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  • District Court Fines Mortgage Brokers More Than $298 Million for Alleged FCA/FIRREA Violations

    Courts

    On September 14, a federal judge in the U.S. District Court for the Southern District of Texas ruled after a five-week jury trial that defendants, who allegedly submitted fraudulent insurance claims after acquiring risky loans, were liable for treble damages and the maximum civil penalties allowed under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). According to the court, the evidence presented at trial demonstrated that the damages suffered by the U.S. were a “foreseeable consequence” of the defendants’ misconduct and that such misconduct was part of an “prolonged, consistent enterprise of defrauding the [U.S.],” warranting a higher level of penalties. The jury found that one of the defendants along with its CEO “submitted or caused to be submitted 103 insurance claims” while misrepresenting that its branches were registered by HUD, causing the Federal Housing Administration (FHA) to sustain damages in excess of $7 million. A separate mortgage broker defendant was found to have submitted or caused to be submitted 1,192 insurance claims causing over $256 million in damages to the FHA due to the “reckless” underwriting of loan applications, in violation of FCA. The court rejected the defendants’ request for lenient civil penalties, finding the defendants’ behavior to be “custom-designed to flout the very program that relied upon [defendants’] diligence and compliance” and demonstrating “a patent unwillingness to accept responsibility for their actions.” The FIRREA penalties resulted from defendants submitting false annual certifications to HUD that were intended “to serve as a separate and independent quality check on the [defendant’s] branches,” but instead led to injury in the form of borrowers entering into default or foreclosures, as well as elevated mortgage insurance premiums.

    The judge imposed over $291 million in FCA treble damages and penalties against the three defendants. Additionally, each defendant was fined $2.2 million in FIRREA penalties for actions that “were neither isolated or relatively benign . . . [but] were reckless, egregious, and widely injurious.”

    Courts Lending Mortgages False Claims Act / FIRREA Litigation Insurance FHA HUD

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  • Second Circuit Cites Spokeo, Rules No Standing to Sue for Violation of FACTA

    Courts

    On September 19, the U.S. Court of Appeals for the Second Circuit issued an opinion ruling that a merchant who had printed the first six numbers of a consumer’s credit card on a receipt violated the Fair and Accurate Credit Transactions Act (FACTA), but that because the violation did not cause a concrete injury, the consumer did not have standing to sue the merchant. Under FACTA, merchants are prohibited from including more than the final five digits of a consumer’s credit card number on a receipt. In this instance, the plaintiff filed a complaint in 2014, followed by an amended complaint later that same year, in which he alleged that he twice received printed receipts containing the first six digits of his credit card number, in violation of FACTA. The plaintiff claimed that the risk of identity theft was a sufficient injury to establish standing. The defendants argued that that the first six digits of the credit card account only identified the card issuer and did not reveal any information about the consumer, which did not “raise a material risk of identity theft.” Citing a Supreme Court ruling in Spokeo v. Robins, the district court opined that a procedural violation of a statute is not enough to allow a consumer to sue, because it must be shown that the violation caused, or at least created a material risk of, harm to the consumer—which, in this case, was not present. Accordingly, the appellate court affirmed the district court’s dismissal for lack of subject matter jurisdiction, but found that the district court erred in dismissing the suit with prejudice.

    Courts Litigation FACTA Second Circuit U.S. Supreme Court

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  • CFPB UDAAP Claim in Structured Settlement Factoring Case Moves Forward

    Courts

    On September 13, the U.S. District Court for the District of Maryland allowed a UDAAP claim brought by the CFPB to move forward in which the defendants allegedly employed abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. The court also dismissed several UDAAP claims related to an attorney acting as a financial advisor in the transactions. The 2016 complaint alleged that defendants violated the Maryland Consumer Financial Protection Act (CFPA) by encouraging consumers to take advances on their structured settlements and falsely representing that the consumers were obligated to complete the structured settlement sale, “even if they [later] realized it was not in their best interest.” According to the complaint, many of the consumers “’did not understand the risks or conditions of the advances, including that the advances did not bind them to complete the transactions.” The CFPB also alleged several counts based on the conduct of an attorney acting as a financial advisor for the transactions, who allegedly provided “virtually no advice,” and whose services were arranged and directly paid by the structured settlement buyer.

