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  • Fannie And Freddie Loans Could Be Next FCA Targets
    February 10, 2016
    Andrew W. Schilling

    By now, lenders that make loans insured by the federal government are well acquainted with the False Claims Act. Following the financial crisis, the U.S. Department of Justice has aggressively used the FCA to collect billions of dollars in settlements from mortgage lenders whose loans are backed by the Federal Housing Administration (FHA), a component of the U.S. Department of Housing and Urban Development (HUD). While most of the DOJ’s cases to date have focused on loan origination, more recently both the DOJ's and the relator’s bar have pursued an increasing number of cases on the servicing side as well, including in the area of reverse mortgages. The government has also used the FCA to pursue mortgage lenders whose loans were insured by the Veterans Administration, albeit not on the same scale as its pursuit of FHA lenders.

    While the DOJ’s pursuit of government lenders and servicers has been aggressive, at least so far most of the government’s enforcement attention in this area to date has focused on loans insured by the federal government. But what if the government applied its same aggressive approach to conventional loans sold to Fannie Mae and Freddie Mac, which for some lenders and servicers constitute a much greater percentage of their business?

    The risk of the DOJ applying the False Claims Act to Fannie and Freddie loans may seem remote. After all, this Civil War-era law — enacted to protect the Union Army from war profiteers — is designed to protect against fraud perpetrated upon the U.S. government, and Fannie and Freddie are not part of the government. End of story.

    But the risk is not nearly as remote as it may seem. In fact, the Justice Department has already pursued several FCA cases involving government-sponsored enterprise (GSE) loans, and recovered more than $1 billion. And the number of cases involving GSE loans is sure to increase if the government prevails in a case that is pending before a federal appeals court. That case, United States ex rel. Adams v. Aurora Loan Services, will be fully submitted for decision by Feb. 12, and its outcome could have significant ramifications for mortgage lenders.

    Originally published in Law360; reprinted with permission. 

  • It's a New Dawn, New Day for HMDA Reporting
    February 10, 2016
    Warren W. Traiger & Kari K. Hall

    On Oct. 15, 2015, the Consumer Financial Protection Bureau (the CFPB or the Bureau) issued its long-awaited final rule amending and drastically expanding the mortgage loan application data reporting requirements under Regulation C and the Home Mortgage Disclosure Act (HMDA). Lenders that are subject to the CFPB’s final rule — which weighs in at 797 pages — have their work cut out for them before it goes into effect on Jan. 1, 2018.

    The purpose of this article is to help prepare lenders for the implementation of this rule, not only by explaining the types of institutions and transactions that are covered, the new data points that must be collected and reported, and the processes for reporting and disclosing this data, but also by suggesting the concrete steps that should be taken to ensure compliance with the final rule.

    Originally published in Bloomberg BNA; reprinted with permission. 

  • Revisiting 2015's New Flood Regulations, Part 2
    February 2, 2016
    Melissa Klimkiewicz, Brandy Hood & Andrew Lim

    ESCROW PROVISIONS
    The Final Flood Rule also imposes new requirements related to the escrow of flood insurance premiums and fees. Previously, flood insurance premiums and fees were required to be escrowed if (1) any taxes, insurance premiums, fees, or other charges were required to be escrowed; and (2) the loan was secured by residential improved real estate or a mobile home and made, increased, extended, or renewed on or after October 1, 1996. However, Biggert-Waters and HFIAA directed the Agencies to (1) expand the mandatory escrow requirements to include most closed-end residential loans made, increased, extended, or renewed on or after January 1, 2016, even if no other charges are escrowed; and (2) require non-exempt lenders to provide borrowers with an option to escrow flood insurance premiums and fees for loans that are outstanding as of January 1, 2016, unless an exception applies. The Agencies also implemented notice requirements consistent with these provisions.

    Orginially published in Mortgage Compliance Magazine; reprinted with permission. 

  • What Companies Can Expect After Campbell-Ewald
    January 26, 2016
    Richard E. Gottlieb, Amanda Raines Lawrence & Brett J. Natarelli

    May defendants moot a putative class action by merely offering complete relief to the putative class representative? The U.S. Supreme Court says no, and the decision may have profound implications on class actions for years to come. Some options may remain, however, if more than a mere offer can be given.

    In Campbell-Ewald Co. v. Gomez, No. 14-857 (Jan. 20, 2016), the Supreme Court held that a mere unaccepted offer of judgment does not moot an individual class action. The decision rejects one of many important defenses commonly thought to be available to companies facing potentially massive litigation costs in cases in which theoretical statutory damages are astronomical. Prior to the decision, many courts concluded that by making an offer of judgment for complete relief under Rule 68 of the Federal Rules of Civil Procedure, a defendant mooted a plaintiff’s claim even if rejected. After the Supreme Court’s 6-3 ruling, that is (mostly) no longer the law in any of our federal courts.

