RC11Kider.LitigationConcerns

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2010 MBA ConferenceLitigation Trends

MBA Regulatory ComplianceConference 2011:Litigation Concerns for the

Compliance Professional,Including Fair Lending andOther Claims

September 26, 2011

Mitchel H. KiderWEINER BRODSKY SIDMAN KIDER PC


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Mi t chel H. Ki derRoad Map to Todays Talk

I. Fair Lending Enforcement In General

II. Federal Trade Commission Recent Enforcement Trends

III. Dept of Housing and Urban Development Discrimination Enforcement Mortgagee Review Board

IV. Department of Justice Deutsche Bank Lawsuit

V. Consumer Financial Protection Bureau Enforcement Authority


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Mi t chel H. Ki derFair Lending

Agencies doing fair lending reviews/examinations: FTC

Prudential Regulators (FDIC, OCC, FRB, etc)

HUD/FHA

DOJ

CFPB (very near future) State regulators and AGs

Claims of fair lending violations can be brought under:

Fair Housing Act

Equal Credit Opportunity Act Fair Credit Reporting Act

Truth in Lending Act

Dodd-Frank mandates CFPB to issue regulations toprohibit abusive or unfair lending practices that promote

disparities among consumers of equal credit worthinessbut of different race, ethnicity, gender or age


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Mi t chel H. Ki derFair Lending

HMDA Dodd-Frank adds new provisions that will requiresubmission of groupings of applications according to:

Originators ID number

Applicants credit score

Total points and fees payable at origination Difference between APR for loan & benchmark rate for all

loans

Loan features such as prepayment penalties, introductoryrate periods, and ability to pay other than fully amortizingpayments

Such other information as CFPB may require

Fair lending will undoubtedly receive greater visibility andCFPB will have additional data under HMDA to support itsanalyses


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The FTCs jurisdiction is limited to nonbank financial entities, such asnonbank mortgage companies, mortgage brokers, finance companies, andunits of bank holding companies. 15 U.S.C. 45(a)(2).

The FTC Act confers jurisdiction only over people or entities organized toengage in for-profit business. See also 15 U.S.C. 45(a)(2).

Banks, thrifts, federal credit-unions, and non-profit organizations falloutside of the FTCs reach.

The FTCs Authority in Mortgage Banking


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In June 2010, the FTC entered into an agreement with Countrywide HomeLoans, Inc. and BAC Home Loans Servicing, LP, to settle allegations ofservicing abuse by the two related servicers.

The companies agreed to pay $108 million, one of the largest judgments everimposed in an FTC-related litigation.

FTC alleged violations of the FTC Act:

inflating the prices of default-related services, including propertymaintenance

As part of the settlement agreement, the companies are permanentlybarred from:

making false or unsubstantiated representations about loan

accounts, such as amounts owed; charging any fee for a service unless it is authorized by the loan

instruments, by law, or by the consumer for a specific servicerequested by the consumer; or

charging any fee for a default-related service unless it is a

reasonable fee charged by a third-party for work actuallyperformed

FTCs Recent Enforcement Actions


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Mi t chel H. Ki der

On January 8, 2009, the FTC announced a settlement with three mortgageloan advertisers that allegedly deceptively touted low monthly paymentsand low rates without disclosing loan terms . . . .

alleged that the companies failed to disclose that advertised lowmonthly payments and low rates only applied for a limited period of

time and that the advertised payments did not include the interest owedeach month or that the interest would be added on to the total loanbalance.

The FTC also alleged violations of TILA and Regulation Z for failing todisclose clearly and conspicuously the repayment terms under theloans.

The consent order barred parties from advertising any rates lower than thatat which the interest is accruing, regardless of whether it was an effectiverate, payment rate, or qualifying rate, and also requires record-keeping

provisions allowing the FTC to monitor compliance with theorder

These matters are similar to the new Mortgage Acts andPractices rule

FTCs Recent Enforcement Actions


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The MAPS rule is a comprehensive new advertising and recordkeepingregulation with the potential to greatly affect the mortgage origination andservicing industry, as well as the greater real estate industry that providescomplementary services.

On July 19, 2011, the FTC issued its Final Rule on Mortgage Acts andPractices (76 Fed Reg. 43826 (July 22, 2011)).

The Final Rule is codified at 16 C.F.R. 321.1 321.7.

The Final Rule is effective August 19, 2011.

