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  • 6 Record Search Lessons From $43M Clydesdale Bank Penalty
    June 23, 2015
    Manley Williams & Nadav Ariel

    Clydesdale Bank PLC was recently hit with a more-than-$43 million fine, largely because it failed to search for documents that should have been subject to its destruction policy, and for misleading consumers and its regulators about the searches. The U.K.’s Financial Conduct Authority (FCA), which is something like the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Trade Commission and the U.S. Securities and Exchange Commission rolled into one, imposed this £20,678,300 fine on April 14, 2015, and issued a detailed notice explaining how it arrived at such a fine. The facts discussed here are as represented by the FCA in its order. 

    As the recent Libor cases have shown, the U.S. and U.K. bank regulators are often found chasing the same fox. Accordingly, the FCA’s notice provides valuable lessons for all U.S. financial institutions, not only those who do business in the U.K.

    Originally published in Law360; reprinted with permission. 


  • FDIC Director Suits: Lessons Learned, 2nd Edition
    June 22, 2015
    David Baris & Loyal Horsley

    David Baris and Loyal Horsley authored “FDIC Director Suits: Lessons Learned, 2nd Edition,” which was published by the American Association of Bank Directors (AABD). 

    The AABD produced this updated review of the FDIC's civil suits against directors of failed banks and savings institutions to find out what directors of open banks can learn from the 104 complaints (involving more than 793 directors) filed from July 2010 through January 2015. The 2nd edition features 70 new cases to assist AABD members and others who currently serve as bank directors in helping to avoid the fate of those who have been sued.

    Click here to learn more or to purchase the book from Amazon.

  • Mortgage Industry Continues to Bear Brunt of CFPB Regulatory Burdens
    June 12, 2015
    Elizabeth McGinn & Moorari Shah

    In recent years, mortgage industry players have had to quickly adapt to the evolving regulatory environment. The latest scramble for mortgage lenders includes the downstream effects of pending rule changes related to disclosures required in implementing regulations of the Truth-in-Lending Act ("TILA") and the Real Estate Settlement Procedures Act ("RESPA"), set to take effect on August 1. A critical factor to successful implementation of this historic set of rule changes is coordinating with various vendors to address new timing and information requirements for Loan Estimates and Closing Disclosures. Undoubtedly, these rule changes are creating project management nightmares for mortgage professionals growing weary of the regulatory onslaught of revised regulations and enforcement actions. Despite the relative speed with which many companies have adapted to various rule changes since the CFPB came online, managing service providers through the changes continues to test the strength of the deep mortgage lender relationships in place in the industry for decades.

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

  • US v. Heinz May Bolster Expansive FIRREA Interpretation
    June 11, 2015
    Andrew W. Schilling & Caroline K. Eisner

    The U.S. Department of Justice’s aggressive use of the Financial Institutions Reform, Recovery, and Enforcement Act to sue banks for fraud just received an unexpected boost, and from an unlikely source: In a criminal case decided last week,the Second Circuit endorsed an expansive approach to the application of FIRREA to frauds that “affect” a financial institution, including frauds in which the bank is not the target of the fraud.

    While the case arose in the criminal context, its impact on civil FIRREA enforcement could be significant, as courts grapple with the government’s “reflective” theory of FIRREA. That theory posits that a financial institution can violate FIRREA by engaging in a fraud that “affects” itself. This controversial theory has been upheld in three district court cases in the Southern District of New York, one of which is currently on appeal to the Second Circuit.

    Originally published in Law360; reprinted with permission. 

Knowledge + Insights

  • Special Alert: Supreme Court Upholds Disparate Impact Under Fair Housing Act, But Emphasizes Limits on Such Claims
    June 25, 2015

    Today, 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). In a 5-4 decision, the Court concluded that the use of the phrase “otherwise make available” in Section 804 of the Fair Housing Act supports disparate-impact claims. The Court also held that Section 805 of the Fair Housing Act (which applies to lending) permits disparate impact, reasoning that the Court “has construed statutory language similar to § 805(a) to include disparate-impact liability.” The Court also wrote that the 1988 amendments to the Fair Housing Act support its conclusion because (1) all the federal Courts of Appeals to have considered the issue at that time had held that the FHA permits disparate-impact claims; and (2) the substance of the amendments, which the Court characterized as exceptions from disparate impact, “is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”

    The Court emphasized, however, that “disparate-impact liability has always been properly limited in key respects . . . ” Specifically, the Court explained disparate-impact liability must be limited so companies “are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” “Entrepreneurs must be given latitude to consider market factors,” the Court explained. The Court clarified further that a variety of factors, including both “objective” and “subjective” factors, are “legitimate concerns.”

