FDIC Obtains Jury Verdict and Settlement in Separate Actions in California District Court Against Former Bank Officers and Prohibition Order Against Bank CEO

On December 7, the FDIC, as receiver of a failed bank, obtained a jury verdict in its favor in the U.S. District Court for the Central District of California against a group of former bank officers. FDIC v. Van Dellen, No. 10-CV-04915, Doc. 596 (C.D. Cal. Dec. 7, 2012). On December 12, the former chief executive officer of the same bank settled a separate FDIC civil action and consented to an order of prohibition from further participation in the banking industry. FDIC v. Perry, No. CV 11-5561 (C.D. Cal. Dec. 12, 2012); In re Perry, No. FDIC-12-642e. In the first case, the FDIC sued the group of former officers, alleging that, in pursuit of bonuses for high loan origination volumes, the officers approved homebuilder loans to unqualified borrowers. The jury found that the former officers breached their duty of care and acted negligently in approving 23 loans and awarded approximately $169 million in damages to the FDIC. In a separate action against the former CEO of the same bank, the FDIC alleged that the CEO was negligent in allowing the bank to generate mortgage loans in 2007 which the bank was then unable to sell, allegedly resulting in $600 million in losses to the bank. The CEO settled the FDIC’s claims for $12 million, $1 million of which is to be paid from personal funds and the remainder from insurance funds. In addition, the CEO consented to an FDIC order prohibiting him from further participation in the conduct of any financial institution or organization.

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California Federal District Court Holds Force-Placed Insurance Claims Not Preempted by National Bank Act

On December 11, the U.S. District Court for the Northern District of California refused to preempt under the National Bank Act claims that a mortgage lender breached its contract by force-placing a backdated flood insurance policy on the borrower’s property. Ellsworth v. U.S. Bank, No. C 12-02506, 2012 WL 6176905 (N.D. Cal. Dec. 11, 2012). The borrower brought a putative class action against his lender and flood insurer on behalf of himself and similarly situated borrowers, alleging that the lender and insurance company overcharged him for a temporary force-placed flood insurance policy that was backdated, and for which the lender received a kickback from the insurer. The lender and insurer moved to dismiss on the grounds that the borrower’s claims are preempted by the National Bank Act and barred by California’s filed rate doctrine and the voluntary payment doctrine, and that the borrower failed to state a claim. The court held that the borrower’s claims are not preempted by the National Bank Act because they are at their core about practices—the alleged kickbacks and backdating—rather than fees. Further, the court held that claims based on overcharging due to the alleged kickback scheme are not a challenge to the rates of the premiums, but rather the allegedly unlawful conduct, and therefore are not barred by the filed rate doctrine. The court also declined to dismiss based on the defendants’ attempts to apply the voluntary payment doctrine and arguments the borrower failed to state a claim, and denied defendants’ motions to dismiss.

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Fifth Circuit Holds Data on Personal Cell Phone Not Protected by Stored Communications Act

On December 12, the U.S. Court of Appeals for the Fifth Circuit held that the Stored Communications Act (SCA) does not apply to data stored in a personal cell phone and affirmed a district court’s grant of summary judgment to the defendants. Garcia v. City of Laredo, Texas, No. 11-41118, 2012 WL 6176479 (5th Cir. Dec. 12, 2012). In this case, after being terminated from her employment based on evidence downloaded by her employer from her cell phone, a former police dispatcher sued the City of Laredo for violating the SCA by accessing the contents of her cell phone without permission. The appeals court agreed with the district court that the cell phone data was not protected by the SCA. Consistent with decisions by the Eleventh Circuit and several district courts that the SCA does not apply to data stored on a personal computer, the court reasoned that an individual’s cell phone is analogous to an individual’s computer hard drive – it only enables, and does not provide an electronic communication service. Therefore, the court held, the contents of the device are outside the scope of the “facilities” covered by the SCA. The court affirmed summary judgment in favor of the City of Laredo.

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California Appeals Court Enjoins Nonjudicial Foreclosure for Lenders’ Failure to Comply with HUD Servicing Requirements

