Thursday, August 25, 2016

Anti-money laundering standards proposed for banks without federal regulators

By Andrew A. Turner, J.D.

The Financial Crimes Enforcement Network is proposing to require banks that do not have federal functional regulators to institute customer identification and anti-money laundering programs and satisfy account beneficial owners identification duties. The agency estimates that approximately 625 financial institutions that currently are exempt from comparable rules for federally regulated financial institutions would be covered by the proposed rules.

Comments on the proposal are due by Oct. 24, 2016. Banks without a federal functional regulator would be required to implement a written AML program approved by their boards of directors or by equivalent functional units within the banks. If customer due diligence requirements for verifying the identity of beneficial owners of their legal entity customers are imposed on non-federally regulated banks, FinCEN seeks comment on what time periods should be given to these institutions to implement the new standards.

FinCEN says its analysis has revealed five types of financial institutions that are covered by the regulatory definition of “bank” but are not currently subject to all of the Bank Secrecy Act obligations:

  1. state-chartered nondepository trust companies;
  2. state-chartered credit unions that are not federally insured;
  3. private banks;
  4. state-chartered banks and savings associations that are not federal insured; and
  5. international banking entities.

It is difficult to count precisely the number of institutions that would be covered by the proposal, FinCEN concedes. Also, the numbers of some types are small—there appear to be no more than a dozen covered state-chartered banks and thrifts, while there is “at least one private bank.” However, there may be additional companies that the regulation would consider to be banks that do not have federal regulators, the proposal notes. In fact, the proposal asks for information on covered banks that FinCEN has not identified.

New requirements. According to FinCEN, banks without federal functional regulators are just as vulnerable to being used for money laundering or terrorism financing as banks with federal regulators. Uniform requirements would make it more difficult for criminals to locate banks with less rigorous AML programs.

Most of the banks covered by the proposal are likely already to have some form of AML program, FinCEN believes, so the rule would not be unduly burdensome.

For reasons of system vulnerability and regulatory consistency, all banks should have customer identification and beneficial ownership identification programs, according to FinCEN.

The proposal would take effect chiefly by removing exemptions that currently benefit banks without federal regulators, so it would bring about a consistent regulatory approach for all banks regardless of what agency is responsible for their regulation. Since the expectation that BSA programs would be appropriate for each bank’s specific risk profile is maintained, the specific programs adopted by banks without federal regulators might not be the same as those adopted by other banks.

Currently applicable obligations. Banks without federal functional regulators are not exempt from all BSA duties, the proposal notes. They currently are required to file currency transaction reports and suspicious activity reports. Also, they are prohibited from allowing foreign shell banks to have correspondent accounts and they must obtain information on the ownership of foreign banks.

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Wednesday, August 24, 2016

Associations support CFPB’s eased privacy notice proposal

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

Trade associations are sending comment letters to the Consumer Financial Protection Bureau in support of the eased privacy notice requirements in the bureau’s proposed amendment to Regulation P. One letter was sent by the American Bankers Association, Consumer Bankers Association, Financial Services Roundtable, Independent Community Bankers of America, and Securities Industry and Financial Markets Association. Another came from the American Bankers Insurance Association.

CFPB proposal. The CFPB’s proposal would implement a December 2015 statutory amendment to the Gramm-Leach-Bliley Act providing an exception to the annual privacy notice requirement for financial institutions that: (1) provide nonpublic personal information about customers to nonaffiliated third parties only in a way that does not require affording customers an opt-out; and (2) have not changed information sharing policies or practices since the last time a customer was provided the privacy notice.

Alternative method delivery. The associations represented in the first letter support the exception to the annual notice requirement, and they also support the bureau’s proposal to eliminate the alternative online delivery method that was adopted in 2014. The proposed exception to the annual privacy notice requirement is simpler than the alternative method, according to the associations, and a bank that satisfies the conditions for the alternative delivery also would meet the conditions of proposed exception.

