Tuesday, June 30, 2015

End of Supreme Court term leaves two appeals undecided

By Richard A. Roth, J.D.

The Supreme Court ended its October 2014 term on Monday with several significant decisions, including one that, while interpreting the Fair Housing Act, strongly implies the continued viability of the disparate impact theory under the Equal Credit Opportunity Act (Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc.). However, the Court deferred until its next term two appeals from decisions on financial services laws. One appeal asks the Court to examine who is entitled to protection under the ECOA, and the other presents a broader question about who has standing to sue under the U.S. Constitution.

ECOA. In Hawkins v. Community Bank of Raymore, two individuals have asked the Court to consider whether spousal guarantors are applicants for credit who are entitled to the protection of the ECOA and Reg. B—Equal Credit Opportunity (12 CFR Part 1002). The individuals claimed that the bank required them to guarantee loans to their spouses’ real estate development business and that requiring a spousal signature violated the equal credit laws. However, the U.S. Court of Appeals for the Eighth Circuit decided that guarantors are not credit applicants, so requiring the individuals to sign did not constitute credit discrimination.

The U.S. Court of Appeals for the Sixth Circuit has reached the opposite conclusion. In RL BB Acquisition LLC v. Bridgemill Commons Development Group, LLC, the Sixth Circuit decided that the ECOA was ambiguous about whether a guarantor was an applicant. The regulatory agencies’ interpretation that guarantors are applicants, which is contained in Reg. B, was reasonable and thus was entitled to judicial deference, the Sixth Circuit said.

The Eighth Circuit’s reply was that “We find it to be unambiguous that assuming a secondary, contingent liability does not amount to a request for credit. A guarantor engages in different conduct, receives different benefits, and exposes herself to different legal consequences than does a credit applicant.”

The Supreme Court granted certiorari in Hawkins v. Community Bank of Raymore, Dkt. No. 14-520, on March 2, 2015.

Standing to sue. Spokeo Inc. v. Robbins has the potential to affect suits under a broad group of federal statutes, not just the Fair Credit Reporting Act under which it arises. The question presented is whether a person who claims no injury other than a violation of a right created by a statute has suffered an injury that confers standing to sue under Article III of the Constitution.

Spokeo runs a website that provides users with information about other individuals, including contact data, marital status, age, occupation, economic health, and wealth level, according to the U.S. Court of Appeals for the Ninth Circuit. A consumer claimed that information posted about him was incorrect and that he had been harmed, but his allegations of specific injury were “sparse,” the court said. Nevertheless, the court decided that his complaint was adequate to describe an “injury in fact” that conferred standing to sue because he had alleged a violation of his own statutory rights, as opposed to the rights of another person, and the law in question—the FCRA—was intended to protect against individual, rather than collective, harm.

Should the Supreme Court reverse the Ninth Circuit and require that plaintiffs demonstrate some type of pecuniary or personal injury to establish their standing to sue, consumers likely will have more difficulty asserting violations of a number of consumer protection statutes.

The Supreme Court granted certiorari in Spokeo Inc. v. Robbins, Dkt. No. 13-1339, on April 27, 2015.

Pending petitions. In addition, the Supreme Court left undecided whether to accept two other appeals of potential significance:
  • Wells Fargo Bank v. Gutierrez, in which the Court was asked whether a class of consumers could be certified if it included members who were not injured and who could not have sued successfully as individuals (Dkt. No. 14-1230); and
  • Quicken Loans v. Brown, in which the Court was asked whether the West Virginia Supreme Court should have included a borrower’s attorney’s fees and costs, totaling $596,200, in the punitive-to-compensatory damages ratio when it decided that a punitive damages award of $2.17 million was not excessive (Dkt. No. 14-1191).
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Monday, June 29, 2015

Student loan servicer’s petition to attend employee exam: Denied

By Katalina M. Bianco, J.D.

Consumer Financial Protection Bureau Director Richard Cordray has entered a decision and order denying student loan servicer TransWorld Systems Inc.’s petition to attend a bureau investigatory exam of its former employee, Chandra Alphabet. Under the CFPB’s Civil Investigative Demand, Alphabet is to give oral testimony as to "whether loan holders, servicers, collectors or other persons have engaged or are engaging in unlawful acts and practices relating to the servicing and collecting of private student loan debt in violation of several federal consumer compliance laws, including the Consumer Financial Protection Act, Fair Credit Reporting Act, and Fair Debt Collection Practices Act.

Background. The CFPB scheduled Alphabet’s examination for March 12, 2015, at the United States Attorney’s Office in Atlanta, Ga. TSI counsel requested that the location of the exam be moved, according to TSI, but the bureau denied the request. The day before the examination, Alphabet retained separate counsel, and the examination was cancelled. On April 17, 2015, Alphabet resigned from TSI. Her last day of work was April 24, 2015.

Privileged communications. TSI petitioned the CFPB to attend the examination on the basis of safeguarding communications protected by the attorney-client privilege. TSI contended that in the course of her employment with TSI, Alphabet at times acted as corporate representative for the Trusts division of the company and, as such, was privy to confidential information. The company asserts that the bureau "bears the heavy burden" of proving that communications subject to the attorney-client privilege should be disclosed.

Legal determinations. The petition was denied for three reasons, according to the decision. The first reason is that Director Cordray found that TSI had no standing to petition for the order it is seeking. TSI petitioned under Section 1052(f) of the CFPA (12 U.S.C. § 5562(f)) which provides that a person served with a CID may petition to modify or set aside the demand within 20 days of service. Alphabet was served with the CID, not TSI, and therefore the servicer has no standing to petition.

Second, TSI’s petition was not timely, according to the decision. Alphabet was served, through TSI’s counsel, on or before Feb. 2, 2015. The statutory deadline to file a petition to modify or set aside the CID expired on Feb. 22, 2015, 20 days after service. TSI filed the petition on April 24, 2015.

Finally, the law is clear as to who may be present at an investigational hearing, Cordray said in the decision. Under CFPA 12 CFR 1080.7(c), in investigational hearings the bureau must exclude from the hearing all persons except the person being examined, the person’s legal counsel, the officer taking the testimony, any investigator or representative of an agency conducting the investigation with the bureau, and the person transcribing or recording the testimony. The CFPB Director said that TSI does not have the right to attend the hearing and that the investigators involved do not intend to exercise their discretion to permit TSI to attend.

For more information about the TransWorld petition, decision and order, and CFPB enforcement activity, subscribe to the Banking and Finance Law Daily.

CFPB opens public floodgates to thousands of consumer complaints

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its first wave of consumer complaint narratives via the bureau’s new initiative to reveal consumer complaints stemming from its consumer complaint database. More than 7,700 consumer stories about problems they’ve encountered concerning mortgages, bank accounts, credit cards, debt collection, and more now are live and available to the public. The bureau simultaneously issued a request for comments on whether there are ways to enable the public to more easily understand and make comparisons of the complaint information.

 "Publishing these consumer stories today is a historic milestone that we believe will lead to better outcomes for everyone," CFPB Director Richard Cordray said. He added that the CFPB’s work is improved by hearing from consumers.

Collection of complaints. The CFPB began accepting complaints as soon as it opened its doors for business in July 2011. The bureau currently accepts complaints on consumer financial products, including: credit cards; mortgages; bank accounts; private student loans; vehicle and other consumer loans; credit reporting; money transfers; debt collection; and payday loans. As of June 1 of this year, the CFPB has handled more than 627,000 complaints, with mortgages and debt collection being the most frequent subjects of the complaints.

Consumer Complaint Database. The CFPB’s Consumer Complaint Database was unveiled in June 2012. According to the bureau, it is the largest public collection of consumer financial complaints in the U.S. The bureau describes the database as including "basic, anonymous, individual-level information about the complaints received, including the date of submission, the consumer’s zip code, the relevant company, the product type, the issue the consumer is complaining about, and how the company handled the complaint."

 Bureau policy. The CFPB finalized a policy in March 2015 that is intended to empower consumers to share their stories to the public when they submit complaints to the bureau. According to the CFPB, since the launch of this added feature to its database, more than half the consumers who submitted complaints to the bureau have "opted in" to share their stories with the public. Starting immediately, consumer narratives that have been "scrubbed of personal information," will be added to the complaint database on a daily basis.

The policy outlines the specific procedures and safeguards the bureau has put in place to publish narratives in the database and includes safeguards for removing a consumer’s personal information and ensuring the informed consent of any consumer who participates, the CFPB said. Under the policy, companies have 180 days to select an optional public-facing response to be included in the public database. These company responses now are included in the database.

Comment request. The CFPB simultaneously issued a notice requesting comments from the public on ways to make the data gathered in its complaint database more useful to the public. Specifically, the bureau is requesting feedback on best practices for "normalizing" the raw complaint data it makes available via the database so they are easier for the public to use and understand. According to the notice, to normalize data is to transform "raw" data so that they may be compared in meaningful ways.

