CFPB and Banks Battle Over Arbitration Clauses, Class Actions

Scales of Justice 1After the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorized its creation, the Consumer Financial Protection Bureau (CFPB) began operating on July 21, 2011. In the more than five years since it opened its doors, the CFPB has rarely appeared shy or hesitant about asserting its authority. Critics—most often the businesses over which it exercises jurisdiction, or proponents of “limited government”—in fact have assailed the agency as a prime example of allegedly unaccountable bureaucrats run amok. Still, few steps taken by the CFPB have aroused its critics’ ire as much as its now-pending proposal to stop banks and other financial firms from placing class action bans in consumer contracts.

In May of this year, the CFPB unveiled a proposal to rein in financial services companies’ use of mandatory arbitration clauses in consumer contracts. The proposal does not ban mandatory arbitration clauses for individual claims, but calls for the removal of bans on consumers joining in class action lawsuits over alleged wrongful acts by financial services firms. Almost immediately, the proposal sparked an outcry in the financial services industry, and the passions on both sides of the key issues have not subsided since. The Bureau has already received an unusually large volume of comments, and the comment period continues. The proposal clearly alarmed the consumer financial services industry, with market participants such as banks and payday lenders arguing heatedly that eliminating the class action ban from arbitration clauses would essentially eliminate arbitration as an option for consumers. They see arbitration as being significantly more affordable and convenient for individuals who believe they have actionable claims to assert against the financial firms. Attempted class actions, a potential means of reducing costs for individual consumers, ultimately often fail to survive judicial scrutiny (due to legal and factual hurdles to class certification), but even having to challenge class certification can be costly enough to business defendants that they regularly contractually seek to preclude litigation—and say they will not pay for consumer arbitration programs if the threat of a class action in court remains intact. Continue Reading

Home Depot Challenges Banks’ Standing to Recover Losses Related to Data Breaches

Lock and motherboard 2In the aftermath of major data breaches at deep-pocketed retailers and other businesses, there is typically no shortage of litigants who move quickly to seek compensation from the business at which the breach occurred. But whether the would-be plaintiffs’ claims get very far in court often depends on whether those plaintiffs are individual consumers, or financial institutions. Consumers typically do not fare well, because courts regularly conclude that their losses resulting from fraud are covered in full by banks. By contrast, financial institution generally succeed in defeating motions to dismiss on data breach-related claims, because they can point to the costs of steps that they have to take to cover cardholders’ losses, and to re-issue customer credit or debit cards.

Now Home Depot is trying to ensure that banks, like individual consumers, have little recourse in court against businesses that suffer data breaches. On July 5, the company asked a federal judge in the Northern District of Georgia to certify for interlocutory appeal his May order preserving the great majority of claims brought by a proposed class of financial institutions and credit unions against Home Depot in multidistrict litigation arising from its 2014 data breach. Home Depot argued that the ruling raised at least six novel questions of law that would benefit from immediate resolution, including whether financial institutions have Article III standing to assert claims arising out of a data breach, whether retailers owe banks a duty to protect against third-party criminal hacks, and whether financial institutions can bring negligence claims based on an alleged violation of Section 5 of the Federal Trade Commission Act. Continue Reading

“No Injury” Consumer Class Actions Weakened, but Not Killed, by Supreme Court

judge and gavel2The U.S. Supreme Court held Monday that the Ninth Circuit erred when it ruled consumers can sue companies without alleging actual injury. The Supreme Court ruled that a consumer could not sue Spokeo Inc. for mere technical violations of the Fair Credit Reporting Act. Its holding left the door open for plaintiffs in other cases to use statutory violations to establish standing, however.

In a 6-2 decision, the high court vacated and remanded the Ninth Circuit’s February 2014 ruling that plaintiffs do not need to allege actual injury to maintain statutory class action claims like the ones asserted in this case by Thomas Robins. Mr. Robins had alleged that Spokeo, a “people search engine,” violated the FCRA by falsely reporting that Robins was wealthy, married and had a graduate degree. Robins asserted that he was in fact struggling to find work. Continue Reading

A Day of Reckoning for the CFPB?

