Litigation & Enforcement Actions – Page 14 – Consumer Financial Services Watch

K&L Gates Consumer Financial Services Group to Present at MBA Legal Issues Conference in San Diego

Apr 28 2014

On May 4-7, 2014 the Mortgage Bankers Association will hold its annual Legal Issues and Regulatory Compliance Conference in San Diego, CA. Several K&L Gates partners from the Consumer Financial Services Group will be presenting at the conference.

Melanie Brody will address “A Look Ahead: HMDA and Fair Lending” on Sunday, May 4, at 4:35 pm.

Krista Cooley will participate on a panel on Tuesday, May 6, at 3:15 pm, entitled “False Claims, Indemnifications, Repurchases and Rescissions.” She will discuss how the False Claims Act is affecting participants in HUD’s Federal Housing Administration loan program.

Andrew Glass will speak on Sunday, May 4, at 1:50 pm in the Litigation Forum on Fair Lending, explaining the status of fair lending/servicing litigation, and specifically the status of challenges to the disparate impact rule, the status of the municipal lawsuits against banks for “predatory” lending, and the HUD complaints by NFHA challenging the maintenance of properties held in REO.

Paul Hancock will address fair lending issues on Tuesday, May 6, at 1:30 pm.

Kris Kully will discuss Dodd-Frank Act amendments to RESPA and TILA on the ever-popular “Essentials: Alphabet Soup of Federal Laws,” on Sunday, May 4, at 1:50 pm.

Larry Platt will speak on Monday, May 5, at 3:15 pm on the “Deep Dive” panel for QRM, the Future of the Secondary Market, and GSE Reform.

Phil Schulman will participate on the panel entitled “A Look Ahead: TILA/RESPA,” on Sunday, May 4, at 3:15 p.m., and then will continue the discussion on the integrated disclosure forms on Monday, May 5, at the “Deep Dive: RESPA/TILA” panel at 3:15 pm.

Nanci Weissgold will present on two panels at the conference. On Sunday, May 4, at 12:30 pm, Nanci will present on a panel entitled “Essentials: Servicing Rule,” focusing on the basics of the CFPB’s Mortgage Servicing Rules. Nanci also will provide more insights into the national servicing standards on the “Deep Dive: Servicing: New Rules, New Developments” panel to be held Monday, May 5, at 1:30 pm.

We look forward to seeing you in San Diego!

5th Circuit Applies HUD Discriminatory Effects Rule to Fair Housing Act Case

Apr 23 2014

By: Melanie Brody, Anjali Garg*

*Ms. Garg is a law clerk and is not admitted to practice law.

On March 24, 2014, the Fifth Circuit issued an opinion in Inclusive Communities Project, Inc. v. Texas Department of Housing and Community Affairs applying HUD’s discriminatory effects rule and burden-shifting analysis to a Fair Housing Act claim. This is the first circuit court to apply the rule since it took effect on March 18, 2013. Read More

Beyond Credit Reporting: The Extension of Potential Class Action Liability to Employers under the Fair Credit Reporting Act

Apr 14 2014

By: Brian M. Forbes, Mark D. Pomfret, Robert W. Sparkes, III

Do not be fooled by its title: the Fair Credit Reporting Act (“FCRA”) reaches far beyond the realm of credit reporting and governs a broad spectrum of industries. Indeed, the provisions of FCRA apply to any business entity that seeks to use a “consumer report” – which broadly includes anything from a credit report to a criminal or even motor vehicle background check – for any “employment purposes” (among other purposes). This includes the use of such reports to evaluate an individual for potential employment, as well as to evaluate a current employee for promotion or termination. The consequences of a FCRA violation can be substantial; the statute provides for a civil private right of action and permits recovery of actual damages, statutory damages, punitive damages, and attorneys’ fees and costs. Read More

DOL Seeks Supreme Court Review of the Invalidation of its Mortgage Loan Officer Overtime Ruling

Mar 05 2014

By: Thomas H. Petrides, John L. Longstreth

On February 28, 2014 the Department of Labor, represented by the Solicitor General, petitioned for Supreme Court review of an appellate decision invalidating a 2010 DOL administrative ruling that determined mortgage loan officers generally do not qualify for the administrative exemption from overtime under the Fair Labor Standards Act. The U.S. Court of Appeals for the D.C. Circuit held last July that a prior administrative ruling issued in a 2006 DOL Opinion Letter was established law and that DOL was therefore required to use notice and comment rulemaking to change it. The 2006 Opinion Letter had previously determined that loan officers could qualify for the administrative exemption and therefore would be ineligible for overtime pay based on that exemption. The Solicitor General argues that requiring notice and comment for an interpretive rule in any circumstances is inconsistent with the Administrative Procedure Act, which exempts interpretive rules from notice and comment requirements, and therefore the 2010 interpretation should be reinstated. The petition also argues that the D.C. Circuit decision is inconsistent with the rulings of at least two other federal appeals courts. Read More

