority

Fred Rivera — Wed, 10 Aug 2011 12:54:09 -0500

An August 9, 2011 Law360 article ("Consumer Financial Protection Bureau: Open for Business") by attorney Gregory J. Pulles of Briggs and Morgan PA provides an overview of the Consumer Financial Protection Bureau's (CFPB) new powers as of the July 21, 2011 "designated transfer date." The article summarizes a number of functions transferred to the CFPB from other federal agencies, and sets out the enumerated consumer laws that now fall within the CFPB's enforcement and rule-making purview.

Fed Fines Wells Fargo & Co. $85MM for Subprime Loan Problems

Fred Rivera — Wed, 20 Jul 2011 14:11:15 -0500

On July 20, 2011 the Federal Reserve Board issued a cease and desist order, including an $85 million fine against Wells Fargo & Co. in connection with its subprime mortgage lending. The Fed's Press Release stated that the action is the largest consumer-protection action of this kind ever by the central bank, and the first major FRB enforcement action related to subprime mortgage lending. The Fed's order addresses allegations that Wells Fargo steered potential prime borrowers into more costly subprime loans. There are also allegations that Wells employees falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.

Disclosure the Key: What to Learn from the Dismissal of SEC's Claims Against Morgan Keegan

Fred Rivera — Fri, 08 Jul 2011 16:37:02 -0500

By Abiman Rajadurai

A federal judge in Georgia has dismissed claims pursued by that Securities and Exchange Commission ("SEC") that Morgan Keegan committed securities fraud by misleading investors about the risks involved with auction-rate securities (or "ARS"). Over two years ago, the SEC filed a complaint against Morgan Keegan alleging that the company had failed to warn investors about the risks relating to auction-rate securities. The SEC claimed that Morgan Keegan had misrepresented to investors that the "debt carried 'zero risk' or was an equivalent of case, 'just like a money' fund." The SEC’s allegations included that the company told investors that the auction-rate securities were "were safe, liquid investments and failed to tell them they were becoming harder to sell by February 2008."

Morgan Keegan, a company owned by Regions Financial Corp., refuted the SEC by claiming that its disclosures were adequate to warn investors about the risky venture. U.S. District Court Judge William Duffey Jr. agreed with the company by holding that the total mix of information, including oral and written disclosures, that Morgan Keegan provided to its investors “clearly and repeatedly” illustrated the liquidity risks. Judge Duffey found that the SEC did not introduce “any evidence to show that Morgan Keegan instituted a company-wide policy encouraging its brokers to misrepresent ARS liquidity risks” or that the company “was aware that its brokers were issuing misleading statements.” See S.E.C. v. Morgan Keegan & Co., Inc., 2011 WL 2559362, *11 (N.D. Ga. 2011). Indeed, the evidence offered by the SEC only demonstrated that “four out of the thousands of customers who purchased ARS during the downturn were told [orally] that ARS carried little to no risk of liquidity.” Id.

Judge Duffey’s ruling reiterates the importance investors and businesses alike should place upon pre-investment disclosures. Companies and brokers should recognize that disclosure of all potential risks is a necessary practice that not only promote investor loyalty and trust but also can serve as a shield against future litigation. Investors meanwhile should recognize that disclosures are not boiler-plate terms but instead specific statements that identify unique risks related to a particular investment opportunity. Ideally, this mutual understanding will result in a higher rate of educated investments and lower rate of litigation.

Case: S.E.C. v. Morgan Keegan & Co., Inc., 1:09-cv-01965-WSD (N.D. Ga. 2011).

Supreme Court Agrees to Hear Important RESPA Kick Back Case

Fred Rivera — Fri, 24 Jun 2011 16:42:21 -0500

On June 20, 2011, the United States Supreme Court agreed to hear a case brought under the Real Estate Settlement Procedures Act (RESPA) that could have widespread implications for consumer claims under RESPA, TILA and similar regulations.

In First American Financial Corp. v. Edwards, the Supreme Court will review whether awarding treble damages to a borrower under RESPA's anti-kickback provisions, without proof of an actual injury (e.g., an overcharge because of the kickback), violates the "injury in fact" requirement included in Article 3 of the constitution. RESPA provides that a person who is charged for a settlement service that violates RESPA's anti-kickback provisions is entitled to three times the amount of any charge paid. There is no requirement that the borrower prove the charge is excessive or injurious to the borrower. The Ninth Circuit decision under review held that Article 3's injury-in-fact requirement is not violated "[b]ecause the statutory text [of RESPA] does not limit liability to instances in which a plaintiff is overcharged..." for services that violate RESPA.

RESPA and TILA claims are a common source of litigation against lenders and servicing companies. If the Supreme Court determines that proof of an actual injury is required, the decision could sharply curtail the number of such claims because of the frequent difficulty borrowers have showing actual damages caused by the purported violations.

Another Former Madoff Employee Pleads Guilty to Fraud

Fred Rivera — Wed, 08 Jun 2011 14:15:02 -0500

By: Abiman Rajadurai

Eric Lipkin, a longtime employee at Bernard L. Madoff Investment Securities LLC, pled guilty yesterday to six counts of falsifying books and conspiracy in federal court. Lipkin, the ninth person to be charged with involvement in the Ponzi Scheme run by Bernard Madoff, was charged by the Securities and Exchange Commission (“SEC”) with violating numerous sections of the Securities Act of 1993, Securities Exchange Act of 1934, and the Investment Advisors Act of 1940.

Official SEC Release.

The SEC alleged that Lipkin contributed to the Ponzi scheme by, among other things, falsifying records of investors account holdings and preparing fake Depository Trust Clearing Corporation (DTCC) reports. The SEC also claimed that Lipkin received compensation from the Madoff firm for his deceptive practices and even from Madoff personally. The SEC identified that Lipkin received (but never paid back) $720,000 from Madoff to purchase a home.

Lipkin admitted to District Court Judge Laura Taylor Swain that since 1986, he not only created false payroll recordsbut also knowingly sent false reports to the DTCC. Lipkin’s plea agreementrequires him to cooperate with federal investigators and to forfeit over $1 million and other assets to compensate victims of the Ponzi scheme.

In pleading guilty, Lipkin joins former Madoff accountant David Friehling in admitting guilt relating to the fraudulent scheme orchestrated by Madoff and for which Madoff was ultimately sentenced to serve 150 years in prison. While Lipkin has pled guilty, five other former Madoff employees have pled not guilty to charges stemming from their alleged roles in the scheme and await trial before Judge Swain.

Case: Securities and Exchange Commission v. Lipkin, 1:11-cv-03826-LTS10-CR-228 (S.D.N.Y. 2011).