Thursday, April 28, 2016

CFPB complaint snapshot: Mortgage servicing troubles continue to plague consumers

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau’s April 2016 complaint snapshot highlights the continuing problems consumers are having with mortgage servicing. This month’s snapshot also highlights trends seen in complaints coming from California.
 “Today’s report shows that consumers are still running into too many dead ends and obstacles in resolving issues with their mortgage servicer,” said CFPB Director Richard Cordray. “The Bureau will continue to press to make sure that people can get the right information and the timely help they need.”
Product spotlight on mortgages. As of April 1, 2016, the CFPB has received approximately 223,100 mortgage complaints from consumers. The majority of complaints about mortgages—51 percent—were about problems consumers faced when making payments. Consumers complained of prolonged loss mitigation review processes that included repeated requests by servicers for the same documentation. Consumers also complained that they received conflicting and confusing foreclosure notifications during the loss mitigation review process.
Another common complaint submitted to the CFPB was difficulty communicating with servicers. Consumers complained that when they were able to speak with their servicers, the information they received often was confusing and did not provide any clarity, leading to delays in resolutions of mortgage issues.
According to the snapshot, the four companies about which the CFPB received the most mortgage-related complaints between November 2015 and January 2016 were Wells Fargo, Bank of America, Ocwen, and Nationstar Mortgage.
National complaints. The report provides an overview of national complaints. As of April 1, 2016, the CFPB has handled 859,900 complaints nationally. Statistics highlighted in the snapshot include:
  • complaint volume: for the month of March 2016, consumers submitted 8,243 debt collection complaints to the CFPB;
  • complaints submitted relating to credit reporting rose 35 percent between February and March of 2016, with 3,321 credit reporting complaints submitted in March;
  • the District of Columbia, Maryland, Delaware, and Florida had the highest concentration of complaints submitted; and
  • the top three companies about which the CFPB received the most complaints between November 2015 and January 2016 were Equifax, Experian, and TransUnion.
Spotlight on California. As of April 1, 2016, consumers in California have submitted about 118,900 of the 859,900 complaints the CFPB has handled, with the majority of complaints being about mortgages. According to the report, consumer complaints from California were more likely to be about mortgages than consumer complaints nationally. Mortgage complaints account for 26 percent of all complaints submitted to the CFPB nationally, but they accounted for 32 percent of complaints submitted from consumers in California.
Debt collection complaints from California were lower than the national average: 24 percent of all complaints as compared to 26 percent of all complaints nationally.
Finally, the three most complained-about companies for California consumers are Bank of America, Wells Fargo, and Experian.
For more information about the CFPB's monthly complaint snapshots, subscribe to the Banking and Finance Law Daily.

CFPB is ‘monkey wrench’ in lawsuit mill’s gears

By John M. Pachkowski, J.D.

The Consumer Financial Protection Bureau has entered into two consent orders with a debt collection law firm, two of the firm’s principal partners, and a debt buyer ordering them “to stop churning out unfair and deceptive debt collection lawsuits based on flimsy or nonexistent evidence.” The CPFB based the consent orders on violations of the Fair Debt Collection Practices Act and provisions of the Consumer Financial Protection Act that prohibit unfair and deceptive acts or practices in the consumer financial marketplace.

The consent orders were entered into by the bureau with Pressler & Pressler LLP, a New Jersey-based law firm, Sheldon H. Pressler and Gerard J. Felt, partners of the firm, and New Century Financial Services, also based in New Jersey.

100,000 lawsuits per year. Under the terms of the consent order with Pressler & Pressler, the CFPB found that the law firm, in a five-year period between 2009 and 2014, filed more than 500,000 debt collection lawsuits. To accomplish this, the bureau noted that the law firm used an automated claim-preparation system and non-attorney support staff to determine which consumers to sue; and that attorneys generally spent less than a few minutes, sometimes less than 30 seconds, reviewing each case before initiating a lawsuit.

Both consent orders against the parties also found that they:
  • made false or empty allegations about consumer debts;
  • filed lawsuits based on unreliable or false information; and
  • harassed consumers with unsubstantiated court filings.
Redress. In light of the FDCPA and UDAAP violations, Pressler & Pressler, the named partners, and New Century Financial Services are prohibited from:
  • filing lawsuits or threatening to sue to collect debts unless they obtain and review specific account-level documents and information showing the debt is accurate and enforceable; and
  • using affidavits as evidence to collect debts unless they accurately describe relevant facts including that the individual executing the affidavit has personal knowledge of the debt, or, if not, has reviewed documentation related to the debt.
In addition, the law firm must also keep an electronic record showing it is following proper procedures. Finally, the law firm and the named partners must pay a penalty of $1 million to the CFPB’s Civil Penalty Fund. New Century must pay a penalty of $1.5 million.

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Tuesday, April 26, 2016

CFPB lacked authority to investigate for-profit colleges’ accreditation process

By Thomas G. Wolfe, J.D.

Notably, the U.S. District Court for the District of Columbia recently denied a petition by the Consumer Financial Protection Bureau to require the Accrediting Council for Independent Colleges and Schools (ACICS) to comply with the CFPB’s Civil Investigative Demand (CID). In deciding that the CFPB lacked the authority to investigate the ACICS’s process for accrediting for-profit schools, the court stated, “Although it is understandable that new agencies like the CFPB will struggle to establish the exact parameters of their authority, they must be especially prudent before choosing to plow head long into fields not clearly ceded to them by Congress.”

