CFPB and FHFA Begin Developing Nationwide Mortgage Database
The Consumer Financial Protection Bureau has announced that it has begun to develop a National Mortgage Database jointly with the Federal Housing Finance Agency. The agencies plan to build the database by matching a nationwide sampling of credit bureau files on borrowers' mortgages and payment histories with Home Mortgage Disclosure Act (HMDA) data, property valuation models, and other data files. For each mortgage loan in the database, loan-level data will be available that includes the borrower's financial and credit profile, the mortgage product and terms, the property purchased or refinanced, and the loan's ongoing payment history. The database will not contain personally identifiable information, and data will be updated on a monthly basis and may go as far back as 1998.
In its press release announcing the database, the CFPB states that it has signed an agreement with the FHFA setting the terms for developing, maintaining, and funding the database and expects early versions of the full dataset to be complete in 2013.
The database is intended to support the agencies' policymaking by providing them with nationwide data they believe will allow them to more readily monitor the mortgage market. In the press release, the CFPB give examples of what the agencies expect to learn from the database. Those examples include a better understanding of how various products are being used and how they are performing, information about what new products are available and their potential problems and risks, and a better understanding of overall consumer debt burden (because the database will also include information about non-mortgage debts, such as auto and student loans).
As industry lawyers, we generally applaud efforts by regulators and legislatures to leverage industry data, resources and expertise to better inform their efforts and decisions, but we have concerns about how the proposed database is being sourced, analyzed and shared. This undertaking should be open to additional examination and industry feedback, or it runs the risk of driving a bigger wedge between interested parties. In addition, while the CFPB has said it will take "appropriate precautions" to ensure that individual consumers cannot be identified, given the risks presented by the database's use of HMDA data, the CFPB should detail the precautions it intends to take to assure consumers that their privacy is secure.
John D. Socknat
Federal Court Finds County Recorder's Office Has Standing To Pursue Claims Against MERS
Since early 2011, nearly a dozen class actions have been brought against Mortgage Electronic Registration Systems, Inc. (MERS) by county recorders alleging that MERS violated state recording laws by failing to formally record "loan transfers," which deprived the county recorders of associated fees. Many of those actions have faltered or even failed. On October 19, 2012, the U.S. District Court for the Eastern District of Pennsylvania delivered a rare blow to MERS in Montgomery County Recorder of Deeds v. MERS Corp. The court denied the defendants' motion to dismiss and found that Pennsylvania's recordation statute dictates that all mortgage assignments and transfers must be recorded with the county recorder's office, and the recorders have standing to pursue their claims against MERS.
The Montgomery County Recorder of Deeds brought a class action against MERS alleging that the MERS process improperly bypasses the statutorily created and mandatory recording system, which harms the recorder by depriving it of recording fees. Based on that allegation, the recorder brought claims for negligent and/or willful violation of Pennsylvania's recordation statute, civil conspiracy, and unjust enrichment, and a claim seeking declaratory and injunctive relief compelling defendants to record all loan assignments with the recorders' offices. MERS moved to dismiss, arguing that Pennsylvania's recordation statute was permissive and not mandatory, and the recorder lacked standing to pursue its claims against MERS.
The court denied that motion in part (it dismissed the conspiracy claim), and held that Pennsylvania's recordation statute was mandatory and that the recorder had standing to pursue its claims against MERS. The court's second finding has the deepest implications. It significantly broadened the scope of standing by holding that "Pennsylvania law permits any person in any manner interest in a conveyance, such as a mortgage assignment, to bring a quiet title action ... to compel the person with the appropriate documents in his or her possession to record them." The immediate effect of that holding is matched only by the potential long-term implications of the court's first holding, which reflects a deep misunderstanding of the MERS process and the distinction between the assignment of beneficial interests to a loan and the assignment of mortgage rights. While the standing issue will certainly motivate the next portion of that action, the mandatory recordation issue—if not corrected—could prove the most troublesome.
Daniel J.T. McKenna
CFPB Issues Final Debt Collection Larger Participant Rule and Examination Procedures
The Consumer Financial Protection Bureau has issued its long-awaited final rule defining larger participants of a market for consumer debt collection. The rule, published on October 24, is effective January 2, 2013. To enable its examiners to immediately begin scheduling examinations of qualifying entities, the CFPB concurrently released its debt collection examination procedures.
