On November 19, the DOJ, other federal authorities, and state authorities in California, Delaware, Illinois, and Massachusetts, announced a $13 billion settlement of federal and state RMBS civil claims, which were being pursued as part of the state-federal RMBS Working Group, part of the Obama Administration’s Financial Fraud Enforcement Task Force. The DOJ described the settlement as the largest it has ever entered with a single entity. Federal and state law enforcement authorities and financial regulators alleged that the bank and certain institutions it acquired mislead investors in connection with the packaging, marketing, sale and issuance of certain RMBS. They claimed the institutions’ employees knew that loans backing certain RMBS did not comply with underwriting guidelines and were not otherwise appropriate for securitization, yet allowed the loans to be securitized and sold without disclosing the alleged underwriting failures to investors.The agreement includes $9 billion in civil penalties and $4 billion in consumer relief. Of the civil penalty amount, $2 billion resolves DOJ’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion resolves federal and state securities claims by the NCUA, $515.4 million resolves federal and state securities claims by the FDIC, $4 billion settles federal and state claims by the FHFA, while the remaining amount resolves claims brought by California ($298.9 million), Delaware ($19.7 million) Illinois ($100.0 million), Massachusetts ($34.4 million), and New York ($613.0 million). The bank also was required to acknowledge it made “serious misrepresentations.” The agreement does not prevent authorities from continuing to pursue any possible related criminal charges.
On December 2, the U.S. Court of Appeals for the Fifth Circuit held that a set of parens patriae suits filed by the Mississippi Attorney General (AG) against credit card issuers is not subject to federal jurisdiction under the Class Action Fairness Act (CAFA) or National Bank Act (NBA) preemption. Hood v. JP Morgan Chase & Co., No. 13-60686, 2013 WL 6230960 (5th Cir. Dec. 2, 2013). The consolidated appeal involves cases originally filed by the AG in state court against six credit card issuers for allegedly violating the Mississippi Consumer Protection Act in connection with the marketing, sale, and administering of certain ancillary products, including payment protection plans. After the card issuers removed the cases, a federal district court denied the state’s motion to remand, holding that it had subject matter jurisdiction because: (i) the cases were CAFA mass actions; (ii) the NBA (and the Depository Institutions Deregulation and Monetary Control Act for one state-chartered bank defendant) preempted some of the state law claims; and (iii) it had supplemental jurisdiction over the remaining state law claims. The Sixth Circuit disagreed and held that the card issuers failed to prove that any card holder met CAFA’s individual amount in controversy requirement, rejecting the issuers’ argument that the state is the real party in interest and its claims for restitution and civil penalties exceed the threshold. The court also rejected the issuers’ argument—and the district court’s holding—that the payment protection plans were part of the loan agreement and the fees associated with the plans constitute “interest,” such that the state’s challenge to the plans was an implicit usury claim preempted by the NBA. Instead, the court held that while the plans could conceivably fit within the definition of “interest,” there is no clear rule on this subject that demands removal. Moreover, the court held that even if the payment protection plan fees are “interest,” the claims still would not be preempted because the state does not allege that the issuers charged too much interest, but rather challenges the alleged practice of improperly enrolling customers in the plans. The court reversed the district court and remanded for further proceedings consistent with its opinion.
On October 17, Nevada Attorney General (AG) Catherine Cortez Masto announced that she had finalized an agreement with a financial institution that requires the financial institution to pay $11.5 million, without admitting fault, to resolve the AG’s investigation into the financial institution’s role in purchasing and securitization of subprime, Alt-A, and payment option adjustable rate mortgages. The investigation focused on whether certain lenders had deceived borrowers about the actual interest rate and payments on their loans, and had originated loans with multiple risk features that led to approval of loans without proper consideration of the borrowers’ ability to repay. The investigation also examined the extent to which the financial institution was aware of the lenders’ allegedly deceptive practices when it bought the loans, and whether the financial institution facilitated these lending practices by financing and purchasing such loans. In addition to the monetary penalty, the agreement stipulates that the financial institution will: (i) only finance, purchase, or securitize subprime mortgage loans in Nevada if it has engaged in a review of such loans and determined that the loans comply with the Nevada Deceptive Trade Practices Act and (ii) not securitize loans where upon review it has reason to believe that the lender has not adequately disclosed to the borrowers the existence of an initial teaser rate, the potential for negative amortization on a loan, the maximum adjusted interest rate or payments, and the potential for payment shock if payments increase after a loan reset or recast.
