MBA Regulatory Compliance Conference 2011: Litigation Concerns for the Compliance Conference 2010 MBA Professional, Litigation

Including FairTrends Lending and Other Claims

September 26, 2011 Mitchel H. Kider WEINER BRODSKY SIDMAN KIDER PC

Mi t chel H. Ki der Road Map to Todays Talk I. Fair Lending Enforcement

In General Recent Enforcement Trends Discrimination Enforcement Mortgagee Review Board Deutsche Bank Lawsuit Enforcement Authority

II. Federal Trade Commission

III. Dept of Housing and Urban Development

IV. Department of Justice V. Consumer Financial Protection Bureau

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Fair Lending
Agencies doing fair lending reviews/examinations: FTC Prudential Regulators (FDIC, OCC, FRB, etc) HUD/FHA DOJ CFPB (very near future) State regulators and AGs

Claims of fair lending violations can be brought under:

Fair Housing Act Equal Credit Opportunity Act Fair Credit Reporting Act

Truth in Lending Act

Dodd-Frank mandates CFPB to issue regulations to prohibit abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age
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Fair Lending
HMDA Dodd-Frank adds new provisions that will require submission of groupings of applications according to:

Originators ID number Applicants credit score Total points and fees payable at origination Difference between APR for loan & benchmark rate for all loans Loan features such as prepayment penalties, introductory rate periods, and ability to pay other than fully amortizing payments Such other information as CFPB may require
Fair lending will undoubtedly receive greater visibility and CFPB will have additional data under HMDA to support its analyses
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The FTCs Authority in Mortgage Banking

The FTCs jurisdiction is limited to nonbank financial entities, such as nonbank mortgage companies, mortgage brokers, finance companies, and units of bank holding companies. 15 U.S.C. 45(a)(2).
The FTC Act confers jurisdiction only over people or entities organized to engage in for-profit business. See also 15 U.S.C. 45(a)(2).

Banks, thrifts, federal credit-unions, and non-profit organizations fall outside of the FTCs reach.

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FTCs Recent Enforcement Actions

In June 2010, the FTC entered into an agreement with Countrywide Home Loans, Inc. and BAC Home Loans Servicing, LP, to settle allegations of servicing abuse by the two related servicers. The companies agreed to pay $108 million, one of the largest judgments ever imposed in an FTC-related litigation. FTC alleged violations of the FTC Act: inflating the prices of default-related services, including property maintenance As part of the settlement agreement, the companies are permanently barred from: making false or unsubstantiated representations about loan accounts, such as amounts owed; charging any fee for a service unless it is authorized by the loan instruments, by law, or by the consumer for a specific service requested by the consumer; or charging any fee for a default-related service unless it is a reasonable fee charged by a third-party for work actually performed

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FTCs Recent Enforcement Actions

On January 8, 2009, the FTC announced a settlement with three mortgage loan advertisers that allegedly deceptively touted low monthly payments and low rates without disclosing loan terms . . . . alleged that the companies failed to disclose that advertised low monthly payments and low rates only applied for a limited period of time and that the advertised payments did not include the interest owed each month or that the interest would be added on to the total loan balance. The FTC also alleged violations of TILA and Regulation Z for failing to disclose clearly and conspicuously the repayment terms under the loans. The consent order barred parties from advertising any rates lower than that at which the interest is accruing, regardless of whether it was an effective rate, payment rate, or qualifying rate, and also requires record-keeping provisions allowing the FTC to monitor compliance with the order These matters are similar to the new Mortgage Acts and Practices rule

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Mortgage Acts and Practices (MAPS) Rule

The MAPS rule is a comprehensive new advertising and recordkeeping regulation with the potential to greatly affect the mortgage origination and servicing industry, as well as the greater real estate industry that provides complementary services. On July 19, 2011, the FTC issued its Final Rule on Mortgage Acts and Practices (76 Fed Reg. 43826 (July 22, 2011)). The Final Rule is codified at 16 C.F.R. 321.1 321.7. The Final Rule is effective August 19, 2011. Virtually identical to the proposed rule issued for comment in September 2010, with minor, non-substantive changes. This rule was issued pursuant to a direct congressional mandate in the 2009 Omnibus Appropriations Act (Public Law No. 111-8 (March 11, 2009)). New rule defines advertisements broadly and imposes burdensome recordkeeping requirements.
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The MAPS Rule in General