To provide some background for the court's ruling in Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools, the CFPB conducted an investigation of for-profit colleges “for deceptive practices tied to their private student-lending activities.” In connection with that undertaking, the CFPB, in August 2015, separately issued a CID to ACICS, an accreditor of for-profit colleges, for the stated purpose of determining “whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges.”

After discussions with the CFPB about the CID reached an impasse, the ACICS formally petitioned the CFPB to set aside or modify the CID. However, CFPB Director Richard Cordray denied the ACICS’s request and outlined his reasons for doing so. Later, the CFPB sought enforcement of the CID in court.

Framing the legal issue before it, the court noted, “In the final analysis, this case boils down to the answer to one question: Did the CFPB have the statutory authority to issue the CID in question? Unfortunately for the CFPB, the answer is no.”

After outlining the CFPB’s statutory authority under the Dodd-Frank Act to issue the CID, the court pointed out that, by its own language, the CFPB’s CID focused on “unlawful acts and practices in connection with accrediting for-profit colleges, in violation of … [the Dodd-Frank Act] or other federal consumer financial protection law” (emphasis reflected by the court). The CFPB failed to establish a “clear nexus” between the consumer financial laws it enforces and the CFPB’s effort to investigate accreditation of for-profit colleges and schools, the court determined. “As ACICS has repeatedly and accurately explained, the accreditation process simply has no connection to a school’s private student lending practices,” the court asserted. Moreover, the court noted that ACICS is not involved in any financial aid decisions of the colleges and schools that it accredits and “plays no part in deciding whether to make or fund a student loan.”

Next, the court addressed the CFPB’s argument that it was not obligated to “accept at face value” ACICS’s description of its interaction with the schools it accredits. The CFPB contended it had a right to investigate and “determine for itself” whether ACICS’s assertions were true and accurate. Rejecting the CFPB’s argument, the court emphasized that the CFPB’s CID “says nothing about an investigation into the lending or financial-advisory practices of for-profit schools.”

In addition, the CFPB’s CID called for the ACICS to provide a list of all schools and all individuals involved in the accreditation of 21-named schools—an undertaking the “CFPB was never empowered to do” said the court. Ultimately, in the court’s view, the fact that the CFPB was separately investigating certain for-profit colleges for suspected violations of consumer financial laws regarding their lending and financial-advisory services did not somehow provide a platform for the CFPB to establish its statutory authority for the scope of its CID pertaining to the ACICS.

For more information about the boundaries of the Consumer Financial Protection Bureau's authority, subscribe to the Banking and Finance Law Daily.

Thursday, April 21, 2016

Fed’s Kashkari sees benefits of increasing bank capital in trying to end 'too big to fail'

By Andrew A. Turner, J.D.

Delivering an update on efforts to address “too big to fail” (TBTF), Neel Kashkari, President and CEO of the Federal Bank of Minneapolis said that the advantages of substantially increasing capital requirements for the largest banks would be that banks are much better positioned to withstand unknown shocks in the future. If all of the largest banks had enough capital that investors were confident in their strength even during an economic shock, in his view, concerns about shared risks could be substantially reduced. 

Kashari saw “virtue in focusing on increasing common equity to assets, which seems the simplest and potentially the most powerful in terms of safety and soundness.” Noting the need to be prepared for more change, he touted another advantage that would come from more capital—the ability to “absorb losses even from activities we cannot anticipate today.”

According to Kashkari, the Minneapolis Fed’s TBTF initiative is still in its early stages, with a series of public symposiums to be held throughout this year examining these issues. On the issue of how to deal with failing large banks, Kashkari stated that “many current reform efforts are headed in the right direction, particularly those that make banks stronger with additional capital, deeper liquidity and stress testing.”

In the past, Kashkari highlighted three options experts have offered to address systemic risks posed by large banks: breaking them up, substantially increasing capital requirements, and taxing leverage across the financial system. He also agreed that another option would be alternative resolution mechanisms that could address some of the perceived shortcomings of current resolution plans.

Current efforts. Kashkari discussed the decision by the Federal Reserve Board and Federal Deposit Insurance Corporation to deem the resolution plans of some of the largest banks in the country not credible, suggesting that the complexity, operations, and structures of these banks make their potential failure a real challenge. “We must work even harder to reduce the likelihood of large bank failures because resolving them in ways that does not trigger widespread economic harm is proving so difficult.”

One of the challenges Kashkari saw in the 2008 crisis was dealing with risk spreading between large banks. He stated that “actions we might have taken to recapitalize one bank could actually lead to increased stress at other banks as their creditors worried they too might face losses.”

Current reforms attempt to address this problem with a new legal framework combined with a plan to bring new investors into banks who agree to absorb losses when the bank gets into trouble. The idea is that by having these new investors take the hit, taxpayers will not be on the hook. According to Kashkari, this sounds good, but it has not worked in practice in prior crises, and he expressed doubt that it would work in the future. While analyzing the current regulatory framework and other potential solutions to TBTF, Kashkari concluded that it’s necessary to attempt to understand whether creditors and not taxpayers would really be allowed to take losses. He also stated that “we must work to assess whether these plans increase the transmission of risk from one bank to another.”