The final rule defines larger participants as third-party debt collectors, debt buyers, and collection attorneys with more than $10 million in annual receipts resulting from consumer debt collection. The CFPB issued the final rule under Section 1024 of the Dodd-Frank Act, which authorizes the CFPB to supervise nonbank covered persons in the residential mortgage, private education lending, and payday lending industries for compliance with federal consumer financial laws. That provision also authorizes the CFPB to supervise nonbank "larger participants" of markets for other consumer financial products and services. (Our prior legal alert discussed the CFPB's final rule issued on July 16, 2012, defining larger participants of a market for consumer reporting.)
The final rule does not differ substantially from the proposed rule (which was the subject of a prior legal alert). The final rule and the supplementary information accompanying it contain several important clarifications, however, which include:
Amounts that result from the collection of medical debts—meaning debts originally owed to a medical provider— are expressly excluded from the definition of "annual receipts." The CFPB notes that where a consumer pays some or all of a medical bill with a credit card, such debt would be deemed originally owed to the card issuer. As a result, the amount collected would be included in the calculation of annual receipts.
For purposes of calculating the annual receipts of an entity such as a debt buyer that engages third-party collectors with whom it only has an agency or contractual relationship, amounts collected by such third parties would not have to be aggregated in the calculation of the debt buyer's annual receipts. (By contrast, the rule would require aggregation of the receipts of the debt buyer's affiliate.)
The CFPB notes that it rejected an approach under which the price debt buyers pay to purchase debt would be excluded from annual receipts. The CFPB said that approach would have been administratively difficult for the Bureau and debt buyers since debt buyers typically amortize their debt purchases over several years, which makes it difficult to know how much to exclude when counting income from debts recovered many years after purchase.
To make clear that traditional loan servicing is not considered consumer debt collection, the definition of "debt collector" expressly excludes a person engaged in collection activity concerning "a debt which was not in default at the time it was obtained by such person." This language is similar to the Fair Debt Collection Practices Act's definition of "debt collector." Nonprofit consumer credit counselors are also expressly excluded from the definition of "debt collector."
The CFPB declined to exclude the collection of student loans made under Title IV of the Higher Education Act from the definition of "consumer debt collection," despite receiving comments that federal audits make the collection of such loans less risky for consumers.
Regardless of whether enforcing a security interest qualifies as debt collection under the FDCPA, for purposes of the final rule, the CFPB does not deem a person to be engaged in consumer debt collection if that person only enforces a security interest and does not seek payment of money or the transfer of assets not designated as collateral.
As it did in the proposal, the CFPB notes in the supplementary information the sources of its authority to examine, regardless of their size, nonbank members of the debt collection industry that do not qualify as larger participants under the final rule. The Dodd-Frank Act authorizes the CFPB to examine a nonbank if it (1) acts as a service provider to banks or companies that are subject to CFPB supervision (i.e., banks, thrifts, and credit unions with more than $10 billion in assets, residential mortgage companies, companies that make payday loans or private student loans, and larger participants), or (2) is found to be engaging in or to have engaged in conduct that presents risks to consumers.
Ballard Spahr lawyers regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws. Our Consumer Financial Services Group has created a team of lawyers who have already conducted compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations. On November 6, members of this team will be conducting a webinar on "What Debt Collectors, Debt Buyers, and Collection Lawyers Need to Know About the CFPB Larger Participant Rule and CFPB Exams." More information on the webinar and a link to register are available on the Ballard Spahr website.
Barbara S. Mishkin
Before You Hit Send: How E-mail Can Get Employers in Trouble
The Radicati Group, a market research firm, estimates that in 2011, the average corporate employee sent and received 105 e-mails a day. The group also reports that corporate e-mail accounts are expected to begin to grow at a faster rate than personal e-mail accounts. Is your company prepared for the legal implications of this ubiquitous medium?
In "Smart Policies for Workplace Technologies," Lisa Guerin reports that half of all employees have sent or received e-mails with jokes, stories or pictures of a "questionable" nature. In addition, 6 percent of employees have e-mailed confidential company information to individuals who should not have such information. Ms. Guerin also notes that 15 percent of companies have faced a lawsuit triggered by employee e-mail usage, and almost one-quarter of companies have had their e-mail subpoenaed by courts and/or regulators. And more than a quarter of companies report that they have fired an employee for e-mail misuse, most often for inappropriate or offensive language or other violations of company rules.