The FTCs intent is to protect prospective borrowers more effectively by establishing clear standards for advertisers, increasing the efficiency of law enforcement efforts, and serving as a deterrent to unlawful behavior. The Rule prohibits any material misrepresentation, either express or implicit, in any commercial communication, regarding any mortgage credit product. Mortage credit product is defined as any form of credit that is secured by real property or a dwelling and that is offered or extended to a consumer primarily for personal, family, or household purposes. A dwelling for the purposes of this rule is a residential structure that contains one to four units, whether or not that structure is attached to real property. It specifically includes condos, co-ops, mobile homes, manufactured homes, and trailers.

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COMMERCIAL COMMUNICATION
The rule establishes specified types of advertisements that are deceptive, and defines advertising, called commercial communications, very broadly:

any written or oral statement, illustration, or depiction, whether in English or any other language, that is designed to effect a sale or create interest in purchasing goods or services, whether it appears on or in a label, package, package insert, radio, television, cable television, brochure, newspaper, magazine, pamphlet, leaflet, circular, mailer, book insert, free standing insert, letter, catalogue, poster, chart, billboard, public transit card, point of purchase display, film, slide, audio program transmitted over a telephone system, telemarketing script, onhold script, upsell script, training materials provided to telemarketing firms, program-length commercial (infomercial), the Internet, cellular network, or any other medium. Promotional materials and items and Web pages are included in the term commercial communication. This definition includes any communication on tv or radio, product labels, packages, package inserts, billboards, webpages, blogs, and any collateral material handed out in branch offices.
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MAPS Recordkeeping Requirement

The Rule imposes a 2-year recordkeeping requirement on all materially different commercial communications.

Copies of all materials showing what products and rates were offered must be kept for 2 years as well.
Copies of all materials showing any additional products or services offered in conjunction with the mortgage credit products offered. The records may be kept in any readable format, and may be kept in the same manner as all other materials that are kept in the ordinary course of business. Failure to keep these records is an independent violation of the Rule. Effective August 19, 2011

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FTC Mortgage Assistance Relief Services Rule

Issued December 1, 2010 16 C.F.R.322 prohibits mortgage assistance relief services providers from misrepresenting in any advertisement: the likelihood of negotiating or otherwise obtaining any result; the amount of time any result may be obtained in; that the provider is affiliated or endorsed by a federal or state government program, or affiliated or endorsed by a lender or servicer; the consumers obligations to make payments; the terms or conditions of the loan; the terms or conditions under which a refund may be obtained for the services provided; the actual services performed by the provider; that the consumer will receive legal representation; the availability of alternatives to the for-profit providers services; the amount of money the consumer may save by using the providers services; and the cost of the providers services.

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FTC Enforcement of MARS Rule

In recent years, the FTC has focused its enforcement activities in the financial services industry on mortgage assistance relief services. Since 2008, the FTC has filed 32 law enforcement actions against providers of mortgage assistance relief services. Among these 32 enforcement actions, the FTC has sought redress for the following types of conduct it has deemed deceptive or unfair: stating that the company can achieve substantial reductions in interest rates, principal amounts, or payments within a specific period of time; stating that the company has a special relationship with the servicer or lender; stating that the company is affiliated with the government, a non-profit organization, or the consumers lender or servicer; and stating that there is a high likelihood or guarantee of success.

