Small Bank Wins CFPB Challenge at the Appellate Level

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Eleven states, including SC, lose in the same case.

The U.S. Court of Appeals for the District of Columbia ruled on July 24 in favor of a small Texas bank in its constitutionality challenge of the Consumer Financial Protection Bureau (CFPB).

In State Bank of Big Spring v. Lew, the Court of Appeals reversed the District Court’s holding that the bank’s claims failed for lack of standing and ripeness. Eleven states, including South Carolina, had joined the lawsuit, but the states’ claims were held to fail on the issues of standing and ripeness.

Big dog little dog aThe bank first challenged the constitutionality of the CFPB on the grounds that all independent agencies must be headed by multiple members, while the CFPB is headed by a single Director.

The Court held that the Bank had standing to raise this challenge because the Supreme Court holds that there is ordinarily little question that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated. Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).

On the issue of when the bank may bring its claim, the ripeness issue, the Court of Appeals again cited a Supreme Court case, Abbott Laboratories v. Gardner, 387 U.S. 136 (1967) for the proposition that regulated parties generally need not violate a law in order to challenge the law.

The bank then questioned the legality of President Obama’s recess appointment of CFPB Director, Richard Cordray. Mr. Cordray was nominated on July 18, 2011. When the Senate had not acted on the nomination by January 4, 2012, President Obama used his recess power to appoint Mr. Cordray during a three-day intra-session Senate recess. On July 16, 2013, after Mr. Cordray had been serving for 18 months, the Senate confirmed his nomination.

The bank alleges that the recess appointment and all the actions Cordray took before he was confirmed were unlawful because the appointment occurred during an intra-session recess of insufficient length. The Court held that the bank had standing on this issue, and that the issue is ripe.

pawn takes queenThe bank then argued that the Financial Stability Oversight Council created by the Dodd-Frank Act is unconstitutional. This council has authority to designate financial institutions as “too big to fail” and subject to additional regulation. The bank has not been designated as “too big to fail”, but its competitor, GE Capital Corporation, has. The bank argued that GE Capital receives a reputational subsidy as a result of its designation which allows it to raise capital at lower costs that it otherwise could, impacting the bank’s ability to compete for the same funds. The Court held that the bank does not have standing to assert this claim because the link between the enhanced regulation and any harm to the bank is too attenuated and speculative to support standing.

Eleven states challenged Dodd-Frank’s “orderly liquidation authority” which gives the Government broad power to liquidate failing financial institutions that pose a significant risk to the stability of the U.S. financial system. The states’ theory for standing and ripeness deals with the fact that the states and their pensions funds have invested in financial companies and their current investments may be worth less because of this authority.

The Court held that it is premature for a court to consider the legality of how the government might wield the orderly liquidation authority in a potential future proceeding. The states’ theory was held not to satisfy standing or ripeness requirements.

The case was remanded to the District Court on the bank’s challenges to the constitutionality of the CFPB and Director Cordray’s recess appointment.

It’s getting interesting out there!

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FHA Settlement Certification Will Require Tweaking After October 3

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FHA answers a FAQ; it doesn’t officially change the certification

The Federal Housing Administration (FHA) released a new settlement certification this summer in anticipation of the implementation of the TRID rules on October 3. The new certification is intended to replace FHA’s current addendum to the HUD-1 Settlement Statement and will be used for the new Closing Disclosures once the TRID rules become effective.

The new certification reads:

“To the best of my knowledge, the Closing Disclosure which I have prepared is a true and accurate account of the funds which were (i) received, or (ii) paid outside closing, and the funds received have been or will be disbursed by the undersigned as part of the settlement of this transaction. I further certify that I have obtained the above certifications which were executed by the borrower(s) and seller(s) as indicated.”

Please note that the new certification contains the language “which I have prepared”.  As we have all heard by now, many of the large lenders have indicated that settlement agents will not prepare the Closing Disclosures to be delivered to borrowers. Because of the perceived liability, several of the larger lenders have announced that they will prepare the deliver borrowers’ Closing Disclosures.

frustrated man paperworkSettlement agents (closing attorneys in South Carolina) will prepare and deliver sellers’ Closing Disclosures in all cases and will prepare the borrowers’ forms for the smaller lenders who are not taking the responsibility internally.