Reviews. The Americans for Financial Reform called the publishing of the narratives "a breakthrough for consumers" and said that the bureau’s action will "vastly expand the value of its complaint system." AFR noted that banks and lenders have opposed publishing the narratives, but AFR believes that "financial companies also stand to benefit from the ability to hear about consumer experiences at other firms as well as their own, spot opportunities for improvement, and correct problems before they get out of control, the way bad mortgage lending did in the runup to the financial crisis."

The Consumer Bankers Association, on the other hand, disagreed with the CFPB’s publishing of “unverified complaint narratives.” The CBA said that the association agrees with the need to “normalize the complaint data” and is pleased that the bureau is requesting comments on the best way to go about doing that. However, the CBA stated that it is “profoundly disappointed the Bureau is releasing the public narratives.” CBA President and CEO Richard Hunt said that he believes that the majority of banks will not respond publicly “but will continue the long held tradition of speaking with their customers in confidence.”

For more information about the CFPB's consumer complaint narratives, subscribe to the Banking and Finance Law Daily.

Friday, June 26, 2015

Scammers ‘Googling’ for victims? CFPB gives Google a heads up

By Katalina M. Bianco, J.D.

Former Consumer Financial Protection Bureau Assistant Director & Student Loan Ombudsman Rohit Chopra alerted Google management that student debt relief scammers may be using the company’s search products to target student loan borrowers. Shortly after contacting Google, Chopra left the CFPB and signed on with the Center for American Progress, thus the "former" added to his recently-held title as Student Loan Ombudsman.

Representing the bureau, Chopra told Google that it is concerned that “unscrupulous companies may be using aggressive advertising through search products to lure distressed borrowers.” In a letter to Susan Molinari, Google Vice President, Americas Public Policy and Government Relations, Chopra explained the student loan debt situation, stating that a “substantial portion” of the more than 40 million Americans owing more than $1.2 trillion in debt are “in distress.” The CFPB estimates that more than 8 million borrowers are in default on a federal or private student loan.

The CFPB is concerned that federal student loan borrowers are “left in the dark” by loan servicers that do not advise them of their options. Borrowers with federal student loans are able to avoid or get out of default through various income-driven repayment and rehabilitation plans, Chopra said.

Increase in illegal practices. Chopra wrote that the bureau has seen an increase in the number of companies that charge large upfront fees to help borrowers enroll in a plan that can be done for free. He noted that federal and state law enforcement has taken action to stop “the illegal and harmful practices of these companies,” and the CFPB has warned consumers about them.

Google trend analysis. In his letter, Chopra told Molinari that the CFPB is aware that Google has policies in place to protect consumers against misrepresentations in advertisements, but there may be companies that do not meet Google’s requirements. The CFPB’s analysis of Google Trends data suggests that struggling borrowers are indeed searching for help using keywords such as “student loan default,” “student loan forgiveness,” and “Obama student loan relief.”

This process “bears a close resemblance” to what happened during the foreclosure crisis, Chopra wrote. Borrowers were given conflicting information about their options and found scammers who made false promises on loan modifications in exchange for upfront fees. In 2011, Google helped to stop these scammers through its cooperation with the Office of the Special Inspector General for the Troubled Asset Relief Program. Now, the bureau is asking for help in stopping scammers from preying on student borrowers in trouble.

Work with authorities. Chopra urged Google to work with federal and state agencies to ensure that the company’s search products are not being used by individuals and companies “seeking to prey on the most vulnerable student loan borrowers by implying an affiliation with the federal government.” He suggested that Google could give greater value to its users and help shut down scammers if the company would closely monitor advertising on key search terms and help drive traffic toward unbiased sources of information.
For more information about student loan-related scams and the letter to Google, subscribe to the Banking and Finance Law Daily.

Thursday, June 25, 2015

Supervisory Highlights spotlight mortgage servicing bad acts

By Katalina M. Bianco, J.D.

It's been more than a year since the Consumer Financial Protection Bureau's mortgage rules took effect, but according to the bureau's latest "Supervisory Highlights," examiners continue to find mortgage loan servicers engaging in dual tracking and mishandling loss mitigation applications, all in violation of the rules.The report on the bureau’s supervisory activities in the first four months of the year also describes violations at debt collection companies and credit reporting agencies. Two areas of concern noted in the report—consumer reporting agency handling of consumer disputes and fair lending violations by mortgage originators—are similar to violations described in the previous “Supervisory Highlights,” published in March 2015.

Mortgage servicing. Mortgage servicers’ ability to engage in dual-tracking—simultaneously considering mortgage relief and moving toward foreclosure—is significantly limited by the CFPB’s mortgage servicing rules. However, the bureau’s examiners found at least one servicer that had sent pre-foreclosure notices to consumers who already had been approved for trial loan modifications, the bureau says. This could lead consumers to think that the servicer had abandoned the trial modification.

Examiners also found that one servicer erroneously sent foreclosure warnings to borrowers who were not in default. Some servicers were not handling loss mitigation applications according to the rules, the CFPB reported. One servicer was found to have demanded that borrowers furnish duplicate or irrelevant documents. Others, the bureau said, failed to tell borrowers whether their loss mitigation applications were complete or deficient. That notice is required within five days of when an application is received.

Debt collection. Some debt collection companies examined by the bureau were found not to have adequate compliance management systems. More specifically, the bureau said+ that at least one company did not properly record or deal with complaints or other inquiries from consumers. In some cases, the consumer contacts were placed “in an electronic queue that never got reviewed or resolved.”

Consumer reporting. Accuracy problems continued to crop up at consumer reporting agencies, the CFPB said. The bureau attributes the problems to information collection and quality control issues, including a failure to monitor the accuracy of information furnishers’ reports and an absence of checks on consumer report accuracy.

The CFPB’s previous report, covering the last third of 2014, said that some consumer reporting agencies were failing in their obligation to forward all relevant consumer information to furnishers when consumers claimed errors.

Fair lending. According to the report, examiners found instances when mortgage loan originators discouraged consumers who would have relied on public assistance from making applications for loans. This practice would violate the Equal Credit Opportunity Act and Reg. B—Equal Credit (12 CFR Part 1002), the bureau said. The same charge was levied in the last report.

Last month, the bureau specifically warned lenders not to discriminate against loan applicants whose income includes payments under the Section 8 Housing Choice Voucher Homeownership Program

Learning tool. At the recent regulatory compliance convention hosted by the American Bankers Assocation, CFPB supervisory staff recommended using the bureau's "Supervisory Highlights" as a learning tool. These supervisory reports can provide insight into areas in which the bureau has focused on, and will continue to target, and specific activities that have triggered supervisory action. Take a good look. That's advice straight from the CFPB.

For more information about "Supervisory Highlights," subscribe to the Banking and Finance Law Daily.

Wednesday, June 24, 2015

Does ZIP Code request upon credit card purchase at gas pump violate privacy law?

By Thomas G. Wolfe, J.D.

It’s a typical, everyday scenario. A consumer pulls his or her car up to a gas station pump and decides to pay for the gas purchase with a credit card. Does the retailer’s request for a ZIP Code for that credit-card transaction at the pump violate the state’s privacy law?

In a June 12, 2015, court decision (Diviacchi v. Speedway LLC d/b/a Hess Retail Stores LLC, Civil Action No. 15-10655-WGY), the U.S. District Court for the District of Massachusetts determined that a retailer’s practice of requesting a consumer’s ZIP Code for credit card purchases at its gas pumps did not violate Massachusetts’ consumer privacy law. In reaching its decision, the court emphasized the factual context of the credit card transaction and the retailer’s purpose for requesting the ZIP Code.

Ultimately, the court determined that the ZIP Code information, while temporarily obtained, was “never actually recorded on the credit card transaction form,” and the retailer used the ZIP Code information for fraud-prevention purposes. Consequently, the retailer’s practice fell outside the scope of the Massachusetts state law, the court ruled. If the retailer had recorded the ZIP Code information on the credit card transaction form, would the court have ruled the same way?

Interestingly enough, the court separately concluded that the consumer had been entitled to pursue her claim for “purely injunctive relief” under Massachusetts law “absent any injury distinct from the collection of cardholder identification information in and of itself.” However, in keeping with the court’s ruling that no violation of Massachusetts’ privacy law occurred, the court denied the consumer’s request for injunctive relief in the case.

For more information about consumer privacy laws, subscribe to the Banking and Finance Law Daily.

Monday, June 22, 2015

CFPB center stage at ABA annual regulatory show

By Katalina M. Bianco, J.D.

The American Bankers Association held its annual regulatory compliance conference in Washington, D.C. this week, and the banking trade association put on quite a show. As in the last few years, the Consumer Financial Protection Bureau was the main attraction at the conference, but there were plenty of non-bureau performances, providing something for everyone.