Costs and benefits of regulation. Kashkari emphasized the need to consider the costs of new regulations against the benefits of increased safety in our banking system. Costs include potentially lower average economic growth between financial crises. Additionally, cost increases to banks have to be passed along to customers in the form of higher borrowing costs. He provided the example of one economy with a less-regulated financial system that experiences a higher average growth rate between financial crises; but it also experiences more-frequent and more-severe financial crises than the more-regulated, slower-growth economy.

Altering bank’s organizational structure. Kashkari discussed one expert’s recommendation to impose an effective cap on bank size of 2 percent of GDP, or approximately $350 billion. He also found the argument that there is little evidence the recent growth of large banks has led to real economic benefits for the U.S. economy “compelling.”

Kashkari believes that given sufficient incentive, banks would be able to restructure themselves. He also expressed concern “that Dodd-Frank is adding to the advantage large banks have over small banks, given that complying with regulatory costs likely exhibits scale economies.”

Earlier speech. In his first speech as President and CEO of the Minneapolis Fed in February 2016, Kashkari offered his assessment of the current status and outlook for ending the problem of too big to fail banks. Since enactment of the Dodd-Frank Act, Kashkari observed, “significant progress has been made to strengthen our financial system,” but he believes that Dodd-Frank “did not go far enough” and that the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy. He further indicated that “Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all.”

For more information about efforts to end too big to fail, subscribe to the Banking and Finance Law Daily.

Wednesday, April 20, 2016

Fed offers off-site opt-in for loan reviews

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

The Federal Reserve Board has implemented new procedures for examiners to conduct off-site loan reviews for community and small regional banks. State member banks (SMBs) and U.S. branches and agencies for foreign banking organizations (FBOs) with less than $50 billion in total assets can opt to allow Fed examiners to review loan files off-site, during both full-scope or target examinations, so long as loan documents can be sent securely and with the required information (SR 16-8).

The Fed noted that most of its off-site examination work has focused on financial performance analyses and the review of bank policies, procedures, and certain bank internal reports. However, with technological advancements, such as secure data transmission and electronic file imaging, examiners now have the ability to collect and review loan file information off-site without compromising the effectiveness of the examination process.

Opt-in. FRBanks should query an SMB or FBO prior to conducting an examination to confirm the institution’s interest in participating in the off-site loan review program. SMBs or FBOs interested in participating in the program should be prepared to demonstrate their ability to appropriately image and send loan documents to the FRBank in a secure manner.

Scope of off-site v. on-site work. As directed in SR 95-13, the Fed said, FRBanks should continue to conduct as much of the examination work off-site as feasible without compromising the effectiveness of the examination process.

However, on-site examination work remains an indispensable component of bank supervision that plays a critical role in ensuring that the Fed fulfills its supervisory responsibilities. Also as directed in SR 95-13, FRBanks are expected to continue to perform on-site those activities that require physical observation, such as transaction testing and direct monitoring of an institution’s operations and internal controls.

For more information about bank supervision and regulation, subscribe to the Banking and Finance Law Daily.

Tuesday, April 19, 2016

Ratification solved problems created by invalid Cordray recess appointment

By Richard A. Roth, J.D.

The invalidity of Richard Cordray’s recess appointment as director of the Consumer Financial Protection Bureau did not deprive the federal courts of jurisdiction over a CFPB enforcement action, and his subsequent ratification of bureau actions resolved any constitutional problems, according to the U.S. Court of Appeals for the Ninth Circuit. The court also affirmed nearly all of the order for relief entered by a federal district judge against an attorney who engaged in an abusive mortgage assistance program (CFPB v. Gordon, April 14, 2016, Owens, J.).

In its enforcement suit, the CFPB asserted that California attorney Chance Edward Gordon attempted to evade restrictions on his ability to charge up-front fees for mortgage relief services by creating a two-piece program. First, under his “Pre-Litigation Monetary Claims Program,” he sold to homeowners across the country legal products that his advertisements claimed would help them with their mortgage loan disputes. Second, he promised to provide legal services free of charge, but only to homeowners who first bought the Pre-Litigation Monetary Claims Program. Gordon previously charged clients for the same services, the court noted.

According to the district court judge, the attorney’s activities violated both the Dodd-Frank Act ban on unfair, deceptive, or abusive acts or practices and the up-front payment ban of Reg. O—Mortgage Assistance Relief Services (12 CFR Part 1015).

Challenges on appeal. The attorney did not just claim that the judge incorrectly found legal and regulatory violations. He asserted that because Cordray’s recess appointment as director was invalid, and the enforcement action began before Cordray’s appointment was approved by the Senate, the bureau could not enforce the Dodd-Frank Act or Reg. O. U.S. Constitution Article II, on appointments, and Article III, on federal court jurisdiction, both left the bureau powerless to act until a director was confirmed.

Standing to sue. Article III gives the federal courts jurisdiction over “cases and controversies,” and a case or controversy exists only if the plaintiff has standing to sue. A private plaintiff must claim a particularized interest to show standing, the appellate court said; however, the government can rely on the need to vindicate the public interest.

When the CFPB sued the attorney, it was asserting “the public interest in making Gordon’s victims whole and preventing him from further fleecing vulnerable homeowners,” according to the court.

Congress authorized the CFPB to bring enforcement suits in federal court. The CFPB was part of the executive branch of government and, regardless of whether a bureau director had been confirmed, the executive branch had standing to sue to vindicate the public interest, the court said.

The court also distinguished between problems under the Article II Appointments Clause and Article III. An invalid appointment did not affect the jurisdiction of the federal courts. No court—not even the Supreme Court—ever had suggested the contrary, the court asserted.

