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  • Why Getting the FHA's Loan Servicing Rules 'Right' Matters
    July 15, 2015
    Michelle Rogers, Melissa Klimkiewicz, & Susanna Khalil

    In recent years, servicing U.S. Federal Housing Administration-insured loans has become risky business. The U.S. Department of Housing and Urban Development has heightened its monitoring and enforcement, with servicers experiencing increased Quality Assurance Division (QAD) reviews, HUD Office of Inspector General inquiries, Mortgagee Review Board (MRB) actions and indemnification demands. Additionally, False Claims Act and Financial Institutions Reform, Recovery and Enforcement Act of 1989-based claims have amplified the potential consequences of noncompliance. Indeed, during fiscal year 2014 alone, the U.S. Department of Justice boasted a record $5.69 billion in settlements and judgments from civil cases involving the FCA. These developments have made it particularly important to get the rules “right,” but as nearly all FHA servicers know, that is not an easy feat.

    Originally published in Law360. Reprinted with permission. 

  • 6 Record Search Lessons From $43M Clydesdale Bank Penalty
    June 23, 2015
    Manley Williams & Nadav Ariel

    Clydesdale Bank PLC was recently hit with a more-than-$43 million fine, largely because it failed to search for documents that should have been subject to its destruction policy, and for misleading consumers and its regulators about the searches. The U.K.’s Financial Conduct Authority (FCA), which is something like the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Trade Commission and the U.S. Securities and Exchange Commission rolled into one, imposed this £20,678,300 fine on April 14, 2015, and issued a detailed notice explaining how it arrived at such a fine. The facts discussed here are as represented by the FCA in its order. 

    As the recent Libor cases have shown, the U.S. and U.K. bank regulators are often found chasing the same fox. Accordingly, the FCA’s notice provides valuable lessons for all U.S. financial institutions, not only those who do business in the U.K.

    Originally published in Law360; reprinted with permission. 


  • FDIC Director Suits: Lessons Learned, 2nd Edition
    June 22, 2015
    David Baris & Loyal Horsley

    David Baris and Loyal Horsley authored “FDIC Director Suits: Lessons Learned, 2nd Edition,” which was published by the American Association of Bank Directors (AABD). 

    The AABD produced this updated review of the FDIC's civil suits against directors of failed banks and savings institutions to find out what directors of open banks can learn from the 104 complaints (involving more than 793 directors) filed from July 2010 through January 2015. The 2nd edition features 70 new cases to assist AABD members and others who currently serve as bank directors in helping to avoid the fate of those who have been sued.

    Click here to learn more or to purchase the book from Amazon.

  • Mortgage Industry Continues to Bear Brunt of CFPB Regulatory Burdens
    June 12, 2015
    Elizabeth McGinn & Moorari Shah

    In recent years, mortgage industry players have had to quickly adapt to the evolving regulatory environment. The latest scramble for mortgage lenders includes the downstream effects of pending rule changes related to disclosures required in implementing regulations of the Truth-in-Lending Act ("TILA") and the Real Estate Settlement Procedures Act ("RESPA"), set to take effect on August 1. A critical factor to successful implementation of this historic set of rule changes is coordinating with various vendors to address new timing and information requirements for Loan Estimates and Closing Disclosures. Undoubtedly, these rule changes are creating project management nightmares for mortgage professionals growing weary of the regulatory onslaught of revised regulations and enforcement actions. Despite the relative speed with which many companies have adapted to various rule changes since the CFPB came online, managing service providers through the changes continues to test the strength of the deep mortgage lender relationships in place in the industry for decades.

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

Knowledge + Insights

  • Special Alert: CFPB Officially Delays TRID Rule Until October 3
    July 21, 2015

    The CFPB finalized a rule today that delays the effective date of the TILA-RESPA Integrated Disclosure (“TRID”) rule, including all amendments, from August 1 to October 3, 2015. This is consistent with the proposed rule issued last month, which we wrote about here.
     
