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November 18, 2014
Calbre Audits and Complaints
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November 21, 2014
A CFO's Preparation for a Regulatory Audit
MBA’s Accounting & Financial Management Conference
Westin St. Francis, San Francisco  

Castle & Cooke 

In July of 2014, a law firm in San Diego filed a lawsuit against Castle & Cooke Mortgage, LLC (“Castle & Cooke") in the United States District Court for the Eastern District of California, Case No. 1:14-cv-01138---JLT. The lawsuit is a “piggy back lawsuit,” in the sense that it uses the facts and law of the Consent Order entered into by the Consumer Finance Protection Bureau (“CFPB”) and Castle & Cooke (and its President and Senior Vice President of Capital Markets) in November of 2013 to bring a private action against Castle & Cooke for additional damages to consumers for the same alleged wrongs asserted by the CFPB. The lawsuit alleges that a consumer received a refund check from the CFPB in May of 2014 related to the Castle & Cooke Consent Order for a loan he received in 2012. He claims it was then, for the first time, that he realized that he had been overcharged for the origination of his loan due to Castle & Cooke’s payment of bonuses to its loan officers. The lawsuit alleges violations of TILA, RESPA, California and Utah Unfair Competition laws and an equitable claim for unjust enrichment. Most importantly, the lawsuit seeks class certification. Castle & Cooke filed a motion to dismiss on October 27, 2014. The motion attacks some of the causes of action but concedes that it will not be able to dispose of the entire action via the motion.

The damages sought by the representative plaintiff are relatively minimal. However, if the plaintiff is able to certify a class of all of the borrowers who received loans from Castle & Cooke during the period which it had its bonus plan in place, a judgment could be significant. Additionally, counsel for plaintiff could recover significant attorney’s fees for successfully prosecuting this action on behalf of the class.

This lawsuit raises the issue among mortgage loan originators who enter into Consent Orders with the CFPB – is the Consent Order the end? Or, is the money that an originator pays to the CFPB just the beginning? In most instances, there is not a public record of a CFPB investigation until the Consent Order is entered into. So, by entering into a Consent Order, an originator may be letting the world know, for the first time, of the CFPB action. Signing the Consent Order may have the dual effect of starting the process that will lead to a private lawsuit and notifying the plaintiff’s bar which borrowers they have to track down to be plaintiffs and class members.

The question of whether or not to resolve an investigation or action by the CFPB is one that a mortgage loan originator has to make by taking many things into account, including the possibility of a private lawsuit to follow. But, there may be ways to structure the language in the Consent Order, or to describe the fines and penalties being paid to the CFPB, in such a manner that it makes it more difficult for a piggy back lawsuit to be successful. Counsel’s ability to work with the CFPB to negotiate these items is an important factor towards this end. While it is unlikely that the CFPB would agree to any language in a Consent Order that would definitively preclude a piggy back lawsuit, with collaborative negotiations, a piggy back lawsuit could be more easily attacked, or less attractive to the plaintiff’s bar.

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Lehman Brothers 

As you may have heard (or experienced firsthand), Lehman Brothers is issuing demand letters to loan originators who originated loans with Aurora prior to 2008. The letters identify the loan(s) on which Lehman is seeking indemnity, but offer little else, including Lehman’s support for the indemnity claim. This lack of detail makes the resolution and evaluation process of these claims particularly difficult, as does the reality that the subject loan files may have been destroyed per the originator’s document retention policy.

By way of background, Lehman filed for Chapter 11 on September 15, 2008 -- the largest bankruptcy filing in U.S. history, and Fannie Mae and Freddie Mac were creditors in the proceeding. (Fannie Mae claimed approximately $19 billion in losses and Freddie Mac claimed about $2.163 billion. Lehman settled those claims for $2 billion and $767 million, respectively, in early 2014). All of the loans that were subject to the settled claims are listed, by loan number, in the settlement documents. As part of the settlement, Fannie Mae and Freddie Mac agreed to work with Lehman to provide information in support of the indemnity claims.

Now, Lehman is sending letters to over 3,000 originators (in connection with over 10,000 loans) seeking indemnity for the sums it paid to Fannie Mae and Freddie Mac, as the first “step” in its collection process. The bankruptcy court has established a procedure for handling these claims before Lehman files a lawsuit against an originator. (Presumably, this was established to make sure that the courts aren’t inundated with thousands of indemnity actions before an evaluation is made as to the viability of the individual claims). This procedure mandates that settlement offers must be exchanged according to a schedule. After that, the parties are required to participate in a mediation program in New York, with mediators drawn from an established pool and without the originator’s input into the selection process. While the Court cannot make the parties settle, it can penalize an originator for not complying with this procedure—an unfair approach to the originator, undoubtedly, but a reality nonetheless.

There are defenses available to the originator, of course, in connection with these Lehman claims, including the possibility of a statute of limitations defense (although this is a “tricky” area of the law, with a host of possible outcomes). Moreover, Lehman has the burden of proof, and admissible evidence in support of Lehman’s claims may have become stale over time or simply unavailable. That is not to say that the evidence does not exist, but it can be very difficult, by way of example only, to locate ten year old pay records of a borrower in a form that would be admissible evidence in court.

If you receive a demand letter from Lehman, contact counsel immediately.

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