Tuesday, June 19, 2018

Community bankers comment on how CFPB can improve rulemaking processes

In response to the Consumer Financial Protection Bureau’s Request for Information (RFI), the Independent Community Bankers of America (ICBA) has submitted comments to the CFPB on the Bureau’s “overall efficiency and effectiveness of its rulemaking processes.” In its June 7, 2018, comment letter, the ICBA stresses the restrictive impact of existing federal laws and regulations on the Bureau’s rulemaking authority. Accordingly, the ICBA makes recommendations for the Bureau’s improvement in the agency’s adherence to specified requirements of the Administrative Procedure Act, Small Business Regulatory Enforcement Fairness Act (SBREFA), and Dodd-Frank Act. Further, the ICBA urges the Bureau to exercise its exemption authority under the Dodd-Frank Act to “tailor regulations to exempt community banks from any final rule that hampers community banks’ ability to provide financial services and products to their customers.”

In March 2018, the CFPB announced that it was seeking input on the efficiency and effectiveness of the “discretionary aspects” of its rulemaking processes. The pertinent RFI asked for input on both the positive and negative aspects of the Bureau’s rulemaking processes as well as specific suggestions regarding those processes.

ICBA recommendations. Among other things, the ICBA’s comment letter, authored by ICBA Assistant Vice President and Regulatory Counsel Rhonda Thomas-Whitley, recommends that the Bureau improve its rulemaking processes by:
  • allowing additional time for “small entity representatives” to review SBREFA meeting materials and prepare for a SBREFA panel, while also allowing Bureau staff time to “obtain appropriate knowledge” on the topic;
  • ensuring that any final SBREFA report include justifications for any feedback that will not be considered or reflected in a proposed rule;
  • ensuring feedback received from small entity representatives is reflected in proposed and final rules;
  • streamlining the notice of proposed rulemaking (NPRM) by providing a concise list of areas in which the Bureau seeks comments;
  • adding a table of contents to the NPRM;
  • establishing longer comment periods for proposed rules that do not have a statutory deadline;
  • responding in a timely fashion to a stakeholder's request to extend a comment period;
  • streamlining the number of pages in a final rule by “limiting content to the summary, background, section-by-section analysis, and legal authority;”
  • adding a table of contents to a final rule that includes links to sections and documents;
  • including a separate “red-lined final rule” to allow for the speedy identification of changes to existing regulations;
  • simultaneously releasing all implementation and supporting materials with a final rule;
  • responding promptly to stakeholder requests to extend compliance deadlines—rather than “delaying a decision to a few days before the deadline;”
  • working with other prudential regulators to facilitate release of examination procedures “six to nine months before a final rule’s effective date;” and
  • using its Dodd-Frank exemption authority to exempt community banks from final rules that hamper the banks from providing financial products and services to customers.
For more information about comment letters to federal or state regulators from organizations within the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, June 14, 2018

Financial facilitators used to enable human rights abuses, advisory warns

By Andrew A. Turner, J.D.

The Financial Crimes Enforcement Network has issued an advisory on financial activities of corrupt foreign political figures and their involvement in human rights abuses. The advisory includes a list of 14 red flags for which U.S. financial institutions should be alert.

FinCEN warns that the use of financial facilitators is one way that corrupt senior foreign political figures access the financial system to move or hide illicit proceeds, evade sanctions, or otherwise engage in illegal activity. These corrupt senior foreign political figures and facilitators, according to a FinCEN advisory, often contribute directly or indirectly to human rights abuses.

“FinCEN is issuing this advisory to warn financial institutions about the use of financial facilitators, shell companies, and other schemes corrupt actors and human rights abusers use to move and hide their illicit proceeds and evade sanctions,” said Treasury Undersecretary Sigal Mandelker.

To assist U.S. financial institutions’ effort to insulate themselves from corruption, the advisory highlights a number of typologies used by foreign politically exposed person (PEP) facilitators to obscure and launder the illicit proceeds of high-level political corruption. For example, the typologies used by financial facilitators of corrupt PEPs may include the misappropriation of state assets, the use of shell companies, or the exploitation of the real estate sector.

Misappropriation of state assets. Foreign corrupt PEPs, through their facilitators, may amass fortunes through the misappropriation of state assets and exploit their own official positions to engage in narcotics trafficking, money laundering, embezzlement of state funds, and other corrupt activities. Such PEPs may exploit corporations, including financial institutions that wish to do business with the government to redirect government resources for their own profit.