Dissent. Judge Sandra Ikuta disagreed with the majority opinion’s standing analysis. “[N]o one had the executive power necessary to prosecute this civil enforcement action in the district court,” she said, so no one could rely on the executive branch’s standing to assert the public interest.

Only a CFPB director confirmed by the Senate would be an officer of the United States who had executive authority, the dissenter said. No one else in the CFPB had the authority, and Cordray could not delegate authority he did not possess before he was confirmed. As a result, neither Cordray nor the CFPB had standing at the time the suit was filed.

Judge Ikuta specifically said that her jurisdiction and standing analysis would apply to all enforcement actions the bureau filed in the 18 months before Cordray’s appointment was confirmed. All should be dismissed, she argued.

Ratification. The CFPB conceded that Cordray’s recess appointment was invalid under NLRB v. Noel Canning. The Appointments Clause issue now was whether Cordray’s Aug. 30, 2013, ratification of actions taken by the bureau before his July 16, 2013, Senate confirmation applied to the bureau’s July 2012 enforcement suit. The court said that the ratification resolved the Appointments Clause problem.

Cordray could ratify the CFPB actions prior to his confirmation because he could have taken those actions at the time of the ratification and, had he been confirmed, he could have taken those actions when they were taken, the court decided. The ratification was effective even if it was taken with no review. In other words, Cordray could simply “rubberstamp” the bureau’s previous actions.

Judge Ikuta disagreed with the ratification analysis as well. If a federal court is to have jurisdiction over a case, standing to sue must exist when the case is filed. Since the CFPB did not have standing to sue when it filed the enforcement action, ratification could not create it retroactively.

For more information about the CFPB and the director's ratification, subscribe to the Banking and Finance Law Daily.

Monday, April 18, 2016

CFPB tainted in payday lending regulations, must monitor long-term loans

By Stephanie K. Mann, J.D.

Senator David Vitter (R-La) continues to question the conflict of interest of Consumer Financial Protection Bureau Assistant Direct Corey Stone on payday lending. In a letter to CFPB Director Richard Cordray, Vitter emphasized his “serious concerns” about Stone’s ability to remain unconflicted during the rulemaking process of the bureau’s “Payday rule.”

“It’s unethical and unacceptable for a federal bureaucrat to craft a regulation that would directly benefit himself or his family, and yet it certainly appears as though the CFPB has allowed exactly that to happen,” said Vitter. “Considering the immense impact this rule will have on credit bureaus and the payday industry, I strongly urge Director Cordray to investigate and confirm that Corey Stone’s conflict of interest did not impact the development of the ‘Payday rule’ before moving forward with implementation.”

Conflict of interest.
According to Vitter, prior to joining the CFPB, Stone was an Executive at Pay Rent, Build Credit, Inc. which was acquired by MicroBilt, which is used extensively by the payday industry. As part of the acquisition, Stone received MicroBilt shares, which he sold to his brother for a reported $18,000. Today, these stocks are valued at approximately $250,000 to $500,000.

In the letter, Vitter asks Cordray to clarify Stone’s role in crafting the “Payday rule,” which could potentially increase business and profitability for companies, including MicroBilt, because the rule is reported to require potential lenders to use services just like those offered by MicroBilt. Vitter has also requested Stone’s Covered Relationships and Financial Interests ethics review document.

Long-term payday loans. In a separate letter to Cordray regarding payday loans, the Center for Responsible Lending has urged the bureau to examine longer-term payday loans, which may be vulnerable once the CFPB cracks down on traditional, short-term payday loans. To address all of the concerns with long-term payday loans, "it is critical that the CFPB require every lender to design, underwrite and service its loans to ensure that the great majority of borrowers can repay the loans, on their original terms, without reborrowing while meeting other expenses," the letter says.

The letter highlights the following hallmarks of predatory long-term payday and car title loans:

  • Repeat refinancing: Refinancing a high-cost loan is an extremely strong indicator that the borrower has been unable to repay the loan on its original terms without re-borrowing.
  • Cash-grab for the lenders: In all of these long-term loans, just as in payday loans, lenders can reach into borrowers’ bank accounts and grab their monthly payments.
  • Little or no pay-down of principle: These loans are designed to extract substantial payments from borrowers for an extended period of time with little progress in repaying the loan. 
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Friday, April 15, 2016

FDIC Publishes Corporate Governance Commentary

By James T. Bork, J.D., LL.M.

On April 5, 2016, the FDIC released a Special Corporate Governance Edition of Supervisory Insights. This "SCG Edition," which is directed primarily to community banks, offers commentary on the FDIC's Pocket Guide for Directors and other guidance related to corporate governance and strategic planning. In this context, the term "community bank" does not refer to banks below a particular asset-size cutoff, but refers instead to those whose business models reflect a focus on traditional lending and deposit-gathering activities within a fairly limited geography.

The SCG Edition is not intended as supervisory guidance, nor does it constitute a revision of the Pocket Guide for Directors. Instead, like other articles published in Supervisory Insights, it is designed to provide helpful information and resources to assist community bank directors to better navigate their roles and responsibilities. In this current edition, that includes a list of resources with links to regulations, as well as guidance and training materials.

