CFPB Warns Again About Marketing Services Agreements

Following up on a series of enforcement actions against industry participants engaged in “marketing services agreements” (“MSAs”), the CFPB issued a Compliance Bulletin (No. 2015-15) entitled “RESPA Compliance and Marketing Services Agreements [“MSAs”].” (The Bulletin can be accessed by clicking here.) The thrust of the Bulletin is again warning companies that “many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement, risks that are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past.”

Background. MSAs have been around for some time now. Basically, they are contracts in which a person who is in a position to refer settlement service business (e.g., real estate brokers, title insurance agents, residential mortgage lenders) agrees to perform certain advertising and marketing services on behalf of a settlement service provider in return for compensation.

RESPA § 8(a) prohibits the payment of fees or other “things of value” for the referral of settlement service business. Notwithstanding RESPA § 8(a), many industry participants have long believed that MSAs could be justified so long as the advertising and marketing services were bona fide, non-duplicative and actually performed, and the compensation paid for the services did not exceed their reasonable market value – even if referrals were involved. This belief was based on § 8(c)(2) of RESPA (“Nothing in [RESPA § 8] shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”), and § 14(g)(iv) of Regulation X (“Section 8 of RESPA permits … [a] payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”).

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CFPB Moves to Ban Class Action Waivers But Will Not Ban Individual Arbitration

In a move that the financial industry long anticipated but nonetheless greeted with loud groans, the Consumer Financial Protection Bureau (“CFPB”) on October 7, 2015 proposed to ban class action waivers in contracts for consumer financial products and services. Although the proposed ban would not take effect for a few years, it would have a significant impact on banks and nonbank lenders because it is expected to lead to a major increase in class action litigation. Since class action waivers and arbitration clauses have historically gone hand-in-hand in consumer agreements, these provisions have helped stem the tide of class actions in recent years. According to the CFPB, more than half of credit card contracts and 44 percent of checking account agreements contain arbitration clauses, and these provisions are common in auto finance contracts as well.

The CFPB’s announcement came in the form of a 34-page “outline of proposals”1 that must be reviewed by a Small Business Review Panel before the CFPB can begin formal rulemaking. The CFPB discussed its proposals at a field hearing in Denver, where CFPB Director Richard Cordray criticized class action waivers as a “free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law.”2 Industry representatives argued that the proposed class action waiver ban would be harmful because it would encourage frivolous lawsuits. They also argued that it was unnecessary because most consumers are able to resolve their disputes through customer service inquiries or complaint mechanisms operated by the CFPB and the state attorneys general.

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CFPB Issues Rule on Mortgage Guidelines for Special Classes of Creditors

The Consumer Financial Protection Bureau (“CFPB”) this week issued a final rule making a series of changes to its mortgage guidelines for small creditors and creditors in rural and underserved communities.

In a series of rulemakings issued pursuant to the Dodd-Frank Act, the CFPB has applied special standards for mortgages extended by small creditors and creditors operating in rural and underserved communities.  In these rulemakings, the CFPB stated that it likely would revisit its regulatory definitions of small creditors and creditors operating in rural and underserved communities.  Several rules issued by the CFPB, including those related to escrow requirements for higher-priced mortgage loans (“HPML”), ability-to-repay requirements (“ATR”), and requirements under the Home Ownership and Equity Protection Act (“HOEPA”), contain these terms and are thus subject to the CFPB’s regulatory definitions.  Continue Reading

FinCEN Proposes AML Regulations for Investment Advisers

In August 2015, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed regulations that would require investment advisers subject to SEC registration to establish anti-money laundering (AML) programs.1 The proposal also adds such investment advisers to the definition of “financial institutions” under the Bank Secrecy Act (BSA), which consequently requires them to report suspicious activity to FinCEN and subjects them to reporting and recordkeeping requirements under the BSA.

Background FinCEN has been contemplating AML regulations for investment advisers for over a decade. In 2003, FinCEN proposed regulations that would have required SEC-registered investment advisers and a significant number of unregistered advisers to establish AML programs.2 In 2008, FinCEN withdrew that proposal, stating that it would “continue[] to consider the extent to which BSA requirements should be imposed on investment advisors.”3 In subsequent years, FinCEN directors noted in public remarks that the agency was in the process of drafting new AML regulations covering investment advisers.4 In light of these developments, as well as SEC no-action relief permitting investment advisers to perform broker dealers’ customer identification program obligations,5 some investment advisers have already implemented voluntary AML programs.

