Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

On December 21, 2011 the U.S. Department of Justice announced it had reached a $335 million settlement with Countrywide, now owned by Bank of America, to resolve allegations of lending discrimination.  The settlement resolves claims that Countrywide charged Hispanics and African-American borrowers higher prices for credit compared to similarly situated non-Hispanic and white borrowers.  The Justice Department announced that the settlement is the largest fair lending settlement in the Department's history. 

The settlement, which is subject to court approval, was filed today in the U.S. District Court for the Central District of California in conjunction with the department’s complaint which alleges that Countrywide discriminated by charging more than 200,000 African-American and Hispanic borrowers higher fees and interest rates than non-Hispanic white borrowers in both its retail and wholesale lending.  The complaint alleges that these borrowers were charged higher fees and interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.  

According to the DOJ press release, the settlement also resolves allegations that Countrywide violated the Equal Credit Opportunity Act by discriminating on the basis of marital status against non-applicant spouses of borrowers by encouraging them to sign away their home ownership rights. 

For the last three years, the Civil Rights Division has warned of its stepped-up enforcement efforts in the fair lending arena.  While case filings were slow to come, the Countrywide settlement, along with recent fair lending activity out of the Division and by members of the interagency Financial Fraud Enforcement Task Force, suggests that government enforcement of fair lending laws may continue to impact the consumer finance industry during 2012.

Read the DOJ's Press Release here; the Complaint here; and the proposed Consent Order here. 

Read MarketWatch's article here and Bloomberg's article here.

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A December 12, 2011 Reuters report states that a recent poll found that three-quarters of Americans are willing to blow the whistle under the protections and incentives offered by the Dodd-Frank Wall Street Reform and Consumer Act.

"According to the poll released on Monday, 78 percent of Americans said they would report wrongdoing in the workplace as long as they could do it anonymously, without retaliation, and claim a monetary report" the article stated.

Under the Dodd-Frank whistleblower provisions, individuals who provide original information that leads to an SEC enforcement action with penalties of more than $1 million are eligible to receive a 10%-30% cut of the penalties.   In its November 15, 2011 Annual Report on Dodd-Frank Whistleblower Program, the SEC stated that it had received 334 whistleblower tips in the seven weeks immediately following the August 12 effective date of the whistleblower bounty rules.

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On Thursday, November 17, 2011, the Board of Governors of the Federal Reserve System the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency  issued a joint statement describing how the total assets of an insured bank, thrift or credit union will be measured for purposes of determining supervisory and enforcement responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.   Under Dodd-Frank, the CFPB has exclusive authority to examine, and primary authority to enforce, compliance with federal consumer financial laws for institutions with total assets of more than $10 billion.  The statement attempts to explain how asset size is measured for this purpose.

For a summary of the statement, read the Perkins Coie Financial Services Bulletin:  New Rules at the CFTC and Fed and a Multi-Agency Joint Statement on Federal Consumer Financial Laws.

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In a 4-3 decision, the Michigan Supreme Court approved non-judicial foreclosures instituted in the state by Mortgage Electronic Registration Systems (MERS).  The high court's order overturns an April 2011 lower court decision that determined MERS could not use the state's non-judicial foreclosure mechanism because it had no real interest in the underlying debt.

In the written decision, the Michigan Supreme Court stated that the lower court ruling "is inconsistent with established legal principles governing Michigan's real property law, and specifically foreclosure by advertising."  It continued that the Michigan Legislature did not create "a new legal framework in which an undisputed record holder of a mortgage, such as MERS, no longer possesses the statutory authority to foreclose."

MERSCorp's president and CEO Bill Beckmann stated that the ruling "affirms MERS' business model and will allow the Michigan real estate industry to get back to business and usual."   

Read more at Bloomberg Businessweek: MERS Wins Appeal of Decision Limiting Michigan Foreclosures and Housingwire.com:  Michigan Supreme Court gives green light to MERS

Read the Michigan Supreme Court Order here.

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Read the latest edition of the Perkins Coie Financial Services Bulletin, covering the following new proposed rules impacting the financial industry: 

• The OCC, Fed, FDIC and SEC issue Volker Rule Proposals
• The Financial Stability Oversight Council Takes Steps Towards Regulation of "Systemically Important" Nonbank Financial Companies
• The SEC Proposed Registration Rules for Security-Based Swap Dealers and Participants

Link to full article here.

