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

On February 2, 2012, Perkins Coie issued its weekly Financial Services Bulletin, including an article discussing the Memorandum of Understanding between the Federal Trade Commission and the Consumer Financial Protection Bureau regarding coordinated efforts to enforce consumer protection laws.  Section 1024(c)(3) of the Dodd-Frank Act requires the CFPB and the FTC to work together to coordinate their enforcement activities and promote consistent regulatory treatment of consumer financial products and services.

Read the Perkins Coie Bulletin

Read the FTC Press Release

Read the MOU

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On January 11, 2012, the Consumer Financial Protection Bureau (CFPB) released new procedures for regulating nonbank mortgage lenders.  The Mortgage Origination Examination Procedures apply to independent lenders, brokers, servicers, and others unaffiliated with banks and depository institutions, the bureau said in a statement.

The rules are a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and were published one week after the January 4, 2012 recess appointment of Richard  Cordray as the bureau's first director. The appointment of a director was a precondition to the CFPB enforcing regulations on certain sectors, including the nonbanking financial industry such as mortgage lending.

In a statement issued with the release of the new procedures, the CFPB said that the bureau's supervision of the nonbank financial sector will be rolled out in phases.  Effective immediately, the CFPB will begin regulating nonbank entities involved in mortgage lending, including originators, brokers, servicers, and loan modification services; payday lenders; and private education lenders.  

For other nonbank financial sectors, including debt collections, consumer credit reporting, and auto financing, the CFPB may supervise "larger participants" after that term is defined.

The bureau's publication of the rules of the game for nonbank mortgage lenders is a watershed moment for the agency.  The agency now has authority to oversee entities that were a main target of the Dodd-Frank financial reform legislation, and it intends to immediatly begin its supervision program. 

The bureau took little time to issue these regulations after the director's appointment, and significant enforcement has already begun with the announcement that the CFPB is investigating New Jersey-based PHH, Corp. in connection with how the company handled mortgage insurance premiums.  (Read more here.)  

Read more about the CFPB's new regulations for nonbank mortgage lenders:  Wall Street Journal Online ; Law360.

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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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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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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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In what may signal a trend in the government's enforcement efforts in the financial services industry, on May 3, 2011 the Department of Justice filed a False Claims Act suit against Deutsche Bank AG and its now defunct unit MortgageIT Inc. seeking over $1.1 Billion in damages.  The Complaint filed in Manhattan federal court alleges that the Federal Housing Administration (FHA) paid over $386 million in insurance claims on defaulted mortgages that MortgageIT Inc. approved for the U.S. Department of Housing and Urban Development 's FHA program between 1999 and 2009.   The Complaint alleges that MortgageIT and its parent failed to maintain quality control standards over the FHA insured loans, resulting in false certifications that the lender had complied with the requirements of HUD's Direct Endorsement Lender program.  The case originated from a HUD investigation subsequently referred to the U.S. Department of Justice.

Companies faced with alleged False Claims Act violations have significant exposure. The FCA provides for mandatory civil penalties of up to $11,000 for each false claim to the government, as well as treble damages. In the MortgageIT case, which involves thousands of FHA endorsed loans, the government alleges damages of at least $386 million, trebled to over $1.1 billion, plus civil penalties.

The MortgageIT False Claims Act case is unique because of the number of alleged false claims and because it is tied alleged programmatic issues rather than specific false claims on individual loans. The government's prior False Claims Act cases in connection with the FHA-endorsed loan program involved alleged false claims at the loan-loss level, not a systemic allegation of false statements tied to controls and processes.  The wide-reaching scope of the false claims alleged in the MortgageIT case is startling.  Rather than alleging false claims specific to each loan, the government claims that all FHA loans that MortgageIT endorsed during the time period that it allegedly submitted fraudulent certifications of compliance with HUD's FHA program regulations are "false claims" under the Act.  It remains to be seen whether this broad allegations, not tied to any specific, is actionable under the FCA.

The MortgageIT FCA case is significant for additional reasons.  First, the case is likely the government's opening salvo of financial industry enforcement actions using the FCA.  Future claims may include, not only the FHA program, but claims in connection with Small Business Administration loans and other government-sponsored programs tied to the financial industry.  Second, the MortgageIT case is an advertisement to relators and whistleblowers; the case will undoubtedly result in actions under the FCA's "qui tam" provisions, which allow private individuals to file FCA suits on behalf of the government and obtain monetary rewards if the case is successful.

