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9th Circuit affirms $8 million California whistleblower claim
On February 26, the U.S. Court of Appeals for the 9th Circuit affirmed a former general counsel’s whistleblower retaliation claim, under California public policy, against a biopharmaceutical manufacturer and its CEO but vacated the jury’s Sarbanes-Oxley Act (SOX) and Dodd-Frank Act verdicts. According to the opinion, the general counsel sued the company and the CEO claiming whistleblower retaliation under SOX, the Dodd-Frank Act, and California wrongful termination case law, claiming the company fired him after he alleged the company may have violated the FCPA in China. The jury awarded the general counsel $11 million, including $2.96 million in lost wages, which was doubled under the Dodd-Frank Act’s whistleblower provision, and $5 million in punitive damages. The company appealed the verdict arguing the district court erred in the instructions to the jury when it stated that statutory provisions of the FCPA constitute “rules or regulations of the SEC for purposes of whether [the general counsel] engaged in protected activity under SOX.”
On appeal, the 9th Circuit concluded the district court’s instructional error was not harmless as to the SOX claim, finding that the statutory provisions of the FCPA are not “rules or regulations of the SEC under SOX” as instructed to the jury. While the error was not harmless, the appellate court rejected entering judgment in favor of the company and instead, remanded the case back for proper instruction. Additionally, the appellate court vacated the district court’s instructions for the jury to enter judgment in favor of the Dodd-Frank Act claim, citing to the Supreme Court decision in Digital Realty Trust Inc. v. Somers. The appellate court concluded that the whistleblower provision of the act does not apply to purely internal reports and entered judgment in favor of the company. As for the California public policy claim, the appellate court determined that the incorrect SOX jury instructions were harmless because his California claim did not depend on SOX and the jury “necessarily would have reached the same verdict under proper instruction.” The affirmation of the California claim and associated damages left the general counsel with an award of nearly $8 million.
CFPB releases semi-annual report to Congress
On February 12, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2018, through September 30, 2018. The report, which is required by the Dodd-Frank Act, addresses issues including problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau when acting Director Mick Mulvaney was still in office. The report is the first to be released under Kathy Kraninger, who was confirmed as Director in December 2018. In her opening letter, Kraninger emphasized that during her tenure the Bureau will “vigorously and even-handedly enforce the law,” and will make sure the financial marketplace “is innovating in ways that enhance consumer choice.” Among other things, the report focuses on credit invisibility and mortgage shopping as two significant problems faced by consumers, noting that credit invisibility among adults tends to be concentrated in rural and highly urban areas and, based on recent studies, more than 75 percent of borrowers report applying for a mortgage with only one lender.
The report also includes an analysis of the efforts of the Bureau to fulfill its fair lending mission. The report highlights the most frequently cited violations of Regulation B (ECOA) and Regulation C (HMDA) in fair lending exams during the reporting period and emphasizes that during the reporting period the Bureau did not initiate or complete any fair lending public enforcement actions or refer any matters to the DOJ with regard to discrimination.
CFPB issues five-year lookback for 2013 ATR/QM and Mortgage Servicing Rule
On January 10, the CFPB released the assessment reports required by Section 1022(d) of the Dodd-Frank Act for two of its 2013 mortgage rules: the TILA Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule and the RESPA Mortgage Servicing Rule. The assessment reports were conducted using the Bureau’s own research and external sources. The reports do not include a benefit-cost analysis of either rule, nor do they propose amendments to the rules or contain any other policy recommendations. However, the Bureau expects the reports to be used to “inform the Bureau’s future policy decisions.”
The ATR/QM Rule became effective in January 2014 and generally requires that lenders make a reasonable and good faith determination, based on documented information, that the borrower has the reasonable ability to repay the mortgage loan. Highlights of the report’s findings include:
- While it is difficult to distinguish the effects of the ATR/QM Rule and the marketwide tightening of underwriting standards following the housing crisis, the rule may have restricted the reintroduction of certain types of loans that were associated with high delinquency or foreclosure rates, such as loans based on limited or no documentation of income or assets, loans with low initial monthly payments that reset after a period of time, and loans with high debt-to-income ratios.