    In the order and memorandum, the court rejected several of the defendants’ arguments to dismiss based on procedural grounds and allowed the CFPB’s UDAAP claim against the structured settlement buyer and its officers to proceed. However, the court dismissed the claims related to the financial advisor, finding that he satisfied the requirements for an exemption under the CFPA for attorneys engaged in the practice of law.

    Courts CFPB UDAAP Litigation Structured Settlement CFPA

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  • District Judge Issues Order Against Bi-Weekly Payment Company, Denies Restitution Sought by CFPB

    Courts

    On September 8, a federal judge in the U.S. District Court for the Northern District of California issued an opinion and order against a company after a seven-day bench trial, finding that the company misrepresented its bi-weekly payment program in violation of the Consumer Financial Protection Act (CFPA). As previously covered in InfoBytes, the CFPB filed a complaint in 2015 against the company, its wholly owned subsidiary, and the company’s founder, alleging that the company’s false and misleading marketing practices were abusive and deceptive when it minimized the existence or amount of the program’s setup fee, misled borrowers on the amount of actual savings, and created the impression that the company was affiliated with the lender. The payment program allowed the defendants to contract with borrowers to make their mortgage, credit card, or other loan payments for them. The program automatically debited their accounts every two weeks in an amount equal to one-half of the monthly payment on the loan. This resulted in 26 payments per year, with the extra payments going towards paying down the principal on the loan. The judge granted the $7.9 million civil penalty proposed by the CFPB but denied the restitution of almost $74 million that the CFPB had sought—a full refund of all setup fees—because it found that “the CFPB has not proved that defendants engaged in the type of fraud commonly connoted by the well-worn phrase ‘snake oil salesmen,’” and specifically had “not shown, and could not show, that the [payment] program never provid[ed] a benefit to consumers, or that no fully-informed consumer would ever elect to pay to participate in the program.” The court found that further injunctive relief is warranted but directed the parties to meet and confer to determine the specific terms of the relief. The court noted that the CFPB had only sought civil penalties under the “basic tier” of the CFPA’s civil penalties provision and speculated that the CFPB did not propose higher penalties because it also expected to obtain a large amount of restitution. Nevertheless, the court found that higher penalties for reckless or knowing violations were not warranted because the defendants had taken “affirmative steps such as training, quality control, and seeking legal counsel, in an effort to stay on the right side of the line.”

    Courts CFPB Payment Processors UDAAP Settlement

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  • District Court Grants Preliminary Settlement Approval in SCRA Class Action Suit

    Courts

    On September 13, the U.S. District Court for the Eastern District of North Carolina granted preliminary approval to settle a class-action suit resolving allegations that a national bank overcharged military families on interest and fees related primarily to mortgage and credit card accounts in violation of the Servicemembers Civil Relief Act (SCRA). The order also, in the context of the proposed settlement only, preliminarily certifies the class, which is comprised of members who—after September 11, 2001—were entitled to “additional compensation related to military reduced interest rate benefits from [the bank].” The plaintiffs filed the complaint against the bank in 2015 claiming alleged violations of the SCRA, TILA, and the North Carolina Unfair and Deceptive Trade Practices Act. In May 2016, the court denied the defendants’ motion to dismiss the first amended complaint, and at the end of 2016, the parties agreed to mediation. A second amended complaint—now the operative complaint—was filed just prior to the motion for preliminary approval. While the bank has not admitted any wrongdoing, it has agreed to refrain from using an “interest subsidy method for interest benefits calculations for a five-year period,” which, plaintiffs pleaded, can lead to higher costs.

    According to the terms of the memorandum in support of the motion for preliminary approval, class members will receive payments based on the strength of their individual claims, considering such factors as: (i) loan type; (ii) whether they previously received remediation from the bank, and how much; and (iii) the eligible period for interest rate refunds. The memorandum further stipulates that approximately $15.4 million of the nearly $42 million overall settlement will be provide to class members who have not received or deposited any payments from the bank. Unclaimed amounts from the first round will be pooled with the remainder of the settlement to be allocated as outlined in the distribution plan. A final approval hearing is scheduled for February of next year.

    Courts SCRA TILA Servicemembers Mortgages Credit Cards Class Action Litigation Settlement

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  • Second Circuit Cites Escobar, Vacates and Remands FCA Suit

    Courts

    On September 7, the Second Circuit Court of Appeals issued an order concerning a False Claims Act (FCA) case on remand from the United States Supreme Court. In its order, the three-judge panel determined that the FCA complaint should be reviewed under the higher court’s Escobar standard, which “set out a materiality standard for FCA claims that has not been applied in the present case.” See Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). As previously discussed in InfoBytes, Escobar holds that a misrepresentation must be material to the government’s payment decision to be actionable under the FCA and that the implied false certification theory can be a basis for liability under the FCA.

