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  • Individual and Coordinated Prosecutors Accelerate - Along With The Challenges
    August 14, 2015
    David Krakoff, Lauren Randell, Veena Viswanatha & Mehul Madia

    For years, federal and state prosecutors have touted their willingness to charge individuals as an essential deterrent to white-collar criminal action, often responding to criticism of prosecutions of corporate entities without any accompanying prosecution of related executives. And for years, those statements in large part remained just statements, without significant numbers of individual prosecutions backing them up. Despite ongoing criticism of the Department of Justice (DOJ) for its failure to prosecute major bank executives for their alleged role in the financial crisis, individual prosecutions have recently begun an inexorable rise, finally matching the rhetoric, particularly in the insider trading and foreign bribery spaces. While not all high-profile individual prosecutions have been successful, the increased risk of individual prosecution is undeniable.

    At the same time, as the interconnected global economy magnifies the effects of corporate actions around the world, US prosecutors are not the only ones facing pressure to bring enforcement actions against perceived multinational wrongdoers. Increasingly, US prosecutors are working in coordination with their foreign counterparts, sharing information and even, in certain cases, deferring to the enforcement actions of foreign prosecutors without an accompanying US action.

    Below we examine both of these trends, each of which amplifies the risks for a company or individual facing investigation and complicates the task of defending against those enforcement actions.

    Originally published in the American Bar Association's Criminal Justice Journal (Vol. 30, (2), Summer 2015). Reprinted with permission.

  • Marketing Services Agreements: Reinterpreting the Wheel
    August 5, 2015
    Jeffrey P. Naimon, Caitlin M. Kasmar, & Alexander D. Lutch

    Marketing services agreements (“MSAs”) have been standard mortgage industry practice for decades. While Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) prohibits entities and individuals from giving or receiving “any fee, kickback, or thing of value” pursuant to an agreement to refer settlement service business to any person, it also contains a safe harbor provision which appears to permit MSAs as long as the compensation paid is bona fide and in exchange for services performed (“nothing 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”) .

    Federal regulators have historically interpreted Section 8 to permit MSAs, under which two or more entities—typically settlement service providers—enter into an arrangement whereby one company is paid to advertise (or provide other non-referral marketing services for) another company’s settlement services to its customers or the general public. Despite widespread usage in the industry and historical acceptance of MSAs by federal banking agencies, recent Consumer Financial Protection Bureau (“CFPB”) enforcement activity has led to new concerns about their viability going forward.

    Click here to read the full article at www.mortgagecompliancemagazine.com 

  • Regulators Turn Up Heat on Vendor Management
    August 3, 2015
    Elizabeth McGinn & Moorari Shah

    The vendor landscape for companies in the mortgage industry has shifted significantly in recent years. State and federal regulators have levied hefty and often unprecedented fines against a number of supervised institutions because of inadequate vendor-management policies and ineffective vendor oversight.

    The Consumer Financial Protection Bureau (CFPB), four years old as of July, has been particularly aggressive in its enforcement activities against companies for alleged failures to ensure that tasks performed by service providers comply with applicable laws and regulations.

    Equally vigilant are state regulators and the primary federal banking regulators — the Federal Reserve Board (FED) and the Office of the Comptroller of the Currency (OCC). These regulatory agencies also have demonstrated a laser-like focus in singling out companies for their lack of attentiveness to various risks presented to consumers and to financial markets when compliance responsibilities are outsourced to third-party service providers.

    This era of heightened regulatory scrutiny has resulted in several new realities for institutions that rely on external vendors.

    Click here to read the full piece at www.scotsmanguide.com (subscription required)

  • Removing Community Bank Barriers Essential for Growth
    July 29, 2015
    David Baris

    Regulatory red tape has inhibited the formation of new community banks, the hometown institutions that have been the cornerstone of our nation’s financial system for more than a century.

    With our economic recovery advancing at a frustratingly slow pace in many communities, Washington can support local growth by encouraging the formation of more of these community-based institutions.

    Federal regulations have created unreasonable barriers to forming new community banks and have brought new-bank formation to an 80-year low. The Federal Deposit Insurance Corp. has approved just two applications for new federal banking charters, known as de novos, since 2009. From 2000 to 2007, on the other hand, the FDIC approved an average of 159 applications for new banks each year.

    While the economic stagnation itself contributes to fewer de novo bank applications, a recent study by the Federal Reserve Bank of Richmond found that regulatory costs, which have increased in recent years due to a financial crisis caused by the very largest banks, also play a key role. Further, community bankers themselves report that FDIC policies and practices are inhibiting the formation of de novo institutions. Apparently, would-be applicants are overwhelmed by the uncertainty of approval and processing of their applications, ultimately deciding not to subject themselves to those uncertainties.

