InfoBytes, March 16, 2012 - A Weekly In-depth review of news & developments in the financial services industry.

By BuckleySandler LLP

Mar 22, 2012

Topics In This Issue Federal Issues State Issues Courts Firm News Mortgages Banking

Consumer Finance E-Commerce Criminal Enforcement

Federal Issues

Multi-Party Mortgage Servicing Settlement Filed in Court. On March 12, federal and state officials filed documents in the United States District Court for the District of Columbia formalizing a previously announced settlement (the Settlement) of various government probes into alleged mortgage-related violations by the five largest residential mortgage servicers (collectively the Servicers). The Settlement resolves investigations and inquiries by numerous federal regulators and 49 state Attorneys General (AGs). The federal agencies that have signed on to the settlement include: the Department of Justice, the Department of Housing and Urban Development, the Department of Treasury, the Department of Agriculture, the Department of Veterans Affairs, the Federal Trade Commission, the Consumer Financial Protection Bureau, and the U.S. Trustee. With the filing of a consolidated complaint and a separate consent judgment for each Servicer, the details of the Settlement have been made available, including its provisions regarding: (i) restitution and other relief, (ii) new servicing standards, (iii) the scope of its releases, and (iv) implementation and enforcement. For a detailed analysis of the Settlement, please see BuckleySandler LLP's recent Special Alert.

FRB Releases Results of Stress Tests on Large Bank Holding Companies. On March 12 and 13, the Federal Reserve Board (FRB) announced the methodology and results of stress tests it conducted on nineteen large U.S. bank holding companies as part of its 2012 Comprehensive Capital Analysis and Review (CCAR). Through the CCAR, the FRB is evaluating the capital planning processes and capital adequacy of the largest U.S. bank holding companies. One element of this evaluation is a supervisory stress test to evaluate whether firms would have sufficient capital to continue lending in a severely adverse economic environment. The CCAR stress test scenario assumes a severe recession in the U.S. with a peak unemployment rate of 13%, a 50% decrease in U.S. equity prices, and a 20% decline in U.S. house prices. The results, which are based on input from the holding companies, project (i) $534 billion of aggregate losses for the nineteen holding companies tested during the nine quarters of the scenario and (ii) that most of the holding companies will maintain regulatory capital ratios above regulatory minimum levels despite significant declines in capital ratios. The FRB emphasized that the results are not "expected or likely outcomes, but rather possible results under hypothetical, highly adverse conditions." The FRB stated in its March 13 release that it would notify each bank holding company of any objections it has to the holding company's current capital plan or planned capital distributions.

FRB Releases Study on Use of Mobile Financial Services. On March 14, the FRB released the results of a survey on the use of mobile financial services in the U.S. The findings, as summarized in the FRB release and report, include: (i) one in five Americans with mobile phones used their mobile phone to access financial accounts last year; (ii) mobile banking is poised to expand further over the next year, with usage possibly increasing to one in three mobile phone users by 2013, (iii) mobile banking use is highly correlated with age, (iv) underbanked consumers were relatively heavy users of mobile services, and widening use of mobile technology can expand access to financial servicers for underserved populations, (v) reviewing account balances was the most common activity, followed by account transfers, and (vi) consumers with mobile devices that do not use mobile banking cited either a lack of need or security concerns.

Senators Push for CFPB Action on Payday Lending, Propose Federal Legislation. On March 12, Senators Jeff Merkley and Daniel Akaka released a letter sent to CFPB Director Richard Cordray urging that the CFPB take action to address online, offshore, and insured depository payday lending activities and products. The letter specifically pushes the CFPB to adopt rules and partner with state attorneys general to address (i) Internet-based lead generators that collect data on potential customers for payday lenders, (ii) offshore Internet lenders that avoid state laws by relying on loopholes in the rules covering debit transactions and remotely-created checks, and (iii) insured depository institutions that offer payday loan or similar products. In the same announcement, Senator Merkley revealed plans to introduce legislation that will, broadly, (i) require greater disclosure for online lending websites, (ii) address the abusive practice of providing false or misleading data to payday lenders and debt collectors to defraud consumers in paying debts they do not owe, (iii) attempt to limit the activities of offshore payday lenders, and (iv) address bank and insured depository institution payday loan products.

