Royal Bank of Scotland agrees to $4.9 billion settlement of RMBS charges

By Thomas G. Wolfe, J.D.

The Royal Bank of Scotland Group plc (RBS) has entered into a $4.9 billion settlement with the United States Justice Department to resolve federal civil claims that RBS misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008. According to the Justice Department, this settlement amount reflects the largest civil penalty imposed by the agency “for financial crisis-era misconduct at a single entity under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989” (FIRREA). Based on an investigation conducted by the U.S. Attorney’s Office for the District of Massachusetts into the RMBS practices of the bank and its pertinent subsidiaries and affiliates, an evidentiary basis was set for the Justice Department’s claims that RBS violated federal laws in connection with “its marketing, structuring, arrangement, underwriting, issuance and sale of RMBS.” At the same time, the settlement agreement provides that it “does not constitute an admission by RBS of any facts or liability or wrongdoing.”

In an Aug. 14, 2018, release, Acting Associate Attorney General Jesse Panuccio remarked that the settlement “holds RBS accountable for serious misconduct that contributed to [the] financial crisis, and it sends an important message that the Department of Justice will pursue financial institutions that illicitly harm the American economy and our consumers.” Andrew E. Lelling, U.S. Attorney for the District of Massachusetts, noted that “[d]espite assurances by RBS to its investors, RBS’s deals were backed by mortgage loans with a high risk of default.” Similarly, Jennifer Byrne of the Federal Housing Finance Agency’s Office of the Inspector General observed that the “actions of RBS resulted in significant losses to investors, including Fannie Mae and Freddie Mac, which purchased the Residential Mortgage-Backed Securities backed by defective loans.”

Claims against RBS. The Justice Department contended that RBS routinely made misrepresentations, or failed to disclose, to investors about significant risks about its RMBS. Among other things, the “Annex 1: RBS Statement of Facts” concerning the settlement indicates that RBS allegedly: (i) employed flawed due-diligence practices; (ii) failed to disclose due-diligence and kick-out caps; (iii) changed due-diligence findings without justification; (iv) failed to disclose systemic problems with loan originators’ underwriting; (v) provided investors with inaccurate loan data; (vi) made misrepresentations about loan repurchases; and (vii) generally profited from its RMBS “at the expense of others.”

According to the Justice Department, through its RMBS practices, RBS “earned hundreds of millions of dollars, while simultaneously ensuring that it received repayment of billions of dollars it had lent to originators to fund the faulty loans underlying the RMBS.” Moreover, “RBS used RMBS to push the risk of the loans, and tens of billions of dollars in subsequent losses, onto unsuspecting investors across the world, including non-profits, retirement funds, and federally-insured financial institutions.”

In keeping with the contours of the settlement agreement, the Justice Department acknowledges that RBS does not admit these allegations, disputes them, and “there has been no trial or adjudication or judicial finding of any issue of fact or law.”

Settlement terms. Under the terms of the Aug. 14, 2018, settlement agreement between RBS and the Justice Department:

• RBS agrees to pay $4.9 billion as a civil monetary penalty, recoverable under FIRREA, to the United States;
• the “covered conduct” of RBS pertains to the “creation, pooling, structuring, sponsorship, arranging, formation, packaging, marketing, underwriting, sale, or issuance prior to January 1, 2009, by RBS of the RMBS identified in Annex 2;”
• RBS and its subsidiaries and affiliates are released from any civil claims that could be asserted by the Justice Department arising under FIRREA, False Claims Act, Program Fraud Civil Remedies Act, Racketeer Influenced and Corrupt Organizations Act, Injunctions Against Fraud Act, and specified common-law theories of recovery;
• clarifies that the settlement does not release RBS from certain potential claims by other federal regulators and agencies; and
• RBS agrees to cooperate with the Justice Department and other federal agencies in the future concerning any document request, investigation, administration, or litigation pertaining to RBS’s “covered conduct” in the settlement.

For more information about the negotiation and settlement of federal or state enforcement actions affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

OCC clarifies how discrimination can affect CRA ratings

By Andrew A. Turner, J.D.

