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On April 2, the FTC announced that it filed a complaint in the United States District Court for the District of Nevada against a payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. The FTC alleges that the operation, consisting of numerous defendants including three Internet-based lending companies, seven related companies and numerous individuals (i) violated the FTC Act by making misrepresentations and false threats, (ii) violated TILA by failing to accurately disclose APR and other loan terms, and (iii) violated the Electronic Fund Transfer Act by requiring consumers to preauthorize electronic fund transfers from their accounts. According to the FTC, the defendants have claimed in state court that they are immune from legal action because of their affiliation with Native American tribes. The FTC argues that notwithstanding any such affiliation, the defendants are still subject to federal law. This is the second time in seven months that the FTC has brought suit against a payday lender that has used a tribal affiliation defense against actions by state authorities.
Last month, the Ohio Attorney General’s office finalized amendments to that state’s “ability to repay” rules adopted under the Ohio Consumer Sales Practices Act. Under that Act, it is unconscionable for a lender to, among other things, (i) engage in a pattern or practice of providing consumer transactions to consumers based predominantly on the supplier’s realization of the foreclosure or liquidation value of the consumer’s collateral without regard to the consumer’s ability to repay the loan in accordance with its terms, and (ii) enter into a consumer mortgage transaction knowing there was no reasonable probability of payment of the obligation by the consumer. Effective March 30, 2012, the Act’s two new rules (available here and here) provide a safe harbor for certain loans. A consumer will be considered to have an ability to repay and to have a reasonable probability of payment under the provisions identified above if the lender is offering a fully-amortizing fixed-rate refinance loan that (i) has the same or lesser interest rate as the rate of the consumer's current loan, (ii) has the same or lesser principal amount as the consumer's current loan, and (iii) does not extend the payoff date of the consumer's current loan.
On March 20, New York’s District Court of Nassau County refused to enforce a forum selection clause because the defendant did not make an affirmative effort to reasonably communicate that key term to the other party or otherwise do enough to ensure the clause became a part of the parties’ contract. Jerez v. JD Closeouts, LLC, No. CV-024727-11, 2012 WL 934390 (N.Y. Dist. Ct. Mar. 20, 2012). The plaintiff filed suit alleging that products ordered over the Internet following an e-mail solicitation from the defendant were defective. The defendant moved to dismiss, arguing that a forum selection clause in the parties’ contract required that the dispute be heard in a Florida state court. The court found that the forum selection clause was not reasonably communicated through any of a printed contract, a confirming letter agreement incorporating provisions from the website by reference, or a click-through acceptance. Rather, the court found, the clause was included in terms and conditions “buried” and “submerged” on the defendant’s website, on a page “that could only be found by clicking on an inconspicuous link to the company’s ‘About Us’ page.” The court denied the defendant’s motion to dismiss.
On April 3, the Financial Stability Oversight Council (FSOC) voted to approve a final rule and interpretive guidance regarding the process it intends to use in designating nonbank financial companies as systemically important and subject to supervision by the Federal Reserve Board (FRB). The final rule and guidance follow an advanced notice of proposed rulemaking, two proposed rules, and proposed guidance. The final designation process is substantially similar to that outlined in the second proposed rule, issued in October 2011, with some clarifications. For example, the final rule provides a longer time period (no less than 30 days) for companies to respond to a notice that it is being considered for a systemically important determination and makes clear that hearings conducted as part of the determination process are nonpublic. The FSOC also clarified in response to comments that it intends to interpret the term "company" broadly to include any corporation, limited liability corporation, partnership, business trust, association, or similar organization, but not unincorporated associations. The rule does not provide any industry-based exemptions and the FSOC indicated that it does not intend to provide any, but will consider related comments as part of the determination process. Regarding coordination, the FSOC declined to delay finalizing this rule until related regulatory activities are completed, for example, the FRB's rule for determining if a company is "predominantly engaged in financial activities," choosing to view those considerations as non-essential to its consideration of whether a nonbank financial company could pose a threat to U.S. financial stability.
On April 2, the FRB released an amended proposed rule to establish requirements for determining whether a company is “predominantly engaged in financial activities.” The original proposal also defined the terms “significant nonbank financial company” and “significant bank holding company.” Comments received in response to the February 2011 proposed rule raised questions as to whether conditions imposed on the conduct of financial activities by the Bank Holding Company Act and the FRB’s implementing regulations should be considered in defining financial activities. In response, the FRB amended the proposal to clarify that any activity referenced in section 4(k) of the Bank Holding Act will be considered to be a financial activity without regard to conditions that were imposed on bank holding companies that do not define the activity itself. The revised proposal also adds an appendix that lists all activities that would be considered to be financial activities as of April 2, 2012. While the FSOC can designate nonbanks as systemically important, it can only do so with regard to nonbank financial companies that are predominantly engaged in financial activities which, under Section 102 of the Dodd-Frank Act, means that 85 percent or more of the company’s revenues or assets are related to financial activities, as defined in section 4(k) of the Bank Holding Act. The FRB is tasked with establishing the detailed criteria for determining whether a company meets this definition.
West Virginia Removes Mortgage Licensing Exemption, Creates Procedure for Abandoned Personal Property Following Foreclosure
According to its May 19 securities filing, Embraer S.A., a Brazilian manufacturer of commercial jets, has entered into discussions with DOJ to resolve a FCPA probe launched by the Department in 2010. The government’s investigation stems from allegations, previously covered here, that Embraer sales executives bribed various Dominican individuals who, in exchange, influenced legislators in the Dominican Republic to approve a $92 million contract and financing agreement for aircraft. In its filing, the company stated that a resolution of the investigation would result in fines and other sanctions by the DOJ. The Brazilian government’s criminal case against the eight Embraer S.A. sales executives is still ongoing.