    Click here to read the full article at www.washingtontimes.com

  • Why Getting the FHA's Loan Servicing Rules 'Right' Matters
    July 15, 2015
    Michelle Rogers, Melissa Klimkiewicz, & Susanna Khalil

    In recent years, servicing U.S. Federal Housing Administration-insured loans has become risky business. The U.S. Department of Housing and Urban Development has heightened its monitoring and enforcement, with servicers experiencing increased Quality Assurance Division (QAD) reviews, HUD Office of Inspector General inquiries, Mortgagee Review Board (MRB) actions and indemnification demands. Additionally, False Claims Act and Financial Institutions Reform, Recovery and Enforcement Act of 1989-based claims have amplified the potential consequences of noncompliance. Indeed, during fiscal year 2014 alone, the U.S. Department of Justice boasted a record $5.69 billion in settlements and judgments from civil cases involving the FCA. These developments have made it particularly important to get the rules “right,” but as nearly all FHA servicers know, that is not an easy feat.

    Originally published in Law360. Reprinted with permission. 

Knowledge + Insights

  • Special Alert: Second Circuit Will Not Rehear Madden Decision That Threatens to Upset Secondary Credit Markets
    August 13, 2015

    Two months ago we issued a Special Alert regarding the decision of the Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, which held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. We explained that the Second Circuit’s reasoning in Madden ignored long-standing precedent upholding an assignee’s right to charge and collect interest in accordance with an assigned credit contract that was valid when made. And, because the entire secondary market for credit relies on this Valid-When-Made Doctrine to enforce credit agreements pursuant to their terms, the decision potentially carries far-reaching ramifications for securitization vehicles, hedge funds, other purchasers of whole loans, including those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to marketplace lending industries and various types of on-line consumer credit.

    After the decision, Midland Funding, the assignee of the loan at issue, petitioned the Second Circuit to rehear the case either by the panel or en banc – a petition that was broadly supported by banking and securities industry trade associations in amicus briefs. On August 12, the court denied that petition.

    Click here to view the full special alert.

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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.

  • Special Alert: CFPB Reports On The Findings From Its "Know Before You Owe" eClosing Pilot Project
    August 6, 2015

    In 2014, the Consumer Financial Protection Bureau (“CFPB”) initiated an eClosing pilot program. The eClosing pilot was intended to assist the CFPB in evaluating the use of electronic records and signatures in the residential mortgage closing process. The pilot program has now been completed and on August 5, 2015, the Consumer Financial Protection Bureau (“CFPB”) released a report detailing its findings (“Report”). In the Report, the CFPB indicates that eClosings present a significant opportunity to enhance the closing process for both consumers and the mortgage industry.

    The pilot program focused on the mortgage closing process and measured borrowers’ (i) understanding (both perceived and actual) of the process, (ii) perception of efficiency, and (iii) feelings of empowerment. The program also sought to quantify objective measures of process efficiency. The program was conducted over four months in 2014 with seven lenders, four technology companies, settlement agents, and real estate professionals. About 3000 borrowers participated in the study – roughly 1200 completed the CFPB’s survey.

    The CFPB sought to determine if an electronic closing process improved the borrowers’ (i) understanding of the transaction, (ii) perception of efficiency, and (iii) feeling of empowerment. These three criteria were measured in multiple ways. To gauge understanding, the borrower was asked about their perceived understanding of the terms and fees, costs, and their rights and responsibilities. To determine the borrower’s actual understanding of their mortgage, they were given an eight question quiz. Five questions were about mortgages generally and three about their mortgage, specifically. To evaluate the efficiency of the transaction, the CFPB measured the difference between eClosings and paper closings in terms of delays, errors in documents, and the time required between steps in the process. Borrowers were also asked about their perceptions concerning efficiency. Finally, in order to gauge the borrower’s feeling of empowerment, the CFPB asked about the borrower’s feelings of control, his or her role, and the role(s) of others in the process.

    Among the key findings of the survey cited by the CFPB:

    • eClosing borrowers felt more empowered, had better perceived and actual understanding of the transaction, and perceived the process as more efficient than a paper-based closing;
    • Delivery of closing documents prior to closing, in particular, improved consumer’s feeling of empowerment and enhanced their perceived and actual understanding of the transaction; and
    • eClosing borrowers tended to have shorter closing meetings and a shorter time frame from clearing the closing documents until the actual closing.