Last year’s conference emphasized building compliance programs in areas that are new to the banking and financial services industries since the advent of the CFPB, such as consumer complaints and everyone’s favorite—UDAAP. This year, the ABA followed up with effective management of the newly-created programs. In light of the ever-growing threats to data security, courses on strong IT protection tactics were bulked up this year, and the conference “marketplace” was heavy on data security vendors.

CFPB Town Hall. Each year, the ABA presents town hall sessions broken down by regulator. Given the overwhelming attendance at the CFPB sessions in the past, conference-goers were happy to find that this year’s bureau town hall was held in the largest conference meeting room available. Generally, the CFPB staff members that have appeared on panels at these sessions were representatives from each division of the bureau, and the discussions were quite broad rather than specific. This year, the panel was made up of Deputy Assistant Directors in Supervision. Each panel member is responsible for an area of supervision: credit/debit/gift cards, servicing in mortgages, student loans, and the indirect auto lending industry, for example. The most popular guest at this party was Calvin R. Hagins, responsible for the 2013 mortgage rules, referred to as the Title XIV rules, and the current Truth in Lending/Real Estate Settlement Procedures integrated disclosure rule, widely known as TRID.

TRID. The day after the conference, CFPB Director Richard Cordray announced that the implementation date of the rule was extended from August 1 to October 1 to rectify an “administrative error.” The implementation date being a hot topic in the industry, Hagins had addressed it at the town hall, stating unequivocally that in his letter to Sens. Joe Donnelly (D-Ind) and Tim Scott (R-SC), Cordray did not say there would be an extension or a grace period. However, Hagins said that there will be no immediate enforcement of the rule. He pointed out that the CFPB held off taking enforcement action for violations of the 2013 mortgage rules after the effective date to allow for “fixes.” The same will hold true for TRID, according to Hagins. What the CFPB expects is that the products will be tested, problems identified, and appropriate corrections made during the period of time following the implementation date.

Hagins concluded his presentation with an offer to speak with anyone interested in discussing TRID. He had on hand a stack of business cards, all of which disappeared into the crowd surrounding the Deputy Assistant Director at the end of the town hall.

Payday lending. A CFPB staff member working in the payday and other “high-cost” lending areas told attendees that a proposed rule on such loans would be issued “in the coming months.” According to her statements, the proposal will target the “debt trap” aspect of such loans and collection of debt stemming from the loans. Payday loan “debt trap” refers to the common problem of consumers borrowing, then failing to repay the loans, leading to rollover of the loans along with more fees. The borrowers end up owing far more than the original loan amount. Under the proposal, lenders would have two options when making a loan. The first option would be to apply the Ability-to-Repay standards to verify that the borrower is able to repay the loan by checking income, other outstanding debt, and other factors before making the loan. This is the “prevention” aspect of the proposal. Should the lender decline to use ATR standards, the lender would be required to apply the CFPB’s terms as outlined in the proposal. The lender also would be prohibited from rolling over the loan beyond a certain number of times so as to prevent the consumer from taking on more debt.

The second aspect of the proposal would address debt collection of the loans. In many cases, lenders have access to consumers’ bank accounts and are able to automatically tap those accounts to collect on the loans. The proposal would prevent lenders from accessing the accounts more than twice before having to get another authorization from the consumer. Should the consumer deny access to the account, the lender would have to move into more standard debt collection practices without use of the account.

UDAAP. No CFPB panel discussion would be complete without a talk about UDAAP. Attendees did not get a definitive answer to the question of the day: Just what is “deceptive” and “abusive” anyway? But they did get some advice. ABA speakers have long advocated following CFPB enforcement actions to get clues as to what the bureau finds UDAAP-adverse. The panel at this year’s conference confirmed that advice. According to staff members, the CFPB deliberately words its consent orders to be used as learning tools. Each one is intended to be another piece in the UDAAP puzzle. The “I’ll know it when I see it” nature of UDAAP makes it difficult to get a handle on. Studying bureau enforcement activity can help prevent UDAAP from being “I’ll know it when the CFPB comes calling, civil investigative demand in hand.”

The conference sessions were quite UDAAP-heavy. There were some dedicated UDAAP sessions, but in many sessions on other regulations, UDAAP was present. There was a good amount of fair lending coverage that was interwoven with UDAAP concerns, and UDAAP showed up in discussions on the Home Mortgage Disclosure Act proposed rule, mortgage servicing, and most other consumer compliance topics. An informative UDAAP sample risk assessment checklist was on offer to attendees of one session.

BSA/AML. The Bank Secrecy Act and anti-money laundering practices were prominent this year, in the sessions and in the vendor marketplace. One of the reasons is a case that has caused concern in the industry. The Treasury Department, specifically the Financial Crimes Enforcement Network, filed suit against a company called MoneyGram for allegedly assisting fraudsters in wire fraud scams from 2004 through 2008. FinCEN also held an individual MoneyGram employee, Thomas E. Haider, personally liable to the tune of $1 million dollars for AML program violations and failing to report suspicious activity. The case, U.S. Department of Treasury v. Haider now is on appeal.

In a second case, an employee was held personally liable for failing to put the company on notice of suspicious activity and following up on that notice. The point of the session was that giving notice in the proper channels no longer is enough to protect an employee. If the proper person to whom the employee reports does nothing to address the problem, the employee should keep going up the company hierarchy. If nothing is done, drastic action is called for: in other words, resign and then inform the proper authorities. Also, check to see if the company has an insurance policy that covers employees and what activities specifically are covered.

Wrapping up. The conference offered a variety of sessions addressing current issues: protection of servicemembers and financial exploitation of elders, notably. The discussion on elder abuse was centered on the Oklahoma Bankers Association model and led by a former police officer now with the association and passionate in her goal to stamp out elder abuse. Rounding out the conference were discussions on building a relationship with regulators (Are you going steady or just friends?) and how to identify the compliance expectations of today’s regulators. The ABA celebrated its 140th anniversary with yet another fine show.
For more information about the ABA and CFPB supervisory activities, subscribe to the Banking and Finance Law Daily.

Friday, June 19, 2015

Richard Cordray and the case of the mysterious ‘administrative error’

By Lisa M. Goolik

If you haven’t already heard, the Consumer Financial Protection Bureau is delaying the effective date of its TILA-RESPA Integrated Disclosures rule, also referred to as the Know Before You Owe rule, until Oct. 1, 2015. The rule combines certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan. CFPB Director Richard Cordray blamed the delay on a newly-discovered “administrative error,” which would have delayed the effective date of the rule by two weeks. Which begs the question, what was the “administrative error”?

There is some speculation that the CFPB failed to file timely notice of the rule with Congress and the Government Accountability Office. Under the Congressional Review Act, federal agencies promulgating rules must submit a copy to both houses of Congress and GAO before the rules can take effect. According to the GAO, federal agencies must file notice of “major rules” at least 60 days prior to the required effective date. 

Cordray’s comments indicate that the administrative error “would have delayed the effective date of the rule by two weeks.” With an effective date of Aug. 1, 2015, the notice would have been required by June 2, 2015. If the error was not discovered until Wednesday, the effective date would have been delayed until Aug. 16, 2015, at least two weeks past the effective date.

Under the CRA, Congress would also have the opportunity to disapprove the rule. The Act provides that Congress may pass a joint resolution of disapproval relating to a “major rule,” resulting in the rule having no force or effect. However, Congressional disapproval rarely occurs. The GAO reports that, since 1996, 43 resolutions of disapproval have been introduced in the Senate or House of Representatives and only one rule, a Department of Labor rule on ergonomics, has been disapproved by Congress.

Regardless of cause, Rep. Blaine Luetkemeyer (R-Mo), Chairman of the House Subcommittee on Housing and Insurance, had comforting words for whoever was responsible, stating, “The need for this extension is a reminder to all of us that we are human beings and mistakes are made, and I appreciate Director Cordray’s actions to remedy the situation.” 

If the overwhelmingly positive reaction to the announcement is any indication, a number of industry groups would like to thank the human responsible for the error.

For more information about the TILA-RESPA Integrated Disclosures rule, subscribe to the Banking and Finance Law Daily.

Thursday, June 18, 2015

Possible appeal avenue for Starr International?

By Richard A. Roth, J.D.

Facing the loss of its $22.7 billion claim against the federal government for illegally exacting—or perhaps extorting—79.9 percent of American International Group Inc.’s equity in exchange for emergency credit, Starr International Company, Inc., is almost certainly looking for appeal possibilities. One possibility could lie in how the judge determined that AIG shareholders suffered no harm.

