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August Beach Read Series: Understanding FIRREA
FIRREA is a financial fraud statute that has been on the books for decades, and is fast-becoming a valuable weapon in the Department of Justice’s efforts to combat alleged financial fraud. FIRREA’s reach is broader than other civil fraud statutes available to the government, making it an especially powerful tool.
- It allows civil liability for violations of any of 14 enumerated criminal statutes, including mail and wire fraud;
- It allows for whistleblower recovery, and the potential for significant monetary penalties for the government;
- It has a 10 year statute of limitations; and
- Unlike the False Claims Act, there need not be a link between government funds and the alleged fraud; instead, the fraud need only affect a federally-insured financial institution, which arguably can include the defendant institution.
To learn more about FIRREA and how it impacts the financial services industry, please review some of our recent articles on the issue. BuckleySandler partner, Andrew Schilling, recommends what steps to take if your institution receives a FIRREA subpoena in his article, “U.S. Using Subpoenas Under 1989 Act as New Tool to Probe Financial Firms.” BuckleySandler attorney Andrew Schilling use a small civil bank fraud case to shed some light on how penalties in FIRREA cases are determined in “Finally, 8 Factors Governing FIRREA Civil Penalty Awards”. Matthew Previn discuss the first time the court permitted DOJ to use FIRREA against an institution engaging in fraud that “affects” the same institution in their article, “A Financial Institution’s Fraud on Itself Triggers FIRREA.” Visit our False Claims Act and FIRREA Practice Resource Center for additional information.
Congress Passes Reverse Mortgage Legislation; Senate Banking Committee Approves Broader FHA Reform Legislation
On July 30, the U.S. Senate passed by unanimous consent the Reverse Mortgage Stabilization Act, H.R. 2167. The bill, which was passed by the House in June and now goes to the President for his signature, will allow HUD to use notices or mortgagee letters to establish additional or alternative requirements necessary to improve the fiscal safety and soundness of the Home Equity Conversion Mortgage (HECM) program.
On July 31, the Senate Banking Committee voted 21-1 to approve the FHA Solvency Act of 2013, S. 1376, as amended during committee markup. As previously reported, that bill also includes reverse mortgage provisions, as well as measures to more broadly reform the FHA. The bill as approved by the committee includes amendments that would, among other things, (i) provide that in addition to the principal dollar amount limitation on all insured HECM loans, fixed rate HECMs may not involve a principal limit with a principal limit factor in excess of .61, (ii) allow HUD to promulgate rules to require servicers of FHA loans to enter into a subservicing arrangement with any independent specialty servicer approved by HUD, and (iii) prohibit FHA from insuring a mortgage executed by a borrower who was the borrower under any two residential properties that have been previously foreclosed upon. In addition, during the markup committee members offered and then withdrew numerous amendments that later could be included in the bill that is considered by the full Senate. For example, those amendments would (i) create a statutory requirement that HUD/FHA repay Treasury for any funds needed to stabilize the MMI Fund, (ii) revise the indemnification provisions to provide certainty for lenders, and (iii) provide the FHA additional flexibility in times of financial crisis to ensure it can play a countercyclical role. Finally, committee members agreed to work with the FHA to expand loss mitigation options for individuals who receive income from sources other than employment.
Special Alert: CFPB Enforcement Action Targets Marketing of Auto Loans, Add-On Products to Servicemembers
This morning, the Consumer Financial Protection Bureau (CFPB) announced enforcement actions against a national bank and its service provider related to alleged deceptive marketing of auto loans and add-on products to active-duty servicemembers. The CFPB claims that the companies failed to disclose or mischaracterized certain fees charged and ancillary products offered through a program developed to finance auto loans to servicemembers. These are the first public enforcement actions by the CFPB related to auto finance, and according to CFPB Director Richard Cordray, were precipitated by a complaint received from an individual servicemember’s relative. The actions demonstrate the CFPB’s focus on auto finance and its increasing coordination with the Department of Defense (DOD) and the individual branches of the military on servicemember protection issues.
Scope of Alleged Violations
The CFPB charges that the bank violated Regulation Z (TILA) by failing to accurately disclose the finance charge, annual percentage rate, payment schedule and total of payments for the subject loans, and also violated the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices by (i) failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for the subject loans; and (ii) deceptively marketing the prices and coverage of add-on service contracts. Specifically, the bank allegedly failed to inform servicemembers that they would be charged a monthly processing fee for automatic payroll allotments; (ii) failed to disclose that the allotments would be deducted from servicemember paychecks twice per month, but only credited once a month; and (iii) failed to regularly review and validate its vendor’s marketing related to the cost and coverage of add-on service contracts. As with the CFPB’s actions last year related to certain add-on products marketed by credit card issuer vendors, the CFPB focused on the marketing of the products and did not directly address their value. This action also applies the CFPB’s guidance on vendor management, which outlines the CFPB’s expectations for oversight and management of third-party vendors involved in the offering of ancillary products.