CFPB Seeks Complaints Regarding Auto and Installment Loans, Announces Complaint Sharing with FTC. On March 12, the CFPB announced that it launched a system to handle consumer complaints regarding auto loans and installment loans. The new complaint form also allows consumers to submit complaints regarding vehicle leases and personal lines of credit. While the system will accept all such complaints, the CFPB initially can handle only complaints with regard to consumer loans with large banks, those over $10 billion in total assets. Loans issued by small banks or nonbanks will be referred to the appropriate federal or state authority. After it has finalized a rule defining "larger participants" in these markets, the CFPB will be permitted to handle directly complaints regarding covered nonbanks.

On March 14, the CFPB announced on its blog that, pursuant to its Memorandum of Understanding with the FTC, the CFPB now is sharing consumer complaint information with the FTC through the FTC's Consumer Sentinel system. Consumer Sentinel is an online database of consumer complaints maintained by the FTC that helps law enforcement track and respond to consumer complaints. Many state attorneys general, the U.S. Postal Inspection Service, and the FBI's Internet Crime Complaint Center also access and provide data to the FTC's Consumer Sentinel system.

CFPB Proposes Rule Governing the Confidentiality of Privileged Information Provided to the Bureau. On March 12, the CFPB released a proposed rule to govern the confidential treatment of privileged information submitted to the Bureau by the financial institutions it regulates. The proposed rule, which would amend 12 C.F.R. part 1070, subpart D, would add a new section providing that a person's submission of any information to the CFPB in the course of the CFPB's supervisory or regulatory processes would not waive or otherwise affect any privilege that such person might claim under federal or state law with respect to the submitted information. In the preamble to the proposed rule, the CFPB notes that although the Dodd-Frank Act did not explicitly address whether the submission of confidential information to the CFPB affects any privilege a supervised entity might claim, the Dodd-Frank Act did grant the CFPB all the powers and duties of the prudential regulators regarding their transferred consumer financial protection functions. The CFPB concludes that this grant of powers and duties includes the ability to receive privileged information from supervised entities without resulting in a waiver of any privileges. The CFPB added that its proposed rule is promulgated pursuant to Congress's delegation of authority to the CFPB to prescribe rules governing the confidential treatment of information obtained from persons during its exercise of its authority. In addition to providing for the non-waiver of privilege when submitting information to the CFPB, the proposed rule provides that the CFPB's provision of privileged information to another federal or state agency would not waive any applicable privilege, whether the privilege belongs to the CFPB or any other person. Comments on the proposed rule must be submitted on or before April 16, 2012.

FHFA Issues Final Rule on Private Transfer Fees. On March 15, the Federal Housing Finance Agency (FHFA) issued a final rule to limit the ability of Fannie Mae, Freddie Mac and the Federal Home Loan Banks to deal in mortgages on properties encumbered by certain types of private transfer fee covenants and in certain types of related securities. The rule generally applies, with some exceptions, only prospectively to private transfer fee covenants created on or after the date of publication of the proposed rule, Feb. 8, 2011, and regulated entities must comply with the rule by July 16, 2012. The final rule largely mirrors the proposed rule, though the FHFA did make some changes in response to comments. For example, as described more fully in Section IV of the final rule, (i) certain changes ensure that the rule clearly restricts any activity dealing in mortgages on property encumbered by private transfer fee covenant, (ii) the exception for fees imposed by a court judgment, order or decree was removed, and (iii) the rule now will not apply to private transfer fee covenants imposed pursuant to a litigation settlement agreement or an agreement approved by a government body before February 8, 2011.