After a brief introduction, the SCG Edition devotes sections to a discussion of community bank corporate governance, an expanded commentary on the FDIC's Pocket Guide, and a discussion of factors that impact FDIC examiners' assessments of community bank board effectiveness. The relative brevity of the document and the presence of white space on nearly every page invite thorough reading, and the use of frequent section headings and text boxes allows for easy review of topics that may be of special interest.

Community Bank Corporate Governance. The SCG Edition acknowledges that the concept of corporate governance has no single definition. But it uses the term as the FDIC's convenient, shorthand reference to a community bank's relationships, policies, and processes that provide strategic direction and controls.

The emphasis in the section devoted to corporate governance is primarily on a community bank's board of directors, but also includes discussions of the extent to which effective corporate governance requires significant cooperation between a community bank's board and senior management. This cooperation is perhaps most evident in the nexus between a board's establishment of a clear governance framework (including sound objectives, policies, and risk limits) and its responsibility to monitor the extent to which officers and employees comply with that framework.

It should be generally understood that effective board oversight involves the directors sending a clear message to staff that they value a strong risk management culture that includes a strong ethical culture. A risk management culture is described as a series of interrelated characteristics of the bank that influence risk decisions. These may include such things as objectives, policies, controls, values, and behaviors -- each of which is responsive to board leadership. A strong ethical culture is characterized by a belief that the interests of customers, investors, the community, and other stakeholders take precedence over short-term profits. Specific guidance regarding the latter is provided in the FDIC's Guidance on Implementing an Effective Ethics Program, which presents what amounts to an annotated checklist of components of a code of conduct or ethics policy. That guidance is available as an attachment to the FDIC's Financial Institution Letter FIL-105-2005. (See link below.)

Commentary on the FDIC's Pocket Guide for Directors. We presume that readers are familiar with the FDIC's Pocket Guide for Directors, a 1,250 word document that remains unchanged since it was issued in 1988. The SCG Edition expands upon the six major topics in the Pocket Guide (e.g., maintain independence, keep informed, supervise management, etc.), but our objective here does not include an item-by-item recitation of the FDIC's commentary on those topics. In light of the importance of risk management, we'll address instead the often-invoked sliding scale that modulates the application of some regulatory requirements. That sliding scale generally incorporates one or more variations of the phrase, "appropriate for the size, complexity, and risk profile of the bank."

The SCG Edition implies that a proper foundation from which the board may set appropriate business objectives, properly monitor the bank's operations, and supervise senior management, involves a solid understanding of the bank's risk profile. According to the FDIC, this understanding requires more than an evaluation of the bank's current financial condition. It may begin from there, but must also include an assessment of the riskiness of the business model.

That additional factor includes (i) an understanding of the types of products and services the bank offers and how those products and services are delivered; (ii) an evaluation of how the bank manages the risks associated with its business model and growth plans; and (iii) an awareness and consideration of developments outside the bank, i.e., potential external threats from the bank's operating environment. When the sliding scale concept of the complexity, nature, scope, and risk of a bank's activities is invoked to describe how rules or guidance should be applied, it refers to this type of risk profile assessment.

Examiners' Assessments of Community Bank Board Effectiveness. Studies of failed banks and troubled banks identify ineffective leadership and oversight by directors and senior management as a significant causal factor. That by itself is sufficient reason for FDIC examiners to carefully assess an institution's corporate governance framework at each onsite examination. The results of that assessment are incorporated into the "Management" component of the CAMELS rating.

The SCG Edition identifies a dozen elements that factor into the Management component review, and expressly states that those elements do not exhaust the list. Any attempt to rank order the factors would constitute an exercise in missing the point. Each is an important element in a well managed institution, but we would not question the placement of oversight by the board of directors and senior management at the top of the list. That element may deserve the top slot. But we mention it here because it is relevant to the concluding section of the SCG Edition, which presents a partial list of conditions whose presence at a community bank would lead the FDIC to expect a higher level of board oversight.

The appropriate level of board oversight will vary from one institution to another and must vary at any single institution in response to changes in the nature and complexity of the bank's operations and in response to external factors. A CAMELS composite or component rating of 3, 4 or 5 and/or the existence of a regulatory enforcement action would be an obvious wake-up call to a bank's board. But other conditions may develop more slowly, and may therefore fail to prompt a timely increase of board oversight. These conditions include, but are not limited to:
  • elevated asset or funding concentrations;
  • rapidly shifting balance sheet structure;
  • low or shrinking levels of liquid assets;
  • low capital levels or poor access to new capital;
  • deterioration in local economies or in business line fundamentals; and/or
  • plans to change the business model or enter into significant new lines of business.
Those are just a sample of conditions that should attract directors' early attention and should motivate serious consideration of increased board oversight.

The Special Corporate Governance Edition of Supervisory Insights is on the FDIC's web site. It is available through this link:

The Pocket Guide for Directors is also available on the FDIC's web site through this link:

Financial Institution Letter FIL-105-2--5 is available on the FDIC's web site through this link:

James T. Bork, J.D., LL.M., is Senior Banking Compliance Analyst with Wolters Kluwer Financial Services. Prior to joining WKFS, he practiced law for several years with a focus on financial institutions, consumer banking issues, commercial lending, and business law. He was also Assistant General Counsel and Senior Compliance Attorney at a billion dollar institution. Jim has written articles and spoken on regulatory and compliance developments affecting financial institutions. He received his law degree in 1989 and earned a Master of Laws degree (LL.M.) in banking law in 1993 from the Morin Center for Banking and Financial Law at Boston University School of Law.