    To prevent what the Court characterized as “abusive disparate-impact claims,” the Court emphasized that the three-step burden-shifting framework used to analyze disparate-impact claims must be applied rigorously by courts and government agencies. At the first step in the framework, 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.”

    With respect to the second step of the framework, the Court, citing the seminal Title VII case of Griggs v. Duke Power, further 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 stated that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.”

    Finally, under the third step of the framework, 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, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.

    Without a rigorous application of this burden shifting framework, the Court cautioned that disparate-impact liability could be used to replace 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).

    Although the Court did not expressly address whether its decision invalidates HUD’s disparate impact rule with its expansive burden shifting framework, the decision also does not rely on or defer to the discussion of the burden shifting framework contained in HUD’s disparate impact rule, notwithstanding the HUD rule’s extensive treatment of the burden shifting framework for disparate-impact claims under the FHA. The dissenting justices, however, concluded that given what they called “this unusual pattern” regarding the promulgation of the HUD rule, “there is an argument that deference may be unwarranted."

  • Special Alert: CFPB Issues Proposal to Delay TRID Rule Until October 3
    June 24, 2015

    The CFPB issued a proposed rule today to delay the effective date of the TILA-RESPA Integrated Disclosure (“TRID”) rule, including all amendments, from August 1 to October 3, 2015. The proposed delayed effective date is two days later than the date announced last week so that the effective date falls on a Saturday. The CFPB chose Saturday because it “may allow for smoother implementation by affording industry time over the weekend to launch new systems configurations and to test systems. A Saturday launch is also consistent with existing industry plans tied to the Saturday August 1 effective date.”

    The proposed rule explains that, due to “an administrative error on the Bureau’s part in complying with the [Congressional Review Act]…, the [TRID] Rule cannot take effect until at the earliest August 15, 2015.” Because “some delay in the effective date is now required, the Bureau believes that a brief additional delay may benefit both consumers and industry more than would allowing the new rules to take effect on [August 15].” The Bureau stated that the additional delay is being proposed to avoid challenges associated with a mid-month effective date and to allow more time to implement the rule in light of recent information the CFPB received that “delays in the delivery of system updates have left creditors and others with limited time to fully test all of their systems and system components to ensure that each system works with the others in an effective manner.”

    The proposed rule does not include any substantive changes to the TRID rule, other than changes to reflect the new proposed effective date. Despite requests by many in industry, the Bureau did not propose to allow lenders to begin complying with the rule before the effective date.

    Comments must be received on or before July 7, 2015.

    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 Will Propose to Delay TRID Rule Until October 1
    June 17, 2015

    Two weeks after declining requests from industry and members of Congress for delayed enforcement of the TILA-RESPA Integrated Disclosure (“TRID”) rule, the CFPB announced today that it will be issuing a proposed amendment to delay the rule’s effective date from August 1 to October 1, 2015.  CFPB Director Richard Cordray stated:
     
    "We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks. We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time."

    The announcement further stated that “[t]he public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter.”

    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: Second Circuit Decision Threatens to Upset Secondary Credit Markets
    June 12, 2015

    The Second Circuit Court of Appeals’ recent decision in Madden v. Midland Funding, LLC 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. In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party. If left undisturbed, the Court’s decision may well have broad and alarming ramifications. The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.

    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.

  • Spotlight on Vendor Management: Mortgage Industry Continues to Bear Brunt of CFPB Regulatory Burdens
    June 12, 2015
    Elizabeth McGinn & Moorari Shah

    Mortgage industry players have had to adapt quickly in recent years to the evolving regulatory environment, and the latest scramble for mortgage lenders includes the various downstream effects of pending rule changes set to take effect on August 1, 2015, related to disclosures required under the implementing regulations of the Truth-in-Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). A critical factor to successful implementation of this historic set of rule changes, known as the TILA-RESPA Integrated Disclosure (“TRID”) rule, is coordinating with various vendors to address new timing and information requirements for Loan Estimates and Closing Disclosures, which are creating project management nightmares for mortgage professionals growing weary of the regulatory onslaught of revised regulations and enforcement actions.