HUD Issues Mortgagee Letter Regarding FHA Refinance of Negative Equity Borrowers. On March 13, HUD issued Mortgagee Letter 2012-5, which amends and updates Mortgagee Letter 2010-23 regarding FHA's Refinance of Borrowers in Negative Equity Positions. Effective immediately, the Mortgagee Letter offers program enhancements to (i) broaden the eligibility for FHA Short Refinance Trial Payment Plans, (ii) offer an additional option for first lien holders to extinguish second lien debt, (iii) increase the allowable housing debt-to-income ratio for loans that receive a "refer" risk calculation, and (iv) extend the program expiration date to cover all loans closed on or before December 31, 2014.

Fannie Mae Updates Lender-Placed Insurance Requirements, Releases 2012 Servicing Guide. On March 14, Fannie Mae followed its March 6 promise to update lender-placed insurance (LPI) requirements, by issuing Servicing Guide Announcement SVC-2012-4. The announcement details policy amendments and clarifications regarding the (i) use of LPI, (ii) coverage requirements, (iii) deductibles, (iv) carrier eligibility requirements, and (v) allowable reimbursable expenses. The Announcement also provides additional guidance to servicers for submitting property insurance claims and remitting outstanding insurance funds to Fannie Mae. The LPI updates will be published as a new section in Part II, Chapter 6 of the Servicing Guide, and servicers are required to implement the amended requirements by June 1, 2012.

Additionally, on March 14, Fannie Mae announced the release of its 2012 Servicing Guide. According to SVC-2012-3, the new Guide incorporates all announcements issued through September 2, 2011. The new Guide does not include policies related to the servicing of reverse mortgages, which now form a new Servicing Manual. In addition, the new Guide includes certain policy clarifications regarding lender relationships and other miscellaneous issues.

Freddie Mac Updates Multiple Servicing Requirements. On March 13, Freddie Mac issued Bulletin 2012-7 providing several updates to its Single-Family Seller/Servicer Guide. Effective immediately, Freddie Mac has revised the definition of "REO rollback" to include additional circumstances beyond bankruptcy petition filings and is requiring servicers to communicate an "REO rollback" through a new REO Rollback Request mailbox. Freddie Mac also announced in the Bulletin that (i) new and revised compensatory fees related to research and construction, "REO rollback", and reporting noncompliance will be instituted under the Servicing Success Program; (ii) submission of requested file documentation that a servicer initially failed to provide under the Servicer Success File Review does not constitute an appeal; and (iii) upcoming enhancements to the Servicing Success Program will treat standard modification mortgages in the same manner as HAMP mortgages.

State Issues

Multiple States Reach Separate Settlements with Mortgage Servicers. On March 13, several major mortgage services notified the U.S. District Court for the District of Columbia that they have settled multiple suits brought by certain State Attorneys General (AGs). That court is tasked with approving or denying the multi-party servicer settlement between federal and state officials and the five largest residential mortgage servicers filed on March 12. The notice is intended to provide the court with "a more complete understanding of the terms of the proposed [Settlement] and related litigation." According to the notice, the servicers have reached agreements with the California, Delaware, Florida, Massachusetts, and New York AGs to resolve certain claims of those states that were preserved under the multi-party agreement. For example, New York settled for $25 million its lawsuit against all of the servicers and MERSCORP, Inc. The notice filed with the court also states that Bank of America is in the process of resolving litigation brought by the AGs of Arizona, Nevada, and Washington.

Ohio Enacts Cyber Fraud Enforcement Legislation. On March 9, Ohio Governor Kasich signed SB 223, which will give the Ohio Attorney General the authority investigate suspected cyber fraud cases, and to subpoena phone records, IP addresses, payment information, and witness testimony when the AG has reasonable cause to believe that a person or enterprise has engaged in, is engaging in, or is preparing to engage violations of state cyber fraud laws. The bill also alters the thresholds for determining the severity of cyber fraud charges, creating a new charge of first degree felony for frauds involving $1 million or more. The changes will take effect on June 7, 2012.