    The CFPB also stated that the eClosing pilot provided insights into practical issues affecting the success of the eClosing process, and expressed the hope that these insights would assist the mortgage industry in further improving the process. The CFPB’s observations included:

    • Certain documents were often still signed on paper because of technology platform limitations, questions about eSignature risks, and the limited availability of electronic notarization services.
    • Hybrid closings (part electronic and part paper) caused some confusion among lenders and investors, and more guidance from investors on the subject of hybrid closing would be desirable.
    • The large number of stakeholders in the mortgage lending process created coordination and acceptance challenges – some ancillary service providers were resistant to the process changes required by eClosings.
    • Mapping closing document packages to eClosing processes proved to be an ongoing challenge during the pilot.
    • Settlement agents and closing attorneys appeared to have a significant learning curve when first being introduced to eClosings.

    The Report signals the CFPB’s ongoing support for continued development and deployment of eClosing processes. The Report concludes:

    Borrowers experiencing eClosing scored higher on average than those experiencing paper closings on many of our measures of perceptions of empowerment, understanding, and efficiency, which suggests that eClosing can be a valuable option for consumers. In particular, eClosing seem to serve as a vehicle to help facilitate two other drivers of empowerment, understanding, and efficiency at closing: early document review and easy integration of educational materials.

    However, the Report also calls upon the mortgage industry, as it moves forward, to conduct further research on the impact of eClosings on the borrower’s experience.


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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.

  • Special Alert: CFPB Officially Delays TRID Rule Until October 3
    July 21, 2015

    The CFPB finalized a rule today that delays the effective date of the TILA-RESPA Integrated Disclosure (“TRID”) rule, including all amendments, from August 1 to October 3, 2015. This is consistent with the proposed rule issued last month, which we wrote about here.
     
    The CFPB considered implementing a “dual compliance period” that would have permitted creditors to voluntarily comply with the TRID rule early, but it ultimately declined to do so, citing concerns that “dual compliance could be confusing to consumers and complicated for industry, including vendors, the secondary market, and institutions who act both as correspondent lenders and originators.”
     
    In addition, although the CFPB declined to create a “hold harmless” or “safe harbor” period following the effective date, it stated that it “continues to believe that the approach expressed in Director Cordray’s letter to members of Congress on June 3, 2015," which we wrote about here, remains fitting:

    [O]ur oversight of the implementation of the Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time. My statement . . . is consistent with the approach we took to implementation of the Title XIV mortgage rules in the early months after the effective dates in January 2014, which has worked out well.

    The rule also implements two technical corrections to the requirements governing the “Calculating Cash to Close” and “Summaries of Transactions” tables in the Closing Disclosure. Specifically, the instructions for the “Adjustments and Other Credits” line are being amended to include the cost of any personal property excluded from the contract sales price. In addition, the instructions for calculating the “Closing Costs Paid at Closing” disclosure in the “Summaries of Transactions” table are being amended to account for general lender credits applied at closing.     

    For additional information and resources on the TRID rule, please visit our TRID Resource Center.

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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.

  • Special Alert: CFPB Launches First Monthly Complaint Report Providing Snapshot of Consumer Trends
    July 17, 2015

    On July 16, 2015, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) launched the first in a new series of monthly complaint reports highlighting key trends from consumer complaints submitted to the CFPB. Importantly, its monthly report provides significant detail on the complaints the CFPB has received, including the names of the companies that received the largest number of complaints. 
     
    Currently, the most-complained-about companies are also the largest bank and nonbank financial institutions in the country. Since these institutions have the highest numbers of customers, it is only natural that they have received the highest number of complaints. On the same day as the monthly report’s release, CFPB Director Richard Cordray provided remarks at an Americans for Financial Reform event in Washington, D.C. Director Cordray noted that in future monthly reports, the CFPB hopes to “normalize” its consumer complaint data by accounting for financial institutions’ respective size and volume. To that end, the CFPB issued a Request for Information seeking input on ways to enable the public to more easily understand company-level complaint information and make comparisons. The comment period closes August 31, 2015.
     
    The report also provides data on complaint volume, state and local complaint information, and trends relating to specific consumer financial products or services. In June 2015, for example, debt collection was the most-complained-about product or service with the 32% of complaints filed with the Bureau, while complaints relating to mortgages and credit reporting were next in line.
     
    Going forward, each monthly report will spotlight a particular financial product and geographic area. In the first report, the CFPB closely examines debt collection complaints and complaints from consumers in Milwaukee, Wisconsin. 
     
    The CFPB began accepting complaints in July 2011 and launched its Consumer Complaint Database in June 2012, which is the nation’s largest public collection of consumer financial complaints. As of July 1, 2015, the CFPB has handled 650,700 complaints.
     