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Read Perkins Coie LLP's 4/21/2011 Financial Service Bulletin regarding two proposed rules for which the Federal Reserve is seeking comment: Financial Services Bulletin (4/21/2011).

One of the proposed rules includes significant changes under Regulation Z, which implements the Truth-in-Lending Act.  Under the proposed rule, creditors must determine a consumer's ability to repay a mortgage before making a loan.  The proposed rule also implements certain other requirements under the Dodd-Frank Act, including a limitation on prepayment penalties.

The Board is soliciting comment on the proposed rule until July 22, 2011. However, general rulemaking authority for TILA is scheduled to transfer to the new Consumer Financial Protection Bureau on July 21, 2011.  Therefore, the Board acknowledged in its press release that this Regulation Z rulemaking will not be finalized by the Board.

TILA and Regulation Z have long been a significant source of consumer lending litigation.  The increased regulation of mortgages in the proposed Regulation Z amendments may lead to yet another wave of consumer protection litigation tied to residential mortgages.  How impactful the amendments will be, and how they will be enforced and regulated, are important questions that will be answered in time.

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On December 6, 2010, Attorney General Eric Holder announced the results of "Operation Broken Trust," a nationwide law enforcement effort formed by the Financial Fraud Enforcement Task Force to investigate investment fraud.  Holder said in a press release:

With this operation, the Financial Fraud Enforcement Task Force is sending a strong message.   To the public: be alert for these frauds, take appropriate measures to protect yourself, and report such schemes to proper authorities when they occur.  And to anyone operating or attempting to operate an investment scam: cheating investors out of their earnings and savings is no longer a safe business plan - we will use every tool at our disposal to find you, to stop you, and to bring you to justice.

Holder was joined at the press conference by representatives of the other federal agencies comprising the task force, including the SEC, U.S. Postal Inspection Service, and IRS. "Operation Broken Trust," formed in August of this year, resulted in 60 civil enforcement actions and 231 criminal cases.  The effort targeting a total of 343 criminal defendants and 189 civil defendants, and involved more than $10 billion in estimated losses, according to the DOJ press release. 

"Operation Broken Trust" is part of the federal governments effort to marshal the efforts of agencies involved in the financial market through the Financial Fraud Enforcement Task Force.  The task force's civil and criminal cases brought to date cover a broad spectrum of the financial markets, and involve alleged violations ranging from securities fraud and insider trading to mortgage fraud and lending discrimination.

Read more about this topic at:  Law360; The Washington Post; and The Los Angeles Times.

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On December 2, 2010, the U.S. Securities and Exchange Commission announced that "budget uncertainty" has caused it to postpone setting up an office to handle whistleblower complaints.  A new SEC whistleblower office is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Once created, the new SEC whistleblower office will be responsible for receiving and vetting tips received through a new bounty program created in Dodd-Frank.  Under that program, whistleblowers who report to the SEC “original information” about securities law violations can earn 10% to 30% of monetary sanction of more than $1 million in a successful enforcement action brought by the agency.

The bounty program has created concern in the business community that it may motivate disgruntled employees and others to file frivolous allegations, resulting in companies needlessly expending resources in investigation and defense costs.  (Read more about Dodd-Frank's bounty provisions in the November 2010 Corporate Counsel:  "When the Whistle Blows, Dodd-Frank's bounty provisions has GCs staying up nights.")

Existing staff within the Division of Enforcement will on an interim basis handle the tasks that would have been assigned to a formal whistleblower office within the agency, according to the SEC announcement. The SEC said on its website that it had similarly deferred creating four other offices required by Dodd-Frank: an office to oversee credit ratings; a new investor advisory committee; an office of investor advocate; and an office of women and minority inclusion.

The SEC said it would have more information on the implementation dates for the deferred offices after Congress finalized the 2011 budget.  The Dodd-Frank law includes additional funding for the SEC to handle the tasks assigned to the agency; however, disputes on Capital Hill about budget issues has created uncertainty about the amount of funding that the SEC and other federal agencies will actually receive to implement Dodd-Frank.  (Read more about financial reform budget issues at Law360 Financial Services Law:  GOP May Slow Down Financial Reform.)

