Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New York Court of Appeals holds that accrual clause does not delay commencement of six-year statute of limitations for RMBS repurchase claims
On October 16, the New York Court of Appeals affirmed a trial court’s dismissal of trustee RMBS repurchase claims against a mortgage originator on statute of limitations grounds, concluding that New York’s six-year statute of limitations for breaches of representations and warranties governed despite the inclusion of an accrual clause within the governing agreements.
In the underlying lawsuit, the plaintiff trustee claimed that the mortgage originator breached representations and warranties in loan purchase agreements relating to the characteristics and quality of the loans ultimately securitized into RMBS. However, because the originator sold the final set of loans conveyed into the RMBS in May 2007, and the trustee did not file suit until August 2013, the trial court held that the claims were time-barred under New York’s six-year statute of limitations for breach of contract suits. The trial court cited precedent set by the appeals court in ACE Securities Corp. v. DB Structured Products, which found that “a cause of action for breach of representations and warranties contained within a [RMBS] contract accrued when the contract was executed” because the representations and warranties were breached on that date.
On appeal, the trustee argued that the contractual language at issue was different from the language in ACE. Specifically, the trustee argued that the inclusion of an accrual clause stating that claims “shall accrue” upon an originator’s failure to repurchase a defective loan created a condition precedent to suit and operated to delay the commencement of the statute of limitations. The appeals court disagreed, concluding that “no substantive condition precedent was created, and that to the extent the parties otherwise intended to delay the commencement of the limitations period, their attempt to do so was inconsistent with New York law and public policy.” In reaching this conclusion, the appeals court explained that New York’s public policy “represented by the statute of limitations” and specific New York laws governing extensions thereof would effectively be abolished if contracting parties could circumvent it by mutually agreeing to postpone the date on which the period of limitation commences.
On October 11, Assistant Attorney General Brian A. Benczkowski issued a memorandum to the DOJ’s Criminal Division that revises the framework for assessing when DOJ will require a corporate monitor as part of a resolution.
Under the revised framework, Criminal Division attorneys must now consider whether the company’s “remedial measures” or changes to “corporate culture” are enough to protect against future misconduct. For instance, “[w]here misconduct occurred under different corporate leadership” that has since left the company, a monitor may not be needed. Criminal Division attorneys must also consider not just the monetary costs to the company of imposing a corporate monitor, but also the burden to the company’s operations, and should impose a monitor only when a “clear benefit” would outweigh the costs and burdens.
As AAG Benczkowski remarked in a speech given the day after the memorandum was issued, the new corporate monitor policy is based on the “foundational principle” that “the imposition of a corporate monitor is never meant to be punitive,” and a corporate monitor ultimately “will not be necessary in many corporate criminal resolutions.”
The memorandum also refines the monitor selection process with the goal of, as AAG Benczkowski described in his speech, ensuring “that the process is fair,” that the “best candidate” is selected, and that “even the perception of any conflicts of interest” is avoided.
On October 18, the SEC announced the launch of its Strategic Hub for Innovation and Financial Technology (FinHub). According to the SEC, FinHub will assist in facilitating public engagement on fintech-related topics, including blockchain/distributed ledger technology, digital marketplace financing, automated investment advice, and artificial intelligence/machine learning. Through FinHub, industry participants and the public will have the opportunity to engage directly with the SEC to discuss and test innovative ideas and technological developments. FinHub will also act as a clearinghouse for SEC staff to access and disseminate fintech-related information throughout the agency, and will “[s]erve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.”
“FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission,” SEC Chairman Jay Clayton announced.
On October 16, the FTC announced that it reached a settlement with a Texas-based company over allegations that it violated the FCRA by failing to take reasonable steps to ensure the accuracy of tenant-screening information furnished to landlords and property managers. The FTC alleges that the company compiled screening reports through an automated system using broad criteria that incorrectly matched applicants to criminal records. Additionally, the company allegedly lacked policies or procedures to assess the accuracy of those results, which led to some renters being turned down for housing. The settlement requires the company to pay $3 million—the largest civil penalty ever assessed by the FTC against a background screening company. In addition, the company must maintain reasonable procedures to ensure consumer reports contain the maximum possible accuracy of information and is subject to compliance, recordkeeping, and reporting requirements.