FCRA requirements. In addition, the associations support the CFPB’s proposed clarifications about the Fair Credit Reporting Act notifications that may be included in the annual privacy notice. The bureau’s proposal does not condition eligibility for elimination of the annual privacy notice on FCRA opt-out requirements. Also under the proposal, the FCRA notification requirement is satisfied if a financial institution includes information about the information sharing with affiliates required by the FCRA in its initial privacy notice, because the FCRA does not require an annual notice as long as the financial institution continues to meet the necessary requirements under FCRA.

Changes to information sharing practices. The letter notes that one of the conditions that a financial institution must meet in order to eliminate the annual privacy notice is that it must not have changed its information sharing practices. The associations agree with the CFPB’s determination that since the statutory changes address information sharing, changes to the categories of information collected or changes to data security practices do not affect whether a bank can eliminate the annual privacy notice. Given the current incidence of cyber security threats, the letter says, the emphasis should be on encouraging institutions to update and enhance information security.

ABIA letter. The ABIA stated that the privacy notice "mandate provides minimal consumer benefit, yet it imposes considerable cost to providers." The presence or absence of "opt out" disclosures in an institution’s privacy notice should not be a factor in the availability of the exemption from the annual notice requirement, according to the ABIA. Its letter also agreed that the exemption should be available to a financial institution that changes its privacy policy as to information sharing with, or use for marketing purposes by, affiliates, pursuant to the FCRA.

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Tuesday, August 23, 2016

Illinois garnishments not subject to Fair Debt Collection Practices Act

By Richard Roth

Illinois law shows that a wage garnishment being used to collect a consumer debt is an action against the consumer’s employer, not against the consumer, according to the U.S. Court of Appeals for the Seventh Circuit. As a result, garnishment proceedings are not subject to the Fair Debt Collection Practices Act restrictions on where debt collectors can sue consumers (Jackson v. Blitt & Gaines, P.C.).

Other than in foreclosure suits, the FDCPA requires debt collectors to bring legal actions “against any consumer” in the judicial district where either the contract was signed or the consumer lives (15 U.S.C. §1692i). In the two consolidated suits, the debt collecting law firm Blitt & Gaines took default judgments against the consumers in the correct Cook County, Illinois, municipal district, but later filed garnishment actions in a different district. The consumers sued, claiming the FDCPA required the garnishment proceedings also to have been filed in the municipal district where they lived.

Who’s the target? To the court, the significant factor was the focus of a garnishment proceeding, and the focus was on a consumer’s employer. The court pointed out that:
  1. The summons was to be served on the employer, while the consumer was entitled only to notice by mail.
  2. The garnishment interrogatories were to be served on, and answered under oath by, the employer.
  3. Although the consumer could file an objection, the garnishment would proceed based on the employer’s actions—“the judgment debtor is not a necessary participant,” the court noted.
  4. The employer could be liable for the amount of the judgment if it did not comply with the process, while there were no penalties imposed on the consumer.
  5. Illinois law set garnishment proceeding venue in the county of the employer’s location, not of the consumer’s residence.
These factors made clear the proceeding was against the employer, not the consumer.

FDCPA purposes. The FDCPA’s venue rule was intended to prevent a debt collector from denying a consumer the opportunity to defend against a collection suit by filing the suit in an inconvenient forum, the court said. Even the Federal Trade Commission, in an FDCPA interpretation, said that a judgment could be enforced in a different jurisdiction as long as the consumer had the chance to defend against the suit where it was filed.

“The FDCPA was created to prevent abusive debt-collection practices, not to prevent law-abiding creditors from collecting on legally enforceable debts,” the court concluded.

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Monday, August 22, 2016

CFPB calls on student loan servicers to fix costly ‘breakdowns’

By Katalina M. Bianco, J.D.

Consumers have continued to complain of servicing problems that make it difficult to get lower student loan payments tied to their income, according to a report by the Consumer Financial Protection Bureau’s Student Loan Ombudsman Seth Frotman. The Ombudsman said that student loan borrowers wishing to make use of income-driven repayment (IDR) plans with their federal student loans have experienced servicing “breakdowns” when trying to navigate the system. The report addresses those difficulties, the impact they have on student loan costs, and what servicers can do to improve the process.

