On June 4, 2014, the Second Circuit issued a 28-page ruling holding that U.S. District Court Judge Jed Rakoff had “abused” his discretion by rejecting a $285 million U.S. Securities and Exchange Commission (“SEC”) settlement with Citigroup, Inc. because the bank neither admitted nor denied wrongdoing. The 2011 decision led to increased criticism of the SEC’s use of settlement agreements in which defendants neither admitted nor denied the government’s allegations of wrongdoing, and heightened scrutiny by some judges who were asked to approve such settlements. The case concerns the SEC’s settlement with Citigroup of allegations that the bank had not properly disclosed to investors matters relating to a $1 billion collateralized debt obligation. In his November 2011 decision rejecting the settlement, Judge Rakoff said the SEC’s policy allowing “no-admit, no-deny” settlements had turned his court into “a mere handmaiden” to the SEC’s enforcement policies, and that he was unable to determine whether the agency’s settlement was “fair, reasonable, adequate and in the public interest” because the agency had alleged, but not proved, that Citigroup engaged in wrongdoing. The Second Circuit, noting the deference courts must give to agency decisions, held that it is not appropriate for courts to scrutinize the “adequacy” of SEC settlements, and that there was “no basis in the law” for a district court to require admissions of wrongdoing in SEC settlements. The Second Circuit ruling provides much needed guidance regarding the court’s role in approving agency settlements.
Read more: New York Times: ”Appeals Court Overturns Decision to Reject S.E.C.-Citigroup Settlement“; Law360: “2nd Circuit Rakoff Decision Nixing SEC-Citgroup ‘No-Admit” Pact”
On May 22, 2014, the Consumer Financial Protection Bureau (CFPB) issued its Spring 2014 Supervisory Highlights Report – its fourth such report since the agency’s founding. The report includes a review of recent rulemaking, guidance, and enforcement activity. The CFPB used its fourth report to focus on the importance of compliance management systems. “In this fourth edition of Supervisory Highlights, the CFPB reiterates the importance of robust compliance management systems and shares recent supervisory observations, which include short-term, small dollar lending, consumer reporting, debt collection and fair lending,” the report states in its introduction. Other report highlights include:
- The agency’s nonpublic supervisory actions concerning consumer reporting, credit cards, mortgage originations and deposit products “resulted in more than $70 million in remediation to over 775,000 consumers.”
- The report reiterates the CFPB’s supervisory guidance for oversight of third-party service providers, a recent agency focus particularly in connection with mortgage servicing.
- The summarizes the CFPB’s observations on fair lending risk resulting from inadequate compliance management systems, particularly with handling lender exceptions to standard underwriting criteria. The report notes that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” At the same time, the report recognizes the importance of access to credit and the use of exceptions to further that goal.
- The report summarizes supervisory findings at non-banks, largely focusing on debt collection, consumer reporting, and payday lending.
As with prior Supervisory Highlight reports, the 2014 Spring edition provides insight into the agency’s supervisory and enforcement priorities, and adequately summarizes recent rulemaking and guidance.
Additional resources: Law360 – “CFPB Sets Sights on Nonbank Compliance Programs”
Following an internal review that found it consistently gave higher performance ratings to whites, younger employees and higher-paid workers, the Consumer Financial Protection Bureau (CFPB) said that it will distribute additional pay to the negatively affected employees, according to a Wall Street Journal report. The CFPB plans to distribute up to $5.5 million in additional pay to several hundred employees to remediate disparities found in its peformance rating process. A March CFPB initial report showed that in 2013 more than 20% of white employees received the highest possible performance, compared with 9% of Hispanics, 10.5% of blacks and 15.5% of Asians. The Wall Street Journal reported that on Monday, CFPB director Richard Cordray informed employees by email that the CFPB “determined that there were broad-based disparities in the way performance ratings were assigned across our employee base,” over the prior two years. The three year old agency created under the Dodd-Frank Act is responsible for enforcing a number of financial services laws and regulations, including the Fair Housing Act and other laws that prohibit racial bias and other unlawful discrimination.
Additional reading: American Banker; Law360; Reuters
On March 31, 2014, the Consumer Financial Protection Bureau (CFPB) released a report showing that the number of consumer complaints it received nearly doubled in 2013. According to the CFPB’s 2013 Consumer Response Annual Report, the agency received 163,700 complaints in 2013, compared to approximately 91,000 in 2012. The majority of 2013 complaints concerned mortgages, debt collection and credit card reporting. Complaints about mortgages accounted for 37 percent (60,000) of overall reported matters.