In the June 15, 2015, decision in Starr International Co., Inc. v. U.S., the judge decided that while the Federal Reserve Board had no authority to take an equity interest in AIG, the company’s shareholders were not harmed because, in the absence of the Fed’s emergency loan, the company would have filed for bankruptcy. Bankruptcy presumably would have wiped out the shareholders’ interests. While the shareholders’ interests in the company were greatly reduced by the Fed’s demand, the shareholders were better off than they would have been had the company filed for bankruptcy, he reasoned. Essentially, the shareholders were benefitted, not harmed.

However, the opinion does not consider that the Fed perhaps could have arranged credit legally, without taking an equity interest. This could perhaps have saved AIG without reducing the shareholders’ ownership percentages.

The opinion noted that the AIG loan was the only time in the history of emergency credit activities that the Fed took an equity interest in the borrower, and that the Fed treated AIG much more harshly than it treated any of the other financial institutions it bailed out. The opinion’s description of the factual situation at the height of the financial crisis makes clear that regulators had determined that AIG had to be saved because the consequences of its failure could have been catastrophic.

The opinion looked at the damages issue from two points of view—the position that shareholders would have been in had the Fed not acted, and the position the shareholders were in after the Fed acted illegally. Should a third possibility have been considered—the shareholders’ position had the Fed taken legal action?

Legal action—extending credit without taking an equity interest—would only have been possible if the credit could have been “secured to the satisfaction of the Federal Reserve bank” that was making the loan, which was the New York Fed. AIG’s problem was lack of liquidity. If providing the needed liquidity would have preserve the value of the company’s assets, would they have been sufficient to secure the credit? This was not addressed in the opinion.

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Penalty grows bigtime as CFPB Director applies RESPA enforcement powers

By Andrew A. Turner, J.D.

In the first appeal of a Consumer Financial Protection Bureau administrative enforcement proceeding, CFPB Director Richard Cordray increased the amount of disgorgement from $6 million to $109 million that PHH Corporation was ordered to pay to the CFPB for illegally referring consumers to mortgage insurers in exchange for kickbacks. Cordray's decision found that PHH, a mortgage lender, violated the Real Estate Settlement Procedures Act every time it received a reinsurance premium from a mortgage insurer to which it had referred a borrower, regardless of when the loan closed. Thus, PHH was ordered to disgorge all premiums that it accepted on or after July 21, 2008, not just those associated with loans that closed on or after July 21, 2008.

PHH comments. The decision drew a strong response from PHH: "We strongly disagree with the decision of the Director. We believe this decision is inconsistent with the facts and is not in accord with well-settled legal principles and interpretations. We continue to believe we complied with RESPA and other laws applicable to our mortgage reinsurance activities. The Company did not provide reinsurance on loans originated after 2009. We intend to file an appeal to the United States Court of Appeals. While there can be no assurances as to the final outcome of any such appeal, we believe our appeal will be successful and, as a result, are not adjusting our previously issued earnings guidance."

Standard of review. Under the CFPB’s rules, when a party appeals an ALI's recommended decision, the CFPB Director’s review as to both facts and law is de novo, giving Cordray discretion to alter the Administrative Law Judge’s ruling.

Statute of limitations and retroactivity. Cordray found that no statute of limitations applies when the Bureau challenges a RESPA violation in an administrative proceeding. The RESPA statute of limitations applies to the CFPB only if it brings an enforcement action in court, and because this proceeding was administrative, RESPA's time limit did not apply.

The CFPB took over enforcement authority for RESPA from the Department of Housing and Urban Development (HUD) under the Dodd-Frank Act on July 21, 2011. As of the last day that HUD could enforce RESPA, it was limited to challenging violations that occurred no earlier than July 21, 2008. If the CFPB were to challenge violations that occurred prior to that date, this would be a retroactive application, Cordray said. Thus, the CFPB lacked authority to pursue violations that occurred before July 21, 2008.

Civil money penalty. Since RESPA did not authorize HUD to seek a civil money penalty, Cordray concluded that it would be an inappropriate retroactive application of the CFPB's authority for it to seek civil money penalties for violations that occurred before the bureau was created. As a result, the CFPB may seek civil money penalties only for violations that occurred on or after July 21, 2011.

Although PHH's size, lack of good faith, and the gravity of the violations would have weighed against mitigation of penalties, Cordray decided not to impose a civil money penalty. The CFPB Director noted that no civil money penalties could have been imposed under RESPA's framework for the vast majority of PHH's conduct over the period encompassed by its captive reinsurance agreements and that he had the discretion to conclude that the award of disgorgement was sufficient.

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

Wednesday, June 17, 2015

Banks' energy portfolios staying afloat, despite sinking oil prices

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

“There’s no sense of alarm,” regarding banks’ oil and gas portfolios, according to a recent Federal Reserve Bank of Cleveland publication written by Michelle Park Lazette on what low oil prices might mean for loans made to the sector. Lazette pointed to the Federal Reserve Board’s April Senior Loan Officer Opinion Survey, which reported that although bankers expect the quality of loans made to the oil and natural gas drilling or extraction sector to deteriorate somewhat this year, their exposures are small and they are taking actions to mitigate the risk of loan losses.

 Of the banks that made loans to oil and gas firms, more than 80 percent indicated that such lending accounted for less than 10 percent of their commercial and industrial (C&I) loans outstanding. That’s a relatively small portion of a bank’s portfolio, according to the Cleveland Fed’s assistant vice president Jenni Frazer. The risk that we are hearing from the bankers is that should oil prices stay low for a much longer period of time, then there’s more reason to worry. In the short term, she added, the oil and gas industry can withstand these lower prices.

Bankers’ actions. The survey reported that bankers expect to write off some loans made to the energy sector. However, Lazette noted, it also reported that bankers are restructuring outstanding loans, reducing the size of existing credit lines, and requiring additional collateral. Frazer added that bankers have increased their oversight and monitoring of impacted borrowers.

Regulators’ roles. Frazer stated that regulators have two roles when a particular risk escalates. “It’s our job to make sure that bankers have the right risk management processes in place to know their exposures and where the risks lie,” she says. “If we don’t see that, we could exercise our authority and direct bankers to establish the right infrastructures and controls.”

“We also have a responsibility to use broader information like what we’re getting from the Senior Loan Officer Opinion Survey to understand the risks nationally or even globally for the industry to make sure there isn’t a systemic risk that would impact financial stability,” Frazer added.

For more information about the impact of energy prices on the banking industry, subscribe to the Banking and Finance Law Daily.

Tuesday, June 16, 2015

Fed's AIG takeover wrong but caused no damages

By Richard A. Roth, J.D.

Neither the Federal Reserve Board nor the Federal Reserve Bank of New York had the legal authority to demand nearly 80 percent of American International Group’s ownership as a condition of providing emergency funding at the height of the financial crisis, a judge for the Court of Federal Claims has decided. However, while the government unjustifiably treated AIG much more harshly than it treated other financial institutions, no damages were owed to the company’s shareholders because AIG’s only alternative was bankruptcy. While the New York Fed’s takeover reduced shareholders’ equity to only 20 percent of what they once had, 20 percent of something is better than 100 percent of nothing, the judge said (Starr International Co., Inc. v. U.S.).

The judge’s extensive recitation of the genesis of the financial crisis, AIG’s liquidity problems, and the government’s response left no doubt that he believed the government had acted wrongly, including by both imposing unjustifiably harsh credit terms on the company and taking much of the company’s equity to the profit of the government. For example, the judge’s side-by-side comparison of how the government treated AIG and how it treated Morgan Stanley demonstrated that:
  • AIG initially was charged a 12-percent interest rate, while Morgan-Stanley was to pay between 2.25 and 3 percent.
  • AIG was to pay a 2-percent commitment fee, while Morgan Stanley was charged no commitment fee.
  • The government claimed 79.9 percent of AIG’s equity, while taking no equity position in Morgan Stanley.
The judge also concluded that “[t]he evidence supports a conclusion that AIG was less responsible for the crisis than other major institutions.” Moreover, “The Government’s justification for taking control of AIG’s ownership and running its business operations appears to have been entirely misplaced,” he said.

In the end, the U.S. Treasury received a $22.7 billion profit on the AIG stock it acquired, the judge said.

Claims raised. The suit was brought on behalf of two classes of AIG shareholders. The first was a class of shareholders who owned common stock during the week when the government took the 79.9-percent interest in exchange for $85 billion in credit that the company needed to meet its immediate liquidity needs. The second was a class of shareholders who held common stock nine months later when AIG’s board of directors, now under the control of the federal government, approved a 20-for-1 reverse stock split that reduced the number of shares that were issued but not the total number of authorized shares. Eventually the government exchanged its preferred shares for many of those unissued shares without any shareholder vote.