- The ATR/QM Rule was not generally associated with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination.
- The ATR/QM Rule did not impact access to credit for self-employed borrowers who were eligible for a GSE loan. For other self-employed borrowers, the Bureau acknowledged lenders may find it difficult to comply with the Appendix Q documentation and calculation requirements but found that approval rates for this population decreased only slightly.
- While the costs of originating a mortgage loan have increased substantially over time, the ATR/QM Rule does not appear to have materially increased the lenders’ costs or the prices the lenders charged to consumers, at an aggregate market level. However, based on data from nine lenders, the Bureau estimated the foregone profits from not originating certain types of non-QM loans at $20-$26 million per year.
- Contrary to the Bureau’s expectations when it issued the ATR/QM Rule, the GSEs have maintained a persistently high share of the market, and the market for non-QM loans remains relatively small.
The Mortgage Servicing Rule became effective in January 2014 and, among other things, imposes procedural requirements on servicers with respect to loss mitigation and foreclosure for delinquent borrowers. Highlights of the report’s findings include:
- Loans that became delinquent were less likely to proceed to a foreclosure during the months after the Mortgage Servicing Rule’s effective date compared to months prior to the effective date and were more likely to return to current status. For borrowers who became delinquent the year the rule took effect, the Bureau estimated that, absent the rule, at least 26,000 additional borrowers would have experienced foreclosure within three years, and at least 127,000 fewer borrowers would have recovered from delinquency within three years.
- The cost of servicing mortgage loans has increased substantially; the main increase in costs occurred before the Mortgage Servicing Rule took effect and is not attributable to the rule. However, some servicers reported significant ongoing costs of complying with the rule, which can be attributable with the need for “robust control functions” and higher personnel costs to support increased communication with delinquent borrowers.
- The time from borrower initiation of a loss mitigation application to short-sale offer increased in 2015 compared to 2012.
- A larger share of borrowers who completed loss mitigation applications in 2015 were able to avoid foreclosure than borrowers who completed loss mitigation applications in 2012.
- The rate of written error assertions per account fell by about one-half after the Mortgage Servicing Rule’s effective date compared to the prior three years.
- There was a moderate decrease in the share of borrowers receiving force-placed insurance and the Rule’s effective date, which can be attributable to the Rule but also to the changes in the insurance market.
Kraninger rejects CFPB name change
On December 19, new CFPB Director, Kathy Kraninger emailed staff stating she has decided to not move forward with changing the name of the agency to the Bureau of Consumer Financial Protection. Former acting Director Mick Mulvaney—to whom Kraninger previously reported at the Office of Management and Budget—had initiated the change and released an official agency seal referring to the Bureau of Consumer Financial Protection on the grounds that the Dodd-Frank Act generally used that name for the agency rather than Consumer Financial Protection Bureau. In an email to Bureau staff, Kraninger stated the seal and the “statutory name given in Dodd-Frank” will be used for “statutorily required reports, legal filings, and other items specific to the Office of the Director,” but “[t]he name ‘Consumer Financial Protection Bureau’ and the existing CFPB logo will continue to be used for all other materials.” The decision comes soon after an internal report allegedly calculated the name change to cost anywhere between $9 million and $19 million dollars and after a request by Senator Elizabeth Warren for the Bureau’s Inspector General to conduct an investigation into Mulvaney’s decision to change the name.
This appears to be one of the first significant decisions Kraninger has made since becoming the Bureau’s second confirmed Director. While her reversal of the course set by Mulvaney is noteworthy, her views on consumer financial protection issues are still largely unknown, and it remains to be seen whether she will continue with her predecessor’s initiatives on substantive matters.
District Court rejects dismissal bid for California interest on escrow class action
On December 7, the U.S. District Court for the Northern District of California denied a bank’s motion to dismiss a putative class action alleging the bank violated the California Unfair Competition Law (UCL) by not paying interest to residential mortgagors on funds held in escrow accounts, as required by California law. The three plaintiffs filed the complaint against the bank after the March decision by the U.S. Court of Appeals for the 9th Circuit in Lusnak v. Bank of America, which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account. (Previously covered by InfoBytes here.) The plaintiffs argued that the 9th Circuit decision requires the bank to comply with the California law requiring interest on funds held in escrow.