Washington Enacts Multiple Amendments to Consumer and Mortgage Lending Laws. On March 8, Washington enacted HB 225, which alters state regulation of consumer loan companies, including mortgage originators, check cashers and sellers, and payday lenders. Under the Consumer Loan Act, which covers nonbank consumer lenders including nonbank mortgage originators, consumer lenders are prohibited from making a loan from an unlicensed location. The Director of the Department of Financial Institutions can, among other things, order refunds to customers, informally settle complaints and enforcement actions, and issue subpoenas. Entities offering retail installment sales using open loop prepaid cards are no longer exempt from the Consumer Loan Act. Under the Check Cashers and Sellers Act, which covers entities that cash or sell checks, drafts, money orders, or other commercial paper, as well payday lenders, the definition of "licensee" is amended to include out-of-state entities, as well as those that should have a small loan endorsement. The Director can informally settle complaints and enforcement actions regarding covered entities. The bill includes new prohibited practices for check cashers and sellers, including (i) selling open loop prepaid access in a retail installment loan, (ii) advertising a statement that is false or deceptive, (iii) failing to pay annual assessments on time, and (iv) failing to pay other monies due to the Director. The law allows for the transition of check cashers and sellers, escrow agents, and money transmitters to the National Mortgage License System and Registry. HB 2255 also eliminates the requirement that mortgage originators provide a state disclosure form, so long as the originator offers disclosures in compliance with federal Regulation X. All of the above changes take effect June 7, 2012.

Courts

DOJ Obtains Guilty Verdict in Haitian Money Laundering and FCPA Case. On March 12, the Department of Justice announced a guilty verdict in the case of a foreign official accused of laundering bribes paid to him by two Miami based telecommunications companies. Following a week-long trial, the jury convicted the former director of Haiti's state-owned telecommunications company on all counts, including nineteen counts of money laundering and two counts of conspiracy to commit money laundering. The laundered funds were alleged to be proceeds of bribes paid by U.S. companies to the defendant to obtain a preference in telecommunications rates and other favorable treatment in violation of the Foreign Corrupt Practices Act. The jury found that the defendant concealed the payments through subsequent transactions and by falsely characterizing the nature of the payments as "commissions" and "payroll."

Ninth Circuit Holds Director Personally Liable for Illegal Debt Collection. On March 8, the U.S. Court of Appeals for the Ninth Circuit held that International Collection Corporation (ICC) and its director were liable for violating the Fair Debt Collection Practices Act (FDCPA) by falsely claiming in communications to debtors that ICC was entitled to interest and legal fees. Cruz v. International Collection Corp., No. 09-17449, 2012 WL 742337 (9th Cir. Mar. 8, 2012). In 2006, Cruz wrote two checks to Harrah's Casino in Reno, Nevada. The checks bounced. Over the course of the next year, ICC sent Cruz eight collection letters, some of which falsely claimed that ICC was entitled to treble damages, interest, and legal fees. The director and sole owner of ICC signed and sent at least one such collection letter. The FDCPA bars the use of any false, deceptive, or misleading representation in connection with the collection of any debt. 15 U.S.C. § 1692e. Cruz filed suit and the district court granted summary judgment for the plaintiff. The Ninth Circuit affirmed the decision against ICC and affirmed that Hendrickson was personally liable. Because the director was personally involved in at least one illegal collection attempt, the court did not need to reach the question of whether an officer who qualifies as a debt collector may be held personally liable based solely on the action of serving in his role as an officer of the company.