The Office of the Comptroller of the Currency has published a revised Policies and Procedures Manual (PPM 500-43) that clarifies its policy for determining the effect of evidence of discriminatory or other illegal credit practices on the Community Reinvestment Act rating of a national bank, federal savings association, or federal branch. The OCC uses CRA performance evaluation as a tool to encourage banks to help meet credit needs by lending, serving, and investing in the communities in which they operate, across income levels and geographies. 

 

The OCC policy guides examiners in determining the adverse effect evidence of discriminatory or other illegal credit practices in CRA lending activities has on a bank’s CRA evaluation, including whether a downgrade of the composite rating, and/or component performance test rating, is appropriate. The OCC says that going forward it will act according to two “guiding principles”:

 

• There must be a logical nexus between the assigned rating and the evidence of discriminatory or other illegal credit practices.
• Full consideration must be given to the bank’s remedial actions.

 

Generally, the OCC considers lowering the composite or component performance test rating of a bank only if the faulty practices directly relate to the institution’s CRA lending activities. “If after completing an evaluation of a bank’s CRA performance, the OCC determines that a bank’s composite or component rating will be lowered based on evidence of discriminatory or other illegal credit practices directly related to the bank’s CRA lending activities, the OCC’s general policy is to downgrade the rating by only one rating level unless such illegal practices are found to be particularly egregious,” according to the updated PPM.

 

Remedial actions. While the CRA evaluation assesses a bank’s past performance for a specific span of time, the OCC has the discretion to assign a CRA rating in light of the bank’s record of performance, including the status at the time the OCC evaluates a bank’s efforts to remediate previous lapses or deficiencies. Examiners must fully consider the corrective actions taken by a bank regarding discriminatory or other illegal credit practices, including: the cumulative impact of supervisory or enforcement actions taken against a bank; the progress to remediate the issues underlying such actions; and whether the actions are directly related to the bank’s CRA activities and performance.

 

The OCC’s policy is generally not to penalize a bank by lowering its CRA rating when examiners have determined the bank has taken appropriate remedial actions because penalties in such cases can unnecessarily distract and divert the bank’s resources from lending, investing, or serving the relevant communities and thereby frustrate the CRA’s purposes.

For more information about CRA compliance issues, subscribe to the Banking and Finance Law Daily.

Senators request relief from enhanced supervision for midsized banks

By J. Preston Carter, J.D., LL.M.

A letter to Federal Reserve Board Vice Chairman Randal K. Quarles, sent by a group of U.S. senators, urges the Fed to "provide immediate regulatory relief for regional banks that do not pose a systemic risk to our financial system." Senate Banking Committee member David Perdue’s (R-Ga) press release notes that the letter’s other signors include Senators Bill Cassidy (R-La), Jim Inhofe (R-Okla), James Lankford (R-Okla), Jerry Moran (R-Kan), Thom Tillis (R-NC), and Mike Rounds (R-SD).

The letter expresses concern with the Fed’s July statement that banks with $100 billion to $250 billion in total assets may not receive substantive relief from the enhanced prudential regulations in the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act. The Act raised the asset threshold for enhanced prudential standards under the Dodd-Frank Act from $50 billion to $100 billion in total assets immediately. For banks with total assets between $100 billion and $250 billion, relief is automatically granted 18 months after enactment. The law provides the Fed with the authority to allow enhanced prudential standards to be re-imposed when there is a risk to financial stability.

The senators are concerned by recent remarks by Fed officials indicating that it will continue to apply Comprehensive Capital Analysis and Review stress tests and other enhanced supervision regulations designed for systemically important financial institutions on non-systemic financial companies. The senators object to this course of action, stating that Congress did not ask the Fed to create a third layer of treatment for banks above and below $100 billion in total assets. Rather, it empowered the Fed to tailor regulations to address individual risk profiles of banks so that all non-systemic banks are treated in accordance with their risk profiles. The senators indicated support for the Fed’s use of its systemic risk indicator score data to identify appropriate tailoring. The senators also suggested that the Fed give comparable regulatory treatment to intermediate holding companies for international banks as the treatment given to U.S. banks of similar size and risk.

