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  • FinCEN’s Lack of Policies and Procedures for Assessing Civil Money Penalties In Need of Reform
    July 25, 2016
    Robert B. Serino

    In remembrance of Bob Serino and his many contributions to both the field of banking law and the financial services community, the ABA Banking Law Committee would like to honor his accomplishments and rich life and career. After a long illness, Bob recently passed away while this article was pending publication.

    There are few in our profession so universally liked and respected as Bob. His long career at the Office of the Comptroller of the Currency (OCC) made a lasting mark. He set up the OCC’s first formal enforcement office, pioneered anti-money laundering enforcement, and served for many years as deputy chief counsel. When he left the agency, he established the OCC Alumni Association, which last year was renamed the Robert Serino OCC Alumni Association. Bob subsequently joined BuckleySandler LLP, where he was a partner. He also served as a captain in the U.S. Navy Reserves.

    What engaged Bob most was connecting with other people. He mentored many young lawyers and gave generously of his time and advice to colleagues. He knew how to nurture a friendship and had a wide circle of friends and colleagues, all of whom will deeply miss him.

    For many years, federal banking agencies have used publicly available processes, procedures, and matrices to determine both whether a Civil Money Penalty (CMP) is justified and, if so, the size of the penalty. Most recently, on February 26, 2016, the OCC published a revised Policies and Procedures Manual “to ensure the statutory and 1998 FFIEC Interagency Policy factors are considered in CMP decisions, and to enhance the consistency of CMP decisions.”

    In contrast, the Financial Crimes Enforcement Network (FinCEN) has no publicly disclosed CMP matrix or procedures to determine either a penalty is warranted or, if so, the appropriate amount. Thus, there is no publicly known process in place to ensure that FinCEN’s vast power is applied consistently and equitably. There is an urgent need for FinCEN to bring its CMP assessment process into alignment with other regulators.

    Banks, Bank Secrecy Act officers, and other institution-affiliated parties live under constant threat of a FinCEN CMP, yet have no inkling whether they are, in fact, at risk and the extent of the risk. The agency’s reluctance to publish its CMP standards and procedures perpetuates banks’ and other regulated entities’ perceived lack of due process. Moreover, the uncertainty created by FinCEN’s opacity is causing havoc among compliance officers. FinCEN’s failure to act contributes to the exodus of compliance officers who face a high degree of uncertainty because of the lack of guidance on whether they may be subject to a FinCEN CMP and the amount of the penalty. Lalita Clozel,Exodus of Compliance Officers Seen if NY Plan Goes Through, American Banker, Feb. 24, 2016 (discussing potential effects on compliance officers if New York implements regulation requiring compliance officers to certify compliance with bank secrecy laws with the threat of criminal action if a problem arises); Jerry Buckley, The Compliance Officers Bill of Rights, American Banker, Feb. 22, 2016 discussing concerns of compliance officers and need to establish protections for them so that they can perform their duties in good faith and without fear of the unknown).To illustrate, in December 2014, FinCEN assessed a $1 million civil money penalty against the chief compliance officer/senior vice president of government affairs at a major money transmitter. And in January 2016, a U.S. district court ruled that the corporate officers could be held personally liable for Bank Secrecy Act compliance failures.

    Click here to read the full article at www.americanbar.org.

  • Mortgage Industry Struggles to Avoid Vendor Management Land Mines
    July 11, 2016
    Elizabeth E. McGinn & Moorari K. Shah

    October 3, 2015, marked the official effective date of the long-anticipated, and widely dreaded, TILA-RESPA Integrated Disclosure (TRID) rule. Mortgage professionals have learned from a half-decade deluge of regulation that their TRID fate, along with almost every other aspect of the industry’s ability to comply with the new regulatory regime, lies largely in the hands of third-party vendors.

    Vendors ranging from independent mortgage brokers to disclosure preparation companies to settlement service providers span the entire origination process. In a rare acknowledgement of the problems associated with unreliable vendors, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray told an audience of mortgage bankers just two weeks into the TRID rule’s existence:

    ‘‘Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date. It may well be that all of the financial regulators, including the [CFPB], need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.’’

    Cordray’s remarks ultimately provide little comfort to mortgage lenders that must bear responsibility for vendors who fail to individually and collectively maneuver around TRID’s many land mines. In that regard, the TRID rule is no different than any other industryshifting paradigm advanced by the Bureau in its short but notable five-year reign.