    The CFPB considered implementing a “dual compliance period” that would have permitted creditors to voluntarily comply with the TRID rule early, but it ultimately declined to do so, citing concerns that “dual compliance could be confusing to consumers and complicated for industry, including vendors, the secondary market, and institutions who act both as correspondent lenders and originators.”
     
    In addition, although the CFPB declined to create a “hold harmless” or “safe harbor” period following the effective date, it stated that it “continues to believe that the approach expressed in Director Cordray’s letter to members of Congress on June 3, 2015," which we wrote about here, remains fitting:

    [O]ur oversight of the implementation of the Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time. My statement . . . is consistent with the approach we took to implementation of the Title XIV mortgage rules in the early months after the effective dates in January 2014, which has worked out well.

    The rule also implements two technical corrections to the requirements governing the “Calculating Cash to Close” and “Summaries of Transactions” tables in the Closing Disclosure. Specifically, the instructions for the “Adjustments and Other Credits” line are being amended to include the cost of any personal property excluded from the contract sales price. In addition, the instructions for calculating the “Closing Costs Paid at Closing” disclosure in the “Summaries of Transactions” table are being amended to account for general lender credits applied at closing.     

    For additional information and resources on the TRID rule, please visit our TRID Resource Center.

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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: CFPB Launches First Monthly Complaint Report Providing Snapshot of Consumer Trends
    July 17, 2015

    On July 16, 2015, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) launched the first in a new series of monthly complaint reports highlighting key trends from consumer complaints submitted to the CFPB. Importantly, its monthly report provides significant detail on the complaints the CFPB has received, including the names of the companies that received the largest number of complaints. 
     
    Currently, the most-complained-about companies are also the largest bank and nonbank financial institutions in the country. Since these institutions have the highest numbers of customers, it is only natural that they have received the highest number of complaints. On the same day as the monthly report’s release, CFPB Director Richard Cordray provided remarks at an Americans for Financial Reform event in Washington, D.C. Director Cordray noted that in future monthly reports, the CFPB hopes to “normalize” its consumer complaint data by accounting for financial institutions’ respective size and volume. To that end, the CFPB issued a Request for Information seeking input on ways to enable the public to more easily understand company-level complaint information and make comparisons. The comment period closes August 31, 2015.
     
    The report also provides data on complaint volume, state and local complaint information, and trends relating to specific consumer financial products or services. In June 2015, for example, debt collection was the most-complained-about product or service with the 32% of complaints filed with the Bureau, while complaints relating to mortgages and credit reporting were next in line.
     
    Going forward, each monthly report will spotlight a particular financial product and geographic area. In the first report, the CFPB closely examines debt collection complaints and complaints from consumers in Milwaukee, Wisconsin. 
     
    The CFPB began accepting complaints in July 2011 and launched its Consumer Complaint Database in June 2012, which is the nation’s largest public collection of consumer financial complaints. As of July 1, 2015, the CFPB has handled 650,700 complaints.
     
    In its press release for the monthly report, the Bureau issued a reminder that it expects companies to respond to CFPB complaints within 15 days. The Bureau also expects companies to describe the steps they have taken or intend to take to resolve each consumer complaint. In fact, in its monthly report, the Bureau provided statistics on how often certain debt collection companies were “untimely” in responding to complaints.
     
    Notably, the CFPB stressed that complaints inform the Bureau’s work and can directly feed into its supervision and enforcement prioritization process. “Consumer complaints are the CFPB’s compass and play a central role in everything we do. They help us identify and prioritize problems for potential action,” said CFPB Director Cordray. The publication of this monthly report, together with continuing consumer complaint initiatives from the CFPB, highlights the critical importance of developing an effective complaint management program.

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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: Disparate Impact Under the Equal Credit Opportunity Act After Inclusive Communities
    June 27, 2015

    On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.

    Applicability to ECOA

    When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA.