Federal Appeals Court Holds Borrower Can Sue Servicer For Promised HAMP Modification. On March 7, the U.S. Court of Appeals for the Seventh Circuit held that a mortgage borrower could proceed with a class action suit against the servicer of her loan for its failure to offer a permanent loan modification under the federal Home Affordable Mortgage Program (HAMP). Wigod v. Wells Fargo Bank, N.A., No. 11-1423, 2012 WL 727646 (7th Cir. Mar. 7, 2012). In Wigod, the loan servicer and borrower entered into a Trial Period Plan (TPP) under HAMP; the servicer stated in the TPP that if the borrower complied with the TPP for four months, the servicer would offer the borrower a permanent HAMP modification. The borrower alleged that she complied with the TPP, but the servicer denied her a permanent HAMP modification. The borrower filed a class action on behalf of all similarly situated borrowers of the servicer who had entered into and complied with a TPP but were nevertheless denied a permanent modification. The District Court for the Northern District of Illinois granted the servicer's motion for summary judgment, but the Seventh Circuit reversed on four of the seven counts. Judge Hamilton's opinion for the Circuit Court held that-while the borrower may not have been able to state a cause of action for a breach of HAMP directly-the borrower properly pled claims for breach of contract and promissory estoppel based on the servicer's promise to offer a permanent modification in the TPP. The Circuit Court also held that the borrower sufficiently stated claims for fraudulent misrepresentation and for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. Finally, the Circuit Court held that these state law claims were not preempted by federal law.

Seventh Circuit Rejects Class Certification for RESPA Section 8 Action. On March 6, the United States Court of Appeals for the Seventh Circuit concluded that borrower claims against a title insurance company for alleged kickbacks and fee splitting, in violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA), were not appropriate for class treatment because an individual determination of liability would be required for each class member. Howland v. First American Title Ins. Co., Nos. 11-1816, 11-1817, 2012 WL 695636 (7th Cir. Mar. 6, 2012). The case involves the sale of title insurance in Illinois by First American Title Insurance Company. First American typically sells title insurance to borrowers by contracting with the borrower's real estate attorney to conduct a title examination. As part of that contract, First American provides the real estate attorney with a substantial amount of information about the property, including a summary sheet that includes legal description of the property, the last known grantee, and any open liens. The borrowers alleged that this summary sheet was itself a preliminary title examination. Because much of the title examination work was provided by First American to the attorney as title agent, the borrower sought to certify a class based on two related alleged violations of RESPA: (i) that the fees charged were excessive and unreasonable given the small amount of work performed and (ii) that the attorney title agents were paid to compensate for referrals and not actual services. The court concluded class certification was not appropriate in this instance. It held that while kickbacks and referral fees to the real estate attorney title agents based on compensation for nominal or duplicative services were banned by Section 8 of RESPA, "the existence or the amount of the kickback in these cases generally requires an individual analysis of each alleged kickback to compare the services performed with the payment made." Furthermore, the court found that claims attorney title agents were being overcompensated for a pro forma clearance of the title based on the title company's property summary sheet required a specific case-by-case inquiry. The court concluded that "RESPA Section 8 kickback claims premised on an unreasonably high compensation for services actually performed are inherently unsuitable for class action treatment."

Federal District Court Holds New York's EIPA Does Not Permit Private Right of Action for Judgment Debtors to Sue Their Banks. On March 2, the U.S. District Court for the Southern District of New York dismissed a putative class action brought by judgment debtors seeking money damages from their bank for allegedly violating New York's Exempt Income Protection Act (EIPA), holding that the statute does not support a private right of action. Cruz v. TD Bank, N.A., No. 10-8026, 2012 WL 694267 (S.D.N.Y. Mar. 2, 2012). The EIPA provides a special exemption from satisfaction of money judgments for certain amounts and types of a debtor's income, including income derived from social security, public assistance, and disability benefits. In Cruz, the judgment debtor plaintiffs alleged that their bank failed to provide them and other members of the putative class with the notices and exemptions forms as required by the EIPA, and asserted that the bank unlawfully restrained their accounts and charged them various fees in violation of the statute. After examining the plain text, legislative history, and purpose of the EIPA, the court held that judgment debtors had neither an express nor implied right to sue their bank for money damages under the statute. Instead of creating a right of action for suing a bank, the court concluded that the EIPA merely permitted judgment debtors and creditors to bring claims against each other. In addition to dismissing the EIPA claim, the court dismissed the plaintiffs' common law fraud, fiduciary duty, unjust enrichment, negligence, and conversion claims.