Court Refuses to Defer to RESPA Statement of Policy Regarding Affiliated Businesses – 6th Circuit Says a Safe Harbor is a Safe Harbor

Dec 03 2013

By: Irene C. Freidel

Providing clarity in an area of law that had become increasingly muddled over the last two decades, the U.S. Court of Appeals for the Sixth Circuit held on November 27, 2013 that HUD’s 1996 policy statement setting forth a so-called “10-factor test” to determine whether an affiliated business arrangement (“ABA”) is bona fide or a sham is not entitled to deference (“1996 Policy Statement”). See Carter v. Welles-Bowen Realty, Inc., No. 10-3922 (6th Cir. Nov. 27, 2013). The Real Estate Settlement Procedures Act (“RESPA”) prohibits the payment of a fee in exchange for a referral of settlement service business. Profits generated by ABAs are exempt from this prohibition if the ABA meets the three prerequisites in RESPA’s safe harbor. Even though the plaintiff did not dispute that the ABA in Carter satisfied the three safe harbor requirements, they urged the district court to hold that the ABA nonetheless fell outside the safe harbor because, they claimed, the ABA did not satisfy a fourth requirement, namely HUD’s 1996 Policy Statement. While several district courts have otherwise concluded that an ABA must satisfy HUD’s policy statement in order to fall within the safe harbor, the theory was rejected by district judge Jack Zouhary in the Carter case. Read More

What’s Old is New: CFPB Claims Captive Reinsurance Arrangements Violate RESPA

Nov 19 2013

By: Phillip L. Schulman, Andrew L. Caplan

Last week, the CFPB announced the filing of a complaint and proposed consent order with a North Carolina-based private mortgage insurer, Republic Mortgage Insurance Corporation (“RMIC”), which echoes previous enforcement positions taken years ago by HUD and state regulators. In this most recent enforcement action, the CFPB alleges that RMIC violated Section 8 of RESPA (the “anti-kickback” provision) through participation in captive reinsurance programs with mortgage lenders. These business arrangements are once again under scrutiny in 2013, as last week’s complaint and proposed consent order with RMIC marks the fifth such enforcement action this year. Read More

Proposed Castle & Cook Settlement on Alleged Loan Originator Compensation Violations

Nov 07 2013

By: Kristie D. Kully

The Consumer Financial Protection Bureau has proposed a settlement with Castle & Cook Mortgage and two of its officers. The CFPB brought an action against Castle & Cook and those officers, alleging that they violated the prohibition against loan-term based compensation under the Dodd-Frank Act and its regulations. On November 7, 2013, the parties to the action proposed a settlement to the federal court in Utah for the payment by the company and the officers of over $9 million for redress to affected consumers, plus a $4 million civil money penalty. The company and officers would also be permanently enjoined from paying compensation to a loan originator in violation of the applicable regulations, and would have to retain evidence of their compliance. According to the proposed settlement, although it would resolve the issue with the CFPB, consumers’ rights to seek redress on their own behalf against the company and/or the officers would not be limited. Read More

New York Campaign Against Out-of-State Online Lenders Survives a Battle in the SDNY

Nov 01 2013

By: David L. Beam, Christopher Shelton*
*Mr. Shelton is a law clerk and not admitted to the practice of law.

The Internet has been with us for about two decades, and financial service companies have been offering products over the Internet for nearly as long. One would have thought that there would be final resolution by now on the question of whether, and under what circumstances, a state may regulate an online lender with no physical presence in the state. However, this issue continues to be a thorny one.

A recent decision by the United States District Court for the Southern District of New York touches on this issue. In Otoe-Missouria Tribe of Indians v. New York State Department of Financial Services, 2013 U.S. Dist. LEXIS 144656, 2013 WL 5460185 (S.D.N.Y. Sep. 30, 2013), the State of New York successfully argued that it can regulate online loans made by Native American tribes to New York residents. The case primarily involved the question of whether a state could regulate an enterprise owned by a Native American tribe located in another state. But the decision potentially has implications for other situations where a company offers financial services over the Internet. Moreover, it is part of a wider campaign by New York authorities to target online lenders for alleged usury.