    In its press release for the monthly report, the Bureau issued a reminder that it expects companies to respond to CFPB complaints within 15 days. The Bureau also expects companies to describe the steps they have taken or intend to take to resolve each consumer complaint. In fact, in its monthly report, the Bureau provided statistics on how often certain debt collection companies were “untimely” in responding to complaints.
     
    Notably, the CFPB stressed that complaints inform the Bureau’s work and can directly feed into its supervision and enforcement prioritization process. “Consumer complaints are the CFPB’s compass and play a central role in everything we do. They help us identify and prioritize problems for potential action,” said CFPB Director Cordray. The publication of this monthly report, together with continuing consumer complaint initiatives from the CFPB, highlights the critical importance of developing an effective complaint management program.

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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.

  • Special Alert: Disparate Impact Under the Equal Credit Opportunity Act After Inclusive Communities
    June 27, 2015

    On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.

    Applicability to ECOA

    When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA.

    But just as the federal officials had stated that they would continue to assert disparate impact under ECOA if Inclusive Communities invalidated disparate impact under the FHA, lenders still have a number of arguments that the Inclusive Communities Court’s analysis does not apply to ECOA, given the material differences between the text and history of the FHA and ECOA. First, the Court principally based its textual arguments on the use of “otherwise make unavailable” in Section 804 of the FHA—a section that applies to the sale and rental of housing but not to lending. The Court stated that this effects-based language “is of central importance” to its analysis. Although the Court also stated that it had construed statutory language similar to FHA Section 805—which applies to lending—the discussion of Section 805 is so brief as to suggest it was merely an afterthought. The Court repeatedly states its textual analysis focused on the text “otherwise make unavailable.” But ECOA contains no similar effects-based language.

    Second, the Court’s analysis of the FHA’s amendment history is inapplicable to ECOA. The Court focused principally on three provisions which it characterized as “exemptions” from disparate-impact liability, and concluded that such exemptions made sense only if Congress were acknowledging the validity of disparate impact claims. But ECOA contains no similar “exemptions” from disparate-impact liability that might otherwise lead to the conclusion disparate impact is cognizable under ECOA.

    Finally, while the Court also notes that disparate-impact claims are “consistent with the FHA’s central purpose,” this justification appears merely to support the Court’s textual and historical arguments. The Court has repeatedly cautioned that a statute’s purpose does not trump its text. Whatever similarities may exist between the purpose of the FHA and ECOA, the material textual and historical differences weigh heavily against treating the two statutes the same for disparate-impact purposes.

    Burden Shifting Framework

    Even if the Inclusive Communities analysis could apply to ECOA, the Court’s emphasis on rigorous application of the three-step burden-shifting framework to analyze disparate impact claims—and protect against “abusive disparate-impact claims” —is likely to impose significant burdens on regulators and plaintiffs seeking to bring disparate impact claims under ECOA. The Court’s articulation of the steps in the burden-shifting framework are materially different—and more friendly to lenders—than those applied by federal agencies (e.g., in HUD’s disparate impact rule). While it is possible that the government and private plaintiffs will argue that the burden shifting framework outlined in Inclusive Communities applies only to the FHA, the Court’s reasoning supports applying the same framework to other civil rights laws—including ECOA.

    First, the Court has reaffirmed the significant burden plaintiffs must bear in satisfying the first step of the burden-shifting framework: establishing a prima facie case. The Court noted that a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity to “protect defendants from being held liable for racial disparities they did not create.” “[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The Court emphasized that “prompt resolution of these cases [by courts] is important.” This, when taken together with the Court’s decision in Wal-Mart Stores, Inc. v. Dukes, may make maintaining a disparate impact claim under ECOA particularly difficult when addressing such practices as discretionary pricing (e.g., dealer markup in the auto finance context).

    Second, with respect to the second step of the framework, the Court explained that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The Court noted that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.” Specifically, the Court endorsed the importance of considering “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system” in determining whether a company’s policy is supported by a legitimate business justification. The Court further explained that “entrepreneurs must be given latitude to consider market factors,” as well as other “objective” and “subjective” factors.

    Third, the Court emphasized that before rejecting a “business justification,” a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.” (internal quotations and alterations omitted). Significantly, and in contrast to previous interpretations by federal agencies, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.

    The Court cautioned that a rigorous application of the burden-shifting framework is necessary to prevent disparate-impact liability from supplanting nondiscriminatory private choice: “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers. And that, in turn, would set our Nation back in its quest to reduce the salience of race in our social and economic system.” (internal citations and alterations omitted).