According to the judge, there were two central issues in the case:
  1. Did the New York Fed have the legal authority to acquire an interest in AIG in exchange for credit?
  2. Did taking the 79.9-percent equity interest constitute taking the shareholders’ property without just compensation?
Jurisdiction. The judge first had to address a challenge to Court of Federal Claims jurisdiction over the “illegal exaction” claim—the claim that the New York Fed unlawfully took the shareholders’ equity in AIG. Normally, Court of Federal Claims jurisdiction is limited to claims based on a “money-mandating source of law.” However, according to the government, the illegal exaction claim was based on Federal Reserve Act Section 13(3) (12 U.S.C. §343), which was not money-mandating.

The government’s jurisdictional challenge was rejected. If the argument was correct, the government “could nationalize a private corporation, as it did to AIG, without any fear of claims or reprisals,” the judge wrote. The necessary implication of the FRA section was that injured shareholders could sue, and that was enough to establish jurisdiction.

The judge also was unpersuaded by the government’s alternative claims that the FRA section was not money-mandating because it was discretionary and that the section was not intended to benefit anyone other than the Federal Reserve System. “The remedies for the financial system must be available to all who comprise it,” including the shareholders of a company that has been nationalized, he said.

Illegal exaction. The Federal Reserve Board and the New York Fed had the legal authority to extend credit to AIG, but they did not have the legal authority to take an ownership interest, the judge determined. Noting that the AIG bailout was the first time among the hundreds of emergency loans the Fed has made that it took over a company, the judge said definitively that “there is no law permitting the Federal Reserve to take over a company and run its business in the commercial world as consideration for a loan.”

As it read before it was amended by the Dodd-Frank Act, FRA Section 13(3) imposed four criteria for an emergency loan to a commercial company:
  1. the existence of unusual and exigent circumstances;
  2. authorization of the loan by at least five Fed governors;
  3. the availability of collateral securing the loan to the satisfaction of the lending Federal Reserve Bank; and
  4. the borrower’s inability to borrow from other banks.
If the government exercises its discretion to provide a benefit, such as emergency credit under the FRA, it cannot condition that benefit on the surrender of rights it has no authority to demand, the judge said. Nothing in the FRA gave the Fed or the New York Fed the authority to demand any AIG equity as a condition of the credit, regardless of the existence of a national crisis.

While it is true that FRA Section 13(3) says that emergency credit is to be “subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe,” this did not extend the Fed’s powers beyond what were specifically delegated, the judge continued. The Fed’s incidental powers to manage its loans could not be broader than the powers delegated to it by Congress, and those delegated powers did not include taking equity in a borrower.

The AIG board’s vote to accept the conditions on the emergency credit could not be a defense to the illegal exaction claim, the judge also determined. A private person cannot ratify an illegal action by the government.

Equity in trust. The judge also observed that the Fed’s outside counsel eventually concluded that there was no authority to hold an equity interest, and the Fed’s own legal staff concurred. This required a restructuring of the transaction to put the shares into a trust of which the Fed was the beneficiary.

However, the creation of the trust did not remedy the illegal exaction, he said. The trust was created only after the New York Fed took the impermissible action, and even then the trustees were controlled by the Fed.

Taking claim. The illegal exaction claim and the taking claim were alternatives, the judge then said. The former was based on the theory that the 79.9-percent interest was taken without legal authority, while the latter was based on the theory that the taking was legal but that compensation was due. Only one could be the case and, since the decision that there had been an illegal exaction meant that the Fed and New York Fed had no legal authority, the taking claim failed.

Reverse split. The shareholders complaining about the effects of the reverse stock split had no claim, the judge said, because there was no evidence of any improper motive at the time of the shareholder vote that authorized the restructuring. The class claim was that the reverse split was orchestrated to allow the government later to exchange the preferred shares it held for common shares without an otherwise required separate vote by the common shareholders. However, the judge rejected this claim.

The evidence actually showed that the purpose of the reverse split was to prevent the delisting of AIG shares, which then were trading at or below $1 per share, the judge pointed out. The shareholders knew when they voted that the reverse split would make nearly five billion shares available to be issued in the future, and 85 percent of the votes—including those of the class representative—were to approve the restructuring. The government’s exchange of preferred shares for common shares was not under consideration at the time and did not happen until more than a year later.

Damages. The class of shareholders who owned shares at the time of the initial loan had to demonstrate an economic loss to prove damages from the illegal exaction of their AIG equity, according to the judge. What mattered was the shareholders’ loss, not the $22.7 billion that the government later gained from selling the stock. By that measure, the shareholders lost nothing and were entitled to recover nothing.

Had the government not stepped in with the emergency loan, no matter how onerous the loan’s terms were, the “inescapable conclusion” was that AIG would have filed for bankruptcy, the judge believed. The shareholders’ shares then would have been worth nothing. The government’s actions preserved for the shareholders 20 percent of their equity and, as one participant told AIG’s board as it considered the offer, “[20] percent of something [is] better than [100] percent of nothing.”

Waiver. Wrapping up his opinion, the judge easily rejected the government’s defense that the AIG shareholders had waived their claim by not suing until after they had accepted the benefits of the bailout. The suit was filed well within the statute of limitations, he said, and the government and its advisors “carefully orchestrated the AIG takeover so that the shareholders would be excluded from the process.” The government could not claim a waiver after it “intentionally kept the shareholders in the dark as much as possible.”

Fed response. Responding to the decision, the Fed briefly but strongly defended its actions, calling them “legal, proper and effective.” “The terms of the credit were appropriately tough to protect taxpayers from the risks the rescue loan presented when it was made,” the Fed added.

This post previously appeared in the Banking and Finance Law Daily.

For more information about financial stability and bailouts, subscribe to the Banking and Finance Law Daily.

Monday, June 15, 2015

Subcommittee discusses proposals to alter CFPB structure; industry responds

By Colleen M. Svelnis, J.D.

The House Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing to discuss legislative proposals related to relieving the regulatory burden financial institutions face. Chairman Randy Neugebauer (R-Tex) said the legislation “covers a wide array of financial services issues. Legislation amending the bank examination and supervision process. Legislation addressing consumer lending concerns. Legislation facilitating a healthy child support system.” The hearing, entitled “Examining Legislative Proposals to Preserve Consumer Choice and Financial Independence,” also considered a bill (H.R. 1266) that would change the structure of the Consumer Financial Protection Bureau from a single director to a bipartisan five-person commission that would be appointed by the president.

Neugebauer, spoke about H.R. 1266, The Financial Product Safety Commission Act of 2015, in his opening statement, pointing out that the bill has bipartisan support, and stating “As we consider this new CFPB structure, I would like to remind members who are still formulating a position of the long standing Democratic support of a five person, bipartisan commission at the CFPB.” H.R. 1266 would require the Commission to be appointed by the President and confirmed by the Senate with no more than three being members of one political party.

Legislative proposals. The proposed legislation discussed by the subcommittee includes:
  • H.R. 766, Financial Institutions Customer Protection Act, introduced by Rep. Blaine Luetkemeyer (R-Mo); 
  • H.R. 1210, Portfolio Lending and Mortgage Access Act, introduced by Rep. Andy Barr (R-Ky); 
  • H.R. 1266, The Financial Product Safety Commission Act of 2015, introduced by Neugebauer; 
  • H.R. 1413, Firearms Manufacturers and Dealers Protection Act of 2015, introduced by David Schweikert (R-Ariz); 
  • H.R. 1553, Small Bank Exam Cycle Reform Act of 2015 (H.R. 1553), introduced by Rep. Scott Tipton (R-Colo);
  • H.R. 1660, Federal Savings Association Charter Flexibility Act, introduced by Rep. Keith Rothfus (R-Penn); 
  • H.R. 1737, Reforming CFPB Indirect Auto Financing Guidance Act, introduced by Rep. Frank Guinta (R-NH);
  • H.R. 1941, Financial Institutions Examination Fairness and Reform Act, introduced by Reps. Lynn Westmoreland (R-Ga) and Carolyn Maloney (D-NY);
  • H.R. 2091 Child Support Assistance Act of 2015, introduced by Rep. Bruce Poliquin (R-Maine); 
  • H.R. 2213, Enforcement Safe Harbor for TRID Implementation, introduced by Reps. Steve Pearce (R-NM) and Brad Sherman (D-Calif); and
  • H.R. 2287, National Credit Union Administration Budget Transparency Act, introduced by Rep. Mick Mulvaney (R-SC).
Longer examination cycle. H.R. 1553 would allow well-managed banks with under $1 billion in total assets to be eligible for an 18-month bank examination cycle by the Office of the Comptroller of the Currency. Currently, only banks with assets below $500 million are eligible for the 18-month cycle, while other small banks are required to undergo an exam every year.

“One of the most pressing concerns I hear from locally owned community banks in my district is the cost of compliance. Our commonsense legislation reduces the heavy red tape burden facing well-managed small banks, and frees up additional resources for bank examiners so they can focus their attention on high-risk institutions,” said Tipton. “This good government bill provides regulatory relief on small banks, allowing them to focus on running their businesses, investing in their communities and helping create economic opportunity on Main Street.”