Dodd-Frank charges the SEC with a substantial rewrite of the financial regulatory framework, including rewriting 105 rules, creating five new divisions, and completing 20 studies.  The agency  has until July 2011 to complete much of its rewrite work.

(Read more on this topic at Law360 and The Wall Street Journal.)

 

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At a November 29, 2010 press conference, Attorney General Eric Holder confirmed that Preet Bharara,  U.S. Attorney for the South District of New York, is leading a "very serious" criminal probe into Wall Street firms.  While Holder declined to provide details, the announcement is on the heals of a November 22 FBI search at three hedge funds purportedly seeking evidence related to an insider trading investigation.   The investigators searched the offices of Diamondback Capital Management LLC, Level Global Investors LP and Loch Capital Management LLC.  FBI spokesman James Margolin said the Bureau was “conducting searches as part of an ongoing investigation.”

Read more at Law360 ; Bloomberg.

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A November 17, 2010 article in  The Wall Street Journal reports that the Federal Deposit Insurance Corp (FDIC) is conducting about 50 criminal investigations in connection with U.S. banks that have failed since the start of the financial crisis. The FDIC is responsible for dealing with bank failures.  Its open criminal investigations concern former executives, directors and employees at failed U.S. banks who may have engaged in recklessness, fraud or other criminal behavior, the Journal said.  The FDIC is also increasing the pace of its civil claims to recover money from former bankers at busted lenders, the newspaper said.

More than 300 banks and savings institutions have failed since the beginning of 2008, but only a few have led to criminal charges against bank officials.

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A class action filed against the SEC in the Southern District of New York alleges that during a 16 year period the federal agency "serially disregarding" complaints and allegations about Bernard Madoff's $65 billion Ponzi scheme.   The complaint asserts that the SEC "did not adequately review the facts nor reasonably understand the Ponzi scheme allegations presented in the numerous complaints provided to the SEC over the course of sixteen years."  The suit is filed on behalf of persons who invested in Madoff Investment Securities, LLC, directly or indirectly, between November 1992 and December 2008, and who have filed administrative claims with the SEC seeking to recover damages for the agency's alleged negligence.

(Click here to access the Class Action Complaint.)

In 2009, the SEC's Inspector General issued a 457-page report that included details of the agency's failure to detect Madoff's Ponzi scheme despite numerous clues about the fraud.   (The SEC's IG Madoff Report is available here.)

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September 22, 2010 - The Treasury Department has released a sample 4-page form that will replace mortgage disclosure requirements of the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). The proposed form can be found here.

Improving mortgage disclosures is a priority of the new Consumer Financial Protection Bureau.  "Moving quickly to improve mortgage disclosures is one in a series of concrete steps we're taking to implement the historic consumer protections included in the Dodd-Frank financial reform law," said Secretary Geithner in a press release.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the newly created CFPB is responsible for combining and simplifying two overlapping mortgage disclosure forms that TILA and RESPA require lenders to provide to applicants.  TILA and RESPA disclosures have been the source of a tremendous amount of litigation, particularly since the mortgage-melt down, where borrowers facing foreclosure have asserted various TILA and RESPA violations for damages or to rescind the loan.
 

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September 21, 2010 - The Obama administration designated July 21, 2011 as the date the Consumer Financial Protection Bureau (CFPB) will take over enforcement of federal consumer protection laws, including TILA and RESPA, that impact mortgage bankers.  The announcement was included in a Federal Registry Notice.  

Effective July 21, 2011, the CFPB will have full authority to prescribe rules or issue orders pursuant to any federal consumer financial law (as defined in the Dodd-Frank Act); officially receive staff transfers from the other agencies; and take over supervision responsibility of depository institutions with assets in excess of $10 billion.  The Federal Register Notice also states that, prior to July 21, 2011, the CFPB will begin conducting research on consumer financial products and services, develop its nationwide consumer complaint response center, and begin to plan implementation of its risk-based supervision of non-depository covered persons. The CFPB is planning a roundtable discussion to begin the process of merging Truth-in-Lending (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosures.