CFPB for Blog

Virtually ever since its inception on July 21, 2011, the Consumer Financial Protection Bureau (CFPB) has inspired wariness and skepticism `in the financial institutions and financial services providers subject to this new agency’s rather ill-defined “jurisdiction” and enforcement authority. As the CFPB embarked on an unmistakably aggressive campaign to exert authority over various sectors of the consumer finance world, industry professionals’ concerns rapidly escalated. They grew into impassioned pleas that someone, somewhere do whatever could be done to bring about elimination of the CFPB entirely, or to greatly curtail the scope of its powers. A recent oral argument in the United States Court of Appeals for the District of Columbia Circuit may offer those most disturbed by the CFPB’s practices their greatest basis to date for hope that the agency will be reined in going forward. The dispute that led up to the appellate court oral argument may serve as an “Exhibit A” for anyone wishing to claim that the CFPB exceeds its mandate in various ways, and can be, at times, recklessly punitive towards the companies it oversees. On January 29, 2014, the CFPB issued a notice of charges alleging that PHH Corp. was involved in a kickback scheme. The CFPB alleged that PHH referred mortgage insurance business to mortgage insurers in exchange for mortgage reinsurance contracts which those insurers entered into with PHH’s wholly-owned subsidiary, Atrium Insurance Corporation.

A trial on these charges took place, adjudicated not in court, but rather by a CFPB (yes, CFPB) administrative law judge. That judge found that when a mortgage insurer entered into a reinsurance contract with Atrium, it typically would then receive substantial mortgage insurance business from PHH. Moreover, on the occasions when those reinsurance contracts were terminated, referrals from PHH to the mortgage insurer would decrease substantially. The CFPB administrative law judge found that this relationship constituted a prohibited kickback under Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). The result: a $6.4 million disgorgement penalty and injunctive relief against PHH. Continue Reading

Proposed IRS and Treasury Regulations Have Broad Implications for Intercompany Debt Structures

Money Bag 2On April 4, 2016, the U.S. Treasury Department and the Internal Revenue Service (“IRS”) issued proposed regulations ostensibly aimed at curbing inversions and earnings stripping, by companies located in the U.S. with overseas ties. If finalized, these regulations would become retroactive to April 4, 2016, and would fundamentally shift the way debt and equity are characterized by a broad range of companies doing business in the United States. Far from simply making it more difficult for U.S. companies to relocate their headquarters overseas, the proposed regulations would dramatically alter the tax landscape for most companies’ capital structures, internal financings and cash management.

The inversion regulations will be addressed in a separate post on our Taxes Without Borders blog shortly. Our blog post focuses solely on the intercompany debt regulations, which likely would result in a substantial portion of intercompany debt transactions being recharacterized as equity contributions and distributions thereon. Continue Reading

Wells Fargo Pays $1.2 Billion Settlement, Admits Deception in Certifications

Mortgage Settlement 2Calling the settlement a reproach for “years of reckless underwriting” at Wells Fargo, U.S. Attorney Preet Bharara in Manhattan announced on April 8th that Wells Fargo & Co. formally reached a record $1.2 billion settlement of a U.S. Department of Justice lawsuit. A notable feature of the settlement is Wells Fargo’s specific admission that it deceived the U.S. government into insuring thousands of risky mortgages. The settlement with Wells Fargo, the largest U.S. mortgage lender and third-largest U.S. bank by assets, was filed on Friday in Manhattan federal court. According to the settlement, Wells Fargo “admits, acknowledges, and accepts responsibility” for having from 2001 to 2008 falsely certified that many of its home loans qualified for Federal Housing Administration insurance.