    Considerable investments to absorb and adjust to new laws and regulations have not altered the reality that coordinating the efforts of vendors will continue to determine whether the mortgage industry can ever conquer the heavy compliance burden it now faces. Along with vendor management concerns arising under the TRID rule, this article explores a number of mortgage industry challenges related to vendor management that have been the focus of intense CFPB enforcement efforts during the past year and are likely to continue into the foreseeable future.

    Back to the Future

    Throughout its existence, the CFPB’s vendor management arsenal has had a familiar tendency, consisting mostly of (1) ominous guidance bulletins, (2) invective-laden enforcement actions, and (3) cryptic signals of future enforcement. In so doing, CFPB regulators have honed in on long-standing compliance pressure points involving third parties, including marketing services agreements (MSAs), deceptive advertising of ancillary products, and prohibited loan originator compensation. In addition, a number of multi-party transactions, such as the delicate relationships among lenders, appraisal management companies (AMCs) and independent appraisers, figure to result in almost certain vendor management enforcement in the post-TRID era.

    To be sure, other federal agencies such as the Federal Reserve Board (Fed) and the Office of the Comptroller of the Currency (OCC) have more modestly echoed the CFPB’s warnings with respect to vendor relationships, and many in the mortgage industry have heeded the regulators’ calls and wisely redoubled their efforts with respect to vendor management.

    The efforts have resulted in, among other improvements, robust policies and procedures that cover vendor selection, contract negotiation and ongoing monitoring, as well as compliance training for everyone from the board of directors and senior management down to line-level employees. Nonetheless, whether because of the TRID rule or otherwise, many mortgage companies continue to grapple with fundamental changes to—and in some cases elimination of—age-old industry conventions.

    Originally published in Bloomberg BNA; reprinted with permission.

  • Fate Of Municipal-Plaintiff FHA Suits In Justices' Hands
    June 28, 2016
    Mark Rooney

    The U.S. Supreme Court on Tuesday announced it will hear an appeal by two banks in a case that could define the reach of mortgage discrimination lawsuits under the Fair Housing Act. Bank of America and Wells Fargo are challenging the city of Miami’s lawsuit seeking to hold the banks responsible for allegedly discriminatory mortgage practices dating back to the subprime boom which, the city claims, resulted in a raft of foreclosures, in turn causing them to lose property tax revenue and incur out-of-pocket costs associated with municipal services rendered at vacant properties. The banks argue that the municipality is not an “aggrieved person” under the law — both because reduced tax receipts and municipal expenditures are not within the “zone of interests” Congress sought to protect in enacting the FHA, and because the city’s injuries, if any, were not caused by any alleged discriminatory conduct.

    The court’s eventual ruling could provide some much-needed clarity to lower courts wrestling with standing issues in FHA cases. Across the country, at least eight different municipalities are pursuing substantially similar cases against bank defendants. The decision to review City of Miami also comes just one year after the court decided Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc., 135 S. Ct. 2507 (2015), holding that claims under a disparate impact theory of liability are allowed under the Fair Housing Act, subject to a “robust causality requirement” at the pleading stage. The City of Miami case could provide more nuanced guidance on the causality requirements in pleading an FHA claim, and will be a key case to watch in the Supreme Court’s 2016 term.

    Originally published in Law360; reprinted with permission. 

  • Verdicts Set Important Precedent for Paperless Mortgage
    June 28, 2016
    Margo H.K. Tank

    It’s no secret that digital is overtaking the finance industry, and mortgage is no exception. However, while end-to-end digital mortgage solutions exist that ensure secure management of documents and loans throughout the entire process, from loan execution through post-lifecycle management, adoption continues to be slow throughout this industry. Among the common justifications for the delay has been a lack of confidence in these processes and documents to withstand legal challenges.

    Hopefully, these excuses can finally be put to rest. Two separate court decisions have recently set the precedent that electronically signed promissory notes secured by real property (eNotes) are legally enforceable by lenders. These decisions address many concerns held by investors about buying eNotes and suggests further clarity may have to come from case law as the digital mortgage industry matures.