Committee promotes stability. Oliver Ireland, a partner at financial services practice Morrison and Foerster stated his support for the Subcommittee’s efforts to examine the bank regulatory system, saying the benefit of hindsight, can help determine if “our bank regulatory system has become overly constraining whether due to the remedial legislation or to the normal evolution of banking services and market.” Ireland stated his strong support of H.R. 1266, saying that the board or commission structure provides greater continuity and stability of policy than does an individual head of an agency, which “helps to foster public confidence in our regulated financial institutions.”

Ireland continued, “Even the most vigorous consumer advocate should recognize that dramatic shifts in policy in consumer protection will not be in consumers’ longer run interests. Replacing the director of the Consumer Financial Protection Bureau with a bipartisan commission, particularly now that the Bureau is established, would provide for an approach to consumer protection that benefits from the views of the differing members of the commission and that is not subject to abrupt changes in direction that could come from individual directors.”

Ireland also testified that “H.R. 1553 would increase the size (asset threshold) of depository institutions eligible for an eighteen-month examination cycle instead of an annual examination cycle. This change would benefit both banks and bank regulators without jeopardizing the stability of our financial system. Examinations consume time and resources at both the examining regulator and at the institution examined. Reducing the examination frequency for smaller institutions would facilitate a more risk-based approach to examinations.”

Goal is competitiveness in market. Jess Sharp, Managing Director, U.S. Chamber of Commerce Center for Capital Markets Competitiveness, testified that the bills “reflect the broad range of its efforts to make financial markets stronger and more competitive to meet the needs of the American consumer.” He said, “many of the proposals under consideration at today’s hearing would help address the problems businesses wrestle with every day in the consumer financial services marketplace.”

Sharp emphasized the following principles:
  • companies and consumers benefit from clear rules of the road;
  • rationing credit does not protect consumers;
  • the bureau must respect clear limits on its authority;
  • the bureau must be transparent to consumers and Congress; and
  • if everyone is in charge, no one is in charge.
According to Sharp, “the subcommittee is focused on the goal of “ensuring that consumers have access to the products they want through safe and competitive marketplaces.” Of H.R. 1553, Sharp said that “the Chamber strongly supports measures that would provide them with regulatory relief. H.R. 1553 simply allows more of our small banks to be examined on an 18-month cycle, reducing the cost and burden of supervision, and allowing them to redirect those resources into serving their communities.” According to Sharp, the Chamber also supports H.R. 766, H.R. 2287, H.R. 1941, H.R. 1210, H.R. 1737, and H.R. 2213.

Burden on smaller institutions. Hester Peirce, Director of Financial Markets Working Group and Senior Research Fellow, Mercatus Center, George Mason University, said the proposed bills “include measures that could encourage financial institutions to take responsibility for their lending decisions, could limit bank regulators’ discretion by enhancing regulatory accountability, and could streamline the regulatory framework to enable it to operate more effectively.” Peirce did not take a position on the bills, instead she discussed ways in which the proposed changes could:
  • encourage financial institutions to take responsibility for their decisions;
  • limit bank regulators’ discretion and enhance regulatory accountability; and
  • update the regulatory framework to enable it to operate more effectively.
With regard to reform of the examination processes, Peirce stated that “The burden of these exams falls disproportionately on smaller institutions.”

Miller testimony. Former Congressman Brad Miller, Senior Fellow at the Roosevelt Institute, testified that the proposed bills would “unlearn the real lessons of the crisis.” Miller said in discussing H.R. 1941, that it “would obviously make it very difficult for regulators to keep a problem from becoming a catastrophe, not just for a given institution but for the financial system.” The bill also creates an appeal from any supervisory determination that provides far more process than is due.

“H.R. 1210 exempts depository institutions, also large and small alike, from the ability-to-repay rules for mortgages held in an institution’s portfolio, not sold to the securitization market.” He continued that “the purpose of the ability-to-repay rule is equally to protect consumers against predatory, equity-stripping mortgages. Asset-based predatory mortgages are no less predatory if held in portfolio, and homeowners can lose all of the equity in their homes, which for most homeowners is the bulk of their life’s savings, and still pose no risk to predatory lenders even if held entirely in portfolio.” Miller also said the purpose of the bill is intended to serve was “not supported by the experience of the financial crisis.”

Industry support. A coalition of trade associations, including the American Bankers Association, the Mortgage Bankers Association, and the Credit Union National Association, issued a joint statement on H.R. 1266: “Concentrating the CFPB’s authority in a sole director jeopardizes the foundation of the Bureau as an objective, neutral consumer protection agency. A commission would serve as a source of balance and stability for consumers and the financial services industry by encouraging internal debate and deliberation, ultimately leading to increased transparency.”

After noting that a commission was the originally intended structure for the CFPB, the coalition concluded that “To preserve the CFPB as a strong and effective regulator, with a mission to protect consumers regardless of which political party is in the White House, Congress should return the CFPB to its originally intended structure, from a sole director to a bipartisan commission.” The statement also noted the CFPB’s “tremendous authority” in supervising a multi-trillion dollar industry. Additionally, the statement stated that “it is imperative the CFPB remain stable, be deliberative, and remain bipartisan—for the sake of the American consumer and the U.S. economy.

ICBA. The Independent Community Bankers of America also issued a statement for the record in support of H.R. 1266 and other proposed legislation that “reflect provisions of ICBA’s Plan for Prosperity community bank regulatory relief agenda.” In addition to H.R. 1266, ICBA supports the following bills discussed at the hearing:
  • H.R. 766;
  • H.R. 1210; 
  • H.R. 2213;
  • H.R. 1553; 
  • H.R. 1660;
  • H.R. 1941; and 
  • H.R. 1737.
AFR opposition. Americans for Financial Reform, on the other hand, released a letter to Congress in opposition to seven “ill-considered deregulatory measures which would significantly reduce protections for consumers and for the financial system as a whole.” Of H.R. 1266, AFR said “there is no measurable evidence that boards or commissions work better,” and that multi-member boards “often fall into a pattern of gridlock.” Additionally, AFR stated concern that the change in structure would “reduce the accountability of its leadership.”

AFR also opposes the following bills:
  • H.R. 1941; 
  • H.R. 766;
  • H.R. 1413; 
  • H.R. 1210; 
  • H.R. 1737;
  • H.R. 2213;
  • H.R. 2091; and
  • H.R. 2287.

This story previously appeared in the Banking and Finance Law Daily.

Friday, June 12, 2015

Bureau steers supervision into auto finance

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has ventured into automobile financing territory with a newly-adopted rule that allows the bureau to supervise the largest nonbank automobile finance companies—those that originate, acquire, or refinance more than 10,000 loans per year. These companies are defined as “larger participants of the automobile financing market” that the CFPB can supervise under the Dodd-Frank Act. The bureau said it intends to use the rule to supervise the companies’ compliance with the Equal Credit Opportunity Act, Truth in Lending Act, Consumer Leasing Act, and other federal consumer financial protection laws.

According to the CFPB, about 34 companies and their affiliates will be brought under its supervision by the rule. These companies originate about 90 percent of the loans made by nonbanks, and they made loans to about 6.8 million consumers in 2013.

Rule applicability. The bureau will supervise companies that finance or refinance purchases or leases of cars, sport utility vehicles, light duty trucks, and motorcycles. Leases are covered because the bureau determined that they are functionally equivalent to loans. However, the bureau exempted title loans from the rule and provided that loan securitization purchases and related activities will not count toward the 10,000-loan threshold. The financing of recreational vehicles, motor homes, golf carts, and motor scooters is not covered.

The rule does not impose any new substantive consumer compliance duties on the finance companies.

Examination procedures. Simultaneously with announcing the rule, the CFPB published updates to its Supervisory and Examination Manual to instruct examiners on how to supervise the new group of companies. While examiners will be looking at compliance in general, the bureau noted specifically that they will look at whether the finance companies are: marketing loans or leases fairly, without misleading or deceptive practices; giving accurate information to consumer reportin agencies; collecting debts and repossessing vehicles legally; and offering financing fairly, in compliance with the Equal Credit Opportunity Act.

Indirect auto lending. This is not the CFPB’s first foray into the auto lending business. In March 2013, the bureau warned indirect lenders, whether banks or nonbanks, that they could be held responsible for auto dealers’ ECOA violations if they allow the dealers to increase consumer interest rates and then compensate the dealers with a share of the increased interest revenues.

For more information about the CFPB's supervision of auto finance companies, subscribe to the Banking and Finance Law Daily.

Thursday, June 11, 2015

CFPB allays concerns over TRID compliance; trades push for “hold harmless” period

By John M. Pachkowski, J.D.