On December 13, the California Court of Appeal for the First Appellate District held that the HUD servicing requirements were incorporated by reference into the borrowers’ FHA deed of trust and served as conditions precedent to the acceleration of the debt or to foreclosure. Pfeifer v. Countrywide Home Loans, No. A133071, 2012 WL 6216039 (Cal. Ct. App. Dec. 13, 2012). In this case, after the lender declared the borrowers’ FHA-insured mortgage in default and commenced nonjudicial foreclosure proceedings, the borrowers filed suit against the lender seeking general and punitive damages, as well as to enjoin the foreclosure proceedings and to obtain declaratory relief, for failure prior to provide the 30-day advance debt validation notice required by the Fair Debt Collection Practices Act (FDCPA) or to conduct a face-to-face interview required by HUD’s servicing regulations prior to commencing foreclosure proceedings. On appeal, the court affirmed the lower court’s ruling that the borrowers did not have a claim for damages against the collection firm under the FDCPA, because that firm was not a debt collector under the statute. However, the court reversed the trial court’s judgment as to the borrowers’ request for injunctive relief based on their wrongful foreclosure claim and their request for declaratory relief. The court agreed with the borrowers that the deed of trust incorporates by reference the servicing requirements of HUD, including the face-to-face interview, and the lenders had to comply with the servicing terms prior to commencing a valid nonjudicial foreclosure. The court also held that tender was not required, because the borrowers were seeking to enjoin a pending foreclosure sale based on the lenders’ failure to comply with the HUD servicing requirements. Concurring with those courts that distinguish an offensive action from a defensive action, the court explained that the borrowers had no private right of action for failure to comply with the HUD regulations and could not seek damages based on their wrongful foreclosure action, but held that the HUD regulations may be used as an affirmative defense to a judicial foreclosure action instituted by the creditor.

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New York Consumer Privacy Bill Takes Effect

Last week, a New York law designed to protect consumers’ social security numbers took effect.  As previously reported, Assembly Bill 8992 prohibits private businesses from conditioning the provision of services on a consumer’s willingness to disclose his or her Social Security number upon request. The law provides several exceptions, including when the collection of the Social Security Number is (i) otherwise required by law, (ii) requested in connection with the opening of a deposit account or a credit transaction initiated by the consumer, or (iii) required for any business function allowed under the Gramm Leach Bliley Act.

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NMLS Announces 2013 Annual Conference

On December 18, the NMLS announced that its fifth Annual Conference and Training will be held February 26 – March 1, 2013, in San Antonio, Texas. The Conference allows companies that manage financial services licenses or registration through NMLS to hear directly from state and federal policymakers regarding the NMLS system and regulatory and compliance developments.

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SEC Names Acting Directors for Corporation Finance, Trading and Markets

On December 17, the Securities and Exchange Commission (SEC) announced that Lona Nallengara will serve as Acting Director of the Division of Corporation Finance, replacing Meredith Cross who recently announced her departure. Mr. Nallengara has served as Deputy Director for Legal and Regulatory Policy of the Division since March 2011 and has been responsible for overseeing the Division’s offices of Chief Counsel, Enforcement Liaison, International Corporate Finance, Mergers and Acquisitions, and Small Business Policy. The SEC also announced that John Ramsay will replace Robert Cook, Director of the Division of Trading and Markets, on an acting basis when Mr. Cook departs after a short transition period. Mr. Ramsay has served since September 2010 as a Deputy Director for the Division and is responsible for broker-dealer financial responsibility, risk oversight, and clearance and settlement functions. He has played a key role in the advancement of rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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FTC Announces Departure of Consumer Protection Director

On December 17, the FTC announced that the Director of its Bureau of Consumer Protection, David Vladeck, will leave the agency on December 31, 2012. Since taking the position in 2009, Mr. Vladeck has led the Bureau’s focus on financial fraud and consumer privacy. Charles Harwood, who currently serves as a Deputy Director in the Bureau, will take over as Acting Director of the Bureau of Consumer Protection. The FTC also announced that Eileen Harrington, the agency’s Executive Director, will retire at the end of year, and that Pat Bak, who currently serves as Deputy Executive Director, will serve as Acting Executive Director.

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HUD Revises FHA Recertification Fee Calculation, Issues 2013 Loan Limits

On December 11, Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2012-27, which changes the way the Federal Housing Administration (FHA) will calculate the recertification fee for its approved lenders. Effective immediately, FHA will calculate recertification fees based on the number of FHA-approved branch offices as of the first business day of the lender’s annual reporting period. Lenders that wish to terminate branches and thereby not pay a recertification fee for the next annual period must do so on or before the last business day of the annual reporting period. On December 6, Mortgagee Letter 12-26 announced the FHA’s single-family loan limits for 2013. The FHA national loan limit floor remains at 65 percent of the national conforming limit (which holds constant at $417,000 for a one-unit property). The letter also lists the maximum FHA loan limits by property size for areas designated as high-cost. The letter also identifies certain exceptions to the limits, and notes that the FHA maximum claim amount for reverse mortgages remains at the statutory limit of $625,500.

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Fannie Mae Updates Selling Guide to Reflect Previously Announced Policies

On December 18, Fannie Mae issued Selling Guide Announcement SEL-2012-14 (Announcement) announcing updates to the Selling Guide to reflect previously announced changes related to disaster policy and DU Refi Plus™ and Refi Plus Property Policies™. The Announcement also (i) provides further clarification regarding escrow account requirements for refinance transactions and clarification that the escrow account requirements do not apply to DU Refi Plus and Refi Plus mortgage loans, (ii) incorporates the Desktop Underwriter® archiving, and (iii) includes updated links from eFannieMae.com to the new business Web portal.