    Embracing the Shift and Meeting Demands

    Deeply traditional, the mortgage industry is rooted in hard-copy, multi-party financial service processes, causing the adoption of digital to be sluggish and restricted. However, demand by the key players and regulators for digital capabilities are spurring the advancement of digital transaction management (DTM), which, as noted in a study conducted by Aragon Research, is expected to grow into a $30-billion market by 2020.

    In addition to the demand for digital, a recent white paper from PwC states, “As regulatory expectations for mortgage originations continue to evolve in scope and complexity, the digital mortgage and its data-driven processes can provide the required transparency and accessibility to consumer data. Lenders who adopt a digital mortgage platform can more easily automate many aspects of their quality control (QC) and compliance program, enabling them to strengthen and streamline their processes and examination outcomes.”

    It is worth noting that the first all-digital paperless home purchase and mortgage transactions in the United States was performed in July of 2000 and showed how the entire home-buying process from closing the loan, recording the documents and delivering the package to the secondary mortgage market took less than three hours to complete.

    Click here to read the full article at www.eoriginal.com.

  • You Can Run, but You Can't Hide: What to Do When a State Attorney General Comes Calling
    June 8, 2016
    Douglas F. Gansler and John Troost

    The dietary supplements industry has grown tremendously over the past few decades. More than half of all adults in the United States now take dietary supplements, and the industry generates more than $37 billion in annual sales. While that growth has been a boon for consumers and businesses alike, it has also caught the eye of state regulators. Add in the fact that the supplements industry is a consumer-centric industry, and it should not come as a surprise that the consumer protection divisions in state attorneys general offices have taken notice.

    Many state attorneys general believe that the supplements industry is not well-regulated by the federal government. Furthermore, even among those who do understand that there are federal regulations, they tend to view those federal requirements as a floor and not a ceiling. Thus, state attorneys general may have your company on their radar even if it is fully complying with all federal Current Good Manufacturing Practices and it has never received a complaint from the Food and Drug Administration or the Federal Trade Commission. This dynamic makes state attorney general investigations a significant risk for the industry.

    New York’s attorney general reveals magnitude of the risk to the supplements industry

    The gravity of this risk burst into full view in February 2015, when New York Attorney General Eric T. Schneiderman issued cease-and-desist orders to four prominent supplements retailers: Walgreens, Walmart, General Nutrition Centers and Target. Schneiderman announced his allegations at a packed press conference, claiming that DNA barcode testing had revealed that most of the supplement products sold by the retailers did not contain the advertised ingredients. He also alleged that his testing had found that the products contained many substances not listed on the label, including known allergens.

    The reputational damage to the supplements industry was done the moment Schneiderman finished the press conference. Press reports of Schneiderman’s allegations made the front pages, and GNC’s stock dropped by as much as 5 percent during the day. What was not reported as widely was the industry perspective that Schneiderman had used the wrong tests for what he was trying to show. DNA barcode testing does not work for processed products, because DNA is too easily damaged during processing to be identified by a test. As the FDA later acknowledged in a March 2015 letter to Senators Martin Heinrich and Orrin Hatch, the agency does not use “DNA-sequencing-based identification methods for botanical materials.” Schneiderman’s office instead should have verified the product ingredients with a more appropriate test for plant extracts, such as liquid chromatography or mass spectrometry. GNC ended up settling the allegations against it without an admission of wrongdoing, but the allegations against the three other retailers are still outstanding. 

    Click here to read the full article at www.newhope.com.

Knowledge + Insights

  • Special Alert: Maryland Ruling Opens New Front in Battle Over Bank Partnership Model
    July 22, 2016

    On June 23, the Maryland Court of Appeals affirmed a lower court judgment holding that a non-bank entity assisting consumers obtain loans from an out-of-state bank and then repurchasing those loans days later qualifies as a “credit service business” under the Maryland Credit Services Business Act (MCSBA), requiring a state license among other obligations. CashCall v. Md. Com’r of Financial Reg., No. 24-C-12-007787, 2016 WL 3443971 (Md. Ct. App. June 23, 2016). This holding is of particular importance to marketplace lending platforms that rely on bank partnerships to originate consumer loans because, in addition to requiring a license, the MCSBA prohibits licensees from arranging loans for out-of-state banks above Maryland’s usury ceiling.