The widespread use of e-mail is fraught with potential legal ramifications. As a general matter, e-mails drafted by employees may be legally binding on the company. This may create problems for employers given the relatively casual nature of e-mail correspondence. For example, an offhand e-mail from a brokerage company analyst calling a stock that the company was recommending at the time a "piece of junk," among other similar e-mails, played a key role in an investigation by the state attorney general that resulted in a multi-million dollar fine to the company. Due to the quick and informal nature of e-mail, employees may also be more imprecise in their e-mail correspondence than they would be in formal written documents, which may also create disputed issues of fact in future litigation.
Employees who engage in harassment, discrimination or other policy violations via e-mail may also subject their employers to liability. For example, e-mails are oftentimes uncovered in the course of litigation that tend to show that individuals in positions of authority at the employer had knowledge of alleged wrongdoing and failed to properly report that conduct. And, as e-mail is searchable, archivable and retrievable, often long after it is sent, such e-mails can haunt employers and create liability for them well into the future.
Employees may also use e-mail to harm their employers. Documents and other company information are easily stored or converted to electronic form and readily transferred by e-mail. Employees may misappropriate confidential and proprietary information or trade secrets simply by e-mailing them to a personal account in a matter of seconds. Employees may also easily disgorge such information to others. Not all employees may engage in these acts maliciously; an employee may think nothing of attaching a sensitive document to an e-mail that s/he would never take from the office in hard copy.
Employers may also run into legal woes when attempting to monitor employee e-mail use. Certain policies or practices, or the failure to have in place a clear policy, may result in invasion of privacy claims. Courts are beginning to address the contours of permissible monitoring of employee e-mail accounts and use of information gained from such monitoring.
Finally, for employers who permit, provide or require their employees to use blackberries or smart phones to access work-related e-mail, the specter of potential wage and hour issues arises in the form of whether such use constitutes compensable work time.
Given the breadth of possible legal issues and the central function of e-mail in daily business operations, companies should reflect on their e-mail policies and practices, including retention and destruction practices, as well as training for employees and managers. Louis L. Chodoff and Alexandra Bak-Boychuk will present a webinar on November 14 that covers the issues highlighted above in greater detail and provides recommendations for employers. More information on the webinar and a link to register are available on the Ballard Spahr website.
Louis L. Chodoff and Amy L. Bashore
Closing and Post-Closing Matters in M&A Transactions
Guest column from members of our Mergers and Acquisitions/Private Equity Group
Closing structure and post-closing obligations in M&A transactions should be considered early on in the deal negotiation process, as they will heavily influence the provisions of the operative transaction agreement.
Simultaneous Signing and Closing vs. Deferred Closing
The terms and conditions of the operative agreement (i.e., the stock purchase agreement, asset purchase agreement, or merger agreement) will vary depending on whether the transaction is structured as a simultaneous signing and closing or as a deferred closing. In a simultaneous signing and closing, the parties sign the transaction documents and close on the deal at the same time. In a deferred closing, the closing occurs sometime after the transaction documents are executed.
A simultaneous signing and closing can be advantageous to both parties because it eliminates transaction risks during the intervening period. For example, the target company may suffer an environmental disaster or lose a key customer contract after signing but prior to closing. A simultaneous closing not only eliminates these risks, but also saves time and resources by eliminating the need for lengthy negotiations over who should bear the risk of such events. But a simultaneous closing may not be possible when the deal is, for example, conditioned on obtaining buyer financing or third-party or stockholder approval. A simultaneous closing may also increase stockholder risk, since the target company may have to "go public" about the transaction by soliciting stockholder consent and contractual consent from customers, suppliers and other third parties without having a binding contract in place. In these situations, a deferred closing structure allows the parties to determine the rights and remedies of each party in the event the required consents are not obtained.
In a deferred closing situation, more time and resources are devoted to negotiating pre-closing covenants and other important provisions in the operative agreement. Typical pre-closing covenants restrict actions that the target company may take prior to closing, including refraining from entering into material agreements and incurring additional debt. A "no-shop" provision is a specific type of pre-closing covenant that restricts the seller from soliciting competing bids from other potential buyers. Other important negotiating points in a deferred closing situation include termination provisions and purchase price adjustments for matters such as working group or inventory counts. In addition, the operative agreement will normally contain a "bring down" closing condition that requires all representations and warranties to be true at the time of closing. This allows the buyer to walk away from the deal if, for example, the target company's business or financial condition materially changes between signing and closing.