Virtually identical to the proposed rule issued for comment in

September 2010, with minor, non-substantive changes.

This rule was issued pursuant to a direct congressional mandate in the 2009Omnibus Appropriations Act (Public Law No. 111-8 (March 11, 2009)).

New rule defines advertisements broadly and imposesburdensome recordkeeping requirements.

Mortgage Acts and Practices (MAPS) Rule


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Mi t chel H. Ki derThe MAPS Rule in General

The FTCs intent is to protect prospective borrowers more effectively byestablishing clear standards for advertisers, increasing the efficiency of lawenforcement efforts, and serving as a deterrent to unlawful behavior.

The Rule prohibits any material misrepresentation, either express or implicit, inany commercial communication, regarding any mortgage credit product.

Mortage credit product is defined as any form of credit that is securedby real property or a dwelling and that is offered or extended to aconsumer primarily for personal, family, or household purposes.

A dwelling for the purposes of this rule is a residential structure thatcontains one to four units, whether or not that structure is attached to real

property. It specifically includes condos, co-ops, mobile homes,manufactured homes, and trailers.


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Mi t chel H. Ki derCOMMERCIAL COMMUNICATION

The rule establishes specified types of advertisements that are deceptive, anddefines advertising, called commercial communications, very broadly:

any written or oral statement, illustration, or depiction, whether in Englishor any other language, that is designed to effect a sale or create interest inpurchasing goods or services, whether it appears on or in a label, package,package insert, radio, television, cable television, brochure, newspaper,magazine, pamphlet, leaflet, circular, mailer, book insert, free standing insert,letter, catalogue, poster, chart, billboard, public transit card, point of purchasedisplay, film, slide, audio program transmitted over a telephone system,telemarketing script, onhold script, upsell script, training materials providedto telemarketing firms, program-length commercial (infomercial), the

Internet, cellular network, or any other medium. Promotional materials anditems and Web pages are included in the term commercial communication.

This definition includes any communication on tv or radio, productlabels, packages, package inserts, billboards, webpages, blogs, andany collateral material handed out in branch offices.


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Mi t chel H. Ki derMAPS Recordkeeping Requirement

The Rule imposes a 2-year recordkeeping requirement on all materiallydifferentcommercial communications.

Copies of all materials showing what products and rates were offered must bekept for 2 years as well.

Copies of all materials showing any additional products or services offered in

conjunction with the mortgage credit products offered.The records may be kept in any readable format, and may be kept in the samemanner as all other materials that are kept in the ordinary course of business.

Failure to keep these records is an independent violation of the Rule.

Effective August 19, 2011


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Issued December 1, 2010 16 C.F.R.322

prohibits mortgage assistance relief services providers from misrepresentingin any advertisement:

the likelihood of negotiating or otherwise obtaining any result;

the amount of time any result may be obtained in; that the provider is affiliated or endorsed by a federal or state government

program, or affiliated or endorsed by a lender or servicer;

the consumers obligations to make payments; the terms or conditions ofthe loan;

the terms or conditions under which a refund may be obtained for theservices provided;

the actual services performed by the provider; that the consumer willreceive legal representation;

the availability of alternatives to the for-profit providers services;

the amount of money the consumer may save by using the

providers services; and the cost of the providers services.

FTC Mortgage Assistance Relief Services Rule


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Mi t chel H. Ki der

In recent years, the FTC has focused its enforcement activities in the financialservices industry on mortgage assistance relief services. Since 2008, the FTChas filed 32 law enforcement actions against providers of mortgage assistancerelief services. Among these 32 enforcement actions, the FTC has soughtredress for the following types of conduct it has deemed deceptive or unfair:

stating that the company can achieve substantial reductions in interestrates, principal amounts, or payments within a specific period of time;

stating that the company has a special relationship with the servicer orlender;

stating that the company is affiliated with the government, a non-profitorganization, or the consumers lender or servicer; and

stating that there is a high likelihood or guarantee of success.

FTC Enforcement of MARS Rule


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Lenders have every right to ascertain the incomes of families todetermine whether they are eligible for a mortgage loan but they haveno right to use a pregnancy or a short-term disability as a cause todeny that family a mortgage they would otherwise qualify for.Having a child should be a time for a family to celebrate and must no

be a cause for unfair lending practices. Shaun Donovan, July 21,2010.