    In light of the ruling, the MCSBA could provide a roadmap for other states to test the limits of federal law, which specifically authorizes banks to export interest rates permitted by their home state notwithstanding another state’s usury limitations. Perhaps in view of a potential future challenge on federal preemption grounds, the CashCall Court appears to have gone out of its way to state in dictum that the non-bank entity was the “de facto lender” based on its efforts to market, facilitate, and ultimately acquire the loans it arranged. In so doing, the Court provides a strong suggestion that it might have reached the same result relative to the state’s usury laws under the “true lender” theory that has gained some traction in other actions against non-bank entities.

    While the most immediate impact of the Court’s ruling is to uphold the state financial regulator’s cease and desist order and $5.65 million civil penalty, the case also creates additional risk and uncertainty for marketplace lending platforms and other FinTech companies seeking to maintain a regulatory safe harbor through the bank partner model. We analyze here the import of this latest case as part of the appreciable tension building as state law theories appear to be increasingly penetrating chinks in the armor of federal preemption principles.

    Click here to view the full Special Alert. 

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    Join BuckleySandler attorneys on August 11, 2016 from 2:00-3:00pm ET for a discussion on recent developments related to partnerships between banks and alternative lenders. The lower costs, simpler products, and consumer convenience ushered in by digital lending means it is here to stay. But regulatory turbulence suggests that some mid-course corrections may be required. After a year of historic growth in 2015, the first half of 2016 has seen a series of potentially game-changing events for the marketplace lending industry, including the Supreme Court’s decision not to consider an appeal from the Second Circuit’s ruling in Madden v. Midland Funding, LLC. We will review the implications of Madden and several other recent court decisions and regulatory actions as they relate to federal preemption, “true lender” challenges, state licensing requirements, and other issues.

    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.

  • 100 Days Until the MLA: Compliance Challenges and Open Questions Before the New MLA's Rule Implementation
    June 24, 2016
    Sasha Leonhardt

    With only 100 days until the new Military Lending Act (MLA) rule takes effect on October 3, 2016, many financial institutions have begun enacting procedures to ensure they are compliant with the new regulation by the effective date. With the implementation of this new rule, financial institutions continue to work towards full compliance with the requirements imposed by the Department of Defense (DoD), but there are growing pains. As this deadline draws near, there are several important compliance concerns that financial institutions must keep in mind and a number of issues where the industry is concerned about unclear language.

    What types of credit are covered by the new MLA rule?

    The 2007 MLA rule was limited to three specific types of products: payday loans, vehicle title loans, and refund anticipation loans. However, under the new rule, the MLA will cover a far broader range of products. The DoD sought to match the definition of credit under the Truth in Lending Act’s (TILA) implementing regulation—Regulation Z—so the new MLA rule will cover any credit that is (i) primarily for personal, family, or household purposes, and (ii) either subject to a finance charge under Regulation Z or payable by written agreement in more than four installments.

    However, the new MLA rule excludes four specific types of transactions:

    • Residential mortgages, which are defined as credit transactions secured by an interest in a dwelling. This includes purchase money home mortgages, as well as construction mortgages, refinance mortgages, home equity loans, home equity lines of credit, and reverse mortgages.
    • Motor vehicle purchase loans that are secured by the vehicle being purchased. Importantly, motor vehicle refinance loans are not excluded, and therefore are covered by the new MLA rule.
    • Personal property purchase loans that are secured by the personal property that is being purchased. As with motor vehicle refinance loans, any refinance or other non-purchase loan secured by personal property is not exempt from MLA compliance.
    • Any transaction exempt from TILA (other than pursuant to a state exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z (such as business-purpose loans).

    How do I determine if a customer is a covered borrower under the MLA? What is the MLA safe harbor?

    The MLA only applies to “covered borrowers,” a term that includes individuals who are servicemembers or the dependents of servicemembers at the time a qualifying loan was originated. Under the new MLA rule, there are four different safe harbors that a creditor may use to determine if a customer is a covered borrower:

    • Online MLA Database (Individual Record Request): This is a free resource provided by the Department of Defense Manpower Data Center (DMDC) that requires the lender to manually enter a customer’s last name and date of birth/Social Security number to obtain a single result from a website. It provides a results certificate in seconds if the database is operational.
    • Online MLA Database (Batch Record Request): This is a free resource provided by the DMDC that permits a creditor to upload a spreadsheet with identifying information for up to 250,000 individuals, and the system provides results within 24 hours if the database is operational.
    • DMDC Direct Connection: This is a free resource provided by the DMDC that will permit certain large creditors to access the DMDC through a direct data link and obtain results instantaneously. The DMDC is still working to set this up and there will only be a handful of connections available to the largest creditors.
    • Consumer Reporting Agency: Under the MLA rule, a code in a consumer report received from a consumer reporting agency can also provide safe harbor protection. Although there are many benefits to this approach, there will be a cost associated with it, and it is unclear if it will be available prior to the October 3, 2016 implementation deadline.