American Land Title Association reached out to FHA, the Mortgage Bankers Association and individual lenders to inform them that the new certification would be inaccurate in the cases where the lender prepares the Closing Disclosure.  FHA did not revise its certification, but, in connection with issuing an additional 120 new FAQs to its Single-Family Handbook Frequently Asked Questions, it answered the following question this month:

FAQ 347:

Q: “The Model Settlement Certification requires the Settlement Agent certifying that he or she has prepared the Closing Disclosure but the CFPB’s requirements for issuing the new TRID Closing Disclosure will make this unlikely to be the case. Should the Settlement Agent sign the form anyway?”

A: “FHA does not wish for anyone to make a false certification. Because this is a model component, FHA will accept the tailoring of this phrase to the actual circumstances. This if the Settlement Agent does not prepare the closing disclosure, he or she should remove or strike through the statement ‘which I have prepared’ before executing the Settlement Certification.

FHA is only providing this guidance through the FAQ. It is neither revising the certification nor clarifying the instructions on the certification itself.  As a result, closing attorneys will be required to educate their staff members about the necessity to revise the certification for FHA closings after the new rules take effect.

Waters Of The United States Redefined

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South Carolina is among the states suing the Feds

The Environmental Protection Agency and the Army Corps of Engineers published a Final Clean Water Act Rule defining “waters of the United States” on June 29. The effective date of the rule, which greatly expands the scope of jurisdictional waters, is August 28. The full text of the rule can be read here.

shutterstock_180127517The Clean Water Act’s jurisdiction relates to “navigable waters” which was previously defined simply as “waters of the United States or the territorial seas”.  This vague definition led to numerous lawsuits and much regulatory interpretation, but confusion persisted. For this reason, the EPA and the Army Corps of Engineers decided to resolve the uncertainty by promulgating a new definition by federal rule. Supporters say the true motivation for the rule is to protect the safety of drinking water and stream health.

The new rule will affect several industries, two of which are of particular importance to real estate practitioners:  construction and housing. The rule will undoubtedly lead to considerable additional costly federal permitting and is likely to slow development.

The rule deems all tributaries to traditional navigable waters with beds, banks and ordinary high water marks, as jurisdictional, regardless of size. The definition of “wetlands” has been expanded to include “neighboring” wetlands which incorporates all waters within the floodplain or within specified distances from the ordinary high water mark of traditional navigable waters, their tributaries and impoundments.

Of local significance, the rule extends protections to “Carolina Bays”, on a case-by-case basis, depending on the significance of their nexus to navigable waters. Carolina bays are defined as ponded depressional wetlands that occur along the Atlantic coastal plains.

shutterstock_147620981Two lawsuits were filed by 22 states on the day after the rule was published. South Carolina is a plaintiff in Georgia v. McCarthy, which claims the rule infringes on state sovereignty by eliminating the states’ primary authority to regulate and protect water under state standards. The lawsuit also alleges that the rule imposes significant new federal burdens on the states, homeowners, business owners and farmers by forcing them to obtain costly federal permits to continue to conduct activities on their property that have no significant impact on navigable, interstate waters.

The second lawsuit, North Dakota v. McCarthy, alleges that the rule harms states in their capacity as owners and regulators of waters and lands within their respective jurisdictions.

It is likely that other challenges to the new rule will follow.  In addition to the challenges by the states, the housing, construction, farming and oil industries are opposed to the implementation of this far reaching rule.

Hilton Head Timeshare Project Entangled In Consumer Litigation

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Lawsuits involve tales of fraudulent sales tactics

Hilton Head’s Island Packet newspaper continues to report on approximately sixty state and federal lawsuits pitting disgruntled consumer purchaser plaintiffs against The Coral Sands Resort timeshare project on Pope Avenue in Hilton Head. The cases have been weaving their way through the court systems for three years.

shutterstock_47620291The lawsuits involve tales of fraudulent tactics by timeshare salesmen, such as promises of extra weeks in related projects that never materialize, promises of waived maintenance fees that never materialize, a pattern of baiting-and-switching units, promises that the developer will purchase timeshare units owned by the consumers in other projects as a sort of trade in, and sales of weeks that are available only every other year or every third year as if they were available every year. In short, the purchasers claim they were misled by sales pitches, and the documents they received did not reflect what had been told.

Most recently, Dan Burley reported on July 1 that two out-of-state couples received full refunds through arbitration. These two decisions are the first rulings in the various cases.

According to the July 1 article, separate arbitrators voided the couples’ contracts and ordered refunds because the contracts were determined to have violated aspects of the South Carolina Timeshare Act.