On October 17, as part of its fall 2018 rulemaking agenda, the FTC announced that it plans to review potential updates to federal privacy rules on how banks protect consumer data. The planned recommendation—scheduled to be presented to FTC commissioners at the end of November—will incorporate recommendations by staff and the public on changing the Gramm-Leach-Bliley Act Safeguard Rules (the Rule) given the potential conflict between the Rule and state, local, or other federal laws or regulations. As previously covered by InfoBytes, the FTC requested comments on the Rule in 2016, seeking feedback on several specific questions relating to the Rule’s economic impact and benefits, potential conflicts, and how technological, economic, or other industry changes will affect the Rule.
Among other things, the FTC’s regulatory agenda will also address (i) 2016 amendments to the Telemarking Sales Rule; (ii) the periodic review of identity theft rules; (iii) issues related to the privacy of consumer financial information concerning vehicle disclosures; and (iv) credit monitoring for active duty military as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act.
On October 17, the Office of Information and Regulatory Affairs released the CFPB’s fall 2018 rulemaking agenda. According to the Bureau’s preamble, the information presented is current as of August 30 and represents regulatory matters it “reasonably anticipates” having under consideration during the period of October 1, 2018, to September 30, 2019. The Bureau also states it plans on “reexamining the requirements of [ECOA] in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”
Key rulemaking initiatives include:
- Property Assessed Clean Energy Loans (PACE): The Bureau is planning to complete an assessment of its 2013 rules for assessing consumers’ ability to repay mortgage loans by January 2019, which will inform the drafting of a request for information or advance notice of proposed rulemaking (ANPR) on PACE issues to facilitate the Bureau’s rulemaking process.
- HMDA/Regulation C: The Bureau plans to follow-up on its action in August 2017 to amend Regulation C to increase the threshold for collecting and reporting data with respect to open-end lines of credit for a period of two years so that financial institutions originating fewer than 500 open-end lines of credit in either of the preceding two years would not be required to begin collecting such data until January 1, 2020.
- Debt Collection: The Bureau states it plans to issue an ANPR addressing issues such as communication practices and consumer disclosures by March 2019, and has received support from industry and consumer groups to engage in rulemaking to explore ways to apply the FDCPA to modern collection practices.
- Small Dollar Lending: The Bureau anticipates it will issue a proposed rule on small dollar lending in January 2019.
- Payday Rule: The Bureau estimates it will issue an ANPR in January 2019 to reconsider the merits and compliance date for its final payday/vehicle title/high-cost installment loan rule.
- FCRA: Comments must be submitted by November 19 on the changes and underlying disclosures implemented by its interim final rule, which amended certain model forms under the FCRA and took effect September 21. (See previous InfoBytes coverage on the interim final rule here.)
Long term priorities now include rulemaking addressing (i) small business lending data collection; (ii) consumer reporting; (iii) amendments to FIRREA concerning automated valuation models; (iii) consumer access to financial records; (iv) rules to implement the the Economic Growth, Regulatory Relief, and Consumer Protection Act, concerning various mortgage requirements, student lending, and consumer reporting; and (v) clarity for the definition of abusive acts and practices.
On October 18, the FTC released a report to Congress outlining the agency’s comprehensive efforts to protect older consumers in the marketplace from fraud, identity theft, imposter scams, deceptive credit schemes, and other unlawful practices. The report, Protecting Older Consumers 2017-2018: A Report of the Federal Trade Commission, discusses (i) scams that target older consumers, including technical support scams; business imposter scams; prizes, sweepstakes, and lottery scams; and family or friend imposter scams; (ii) key FTC enforcement actions taken against companies that allegedly engaged in deceptive schemes that targeted or affected older consumers; and (iii) outreach and education efforts, including fraud prevention campaigns and resources for older consumers. Specifically, the report contains analysis of consumer complaint data from 2017, which revealed that older consumers (especially those over 80) were more likely to report fraud than younger people, and that when they reported losing money to fraud, they lost significantly more money than consumers in their twenties. (See previously InfoBytes coverage here on the FTC’s annual summary of consumer complaints received in 2017).