    In issuing the order, the appellate court vacated the district court’s dismissal of the relators’ complaint (which it had affirmed the first time around) and remanded for further proceedings to determine whether the bank’s certification was materially false. At issue is a qui tam suit filed against a national bank, in which plaintiffs claimed the bank violated the FCA when it certified to the Federal Reserve that the bank and its predecessors were obeying the law in order to “borrow money at favorable rates” during the financial crisis. The decision originally relied upon two requirements cited in a case overturned by Escobar—“the express-designation requirement for implied false certification claims and the particularity requirement for express false certification claims.”

    Courts False Claims Act / FIRREA Second Circuit Federal Reserve U.S. Supreme Court

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  • District Court Denies Class Certification for Lack of Temporal Constraint on Proposed Class Definition

    Courts

    On August 30, the U.S. District Court for the Southern District of New York issued an opinion and order denying the certification of a proposed class of investors alleging that a bank failed in its responsibilities as trustee of five residential mortgage-backed securities. The court found that “the proposed class cannot be certified because it is not ‘defined using objective criteria that establish a membership with definite boundaries’ . . . [such as] a fixed date, a window of acquisition, or length or continuity of ownership.” The judge ruled that the lack of a “temporal constraint on the proposed class definition” meant investors who bought and sold the securities before and after the alleged violations occurred could be included in the suit, despite the fact that any losses incurred by these groups would not necessarily be associated with the bank’s alleged misconduct. However, the court ruled that the plaintiff may file an amended motion proposing an alternative class construction within 45 days.

    Courts Class Action Mortgages Securities

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  • Mortgage Company, Real Estate Services Companies Reach $17 Million Class Action Settlement for Alleged RESPA Violations

    Courts

    On August 25, a national mortgage company and a real estate services family of companies (Defendants) together entered into a $17 million settlement to end a putative class action lawsuit accusing them of arranging kickbacks for unlawful referrals of title services in violation of the Real Estate Settlement Procedures Act (RESPA). The complaint, filed in 2015 in the U.S. District Court for the Central District of California, accused Defendants—along with various affiliates—of violating RESPA by allegedly facilitating the exchange of unlawful referral fees and kickbacks through an affiliated business arrangement, while also directing various banks to refer title insurance and other settlement services to a subsidiary in the real estate services family of companies without informing customers of the relationship between the entities. According to a memorandum in support of the motion seeking preliminary approval of the settlement, the real estate services family of companies was “obligated to refer their customers exclusively to [the mortgage company] for mortgage loans, and, in return, [the mortgage company] was required to refer all settlement services back to [the real estate services enterprise’s] subsidiaries.” While a federal judge dismissed the first and second amended complaints “on the basis that Plaintiffs failed to plead sufficient facts for equitable tolling of RESPA’s one-year statute of limitations,” the same judge denied Defendants’ motion to dismiss a third amended complaint because “Defendants’ contention regarding equitable tolling for the statute of limitations was ‘better resolved in either a motion for summary judgment or trial.’” A fourth amended complaint, filed in July 2017, amended certain claims and added additional class plaintiffs, well after settlement discussions had started.

    A stipulation of settlement was filed alongside the motion for preliminary approval, in which Defendants continued “to deny each and all of the claims and contentions alleged in the [a]ction . . . [but] have concluded that the further conduct of the [a]ction against them would be protracted and expensive.” Furthermore, the stipulation noted that “substantial amounts of time, energy and resources have been and, unless this [s]ettlement is made, will continue to be devoted to the defense of the claims asserted in the [a]ction.” The proposed settlement class consists of more than 32,000 transactions related to borrowers who closed on mortgage loans originated by the mortgage company between approximately November 2014 through November 2015, and who paid any title, escrow or closing related charges to the real estate services companies. The proposed settlement stipulates that Defendants must pay $17 million into a settlement fund to be used to provide cash payments to class members, as well as a portion that will go towards class counsel attorney fees and litigation expenses pending court approval.