The implementation of the CFPB will usher in a new era in consumer finance regulation and enforcement.  The broad CFPB authority will allow it to both write regulations and enforce those regulations in connection with consumer lending, including residental mortgage lending. 

On September 17, 2010, President Obama appointed Elizabeth Warren as Assistant to the President and Special Adviser to the Secretary of the Treasury.  Warren is expected to play a key role within the administration in organizing the CFPB.  In annoucing Warren's new role, President Obama stated "[t]he Consumer Financial Protection Bureau will crack down on the abusive practices of unscrupulous mortgage lenders [and] reinforce the new credit card law we passed banning unfair rate hikes."

Read more about Warren's appointment:  http://www.nytimes.com/2010/09/16/business/16consumer.html?_r=1&scp=2&sq=elizabeth%20warren&st=cse

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The 2,000 page Dodd-Frank Wall Street Reform and Consumer Protection Act is ready for its final test:  a full vote by the House and Senate.  The New York Times wrote on Friday (June 25, 2010):

The deal between House and Senate negotiators, sealed just before sunrise on Friday, imposes new rules on some of the riskiest business practices and exotic investment instruments. It also levies hefty fees on the financial services industry, essentially forcing big banks and hedge funds to pay the projected $20 billion, five-year cost of the new oversight that they will face. And it empowers regulators to liquidate failing financial companies, fundamentally altering the balance between government and industry.

The sponsors of the legislation expect that Congress will approve the legislation this week and that President Obama will sign it by the Fourth of July.

The financial reform bill expands the federal government's role in the enforcement and oversight of consumer protection laws and consumer lenders.  The lynchpin of the bill is the creation of a Consumer Financial Protection Bureau (CFPB) with significant regulatory authority.   The CFPB will be part of the Federal Reserve, and led by a director appointed by the President and confirmed by the Senate.  Other key elements of the CFPB include: 

• Examination and enforcement authority.  The CFPB would have authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure scam operators), payday lenders, and student lenders as well as other large non-bank financial companies, such as debt collectors and consumer reporting agencies. Banks and Credit Unions with assets of $10 billion or less will be examined for consumer complaints by the appropriate regulator. 
• Consolidation of consumer protection enforcement.  The CFPB would coordinate consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, the Department of Housing and Urban Development, and Federal Trade Commission.
• Lending discrimination.  The CFPB would oversee the enforcement of federal laws intended to ensure the fair, equitable and nondiscriminatory access to credit for individuals and communities, including the Fair Housing Act and Equal Credit Opportunity Act. 
• Consumer Hotline.  The CFPB would run a national consumer complaint hotline establishing a toll-free number to report problems with financial products and services.
• Coordination with bank regulations.  The CFPB would coordinate with other regulators when examining banks to prevent undue regulatory burden.

The bill also includes provisions that significantly impact residential mortgage lending, including underwriting considerations and disclosure requirements:

• Lenders would be required to provide additional disclosures to consumers on mortgages, including disclosure of the maximum a borrower could potentially pay on a variable rate mortgage.
• Lenders would be required to consider a borrower's "ability to repay" a mortgage during the underwriting process.
• Lenders could not pay brokers "yield spread premiums" or other financial incentives for certain loan types. 
• Pre-payment penalty terms would be prohibited.
• The bill includes enhanced penalties for mortgage lenders and brokers who violate certain consumer protection laws, including penalties up to the equivalent of three-years of interest payments and damages, plus attorney’s fees.
• The bill expands consumer protections for certain high cost mortgages, going beyond the current requirements in HOEPA.

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Reuters.com reports that on Monday (June 7, 2010) the Financial Crisis Inquiry Commission probing the financial crisis subpoenaed Goldman Sachs, after the firm allegedly flooded the commission with 2.5 billion pages of records in response to an earlier request.  According to FCIC Chairman Phil Angelides, in response to an earlier document request Goldman produced 5 terabytes of records, with each terabyte containing 500 million pages of digitized records.  The subpoena includes requests for documents and witnesses concerning Goldman’s synthetic and hybrid collateralized debt obligations and "the ABACUS transactions."

According to its website, the FCIC "is a bipartisan commission that has been given a critical non-partisan mission — to examine the causes of the financial crisis that has gripped the country and to report our findings to the Congress, the President, and the American people." 

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