On October 3, Delaware Attorney General Beau Biden (DE AG) announced that his office sent letters to nearly 30 lending institutions asking for information about their compliance with the Servicemembers Civil Relief Act (SCRA). The letters ask the financial institutions to provide by October 16: (i) documentation of any internal SCRA compliance review, including the findings of any such review; (ii) all written policies, procedures and practices in place used to verify SCRA compliance; (iii) the number of customer files reviewed for SCRA compliance, both in Delaware and nationwide; (iv) documentation concerning any SCRA violations identified during reviews; (v) all written policies, procedures, and practices in place concerning the provision of remediation to account owners to address any judgments obtained in error or other actions taken in violation of the SCRA; (vi) documentation of steps taken to prevent future SCRA violations; and (vii) all SCRA employee training materials. The DE AG also sent a letter to the chairmen of the U.S. House and Senate veterans’ affairs committees, urging the lawmakers to change federal to allow state attorneys general to prosecute SCRA violations.
On October 2, New York Attorney General Eric Schneiderman (NY AG) announced actions to address alleged failures by two servicers to comply with certain of the 304 servicing standards established by the National Mortgage Servicing Settlement. In May, the NY AG threatened to sue both servicers based on borrower complaints that the servicers were not fulfilling their settlement obligations. The NY AG now has initiated proceedings to enforce the terms of the settlement against one of the banks, alleging numerous servicing deficiencies. In exchange for the NY AG suspending planned legal action against the second servicer, that servicer entered an agreement pursuant to which it is required to, among other things, (i) designate staff with decision-making authority to every housing counseling and legal services agency within the NY AG’s Homeowner Protection Program, (ii) revise the letters it uses to request from borrowers missing documents or information needed to complete a loan modification, (iii) halt the sale of mortgage servicing rights to third parties on New York mortgages when borrowers are already in negotiations for a loan modification or are making trial payments on a loan modification, and (iv) allow borrowers’ attorneys permission to negotiate loan modifications directly with bank staff, as opposed to the bank’s outside foreclosure lawyers.
On September 30, the NY AG announced settlements with five companies that collected debts on allegedly illegal payday loans. The AG alleged that the companies collected on behalf of payday lenders who allegedly made illegal loans; under state law, the maximum allowable interest rate is 16% for most lenders not licensed by the state. In August, the NY AG sued payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. In March, the New York Department of Financial Services warned third-party debt collectors that it is illegal to attempt to collect a debt on an illegal payday loan made in New York, even if such loans were made on the Internet, and followed up with a similar warning to lenders in August. The NY AG’s settlement requires the five companies collectively to pay approximately $280,000 in restitution and $30,000 in penalties. One of the companies is required to reverse negative reporting to the credit reporting bureaus related to approximately 8,550 consumer accounts. In addition, all of the companies will be prohibited from collecting on payday loans from New Yorkers in the future.
On September 9, Massachusetts Attorney General Martha Coakley (AG) announced the state’s fourth mortgage-securitization related enforcement action. The AG alleged that during 2006 and 2007 a U.K. bank financed, purchased, and securitized residential loans that were presumptively unfair under Massachusetts law. Under an Assurance of Discontinuance, the bank, without admitting the allegations, agreed to pay $36 million to resolve the state’s claims. Under the terms of the agreement over $25 million will be dedicated to principal reduction and related relief for more than 450 subprime borrowers, while approximately $2 million will compensate municipalities that claim to be impacted by foreclosures resulting from the allegedly faulty loans.