Read more: Law360.c0m; CFPB Release;
A February 12, 2014 letter from the U.S. Chamber of Commerce to the Consumer Financial Protection Bureau (CFPB) asks the agency to write new rules governing the auto-lending industry to eliminate ambiguity regarding fair lending and abusive practices standards. The Chamber identified three areas of particular concern: the test for disparate impact in indirect auto lending; the definition of abusive acts and practices under the Dodd-Frank Act; and the standards under which a company may be liable for the actions of service providers.
"If the bureau identifies areas in which it wants to fundamentally alter the rules, it should take the time to write new standards rather than rely on one-off enforcement and news release ‘warnings’ to other regulated companies," the Chamber’s letter stated. The CFPB has identified auto-lending discrimination as a top enforcement priority. In December 2013, auto lender Ally Financial Inc. agreed to pay $98 million to resolve allegations levied by the CFPB and Department of Justice that it charged higher interest rates to certain minority borrowers. Ally denied the allegations.
Read more: The Wall Street Journal Online; Automotive News; CFPB Monitor.
On January 10, 2014, representatives of the United States Attorney for the Southern District of Florida, the Federal Bureau of Investigation, and the Inspector General’s Office for the Federal Deposit Insurance Corporation announced the unsealing of a 15-count indictment against seven defendants allegedly involved in a complex mortgage fraud scheme. According to the announcement, the indictment involves lender approvals of approximately $49.6 million in fraudulent loans involving vacant lots in a community development in North Carolina. The government noted in its announcement that an indictment is only an accusation and the defendants are presumed innocent until proven guilty.
The indictment alleges that between 2003 and 2008, the defendants engaged in a mortgage fraud conspiracy against various FDIC-insured lenders. Certain of the defendants used shell companies to obtain ownership and control of a purported North Carolina residential property development known as Hampton Springs, according to the announcement. The indictment alleges that the defendants used straw buyers to finance the purchase of lots at the development, in addition to construction loans, which were supported by false and fraudulent loan applications and supporting documents. The government alleges lenders were induced to advance approximately $49.6 million in loan proceeds through this scheme. The indictment includes charges of conspiracy to commit bank fraud, bank fraud, and wire fraud affecting a financial institution, which each carry a statutory maximum sentence of 30 years in prison, a $1 million fine, and mandatory restitution, said the government.
"Seven Florida Residents Indicted For Mortgage Fraud"
www.mortgagefraudblog.com: 7 Indicted in $49.6M Mortgage Fraud Scheme Involving North Carolina Property Development
On January 1, 2014, Law360 published it list of "Banking Cases To Watch In 2014." The list includes:
NACS v. Board of Governors of the Federal Reserve System, Case No. 13-5270, U.S. Court of Appeals for the D.C. Circuit. The Court will review the Fed’s appeal of a federal district court judge’s July 2013 ruling rejecting the Federal Reserve rule limiting swipe fees that banks can charge for processing debit card transactions under the Durbin Amendment to the Dodd-Frank Act.
Otoe-Missouria Tribe of Indians, et al. v. New York State Department of Financial Services, Case No. 1:13-cv-05930, U.S. District Court for the Southern District of New York. This case was filed by Native American tribes to stop New York’s banking regulator from preventing banks processing online payday loans issued by lenders located on sovereign tribal territories. "The case could determine not just how regulators are able to crack down on tribal lending that violates state laws, but how far they can stretch their jurisdiction by pressuring banks and other entities that process transactions," the Law360 article stated.
U.S. v. Bank of America Corp. et al., Case NO. 1:12-cv-01422, U.S. District Court for the Southern District of New York. This is a fraud case brought by the federal government under FIRREA. The federal district court is expected to decide penalties in connection with a jury verdict that found Countrywide Financial Corp. and a former executive defrauded Fannie Mae and Freddie Mac through a program known as the "Hustle," which was designed to speed up its mortgage issuing process. According to Law360, "[i]f [the Court] opts to slap [Countrywide] with the $864 million fine that the government is seeking, it would signal a total victory and vindication of FIRREA, which allows entities to be sued for fraud with a more relaxed civil law burden of proof."
In addition to identifying key cases, the Law360 article noted that the government is likely to pursue a number of other actions against banks and bankers in 2014, including FDIC actions against the officers and directors of failed banks, cases involving benchmarking fixing, and additional fraud cases under FIRREA.
December 21, 2013 - The United States Department of Justice and Consumer Financial Protection Bureau announced the filing of their first joint fair lending enforcement action and settlement regarding allegations that an auto finance company’s dealer compensation policy resulted in a disparate impact for certain minority borrowers. The $98 million settlement announced by the agencies is the third-largest fair lending action filed by the DOJ, and the largest case concerning auto lending.