For more information about regulating for financial stability, subscribe to the Banking and Finance Law Daily.

Settlement with debt collector moots claim against collector’s attorneys

By Katalina M. Bianco, J.D.

A consumer who settled her Fair Debt Collection Practices Act claims against a debt collector for $5,000 could not pursue FDCPA statutory damages claims against the debt collector’s law firm, the U.S. Court of Appeals for the Seventh Circuit has decided. Based on the single recovery for a single injury principle, the consumer could not recover from the law firm after having recovered the most the statute allowed from the debt collector, the court said. The consumer’s claim for attorney fees was lost for the same reason (Portalatin v. Blatt, Hasenmiller, Leibsker & Moore, LLC, Aug. 13, 2018, Manion, D.).

Winning in trial court. Debt collector Midland Funding hired the firm of Blatt, Hasenmiller, Leibsker & Moore to collect a claimed $1,330 debt from the consumer. The firm relied on then-binding Seventh Circuit precedent to decide where to file the collection suit, but soon had the rug pulled out from under it by a contrary Seventh Circuit decision on FDCPA venue rules (see Oliva v. Blatt, Hasenmiller, Leibsker & Moore, LLC). The consumer sued both the debt collector and the law firm for violating the debt collection suit venue restrictions.

The consumer settled her claim against Midland Funding, accepting $5,000 for releasing her claims. She did not settle her claims against Blatt, Hasenmiller. However, as that suit progressed, she abandoned her claim for actual damages and proceeded only on her claim for statutory damages. The jury awarded her $200, and the judge added $70,000 in attorney fees and costs.

Losing on appeal. The trial judge was wrong to have rejected the law firm’s argument that the consumer’s claim ran afoul of the single-satisfaction rule, the appellate court said. The consumer’s settlement of her claims against Midland Funding mooted her claim against the law firm because it fully remedied the consumer’s injury. Moreover, with no remaining injury for which to seek satisfaction, the consumer had no claim that could support an award of fees and costs, the court added.

A plaintiff generally can seek only one recovery for an injury, no matter how many defendants could be liable or how many theories of liability might be raised, the appellate court said. The consumer conceded that there was only one violation of the FDCPA—a violation of the venue restrictions—and that her injury could not be divided between the debt collector and the law firm. The two acted together.

The consumer might have been able to continue to sue Blatt, Hasenmiller had her settlement with Midland Funding included a good-faith allocation of the settlement funds to a claim only against the debt collector, the court pointed out. However, the settlement agreement included no such allocation; in fact, it said it resolved all claims arising out of the facts that were covered by the claims raised in the suit. As a result, the $5,000 settlement included the maximum possible award of $1,000 in statutory damages.

The FDCPA’s language also made clear that statutory damages were capped at $1,000 per suit, not $1,000 per defendant, the court added.

The case is No. 16-1578 and No. 17-3335.

For more information about FDCPA court opinions, subscribe to the Banking and Finance Law Daily.

Treasury reports to president on nonbank financials, fintech, and innovation

By Thomas G. Wolfe, J.D.

In keeping with President Donald Trump’s February 2017 executive order setting forth core principles for regulating the U.S. financial system, the Treasury Department has released its fourth report, titled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation.” According to the Treasury, the report identifies “improvements to the regulatory landscape” to enable U.S. firms to “more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency.” Notably, the July 2018 report makes over 80 recommendations, including setting a national data security and breach notification standard. Collectively, the Treasury recommendations are designed to: embrace the efficient and responsible use of consumer financial data and competitive technologies; streamline the regulatory environment to foster innovation and avoid fragmentation; modernize regulations for an array of financial products and activities; and facilitate experimentation to promote innovation—by setting up “regulatory sandboxes,” for example.

In a release accompanying the report, Treasury Secretary Steven Mnuchin commented, “American innovation is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector.”

