Update Regarding Marketing Services Agreements (“MSAs”)

On Thursday, June 30, 2015, a CFPB spokesman issued a statement to HousingWire in response to the announcement by a large lender that it was terminating its MSAs:

[This] decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with [the Real Estate Settlement Procedures Act (“RESPA”)] and freeing up more choices for consumers.  We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers.  Companies should take note of today’s action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referrals.

These announcements come in the wake of the CFPB’s September 2014 consent order against Lighthouse Title, Inc. and CFPB Director Cordray’s June 2015 ruling against PHH Corporation and its affiliates. Both matters involved alleged violation of Section 8 of RESPA, which states that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a). However, Section 8 also states that “[n]othing in this section shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” 12 U.S.C. § 2607(c)(2).  Read more…

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Mead Johnson Nutrition Settles SEC FCPA Charges for $12 Million

On July 28, Mead Johnson Nutrition Co. (“Mead”), an infant formula maker, agreed to pay $12.03 million to settle civil FCPA charges with the SEC. The SEC alleged that a majority-owned subsidiary in China used discounts given to third-party distributors to make over $2 million in bribes from 2008 to 2013 to healthcare professionals at state-owned hospitals, to get them to push the use of Mead’s products to new mothers, reaping profits of over $7 million. The SEC also alleged that the subsidiary’s books and records were false as a result of the improper payments, and were then consolidated into the parent company’s books and records; Mead’s internal controls were also alleged to be deficient. Mead did not admit or deny liability.

Of note, the settlement came through the SEC’s administrative process, continuing the trend at the SEC of sending cases to its internal decision-makers instead of to a federal court. The alleged facts also highlight the danger of directing the activities of third-party distributors (here, related to the use of discounts provided to them).

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Florida Appellate Court Rules Non-Signing Spouse in Reverse Mortgage is Protected from Foreclosure

On July 15, a three-judge panel of the Florida Third District Court of Appeal issued its opinion in Smith v. Reverse Mortgage Solutions, Inc., 2015 WL 4257632. In 2008, Mr. Smith took out a reverse mortgage on his home where he lived with his wife; only Mr. Smith signed the promissory note, but both spouses signed the mortgage. Mr. Smith died in late 2009, and Reverse Mortgage Solutions filed a complaint for foreclosure, although Mrs. Smith was still alive. The mortgage allowed foreclosure if “a Borrower dies and the Property is not the principal residence of at least one surviving Borrower.” The lower court ruled in favor of Reverse Mortgage Solutions. On appeal, however, the court interpreted the documents de novo and found that Mrs. Smith was a “borrower” “based on the plain and unambiguous language of the mortgage,” and therefore was protected from foreclosure until she died. Although the court stated that this finding would be sufficient to decide the case, it also noted several other bases for its decision, including that (i) Mrs. Smith was identified as the “Borrower” on the signature page of the mortgage; (ii) Florida’s homestead provisions require the spouse’s signature on a mortgage of jointly held property to validly convey the interest in property; and (iii) federal law applicable to reverse mortgages contemplates the foreclosure of mortgaged property and expressly defines “homeowner” to include the spouse of the homeowner. The court remanded the case to the lower court to decide whether the other condition precedent preventing foreclosure, that the property was Mrs. Smith’s primary residence, had been met. A dissenting judge argued that neither the Florida homestead provisions nor HUD requirements should affect the interpretation of the loan note. Although he was prepared to affirm the lower court decision based on the unavailability of a trial transcript, he stated that if it was necessary to address the question of whether Mrs. Smith was a “borrower,” he would conclude that she was not because both the mortgage and the promissory note generally identified Mr. Smith as the only borrower.

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CFPB Orders Mortgage Servicer to Pay $1.6 Million over Servicing Practices

On July 30, the CFPB ordered a Texas-based mortgage servicer to pay $1.5 million in restitution and $100,000 in civil money penalties for allegedly engaging in faulty servicing practices, according to a settlement announced by the CFPB. The CFPB alleged that, beginning in 2009, the mortgage servicing firm failed to honor “in-process” modifications—trial modifications that were pending when a loan was transferred to the company—until it determined that the prior servicer should have agreed to the trial modification. In addition, the CFPB alleged that the servicing firm provided inaccurate account statements to borrowers related to their loan balance, interest rates, payment due dates, and the amount available in escrow accounts. The CFPB further contends that, in certain instances, the servicing firm coerced consumers into waiving certain legal protections as a condition to being allowed to pay off delinquent payments in installments. Under the terms of the consent order, the servicing firm agreed to, among other things, (i) provide $1.5 million in restitution to consumers whose loan modifications were not acknowledged; (ii) pay a $100,000 civil money penalty; (iii) mitigate the impact of its allegedly unlawful practices by, for example, converting “in-process” loan modifications to permanent modifications and stopping foreclosure processes for certain borrowers; and (iv) honor loss-mitigation agreements entered into by prior servicers and “in-process” loan modifications and engage in outreach to contact borrowers and offer them loss-mitigation options.

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Federal Reserve Appoints Faster Payments Strategy Leader

On July 30, the Federal Reserve announced the appointment of Sean Rodriguez as its Faster Payments Strategy Leader. Rodriguez serves as a Senior Vice President at the Chicago Federal Reserve Bank. In his new role, Rodriguez will lead the Federal Reserve’ Faster Payments Task Force focusing on improving the speed and efficiency of various current and emerging payment systems. More information related to the Federal Reserve’s efforts to improve the U.S. payment system is available at fedpaymentsimprovement.org.

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Spotlight on the Military Lending Act: Did the Final Rule Improve on the Proposal?

Valerie-Hletko-captionBen-Olson-captionOn July 22, 2015, the Department of Defense (“Department”) released its final rule amending the regulations that implement the Military Lending Act (“MLA”), which means that a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”) will now be subject to the MLA and its “all-in” 36% military annual percentage rate (“MAPR”) cap.
Andrew-Grant-captionManley-Williams-captionSpecifically, the Department expanded the definition of “consumer credit” to be consistent with credit that is subject to the Truth-in-Lending Act (“TILA”)—credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.

In response to the initial proposed rule, financial services industry stakeholders undertook a substantial effort to show how proposed modifications to the MLA regulations were overly broad and, in parts, inconsistent with the Department’s mandate under the MLA.  At a high level, industry comment letters fell into five categories: Read more…

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CFPB Settles with Payment Processor and Mortgage Servicer over Deceptive Mortgage Advertisement Allegations

On July 28, the CFPB announced that a Colorado-based payment processor, along with a Virginia-based mortgage servicer, agreed to pay a total of $38.5 million to resolve allegations that both entities used misleading advertisements related to a mortgage payment program. The CFPB alleged that both entities advertised the “Equity Accelerator Program” as a program that would help consumers save on interest payments by making mortgage payments biweekly rather than monthly. However, according to the CFPB, the program failed to make the biweekly payments, and no more than a “tiny” percentage of consumers enrolled in the program benefitted from the promised savings. Under the terms of the consent orders, the payment processor agreed to provide $33.4 million in restitution to affected consumers and pay a $5 million civil money penalty. The mortgage servicer will pay a $100,000 civil money penalty. Both entities also agreed to ensure that any advertisements concerning the mortgage program’s benefits complied with federal law.

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Comptroller Talks Interest Rate, Compliance, and Cybersecurity Risks Facing Financial Institutions

On July 24, OCC Comptroller Curry delivered remarks before the New England Council in Boston, MA regarding the risks that financial institutions face today. Rising interest rates and regulatory compliance were two of the three risks discussed. Curry emphasized that the inevitable rise in interest rates could greatly affect loan quality, particularly loans that were not carefully underwritten to begin with, and that ”[l]oans that are typically refinanced, such as leveraged loans,” would be particularly severely affected. Recognizing the impact that Dodd-Frank continues to have on banks, Curry said that financial institutions face two categories of risk from new regulations: (i) “banks run afoul of the new regulations, possibly damaging their reputations and subjecting themselves to regulatory penalties”; and (ii) banks devote their time and money to regulatory compliance, rather than putting those resources toward serving their customers and communities. The final and “perhaps the foremost risk facing banks today,” according to Curry, is cyber threats. Curry outlined the agency’s efforts to curtail cyber intrusion in the banking industry, highlighting the June 30 release of its Semiannual Risk Assessment and the creation of a Cybersecurity and Critical Infrastructure Working Group, which was designed to (i) increase cybersecurity awareness; (ii) promote best practices; and (iii) strengthen regulatory oversight of cybersecurity readiness. Curry noted, however, that information-sharing is just as important as self-assessment and supervisory oversight: “We strongly recommend … that financial institutions of all sizes participate in the Financial Services Information Sharing and Analysis Center, a non-profit information-sharing forum established by financial services industry participants to facilitate the sharing of physical and cyber threat and vulnerability information.” Collaboration among banks of all sizes and non-bank providers, Curry stated, can be a “game-changer” in more ways than one: “By promoting the discovery of common interests and common responses to the risks that you face in your businesses and we all face together, you provide an invaluable service to New England and to the United States.”

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BuckleySandler Secures Second Circuit Victory in Lender-Placed Insurance Rate Case

On July 22, BuckleySandler secured a substantial victory before the United States Court of Appeals for the Second Circuit. Representing a global insurance company in a nationwide lender-placed insurance (“LPI”) class action brought by mortgage borrowers, the Firm argued on interlocutory appeal that the Second Circuit should reverse the district court’s denial of its motion to dismiss on the basis of the “filed-rate” doctrine. Ordinarily, the filed-rate doctrine provides that rates approved by the applicable regulatory agency – including LPI rates – are per se reasonable and unassailable in judicial proceedings brought by ratepayers. The district court, however, held that the plaintiffs’ claims were not barred by the doctrine because, rather than directly billing the plaintiffs for the LPI premiums, the insurance company initially charged the premiums to the plaintiffs’ mortgage servicer who, in turn, charged the borrowers. The Second Circuit reversed the Southern District of New York’s decision, holding that the filed-rate doctrine applied notwithstanding the fact that the mortgage servicer served as an intermediary to pass on the LPI rates to borrowers. Because the plaintiffs’ claims ultimately rested on the premise that the LPI rates approved by the regulators were too high and included impermissible costs, the Second Circuit held that the claims were barred by the filed-rate doctrine.

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FinCEN Issues Final Rule Imposing Special Measure Five Against FBME Bank Ltd.

On July 23, FinCEN issued a final rule pursuant to Section 311 of the USA PATRIOT Act to impose “special measure five” against FBME Bank Ltd. (“FBME”), formerly known as the Federal Bank of the Middle East. Special measure five prohibits U.S. financial institutions from opening or maintaining correspondent accounts or payable through accounts for or on behalf of FBME. The action follows a July 17, 2014 notice of proposed rulemaking in which FinCEN stated that it had found FBME to be of primary money laundering concern under Section 311 and issued a related notice of proposed rulemaking (NPRM) proposing the imposition of special measure five against FBME. Supporting the proposed rule were the following factors: (i) FBME is used by its customers to facilitate money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasion, and other illicit activity internationally and through the U.S. financial system; (ii) FBME has systemic failures in its anti-money laundering controls that attract high-risk shell companies, that is, companies formed for the sole purpose of holding property or funds and that do not engage in any legitimate business activity; and (iii) FBME performs a significant volume of transactions and activities that have little or no transparency and often no apparent legitimate business purpose. The final rule will be effective 30 days after its publication date in the Federal Register.

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NMLS Updates Resource Center: Encourages Public to Submit Comments on Proposed Changes; Responds to Public Comments

On July 21, the Nationwide Mortgage Licensing System (NMLS) updated its resource center to encourage the public to submit further comments – via the Conference of State Bank Supervisors – on certain proposed changes to the Uniform NMLS Licensing Forms and the Mortgage Call Report. The proposed changes to the licensing forms include, but are not limited to: (i) adding a Filing Comment section to the Company Form (MU1) and the Branch Form (MU3); (ii) expanding the Business Activities section by adding “Reverse Mortgage Lending,” “Reverse Mortgage Brokering,” and “Reverse Mortgage Servicing” as available selections; (iii) expanding the Contact Employees section by adding “Annual/Call Report” as an available selection under Area(s) of Responsibility; and (iv) updating language in the Disclosure Questions section. If implemented, changes to the Mortgage Call Report (“MCR”) would include: (i) adding fields that allow for more accurate reporting on Qualified Mortgage standards; (ii) adding an upload option within the Loans Serviced section; and (iii) exploring the “development of a dynamic MCR based on a company’s business activities and license authority.” Comments on the proposals are due August 20.

Also on July 21, the NMLS posted to its resource center responses to the public’s comments regarding the Pre-Licensure Education Expiration Policy, Electronic Surety Bond Tracking, and the Uniform NMLS Licensing Forms and Mortgage Call Report. Feedback received on the initial proposed changes to the Licensing Forms and MCR prompted the additional comment period for the more targeted proposed changes described above.