    As long as a creditor retains the results of the safe harbor search, these results are “legally conclusive,” even if the customer was in fact on military service at the time of origination or account opening.

    What is the Military APR (MAPR)?

    The new MLA rule, like its 2007 predecessor, applies a MAPR cap of 36 percent to any debt that is covered by the MLA. The MAPR includes both the finance charges that are included under the Regulation Z APR calculation, as well as credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other costs and fees.

    The MAPR need not be disclosed. However, in many instances, creditors need to refine their existing systems—or create a new system—to calculate the MAPR on a billing period-by-billing period basis to ensure that the MAPR never exceeds 36 percent in any billing cycle for as long as the customer remains a covered borrower.

    What other protections are provided by the new MLA rule?

    In addition to the 36 percent MAPR limit, the MLA rule also places several other limits on the terms of an extension of credit to a covered borrower. Under the MLA, a creditor may not:

    • Roll over, renew, repay, refinance or consolidate any consumer credit extended to the covered borrower by the same creditor with the proceeds of other consumer credit extended by that creditor to the same covered borrower
    • Require the borrower to waive his or her right to legal recourse under any state or federal law
    • Require the borrower to submit to arbitration or impose onerous legal notice requirements in the event of a dispute
    • Demand unreasonable notice from the borrower as a condition for a legal action
    • Use a check or other method to access a consumer’s financial account, with certain exceptions
    • Use a vehicle title as a security for an obligation, with certain exceptions
    • Require the consumer to establish an allotment to repay the debt
    • Prohibit the consumer from prepaying the credit or impose a prepayment penalty

    What disclosures must be provided under the new MLA rule?

    The MLA rule requires three different written disclosures to the consumer before or at the time the borrower becomes obligated on the account: (1) a statement regarding the MAPR (which is not a disclosure of the numeric MAPR and may be satisfied using a model statement provided in the rule itself); (2) any disclosures required by Regulation Z; and (3) a clear description of the payment obligation of the borrower (which may be a payment schedule for closed-end credit or an account opening disclosure for open-end credit).

    In addition, the MAPR statement and the description of the payment obligation must also be offered to the consumer orally before or at the time the borrower becomes obligated on the account. A creditor can satisfy this requirement by either providing the information to the customer in person, or by providing a toll-free telephone number that the consumer may call to obtain this information.

    Are credit cards covered under the new MLA rule?

    Yes, credit cards are covered under the new MLA rule. However, credit card issuers have an additional year to comply with the MLA rule’s requirements and need not have their compliance plans in place until October 3, 2017.

    As we approach the October 3, 2016 implementation date, what are some areas of uncertainty under the MLA rule?

    As it is currently written, there are several loan products and scenarios covered by the new rule where it is unclear how regulators and the courts will apply the MLA’s protections. Among the areas where there is some uncertainty under the MLA are the following:

    • How can creditors ensure full compliance with the oral notice requirements under the MLA? Is it necessary to provide account-specific disclosures orally before the loan has been made and boarded onto the lender’s system?
    • For creditors issuing credit based upon a telephone call from a consumer, how can they best comply with the requirement to provide written disclosures before the borrower becomes obligated?
    • How can creditors best structure their account agreements so that they can use one account agreement for both MLA and non-MLA customers?
    • If a creditor assigns an account to a third party, can the third party also enjoy the protections of the MLA covered borrower safe harbor?
    • If the consumer reporting agencies have not reached an agreement with the DMDC to provide active duty information, how can financial institutions determine military status when issuing credit through instantaneous, automated (e.g. online or retail point-of-sale) channels?
  • Special Alert: CFPB's Proposed Rule Regarding Payday, Title, and Certain Other Installment Loans
    June 6, 2016

    On June 2, 2016, the CFPB published its proposed rule (the “Proposed Rule”) addressing payday loans, vehicle title loans, and certain other installment loans (collectively “covered loans”). This alert summarizes the Proposed Rule and compares the Proposed Rule to the CFPB’s March 26, 2015 outline released pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA). Those wishing to comment on the Proposed Rule must do so by September 14, 2016.