On August 12, New York Attorney General (AG) Eric Schneiderman announced a lawsuit against payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. The AG claims that the companies charged annual interest rates from 89% to more than 355% to thousands of New York consumers, which rates far exceed the 16% rate cap set by state law. The AG joins the FTC and other state attorneys general who have acted against some of these and other Internet lending companies. Federal and state authorities more generally have been ratcheting up their scrutiny of online lending, and the AG’s action follows an inquiry initiated last week by the New York Department of Financial Services concerning payday lending. The AG states that his investigation began last fall. He is seeking a court order prohibiting the companies and individuals from engaging in further illegal lending or enforcing existing usurious loan contracts, cancellation of all outstanding loans, restitution for borrowers of all interest collected above the legal limit of 16% interest, disgorgement of profits, and penalties of up to $5,000 per violation for deceptive acts and practices.
On August 6, the Special Inspector General for the Troubled Asset Relief Program (TARP), the FDIC Office of Inspector General, and Illinois Attorney General Lisa Madigan announced criminal charges against former members of the board of directors and senior executives at a bank that received funds under the TARP program. The authorities allege that the former directors and officers concealed the bank’s financial condition from state regulators, while the board chairman allegedly solicited and demanded bribes in exchange for business loans and lines of credit. The authorities charge that over a six year period, the officers submitted numerous fraudulent reports to their Illinois regulator and used money from third parties to make payments on several bank loans that were pasts due. During this period, the bank applied for and obtained TARP funds that were used to further the officers’ criminal scheme.
On July 29, Georgia Attorney General (AG) Sam Olens announced a lawsuit against a payday lending operation affiliated with a Native American Tribe for allegedly making illegal loans in that state. The AG asserts that the state’s Pay Day Lending Act specifically prohibits the making of payday loans, including the making of payday loans to Georgia residents through the Internet. The AG alleges, based on an investigation conducted after receiving numerous consumer complaints, that (i) the payday lender makes high interest payday loans to Georgia consumers over the Internet despite not having a license to lend in that state, (ii) the lender has continued to electronically withdraw funds from consumers’ bank accounts even after the consumers have repaid the full amount of the principal on the loan, and (iii) the loan servicer has harassed consumers with repeated telephone calls, obscene and abusive language, threats of wage garnishment or other legal action. In his complaint, the AG rejects claims by the defendants that their lending activities are governed solely by tribal laws, stating that only Georgia law governs loan agreements with Georgia borrowers. According to the AG, efforts to resolve the issue without litigation were undermined by the defendants’ continuing illegal activity. The AG is seeking (i) to enjoin the operation from making or collecting on any loans, (ii) a declaration that any pending loans are null and void, and (iii) civil penalties and attorneys’ fees. Georgia is among several states, in addition to the FTC, to take action against this operation. For example, earlier this month Minnesota Attorney Lori Swanson filed suit a similar suit against the same operation targeted by the Georgia suit.
On August 1, the U.S. District Court for the District of Columbia dismissed in its entirety a lawsuit that challenged Titles I, II, and X of the Dodd-Frank Act as unconstitutional. The lawsuit was brought originally by three private parties and later joined by several state attorneys general. The court determined that that the plaintiffs lacked standing and had not demonstrated injury sufficient to permit a challenge of the law on any of their claims.
The private plaintiffs’ challenge to Title X, which created the CFPB, was based on “financial injuries directly caused by the unconstitutional formation and operation of the [CFPB,]” including substantial compliance costs, increased costs of doing business, and forced discontinuance of profitable and legitimate business practices in order to avoid risk of prosecution. The court concluded that such “self-inflicted” harm could not confer standing to challenge Title X. With respect to the private plaintiffs’ challenge to the Financial Stability Oversight Council (FSOC) created by Title I, the court concluded that while an unregulated party is not precluded from establishing standing to challenge the creation and operation of FSOC, standing is “substantially more difficult to establish” under such circumstances and the theories asserted by the plaintiffs were too remote to confer standing.