But the relief the consumers had requested went far beyond the refund of several thousand dollars. One of the cases was arbitrated by Hilton Head lawyer Curtis Coltrane. His twelve-page Award was attached to the news report and discussed allegations of common law fraud, negligent misrepresentation, civil conspiracy and Unfair Trade Practices, among others. All of those claims were dismissed for lack of evidence.  The arbitrator stated that the plaintiffs were intelligent individuals who should have been able to ascertain the contents of the documents by reading them.shutterstock_55553422

The second suit was arbitrated by Florence lawyer Richard L. Hinson with a similar result. As in the first case, all claims were dismissed except for the causes of action for Violation of the South Carolina Timeshare Act, in Mr. Hinson’s two-page award.

Representatives of the project are quoted as saying that thousands of customers are pleased with their Coral Resorts experience, and that owners who suffer from buyers’ remorse can ask for a refund within five days of signing the contract.

Mr. Burley’s previous articles in The Island Packet provide additional detail. I recommend the previous …and future articles on this litigation for interesting reading!

Be Vigilant to Prevent “Business E-mail Compromise” Scams

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fraud alertWire fraud is on the rise! Train your staff!

United States business e-mail accounts are under attack by sophisticated fraudsters.

The FBI, Financial Services Information Sharing and Analysis Center (FS-ISAC) and the United States Secret Service issued a financial services bulletin on June 19 warning against increasing wire transfer fraud against U.S. businesses referred to as “Business E-mail Compromise” (BEC) scams.

The bulletin warned that BEC is a type of payment fraud that involves the compromise of legitimate business e-mail accounts for the purpose of conducting unauthorized wire transfers.  Many compromised accounts belong to business CEOs or CFOs. The funds are primarily sent to Asia, but funds involved in these schemes have been diverted to locations around the globe.

BEC fraud compromises e-mail accounts through phishing, social engineering or malware used to obtain the user’s password. Once an e-mail account is compromised, fraudsters begin accessing and reviewing e-mails, including meeting and calendar information, contacts lists, and information concerning business partners, vendors and customers.

This activity enables the fraudsters to interject themselves into normal business communications masquerading as the person whose account was compromised. This reconnaissance stage lasts until the actor feel comfortable enough to send wire transfer instructions using either the victim’s e-mail or a spoofed e-mail account.   E-mails are typically sent to an employee with the ability to wire funds. A common tactic is to wait until the victim is away on legitimate business travel to send new wire instructions, making it more likely that individual would use e-mail to conduct business and making it more difficult to verify the transaction as fraudulent while the victim is in transit. The requests will sometimes state that the wire transfer is related to urgent or confidential business matters and must not be discussed with other company personnel.

Other incidents involve the compromise of a vendor or supplier’s e-mail account with the intention of modifying the bank account associated with that business. This scheme may also be labeled “vendor fraud” and often involves last minute changes of the bank and account number for future payments.

red-phoneThere is a relatively easy fix: all wire information received via e-mail should be verbally verified using established business telephone numbers.

Other suggestions to guard against this fraud are:

  1. Limit the number of employees with authority to handle wire transfers.
  2. Have a second employee designated as an approver for any wire transfer requests.
  3. Be careful opening attachments and clicking on links even if the e-mail appears to be from a legitimate source if you believe wire instructions may be included in the communication.
  4. Look out for e-mails that contain significant changes in grammar, sentence structure and spelling compared to previous communications.
  5. Look out for suspicious communications particularly toward the end of the week or the end of a business day. The fraudsters will have more time to access and divert funds.
  6. Maintain a file, preferably in non-electronic form, of vendor contact information, including telephone numbers.
  7. Look out for “spoofed” e-mail addresses that are made to look like the real addresses. Fraudsters use tactics like character substitution, addition and omission to make e-mails addresses appear legitimate. Here are some examples using a Chicago Title address, richard.roe@chicagotitle.com
  • roe@chicag0title.com
  • roe@chicagotit1e.com
  • roe@chicagotitlee.com
  • roe@chicagottle.com
  • roe.chicagotitle@gmail.com
  • roa@chicagotitle.com
  1. Be wary of wire transfers to countries outside of normal trading patterns.

ic3 circleIncidents should be reported to local offices of the FBI or Secret Service or to:

Dirt lawyers, protect your businesses and your clients’ funds by following these critical guidelines!