The New Administration’s Plans for the CFPB Take Shape

Facade of courthouse with columns.

For those who have been wondering—as I did in a previous post—what the new presidential administration would mean for the Consumer Financial Protection Bureau (CFPB), an agency that has been in Republicans’ crosshairs virtually since it came into existence, we now have at least the beginnings of a concrete answer. Claiming that the CFPB’s leadership structure is unconstitutional, the Trump administration asked the U.S. Court of Appeals for the D.C. Circuit last week to allow the president to fire the bureau’s director, Richard Cordray, at will. The administration did not go so far as to ask the court to authorize elimination of the agency, however.

In its brief to the appeals court, the U.S. Department of Justice (DOJ) argued that an October split ruling by a three-judge panel of the D.C. Circuit correctly determined that the CFPB’s single-director leadership structure violated the U.S. Constitution’s separation of powers clause. And, according to the DOJ, giving the president the power to fire the director at will rather than for cause, as was required by the 2010 Dodd-Frank Act, would serve to remedy the alleged structural problem. Continue Reading

Minnesota State Court Defendants Win Partial Summary Judgment Over RFC and ResCap

Close-up of weights balancing scales of justice with gavel beside itWednesday, February 1 brought a welcome development for the many correspondent lenders currently defending against claims filed by (or threatened with future lawsuits by) Residential Funding Company (“RFC”) and its successor-in-interest, the ResCap Liquidating Trust (“ResCap”). There have been three venues in which RFC and ResCap have been litigating, for years now, against correspondent lenders. They filed dozens of lawsuits in federal court in Minnesota, several more in the Bankruptcy Court for the Southern District of New York, and just a few in state court in Minnesota. On February 1, three state court defendants triumphed on their motion for partial summary judgment against RFC and ResCap. They obtained a ruling that, though limited in scope, is potentially of great significance. Specifically, the Minnesota state court (the District Court of Hennepin County) held that RFC and ResCap would not be able to pursue loan-level (i.e., loan-by-loan) damages associated with a repurchase claim, and thus could not apply a repurchase price “formula” to establish damages.

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Key Legal & Regulatory Issues for Financial Services Companies in 2017

Financial Serives Blog ImageWith 2016 rapidly drawing to a close, here are some thoughts regarding the types of litigation and legal/regulatory issues that will likely be top-of-mind for financial services companies, especially mortgage companies and banks, in 2017:

RMBS Suits and Mortgage Repurchase or Indemnification Claims

I admit it—I never would have thought, when I started working on cases of this type back in 2009, that new waves of residential mortgage-backed securities(“RMBS”) lawsuits and contractual mortgage buyback claims would still be getting filed (or that some older claims would still be getting litigated) in 2016 and 2017. But they remain with us. Yes, some things about these cases have changed. For example, a higher percentage of mortgage buyback suits are now brought by entities, like ResCap/RFC, Lehman Brothers Holdings, and the various failed institutions for which the FDIC  is acting as Receiver, that long ago ceased to do business—and now function primarily as “litigation machines.” Also, plaintiffs are now more prone to pitch their claims as ones for “indemnification” rather than “repurchase.” They do that both because they believe (falsely, in our view) that using the term “indemnification” can help them navigate around the statute of limitations, and because most of the loans in dispute are by no means still available for true repurchase. But more about these cases remains the same than has changed. Mortgage companies and banks threatened with RMBS and buyback/indemnification claims still tend to have far stronger legal and factual defenses available to them than the parties making the threats initially believe. And, unfortunately, the stakes remain high for the companies facing these claims—sometimes so high that negotiating a quick, acceptable settlement is all but impossible. 2017 may be a watershed year in this area of the law, with additional important decisions likely to be forthcoming on the statute of limitations, plaintiffs’ ability or inability to use “statistical sampling” in especially large cases, how alleged damages should be calculated, and the impact of bulk loan sales as part of a bid process on a plaintiff’s claims that its own client guide was breached. Continue Reading

CFPB Steps Up Oversight of Companies’ Compensation Programs Following Wells Fargo Scandal

Protection of MoneyThe Consumer Financial Protection Bureau (CFPB) will likely be weakened by the incoming Trump administration and its Republican allies in Congress. Exactly how, and how much, remains to be seen, however—and, in the meantime, the agency continues to make its presence felt. Earlier this week, the CFPB warned companies that it oversees to take steps to ensure that their incentive compensation programs are not likely to motivate unethical conduct by employees. The types of unethical conduct that the CFPB wants to ensure that companies are guarding against might include employees creating fake accounts, as happened at Wells Fargo & Co., or enticing consumers to sign up for products they neither want nor need. But the CFPB made clear in its warning to companies that its concerns over sales practices go beyond situations similar to Wells Fargo’s fake account scandal. In other words, as has at times been the case with the CFPB, it is casting a broad net, but not necessarily saying what specifically it intends to catch with that net.

The federal consumer protection watchdog said that banks, mortgage lenders, payday lenders and other firms that it regulates should review their compensation policies on a regular basis. In doing so, these types of companies need to make sure that they are not creating the wrong kinds of incentives, ones that may lead employees to conclude that they must engage in potentially fraudulent activity in order to meet inflated sales goals. In particular, companies should undertake a comprehensive analysis of their compliance management systems. Boards of Directors will be expected to increase their level of oversight to make sure that appropriate policies and incentives are in place and are being followed. Continue Reading

Second Circuit Sides With AmEx, Reversing Lower Court Victory for DOJ

American ExpressThe United States Court of Appeals for the Second Circuit, a highly influential appellate court sitting in New York, on September 26 issued a unanimous ruling with major implications for antitrust and unfair competition laws, the payment card industry, and merchants that accept payments by credit card. The Second Circuit reversed a district court win by the U.S. Department of Justice in a suit that accused American Express of violating antitrust laws. Specifically, the DOJ had asserted that, by imposing rules barring merchants from steering consumers to other credit card brands, AmEx was improperly thwarting competition. On appeal, the Second Circuit held that the lower court ruling was in error, because it considered only one side of the market—-merchants, but not the consumers (the cardholders) transacting business in those merchants’ stores. Continue Reading

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