Firm News

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BuckleySandler LLP will be hosting a webinar entitled "Deconstructing the Federal-State Servicing Settlement: An Analysis of the New National Servicing Standards and How They May Impact Your Institution" on Wednesday, March 21, 2012, 1:00 - 2:15 PM ET.

David Krakoff is featured in an article entitled, "BuckleySandler Partner David Krakoff on FCPA Trials, Corporate Voluntary Disclosures and Big Firm Refugees," in the Corporate Crime Reporter on March 13, 2012.

Donna Wilson will be participating in a CLE webinar entitled "Consumer Finance Class Actions: FCRA and FACTA: Leveraging New Developments in Certification, Damages and Preemption" on March 21, from 1:00pm-2:30pm EDT.

David Baris will be speaking in the ABA Business Law Section CLE panel, "Dealing with Enforcement Actions and Insider Liability," in Las Vegas on March 23, 2012. Mr. Baris will join other leading enforcement attorneys from the federal banking agencies in describing their views regarding the enforcement actions being issued and lawsuits being filed against banks and their institution-affiliated parties.

Jonice Gray Tucker will be speaking at the ABA Business Law Section's Spring Meeting in Las Vegas on March 23, 2012 on a panel entitled "The CFPB Approaches One Year: Experiences and Exposures." The panel will include speakers from PNC Financial Services Group, PayPal, Treliant Risk Advisors, the Consumer Federation of America, and the Federal Trade Commission.

Andrew Sandler will moderate a panel at the American Conference Institute's 8th National Forum on Residential Mortgage Litigation and Regulatory Enforcement on March 29, 2012 in Washington, DC. The panel is titled, "Complying With and Responding to New and Emerging Federal and State Enforcement Actions."

David Baris will be speaking at the 2012 Virginia Bank Directors Symposium on March 29, 2012 in Tysons Corner, Virginia. Mr. Baris will discuss how bank directors can minimize their risk of personal liability.

David Baris will be speaking at the NACD/AABD Bank Director Workshop on April 12, 2012 in Fort Lauderdale, Florida. The topic of the presentation is "Bank Director Liability and Practical Steps to Minimize It."

Donna Wilson will be moderating a panel entitled "BANKS UNDER SIEGE: The Civil, Criminal, Regulatory and Insurance Fallout from Mortgage Foreclosures and Bank Failures" at the ABA Section of Litigation annual meeting in Washington DC, April 18-21, 2012.

David Krakoff will be speaking at ACI's 27th National Conference on the Foreign Corrupt Practices Act in New York, NY on April 17, 2012. Mr. Krakoff's session will focus on defending executives in FCPA investigations.

James Parkinson will be speaking at a PLI program seminar entitled "Foreign Corrupt Practices Act 2012" in San Francisco, California on April 17, 2012 and in New York, New York on May 4, 2012.

Andrew Sandler will be speaking at the 2012 Marquis National Compliance Conference in Fort Worth, Texas on April 18, 2012. Mr. Sandler's session will cover the view from Washington, DC on CRA, HMDA, and Fair Lending.

David Krakoff will be speaking at the ALI-ABA Environmental Crimes Conference in Washington, DC on April 26, 2012. Mr. Krakoff's session will discuss the key issues at the outset of an environmental criminal action.

Benjamin Klubes and Jonice Gray Tucker will be speaking at The Financial Services Roundtable's Spring Meeting of the Lawyers Council on May, 3, 2012, in a session entitled "Litigation & Enforcement Update."

Jonice Gray Tucker will be participating in an American Bar Association webinar focusing on the Federal-State Mortgage Servicing Settlement on May 15, 2012.

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