Use of shell companies. PEP facilitators commonly use shell companies to obfuscate ownership and mask the true source of the proceeds of corruption. Shell companies are typically non-publicly traded corporations or limited liability companies that have no physical presence beyond a mailing address and generate little to no independent economic value.

Corruption in the Real Estate Sector. Real estate transactions and the real estate market have characteristics that make them vulnerable to abuse by illicit actors, including corrupt foreign PEPs or PEP facilitators. For example, many real estate transactions involve high-value assets, opaque entities, and processes that can limit transparency because of their complexity and diversity. In addition, the real estate market can be an attractive vehicle for laundering illicit gains because of the manner in which real estate appreciates in value, “cleans” large sums of money in a single transaction, and shields ill-gotten gains from market instability and exchange-rate fluctuations.

Regulatory obligations. The advisory reminds U.S. financial institutions of their due diligence and suspicious activity report filing obligations related to such corrupt senior foreign political figures and their financial facilitators Consistent with existing regulatory obligations, FinCEN cautioned, “financial institutions should take reasonable, risk-based steps to identify and limit exposure they may have to funds and other assets associated with individuals and entities involved in laundering illicit proceeds, including the proceeds of foreign corruption.”

For more information about the duties of financial institutions, subscribe to the Banking and Finance Law Daily.

Wednesday, June 13, 2018

Alleged student debt relief scammers settle with FTC

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

The Federal Trade Commission has reached a settlement with Student Debt Relief Group, charged with falsely claiming to be affiliated with the Department of Education, charging consumers up to $1,000 in illegal upfront fees to enter them into free government programs, and collecting monthly fees they falsely claimed would be credited toward consumers’ student loans. The FTC’s complaint charges individual Salar Tahour and his companies—Los Angeles-based M&T Financial Group and American Counseling Center Corp., doing business as Student Debt Relief Group, SDRG, Student Loan Relief Counselors, SLRC, StuDebt, and Capital Advocates Group, with violating the FTC Act and the FTC's Telemarketing Sales Rule. According to the FTC’s complaint, the defendants "bilked at least $7.3 million from consumers struggling to repay their student loans" (FTC v M&T Financial Group, FTC File No. 172 3065, Case No. 2:17-cv-06855-ODW-PLA).

Allegations. The FTC alleged that, instead of using fees paid by consumers to enter them into government programs and pay down their loans, "the defendants pocketed consumers’ money and responded to consumer complaints by changing the name of their companies rather than their business practices." Additionally, the FTC alleged that, to prevent consumers from discovering the scam, the defendants cut consumers off from their loan servicers and the Department of Education by instructing consumers to stop all communication with those entities. Furthermore, the defendants are alleged to have obtained consumers’ Social Security numbers and Federal Student Aid IDs and hijacked consumers’ online student loan accounts. Also, the FTC accused the defendants of routinely placing illegal calls to consumers on the National Do Not Call Registry.

Settlement. Under the settlement order, the defendants are permanently banned from engaging in any type of debt relief activities and from making misrepresentations or unsubstantiated claims related to financial or any other products or services. They also are prohibited from engaging in illegal telemarketing practices.

The order includes a monetary judgment of $11,694,347.49, which is the estimated consumer injury caused by the deceptive practices. Once the defendants turn over nearly all of their available assets, totaling more than $2.3 million, the remainder of the judgment would be suspended due to their inability to pay.

The FTC’s press release notes that the settlement with Student Debt Relief Group is part of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief scams announced by the FTC in October 2017, called Operation Game of Loans.

For more information about debt relief scams, subscribe to the Banking and Finance Law Daily.

Monday, June 11, 2018

CFPB drops mortgage lender kickback case

By Colleen M. Svelnis, J.D.

The Consumer Financial Protection Bureau has dismissed its proceedings against a mortgage lender for mortgage insurance kickback violations. CFPB Acting Director Mick Mulvaney ordered the dismissal of the administrative proceeding against PHH Corporation which began under former Director Richard Cordray for allegedly referring consumers to mortgage insurers in exchange for kickbacks in the form of mortgage reinsurance premiums paid by the mortgage insurers. Mulvaney’s order dismissing the proceedings stated that “it is now the law of this case” that PHH did not violate RESPA even if there was a quid pro quo for referrals as long as the required reinsurance was priced at reasonable market value.