    Summary of the Proposed Rule

    The Proposed Rule is issued pursuant to the CFPB’s authority under section 1031 of the Dodd-Frank Act to identify and prevent unfair, deceptive, and abusive acts and practices. It defines two types of covered loans: (1) “short-term” loans that have terms of 45 days or less; and (2) “longer-term” loans with terms of more than 45 days that have a “total cost of credit” exceeding 36% and either a “leveraged payment mechanism” or a security interest in the consumer’s vehicle. A “leveraged payment mechanism” includes a right for the lender to initiate transfers from the consumer’s account and certain other payment mechanisms. The Proposed Rule would exclude (i) credit extended for the sole and express purpose of financing a consumer’s initial purchase of a good when the credit is secured by the property being purchased; (ii) credit secured by any real property or by personal property used or expected to be used as a dwelling; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; and (vi) overdraft services and lines of credit.

    The Proposed Rule would make it an abusive and unfair practice for a lender to make a covered short-term or longer-term loan without determining upfront that the consumer will have the ability to repay the loan (the “full-payment test”). For both types of covered loans, the Proposed Rule would require a lender to determine whether the consumer can afford the full amount of each payment of a covered loan when due and still meet basic living expenses and major financial obligations. As a practical matter, the full-payment test imposes restrictions on rollovers, loan sequences, and refinancing by preventing the offering of short-term loans fewer than 30 days after payoff without a showing that the borrower’s financial situation is materially improved (and capping successive short-term loans at 3 before requiring a 30-day cooling off period), and preventing the refinancing of longer-term loans without a showing that payments would be smaller or would lower the total cost of credit. The Proposed Rule also would provide conditional exemptions for certain covered loans meeting specified criteria, as discussed further below. These conditional exemptions essentially provide alternative compliance options to the Proposed Rule’s full-payment test. Additionally, the Proposed Rule would require lenders to use and furnish information to registered information systems established to track covered loans.

    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.

    • Matthew P. Previn, (212) 600-2310
    • Valerie L. Hletko, (202) 349-8054
    • John P. Kromer, (202) 349-8040
    • Benjamin K. Olson, (202) 349-7924
    • Walter E. Zalenski, (202) 461-2910
    • Marshall T. Bell, (202) 461-2997
  • Special Alert: Second Circuit Rules Fraud Claim Based on Contractual Promise Cannot Support FIRREA Violation Without Proof of Fraudulent Intent at Time of Contract Execution
    May 24, 2016

    On May 23, in an opinion delivered by Circuit Judge Richard Wesley, the Second Circuit Court of Appeals reversed the District Court for the Southern District of New York’s (SDNY) July 30, 2014 judgment ordering a bank and its lender subsidiary to pay penalties in excess of $1.2 billion for alleged violations of section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1833a. U.S. v. Countrywide Home Loans, Inc., Nos. 15-469, 15-499 (2d Cir. May 23, 2016). In relevant part, FIRREA imposes civil penalties for violations of the federal mail and wire fraud statutes that affect a federally insured financial institution. The Government had alleged in the case that the lender subsidiary had defrauded Fannie Mae and Freddie Mac (collectively, the GSEs), by originating mortgage loans through its High Speed Swim Lane (HSSL) loan origination process that it allegedly knew to be of poor quality, and subsequently selling those loans to the GSEs despite representations in the contracts between the GSEs and lender subsidiary that the loans were of investment quality. At trial, the Government presented evidence that high-level employees of the lender subsidiary “knew of the pre-existing contractual representations, knew that the loans originated through HSSL were not consistent with those representations, and nonetheless sold HSSL Loans to the GSEs pursuant to those contracts.” The defendants argued on appeal that, under common-law principles of fraud the Government’s trial evidence proved, at most, a series of intentional breaches of contract which did not suffice as a matter of law to establish fraud.