    Courts Class Action Kickback Settlement RESPA

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  • District Court Dismisses CFPB Lawsuit Against Payment Processors, Cites “Blatant Disregard” for Discovery Order

    Courts

    On August 25, a federal judge in the U.S. District Court for the Northern District of Georgia filed an order dismissing claims brought by the CFPB against four payment processors for allegedly engaging in an illegal robocall phantom debt collection operation involving certain payment processors and a telephone broadcast service provider (defendants). (See previous InfoBytes coverage here.) According to a complaint filed in 2015, the defendants “knew, or should have known” that the debt collectors were contacting millions of consumers in an attempt to collect debt that consumers did not owe or that the collectors were not authorized to collect by using threats, intimidation, and deceptive techniques in violation of the Consumer Financial Protection Act and the Fair Debt Collection Practices Act.

    According to the order, however, the CFPB displayed a “blatant disregard” for the court’s instructions when asked repeatedly to identify the factual bases for its claims, and willfully failed to present a knowledgeable 30(b)(6) witness during depositions. As examples of “willful disregard,” the court noted that the CFPB’s approach was to first “bury the Defendants in so much information that [they] cannot possibly identify, with any reasonable particularity, what supports the CFPB’s claims,” and second, to “assert privilege objections to questions that the Court … repeatedly ordered to be answered.” The court also indicated that Bureau witnesses relied on “memory aids”—which the court characterized as “scripts”—to provide answers to the defendants’ questions and were unable to testify beyond what was stated on the memory aids. This behavior made the court “not optimistic that reopening the depositions would be fruitful.” As a result, the court dismissed the defendants from the action, granting sanctions under Rule 37, which permits “a district court [to] impose sanctions upon a party for failure to comply with a discovery order,” which may include striking pleadings in whole or in part.

    Courts Payment Processors CFPB CFPA FDCPA UDAAP

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  • Eleventh Circuit Rules Credit Reporting Agency Did Not Willfully Violate FCRA

    Courts

    In an August 24 opinion, the U.S. Court of Appeals for the Eleventh Circuit held that a credit reporting agency had not interpreted the Fair Credit Reporting Act (FCRA) in an “objectively unreasonable” manner when it included in a plaintiff’s credit report that the plaintiff was an authorized user of her parents’ delinquent credit card account. In doing so, the appellate court upheld the Georgia district court’s decision to dismiss the class action lawsuit over allegations that two credit reporting agencies failed to take reasonable precautions to ensure the accuracy of the plaintiff’s credit score. The appellate court concluded that including the information was a reasonable interpretation of the FCRA obligation to “follow reasonable procedures to assure the maximum possible accuracy” of the reported information—meaning the report must be technically accurate. Because this interpretation was not objectively unreasonable, the plaintiff could not plead that the violations were willful.

    The case concerned a plaintiff who was designated as an authorized user of her parents’ credit card when they became ill. After the plaintiff’s parents died, the account went into default, and the credit card company reported the default to consumer reporting agencies listing the consumer as an authorized user, which caused her credit score to drop by 100 points. The credit card company—responding to the plaintiff’s complaint over the inaccurate information—interceded in the matter with the credit reporting agencies. The information was expunged from the plaintiff’s report and her credit score returned to its prior level. The plaintiff then filed a consumer class action complaint in 2015, contending that the consumer reporting agencies had violated their duty under the FCRA when they failed to take reasonable precautions to ensure the accuracy of her credit score.

    At issue, the appellate court opined, was which interpretation should be applied when determining “maximum possible accuracy,” which, depending on differing court opinions, might mean (i) making certain that any included information is “technically accurate,” or (ii) ensuring the information is not only technically accurate but also not misleading or incomplete. The appellate court asserted that while the first interpretation was a less exacting reading of the FCRA, the plaintiff failed to cite any judicial precedents or agency interpretive guidance advising that reporting authorized user information was a violation. Further, the plaintiff failed to show that the credit reporting agency reported false information.

    Of note, the appellate court determined the plaintiff had shown an “injury in fact” and had standing to sue based on the following reasons: (i) reporting inaccurate credit information “has a close relationship to the harm caused by the publication of defamatory information,” which has a long provided basis as a cause of action; (ii) a concrete injury was allegedly sustained due to time spent resolving the problems resulting from the credit inaccuracies; and (iii) the plaintiff was affected personally because her credit score fell due to the reported information.

    Courts Credit Reporting Agency Appellate Eleventh Circuit FCRA

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