Report specifics. The report analyzes complaints submitted to the CFPB between Oct. 1, 2015, and May 31, 2016. The bureau handled approximately 3,500 private student loan complaints and 1,500 debt collection complaints related to private and federal student loans during that time.

Among the issues that consumers have reported:
  • Consumer applications “sit under review” for a lengthy period of time, leaving borrowers “to linger in an application abyss.”
  • Applications are rejected because of missing information or because the servicer lost paperwork, but applicants are not notified by servicers and given a chance to remedy the problem.
  • Borrowers who successfully enroll in an IDR plan may re-encounter the same obstacles each year because they are required to certify their income and family size annually in order to keep an income-driven payment. Servicing requirements can lead to increased costs for borrowers.
  • Processing delays may cost more than $2 per day and can last weeks or months. For borrowers with high loan balances or higher interest rates, the bureau estimates these costs to be substantially greater. 
Fix It Form. The CFPB has developed a prototype “Fix It Form” intended to help servicers improve the level of service they provide. The form can be used by servicers to address application problems and help borrowers understand whether their IDR application has been approved, denied, or needs to be corrected. When a borrower needs to make a correction or provide more information, servicers can use the Fix It Form to help consumers understand how to "fix it" and stay on track. Specifically, the form is intended to:
  • create more responsive and consistent servicing;
  • improve transparency around criteria by documenting problems with an application and communicating with borrowers about fixing those problems; and
  • make the process easier for consumers in order to bolster applications and increase the number of borrowers who are able to their right to a federal IDR plan.
Blog post. The CFPB posted information to consumers on its blog detailing how borrowers with federal student loans can make their payments more affordable by changing their repayment plans. Almost all federal student loan borrowers have the right to a repayment plan that can set their monthly student loan payment based on their income. IDR plans can make borrowers’ monthly payment as little as 10 percent of their income. In its post, the bureau advises consumers on how to use the Fix It Form and provides tips for navigating the IDR process.

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Thursday, August 18, 2016

Eliminating mortgage lien without notice violated creditor’s due process rights

By Richard A. Roth, J.D.
A Nevada state law that allowed a homeowners association to extinguish Wells Fargo’s first mortgage lien by foreclosing on the HOA’s lien for unpaid condominium assessments was unconstitutional because the law did not require the HOA to give prior notice, the U.S. Court of Appeals for the Ninth Circuit has decided. The state legislature’s enactment of the statute denied Wells Fargo due process of law in violation of the Fourteenth Amendment (Bourne Valley Court Trust v. Wells Fargo Bank, N.A., Aug. 12, 2016, Nelson, D.).
Nevada state law gives HOA liens a "super priority," making them superior to other liens. This superiority includes making nine months of HOA assessments superior to first mortgage liens. The Nevada Supreme Court has decided that an HOA’s foreclosure of its super priority lien extinguishes all junior liens, including a first mortgage (SFR Investments Pool 1 v. U.S. Bank, 334 P.3d 408 (Nev. 2014)).
No notice required. However, prior to a recent amendment, the state law included a scheme the U.S. appellate court termed both "strange" and "peculiar"—a mortgage creditor like Wells Fargo was entitled to notice of the planned foreclosure only if it had previously asked the HOA to notify it. Without this request by the creditor, the HOA could foreclose on its super priority lien and extinguish the mortgage lien without the creditor’s knowledge.
This "opt-in" scheme violated due process, the appellate court determined.
Impermissible burden shifting. The state law violated the Fourteenth Amendment when it shifted the notice burden to Wells Fargo, the court said. Only the HOA knew that a homeowner had not paid his assessments. Wells Fargo had no relationship with the HOA—in fact, the two might not have known of each other’s existence—so how Wells Fargo should have known to ask to be notified "is anybody’s guess," the court pointed out.
The Fourteenth Amendment requires a state to give reasonable notice before taking an action that could affect a person’s interest in life, liberty, or property. An opt-in scheme does not satisfy the reasonable notice requirement, according to the court.
The appellate court also rejected the HOA’s attempt to borrow a notice requirement from a different section of Nevada law. Borrowing the notice requirement would have made the opt-in provisions meaningless, the court said, and all provisions of a law should be interpreted to give them meaning when possible.
State action. The Fourteenth Amendment only applies when there has been action by the government, the court continued. This requires a deprivation of rights due to a person’s exercise of a right or privilege given by the state, or of a rule of conduct established by the state. It also requires that the person said to have caused the deprivation be a state actor.
The foreclosure could not be characterized as a state action, the court conceded. However, that was irrelevant. The state action was the legislature’s enactment of the opt-in scheme and imposition of that scheme on two persons, the HOA and Wells Fargo, who had no preexisting relationship.
The enactment of the state law "unconstitutionally degraded" Wells Fargo’s security interest in the condo, the court said. Had the law not been in place, the bank’s lien would have been fully secured while, with the law in place, its lien could be extinguished.
The absence of a prior relationship between the HOA and Wells Fargo meant the HOA was not permissibly exercising a contractual right, the court also explained. Rather, the HOA was exercising a right granted to it by state law.
Dissenting opinion. A dissenter rejected the entirety of the majority opinion. According to the dissenter:
The state law could not have "degraded" Wells Fargo’s security interest when the law was enacted 15 years before Wells Fargo acquired the loan.
  1. There was no state action because no government actor was involved in the foreclosure process.
  2. The notice requirement should be borrowed, and this would require an HOA to give a mortgage creditor prior notice of foreclosures and cure the opt-in defect.
Amendment. An amendment enacted by the Nevada legislature now requires that mortgage creditors be notified before foreclosures.