Denying a mortgage to people just because theyre having a baby isflat wrong. . . I applaud HUD for taking action on this practice that

could potentially affect untold numbers of families. Vice PresidentJoe Biden

Recent HUD Enforcement Trends:

Maternity Status


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In May 2011, HUD entered into a settlement agreement with CornerstoneMortgage Company for allegedly discriminating against a couple on the basis ofthe mother being on maternity leave

Mother claimed that the company pre-qualified her, and after learning she

was on maternity leave, informed her that maternity leave is classified asshort-term or temporary disability income, and may not be used forqualification on the loan

Settlement included a $750,000 fund designed to compensate other potentialvictims of this practice

Required an administrator who sent out notices to all potentially affected

borrowersPaid $15,000 directly to the woman who made the complaintRequires additional training on discriminatory practices

Requires retention of all records re: obligations under the agreementfor one yearRequires a report to HUD after one year on the progress of the

agreement


Maternity Status


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Mi t chel H. Ki der

HUD/DOJ filed a complaint against MGIC alleging violations of FairHousing Act in their decision to deny PMI to a borrower based onmaternity leave

USA v. Mortgage Guaranty Insurance Corp., No. 2:11-CV-882,Complaint (W.D. Pa. July 5, 2011);42 USC 3604(b); 42 USC 3605(a)Borrower was conditionally qualified based on approval by PMIPMI allegedly denied based on maternity leave


Maternity Status


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Mi t chel H. Ki der

Not only a HUD trend a class action was filed against MGIC allegingthe same facts

Neals v. Mortgage Guaranty Insurance Corp., No. 2:10-CV-1291(W.D. Pa.)The fair housing claims have survived a motion to dismiss

42 USC 3604(b)claim re: limiting services associated with adwelling based on maternity status survived motion to dismiss42 USC 3617 claim re: interfering in the exercise or enjoyment ofany right granted by the FHA on basis of maternity status

survivedNeals v. MGIC, No. 2:10-CV-1291, Report and Recommendation(W.D. Pa. April 6, 2011)


Maternity Status


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Mi t chel H. Ki der

Neals opinion dismissed claims based on 3604(a) and 36053604(a) makes it unlawful to refuse to sell or rent or otherwise makeunavailable

This claim was dismissed because the transaction was a

refinance this may be viable on a purchase transaction underthe logic of Neals

3605(a) makes it unlawful for any person or other entity whosebusiness includes engaging in residential real estate-relatedtransactions to discriminate against any person in making available

such a transaction . . . .This claim was dismissed because providing insurance is notproviding financial assistance to the borrower may be viableagainst a lender under Neal


Maternity Status


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Mi t chel H. Ki der

Just published list of administrative actions (240/1600)

Mortgagee Review Board administrative actions against

servicers for MIP issues, payment as well as late reporting

HUDs Mortgagee Review Board


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Mi t chel H. Ki der

The Governments key allegations:

Systemic violations in quality control make Deutsche Bank responsible forall FHA losses on the loans at issue

Alleged violations (systemic vs. loan level)

Dysfunctional quality control systemIgnoring QC audits and procedures

Failing to provide guidance

Chronically understaffing QC functions

Stuffing QC audits in closet, unread & unopened

Failure to perform reviews of EPDs in first 6 months (more than 60days late)

False annual certifications

Deutsche Bank DOJ Lawsuit


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What Can We Learn From This?

Watch your FHA compare ratios. They are used to identify problemlenders

Review QC plan for compliance with FHA rules

Make sure that you review all EPDs in first 6 months

Remind underwriters regularly how important it is to document gift funds,cash investment, and the source of a downpayment properly

For servicers, follow HUD Handbook 4330.1Think broadly of regulatory requirements that may be implicated

Deutsche Bank DOJ Lawsuit


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Mi t chel H. Ki derConsumer Financial Protection Bureau

Created in July 2010 by Title X of the Dodd-Frank Act

Live as of July 21, 2011

Independent Agency Within the Federal Reserve System

Broad Consumer-Protection Mandatenot a prudential regulator

Powerful Director

President nominates; Senate Confirms

Richard Cordray is nominee working his way through theconfirmation process currently

Removable only for inefficiency, neglect of duty, or malfeasance inoffice

Subject to a Systemic Risk Veto


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Mi t chel H. Ki derCFPBs Enforcement Authority:

The Bureau has enforcement authority (with a few exceptions)for the following enumerated consumer laws and forregulations under them:

Alternative Mortgage Transaction Parity Act of 1982 (Parity

Act) Consumer Leasing Act of 1976

Electronic Fund Transfer Act (except section 920) (EFTA)

Equal Credit Opportunity Act (ECOA)

Fair Credit Billing Act

Fair Credit Reporting Act (except sections 615(e) and 628)

Home Owners Protection Act of 1998

Fair Debt Collection Practices Act (FDCPA)

Section 43 of the Federal Deposit Insurance Act (subsecs. (b)-

(f))


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Gramm-Leach-Bliley Act 502-509 (except part of 505)

Home Mortgage Disclosure Act of 1975 (HMDA)

Home Ownership and Equity Protection Act of 1994(HOEPA)

Real Estate Settlement Procedures Act of 1974 (RESPA)

S.A.F.E. Mortgage Licensing Act of 2008

Truth in Lending Act (TILA)

Truth in Savings Act

Section 626 of the Omnibus Appropriations Act, 2009 Interstate Land Sales Full Disclosure Act

The Mortgage Reform and Anti-Predatory Lending Act (TitleXIV of Dodd-Frank)


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Enforcement authority under these enumerated laws isexclusive vis vis federal agencies other than the FTC

The Bureau can enforce regulations that it issues under TitleX itself (also called the Consumer Financial Protection Act of2010), defining practices as unfair, deceptive, or abusive

(including prophylactic rules) The Bureau can enforce FTC regulations under the FTC Act,

defining practices as unfair, deceptive or abusive, as if theywere the Bureaus own regulations under Title X

The Bureau can enforce violations of other Federal consumer

financial laws, and regulations under them, as violations ofTitle X

This allows the Bureau to seek all of the broad newremedies available under Title X for a violation of any ofthe statutes that it enforces


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Mi t chel H. Ki der

Rescission or reformation of contracts

Refund of moneys

Return of real property

Restitution

Disgorgement of profits

Compensation for unjust enrichment

Damages

Public notification of violations (with costs to be borne by

the violator) Limits on activities or functions

Civil money penalties

But no punitive damages under Title X

CFPB Remedies


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Mi t chel H. Ki der

Three Tiers of Civil Money Penalties:

First Tierup to $5,000 per day

Second Tierup to $25,000 per day

Third Tierup to $1 million per dayNew TILA/RESPA Penalties

Penalties for servicing violations increased to $2,000 perviolation and up to $1 million for class actions

Individual liability for mortgage originators

CFPB Penalties


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Mi t chel H. Ki der

Issue subpoenas Issue Civil Investigative Demands (CIDs)

Must state nature of conduct constituting the alleged violation andapplicable provision of law

Subject can petition Bureau to modify or set aside

Bureau can petition Federal district court to enforce

Bring suit in court

Commence administrative proceedings (C&D)

Administrative hearing with appeal to Court of Appeals

Temporary C&D where violation is likely to cause the person to be

insolvent or otherwise prejudice the interests of consumers before thecompletion of the proceedings

Enforce FTC regulations defining unfair/deceptive practices

CFPB Powers


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Mi t chel H. Ki der

State Attorneys General Can Enforce Title X in State or Federal court

But only as interpreted by the Bureau in regulations

This prevents state AGs from advancing aggressive interpretations

of the terms unfair, deceptive or abusive, or from using Title X toenforce otherwise unenforceable provisions of other consumerfinancial statutes or regulations

Not clear whether state AGs can seek the long list of remediesavailable to the Bureau

State Attorneys General under Dodd Frank


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Mi t chel H. Ki derSpeaking of the States Enforcers . . .

On September 1, 2011, the NY Department of Financial Servicesannounced an agreement with Goldman Sachs, Litton Loan Servicing, andOcwen Financial Corp.

Condition of approval of the sale of Litton to Ocwen

Commitment from Goldman to write down approximately $53Million in unpaid principalForgive 25% of the principal balance on all 60-day delinquent homeloans in New York serviced by Litton and owned by Goldman as ofAugust 1

Does not preclude any future investigations


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Mi t chel H. Ki der

In Conclusion . . .

Regulators and enforcement agencies continue to use the

hostile economy as a basis for unprecedented aggression

in enforcement

Many new theories being tested in administrative

investigations and courts

Cannot afford to be passive with compliance

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