Thursday, April 14, 2016

Cordray testifies before Senate committee on meeting Dodd-Frank mandates

By Katalina M. Bianco, J.D.

Consumer Financial Protection Bureau Director Richard Cordray appeared before a Senate Banking Committee hearing on the bureau’s semi-annual report to Congress. In his testimony, Cordray described actions that the CFPB has taken within the last six months to fulfill the bureau’s mandates as charged by the Dodd-Frank Act.
Supervision and enforcement. Cordray told lawmakers that in the six months since its last semi-annual report to Congress, CFPB supervisory actions resulted in financial institutions providing more than $95 million in redress to over 177,000 consumers. Within the same timeframe, the bureau announced orders through enforcement actions for approximately $5.8 billion in total relief for consumers victimized by various violations of consumer financial protection laws, along with more than $153 million in civil money penalties. He stated that the CFPB worked in tandem with other agencies on some enforcement actions, including the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and New York Department of Financial Services.
Cordray outlined additional supervisory undertakings in the past six months, including:
  • publishing one issue of Supervisory Highlights, a series intended to inform the industry and public about the CFPB’s supervisory program and discuss broad trends found through examinations; and
  • releasing new guidance documents intended to help institutions know what to expect and how to become, or remain, compliant with the law, including bulletins on private mortgage insurance cancellation and termination, the Section 8 housing choice voucher homeownership program, and interstate land sales.
Regulatory activity. Cordray testified that since its last report, the bureau issued regulations modifying and clarifying a number of rules implementing changes made by the Dodd-Frank Act to the laws governing various aspects of the mortgage market, including amendments relating to small creditors and rural or underserved areas under Regulation Z. He stated that the regulations, among other things, increased the number of financial institutions able to offer certain types of mortgages in rural and underserved areas.
Other regulatory action taken within the same timeframe include a rule moving the effective date of the Know Before You Owe mortgage disclosure rule, also known as the Truth in Lending Act/Real Estate Settlement Procedures Act rule (TRID) to Oct.3, 2015, and an interpretive rule on homeownership counseling organizations lists and high-cost mortgage counseling. Cordray testified that the CFPB also issued several other proposed or final rules or requests for information under the Dodd-Frank Act, including a final rule defining larger participants of the automobile financing market and defining certain automobile leasing activity as a financial product or service, which extends the CFPB’s supervision relating to consumer financial protection laws to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year, and a request for information regarding student loan servicing.
The CFPB director stated that to support implementation of its rules, the bureau developed a number of plain-language compliance guides that summarize certain rules and has actively engaged in discussions with industry about ways to achieve compliance.
Finally, Cordray said that over the next six months, the CFPB “will continue implementing the Dodd-Frank Act and using its regulatory authority to ensure that consumers have access to consumer financial markets that are fair, transparent, and competitive.”

For more information about CFPB Director Richard Cordray, subscribe to the Banking and Finance Law Daily.

Wednesday, April 13, 2016

Will Goldman Sachs pay $5.06 billion?

By John M. Pachkowski, J.D.

Although the Justice Department, along with its federal and state partners, procured a $5.06 billion settlement with Goldman Sachs related to Goldman’s conduct in the packaging, securitization, marketing, sale, and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007, there has been a small of chorus proclaiming that the actual settlement will be at least a billion dollars less.

Under the terms of the settlement, Goldman Sachs will pay a $2.385 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act. An additional $875 million will be paid by Goldman Sachs to settle claims filed by the National Credit Union Administration, the States of California, Illinois, and New York, as well as the Federal Loan Bank of Chicago and Federal Home Loan Bank of Seattle. The Federal Home Loan Bank of Des Moines is the successor-in-interest to the Federal Home Loan Bank of Seattle.

The settlement also includes an agreed-upon Statement of Facts that describes how Goldman Sachs made multiple representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors, its process for screening out questionable loans, and its process for qualifying loan originators.

 “Just on paper”. In an analysis in The New York Times, Nathaniel Popper said the $5.06 billion is “just on paper. He added, “Buried in the fine print are provisions that allow Goldman to pay hundreds of millions of dollars less—perhaps as much as $1 billion less than that headline figure. And that is before the tax benefits of the deal are included.”

More to conceal than reveal. Dennis Kelleher, the founder of the advocacy organization Better Markets, said, “The problem all along, with all of these settlements—and this one highlights it even more—is that they are carefully crafted more to conceal than reveal to the American public what really happened here—and what the so-called penalty is.”

Illusion of accountability. Robert Weissman, president of Public Citizen, noted, “The Department of Justice says this settlement will hold Goldman Sachs accountable. Unfortunately, that’s not so. Without criminal prosecution, there’s not even the illusion of accountability. This settlement, like others involving Goldman Sachs and the rest of the Wall Street perpetrators of the wrongdoing that led to the Great Recession, does virtually nothing to advance the objectives of deterrence, punishment or compensation for victims. The real message is, whether due to size, complexity or privileged access to politicians, Goldman Sachs and Wall Street remain above the law.”