The lender also admitted that from 2002 to 2010, it failed to file timely reports on several thousand loans that had material defects or were badly underwritten, a process that one of its executives, who was also sued in this litigation, was responsible for supervising. Continue Reading

Lenders & FinTech Companies Now Have an Opportunity to Shape Federal Regulation of FinTech

FinTech 2On March 31, 2016, the Office of the Comptroller of the Currency (“OCC”) issued its much anticipated white paper on the role of financial technology (“FinTech”) in the financial services industry. The paper, titled Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective, opens a two-month window in which banks, FinTech companies and lenders may engage in discourse with the OCC regarding the role of federal agencies in regulating FinTech. Comments on the paper are due by May 31, 2016; the OCC has scheduled a FinTech forum for July 23, 2016, at which industry commentary on the paper presumably will be discussed.

The importance of FinTech has steadily increased over the last five years to the point that it is mentioned almost daily in trade journals, newspapers and other media outlets. It is a hot topic at conferences and foremost on the mind of lenders and financial services providers. As is evident from the white paper’s publication, FinTech has become so interwoven in the financial services tapestry that it now has the dubious honor of being subject to federal government scrutiny. Continue Reading

Caveat Emptor: Non-compliance with a Non-Binding Term Sheet Results in $195 Million Judgment

On December 23, 2015, the Delaware Supreme Court affirmed the Delaware Chancery Court’s award of $195 million to PharmAthene, Inc. (“PharmAthene”) as compensation for lost profits (a/k/a expectation damages) on account of the failure by its counter-party to a term sheet to negotiate a license agreement in good faith.  The judgment was affirmed notwithstanding the fact that the obligation to negotiate in good faith was set forth in a non-binding term sheet.

Term sheets and letters of intent (“LOIs”) are an integral part of our legal practice and an expected component of any sophisticated financing or other corporate transaction. This court decision underscores the importance of clarity in these preliminary documents, even on something as boilerplate as agreeing to negotiate binding deal documentation in good faith.  Moreover, it increases the risk of using non-binding preliminary agreements governed by Delaware law to set forth the terms of prospective transactions. Continue Reading

Fannie and Freddie Adopt IDR Policy for Repurchases

Mortgage RepurchaseAfter years of litigation costing tens of millions of dollars, the Federal Housing Finance Agency has hit upon a way to expedite resolution of breach of representation and warranty claims that, if successful, could minimize costs.

The FHFA announced that Fannie Mae and Freddie Mac will, from now on, purchase loans that provide for independent dispute resolution (IDR) for any alleged breach of representations or warranties. This would be a substantial change from the current process, in which breach claims could spur repurchase demands and rescission requests that can lead to years of argument and sometimes costly resolutions.

Representations and warranties (R/W) are an important component of any lender’s effort to sell its loans to government sponsored entities like Fannie Mae or Freddie Mac. Indeed, GSEs rely on lender’s explicit guarantees that loans purchased are underwritten to Fannie’s or Freddie’s underwriting guidelines – that itself is perhaps the most important representation and warranty. Under the present framework, if a GSE concludes that a R/W was breached, it may pursue repurchase, a “make-whole” agreement, or any number of alternative remedies. But those remedies can lead to months of correspondence and demands for documentation and proof, and may lead to litigation. Continue Reading

Citibank Breaks the Ice with a $23 Million Settlement in LIBOR Class Action

Lawsuit 1Citibank, N.A. has asked a federal district court to bless its $23 million settlement in a class action lawsuit alleging a wide-ranging conspiracy among banks to fix yen-denominated London Interbank Offered Rates (LIBOR) interest rates between 2006 and 2010. The settlement is the first of its kind in the case. The lead plaintiff in the litigation, Jeffrey Laydon, urged the court to approve the settlement, with his counsel describing it as an “ice breaker” that could serve as a “potential catalyst” for other banks to settle.

In 2012, Mr. Laydon sued more than twenty financial institutions, alleging violations of the Commodity Exchange Act and Sherman Act, among others. In a 300 page complaint, he detailed an alleged conspiracy among banks that sit on LIBOR and Tokyo Interbank Offered Rate (TIBOR) panels of conspiring to fix these rates by submitting agreed-upon estimates. As a result of the defendants’ actions, Laydon claims that he suffered thousands of dollars of damages in connection with his shorting derivatives of Euroyen TIBOR futures contracts. Continue Reading