According to the complaint, the action arose out of the CFPB’s examination of the company’s indirect auto lending practices, including an evaluation of the company’s compliance with fair lending laws and regulations in its indirect automobile lending program. The CFPB’s investigation allegedly revealed pricing disparities in the finance company’s auto loan portfolio with regard to loans made by dealers to African-American, Hispanic, Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ, which purportedly reached similar conclusions. The complaint alleges discriminatory pricing based on the disparate impact theory of liability. The CFPB and DOJ relied on statistical analysis of the finance company’s auto loan portfolio, using proxy methodologies including in an effort to identify the race/national origin of the borrowers, to conclude that certain minority borrowers were charged higher dealer markups compared to similarly situated non-minority borrowers.
The agencies did not claim or make any allegation suggesting that the finance company engaged in intentional discrimination. Rather, the complaint alleges that the company’s facially neutral pricing policies allowed independent auto dealers to set pricing that resulted in certain minority groups, on average, paying higher credit prices compared to similarly situated non-minority borrowers. In announcing the settlement, CFPB Director Cordray reiterate the agency’s position that intentional discrimination is not required to violate fair lending laws: "Whether or not [the finance company] consciously intended to discriminate makes no practical difference. In fact, we do not allege that [the finance company] did so."
The settlement terms are included in a CFPB administrative consent order and a DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan. The settlements require the finance company to pay an $18 million penalty and pay $80 million for a settlement fund. The settlement also requires the finance company to implement a compliance plan including specific elements detailed in the settlement papers. The settlement does not prohibit discretionary dealer compensation, but includes incentives to eliminate the practice and compliance protocols if the practice continues.
The CFPB has made clear that auto dealer compensation practices are a target for its enforcement activity. In March 2013, the CFPB issued guidance (Bulletin 2013-02) on the topic. CFPB activity in this area will likely increase in 2014 and potentially beyond.
December 23, 2013 - The United States Department of Justice and the Consumer Financial Protection Bureau announced that they have settled allegations that National City Bank engaged in discriminatory lending practices by charging African American and Latino home loan borrowers higher interest rates between 2002 and 2008. The settlement was filed in the U.S. District Court for the Western District of Pennsylvania.
The joint-agency filing alleged that National City Bank violated the Fair Housing Act and Equal Credit Opportunity Act by charging certain minority borrowers higher loan rates based on their race or ethnicity and not their risk level. According to the complaint, the loans at issue were originated through retail offices and independent mortgage brokers. The CFPB alleged that National City allowed discretionary pricing, allowing originators to subjectively vary the prices paid by borrowers. The settlement includes a $35 million restitution fund for borrowers allegedly harmed by the bank’s lending practice.
PNC, which acquired National City Bank in 2009 after the alleged discriminatory lending activity, said in a statement: "PNC is committed to fair lending for all. Once PNC acquired National City Bank, we took steps to improve policies and procedures governing the mortgage lending of National City, discontinue National City’s mortgage broker channel, and discontinue certain practices reviewed by the agencies."
The joint DOJ/CFPB settlement follows the agencies’ 2012 announcement that they had signed a Memorandum of Understanding regarding fair lending enforcement coordination between the two federal agencies. According to the CFPB press release, in 2011 the CFPB and DOJ began a joint investigation into National City’s lending practices. This is the first joint lawsuit brought in federal court by the CFPB and the DOJ under fair lending laws, the CFPB announced.
Read more: Complaint; Proposed Consent Order; CFPB press release; DOJ press release; Wall Street Journal (on-line)
For the second time in the last two years, a settlement will prevent the United States Supreme Court from deciding whether a disparate impact claim may be brought under the Fair Housing Act.
According to a National Mortgage News report, on November 13, 2013, the Township of Mount Holly, New Jersey approved a settlement resolving a lawsuit brought by township residents displaced by a redevelopment plan. The lawsuit alleged that the redevelopment plan, while neutral on its face, had a disparate impact on minority residents in violation of the Fair Housing Act. The settlement is subject to approval by the U.S. District Court.
In accepting the Mount Holly appeal, the Supreme Court agreed to decide whether disparate impact claims are cognizable under the Fair Housing Act. Currently, eleven federal circuits, and numerous federal agencies, recognize the disparate impact theory under the Fair Housing Act, allowing government and private plaintiffs to establish unlawful discrimination based solely on the results of a neutral policy, and without any evidence of an intent to discriminate. While not a lending case, many in the mortgage lending industry were anxiously awaiting the Supreme Court’s decision on the case, according to the National Mortgage News report. The Supreme Court was set to hear oral argument on December 4.
In 2011, the Supreme Court was scheduled to hear a Fair Housing Act disparate impact case in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010). Instead, the parties settled the case and withdrew the appeal before the Supreme Court had an opportunity to address the issue.
Read More: Mount Holly settlement spares Fair Housing Act – for now (www.msnbc.com)
Fair Housing Act Case Is Settled Before It Reaches Supreme Court (www.nytimes.com)