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

Tuesday, April 12, 2016

Mobile banking continues to rise, Fed survey says

By Thomas G. Wolfe, J.D.
The Federal Reserve Board observes that consumers’ use of mobile banking has increased during the past year “as smartphone adoption grew and consumers were increasingly drawn to the convenience of mobile financial services.” In its March 2016 report of its fifth annual survey on “Consumers and Mobile Financial Services,” the Fed indicates that 43 percent of adults with mobile phones and bank accounts reported using mobile banking—a 4 percent increase from the Fed’s prior survey. Since 2011, these surveys have provided an annual snapshot of how consumers use their mobile phones to interact with financial institutions, make payments, and manage their personal finances overall.
An online consumer research firm conducted the survey on behalf of the Fed, and more than 2,500 respondents completed the survey. The Fed’s March 2016 report points out a number of notable trends and developments. Among other things, the report indicates: 
  • The most common way in which consumers use mobile banking is the monitoring of account balances or recent transactions. The second most common way consumers use mobile banking is the transferring of money between accounts, and the third most common way involves consumers’ receipt of an alert from their financial institution—whether it be through text message, push notification, or e-mail.
  • Among mobile banking users with smartphones, approximately 54 percent indicated that the “mobile channel” was one of the three most important ways they interact with their bank. In terms of the most important method of interacting with their bank, 65 percent cited the online method; 62 percent cited the ATM method; 54 percent cited the mobile channel method; and 51 percent cited a teller at a bank branch.
  • Compared to mobile banking, mobile payment continues to be a less common activity. For example, the recent survey notes that 28 percent of smartphone users and 24 percent of all mobile phone users reported having made a mobile payment within the past year.
  • For those who made mobile payments, the most common reason for doing so was to pay bills. Purchasing an item or service remotely was the second most common reason, and using a mobile phone to pay for something in a store was next.
  • Generally, the use of mobile financial services “varies across demographic groups.” At the same time, “given the prevalence of mobile phones—particularly smartphones—among minorities, low-income individuals, and younger persons, mobile technology has the potential to empower consumers and expand access to financial services for underserved populations.”
  • In keeping with the findings of past surveys, a majority of those consumers who use mobile banking and mobile payments cited “convenience” or “getting a smartphone” as the main reason for that use.
  • In terms of the “main impediments” to adopting mobile financial services, respondents continue to cite concerns about security and privacy as well as a preference for other methods of banking and making payments.
For more information about mobile banking trends, subscribe to the Banking and Finance Law Daily.

Friday, April 8, 2016

Lew: MetLife decision 'dangerously ignores' lessons of financial crisis

By Lisa M. Goolik, J.D.

The Financial Stability Oversight Council is already appealing the decision by the U.S. District Court for the District of Columbia to rescind the FSOC’s designation of MetLife as a nonbank systemically important financial institution. After the opinion was unsealed on April 7, 2016, Treasury Secretary Jacob Lew warned that the court's decision "dangerously ignores the lessons of the financial crisis."

According to Lew, the designation was made after a thorough review, which concluded that "material financial distress at the company could threaten U.S. financial stability." Lew also pointed out that the "heads of every U.S. financial regulatory agency concurred" in the decision. By overturning the designation, the court imposed new requirements that Congress never enacted and "contradicted key
policy lessons from the financial crisis," said Lew.

"Wall Street Reform was enacted in response to serious problems identified during the financial crisis, and to protect taxpayers from having to bear the enormous burdens of another crisis. Regulators previously did not have the tools to understand and respond to the risks posed by the distress of companies such as MetLife. In using these tools, FSOC has taken a deliberative and data-driven approach, relying on a careful analysis of available information, including intensive engagement with each company and its regulators to evaluate how the firm’s distress could affect the financial system," said Lew.

Lew was not alone in his criticism. Sen. Sherrod Brown (D-Ohio), Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, also released a statement, reminding the public that “massive non-bank institutions like AIG and Lehman Brothers were central to the last financial crisis” and that the Dodd-Frank Act was created to protect taxpayers when “too big to fail” institutions go unchecked. “Any actions that could undermine or hamstring that important oversight mission are steps in the wrong direction, and potentially sow the seeds of another crisis that would once again expose U.S. taxpayers to risky Wall Street practices,” warned Brown.  

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

Thursday, April 7, 2016

Banks told how to guard against elder exploitation

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has issued an advisory and a report with recommendations for banks and credit unions on preventing and responding to elder financial abuse. The advisory encourages banks to train employees on how to prevent, detect, and report elder financial abuse. The report provides an in-depth look at financial exploitation, case scenarios, and detailed recommendations to help financial institutions identify abuse.

According to the bureau, the advisory marks the first occasion a federal regulator has provided an extensive set of voluntary best practices to help banks and credit unions address the financial exploitation of older Americans. “This action gives financial institutions best practices and tools to protect older consumers from financial abuse,” said CFPB Director Richard Cordray. “Banks and credit unions are uniquely positioned to look out for older Americans and take action to protect them.” On a press call, Cordray noted that the issue is also of personal interest—Cordray’s father is 98.

Pervasive problem. Older consumers are attractive targets for financial abuse. They may have significant assets or equity in their homes; they usually have a regular source of income such as Social Security or a pension; and they may be especially vulnerable due to isolation, cognitive decline, physical disability, or other health problems. Financial exploitation, said the bureau, is the most common form of elder abuse. Cordray called it the “crime of the 21st Century.”

Role of financial institutions. Financial institutions play a vital role in preventing and responding to elder financial abuse, said the CFPB. Because the majority of older adults have checking or savings accounts and many prefer tellers as their primary form of banking, banks and credit unions have multiple opportunities for face-to-face transactions.
A number of state laws also require that financial institutions report suspected elder financial exploitation. In addition, the Financial Crimes Enforcement Network has said that Suspicious Activity Reports are useful for spotting elder financial exploitation and are required when the dollar threshold and other Bank Secrecy Act requirements are met.