    “Despite the relative speed with which many companies have adapted to various rule changes since the CFPB came online, there seems to be a new rule change waiting in the wings at almost every turn,” observed Elizabeth McGinn, Partner in the D.C. office of BuckleySandler. “To make matters worse, managing service providers through the changes has undoubtedly tested the strength of deep industry relationships that have been in place for decades.”

    Synchronizing TRID-related changes with third party mainstays throughout the origination and closing processes has required extensive planning with mortgage brokers, software vendors, title companies, and closing agents, all of whom play a significant role in ensuring that Loan Estimates and Closing Disclosures (and any revisions thereto) are delivered to borrowers in an accurate and timely fashion. Importantly, as the CFPB has made clear repeatedly in stating its vendor management expectations, the mortgage lender will bear primary responsibility for any failure to comply with the new TRID rules, regardless of whether such failures are the result of vendor missteps.

    “There is a lot of concern that vendors and various critical third parties will not be up to the task,” notes Moorari Shah, Counsel in BuckleySandler’s Los Angeles office. “As a result, we are seeing a number of companies revising service provider contracts in an effort to have better visibility and control over the end-to-end process of loan origination.”

    While many will sweat through the summer months in hopes of a flawless transition, TRID represents just the latest vendor management test for an industry that has already perspired through plenty. McGinn and Shah also recommend that legal and compliance personnel take note of recent guidance and enforcement actions which raise vendor management issues specific to the mortgage industry, including oversight of (i) mortgage servicers, (ii) mortgage advertising companies, and (iii) relationships between loan officers and title companies.

    Mortgage Servicers

    Amongst the most difficult adjustments companies have had to make has been increased oversight of mortgage servicers, which continues to consume considerable compliance resources and expense. Regulators are focused in particular with ensuring that servicers (i) have instituted policies and procedures consistent with new regulations and guidance, and (ii) comply with collections and credit reporting requirements:

    • Under the revisions to Regulation X that took effect in January 2014, the CFPB may now cite an institution for failure to maintain policies and procedures reasonably designed to, among other things, facilitate (i) ready access to accurate and current documents and information reflecting actions taken by service providers, and (ii) periodic reviews of service providers. See 12 C.F.R. § 1024.38(b)(3). The Bureau explained at the time it proposed § 1024.38(b)(3), that the new regulation was designed to address evaluations of mortgage servicer practices that had found that some major servicers ‘‘did not properly structure, carefully conduct, or prudently manage their third-party vendor relationships,” citing deficiencies in monitoring foreclosure law firms and default management service providers as key examples. Going forward, the CFPB expects that servicers seeking to demonstrate that their policies and procedures are reasonably designed to achieve these objectives will demonstrate that, in fact, the servicer has been able to use its information to oversee its service providers effectively.
    • The compliance burdens on servicers are also evident in the latest CFPB guidance on mortgage servicing transfers. Bulletin 2014-01, Compliance Bulletin and Policy Guidance: Mortgage Servicing Transfers, was issued August 19, 2014, and outlines a number of CFPB expectations of servicers in connection with the transfer of mortgage servicing rights, including potentially preparing and submitting informational plans to the Bureau describing how the servicers will be managing the related risks to consumers. In this regard, a primary focus of Bulletin 2014-01 is signaling that the CFPB is committed to enforcing the new servicing transfer rules under RESPA, which, requires servicers to, among other things, maintain policies and procedures that are reasonably designed to achieve the objectives of facilitating the transfer of information during mortgage servicing transfers and of properly evaluating loss mitigation applications.
    • It should come as no surprise that one of the primary vendor management implications of the evolving regulatory requirements described above is that ongoing compliance will likely require significantly more dedication of financial and human resources for most mortgage servicers to comply. However, the cost of non-compliance can be substantially more devastating. Consider the troubles of one of the largest nonbank servicers that entered into a $2 billion settlement with the CFPB, authorities in 49 states, and the District of Columbia under a joint enforcement action in December 2013 over allegations related to charging customers unauthorized fees, misleading customers about alternatives to foreclosure, denying loan modifications for eligible homeowners, and sending robo-signed documents through the courts during the foreclosure process. Just one year later, in December 2014, the same servicer entered into a $150 million settlement with the New York Department of Financial Services in connection with allegations of mishandling foreclosures, abusing delinquent borrowers, and failing to maintain adequate systems for servicing hundreds of billions of dollars in mortgages. In each consent order, the failure to maintain reasonable policies and procedures and engage in appropriate vendor oversight was highlighted as a finding by the regulators.
    • In addition to ensuring that mortgage servicers are implementing adequate policies and procedures with respect to vendor oversight, federal agencies have also been attentive to debt collection and credit reporting practices of mortgage servicers. A joint enforcement action by the FTC and CFPB in April of this year was critical of the servicer, in part, for allegedly (i) threatening arrest and imprisonment to consumers that were behind on payments and placing collection calls outside of the daily call window permitted under the Fair Debt Collections Practices Act (15 U.S.C. 1692 et seq.), and (ii) furnishing inaccurate credit information to consumer reporting agencies in violation of the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) even after consumers indicated that they had reported the inaccuracies to the servicer. The servicer agreed to a $63 million settlement with the FTC and CFPB to resolve the matter.