    But just as the federal officials had stated that they would continue to assert disparate impact under ECOA if Inclusive Communities invalidated disparate impact under the FHA, lenders still have a number of arguments that the Inclusive Communities Court’s analysis does not apply to ECOA, given the material differences between the text and history of the FHA and ECOA. First, the Court principally based its textual arguments on the use of “otherwise make unavailable” in Section 804 of the FHA—a section that applies to the sale and rental of housing but not to lending. The Court stated that this effects-based language “is of central importance” to its analysis. Although the Court also stated that it had construed statutory language similar to FHA Section 805—which applies to lending—the discussion of Section 805 is so brief as to suggest it was merely an afterthought. The Court repeatedly states its textual analysis focused on the text “otherwise make unavailable.” But ECOA contains no similar effects-based language.

    Second, the Court’s analysis of the FHA’s amendment history is inapplicable to ECOA. The Court focused principally on three provisions which it characterized as “exemptions” from disparate-impact liability, and concluded that such exemptions made sense only if Congress were acknowledging the validity of disparate impact claims. But ECOA contains no similar “exemptions” from disparate-impact liability that might otherwise lead to the conclusion disparate impact is cognizable under ECOA.

    Finally, while the Court also notes that disparate-impact claims are “consistent with the FHA’s central purpose,” this justification appears merely to support the Court’s textual and historical arguments. The Court has repeatedly cautioned that a statute’s purpose does not trump its text. Whatever similarities may exist between the purpose of the FHA and ECOA, the material textual and historical differences weigh heavily against treating the two statutes the same for disparate-impact purposes.

    Burden Shifting Framework

    Even if the Inclusive Communities analysis could apply to ECOA, the Court’s emphasis on rigorous application of the three-step burden-shifting framework to analyze disparate impact claims—and protect against “abusive disparate-impact claims” —is likely to impose significant burdens on regulators and plaintiffs seeking to bring disparate impact claims under ECOA. The Court’s articulation of the steps in the burden-shifting framework are materially different—and more friendly to lenders—than those applied by federal agencies (e.g., in HUD’s disparate impact rule). While it is possible that the government and private plaintiffs will argue that the burden shifting framework outlined in Inclusive Communities applies only to the FHA, the Court’s reasoning supports applying the same framework to other civil rights laws—including ECOA.

    First, the Court has reaffirmed the significant burden plaintiffs must bear in satisfying the first step of the burden-shifting framework: establishing a prima facie case. The Court noted that a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity to “protect defendants from being held liable for racial disparities they did not create.” “[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The Court emphasized that “prompt resolution of these cases [by courts] is important.” This, when taken together with the Court’s decision in Wal-Mart Stores, Inc. v. Dukes, may make maintaining a disparate impact claim under ECOA particularly difficult when addressing such practices as discretionary pricing (e.g., dealer markup in the auto finance context).

    Second, with respect to the second step of the framework, the Court explained that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The Court noted that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.” Specifically, the Court endorsed the importance of considering “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system” in determining whether a company’s policy is supported by a legitimate business justification. The Court further explained that “entrepreneurs must be given latitude to consider market factors,” as well as other “objective” and “subjective” factors.

    Third, the Court emphasized that before rejecting a “business justification,” a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.” (internal quotations and alterations omitted). Significantly, and in contrast to previous interpretations by federal agencies, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.

    The Court cautioned that a rigorous application of the burden-shifting framework is necessary to prevent disparate-impact liability from supplanting nondiscriminatory private choice: “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers. And that, in turn, would set our Nation back in its quest to reduce the salience of race in our social and economic system.” (internal citations and alterations omitted).