On October 16, the U.S. Attorney for the Eastern District of New York announced that the U.S. branch of a Japanese bank and several of its affiliates would settle claims related to the bank’s marketing, sale, and issuance of residential mortgage-backed securities (RMBS) in the lead-up to the 2008 financial crisis. In particular, the U.S. Attorney alleged that the bank, among other things, (i) misrepresented the effectiveness of its due diligence loan review procedures and the quality of the RMBS to investors; (ii) overruled due diligence warnings and allowed the securitization of loans that failed to comply with underwriting guidelines without investors’ knowledge; and (iii) continued to work with originators that “had ‘systemic’ underwriting issues and employed ‘questionable’ origination practices.” The bank disputes the allegations and does not admit to any liability or wrongdoing, but agreed to pay a $480 million civil money penalty pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act to resolve the matter.
FinCEN encourages financial institutions affected by Hurricane Michael to communicate BSA filing delays; extends FBAR filing deadline
On October 15, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions that file Bank Secrecy Act reports to encourage communication with FinCEN and their functional regulators regarding any expected filing delays caused by Hurricane Michael. FinCEN also reminded financial institutions to review advisory FIN-2017-A007, previously covered by InfoBytes, which discusses potential fraudulent activity related to recent disaster relief schemes.
The same day, FinCEN issued a second notice for certain filers affected by Hurricane Michael to extend the deadline for submitting their 2017 calendar year Reports of Foreign Bank and Financial Accounts (FBARs). FBARs for affected filers are now due February 28, 2019.
Find more InfoBytes disaster relief coverage here.
FHFA launches clearinghouse for mortgage industry to assist borrowers with limited English proficiency
On October 15, the Federal Housing Finance Agency (FHFA), Freddie Mac, and Fannie Mae announced the joint launch of the Mortgage Translations clearinghouse, a collection of online resources designed to help lenders and servicers assist borrowers with limited English proficiency. The clearinghouse currently provides Spanish-language resources, and will add resources in Chinese, Vietnamese, Korean, and Tagalog in the coming years. Mortgage Translations also includes a Spanish-English glossary developed in collaboration with the CFPB to help standardize translations across the mortgage industry.
- Valerie L. Hletko to discuss "Forecasting litigation and settlement trends in the mortgage servicing and fair lending context" at the American Conference Institute National Forum on Residential Mortgage Regulatory Enforcement & Litigation
- Michelle L. Rogers and Jonice Gray Tucker to discuss “Building a govt affairs program; Government investigations” at the TechGC National Summit
- Tina Tchen to deliver keynote address at the American Bar Foundation Montgomery Summer Research Diversity Fellowship 30th Anniversary Celebration
- Douglas F. Gansler to discuss "Privacy, security and protection of your assets in contracts; Security exercises and tactical measures" at the TechGC National Summit
- H Joshua Kotin will discuss federal regulatory developments in mortgage lending and servicing at the Mortgage Bankers Association of Arkansas Fall Conference
- Kate Shrout to discuss "Conducting workplace investigations" at the TechGC National Summit
- Kathryn R. Goodman to discuss "HECM servicing policies and updates" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Fredrick S. Levin to discuss "Reverse mortgage litigation trends" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Melissa Klimkiewicz to speak at the "Digital marketing compliance roundtable" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Hank Asbill to discuss "The role of the media in white collar criminal investigations and the Mueller probe" at the American Bar Association White Collar Crime Town Hall
- John C. Redding to discuss "Regulatory compliance update" at PowerSports Finance
- Matthew P. Previn to discuss "Enforcement trends: Who is doing what and how?" at the Cambridge Forums Inc. Forum on Consumer Finance Litigation & Enforcement
- Jonice Gray Tucker to discuss "Protect yourself from a CFPB investigation" at the National Association of Settlement Purchasers Conference
- Tina Tchen to deliver keynote address at the American Bar Association Professional Success Summit
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "New CDD Rule: Pitfalls in compliance" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference