On September 27, the U.S. Court of Appeals for the Sixth Circuit revived an individual’s private action under FCRA against a bank, alleging that the bank failed to adequately investigate and respond to notices it received from several consumer reporting agencies regarding disputed car loan. Boggio v. USAA Fed. Savings Bank, No 11-4040, slip op. (6th Cir. Sep. 27, 2012). After experiencing credit problems caused by his ex-wife’s failure to make payments on a car she purchased during their marriage by signing both of their names to a check, the plaintiff wrote to several consumer reporting agencies to dispute his responsibility for the loan in light of the forgery, as well as the parties’ separation and divorce agreements that stated the ex-wife would be responsible for the car payments. The plaintiff alleges that the reporting agencies notified the bank of the dispute, which the bank refused to investigate without a police report or fraud affidavit from the plaintiff, as required by the bank’s fraud policy. The district court granted summary judgment in favor of the bank, holding that the bank reasonably investigated the notices it received from credit reporting agencies, and that the plaintiff had ratified the debt. On appeal, the circuit court reversed and remanded the district court’s decision, holding that there is a genuine dispute of material fact with regard to the sufficiency of the bank’s investigation. The court added that the plaintiff’s failure to comply with the bank’s fraud policy does not alter its finding of a genuine dispute of material fact, holding that FCRA does not permit the bank to require independent confirmation of the reporting agencies’ notices before conducting an investigation. The court also held that the dispute over ratification requires resolution by a trier of fact given the ambiguity of the separation agreement, among other issues.
On September 24, the CFPB announced that it resolved an investigation initiated by the FDIC and subsequently joined by the CFPB into telephone sales of certain ancillary or “add on” products marketed and sold by a major credit card issuer. The products related to (i) payment protection, (ii) credit monitoring, (iii) identity theft protection, and (iv) protection in the event of wallet loss. Pursuant to the Joint Consent Order released by the CFPB, the bank will pay a $14 million penalty and provide approximately $200 million in restitution to eligible consumers who purchased one or more ancillary products over a period of approximately four years. The order also calls for certain changes to the bank’s marketing and sales practices in connection with the products. During a press call to announce the consent order, CFPB Director Richard Cordray explained that the CFPB “expect[s] that more such actions will follow.” The CFPB is publishing the orders from its various actions on its administrative adjudication docket. Mr. Cordray also stated that “[i]n the meantime, [the CFPB is] signaling as clearly as [it] can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.” In July, the CFPB issued Bulletin 2012-06, which outlines the CFPB’s expectations for the institutions it supervises, and their vendors, with regard to offering ancillary products in compliance with federal consumer financial laws. BuckleySandler represented the bank in this joint CFPB-FDIC investigation and enforcement action.
On September 26, the FHFA Inspector General (IG) reported that neither Freddie Mac nor the FHFA purposefully limited refinancing opportunities to influence the yields of Freddie Mac inverse floating-rate bonds (inverse floaters). Inverse floaters are a by-product of other variable rate bonds carved out of Freddie Mac’s securitized mortgages to capitalize on increasing investor demand. Because the value of inverse floaters decreases when the underlying mortgages are refinanced, U.S. lawmakers and others argued that inverse floaters created a conflict of interest for Freddie Mac’s investment and refinancing policies because Freddie Mac could intentionally limit refinances to protect the value of its retained inverse floaters. The FHFA IG reviewed the practice and Freddie Mac’s portfolio and determined that (i) inverse floaters represent a small portion of Freddie Mac’s capital markets portfolio, (ii) inverse floaters pose no greater conflict than do any other mortgages held by Freddie Mac, and (iii) Freddie Mac employs an “information wall” to prevent the use of nonpublic information—including information about refinancing activity—from being used in investment decisions.
On September 25, the CFPB released a draft strategic plan for 2013-2018. The draft plan outlines the CFPB’s four strategic goals and desired outcomes, as well as its broad strategies for achieving those objectives. The CFPB states that it will strive to (i) “prevent financial harm to consumers while promoting good practices that benefit them,” (ii) “empower consumers to live better financial lives,” (iii) inform the public and policymaking with “data-driven analysis,” and (iv) advance the CFPB’s performance “by maximizing resource productivity and enhancing impact.” For each goal, the plan identifies metrics the CFPB will use to measure its performance. For example, to assess its progress in preventing financial harm to consumers and promoting good practices, the CFPB will consider, among other indicators, the number of fair lending supervision activities opened during the fiscal year and the percentage of fair lending cases filed that were “successfully resolved” through litigation, settlement, or default judgment. The CFPB has asked for comments by October 25, 2012.
On September 25, California Governor Jerry Brown signed the three outstanding bills proposed as part of the state’s Homeowner Bill of Rights. First, under Assembly Bill 2610, purchasers of foreclosed properties must provide ninety days’ written notice to quit before removing the tenant or subtenant from the property. Except in limited circumstances, tenants or subtenants holding possession of a rental housing unit under a fixed-term residential lease entered into before the purchase at foreclosure is permitted would have the right to possession until the end of the lease term. Second, Senate Bill 1474 allows the state attorney general to use a statewide grand jury to investigate and indict the perpetrators of financial crimes involving victims in multiple counties. Finally, Assembly Bill 1950 extends the statute of limitations for prosecuting mortgage related crimes from one year to three years.
On September 25, the FDIC issued Financial Institution Letter FIL-41-2012, which revises the classification system used to cite violations of consumer financial laws identified during compliance examinations. The new system features three levels of severity and will replace the current two-level system on October 1, 2012. The FDIC letter states that the change is intended to provide greater clarity regarding the severity of a violation by focusing on the most significant issues identified during an examination. For example, the new “Level 3/High Severity” classification will cover violations that result in significant harm to consumers or members of a community. These violations typically result in restitution in excess of $10,000 (in aggregate), and include any pattern or practice violations of anti-discrimination provisions.
On September 26, the U.S. Department of Treasury announced that FinCEN is repealing a 2004 rule that required certain U.S. financial institutions to terminate correspondent or payable-through accounts for, or on behalf of, two Burmese banks, and to apply due diligence to guard against the banks’ indirect use of correspondent or payable-through accounts. The repeal takes effect upon publication in the Federal Register.
On September 26, the NMLS published a portfolio of targeted system enhancements scheduled for release on October 22, 2012. The release will include (i) credit report enhancements, (ii) updates to the federal registry disciplinary actions reporting pursuant to the SAFE Act, (iii) renewal enhancements, and (iv) other general system enhancements. One such enhancement would require federally registered mortgage loan originators to provide certain disciplinary action information related to any disclosure questions they answered in the affirmative.
On September 25, the FHFA published a notice and request for comment on its proposal to set risk-based guarantee fees by state. The proposal identifies five states—Connecticut, Florida, Illinois, New Jersey, and New York—that have substantially higher default-related costs than the national average. The proposed methodology for state-level guarantee fees considers three factors (i) the number of days it takes Fannie Mae or Freddie Mac to obtain marketable title, (ii) the average per-day carrying cost incurred by Fannie Mae or Freddie Mac, and (iii) the national average default rate on single-family mortgages. The FHFA is proposing to charge lenders an upfront fee of between fifteen and thirty basis points on each new mortgage originated in the five higher-cost states, beginning in 2013. The actual increase in the upfront fee would vary for each state, depending on default data in the state and the state’s deviation from the mean of the state-level estimates of expected total default-related carrying costs. The proposed approach is based on the expected costs of defaults on mortgages acquired by Fannie Mae and Freddie Mac in the future given current underwriting standards, rather than actual default losses realized over the past decade. The FHFA also states that its methodology for determining increased state-level fees could change in the future to consider other factors, including the impact of recently-enacted laws and ordinances or a wider range of state actions. The FHFA has asked for comments on the proposal by November 26, 2012.
On September 25, the CFPB published a report on credit scores and consumer reporting agencies. As required by the Dodd-Frank Act, the CFPB compared credit scores sold to consumers to those sold to creditors to determine the impact of the different scoring models used by consumer reporting agencies. Using 200,000 credit files obtained from each of the major consumer reporting agencies, the CFPB found that for a substantial minority of consumers, the different scoring models yielded meaningfully different results, i.e., the consumer and creditor purchased different credit scores from the same reporting agency. In comparing different models across various demographic subgroups, the CFPB found that different credit scores did not appear to treat different groups of consumers systematically differently than other scoring models. The CFPB cautioned consumers against exclusively relying on credit scores they purchase as a guide to how creditors will view their credit quality. Additionally, the CFPB urged consumer reporting agencies to advise consumers that the scores they purchase could vary, sometimes substantially, from the scores used by creditors.
On September 26, the FDIC named John Vogel as New York Regional Director. The New York Region covers twelve northeastern states, as well as Washington, DC, Puerto Rico, and the U.S. Virgin Islands. Mr. Vogel has been with the FDIC since 1990 and previously served as New York Deputy Regional Director for Risk Management.
On September 24, Representatives Lamar Smith (R-TX), Patrick McHenry (R-NC), and Darrell Issa (R-CA), along with Senator Charles Grassley (R-IA), sent a letter to U.S. Attorney General Eric Holder alleging that Assistant Attorney General Tom Perez struck an inappropriate deal with the City of St. Paul to entice the City to withdrawal its appeal in Magner v. Gallagher, a case that could have yielded a decision on whether disparate impact claims are cognizable under the Fair Housing Act, and if they are, the applicable legal standards for such claims. Based on a DOJ staff briefing and documents obtained from the DOJ, the lawmakers claim that the DOJ agreed not to intervene in a False Claims Act case pending against the City of St. Paul in exchange for the City abandoning its appeal, and that such an arrangement went beyond a standard settlement between the parties. The letters seeks additional documents and interviews of top DOJ officials by September 28, 2012.
On September 24, the Joint Forum, which brings together the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors to coordinate regulation of financial conglomerates, published final principles for the supervision of financial conglomerates. The principles are meant to provide an overarching policy framework to support consistent and effective supervision of financial conglomerates across borders, while closing regulatory gaps. The final guidelines, which update a framework originally adopted in 1999, are organized in five categories—(i) supervisory powers and authority, (ii) supervisory responsibility, (iii) corporate governance, (iv) capital adequacy and liquidity, and (v) risk management—and provide implementation criteria and comments explaining each principle.
On September 21, the U.S. Court of Appeals for the First Circuit vacated a district court’s dismissal of two putative class actions brought by borrowers alleging that their mortgage lender improperly required borrowers to buy and maintain higher flood insurance coverage. Lass v. Bank of America, N.A., No. 11-2037, 2012 WL 4240504 (1st Cir. Sep. 21, 2012); Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012). Both named borrowers claim on their own behalf and that of similarly situated borrowers that the bank breached its contracts by requiring borrowers to purchase more flood insurance than contractually required. They also claim that the bank proceeded in bad faith by requiring that such insurance be purchased through backdated policies placed with the bank’s affiliates, which earned a kickback on the purchase. In Kolbe, while the court favored the borrower’s interpretation that the contract prohibits the lender from exercising discretion with regard to flood insurance, it held that the mortgage contract was ambiguous and susceptible to multiple interpretations. In Lass, the court held that while the borrower’s mortgage contract explicitly grants the lender discretion to set the amount of flood insurance required for the property, a “flood insurance notification” document provided to the borrower at closing may be read to state that the amount of insurance required at closing would not change during the term of the mortgage. The notification was part of the mortgage agreement and essentially completed that contract, the court held. Taken together, the court explained, the mortgage contract and flood insurance notification are ambiguous with regard to the lender’s authority to alter the flood insurance coverage requirement. Further, in both cases, the court held that the borrowers alleged sufficient facts to support their bad faith claims of the bank’s backdating and self-dealing. The court vacated the district court’s decisions on the lender’s motions to dismiss and remanded both cases for further proceedings. Notably, in Kolbe, the circuit court did not overturn the lower court’s dismissal of the plaintiff’s claims for breach of contract and breach of the implied covenant of god faith and fair dealing against the insurance carrier, noting that the complaint was devoid of allegations showing a contractual relationship between the plaintiff and the insurance carrier.
On September 20, the Attorneys General (AGs) of Michigan, Oklahoma, and South Carolina joined an earlier-filed lawsuit in the U.S. District Court for the District of Columbia that challenges aspects of the Dodd-Frank Act, including the CFPB and its director. The AGs joined an amended complaint that seeks to challenge as unconstitutional the “formation and operation” of the CFPB, and that argues the President side-stepped constitutional checks and balances by refusing to submit his nominee for CFPB Director to the Senate. The AGs also charge that the “orderly liquidation authority” (OLA) for financial institutions provided to the Treasury Secretary by the Dodd-Frank Act violates the separation of powers doctrine, as well as the Fifth Amendment’s bar against the taking of property without due process. The AGs cite their state pension funds—each of which is invested in “a variety of institutions” subject to the OLA—as their basis for standing, claiming that the OLA exposes the states and their funds to “the risk that their credit holdings could be arbitrarily and discriminatorily extinguished.” Finally, the private plaintiffs that originally filed the suit also contest based on a separation of powers argument the “unconstitutional creation” of the Financial Stability Oversight Council.