To read the full client alert, please click here.

What Do You Get for the Plaintiff Who Has Everything? Maybe a Class Action, Ruled The Seventh Circuit

Perturbed by two allegedly unwanted faxes, Arnold Chapman brought a putative class action under the Telephone Consumer Protection Act (“TCPA”). For himself, he sought the most the statute could provide – $3,000, an injunction, and costs. ($3,000 represents $500 in statutory damages for each of the two faxes, trebled for an allegedly knowing or wilful violation.) The defendant offered Chapman $3,002, and the entry of an injunction, and costs. Chapman let the offer expire without accepting it. The District Court dismissed the case as moot.

Chapman appealed, and late last week, the Seventh Circuit reversed the lower court ruling. In Arnold Chapman v. First Index, Inc., the Seventh Circuit held that an expired offer of judgment does not moot an individual plaintiff’s claims. In so ruling, the panel reversed circuit precedent and aligned itself with the Second, Ninth, and Eleventh Circuits on the issue.

Per the court, “A case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party,” citing to Knox v. Service Employees International Union, 132 S. Ct. 2277, 2287 (2012). “Many other decisions say the same thing. By that standard, Chapman’s case is not moot. The district court could award damages and enter an injunction. Chapman began this suit seeking those remedies; he does not have them yet; the court could provide them.”

The court acknowledged that in other circumstances, an unaccepted offer of judgment would moot the case. Indeed, “If there is only one plaintiff, however, why should a court supply a subsidized dispute-resolution service when the defendant’s offer means that there’s no need for judicial assistance, and when other litigants, who do need the court’s aid, are waiting in a queue?” But in a class setting, “Settlement proposals designed to decapitate the class upset the incentive structure of the litigation by separating the representative’s interests from those of other class members.”

The Seventh Circuit sought to clarify the law in that circuit ahead of the same issues that will be presented for the Supreme Court in Campbell-Ewald Co. v. Gomez. Oral arguments in Campbell-Ewald v. Gomez are scheduled for October 14, 2015.

Meet Chris Christie’s Choice for Commissioner of Banking & Insurance for New Jersey

As part of a restructuring in his administration, New Jersey Governor and GOP Presidential Candidate Chris Christie has nominated Richard J. Badolato, formerly a private practice insurance litigator in Roseland, NJ, as the new Commissioner of the New Jersey Department of Banking and Insurance. Mr. Badolato has been serving as Acting Commissioner since August 1, 2015.

The New Jersey State Bar Association’s Banking Law Section, in conjunction with the New Jersey Bankers Association and the New Jersey Mortgage Bankers Association, will be hosting an Evening with the Commissioner on Thursday, September 17, 2015, at 6pm, in New Brunswick, NJ. This event will be a great opportunity for banking, insurance, and real estate professionals from throughout the region to meet the state’s new chief regulator for these key industries. In order to register for this unique and exciting event, please click here.

Mr. Badolato previously served as president of the New Jersey State Bar Association, president of the New Jersey State Bar Foundation, and Chairman for the Supreme Court Advisory Committee on Professional Ethics. Mr. Badolato graduated from Rutgers School of Law and Fairfield University.

The Banking Law Section is composed of several of New Jersey’s top banking and financial services practitioners, including current Section Vice Chair, Travis Nelson, and former Chair Robert Jaworski, both of Reed Smith’s Princeton Office.

Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and Co-Chair of the Anti-Money Laundering & Trade Sanctions Group, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in regulatory compliance, corporate governance, transactions, and examinations and enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation, editor-in-chief of the ABA’s Banking Law Committee Journal, and Vice-Chair of the Banking Law Section of the New Jersey State Bar.

The European Securities and Markets Authority (ESMA) published advice on the extension of the Alternative Investment Fund Managers Directive (AIFMD) passport on 30 July 2015 (the Advice).

