On May 18, the CFPB released an overview of its Spring 2016 Rulemaking Agenda, which outlines the CFPB’s current initiatives. In addition to summarizing the CFPB’s recently released proposed rule to ban pre-dispute arbitration clauses in future consumer agreements, the agenda states that the CFPB expects to release this Summer (i) a Notice of Proposed Rulemaking regarding small dollar loan products, including payday loans and auto title loan; (ii) a rule to finalize its November 2014 proposed rule on prepaid products; (iii) a Notice of Proposed Rulemaking to provide clarity concerning its TRID Know Before You Owe mortgage rule; and (iv) a final rule to amend its 2014 proposed rule revising certain provisions of mortgage servicing requirements under RESPA and TILA. The agenda further comments on the CFPB’s oversight of (i) overdraft services on checking accounts, noting that the agency “is engaged in pre-rule making activities to consider potential regulation” of such services; (ii) debt collection practices, observing that the agency is in the process of developing proposed rules to further regulate the industry; (iii) nonbank institutions, emphasizing the CFPB’s rulemaking efforts to further define larger participants of certain markets for consumer financial products and services; and (iv) mortgage markets, highlighting CFPB efforts to implement “critical consumer protections under the Dodd-Frank Act.” Finally, the agenda comments that the CFPB is in the “very early stages starting work to implement section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses.”
Special Alert: Second Circuit Reverses SDNY Judgment; Rules Fraud Claim Based on Contractual Promise Cannot Support FIRREA Violation Without Proof of Fraudulent Intent at the Time of Contract Execution
On May 23, in an opinion delivered by Circuit Judge Richard Wesley, the Second Circuit Court of Appeals reversed the District Court for the Southern District of New York’s (SDNY) July 30, 2014 judgment ordering a bank and its lender subsidiary to pay penalties in excess of $1.2 billion for alleged violations of section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1833a. U.S. v. Countrywide Home Loans, Inc., Nos. 15-469, 15-499 (2d Cir. May 23, 2016). In relevant part, FIRREA imposes civil penalties for violations of the federal mail and wire fraud statutes that affect a federally insured financial institution. The Government had alleged in the case that the lender subsidiary had defrauded Fannie Mae and Freddie Mac (collectively, the GSEs), by originating mortgage loans through its High Speed Swim Lane (HSSL) loan origination process that it allegedly knew to be of poor quality, and subsequently selling those loans to the GSEs despite representations in the contracts between the GSEs and lender subsidiary that the loans were of investment quality. At trial, the Government presented evidence that high-level employees of the lender subsidiary “knew of the pre-existing contractual representations, knew that the loans originated through HSSL were not consistent with those representations, and nonetheless sold HSSL Loans to the GSEs pursuant to those contracts.” The defendants argued on appeal that, under common-law principles of fraud the Government’s trial evidence proved, at most, a series of intentional breaches of contract which did not suffice as a matter of law to establish fraud.
The Second Circuit agreed with defendants and reversed the judgment of the district court. The court held that:
a contractual promise can only support a claim for fraud upon proof of fraudulent intent not to perform the promise at the time of contract execution. Absent such proof, a subsequent breach of that promise—even where willful and intentional—cannot in itself transform the promise into a fraud.
Thus, the Second Circuit concluded that under common law principles, which were incorporated into the mail and wire fraud statutes, “the proper time for identifying fraudulent intent is contemporaneous with the making of the promise, not when a victim relies on the promise or is injured by it.” The Second Circuit further held that “where allegedly fraudulent misrepresentations are promises made in a contract, a party claiming fraud must prove fraudulent intent at the time of contract execution; evidence of a subsequent, willful breach cannot sustain the claim.”
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
On May 18, the CFPB issued a report titled “Single-Payment Vehicle Title Lending.” The report provides an overview of the CFPB’s analysis of “de-identified data from vehicle title lenders consisting of nearly 3.5 million loans made to over 400,000 borrowers in ten states during 2010-2013.” The CFPB examined loan patterns (re-borrowing and rates of default) for single-payment auto loan titles. A loan contained in the CFPB’s study has three possible outcomes: (i) repaid without subsequent borrowing; (ii) default; or (iii) re-borrowing on the same day or within a certain specified period (14, 30, or 60 days) of time after repayment. According to the report, auto title loans have high rates of consumers re-borrowing: “[o]ver 80% of vehicle title loans are re-borrowed on the same day a previous loan is repaid, and 87% of loans are re-borrowed within 60 days.” The CFPB further contends that only about one in every eight loan sequences is repaid without a consumer having to re-borrow. Additional findings highlighted in the report include: (i) approximately one-third of loan sequences default, with one in every five borrowers having a vehicle repossessed by the lender for failure to repay; and (ii) approximately two-thirds of the loans are in sequences of seven loans or more and about half are in sequences of ten or more loans, with no more than 15% of the sequences maintaining three loans or fewer. Read more…
On May 11, the CFPB filed a complaint for alleged violations of the Consumer Financial Protection Act of 2010 (CFPA) against a Mississippi-based company offering cash checking services and payday loans. Regarding the company’s check cashing services, the CFPB alleges that the company violated state consumer protection laws by (i) explicitly forbidding employees from disclosing check cashing fees to consumers and providing new employees with a training presentation instructing them to “NEVER TELL THE CUSTOMER THE FEE”; and (ii) telling consumers that check transactions could not be canceled or that the process to reverse transactions would be lengthy, when neither was the case. The CFPB’s complaint further contends that the company’s payday lending practices differ from other companies’ practices in that it provides “multiple two-week loans over the course of the month” as opposed to providing 30-day loans to monthly consumers. Read more…
On May 17, the SEC announced that a former company insider will receive between $5 million and $6 million for providing a “detailed tip” that led the agency to uncover securities violations. According to the SEC, without the whistleblower’s information, the violations would have been “nearly impossible” to detect. Since the SEC started its whistleblower program in 2011, the agency has awarded more than $67 million to 29 whistleblowers. The SEC’s most recent award is its third highest and follows a $3.5 million award announced last week.