    The Second Circuit agreed with defendants and reversed the judgment of the district court. The court held that:

    a contractual promise can only support a claim for fraud upon proof of fraudulent intent not to perform the promise at the time of contract execution. Absent such proof, a subsequent breach of that promise—even where willful and intentional—cannot in itself transform the promise into a fraud.

    Thus, the Second Circuit concluded that under common law principles, which were incorporated into the mail and wire fraud statutes, “the proper time for identifying fraudulent intent is contemporaneous with the making of the promise, not when a victim relies on the promise or is injured by it.” The Second Circuit further held that “where allegedly fraudulent misrepresentations are promises made in a contract, a party claiming fraud must prove fraudulent intent at the time of contract execution; evidence of a subsequent, willful breach cannot sustain the claim.”

    Click here to view the full Special Alert.

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    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.

  • Special Alert: SCOTUS Vacates Ninth Circuit Decision in Case Alleging Procedural FCRA Violations
    May 16, 2016

    On May 16, the United States Supreme Court issued an opinion vacating the Ninth Circuit’s 2014 ruling that a plaintiff had standing under Article III of the Constitution to sue an alleged consumer reporting agency as defined by the Fair Credit Reporting Act (FCRA), for alleged procedural violations of the FCRA, 15 U.S.C § 1681 et seq. Spokeo v. Robins, No. 13-1339 (U.S. May 16, 2016). According to plaintiff Thomas Robins, the reporting agency violated his individualized (rather than collective) statutory rights by reporting inaccurate credit information regarding Robins’s wealth, job status, graduate degree, and marital status in willful noncompliance with certain FCRA requirements. In a 6-2 opinion delivered by Justice Alito, the Court ruled that Robins could not establish standing by alleging a bare procedural violation because Article III requires a concrete injury even in the context of statutory violation. Here, the Ninth Circuit erred in failing to consider separately both the “concrete and particularized” aspects of the injury-in-fact component of standing. The Court opined that the Ninth Circuit’s analysis was incomplete:

    [T]he injury-in-fact requirement requires a plaintiff to allege an injury that is both “concrete and particularized.” Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 180-181 (2000) (emphasis added). The Ninth Circuit’s analysis focused on the second characteristic (particularity), but it overlooked the first (concreteness). We therefore…remand for the Ninth Circuit to consider both aspects of the injury-in-fact requirement.

    Relying on case law, the Court emphasized that the “irreducible constitutional minimum” of Article III’s standing to sue relies on the plaintiff demonstrating (i) an injury-in-fact; (ii) that the injury is fairly traceable to the challenged conduct of the defendant; and (iii) that the injury is likely to be redressed by a favorable judicial decision. Lujan v. Defenders of Wildlife, 504 U.S., 560-561 (U.S. June 12, 1992); Friends of the Earth, Inc., 528 U.S., at 180-181. Spokeo primarily revolves around the first element, establishing an injury-in-fact. Again relying on Lujan, the Court reasoned that to establish injury-in-fact, the plaintiff must “show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” Lujan, at 560. According to the Court, the Ninth Circuit’s discussion of Robins’s standing to sue, and in particular its discussion of whether Robins had articulated an individualized statutory right rather than a collective right, concerned only the particularization element of establishing an injury-in-fact. The Court stated that the Ninth Circuit’s standing analysis was incomplete because it had failed to consider whether the “concreteness” requirement for an injury-in-fact—whether Robins had a “real” and “not abstract” injury—also had been satisfied. While the Court did make clear that a concrete injury could be intangible and that Congress may identify intangible harms that meet minimum Article III requirements, it noted that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.”

    The Court noted that because the Ninth Circuit had not fully distinguished concreteness from particularization, it had failed to consider whether the reporting agency’s procedural violations of the FCRA constituted a sufficient degree of risk to Robins to meet the concreteness standard. The Court observed that while a procedural violation of the FCRA may, in some cases, be sufficient to establish a concrete injury-in-fact, not all inaccuracies in consumer information, i.e. an incorrect zip code, cause harm or a material risk of harm. Further, because “Article III standing requires a concrete injury even in the context of a statutory violation” the Court explained that “Robins cannot satisfy the demands of Article III by alleging a bare procedural violation.”

    The Court vacated the Ninth Circuit’s judgment, and remanded the case for the Ninth Circuit to consider both aspects of the injury-in-fact requirement.

    * * *

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