Township of Mount Holly: The United States Supreme Court Considers Whether the Fair Housing Act Recognizes Disparate-Impact Liability

Sep 05 2013

By: Paul F. Hancock, Andrew C. Glass, Melanie Brody, John L. Longstreth, Roger L. Smerage

On September 3, 2013, K&L Gates LLP filed a brief as amici curiae before the United States Supreme Court in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., a case in which the Court will consider whether the Fair Housing Act recognizes a disparate-impact theory of liability. The brief addresses the effect that the Court’s recognition of the disparate-impact theory would have on the residential mortgage lending industry and was filed on behalf of the American Financial Services Association, the Consumer Mortgage Coalition, the Independent Community Bankers of America, and the Mortgage Bankers Association. A copy of the as-filed brief is available here. The Court is likely to schedule oral argument in the matter for late 2013 or early 2014.

To read the full alert, click here.

Will the CFPB Give Credit Where Credit Is Due? It Depends on the Circumstances

Jul 15 2013

By: Melanie Brody, Stephanie C. Robinson, Amanda D. Gossai

The Consumer Financial Protection Bureau (CFPB or Bureau) recently elaborated on some of the factors it will consider in determining what actions to bring, if any, against those subject to its enforcement authority. In a bulletin very reminiscent of the Securities and Exchange Commission’s so-called Seaboard Report, the CFPB announced that it may consider a party’s conduct favorably if the conduct “substantially exceeds” what is required by law in its interactions with the Bureau. Specifically, the CFPB “may” in its discretion award some form of affirmative credit in an enforcement action, such as potentially reducing the sanctions or penalties it seeks, if a party meaningfully engages in responsible business conduct.

Like the SEC’s Seaboard Report, CFPB Bulletin 2013-06 – while encouraging responsible business conduct – is full of caveats. The CFPB makes no promises in the bulletin. No matter how “substantial” or “meaningful” a party’s responsible business conduct in the course of an investigation, the Bureau’s evaluation will depend on the circumstances. Whatever “best protects consumers” is ultimately the Bureau’s main priority, because consumer protection is its singular purpose.

The bulletin lays out four broad categories of responsible business conduct: self-policing for potential violations, self-reporting to the CFPB, remediating any harm resulting from violations, and cooperating in investigations beyond what the law requires. In many cases mirroring the language of the Seaboard Report, the CFPB lists some of the factors it will consider in determining whether and how much to take into account those four categories of conduct.

Self-policing: Some of the factors the CFPB will consider are the nature of the violation, whether senior management turned a blind eye toward obvious indicia of misconduct, and whether the conduct was pervasive or an isolated act. Unlike the Seaboard Report, the bulletin also poses the question, “Was the conduct significant to the party’s profitability or business model?”
Self-reporting: The CFPB particularly emphasizes this category because self-reporting reduces the need for the CFPB to expend its own resources. In deciding whether to favorably consider self-reporting of violations or potential violations of federal consumer financial laws, the CFPB will consider, among other things, whether affected consumers received appropriate information related to the violations or potential violations within a reasonable period. The CFPB may be less inclined to consider self-reporting favorably if the party waited to report the violation until the disclosure was likely to happen anyway through, for example, impending supervisory activity.
Remediation: Remediation involves stopping the misconduct immediately, implementing an effective response that includes disciplining individuals responsible for the misconduct, preserving information, and redressing the harm. The CFPB will consider whether the party improved its internal controls and procedures to “remove harmful incentives” and “encourage proper compliance.”
Cooperation: It appears that a party will have to really, really cooperate for the Bureau to reward it with affirmative credit. To receive credit for cooperation, a party cannot just meet its obligations under the law. Rather, it must take “substantial and material steps above and beyond what the law requires” in interacting with the CFPB. The CFPB will ask whether the party cooperated promptly and completely throughout the course of the investigation, and whether it conducted (or hired an unbiased third party to conduct) a full and impartial internal investigation and promptly provided the CFPB with a thorough written report of its findings.

How the CFPB will in practice choose to apply the principles outlined in the bulletin remains to be seen. At the end of the day, there is no magic formula, no rule, and no promise. To quote the SEC in its Seaboard Report, “[b]y definition, enforcement judgments are just that – judgments.”

Catagory:Litigation & Enforcement Actions