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October 3, 2011.  Arizona U.S. District Judge James Teilborg dismissed 72 lawsuits, including six class actions, against Mortgage Electronic Registration Systems Inc. (MERS) that challenged MERS' role as a beneficiary on deeds of trust.  The plaintiffs in the consolidated actions claimed that because MERS is not a proper beneficiary the deeds of trust to which they agreed are unenforceable, leaving the underlying loan unsecured.  Relying largely on a recent 9th Circuit Court of Appeals Decision (Cervantes v. Countrywide Home Loans), Judge Teilborg wrote in his decision that "'[t]his court does not find legal support for the proposition that the MERS system of securitization is so inherently defective so as to render MERS deed of trust completely unenforceable and unassignable."

A MERS press release said

"The Court's dismissal of these 72 cases against MERS, including six class actions, is an extremely significant ruling and shows that claims being made against MERS and MERSCORP alleging fraud, or that security interests are unenforceable, or alleging that foreclosures are inappropriate due to MERS’ presence as a party, are meritless,” said Janis Smith, MERSCORP Vice President for Corporate Communications. “The Court's clearly-worded order affirms the validity of the MERS business model and the exercise of powers associated with it."

IN RE Mortgage Electronic Registration Systems (MERS) Litigation, MDL Docket No. 09-2119-JAT

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On September 14, 2011, Law360 reported that the U.S. Department of Labor's Occupational Safety and Health Administration has ordered Bank of America to pay $930,000 to a former employee allegedly fired for exposing fraud at Countrywide Financial Corp. before its merger with the bank.   OSHA also ordered that the bank rehire the employee, according to an OSHA News Release.  According to the Law360 report, the whistleblower led internal investigations at Countrywide (before the BofA merger) regarding its business practices. 

OSHA found that the employee's firing violated the whistleblower protections included in the Sarbanes-Oxley Act (SOX), Law360 reported.   OSHA is the federal agency responsible for investigating complaints under SOX's whistleblower protections.  BofA may appeal the decision.

The OSHA decision is a strong reminder of the importance of SOX policies and procedures regarding the handling of internal complaints and non-retaliation policies.

(For further information:  OSHA News Release; LA Times Blog; CNBC.com)

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On September 8, 2011, the New York Times reported that the Securities and Exchange Commission is close to settling claims that Fannie Mae and Freddie Mac failed to adequately disclose their subprime mortgage risk.  The SEC investigation centers on whether the GSEs misled its regulators and the public regarding the nature and extent of risk they carried in connection with subprime mortgage purchases.  According to the report, the civil settlement under discussion would not include any monetary penalty or admission of fraud. 

The report of the settlement comes one week after Fannie and Freddie's regulatory, the Federal Housing Finance Agency, sued 17 firms to recover losses allegedly tied to mortgage-backed securities packed with subprime loans that were sold to Fannie and Freddie.  (See FHFA press release.)   A significant issue in the FHFA's case is whether Fannie and Freddie were aware of  the risk associated with the subprime loans purchased from the 17 firms.   As attorney Andrew Sandler recently noted in a Wall Street Journal article ("What Did Fannie, Freddie Know?", 9/6/2011), the firms sued by the FHFA will likely argue that Fannie and Freddie knew that the loans were risky when they were acquired, and that losses were due to economic conditions, not faulty underwriting.  "It will become clear that the plaintiffs knew as much as the defendants about the quality of these loan portfolios," Sandler said in the article.

It remains to be seen whether the SEC settlement, which may include terms suggesting that Fannie and Freddie were aware of subprime loan risk in their portfolio, will impact or conflict with the FHFA's case.

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An August 9, 2011 Law360 article ("Consumer Financial Protection Bureau:  Open for Business") by attorney Gregory J. Pulles of Briggs and Morgan PA provides an overview of the Consumer Financial Protection Bureau's (CFPB) new powers as of the July 21, 2011 "designated transfer date."  The article summarizes a number of functions transferred to the CFPB from other federal agencies, and sets out the enumerated consumer laws that now fall within the CFPB's enforcement and rule-making purview.

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