In 2017, the Treasury issued three reports in response to the set of core principles enunciated by President Trump in his directive (Executive Order 13772). These prior reports covered the U.S. depository system, capital markets, as well as asset management, investments, and insurance. Noting the Treasury’s latest installment in the series, Jay Clayton, Chairman of the Securities and Exchange Commission, remarked that these reports “clearly and comprehensively frame many of the key issues in our financial markets. The reports have informed … and will continue to inform the regulation of our markets. The Treasury reports have made an extremely valuable contribution to the SEC’s mission, and, importantly, to investors in our capital markets.”

Nonbank financial firms. As observed by the Treasury, nonbank financial firms play a number of key roles in the financial system such as “facilitating back-end check processing; enabling card issuance, processing, and network activities; and providing customer-facing digital payments software.” Further, these nonbank financial firms are involved in capital markets and provide financial advice and execution services to retail investors as well.

Report highlights. In compiling its report, the Treasury consulted with many stakeholders, including trade groups, financial services firms, investment strategists, federal and state regulators, consumer advocacy groups, and academics. The Treasury released a fact sheet in tandem with its 222-page report. Among other things the report recommends:

• increasing efforts to enable digital communications, data sharing, and the use of cloud computing and machine learning;
• modernizing rules for digital communications in general and for the Telephone Consumer Protection Act and the Fair Debt Collection Practices Act in particular;
• setting a national data security and breach notification standard, permitting consumers to withdraw prior data authorizations, and developing more secure data-sharing methods;
• encouraging state regulators to “harmonize rules” across the country, especially in connection with licensing, supervision, and money transmission, to create a clear and consistent environment for innovators and existing financial institutions;
• moving forward with the Office of the Comptroller of the Currency’s special-purpose national bank charter to reduce “regulatory fragmentation and supporting beneficial business models;”
• updating rules to accommodate technological advances, such as facilitating service partnerships between banks and nonbank financial firms;
• for marketplace lending, urging Congress to codify the “valid when made” doctrine and the role of the bank as the “true lender” of loans it makes to bolster productive partnerships between banks and newer technology-based firms;
• for mortgage lending and servicing, promoting changes to “accommodate an end-to-end digital mortgage, including acceptance of digital promissory notes, recognition of modern digital notary standards, and automated property appraisals;”
• for student lending and servicing, establishing “minimum effective guidance” for loan servicers handling decisions with significant financial implications;
• for short-term, small-dollar loans, recognizing and supporting the authority of states to establish comprehensive requirements for these financial products, recommending that the Consumer Financial Protection Bureau rescind its Payday Rule; and encouraging small-dollar installment lending by banks;
• for debt collection, establishing “minimum federal standards” governing debt collection by third-party collectors;
• updating the “IRS income verification system” to protect taxpayer information and enable automated and secure data-sharing with lenders or designated third parties;
• testing “newer credit models and data sources” by both banks and nonbank financial firms to expand access to credit and improve risk assessments;
• coordinating regulatory actions by agencies to best protect consumer data held by credit reporting agencies;
• modernizing payment services by having the Federal Reserve continue working towards a faster retail payments system;
• promoting the ability of smaller financial institutions, like community banks and credit unions, to access the most-innovative technologies and payment services;
• harmonizing the current patchwork of regulatory authority over wealth management and financial planning, which makes these services more costly and “potentially presents unnecessary barriers to the development of digital financial planning services;”
• working with federal and state regulators to invite innovations from new and existing market participants —similar to a “regulatory sandbox;” and
• reforming procurement rules and encouraging “regulator engagement” to allow financial regulators to keep up with technological developments in the industries they regulate.

For more information about governmental reports affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

Debt buyers are debt collectors under consumer debt collection act

By Richard A. Roth, J.D.

A company whose sole business is buying and collecting consumer debts is a debt collector under the Fair Debt Collection Practices Act, according to the U.S. Court of Appeals for the Third Circuit. That means the company is required to conform its collection tactics to those that are permitted by the FDCPA (Tepper v. Amos Financial, LLC, Aug. 5, 2018, Ambro, T.)