With the Aug. 1, 2015, date for complying with the regulations implementing the TILA-RESPA Integrated Disclosure (TRID) requirements occurring in less than two months, the Consumer Financial Protection Bureau has sent a letter to Sens. Joe Donnelly (D-Ind) and Tim Scott (R-SC) stating that the bureau’s oversight of the TRID implementation “will be sensitive to the progress made by those entities that have been squarely focused on making good-faith efforts to come into compliance with the rule on time.”

The TRID rule combines certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act.
Hold harmless. Industry stakeholders have called upon the CFPB to establish a “hold harmless period of enforcement and liability” for institutions that, acting in good faith, are unable to comply with TRID.
Grace period. Besides a letter sent to the CFPB by Donnelly and Scott, many other members of Congress have also called for a grace period until the end of 2015 for financial institutions that are making a good faith effort to comply with TRID. More than 250 members of the House, led by Reps. Andy Barr (R-Ky.), Carolyn Maloney (D-N.Y.), and Maxine Waters (D-Calif.), sent a similar letter to the CPFB director. In their letter, the representatives noted also that January and February are consistently the slowest months of the year for home sales, making them more ideal for implementation.
Consumer expectations. The CFPB letter to Donnelly and Scott was mentioned in a bureau blog posting apprising consumers what to expect under TRID. The blog posting also provided a factsheet explaining the changes.
Following the CFPB’s action, a diverse group of 19 financial services trade groups, led by the American Bankers Association, have called upon Rep. Jeb Hensarling (R-Texas), the Chairman of the House Financial Services Committee, and Rep. Maxine Waters (D-Calif.), the committee’s Ranking Member, to pass H.R. 2213 which was introduced by Reps. Steve Pearce (R-N.M.) and Brad Sherman (D-Calif.), and would provide a reasonable hold-harmless period for enforcement of the of the TRID regulation for those lenders and settlement service providers that make good-faith efforts to comply.
In their letter to Hensarling and Waters, the groups noted that a hold-harmless period helps ensure consumers’ real estate closings will not be disrupted after this complicated regulation’s Aug. 1, 2015 effective date.
They also added that, although the CFPB’s action was appreciated, the industry needs more certainty that their good-faith efforts to comply while still meeting consumers’ expectations does not expose lenders and settlement service providers to litigation during the initial period after the regulation becomes effective.
For more information about RESPA and TILA, subscribe to the Banking and Finance Law Daily.

Tuesday, June 9, 2015

OIG report sparks debate over expanded financial services by U.S. Postal Service

By Thomas G. Wolfe, J.D.

The U.S Postal Service Office of Inspector General’s May 2015 report examining the “different roads” the Postal Service could likely take for expanding financial services has elicited further debate on the topic. For example, while Ranking Member of the House Committee on Oversight and Government Reform, Elijah Cummings (D-Md), praised the OIG’s report, the Independent Community Bankers of America (ICBA) expressed serious concerns about the USPS venturing deeper into the consumer financial services marketplace.

By way of background, in its May 21, 2015, report entitled “The Road Ahead for Postal Financial Services”, the OIG for the USPS concludes that, with the “right execution and marketing, expanded financial services would benefit the underserved and shore up the strength of the postal network, helping to ensure that the Postal Service is ready to meet the needs of all citizens in the 21st century.” Along these lines, the report states that a “logical first step could be to revamp existing [financial] services to make them more appealing to consumers, then expand into adjacent products that could be allowable under current law.”

In commending the OIG’s recent report, Rep. Cummings remarked, “This White Paper makes clear that the Postal Service could generate new revenue by offering an expanded range of financial products and services that American consumers want.” Noting that “one in five American households are ‘under-banked’ and obtain financial services from alternative entities such as liquor stores and payday lenders,” Cummings maintained that the Postal Service should be given additional authority to offer financial products and services as part of “comprehensive postal reform this year.”

In stark contrast, the ICBA voiced its concern about the report. In a recent release, ICBA President and CEO Camden R. Fine emphasized that the ICBA “strongly disagrees with the assertion that the answer to the U.S. Postal Service’s growing operational, management and financial troubles is entering the banking industry.” Besides questioning the OIG’s role as a “business consultant” to the Postal Service, Fine maintained that the “Postal Service’s role in delivering the mail does not make it a good fit for handling credit or lending to consumers.”

In Fine’s view, the “idea of trying to salvage a floundering operation by venturing into a new business with inherent risks and for which the Postal Service has no qualifications or expertise defies logic, reason and prudence.”

For more information about the OIG's report, subscribe to the Banking and Finance Law Daily.

Monday, June 8, 2015

Personal jurisdiction results from debt collector’s use of mail, telephone

By Richard A. Roth

A debt collecting law firm that mailed a demand letter and a summons to New York consumers, and made one telephone call to one of them, transacted enough business in the state to be subject to the personal jurisdiction of a New York federal district court. According to the U.S. Court of Appeals for the Second Circuit, that was enough to satisfy New York’s “long arm” statute even though no one from the firm ever was present in New York in connection with the debt. Constitutional due process requirements also were satisfied, the court said (Eades v. Kennedy, PC Law Offices, June 4, 2015, Lohier, R.).

According to the consumers, a father and his daughter, the debt in question was an $8,000 bill for care that was provided to their wife and mother, respectively, by a Pennsylvania nursing home. The father had signed an admission agreement saying he was responsible for the bill and promising to use his wife’s assets to pay. When the bill went unpaid, the nursing home retained Kennedy, PC Law Offices, a Pennsylvania law firm, to collect it.

Collection efforts. Kennedy first sent a demand letter to the daughter in New York, asserting that she could be liable for the bill under Pennsylvania’s indigent support law. In a later telephone conversation with the daughter, an employee of the firm threatened to put a lien on the father’s home and garnish the daughter’s wages.

Five months after the demand letter, the law firm filed a collection suit in Pennsylvania state court and mailed the summons and complaint to the father and daughter at their New York homes.

FDCPA suit. The consumers responded to the collection suit by suing Kennedy in New York federal court, claiming violations of the Fair Debt Collection Practices Act. They argued that the law firm had engaged in misrepresentations, threatened to take actions it could not legally take, and attempted to collect money it had no legal or contractual authority to collect. Their arguments were based on assertions that the Pennsylvania indigent support law did not support the payment demand, that the law was preempted by the federal Nursing Home Reform Act, and that the firm had no evidence to support its allegations.

The federal district court judge in New York agreed with Kennedy that the court did not have personal jurisdiction over the firm. Alternatively, the judge said that the nursing home care bill did not constitute a debt under the FDCPA and, if it was a debt, the FDCPA had not been violated.

Personal jurisdiction. The appellate court began by noting that whether there was personal jurisdiction over Kennedy depended on the application of both the New York long arm statute and the U.S. Constitution’s due process clause.

New York state law, which also applies to federal courts sitting in New York, says that there is personal jurisdiction over any person who “transacts any business within the state” (N.Y. C.P.L.R. §302(a)(1)). Also, the claim being asserted must arise from that business. A single business transaction can be enough, even if the person being sued never entered the state, as long as the person’s actions in New York were “purposeful,” the court pointed out.

Based on those criteria, the Pennsylvania law firm was subject to New York jurisdiction, the appellate court said. Debt collection appeared to be a major part of the law firm’s business, and the firm initiated efforts to collect a debt from New York residents.

Constitutional due process requirements were satisfied, the appellate court then determined. Kennedy’s three intentional contacts with residents in New York established the required minimum contacts with the state, and the other relevant factors—the ability of the firm to defend itself in New York, New York’s interest in protecting its residents’ rights, the consumers’ interest in using their home state courts, the efficient resolution of the controversy in either New York or Pennsylvania, and the states’ interest in allowing their citizens to litigate in their home states—offered no reason to deny the New York court personal jurisdiction over the firm.

Bill is a debt. The district court judge also was in error in deciding that the nursing care bill was not a debt, the appellate court said. Under the FDCPA, a debt is a consumer’s obligation to pay arising out of a transaction that was primarily for persona, family, or household purposes. The nursing care services were primarily for personal or family services, and the bill arose from a consumer transaction in which the services were provided in exchange for a promise to pay, the court decided.

The appellate court rejected Kennedy’s effort to analogize the nursing care bill to child support, which some courts have decided is not a debt under the FDCPA. It was irrelevant that the obligation to pay was imposed by Pennsylvania state law, the court said. What mattered was that the obligation arose from an exchange of the services for an obligation to pay.

FDCPA violations. At this point, though, the consumers encountered problems, as the appellate court decided that most of the actions they were complaining about did not violate the FDCPA.

To begin with, the nursing home’s admission agreement did not violate the federal nursing home law, the court said. The federal law generally said that nursing homes could not require third-party payment guarantees. However, the agreement only imposed on the father a duty to pay for the mother’s care from her resources, which was permissible. The agreement did not impose any personal liability on him.