The service provider is alleged to have violated the CFPA’s prohibition on unfair, deceptive, or abusive practices by (i) deceptively marketing the prices of an add-on vehicle service contract and an add-on GAP insurance product; and (ii) deceptively marketing the scope of the coverage of a vehicle service contract. The CFPB asserts that the company understated the costs of the vehicle service contract and insurance product and overstated the reach of their coverage.
Resolution
The orders require the companies to cease the alleged practices, improve disclosures, and pay combined restitution of approximately $6.5 million - $3.2 million by the bank, $3.3 million by the vendor. Neither order includes a civil money penalty.
In addition, the bank must (i) develop a comprehensive compliance plan within 60 days; (ii) submit compliance progress reports within 90 days and after one year, as well as within 14 days of receiving a request from the CFPB after the one-year report; and (iii) implement certain recordkeeping requirements. The service provider has 15 days to retain an independent consultant to develop a compliance plan. Within 90 days of when the CFPB approves the consultant, the service provider must submit a compliance management system and written compliance plan. It also is subject to similar reporting and recordkeeping requirements.
Application of “Responsible Conduct” Guidance
Earlier this week, as detailed in our prior Special Alert, the CFPB issued guidance setting forth its expectations for companies subject to enforcement activity. Among other things, the CFPB stated that “responsible conduct” may be rewarded by the exercise of its discretion to resolve an investigation with no public enforcement action or to reduce any sanction or penalty imposed. According to the CFPB, in the actions announced today, the companies proactively addressed aspects of the loan program at issue and worked cooperatively with the Bureau to provide refunds to servicemembers. While the matters nonetheless resulted in public enforcement actions, the Bureau states expressly that this “responsible conduct” was one of several factors it considered in electing not to impose civil money penalties.
CFPB’s Focus on Auto Finance & Servicemember Protection
In addition to marketing of loans and add-on products, the CFPB has continued to focus on the fair lending implications of certain practices of indirect auto lenders. Just last week, the CFPB sought to explain to members of Congress its rationale for pursuing auto fair lending claims, largely reiterating the information set forth in the guidance issued in CFPB Bulletin 2013-02, and the CFPB reportedly has several ongoing auto finance investigations. We expect to see additional auto finance actions from the Bureau addressing the marketing and pricing of auto loans and add-on products.
Today’s CFPB announcement notes that the DOD and the Judge Advocate General Corps of each of the service branches assisted the CFPB in this matter. Concurrent with the announcement, the CFPB published information for servicemembers related to military allotments, announced that the DOD has established a working group that will consult with the CFPB and other federal regulators to look at the use of military discretionary allotments, and reiterated the Bureau’s general commitment to working with the DOD on protecting servicemembers in the consumer financial marketplace.”
U.K. Parliamentary Commission Report Offers Comprehensive Bank Governance Reforms
On June 19, the U.K. Parliamentary Commission on Banking Standards published a report titled “Changing Banking for Good.” The Commission, established in July 2012 after the alleged rigging of LIBOR was revealed, was tasked “to conduct an inquiry into professional standards and culture in the U.K. banking sector and to make recommendations for legislative and other action.” The report covers a broad range of banking sector issues, but focuses on the impacts of a perceived misalignment of incentives in banking. Some of the key recommendations include: (i) establishing a new regime to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks ; (ii) creating a new licensing regime underpinned by Banking Standards Rules; (iii) creating a new criminal offense of reckless misconduct in the management of a bank for senior bank officers; (iv) adopting a new remuneration code to better align risks taken and rewards received that would also defer more remuneration for a longer period of time; and (v) giving the bank regulator a new power to cancel all outstanding deferred remuneration for senior bank employees in the event their banks require taxpayer support.
Special Alert: SCOTUS Grants Cert. Petition Regarding Use of Disparate Impact Analysis Under the FHA
This morning, the U.S. Supreme Court granted certiorari in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al. (No. 11-1507). The case has been watched closely by financial institutions because it raised questions about the viability of disparate impact claims under the Fair Housing Act ("FHA"). Disparate impact theory allows government and private plaintiffs to establish "discrimination" based solely on the results of a neutral policy, without having to show any intent to discriminate - or even in the absence of an intent to discriminate.
The Court has agreed to address one of two disparate impact questions presented in a petition from the Township of Mount Holly, New Jersey (and other appellants) - specifically the threshold question of whether disparate impact claims are cognizable under the FHA. Though not a lending case, the case could offer the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory. Last year, the parties in another fair housing case brought before the Court, Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010), withdrew the case before the Court had an opportunity to decide the issue.