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Tuesday, August 16, 2016

Filing a time-barred claim in bankruptcy not an FDCPA violation

By Richard Roth

Debt collectors that filed accurate proofs of claim on time-barred debts in consumers’ bankruptcy cases did not engage in false, deceptive, misleading, unfair, or unconscionable debt collection practices, the U.S. Court of Appeals for the Seventh Circuit has decided. As a result, the debt collectors did not violate the Fair Debt Collection Practices Act by filing their claims, the court said, even though the Seventh Circuit had previously determined that suing on a stale claim is a violation (Owens v. LVNV Funding, LLC).

As outlined by the court, the significant facts in the three consolidated cases were the same: debt buyers filed proofs of claim in consumers’ bankruptcy cases. All of the filings outlined the claims in a factually accurate manner, all of the consumers were represented by attorneys, all of them objected to the claims under the statutes of limitations, and all of the claims were rejected by the bankruptcy courts. All of the consumers then sued the debt collectors, alleging that filing a time-barred proof of claim violated the FDCPA.

What’s a “claim” in bankruptcy? The court first rejected the consumers’ attempt to narrow the bankruptcy definition of “claim” to only legally enforceable obligations. If that definition were correct, then filing a proof of claim on a stale debt would automatically be an FDCPA violation, the court conceded. However, the bankruptcy definition actually is much broader, encompassing claims that were characterized as unmatured or contingent. This implies that stale claims are permissible.

The Bankruptcy Code expects that claims will be filed for unenforceable debts and that the bankruptcy court will disallow such claims, the court said. It is true that this could result in some unenforceable debts slipping through, the court conceded, but the requirement that a proof of claim include details about the debt would help prevent this, including by demonstrating the timeliness or untimeliness of the claim.

No FDCPA violation. Of course, a creditor’s ability to file a proof of claim on a time-barred debt under the Bankruptcy Code did not mean that doing so would not violate the FDCPA, the court continued. However, in this case, the claims were not false, deceptive, or misleading.

The consumers conceded that the proofs of claim gave complete and accurate information about the debts, the court pointed out. The consumers all had attorneys and, given the information in the filings, “a reasonably competent lawyer would have had no trouble evaluating whether the debt was timely.”

Precedent disregarded. The court was unpersuaded that its opinion in Phillips v. Asset Acceptance, LLC, compelled a decision that the FDCPA had been violated. In Phillips, a different three-judge panel of the Seventh Circuit decided that filing a collection suit on a time-barred debt would violate the FDCPA. However, the factors that led to the Phillips ruling were not present in the context of bankruptcy court proceedings, the court said.