  • Special Alert: Supreme Court Upholds Disparate Impact Under Fair Housing Act, But Emphasizes Limits on Such Claims
    June 25, 2015

    Today, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). In a 5-4 decision, the Court concluded that the use of the phrase “otherwise make available” in Section 804 of the Fair Housing Act supports disparate-impact claims. The Court also held that Section 805 of the Fair Housing Act (which applies to lending) permits disparate impact, reasoning that the Court “has construed statutory language similar to § 805(a) to include disparate-impact liability.” The Court also wrote that the 1988 amendments to the Fair Housing Act support its conclusion because (1) all the federal Courts of Appeals to have considered the issue at that time had held that the FHA permits disparate-impact claims; and (2) the substance of the amendments, which the Court characterized as exceptions from disparate impact, “is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”

    The Court emphasized, however, that “disparate-impact liability has always been properly limited in key respects . . . ” Specifically, the Court explained disparate-impact liability must be limited so companies “are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” “Entrepreneurs must be given latitude to consider market factors,” the Court explained. The Court clarified further that a variety of factors, including both “objective” and “subjective” factors, are “legitimate concerns.”

    To prevent what the Court characterized as “abusive disparate-impact claims,” the Court emphasized that the three-step burden-shifting framework used to analyze disparate-impact claims must be applied rigorously by courts and government agencies. At the first step in the framework, the Court noted that a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity to “protect defendants from being held liable for racial disparities they did not create.” “[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The Court emphasized that “prompt resolution of these cases [by courts] is important.”

    With respect to the second step of the framework, the Court, citing the seminal Title VII case of Griggs v. Duke Power, further explained that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The Court stated that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.”

    Finally, under the third step of the framework, the Court emphasized that before rejecting a “business justification,” a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.” (internal quotations and alterations omitted). Significantly, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.

    Without a rigorous application of this burden shifting framework, the Court cautioned that disparate-impact liability could be used to replace nondiscriminatory private choice: “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers. And that, in turn, would set our Nation back in its quest to reduce the salience of race in our social and economic system.” (internal citations and alterations omitted).

    Although the Court did not expressly address whether its decision invalidates HUD’s disparate impact rule with its expansive burden shifting framework, the decision also does not rely on or defer to the discussion of the burden shifting framework contained in HUD’s disparate impact rule, notwithstanding the HUD rule’s extensive treatment of the burden shifting framework for disparate-impact claims under the FHA. The dissenting justices, however, concluded that given what they called “this unusual pattern” regarding the promulgation of the HUD rule, “there is an argument that deference may be unwarranted."

  • Special Alert: CFPB Issues Proposal to Delay TRID Rule Until October 3
    June 24, 2015

    The CFPB issued a proposed rule today to delay the effective date of the TILA-RESPA Integrated Disclosure (“TRID”) rule, including all amendments, from August 1 to October 3, 2015. The proposed delayed effective date is two days later than the date announced last week so that the effective date falls on a Saturday. The CFPB chose Saturday because it “may allow for smoother implementation by affording industry time over the weekend to launch new systems configurations and to test systems. A Saturday launch is also consistent with existing industry plans tied to the Saturday August 1 effective date.”

    The proposed rule explains that, due to “an administrative error on the Bureau’s part in complying with the [Congressional Review Act]…, the [TRID] Rule cannot take effect until at the earliest August 15, 2015.” Because “some delay in the effective date is now required, the Bureau believes that a brief additional delay may benefit both consumers and industry more than would allowing the new rules to take effect on [August 15].” The Bureau stated that the additional delay is being proposed to avoid challenges associated with a mid-month effective date and to allow more time to implement the rule in light of recent information the CFPB received that “delays in the delivery of system updates have left creditors and others with limited time to fully test all of their systems and system components to ensure that each system works with the others in an effective manner.”

    The proposed rule does not include any substantive changes to the TRID rule, other than changes to reflect the new proposed effective date. Despite requests by many in industry, the Bureau did not propose to allow lenders to begin complying with the rule before the effective date.

    Comments must be received on or before July 7, 2015.

    For additional information and resources on the TRID rule, please visit our TRID Resource Center


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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.