The federal Nursing Home Reform Act did not preempt the Pennsylvania indigent support law, the appellate court continued. There was no conflict between the two laws because nothing in the federal law was intended to shield patients’ family members from financial responsibility, and nothing in the state law conditioned a patient’s care on a family member’s financial responsibility.

The broad claim that Kennedy violated the FDCPA by filing a suit without adequate evidence to support the allegations was rejected by the court. There was no claim that the collection suit was frivolous, baseless, of filed in bad faith. The simple assertion that the firm did not have enough evidence did not rise to the level of claiming the suit constituted a misrepresentation to collect a debt.

The consumers also asserted that Kennedy’s allegation that the mother’s property had been transferred fraudulently was false and violated the FDCPA. However, there was no indication beyond a “naked assertion” that the allegation was false, the court observed. Therefore, there was no FDCPA violation.

The court continued to shoot down the consumers’ claims by determining that the law firm’s demand letter did not misrepresent the daughter’s potential liability for the bill. The letter asserted that the daughter could be liable under the indigent care law, but it did not set out various factors that the law said could relieve her of that liability. While the consumers claimed this amounted to a misrepresentation, the appellate court said that “even an unsophisticated consumer could not reasonably interpret Kennedy’s collection letter as purporting to recite all relevant defenses and considerations.” After all, the letter described the daughter’s liability in a conditional manner and said explicitly that it was quoting Pennsylvania law only in part.

One last chance. The appellate court did, however, decide it was not in the best position to consider two violations claimed by the consumers. According to the consumers, Kennedy violated the FDCPA in the single telephone conversation by threatening to take actions it could not legally take—garnishing the daughter’s wages and putting a lien on the father’s home in advance of any judgment.

The district court judge had not considered these claims, the appellate court said, and they had not been fully briefed on appeal. As a result, they were returned to the district court for an initial decision.

This story previously appeared in the Banking and Finance Law Daily.

Friday, June 5, 2015

Casinos roll the dice on AML compliance and lose

By Lisa M. Goolik
This week's $75 million fine assessed by the Financial Crimes Enforcement Network against Tinian Dynasty Hotel & Casino in the Northern Mariana Islands for willful and “egregious” violations of the Bank Secrecy Act is the second civil money penalty assessed by the agency against a casino this year. In March, the agency fined Trump Taj Mahal Casino Resort $10 million for willful and repeated BSA violations.
Tinian Dynasty. According to the assessment, the casino’s failure to develop and implement an anti-money laundering program contributed to its failure to file currency transaction reports (CTRs) at the request of undercover Internal Revenue Service agents posing as Russian businessmen.
“Tinian Dynasty didn’t just fail to file a few reports,” said FinCEN Director Jennifer Shasky Calvery. “The casino operated for years without an AML program in place. It failed to file thousands of CTRs and its management willfully facilitated suspicious transactions and even provided helpful hints for skirting and avoiding the laws in the U.S. and overseas. Tinian Dynasty’s actions presented a real threat to the financial integrity of the region and the U.S. financial system.”
Undercover operation. During a criminal investigation, undercover agents, posing as casino patrons, told Tinian Dynasty’s Casino Manager and its VIP Services Manager that they planned to gamble large amounts of money and expressly requested that the casino not report their gaming transactions to the government. The VIP Manager assured the undercover agents that they could bring large amounts of currency and that the casino would not file reports related to their activity at the casino. The Casino Manager also provided the agents with detailed advice on how to conduct transactions in a manner that would allow them to avoid having their transactions reported.
In addition, during a search conducted at the casino, law enforcement agents discovered more than 2,000 unfiled CTRs. When asked, the casino’s Chief Auditor stated that he assumed that filing them was a low priority because nobody ever noticed that they were not being filed.
Trump Taj Majal. Earlier this year, Trump Taj Mahal admitted that it failed to implement and maintain an effective AML program, failed to report suspicious transactions, failed to properly file required currency transaction reports, and failed to keep appropriate records. Trump Taj Mahal had a history of prior, repeated BSA violations, dating back to 2003. Additionally, in 1998, FinCEN assessed a $477,700 civil money penalty against Trump Taj Mahal for currency transaction reporting violations.
When the $10 million penalty was announced, Shasky Calvery stated, "Like all casinos in this country, Trump Taj Mahal has a duty to help protect our financial system from being exploited by criminals, terrorists, and other bad actors." FinCEN's latest action indicates that the duty extends to the U.S. territories as well.
AML compliance. For casinos interested in learning more about anti-money laundering programs, Wolters Kluwer has released Federal Money Laundering Regulation, a complete guide to understanding and complying with all U.S. statutes, regulations, and court decisions governing money laundering activity. Written by Steven Mark Levy, a noted authority on regulatory and compliance issues, the desk reference provides in-depth analysis and guidance on:
  • recordkeeping and reporting requirements;
  • anti-money laundering compliance programs;
  • money laundering crimes;
  • asset forfeitures;
  • state and international measures against money laundering; and
  • terrorist financing.
For ordering information, visit wklawbusiness.com/store or call 1-800-449-6435.

Thursday, June 4, 2015

Regulatory right-sizing is the goal for state banking regulators

By Andrew A. Turner

As law and regulatory changes for the coming year are considered, the path to regulatory right-sizing (supervising an institution in a manner appropriate for its size, complexity, and risk profile) is a joint effort by federal and state policy makers, according to the Conference of State Bank Supervisors.

“By supporting flexible, appropriate, and tailored supervision,” new CSBS Chairman David J. Cotney says, “states are designing creative supervisory processes to ensure safety and soundness, consumer protection, and industry diversity.” In his speech to state and federal financial regulators at the 2015 CSBS State-Federal Supervisory Forum, Cotney previewed his priorities for bank and non-bank supervision and professional standards in the year ahead. Using research and data to create a right-sized regulatory system, in his view, would allow “financial institutions to promote economic growth and contribute to job development in the communities in which they operate.”

Outgoing CSBS Chairman Candace A. Franks told attendees at the Supervisory Forum that to successfully implement a right-sized regulatory framework, a consensus definition of a “community bank” needs to be adopted. She said that “a definitional approach to identifying community banks that looks beyond assets size would facilitate a broad range of regulatory right-sizing initiatives.”

Earlier in May, in welcoming a draft of the “Financial Regulatory Improvement Act of 2015,” (subsequently introduced in the Senate on June 2nd as S. 1484), CSBS President and CEO John W. Ryan said: “right-sized regulation and supervision of community banks will require Congress, federal regulators, and state banking agencies to rethink how we approach regulating and supervising community banks.” Provisions in the draft bill supported by the CSBS include:
  • granting qualified mortgage, or “QM,” liability safe harbor to mortgages held in portfolio by a community bank; 
  • establishing a process for institutions to petition the CFPB for rural designation for the purpose of issuing balloon loans;
  • clarifying the SAFE Act to support state regulators’ expanded use of the Nationwide Multi-state Licensing System and Registry without the loss of privilege or confidentiality protections provided by state and federal laws; and
  • establishing an 18-month exam cycle for well-capitalized banks with assets under $1 billion.
For more information about state-federal supervision of banks, subscribe to the Banking and Finance Law Daily.

Wednesday, June 3, 2015

New York’s Schneiderman says workers have earned payroll card protections

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

“Of the many issues swirling around Albany as the legislative session draws to a close,” New York Attorney General Eric T. Schneiderman wrote in an Op-Ed published in amNewYork, “few should be less controversial than ensuring New Yorkers are paid the wages they earn, without getting cheated or charged when they try to spend their money.” The AG continued, “New Yorkers deserve legal protection to make sure payroll cards do not chip away at their wages,” and he urged the state legislature to protect workers by passing his legislative program—My Payroll Card Act—“before this session ends next month.”

My Payroll Card Act seeks to increase cardholder protections for workers; resolve ambiguities in New York’s labor law to set forth clear rules for both employers and employees on the use of payroll cards; and ensure that payroll cards offer a convenient, beneficial, and fair method for workers to access their pay. Schneiderman recently announced that he had secured legislative sponsorship for the measure.

Payroll cards are prepaid debit cards used in lieu of paychecks and direct deposits. Schneiderman noted that payroll cards do offer benefits over paper checks, including greater efficiency and reduced environmental impact. Also, they can be more reliable during natural disasters and provide a useful alternative for workers without bank accounts, who may otherwise have to pay check-cashing companies.

However, fees for withdrawals, purchases, and checking the account balance can run as high as $20 per month. Schneiderman wrote that passing the legislation would ensure that “New Yorkers are paid the wages they earn, without getting cheated or charged when they try to spend their money.” Should the state legislature fail to act, the AG continued, the state Department of Labor should issue regulations to protect workers.

For more information about payroll cards, subscribe to the Banking and Finance Law Daily.