A consumer being sued might not know about the statute of limitations or might not recall the debt at all, the court explained. Alternatively, a consumer might choose to surrender rather than litigate a collection suit. These concerns were not present in bankruptcy proceedings.

Dissenting opinion. Chief Judge Woods disagreed with the other two members of the panel. According to the dissenter, Seventh Circuit precedent makes clear that misleading a consumer about the collectability of a debt is a violation, and a bankruptcy court proof of claim is just as misleading as the collection suit found to be a violation in Phillips.

Contrary to the majority’s belief, an effort to collect a time-barred debt is not a claim permitted by the bankruptcy rules, she continued. Such a debt is neither contingent nor unmatured.

When a creditor knows that a debt is time-barred, it should not be attempting to collect it in bankruptcy, according to the dissenting opinion. Nearly 10 percent of recent bankruptcy cases filed in the Chicago district were filed by consumers without attorneys, she pointed out, and these consumers need to be protected.

Differing interpretations. U.S. appellate courts have reached contrary conclusions on whether filing bankruptcy court proofs of claim on stale debts violates the FDCPA. For example, the Eleventh Circuit recently decided in Johnson v. Midland Funding, LLC that such a filing is a violation. The bankruptcy code does not displace the FDCPA, in the Eleventh Circuit’s opinion. Creditors can file claims on stale debts, but they are liable for the consequences if they do so.

However, the Seventh Circuit agreed with the Second and Eighth Circuits that filing a claim is not necessarily an FDCPA violation. Most recently, the Eighth Circuit decision in Nelson v. Midland Credit Management, Inc., found there is no violation because bankruptcy court procedures adequately protect consumers, making the application of the FDCPA unnecessary.

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Monday, August 15, 2016

Creditors must follow SCRA procedures when collecting from servicemembers

By Lisa M. Goolik, J.D.

A recent settlement between HSBC Finance Corporation, as successor to HSBC Auto Finance Inc., and the Department of Justice may serve as a reminder to creditors that they must make certain that they follow the requirements of the Servicemembers Civil Relief Act when collecting on debts held by servicemembers.

Last week, HSBC agreed to pay $434,500 to resolve DOJ charges that it violated the SCRA by repossessing at least 75 cars owned by protected servicemembers without obtaining the necessary court orders. The DOJ alleged that HSBC repossessed the vehicles even when it had evidence in its own records suggesting that a borrower could be a protected servicemember—in one case, the vehicle was on military property. The consent order requires also that HSBC repair the affected servicemembers’ credit.

SCRA protections. The SCRA requires a court to review and approve any repossession if the servicemember took out the loan and made a payment before entering military service. The DOJ alleged that by allegedly failing to obtain court orders before repossessing the vehicles, HSBC prevented servicemembers from exercising their rights under the SCRA, such as a review of whether their repossessions should be delayed, whether the loan should be adjusted to account for their military service, if bond should be required, or if an attorney should be appointed.

"HSBC repossessed cars without taking into account their owners’ ongoing service to our country," said Principal Deputy Associate Attorney General Bill Baer. "This settlement rights this wrong, compensates the affected servicemembers and honors our commitment to making sure military members are treated fairly at all times." Principal Deputy Assistant Attorney General Vanita Gupta, head of the DOJ’s Civil Rights Division, commended HSBC for "working cooperatively to reach an appropriate resolution."

Prior settlement with Santander. The settlement covers repossessions that occurred between 2008 and 2010. In 2010, HSBC sold its car lending operations and assets to Santander Consumer USA Inc. Included in the sale were the rights to collect debts owed by servicemembers after their cars had been repossessed by HSBC. In February 2015, the DOJ entered a settlement with Santander that provided servicemembers with more than $10.5 million in compensation for repossessions that violated the SCRA.

According to the DOJ, most of the servicemembers compensated through the settlement with HSBC received partial compensation through the settlement with Santander, and the agreement requires HSBC to pay $5,500 to each of these servicemembers. HSBC must pay $11,000 to affected servicemembers who did not receive payments from the Santander settlement.

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