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Recent HUD Enforcement Trends: Maternity Status

Lenders have every right to ascertain the incomes of families to determine whether they are eligible for a mortgage loan but they have no right to use a pregnancy or a short-term disability as a cause to deny that family a mortgage they would otherwise qualify for. Having a child should be a time for a family to celebrate and must no be a cause for unfair lending practices. Shaun Donovan, July 21, 2010. Denying a mortgage to people just because theyre having a baby is flat wrong. . . I applaud HUD for taking action on this practice that could potentially affect untold numbers of families. Vice President Joe Biden

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Recent HUD Enforcement Trends: Maternity Status

In May 2011, HUD entered into a settlement agreement with Cornerstone Mortgage Company for allegedly discriminating against a couple on the basis of the mother being on maternity leave Mother claimed that the company pre-qualified her, and after learning she was on maternity leave, informed her that maternity leave is classified as short-term or temporary disability income, and may not be used for qualification on the loan Settlement included a $750,000 fund designed to compensate other potential victims of this practice Required an administrator who sent out notices to all potentially affected borrowers Paid $15,000 directly to the woman who made the complaint Requires additional training on discriminatory practices Requires retention of all records re: obligations under the agreement for one year 15 Requires a report to HUD after one year on the progress of the agreement

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Recent HUD Enforcement Trends: Maternity Status

HUD/DOJ filed a complaint against MGIC alleging violations of Fair Housing Act in their decision to deny PMI to a borrower based on maternity leave USA v. Mortgage Guaranty Insurance Corp., No. 2:11-CV-882, Complaint (W.D. Pa. July 5, 2011); 42 USC 3604(b); 42 USC 3605(a) Borrower was conditionally qualified based on approval by PMI PMI allegedly denied based on maternity leave

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Recent HUD Enforcement Trends: Maternity Status

Not only a HUD trend a class action was filed against MGIC alleging the same facts Neals v. Mortgage Guaranty Insurance Corp., No. 2:10-CV-1291 (W.D. Pa.) The fair housing claims have survived a motion to dismiss 42 USC 3604(b)claim re: limiting services associated with a dwelling based on maternity status survived motion to dismiss 42 USC 3617 claim re: interfering in the exercise or enjoyment of any right granted by the FHA on basis of maternity status survived Neals v. MGIC, No. 2:10-CV-1291, Report and Recommendation (W.D. Pa. April 6, 2011)
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Recent HUD Enforcement Trends: Maternity Status

Neals opinion dismissed claims based on 3604(a) and 3605 3604(a) makes it unlawful to refuse to sell or rent or otherwise make unavailable This claim was dismissed because the transaction was a refinance this may be viable on a purchase transaction under the logic of Neals 3605(a) makes it unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction . . . . This claim was dismissed because providing insurance is not providing financial assistance to the borrower may be viable against a lender under Neal
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HUDs Mortgagee Review Board

Just published list of administrative actions (240/1600) Mortgagee Review Board administrative actions against servicers for MIP issues, payment as well as late reporting

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Deutsche Bank DOJ Lawsuit

The Governments key allegations: Systemic violations in quality control make Deutsche Bank responsible for all FHA losses on the loans at issue Alleged violations (systemic vs. loan level) Dysfunctional quality control system Ignoring QC audits and procedures

Failing to provide guidance

Chronically understaffing QC functions Stuffing QC audits in closet, unread & unopened Failure to perform reviews of EPDs in first 6 months (more than 60 days late) False annual certifications
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Deutsche Bank DOJ Lawsuit

What Can We Learn From This?

Watch your FHA compare ratios. They are used to identify problem lenders
Review QC plan for compliance with FHA rules Make sure that you review all EPDs in first 6 months

Remind underwriters regularly how important it is to document gift funds, cash investment, and the source of a downpayment properly
For servicers, follow HUD Handbook 4330.1 Think broadly of regulatory requirements that may be implicated

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Consumer Financial Protection Bureau

Created in July 2010 by Title X of the Dodd-Frank Act Live as of July 21, 2011 Independent Agency Within the Federal Reserve System Broad Consumer-Protection Mandatenot a prudential regulator Powerful Director President nominates; Senate Confirms Richard Cordray is nominee working his way through the confirmation process currently

Removable only for inefficiency, neglect of duty, or malfeasance in office

Subject to a Systemic Risk Veto
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CFPBs Enforcement Authority:

The Bureau has enforcement authority (with a few exceptions) for the following enumerated consumer laws and for regulations under them: Alternative Mortgage Transaction Parity Act of 1982 (Parity Act) Consumer Leasing Act of 1976

Electronic Fund Transfer Act (except section 920) (EFTA)

Equal Credit Opportunity Act (ECOA) Fair Credit Billing Act Fair Credit Reporting Act (except sections 615(e) and 628) Home Owners Protection Act of 1998 Fair Debt Collection Practices Act (FDCPA) Section 43 of the Federal Deposit Insurance Act (subsecs. (b)(f))
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CFPBs Enforcement Authority:

Gramm-Leach-Bliley Act 502-509 (except part of 505) Home Mortgage Disclosure Act of 1975 (HMDA) Home Ownership and Equity Protection Act of 1994 (HOEPA) Real Estate Settlement Procedures Act of 1974 (RESPA) S.A.F.E. Mortgage Licensing Act of 2008

Truth in Lending Act (TILA)

Truth in Savings Act Section 626 of the Omnibus Appropriations Act, 2009 Interstate Land Sales Full Disclosure Act

The Mortgage Reform and Anti-Predatory Lending Act (Title XIV of Dodd-Frank)
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CFPBs Enforcement Authority:

Enforcement authority under these enumerated laws is exclusive vis vis federal agencies other than the FTC

The Bureau can enforce regulations that it issues under Title X itself (also called the Consumer Financial Protection Act of 2010), defining practices as unfair, deceptive, or abusive (including prophylactic rules)
The Bureau can enforce FTC regulations under the FTC Act, defining practices as unfair, deceptive or abusive, as if they were the Bureaus own regulations under Title X The Bureau can enforce violations of other Federal consumer financial laws, and regulations under them, as violations of Title X This allows the Bureau to seek all of the broad new remedies available under Title X for a violation of any of the statutes that it enforces
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CFPB Remedies
Rescission or reformation of contracts Refund of moneys

Return of real property

Restitution Disgorgement of profits Compensation for unjust enrichment Damages Public notification of violations (with costs to be borne by the violator) Limits on activities or functions Civil money penalties But no punitive damages under Title X
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CFPB Penalties
Three Tiers of Civil Money Penalties:
First Tierup to $5,000 per day
Second Tierup to $25,000 per day Third Tierup to $1 million per day

New TILA/RESPA Penalties

Penalties for servicing violations increased to $2,000 per violation and up to $1 million for class actions
Individual liability for mortgage originators

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CFPB Powers
Issue subpoenas Issue Civil Investigative Demands (CIDs) Must state nature of conduct constituting the alleged violation and applicable provision of law Subject can petition Bureau to modify or set aside Bureau can petition Federal district court to enforce Bring suit in court

Commence administrative proceedings (C&D)

Administrative hearing with appeal to Court of Appeals Temporary C&D where violation is likely to cause the person to be insolvent or otherwise prejudice the interests of consumers before the completion of the proceedings

Enforce FTC regulations defining unfair/deceptive practices

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State Attorneys General under Dodd Frank

State Attorneys General Can Enforce Title X in State or Federal court But only as interpreted by the Bureau in regulations This prevents state AGs from advancing aggressive interpretations of the terms unfair, deceptive or abusive, or from using Title X to enforce otherwise unenforceable provisions of other consumer financial statutes or regulations

Not clear whether state AGs can seek the long list of remedies available to the Bureau

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Speaking of the States Enforcers . . .

On September 1, 2011, the NY Department of Financial Services announced an agreement with Goldman Sachs, Litton Loan Servicing, and Ocwen Financial Corp. Condition of approval of the sale of Litton to Ocwen Commitment from Goldman to write down approximately $53 Million in unpaid principal Forgive 25% of the principal balance on all 60-day delinquent home loans in New York serviced by Litton and owned by Goldman as of August 1 Does not preclude any future investigations

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In Conclusion . . .

Regulators and enforcement agencies continue to use the

hostile economy as a basis for unprecedented aggression in enforcement Many new theories being tested in administrative investigations and courts

Cannot afford to be passive with compliance

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