Both the private plaintiffs and the state attorneys general challenged Title II, claiming that the “orderly liquidation authority” (OLA) provisions violate the separation of powers, deny due process to creditors of a liquidated firm, and violate the requirement for uniformity in bankruptcy. The court again concluded that none of the plaintiffs established either present or future injury sufficient to confer standing to challenge the OLA.
According to media reports, an appeal of the ruling by at least one of the private plaintiffs is anticipated.
On July 18, Virginia Attorney General Ken Cuccinelli (AG) announced a lawsuit against an online lender for allegedly making illegal payday loans in the state. The AG explained that the Virginia State Corporation Commission requires every payday loan lender to obtain a license before conducting business in Virginia. The AG asserts that the lender did not obtain the required license. State law limits unlicensed lenders to charging no more 12% in annual interest on a loan. The AG alleges that the rates on the online lender’s loans range from 438% annually for a 25-day loan to 1,369% annually for an eight-day loan. The AG stated that the company instructs customers to apply for loans through its website, and after the loan applications are approved, the company wires funds directly to the consumers’ bank accounts in exchange for authorizing the company to directly debit loan payments from the customers’ bank accounts. The suit seeks to enjoin the company from collecting interest over the 12% state limit, and seeks consumer reimbursement of certain interest paid and civil penalties in the amount of $2,500 for each violation.
On July 11, a group of Democratic Senators urged the CFPB and the Department of Labor to “take swift action” regarding prepaid payroll cards. The Senators expressed concern that workers do not understand the “excessive fees” and “harmful practices” associated with such cards, and suggested that those fees and practices – specifically, those relating to ATM use, balance inquiry, swipe purchases, overdraft, and inactivity, among others – may violate the Electronic Funds Transfer Act and its implementing regulation, Regulation E. The lawmakers asked the CFPB to conduct a study to better understand these fees and their impact on workers, and to clarify through a rulemaking or other supervisory action the options employers must provide to their employees under Regulation E. The Senators’ letter follows reports of an investigation by New York Attorney General Eric Schneiderman into potential state law violations related to employers’ use of payroll cards.
On July 11, the Denver Post reported that Colorado Attorney General (AG) John Suthers is investigating whether foreclosure law firms are inflating fees that are added to the cost of the foreclosure and mortgage balance, and subsequently are passed on to borrowers, lenders, and investors. The AG has not filed charges against any firms, but has moved to enforce subpoenas his office issued seeking information from numerous law firms about the foreclosure fees they charged. The investigation covers all costs claimed by the firms, including costs related to posting foreclosure notices on homeowners’ doors, which the AG claims substantially exceed the market rate.
On July 1, California Attorney General Kamala Harris (AG) released a report analyzing data breaches reported to her office in 2012, the first year companies were required to report to the AG any breach involving more than 500 state residents. The report identifies 131 data breach incidents that put the personal information of 2.5 million individuals at risk. The AG noted that the report is not required by the law, but provides support for the AG’s recommendations to companies, law enforcement agencies, and the legislature about how data security could be improved. Those policy recommendations focus on (i) data encryption, (ii) information security, (iii)notice letters, and (iv) the definition of personal information.
Specifically, the AG claimed that the information for 1.4 million Californians would have been protected if companies had encrypted data, and urges companies to encrypt digital personal information when moving or sending it out of their secure network. The AG pledged to prioritize enforcement investigations of breaches involving unencrypted personal information. The AG’s report notes that a large percentage of breaches surveyed resulted from the failure of information security controls and references requirements under state law to protect the personal information of California residents.
The AG also stated that companies should make their data breach notices to consumers easier to read, and that the state legislature should consider expanding breach notice requirements to cover breaches involving passwords. The AG highlighted a pending bill, SB 46, that would revise the notice requirement’s definition of personal information to require reporting of breaches involving information that would permit access to an online account - user name or email address, in combination with a password or security question and answer. That bill has already passed the state Senate and was approved by the Assembly’s Judiciary Committee. It is scheduled to be considered by the Assembly’s Appropriations Committee on July 3, 2013.