    The ruling is a significant one for companies facing consumer protection statutes lacking statutory damages caps, or any other actions where offers of judgment were often made, such as those brought under the Fair Labor Standards Act. Perhaps the best example of the problem is the much-criticized federal Telephone Consumer Protection Act, which was the statute at issue in Campbell-Ewald.

    Even though today’s consumers are less likely to maintain landlines for their own use, and instead rely solely upon their mobile phones, the TCPA imposes draconian penalties on companies that even inadvertently contact mobile phone users without their prior and express written consent. New and evolving rules and regulations, scrutinizing regulators and aggressive plaintiffs have combined to create a complex web of risks ready to ensnare even the most careful institutions. The TCPA has posed one of the greatest litigation and compliance risks these institutions have faced in recent years. Indeed, companies with valid business reasons for contacting customers have been swept up in the wave of  TCPA class actions, often paying out multimillion-dollar settlements just to resolve claims that often amount to minimal or no actual customer harm.

    Originally published in Law360; reprinted with permission. 

  • New California Laws for 2016: SB 286 - Consumer Legal Remedies Act Update
    January 20, 2016
    Sherry-Maria Safchuk

    California recently enacted Senate Bill 386. Under existing law, the Consumer Legal Remedies Act, prohibits unfair methods of competition, acts, or practices by any person that either is intended to result of results in the sale or lease of goods or services. The purpose of the CLRA is "to protect consumers against unfair and deceptive business practices and to provide efficient and economical procedures to secure such protection."

    SB 386 added another prohibition to the current CLRA. Specifically, SB 386 prohibits advertising or offering for sale a financial product that is illegal under state or federal law. This prohibition includes requiring any cash payment for the assignment to a third party of a consumer's right to receive future pension or veteran's benefits. 

    Originally published in the California Daily Journal; reprinted with permission. 

Knowledge + Insights

  • Special Alert: CFPB Director Opines on TRID Liability
    January 5, 2016

    On December 29, 2015, CFPB Director Richard Cordray issued a letter in response to concerns raised by the Mortgage Bankers Association regarding violations of the CFPB’s new TILA-RESPA Integrated Disclosure (“TRID”) rule, also known as the Know Before You Owe rule. In an effort to address concerns that technical TRID violations are resulting in extraordinarily high rejection rates by secondary market purchasers of mortgage loans, Director Cordray acknowledged that, “despite best efforts, there inevitably will be inadvertent errors in the early days.” However, he suggested that rejections based on “formatting and other minor errors” are “an overreaction to the initial implementation of the new rule” and that the risk to private investors from “good-faith formatting errors and the like” is “negligible.” He expressed hope that this issue “will dissipate as the industry gains experience with closings, loan purchases, and examinations.”

    Click here to view the full Special Alert.

    * * *

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Credit Cards 2016: Consumer Protection in Focus
    December 31, 2015
    Valerie Hletko & Manley Williams

    The past year has seen heightened CFPB interest in the following areas: (i) deferred interest and rewards, (ii) limited English proficiency consumers, and (iii) the recent revisions to the Military Lending Act (MLA). Pursuing simplicity in the design of product features and closely following limited English proficiency issues will help credit issuers mitigate their regulatory risk. Also on the horizon in 2016 is the effective date of the MLA revisions, which were announced in July 2015.

    Deferred Interest and Rewards

    The Bureau has been focused on the marketing and design of deferred interest products and issued a strong admonition in September 2014 relating to the potential for consumer surprise. However, there has been relatively little enforcement activity in this regard. Instead, enforcement generally has focused on technical violations of law. For example, an August 2015 consent order arose out of point-of-sale disclosures as opposed to the product features themselves. Some deferred interest issues, such as “old fashioned mistakes,” (e.g., “if paid in full” is dropped from the marketing copy) may represent low-hanging fruit for the CFPB and should be addressed to mitigate enforcement risk. The Bureau has also expressed concern about technical issues that may complicate deferred interest for consumers, such as expiration of the promotional period prior to the payment due date.

    The Bureau has suggested that consumers base their choice of credit card more on the nature and richness of the rewards than on the interest rate. Accordingly, the Bureau has expressed concern about various aspects of rewards programs, including the expiration of points and complexity surrounding how they are earned and redeemed. While simplicity may reduce regulatory risk, it undoubtedly makes rewards programs more expensive for issuers, and makes it more difficult for consumers to distinguish among them.

    Limited English Proficiency

    In September 2015, the CFPB issued an enforcement action related to mortgages, which required the respondent to spend $1M on targeted advertising and an outreach campaign in Spanish and English over the five-year term of the order. The CFPB recently created several Spanish language documents: a glossary of basic financial terms as well as two documents titled “Your Money, Your Goals,” and “The Newcomer’s Guide to Managing Money.”