In an official statement, PHH Corporation stated “We are extremely gratified to have this matter fully resolved as a result of Acting Director Mulvaney’s decision to dismiss this case. Today’s Order is consistent with our long-held view that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects.”

Retroactive violations rejected. PHH appealed the Bureau’s decision, arguing that the retroactive application of the Real Estate Settlement Procedures Act had denied the company due process. PHH argued that the CFPB changed a long-standing Department of Housing and Urban Development RESPA interpretation that allowed captive reinsurance arrangements as long as the reinsurance was purchased at market prices, and then applied its reinterpretation of RESPA to past PHH conduct.

In October 2016, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously rejected the Bureau’s claims that there was no statute of limitations that restricted its ability to enforce RESPA against PHH. To successfully show a RESPA violation by PHH Corporation, the Bureau needed to prove that mortgage insurers paid a PHH-affiliated reinsurer above-market premiums less than three years before the enforcement action was initiated.

The court found that even if the CFPB’s reinterpretation was correct, it could not be applied to earlier conduct. The CFPB could still enforce the RESPA anti-kickback provisions against PHH if it showed that the mortgage insurers paid the PHH reinsurance subsidiary more than the reinsurance was worth, the court said. However, the violation also had to be within the statute of limitations. PHH claimed that most of the relevant activities were more than three years old, which would be too old to be the basis of enforcement.

On appeal, the original three-judge panel decision on the RESPA issues was reinstated by an opinion of the full court, which then remanded the administrative proceeding to the CFPB.

Attorneys for the Bureau and PHH agreed to recommend dismissal of the administrative proceeding and submitted a request to Mulvaney to dismiss the matter. Mulvaney accepted the recommendation. According to Mulvaney’s order, the court’s reinstatement means that PHH did not violate RESPA “if it charged no more than the reasonable market value for the reinsurance it required the mortgage insurers to purchase, even if the reinsurance was a quid pro quo for referrals.”

Support in Congress. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) applauded the dismissal. Hensarling issued a statement calling Mulvaney’s actions “needed to continue the agency’s transformation into one that follows the law as written.” Hensarling stated that former CFPB Director Richard Cordray “unilaterally reversed accepted law with regards to Section 8(c) of RESPA, and did so not with formal rulemaking, but with an ad hoc enforcement action instead.”

Representative Luke Messer (R-Ind) also applauded the decision to dismiss the case. According to Messer, the CFPB “never had the authority to retroactively impose fines beyond the statute of limitations.”

For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.

Thursday, May 31, 2018

Fed proposes simplified and tailored approach to Volcker Rule

By Andrew A. Turner, J.D.

The Federal Reserve Board has proposed rulemaking that would 1) tailor the requirements of the regulation, implementing the Volcker Rule, to focus on entities with large trading operations; and 2) streamline and simplify regulatory requirements by eliminating or adjusting certain requirements and focus on quantitative, bright-line rules where possible to provide clarity regarding prohibited and permissible activities. There will be a 60 day comment period.
The proposed amendments to regulations implementing Volcker Rule restrictions on the ability of banking entities to engage in proprietary trading and have relationships with a hedge fund or private equity fund were developed jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Specifically, the proposal would, among other changes:
  • create categories of banking entities based on the size of their trading assets and liabilities that would be used to tailor certain requirements of the rule;
  • clarify restrictions related to certain proprietary trading activities, revise and define terms relevant to proprietary trading activity, and reduce and tailor the criteria that apply when a banking entity seeks to rely on exemptions from the proprietary trading prohibitions;
  • clarify the prohibitions on a banking entity’s ability to acquire an ownership interest in, and maintain certain relationships with, a hedge fund or private equity fund; and
  • tailor compliance programs and amend the CEO attestation requirement.
After five years of experience in applying the Volcker Rule, Federal Reserve Board Chair Jerome Powell views the proposal as a way to tailor requirements so firms that do modest amounts of trading will face fewer demands. “The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance,” according to Powell.
Similarly, Fed Vice Chair Randal K. Quarles emphasized that categorization of three tiers of firms based on trading activity levels in the proposal will align compliance requirements with the level of trading activity. “By focusing the application of the rule on those firms with the highest levels of activity covered by the statue, and by clarifying and simplifying the compliance regime, we can promote safety and soundness while reducing unnecessary burdens,” Quarles said.
“Rather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review,” Fed Governor Lael Brainard added.