In response, the bank filed a motion to dismiss, or in the alternative to stay the case, on the basis that the plaintiffs failed to provide the bank with notice and an opportunity to cure alleged misconduct prior to judicial action as required by the mortgage deed, and that the plaintiff’s claims were preempted by the Home Owners Loan Act (HOLA). The court rejected these arguments, finding that the plaintiff’s failure to comply with the ambiguous provisions in the mortgage deed do not foreclosure their claims, concluding “[t]o deprive Plaintiffs of recourse to their statutory rights based on an ambiguous contractual provision would also frustrate the consumer protection purposes of those statutes.” As to the HOLA argument, the court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan is transferred to a bank whose own lending is not covered by HOLA. Specifically, the court looked to the legislative intent of HOLA and noted it was unclear if Congress intended for preemption to attach through the life of the loan, but found a clear goal of consumer protection. Therefore, the court concluded that “[a]llowing preemption may run contrary to HOLA's purpose and could result in a gross miscarriage of justice” by depriving homeowners of state law protections.
Additionally, the court rejected as moot the alternative request to stay the case pending the Supreme Court’s resolution of Lusnak, because the Supreme Court denied the petition of writ in that case in November (covered by InfoBytes here).
FHFA and CFPB release dataset from National Survey of Mortgage Originations
On November 8, the FHFA and the CFPB announced the release of a new loan-level dataset that was collected through the National Survey of Mortgage Originations (NSMO). Since 2014, in each quarter, FHFA and the CFPB send the NSMO survey to borrowers who recently obtained a mortgage to gather feedback on their experiences, perceptions, and future expectations of the mortgage market. This is the first public release of the compiled NSMO data. The NSMO is a component of the National Mortgage Database, which the FHFA and the CFPB launched in 2012 to help regulators better understanding mortgage market trends to support policymaking and research efforts and to fulfill the mortgage survey and mortgage market monitoring requirements of the Housing and Economic Recovery Act (HERA) and the Dodd Frank Act.
OCC proposes changes to annual stress test reporting requirements
On October 31, the OCC published in the Federal Register proposed changes to its “stress test” rules for covered financial institutions, as required by the Dodd-Frank Act. The proposal would, among other things, (i) revise the OCC reporting requirements to mirror the Federal Reserve Board’s proposed Comprehensive Capital Analysis and Review (CCAR) reporting form FR Y-14A for covered institutions with total consolidated assets of $100 billion or more; (ii) implement the revised asset threshold mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act; and (iii) remove the Retail Repurchase worksheet. Comments on the proposed changes must be received by December 31.
CFPB releases Remittance Rule assessment report
On October 26, the CFPB released an assessment report of its Remittance Rule, in accordance with the Dodd-Frank Act’s requirements that the Bureau conduct an assessment of each significant rule within five years of the rule’s effective date. The Bureau’s 2013 Remittance Rule (Rule), including its subsequent amendments, requires providers to (i) give consumers disclosures showing costs, fees and other information before they pay for a remittance transfer; (ii) provide cancellation and refund rights; and (iii) investigate disputes and remedy certain errors. The assessment was conducted using the Bureau’s own research and external sources. Key findings of the assessment include:
- Money services businesses (MSBs) conduct 95.6 percent of all remittance transfers and the volume of transfers from these businesses was increasing before the effective date of the Rule and continued to increase afterwards at the same or higher rate.
- The average price of remittances was declining before the Rule took effect and has continued to do so.
- Initial compliance costs for the Rule were between $86 million, based on analysis at the time of the rulemaking, and $92 million, based on estimates from a survey of industry conducted by the Bureau.
- Ongoing compliance costs are estimated between $19 million per year and $102 million per year.