    Notwithstanding these efforts, it is worth noting that the CFPB has not translated any of the credit card model forms into Spanish. Determining the appropriate extent of Spanish-language marketing—and fulfillment, if any—is a difficult calculation, and the Bureau has provided no firm guidance. Still, while the industry awaits further developments in 2016, it is advisable to make specific efforts to engage Spanish-speaking communities.

    Military Lending Act

    The recently revised MLA will also impact the credit card industry in 2016. Under the new regulations, most credit card products will be subject to the MLA, including its 36 percent interest rate limitation. Creditors will need to determine who is a covered borrower, but the revised regulations also provided two safe harbors for a creditor to make such a determination. The revised regulations take effect on October 3, 2016, except for most credit cards, as to which the compliance date is October 3, 2017. BuckleySandler addressed this new rulemaking in an MLA Spotlight Series (see Part 1, Part 2, Part 3).

  • Vendor Management in 2015 and Beyond
    December 31, 2015
    Valerie L. Hletko, Jon D. Langlois, Jeffrey P. Naimon & Christopher M. Witeck

    With evolving regulatory expectations and increased enforcement exposure, financial institutions are under more scrutiny than ever. Nowhere is this more evident than in the management and oversight of service providers. When service providers are part of an institution’s business practice, understanding the expectations of regulators, investors, and counterparties for compliance with consumer financial laws is critical.

    CFPB Guidance

    In 2012, the CFPB issued Bulletin 2012-03, which outlines the CFPB’s expectations regarding supervised institutions’ use of third party service providers. Banks and nonbanks alike are expected to maintain effective processes for managing the risks presented by service providers, including taking the following steps:

    • Conducting thorough due diligence of the service provider to ensure that the service provider understands and is capable of complying with federal consumer financial law
    • Reviewing the service provider’s policies, procedures, internal controls, and training materials
    • Including clear expectations in written contracts
    • Establishing internal controls and on-going monitoring procedures
    • Taking immediate action to address compliance issues

    Implementing consistent risk-based procedures for monitoring third party service provider relationships is an extremely important aspect of meeting the CFPB’s expectations and mitigating risk to the institution.

    The Risk Management Lifecycle and Best Practices

    The CFPB is but one of many agencies that have circulated vendor management guidance. Other federal prudential regulators—most notably the Office of the Comptroller of the Currency—have developed regulatory guidance describing a “lifecycle” for oversight of third parties that supervised institutions are expected to follow. The risk management lifecycle of a service provider relationship consists of:

    • Planning/risk assessment
    • Due diligence and service provider selection
    • Contract negotiation and implementation
    • Ongoing relationship monitoring
    • Relationship termination/contingency plans

    Supplemented by enhanced risk management processes, including meaningful involvement by the Board of Directors and extensive monitoring of performance and condition, the new framework for oversight of third parties can present both cost and operational challenges for all institutions. Financial institutions would be prudent to implement the following best practices into their vendor management procedures, among others:

    • Staffing sufficiently to ensure that service providers are properly monitored
    • Incorporating Board and senior executive involvement throughout the process
    • Documenting its efforts at every stage of the lifecycle
  • Debt Collection and Beyond in 2015
    December 16, 2015
    John C. Redding, Walter E. Zalenski, Aaron C. Mahler

    In 2015, the CFPB further expanded its reach into debt collection through a number of enforcement actions. The CFPB also continues to conduct research on a potential rulemaking regarding debt collection activities, which may address information accuracy concerns involving debt sales and other collection activity, as well as many other issues regarding how creditors collect their own debts and oversee collectors working on their behalf. In addition to CFPB activity, this year’s Madden v. Midland Funding, LLC decision has important implications beyond the debt collection industry. Finally, developments regarding the Telephone Consumer Protection Act (TCPA) and collections will likely be of interest to regulatory agencies in the new year.

    Debt Sale Consent Orders and Regulatory Guidance

    Among the CFPB enforcement actions relevant to debt collection in 2015 were two consent orders with large debt buyers. These orders resolved allegations that the debt buyers, among other things, engaged in robo-signing, sued (or threatened to sue) on stale debt, made inaccurate statements to consumers, and engaged in other allegedly illegal collection practices. In particular, the CFPB criticized the practice of purchasing debts without obtaining supporting documentation or information, or taking sufficient steps to verify the accuracy of the amounts claimed due before commencing collection activities. Under the consent orders, one company agreed to provide up to $42 million in consumer refunds, pay a $10 million civil money penalty, and cease collecting on a portfolio of consumer debt with a face value of over $125 million. The second company agreed to provide $19 million in restitution, pay an $8 million civil money penalty, and cease collecting on a consumer debt portfolio with a face value of more than $3 million. In addition, both companies agreed to refrain from reselling consumer debt more generally.

