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.
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.
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.
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.
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.
On November 6, 2013, the Consumer Financial Protection Bureau (CFPB) published an advanced notice of proposed rulemaking announcing its intent to issue debt collection regulations that restrict how companies may contact consumers using mobile phones and other modern technologies. The CFPB also announced that it intends to expand the types of firms that will be governed by its debt collection regulations. The CFPB plans to solicite comments regarding expanding the scope of the Fair Debt Collectin Practices Act (FDCPA) to include debt collection practices that are carried out over mobile phones, email and other systems and technologies not contemplated when Congress passed the FDCPA in 1977. An American Banker article quoted CFPB Director Richard Cordray as stating, "Updating the legal framework to protect today’s consumers and to allow fair and appropriate use of modern technology is a high priority for the Consumer Bureau, which motivates this advance notice of proposed rulemaking."
The Dodd-Frank Act authorized the CFPB to regulate debt collection firms, and to write rules governing their business practices. In January 2013, the CFPB began regulating debt collection firm that take in $10 million in receipts from consumer debt collection activities, which covers 60 percent of the total industry in the US.
Read more: The Washington Post: Debt collectors face new rules under proposal from Consumer Financial Protection Bureau; AmericanBanker: CFPB Debt Collection Rules May Move in Unprecedented Direction; CFPB Press Release.
On September 25, the Federal Trade Commission (FTC) announced it had settled its first case alleging that a debt collector had unlawfully used text messaging while attempting to collect debts. The August 23 complaint alleged that two Glendale, California based debt collection companies violated the Fair Debt Collection Practices Act (FDCPA) and FTC Act by failing to disclose in English- and Spanish-language text messages and phone calls that the companies were debt collectors. The Complaint also alleged that the companies falsely represented themselves as law firms, and improperly revealed debts to third-parties. The companies settled the FTC’s claims by agreeing to pay a $1 million civil penalty and to alter the allegedly unlawful debt collection practices, including agreeing to refrain from contacting people via text without their express consent.
Read More: cnbc.com: "FTC alleges debt collection via text message"
latimes.com: "Collection agency fined $1 million for unlawfully texting debtors"
On September 6, 2013, the Department of Justice’s Civil Rights Division announced it had settled a lawsuit alleging that a now defunct Los Angeles automobile dealership violated the Equal Credit Opportunity Act by charging higher interest rate markups to non-Asian customers in connection with auto loans. The settlement with Union Auto Sales Inc. includes a $125,000 payment to resolve the allegations. Union Auto Sales denied all liability. The case originated from a referral from the Federal Reserve Board involving Nara Bank. The Justice Department resolved its claims against the bank in 2009.