For Jersey and Guernsey, the ESMA Advice was positive: no obstacles exist to the extension of the AIFMD passport to these jurisdictions.  AIFMD Article 67 envisages that a delegated act will follow within three months to implement this advice.  However, the time-frame for this now appears to be uncertain.

The Advice notes that the Commission are obliged to adopt a delegated act extending the EU passport to non-EU AIFs and non-EU AIFMs within three months of receipt of positive advice from ESMA (although the date on which the rules will become applicable in all Member States will be specified within in the delegated legislation.  This date will be determined according to a number of listed criteria e.g. internal market, investor protection, risk monitoring). There are further provisions in AIFMD Article 58 that allow the European Parliament and Counsel to object to the delegated act within 3 months (increasing to 6 months if the European Parliament or Counsel request).

However, the press release issued by ESMA on publication of the Advice states that “the institutions may wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries may have”.

A total of 22 non-EU jurisdictions were identified for detailed assessment by ESMA on a country-by-country basis.  The Advice issued on 30 July 2015 relates to only 6 of these 22.  Only Jersey and Guernsey were the subject of ‘positive’ advice from ESMA, although pending national legislation will remove remaining obstacles in Switzerland shortly.  ESMA did not reach a definitive view on Hong Kong (more time required for assessment), Singapore and USA (ESMA recommended the EU delay a decision on these 2 jurisdictions).

In its view, ESMA does not have sufficient information in relation to the remaining 16 identified non-EU jurisdictions in order to perform the substantive assessment necessary to underpin any advice it issues pursuant to AIFMD Article 67(1)(b).

ESMA aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries – until it has provided advice on all the non-EU countries that it considers should be included in the extension of the passport.

Robert Jaworski Writes on National Credit Reporting Agencies Amending Practices

Reed Smith’s Robert Jaworski recently wrote an article on New York Attorney General Eric Schneiderman’s settlement agreement (Agreement) with the three national consumer reporting agencies (CRAs). In the article, he provides a summary of the Agreement and the impact of the settlement on CRAs, users of the credit reports, those that furnish the CRAs with information contained in the reports and consumers.

Robert Jaworski writes:  “Two recent studies – a 2012 study by the Federal Trade Commission and a 2014 study by the Consumer Financial Protection Bureau – concluded that a large percentage of credit reports provided by CRAs contain inaccuracies. These studies identified various causes for these inaccuracies, the most important being incomplete or inaccurate information provided by Furnishers or by consumers, fraud and identity theft, the processes used by the CRAs to match information requested by Furnishers to the correct consumer files, and the difficulties consumers experience when trying to rectify errors through the CRAs’ dispute processes.”

To read the full article from the June 2015 edition of E-Finance & Payments Law & Policy Journal, click here.

FCC Issues Omnibus Ruling on Host of Issues Affecting TCPA Litigation and Compliance

On July 10, 2015, the Federal Communications Commission (FCC) finally released its long awaited TCPA Omnibus Declaratory Ruling and Order, which resolved 21 petitions involving a wide variety of issues regarding the enforcement and interpretation of the Telephone Consumer Protection Act (TCPA). The FCC had voted in favor of the Ruling June 18 at an Open Meeting of the Agency’s five Commissioners, but the details of the Ruling were only summarized at the time. See June 19, 2015 Reed Smith Client Alert: FCC Finally Acts to Clarify Ambiguities in the TCPA. Now, we have the full 166 page document – which includes more than 550 footnotes – so we can report more definitively about the scope of the FCC’s Ruling.

To read the full client alert, please click here.

Supreme Court upholds ‘disparate impact’ under the FHA but emphasizes that claims cannot rely on statistics alone

In a much-anticipated decision, the U.S. Supreme Court held in Texas Department of Housing and Community Affairs v. Inclusive Communities Project (“Inclusive Communities”) that claims of disparate impact discrimination are cognizable under the Fair Housing Act (“FHA”). In the case, the Inclusive Communities Project (“ICP”) accused the Texas state housing agency of violating the FHA by causing continued segregated housing patterns through disproportionately allocating low-income housing tax credits. ICP alleged that Texas granting too many tax credits for developments in predominantly African American inner-city neighborhoods and too few in predominantly Caucasian suburban neighborhoods in the Dallas area resulted in a disparate impact based on race in violation of the FHA.

To read the full client alert, please click here.