On May 20, BHP Billiton, an Australian-based metal resources company, paid $25 million to settle claims brought by the SEC alleging that the company violated the FCPA’s internal controls and books and records provisions by sponsoring the attendance of foreign government officials at the 2008 Beijing Olympics. According to the SEC’s cease-and-desist order, in which the company neither admitted nor denied the SEC’s findings, BHP Billiton invited 176 government officials to attend the Olympics at BHP Billiton’s expense, 98 of whom were representatives of state-owned enterprises that were BHP Billiton customers. The flight and hospitality packages the officials received were worth between $12,000 and $16,000 per package.
Of note, the SEC did not allege any specific quid pro quo in exchange for the trips (and did not allege that BHP Billiton violated the anti-bribery provisions of the FCPA), but noted that the foreign officials came from African and Asian countries with well-known histories of corruption and were in a position to influence pending contract negotiations, efforts to obtain access right, and other regulatory and business dealings affecting BHP Billiton. The SEC settlement order found that BHP Billiton’s Olympic hospitality applications did not accurately reflect pending negotiations or business dealings between BHP Billiton and government officials invited to the Olympics, and also found that the company failed “to design and maintain sufficient internal controls over the Olympic global hospitality program.”
Continuing recent efforts to highlight the nature of certain companies’ cooperation efforts, the SEC called out BHP Billiton’s “significant cooperation” with the government’s investigation by, among other things, “voluntarily producing large volumes of business, financial, and accounting documents from around the world in response to the staff’s requests, and by voluntarily producing translations of key documents.” The SEC also noted the remedial efforts undertaken by the company to improve its compliance programs, including the creation of a compliance group within its legal department that reports directly to BHP Billiton’s general counsel and audit committee. According to the order, BHP Billiton also enhanced its financial and auditing controls, including its policies for conducting business in high-risk markets, and conducted extensive employee training on anti-corruption issues. The settlement requires the company to report to the SEC on the operation of its FCPA and anti-corruption compliance program for a one-year period, although no independent monitor was required.
On May 12, the UK Serious Fraud Office announced yet more corruption charges against Alstom SA, the beleaguered French power and transportation company that last year pleaded guilty in the US to allegations of bribery and agreed to pay the largest criminal penalty for FCPA violations ever to the DOJ. The new charges were brought against the former senior vice president of ethics and compliance and director of Alstom International Limited for alleged bribery in Hungary related to a Budapest Metro contract for trains. The charges arise from the same conduct as last month’s bribery charges against another company and employee affiliated with Alstom, and continue the recent trend of compliance professionals facing increased personal liability.
The SFO has now charged six individuals in its long-running investigation of Alstom.
On March 29, Representatives Randy Neugebauer and Shelley Moore Capito sent a letter to CFPB Director Richard Cordray seeking his assurance that the CFPB will “conduct rigorous, transparent cost-benefit analysis whenever it drafts a new rule.” The letter also asks the CFPB to respond by April 19 to a series of questions related to its rulemaking and other regulatory processes and procedures, as well as the applicability of federal regulatory reform initiatives to the CFPB’s regulatory activities.
On March 29, Washington enacted House Bill 2614, which took effect immediately and created new borrower protections. The bill requires mortgagees that intend to permit a short sale of a residential property to provide written notice to the borrower that it is either waiving or reserving its right to collect the full debt. Mortgagees that reserve the right to collect must initiate a court action to collect within three years of the short sale. House Bill 2614 also amends provisions ofWashington’s Foreclosure Fairness Act, including, among other things, (i) to allow meetings with the borrower to discuss foreclosure avoidance options to be conducted by phone, if the borrowers agrees, (ii) to alter the foreclosure mediation procedures, (iii) to extend the time period for a trustee’s sale, and (iv) to change beneficiary reporting requirements. Lastly, the bill creates a process to rescind a trustee sale under certain circumstances.
Also on March 29, Washington, through Senate Bill 6218, amended its escrow licensing requirements to clarify that attorneys are not required to obtain a license, provided that (i) the escrow transactions are performed by either the lawyer while engaged in the practice of law or any employee of the law practice under direct supervision of the lawyer, (ii) all escrow transactions are performed under a legal entity that is publicly identified and operated as a law practice, and (iii) all escrow funds are deposited to, maintained in, and disbursed from a trust account in compliance with rules enacted by the Washington Supreme Court regulating the conduct of lawyers. These changes take effect June 7, 2012.
- Tina Tchen to deliver keynote address at the American Bar Association Professional Success Summit
- Jeffrey P. Naimon and Jonice Gray Tucker to discuss "Enforcement and litigation trends" at the American Bankers Association General Counsel Meeting
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- David S. Krakoff to discuss "The DOJ corporate enforcement policy and your disclosure calculus one year in: Are companies benefitting?" at the American Conference Institute International Conference on the Foreign Corrupt Practices Act
- Moorari K. Shah to discuss "Legal & regulatory issues" at the Opal Group Marketplace Lending & Alternative Financing Summit
- Jonice Gray Tucker to discuss "Hot topics in 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
- Daniel P. Stipano to discuss "Anti-money laundering/OFAC compliance" at the Institute of International Bankers U.S. Regulatory/Compliance Orientation Program