Two information collections were issued with the proposal—Information Schedules and a Quantitative Measurements Daily Schedule.
The recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act made several changes to the statutory Volcker Rule provisions. Among other things, the Act exempted community banksfirms with less than $10 billion in total consolidated assets and with total trading assets and liabilities that are not more than five percent of total consolidated assetsfrom the Volcker Rule restrictions. Formal implementation of the Volcker Rule-related changes contained in the Act will occur in a separate rulemaking by the agencies.
For more information about Volcker Rule changes, subscribe to the Banking and Finance Law Daily.

Wednesday, May 30, 2018

Senators urge regulators to strengthen credit access for low-income communities

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

Senator Mark R. Warner (D-Va) and 15 other senators sent a letter to Joseph M. Otting, Comptroller of the Currency, Jerome H. Powell, Chairman of the Federal Reserve Board, and Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, urging them to take steps that would strengthen access to credit for low- and moderate-income (LMI) communities under the Community Reinvestment Act. The letter is in response to reports that the agencies are considering  significant updates to the CRA.

According to the legislators, the CRA expanded homeownership to more Americans, financed more small businesses, and helped local economies by providing LMI communities with access to credit. In the letter, the senators urged the agencies to strengthen the CRA by expanding its applicability to regions and institutions that are not currently covered by the CRA and avoid proposals that could undermine the effectiveness of the law. In addition, the senators emphasized the need to reflect the impact of digital banking in any new regulations.

"When the CRA became law in 1977, a bank’s geographic footprint and the areas surrounding it was a good proxy for the communities served by the bank," the senators wrote in a press release. "That no longer holds true. A bank should be examined under the CRA for how it serves LMI communities where it has a physical footprint and in areas where the bank accepts deposits and does substantial business, and it should receive CRA credit for qualifying loans and investments made in those areas."

In addition to Warner, the letter was signed by Sens. Tim Kaine (D-Va), Cory Booker (D-NJ), Sherrod Brown (D-Ohio), Catherine Cortez Masto (D-Nev), Elizabeth Warren (D-Mass), Doug Jones (D-Ala), Amy Klobuchar (D-Minn), Bob Menendez (D-NJ), Kirsten Gillibrand (D-NY), Dianne Feinstein (D-Calif), Brian Schatz (D-Hawaii), Chris Van Hollen (D-Md), Gary Peters (D-Mich), Ron Wyden (D-Ore), and Debbie Stabenow (D-Mich).

For more information about access to credit under the Community Reinvestment Act, subscribe to the Banking and Finance Law Daily.

Tuesday, May 22, 2018

CFPB lists companies, organizations offering free credit scores

By Thomas G. Wolfe, J.D.

The Consumer Financial Protection Bureau has provided an updated list of credit card issuers, financial institutions, nonprofit credit providers, financial counseling providers, and other companies and organizations that offer free credit scores to customers or the general public. The list is based on voluntary responses to the Bureau’s November 2017 Federal Register notice asking companies whether they wanted to be included on the updated list of entities offering consumers free access to their credit scores. Further, as communicated in its May 16, 2018, release, the Bureau seeks to help consumers understand “how they can access and use their credit scores” to manage their finances.

As observed by the CFPB, while a consumer may request a credit report from each of the three national credit reporting agencies once every 12 months for free, that free credit report currently does not include a free credit score as well. In addition, the Bureau explains that a consumer’s credit score may vary depending on the applicable scoring model, the date on which the score was computed, the type of financial product involved, and the underlying data from a credit reporting company that was used to make the calculation. Consequently, a credit score that a consumer obtains from a company “may or may not be different from the one that company, and other businesses, later use to make credit decisions” about the consumer.

Updated list. Generally, the CFPB has organized its updated list by: (i) credit card issuers stating they offer free credit scores to certain customers; (ii) companies stating they offer free credit scores to customers using some of their other financial products besides credit cards; (iii) nonprofit credit and financial counseling providers stating they offer free credit scores to their clients; and (iv) companies stating they offer free credit scores to the general public.

While the Bureau accentuates the benefits of its updated list, the agency also states that the “accuracy of third-party information is not guaranteed and listing a company does not constitute an endorsement.”

For more information about credit reporting matters affecting the financial services industry, subscribe to the Banking and Finance Law Daily.