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CFPB Files Complaint Against Student Financial Aid Consulting Company for Allegedly Illegal Sales and Billing Practices

On July 23, the CFPB announced that it had entered into a proposed consent order with a Sacramento-based company that provides fee-based student financial aid counseling and preparation services. The CFPB’s simultaneously filed complaint alleges that the company violated the Telemarketing and Consumer Fraud and Abuse Prevention Act by engaging in deceptive sales tactics through its websites and call center representatives. The complaint claims that from at least July 21, 2011 to present (recognizing that the company no longer operates one of the websites effective July 13, 2015), the company offered consumers certain services “as an upgrade from its ‘standard’ service level at ‘no additional cost.’” However, consumers were allegedly charged future annual fees of $67 to $85 for such upgrades. The Bureau also alleges that the company violated the Electronic Fund Transfer Act by enrolling consumers in automatic, recurring payments without their knowledge or consent: “The Company did not provide consumers a copy of the consumers’ authorization for electronic fund transfers in which the terms of the preauthorized transfers – including automatic, recurring charges going forward – were clear and readily understandable.” The proposed consent order would require the company to pay $5.2 million in consumer relief and cancel all automatic and recurring charges currently in place. Due to the company’s limited financial resources, the proposed order seeks a civil money penalty of $1.00.

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Federal Reserve Orders Chinese Bank to Overhaul its BSA/AML Compliance Program

On July 21, a leading China-based bank agreed to address deficiencies in connection with the BSA/AML risk management and compliance program of its New York branch office. The Agreement, entered into with the Federal Reserve Bank of New York and the New York State Department of Financial Services, requires the bank and its New York branch to (i) enhance the branch’s written BSA/AML compliance program and customer due diligence program; and (ii) develop a written program for the branch that is capable of identifying and reporting suspected violations of law and suspicious transactions to law enforcement and supervisory authorities. In addition, the bank must hire an independent third-party to review the Branch’s U.S. dollar clearing transaction activity “to determine whether suspicious activity involving high-risk customers or transactions at, by, or through the branch was properly identified and reported” to the appropriate federal banking authorities. No civil money penalty was imposed on the bank.

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FDIC and California Department of Business Oversight Levy $140 Million Penalty Against California Bank for Ongoing BSA/AML Deficiencies

On July 22, the FDIC, along with the Commissioner of the California Department of Business Oversight (“DBO”), announced the assessment of a $140 million civil money penalty against a California state-chartered bank to resolve allegations that it failed to implement and maintain an adequate BSA/AML Compliance Program over an extended period of time. In 2012, the bank entered a consent order with the FDIC and the DBO (fka California Department of Financial Institutions), requiring that it “address the weaknesses and correct deficiencies” in its BSA and AML programs. According to the DBO, the bank has since failed to implement the corrective actions stipulated in the consent order, which required the bank to, among other things, (i) establish internal controls to “detect and report illicit financial transactions and other suspicious activities”; (ii) hire a qualified BSA officer and sufficient staff; (iii) provide adequate BSA training; and (iv) conduct effective independent testing. Additionally, since the 2012 consent order, the DBO and FDIC have discovered “new, substantial violations of the BSA and anti-money laundering mandates over an extended period of time.” Under terms of the joint order, the bank will pay $40 million to the DBO and $100 million to the Department of the Treasury to satisfy the full $140 million penalty.

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CFPB Settles with Bank and its Two Affiliates for $18.5 Million over Alleged Faulty Student Loan Servicing Practices

On July 22, the CFPB announced that a major bank and its two affiliates agreed to pay $18.5 million to resolve allegations that the entities engaged in inadequate private student loan servicing practices. According to the consent order, the CFPB alleged that the bank and its affiliates (i) failed to provide clear information regarding the student-loan interest consumers paid; (ii) overstated the minimum amount due in student-loan billing statements; (iii) initiated collection phone calls to student loan borrowers that were non-compliant with certain provisions of the Fair Debt Collection Practices Act; and (iv) failed to provide students with defaulted student loans with information about the amount and source of the debt and the consumers’ right to contest the debt’s validity, as required by the Fair Debt Collection Practices Act. Under terms of the settlement, the bank agreed to provide $16 million in restitution to affected borrowers, improve its student loan servicing and collections practices, and pay a $2.5 million civil money penalty. The announcement comes as the CFPB, along with the Department of Education and Department of Treasury, concluded its comment period for public feedback on ways to improve borrower service, reduce defaults, develop best practices, implement consumer protections, and spur innovation in the student loan servicing market.

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