- Consumers cancel between 0.3 percent and 4.5 percent of remittance transfers, according to available data sources, and there is evidence of some banks initiating a delay in the transfer to make it easier to provide a refund if a consumer cancels within the 30-minute cancellation window permitted under the Rule.
- Approximately 80 percent of banks and 75 percent of credit unions that offer remittance transfers are below the 100-transfer threshold in a given year and are therefore, not subject to the Rule’s requirements.
VA provides status update to address 2014 loan guaranty interim final rule
On October 9, the Department of Veterans Affairs (VA) published a status update in the Federal Register to inform the public that it will not publish a final rule to adopt provisions outlined in its May 2014 interim final rule (IFR). The IFR was issued to implement provisions of Dodd-Frank concerning ability-to-repay standards and qualified mortgages (QM) as defined under TILA. According to the status update, section 309 of Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) superseded certain elements of the IFR. Specifically, the EGRRCPA’s “seasoning and recoupment requirements for [Interest Rate Reduction Refinance Loans] effectively eliminated the category of rebuttable presumption QM.” The VA reminded program participates to refer to Circular 26-18-13, previously issued in May and covered by InfoBytes, which addressed “loan churning” of VA-guaranteed refinance loans and set out new requirements for VA eligibility as addressed by EGRRCPA. The VA commented that it will publish future rulemaking to supersede the IFR, but that in the meantime, the IFR remains in effect to the extent the provisions do not conflict, or are not superseded by, EGRRCPA.
SEC announces second-largest whistleblower award; waives “voluntary” requirement for one claimant
On September 6, the SEC announced a whistleblower award totaling more than $54 million— $39 million to one (the second-largest award given under the SEC’s whistleblower program) and $15 million to another—for critical information and continued assistance, which helped the agency bring an enforcement action. The redacted order highlights the denial of related-action claims by both claimants and notes an exception made to the “voluntary submission” requirement for claimant two.
According to the order, the SEC denied claimant one’s request for an additional award based on another agency’s related action, because the claimant failed to demonstrate the causal relationship required to establish that the “submission significantly contributed to the success of the [related action].” Specifically, the SEC noted that the claimant’s information was never directly transmitted to the other agency, which relied on the SEC’s order to pursue its action. The SEC rejected the claimant’s argument that providing information directly to another agency would be “at war with Congress’ clear instruction that the identity of a whistleblower must be protected” due to the fact that the other agency may not offer the same anonymity as possible under the SEC’s whistleblower program. The SEC notes that while a whistleblower may choose not to provide the information to another agency themselves, the rules allow for the SEC to transmit the information directly, while requiring the other agency to maintain confidentiality, which was not done in this case.
The SEC also denied claimant two’s related action request, concluding that the claimant should seek an award through the alternative program available from the other agency. The SEC noted that if the claimant were to receive a related-action award there would be the potential that the cumulative award would exceed the 30-percent ceiling established by Congress and would produce an “irrational result” encouraging “multiple ‘bites at the apple’” as it would allow whistleblowers to have multiple opportunities to adjudicate and obtain separate rewards on the same enforcement actions.
Notably, for claimant two, the redacted order demonstrates that the SEC made an exception to the “voluntary” submission requirements under the rules. Specifically, Rule 21F-4(a)—in order to create an incentive for whistleblowers to proactively provide information about possible violations—requires that a whistleblower “must come forward before the government or regulatory authorities designated in the rule seek information from the whistleblower.” In this instance, it was undisputed that claimant two provided the SEC information after an investigative review by another agency; however, the SEC exercised discretionary authority to grant a limited waiver of Rule 21F-4(a) and permit an award to claimant two. The SEC determined that a limited waiver was appropriate because, although claimant 2 previously “appeared before [the other agency] for an investigative interview” regarding the same violations, at the time of that appearance the claimant was unaware of the information that would ultimately be deemed by the SEC to be the “critical basis” for the whistleblower claim. The SEC concluded that once claimant two became aware of the critical information, they promptly reported it to both agencies, despite no legal obligation to do so and having no other “self-interested motive to come forward,” achieving a primary policy goal of the program to encourage prompt reporting of information about possible securities law violations.