The consumers originally took a home equity line of credit from a bank, and then they defaulted when the bank was placed into receivership and they had trouble making payments to the Federal Deposit Insurance Corporation receivership. The FDIC sold the note and mortgage to Amos Financial, which declared the loan to be in default, made payment demands, and then moved to foreclose.

The consumers responded by suing Amos under the FDCPA.

What is a debt collector? The appellate court began by noting that a company can meet the relevant FDCPA criteria for “debt collector” by satisfying either of two definitions:

• the “principal purpose” definition, which applies to companies that use interstate commerce, or the mail or wires, in any business “the principal purpose of which is the collection of any debts”; or
• the “regularly collects” definition, which applies to any person who regularly collects or tries to collects debts owed or said to owed to another person.

In Henson v. Santander Consumer USA, Inc., the Supreme Court clarified that the “regularly collects” definition did not cover a company that bought debts and then collected them for its own account. However, the Court did not examine the “principal purpose” definition.

Principal purpose. The plain language of the FDCPA makes clear a company that satisfies the “principal purpose” definition is a debt collector, the Third Circuit said. In this case, Amos admitted that collecting debts it had purchased was its sole business, and it clearly used both mail and telephone calls in its collection efforts. Collecting “any debts,” as the FDCPA section specified, did not consider to whom the debts were owed.

“Asking if Amos is a debt collector is thus akin to asking if Popeye is a sailor. He’s no cowboy,” the court said.

Summing up, the court said that “an entity whose purpose of business is the collection of any debts is a debt collector regardless whether the entity owns the debts it collects.”

For more information about fair debt collection practices litigation, subscribe to the Banking and Finance Law Daily.

RD Legal Funding moves to dismiss New York’s CFPA claims

By J. Preston Carter, J.D., LL.M.

RD Legal Funding submitted a letter motion to the U.S. District Court for the Southern District of New York asking it to dismiss the New York Attorney General’s Consumer Financial Protection Act claims against it for lack of subject matter jurisdiction, based on the court’s June order finding the CFPA structure unconstitutional.

Constitutionality decision. The AG and Consumer Financial Protection Bureau sued RD Legal Funding, two other companies, and an associated individual, claiming that they violated state laws and the CFPA in the process of exchanging structured settlements for lump-sum payments. The U.S. district judge decided that the Bureau’s single-director-removable-only-for-cause structure is unconstitutional, meaning the Bureau has no authority to sue the company. She also decided that the organizational section of the CFPA cannot be severed from the remainder of that Act; as a result, she ruled that the entire CFPA is unconstitutional. However, the judge then declined to dismiss the suit in its entirety, saying that the CFPA—which she had said was unconstitutional—allows the AG to bring an enforcement suit in federal court (Banking and Finance Law Daily, June 22, 2018).

Joint letter to the court. In a July joint letter to the court, called for by the judge, the AG interpreted the judge’s order as striking down the Bureau’s structure but the not entire CFPA. In that way, the U.S. district judge still would have subject matter jurisdiction over the CFPA claims and supplemental jurisdiction over the state law claims. RD Legal Funding, however, indicated that there no longer is a basis for federal question jurisdiction and that it would address the issue in a separate motion (Banking and Finance Law Daily, July 11, 2018).

Letter motion. RD Legal Funding’s letter motion addresses the federal jurisdiction issue. The motion states that the court’s June order struck each substantive provision of the CFPA that forms the basis of the AG’s federal claims as well as the statutory provisions of Title X of the Dodd-Frank Act granting the AG enforcement authority over the CFPA. The motion noted that, as plaintiff, the AG has the burden to establish subject matter jurisdiction, and states, "Here, however, the entire basis for the NYAG invoking federal jurisdiction is Title X of the CFPA, which has been stricken." RD Legal Funding requests that the federal claims in the case be dismissed with prejudice, under Rule 12(h)(3) of the Federal Rules of Civil Procedure, and that the state law claims be dismissed without prejudice to being refiled in state court.

The case is No. 17-cv-890.

For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.