To date, eleven federal courts of appeals have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court's then-current Title VII jurisprudence regarding employment discrimination - which the appellate courts interpreted as permitting disparate impact claims - and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company's neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, culminating in Smith v. City of Jackson, 544 U.S. 228 (2005), that call into question the prior appellate court holdings regarding the FHA into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII's specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, the courts of appeals have offered almost no guidance as to whether the FHA's statutory text permits disparate impact claims.
Earlier this year, the Department of Housing and Urban Development issued a rule on the use of disparate impact under the FHA that codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Citing that rule, among other things, the government urged the Court not to grant cert. and instead allow courts to implement the HUD rule.
While the Court now may have the opportunity to resolve the basic question of whether disparate impact claims are cognizable under the FHA, it could bypass certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in a multi-part second question on which cert. was not granted. Additionally, the question before the Court is whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court's analysis, the question of whether Section 805 of the FHA - the section specifically applicable to mortgage financing - permits disparate impact claims may remain an open issue.
The parties in the Mt. Holly case have been involved in well-publicized settlement meetings, which will continue this week. For this reason, the prospect exists that this matter may also be resolved prior to the Court having a chance to determine the question it has certified for review.
If the parties do not resolve the matter, the Court likely will hear the case in the fall and will issue a ruling in the spring of 2014.
FFIEC Creates Cyber Security Working Group
On June 6, the Federal Financial Institutions Examination Council (FFIEC) announced the formation of a working group to further promote coordination across the federal and state banking regulatory agencies on critical infrastructure and cybersecurity issues.
Obama Administration Targets Iranian Currency
On June 3, the Obama Administration announced a new Executive Order authorizing sanctions that directly target trade in Iran’s currency, the rial. The order authorizes the Treasury Secretary to take action against foreign financial institutions that knowingly conduct or facilitate significant transactions for the purchase or sale of the rial, or that maintain significant accounts outside of Iran denominated in the rial. Specifically, the Treasury Secretary can (i) prohibit opening, and prohibit or impose strict conditions on maintaining, in the United States, a correspondent account or a payable-through account by such foreign financial institution; or (ii) block all property and interests in property that are in the United States, that come within the United States, or that are or come within the possession or control of any United States person (including any foreign branch) of such foreign financial institution, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in. The order also (i) subjects to new sanctions persons and financial institutions that knowingly engage in transactions for the supply of significant goods or services used in connection with the automotive sector of Iran, and (ii) expands sanctions against those who materially assist, sponsor, or provide financial, material, or technological support to persons designated by Treasury as the “Government of Iran.”
NIST Prepares Analysis of Comments Submitted Regarding Cybersecurity Framework
On May 16, the National Institute of Standards and Technology (NIST) released an initial analysis of the hundreds of comments it received in response to its request for information to begin developing the "Cybersecurity Framework" required by President Obama's executive order. The analysis sifts from the comments characteristics and considerations the Framework must encompass and practices identified as having wide utility and adoption, and identifies initial gaps in the responses that must be addressed in order to meet the goals of the executive order. The paper also includes a series of questions that will serve as the basis for additional discussion and study at an upcoming workshop to be hosted at Carnegie Mellon University in Pittsburgh, Pennsylvania on May 29-31, 2013.
State Department Finalizes Burma Investment Reporting Requirements
On May 23, the State Department announced that the Office of Management and Budget approved the final Burma Responsible Investment Reporting Requirements. Effective immediately, pursuant to General License No. 17, all U.S. persons with aggregate investment in Burma over $500,000 are subject to the reporting requirements, which generally cover a range of policies and procedures with respect to investments in Burma, including human rights, labor rights, land rights, community consultations and stakeholder engagement, environmental stewardship, anti-corruption, arrangements with security service providers, risk and impact assessment and mitigation, payments to the government, any investments with the Myanmar Oil and Gas Enterprise (MOGE), and contact with the military or non-state armed groups. The State Department will use the information collected to conduct to encourage U.S. businesses to develop robust policies and procedures to address a range of impacts resulting from their investments and operations in Burma.
FTC Approves Order Settling Data Breach Charges
On May 3, the FTC approved a final order settling charges against a California-based cord blood bank firm alleged to have violated the FTC Act by failing to use reasonable and appropriate procedures for handling customers’ personal information, despite its privacy policy claims to the contrary. Further, the FTC alleged that the firm created unnecessary risks to personal information by transporting portable data storage devices containing personal information in a manner that made the information vulnerable to theft, and failed to prevent, detect and investigate unauthorized access to computer networks. According to the FTC, these practices resulted in a data breach in which certain portable devices were stolen from an employee’s personal vehicle and the personal information of nearly 300,000 customers was compromised. The settlement requires the company to establish a comprehensive information security program and submit to security audits by independent auditors every other year for 20 years, and prohibits the company from misrepresenting the privacy and security of information collected from consumers.