    The Office of the Comptroller of the Currency’s (OCC) has also been active in issues affecting debt sales, issuing Bulletin 2014-37. The Bulletin provides guidance requiring national banks to provide the consumer with notice that a debt has been sold, the dollar amount of the debt transferred, and the name and address of the debt buyer; perform due diligence on the debt buyer; provide the debt buyer with the signed debt contract and a detailed payment history; and take other measures designed to ensure that debt buyers fairly and appropriately collect debts that they purchase.

    Madden v. Midland Funding, LLC

    The Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC carries potentially far-reaching ramifications for the secondary market for credit. In this case, the court held that non- bank assignees of credit obligations originated by national banks are not entitled to rely on National Bank Act preemption from state-law usury claims. In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle which provides a loan that is not usurious when made does not become usurious when assigned to another party. Since buyers of defaulted debt, securitization vehicles, hedge funds, and other purchasers of whole loans are often non-bank entities, this decision could create a heightened risk environment for those in the secondary credit market, particularly those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to the peer-to-peer and marketplace lending industries and various types of on-line consumer credit. The Second Circuit decided not to rehear Madden and the defendants have filed a writ of certiorari to the Supreme Court. Bank sellers of loans and related assets and non-bank assignees of bank-originated credit obligations would be prudent to consider the risks that Madden poses to their business, investments, and operations and whether there are risk mitigation measures that may be available.

    Telephone Consumer Protection Act

    Recent declaratory rulings by the Federal Communications Commission regarding the TCPA included clarifying the ability of consumers to revoke their consent to receive autodialed calls and requiring callers making autodialed calls to stop calling a number after one call when it has been reassigned to a new subscriber. Debt collectors and others should take note of these issues, as TCPA compliance will likely continue to be an area of interest for regulators moving forward.

  • Year in Review: Auto Finance and the CFPB in 2015
    December 14, 2015
    John C. Redding & Amanda Raines Lawrence

    The auto finance industry gained a new regulator in 2015 with the publication of the CFPB’s larger participant rule, which, for the first time, allows the Bureau to supervise larger non-bank auto finance companies. In this new compliance environment, larger participants would be prudent to examine past bulletins and consent orders executed by the CFPB to proactively prepare for examinations and enforcements in the coming year.

    Regulation by Bulletins and Consent Orders

    CPFB Bulletin 2013-02, which set forth the CFPB’s initial views regarding the risk under the Equal Credit Opportunity Act associated with “allowing” dealers the discretion to “mark up” the rates of customers’ retail installment sale contracts, provided a basis for two 2015 consent orders. Broadly speaking, the Bulletin noted two possible ways auto finance creditors could mitigate their risk – eliminating dealer discretion or monitoring for disparities in dealer discretion and then providing customer remediation for such disparities.

    Since 2013 there have been three public CFPB consent orders regarding dealer pricing discretion. The first order, executed with a large bank holding company and its subsidiary bank in 2013, required the respondents to pay remediation for past transactions within the order’s scope, pay a $18 million civil money penalty, and establish a program to monitor and remediate disparities going forward. This contrasts with the two public consent orders that were issued afterwards. Those subsequent orders, entered into with a captive finance company and a large regional bank in the summer and fall of 2015, respectively, provided the respondents with the option of reducing the range of acceptable “markup” (i.e., the difference between the rate of the installment contract and the institution’s buy rate) to 125 basis points for contracts with a term of 60 months or less and 100 basis points for contracts with a term of more than 60 months. If a respondent selected this option, then monitoring for compliance with these markup limits is required, but monitoring and remediating disparities in dealer markup is not required. Both orders also included other options involving reduced dealer discretion, but did not include an option to monitor and remediate disparities without any change in the permitted dealer discretion.

    Larger Participant Rule for Auto Finance

    The CFPB’s larger participant rule for auto finance, which became effective on August 31, 2015, extended the CFPB’s supervisory authority to nonbank auto finance companies that have at least “10,000 annual originations.”

    • “Originations” in this case includes credit for the purpose of purchasing an automobile, leases of automobiles, refinancings of such transactions, and purchases of such transactions.
    • The rule excludes title lending and securitization transactions.
    • “Automobile” includes any self-propelled vehicle primarily used for personal, family, or household purposes for onroad transportation except for motor homes, RVs, golf carts, and motor scooters.

    Now that the rule is in effect, CFPB examinations of non-bank auto finance companies are expected to follow. In light of this new rule, companies should examine other areas where the CFPB has been active in connection with other consumer financial products, in the event the Bureau extends such initiatives into auto finance. Those areas include:

    • Fair lending
    • Credit reporting
    • Debt collection
    • Treatment of servicemembers
    • Ancillary products
    • Vendor management