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Freddie Mac Offers Flexibility for Certain Selling Guide Verification Requirements

On December 14, Freddie Mac issued Bulletin 2012-28 (Bulletin), which provides sellers more flexibility with regard to certain required verifications. Under the new policy, Freddie Mac will (i) allow sellers to obtain a verbal verification of employment or a verification of existence of the business, as applicable, after the note date, provided the verifications are obtained prior to the delivery date, and (ii) provide additional options for sellers when documenting the terms of secondary financing, the fees and costs paid in connection with secondary financing and the evidence of subordination of secondary financing to the first lien. The Bulletin also (i) clarifies condominium project review and eligibility requirements, (ii) updates the Single-Family Seller/Servicer Guide (Guide) to reflect the new property valuation requirements for Relief Refinance Mortgages℠ secured by properties affected by disasters, (iii) reminds sellers and servicers about base conforming loan limits and high-cost area loan limits for 2013, and (iv) reminds sellers and servicers who use the services of a warehouse lender that Freddie Mac may refuse to fund or delay funding if the warehouse lender has not submitted acceptable documentation as required in Guide Chapter 19.

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Freddie Mac Supplements Storm Relief Guidance

On December 18, Freddie Mac updated its disaster relief policies through Bulletin 2012-29 (Bulletin). Effective immediately, but only temporarily, servicers must perform one interior disaster-related property inspection for delinquent mortgages secured by properties in eligible disaster areas that have been identified as abandoned as of, or prior to the date of the area being declared an eligible disaster area. Freddie Mac will reimburse servicers up to $20 per property for the additional costs associated with completing the interior inspections. For mortgages secured by properties located in eligible disaster areas, which were reported as current in the most recent reporting cycle just prior to the area being declared an eligible disaster area, Freddie Mac will reimburse servicers up to $10 per property for one exterior property inspection related to the disaster. The Bulletin also provides instructions regarding forbearance plans for borrowers who are or were in approved or active trial period plans and whose property or places of employment are located in an eligible Hurricane Sandy disaster area.

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FDIC Releases Community Bank Study

On December 18, the FDIC released the results of a study of U.S. community banking and other community bank measures resulting from its year-long Community Banking Initiative. The study explores the definition of a community bank, structural changes among community and non-community banks, the geography of community banking, the performance of community banks compared to non-community banks, the performance of community bank lending specialty groups, and capital formation at community banks. Other materials developed by the FDIC as part of the Initiative include the findings of a review of the FDIC’s examination, rulemaking, and guidance processes.

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FDIC Supervisory Insights Focuses on Mobile Payments and High-Yield Checking

On December 17, the FDIC published the Winter 2012 issues of Supervisory Insights. The two featured articles focus on mobile payments and high-yield checking. In “Mobile Payments: An Evolving Landscape,” FDIC staff (i) review mobile payment technology, (ii) provide guidance regarding understanding and managing risks, and (iii) include a chart explaining the applicability of various federal laws to mobile payments. The article states that, going forward, non-bank mobile payment providers may start to capture greater market share from financial institutions and alter bank/customer relationships. The article describes the potential for banks to gradually be pushed out of the payment transaction, and identifies potential impacts of such disintermediation, including loss of access to key customer data. A second article, “High-Yield Checking Accounts: Know the Rules,” reviews the features of high-yield checking accounts and identifies problematic disclosures that may accompany their promotion. The article identifies what examiners look for when examining high-yield account offerings and provides best practices for banks.

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Federal Reserve Board Updates Large Institution Supervision Framework

On December 17, the Federal Reserve Board (FRB) issued Supervisory Letter SR 12-17, which describes an updated framework for the consolidated supervision of large financial institutions in order to enhance the resilience of a firm, lower the probability of its failure, and reduce the impact on the financial system in the event of an institution’s failure. With regard to the former, the letter specifies the FRB’s expectations with regard to (i) capital and liquidity planning and position, (ii) corporate governance, (iii) recover planning, and (iv) management of core business lines. In support of its goal to reduce the impact of a failed firm, the letter describes the FRB’s  expectations with regard to (i) management of critical operations, (ii) support of banking offices, (iii) resolution planning, and (iv) other macroprudential supervisory approaches. The letter also summarizes the FRB’s supervisory activities designed to assess each firm and support these goals. The framework applies to (i) Large Institution Supervision Coordinating Committee (LISCC) firms, (ii) domestic bank and savings and loan holding companies with consolidated assets of $50 billion or more that are not included in the LISCC portfolio, and (iii) foreign banking organizations with combined assets of U.S. operations of $50 billion or more that are not included in the LISCC portfolio.

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