    Mortgage Advertising Companies

    The CFPB has taken direct aim at deceptive mortgage advertisements in 2015, particularly those that imply an affiliation with programs offered by the U.S. government. At least a handful of enforcement actions have been announced by the Bureau during the first half of the year, including a simultaneous announcement in February against three private mortgage lenders that sent mailings simulating notices from the U.S. government despite the fact that none of the companies had any connection to a government agency. In bringing these actions, the CFPB made note of the customary practice of mortgage brokers and mortgage lenders to hire marketing companies to produce advertisements for mortgage credit products:

    • In the two matters that resulted in consent orders (n.b., the third matter is still pending), the CFPB compelled the companies to (i) pay a civil monetary penalty for which they could not seek indemnification from any of the marketing companies that assisted with producing the advertisements, and (ii) carefully review henceforth any proposed marketing materials prepared by such marketing companies for compliance specifically with the Mortgage Acts and Practices Rule (Regulation N, 12 C.F.R. § 1014.3(n)), and the Dodd-Frank Act, which generally prohibits unfair, deceptive, and abusive acts and practices (12 U.S.C. §§ 5531(a), 5536(a)(1)(B)).
    • In terms of vendor management, a key takeaway from these enforcement actions is that the CFPB expects mortgage lenders to take the same precautions with mortgage advertising companies as they are required to do with any other service provider that interacts with customers, inclusive of appropriate due diligence and oversight. Treating mortgage advertising companies as service providers has taken some in the industry by surprise as such companies have generally been viewed as marketing partners rather than service providers for mortgage brokers and lenders, and often receive a marketing fee for any advertisement that yields a new origination. Note also that the general expansion of third parties that qualify as “service providers” under Dodd-Frank is in keeping with various CFPB enforcement actions taken against ancillary and add-on product providers in the credit card and auto finance industries.

    Relationships between loan officers and title companies

    Another area of focus for the CFPB has been referrals made by loan officers to title companies in exchange for cash and marketing services:

    • In April of this year, the CFPB joined forces with Maryland Attorney General to take action against several loan officers for their alleged participation in steering title insurance and closing services to a title company in exchange for the loan officers’ receipt of marketing services and cash from the title company. The consent orders, in addition to outlining RESPA violations which prohibit the giving of a “fee, kickback, or thing of value” in exchange for a referral of business related to a real estate settlement service (12 U.S.C. § 2607(a)), barred each of the loan officers from the mortgage industry for a period of years. The April announcements were follow-on enforcement actions to ones that the CFPB had announced in January against two large banks stemming from allegations that the banks’ loan officers had participated in similar schemes with the same (now defunct) title company.
    • The potential for RESPA violations presents another compliance challenge for mortgage lenders to increase their oversight of not only third party title companies, but also the lender’s own loan officers that may be engaged, wittingly or unwittingly, in potentially illegal activity. In addition to enhanced RESPA training for loan officers and title companies, mortgage lenders may need to increase their monitoring and auditing activities of interactions between loan officers and title companies to further mitigate the risk of RESPA violations.

    Note: This article previously appeared in the June 12, 2015, issue of Mortgage News Daily.