Virtual vs. In-Person Closing
Historically, closings occurred in person with representatives of both parties and their counsel present. It is now common practice, however, to complete closings by phone, fax, e-mail and/or wire transfer without an in-person meeting. Nonetheless, in-person closings still occur, and some transactions, including those involving the sale of real estate, require that certain documents be signed in person.
Typical closing deliveries in an M&A transaction include:
The operative transaction document, such as the stock purchase agreement or the merger agreement, if not already executed
Board and stockholder consents authorizing the transaction
Secretary's certificate certifying the accuracy and effectiveness of the relevant authorizing resolutions and charter documents of the target company
Ancillary agreements and documents, such as promissory notes, bills of sale, employment agreements and escrow agreements
Consideration (e.g., stock or cash)
Evidence of third-party consents
Evidence of the release of any liens
In a deferred closing situation, the buyer will typically require an officer's certificate in which an officer of the target company certifies, with respect to the operative agreement, that the representations and warranties are true and correct as of the date of closing, all covenants and agreements have been performed, and all conditions to closing have been satisfied. These "bring downs" are often qualified by materiality.
The parties' obligations will often not end at closing. The seller is normally required to enter into a number of covenants restricting its conduct for a defined period of time after closing. These may include covenants not to compete with the target company or to hire the company's employees. Depending on the specifics of the transaction, the buyer may also be subject to post-closing covenants, such as a requirement to provide similar employee benefits for a period of time or to provide director and officer insurance and indemnification for outgoing directors and officers of the target company. Other typical post-closing obligations include making certain state filings (such as articles of merger or an amendment to the party's certificate of incorporation to change the company name), filing press releases and obtaining third party consents not received at closing. Public companies also have to comply with SEC reporting requirements, such as the requirement that a Form 8-K be filed within four business days of closing.
Karen C. McConnell and Lauren B. Ziegler
The Collingwood Group and Motivity Solutions Introduce New FHA Risk Management and Compliance Tool
FHA mortgage lenders face unprecedented scrutiny of their regulatory and compliance practices today. Additionally, much of the technology developed over the past decade to address these regulatory challenges has focused on conventional, alt-A, and sub-prime originations—not FHA. In response, The Collingwood Group, a top mortgage industry advisory group, and Motivity Solutions, a leading business intelligence technology provider, recently developed and released NW-Insight, which provides automated access to critical business intelligence on the Federal Housing Administration's Neighborhood Watch database.
The new technology provides FHA mortgage lenders, Ginnie Mae issuers, and warehouse lenders with a combination of easy-to-use web-based analytics, including dashboards and scorecards, to monitor loan performance and to identify and track default trends within an individual organization. It will give those lenders a powerful risk management tool enabling them to manage and monitor the FHA compliance of their businesses or the companies with whom they do business, including the performance of their correspondent lenders and third-party originators. Users can better avoid potential Credit Watch and Direct Endorsement terminations through alerts and ad hoc scenario planning.
"Staying aware and ahead of positive and negative trends in your FHA business performance has never been more critical," said Brian Montgomery, Chairman of The Collingwood Group. He added that the NW-Insight tool provides users with real-time access to relevant Neighborhood Watch data, "so FHA lenders can easily identify areas of vulnerability and more effectively manage risk."
For more information on pricing or to schedule a live demonstration, companies can visit the product website at nw-insight.com.
Pennsylvania Implements Provisions of the Consumer Financial Protection Act
Pennsylvania recently enacted certain provisions implementing the federal Consumer Financial Protect Act (CFPA). The provisions authorize the Pennsylvania Attorney General to, upon request by the Pennsylvania Department of Banking, bring a civil action against certain entities to enforce the federal CFPA or its corresponding regulations. The provisions also authorize the Department of Banking to receive reports of examination by the CFPB and to enter into agreements with the CFPB regarding the coordination of examinations. Additionally, the provisions address the Department of Banking's jurisdiction and the scope of federal preemption. These new provisions are effective December 23, 2012.
Maryland Adopts Emergency Regulations Regarding Housing Counseling Services
Maryland recently adopted emergency regulations that provide the timing and form of the certification of a mortgagor's participation in housing counseling services. A mortgagor who has elected to participate in prefile mediation must either obtain housing counseling services after electing to participate in the mediation, or be receiving such services at the time of election. Additionally, the housing counseling services must be completed before the mediation. The emergency regulations also provide a form that is to be supplied by the entity conducting housing counseling services to the mortgagor, certifying completion of the counseling. The regulations' emergency status began on October 1, 2012 and expires on March 30, 2013.