As a result, the bureau’s advisory provides broad, but actionable, recommendations for banks and credit unions to help them identify and respond quickly to elder financial exploitation. Cordray clarified that the recommendations are not binding regulations, but rather “suggestions” that the bureau urges financial institutions to consider in serving their older customers. The advisory recommended the following actions:
  • Train staff to recognize abuse. Financial institutions should train employees to prevent, detect, and respond to abuse. Training should cover the warning signs of financial exploitation and appropriate responses to suspicious events.
  • Use fraud detection technologies. Financial institutions should ensure that their fraud detection systems spot suspicious account activity and products associated with elder fraud risk. This includes using predictive analytics to review account holders’ patterns and explore additional risk factors that may be associated with elder financial exploitation.
  • Offer age-friendly services. Banks and credit unions should enhance protections for seniors, such as encouraging consumers to plan for incapacity, and should consider age-friendly account features, such as opt-in limits on cash withdrawals. They can also enable older consumers to provide advance consent to share account information with a trusted relative or friend when the consumer appears to be at risk.
  • Report suspicious activity to authorities. Financial institutions should promptly report suspected exploitation to relevant federal, state, and local authorities, regardless of whether reporting is mandatory or voluntary under state or federal law.
  • Collaborate with other stakeholders. Financial institutions should work with the array of organizations on the local, regional, and state level that play a critical role in preventing, detecting, and responding to elder financial exploitation.

Warning signs. The bureau acknowledged that elder financial exploitation can be hard to identify. To assist financial institutions, the bureau also issued a report that provides an in-depth look at financial exploitation, case scenarios, and detailed recommendations to help financial institutions identify abuse. The report contains a list of 20 warning signs that may indicate elder financial exploitation.

In one case example cited by the report, prosecutors charged an Indiana home care worker with nine felonies after she took more than $150,000 from a 79-year-old woman with dementia. The caregiver stole the funds through transactions on multiple credit cards, checks drawn on a savings account, and cashed certificates of deposit. A bank fraud analyst was the first to detect the unusually large credit card charges, and the analyst called Indiana Adult Protective Services.

Consumers who suspect they or someone they know has been a victim of elder financial exploitation can visit to find a local agency or other service provider for help.

For more information about CFPB initiatives to prevent elder financial abuse, subscribe to the Banking and Finance Law Daily.

Wednesday, April 6, 2016

Wells Fargo pays $8.5M to settle alleged California privacy law violations

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

California Attorney General Kamala D. Harris announced an $8.5 million settlement with Wells Fargo Bank over violations of California privacy law that included recording consumers’ phone calls without timely telling them that they were being recorded. As part of the settlement, which is in the form of a stipulated judgment with no admissions of wrongdoing by Wells Fargo, the bank will pay civil penalties totaling $7.6 million and will reimburse the prosecutors' investigative costs of $384,000. In addition, Wells Fargo will contribute $500,000 to two statewide organizations dedicated to advancing consumer protection and privacy rights.
“Protecting the privacy of California consumers is increasingly crucial as technology rapidly develops and becomes a bigger part of our lives,” said Harris. “This settlement holds Wells Fargo accountable for violating the privacy of its customers by recording calls without providing adequate notification, and ensures that the bank makes the changes necessary to protect the privacy of its customers.”
The civil complaint alleged that Wells Fargo violated Sections 632 and 632.7 of the California Penal Code by failing to timely and adequately disclose its automatic recording of phone calls with members of the public. The AG’s release stated that California has some of strongest privacy laws in the country. In California, each party to a confidential conversation must be advised at the outset if a call is being recorded, so that the individual can object or terminate the call if he or she does not wish to be recorded.
In addition, the settlement agreement states that Wells Fargo must comply with California's standards for recording confidential communications between the bank and its customers by making clear, conspicuous, and accurate disclosures. Wells Fargo has also agreed to implement an internal compliance program to ensure that the policy changes are made, the release stated.
For more information about bank privacy law compliance, subscribe to the Banking and Finance Law Daily.

Tuesday, April 5, 2016

Misrepresentation to attorney can violate consumer debt collection protections

By Richard A. Roth

A debt-collecting law firm that sent to a consumer’s attorney a demand letter omitting two words required by the Fair Debt Collection Practices Act could have indirectly communicated with the consumer, the U.S. Court of Appeals for the Eleventh Circuit has determined. The court also decided that the firm’s failure to include in its consumer warnings that the debt needed to be disputed in writing if the consumer wanted to invoke the FDCPA debt verification procedures could have been a misrepresentation (Bishop v. Ross Earle & Bonan, P.A., March 25, 2016, Black, S.).

The claimed debt comprised $2,000 in fines the consumer was said to owe her homeowners’ association, the court said. The law firm’s demand letter was sent to the consumer’s attorney, rather than to the consumer, because she had told the association to contact her attorney about the fines.

Required FDCPA disclosures. Debt collectors are required to provide specified information to consumers, either as part of their initial communication or within the following five days. Among these disclosures is that the debt collector will provide verification of the debt if the consumer demands verification in writing within 30 days. The law firm’s disclosures omitted “in writing.”

Claiming that the omission was a misrepresentation under the FDCPA, the consumer sued.

Letter to attorney. Contrary to the debt collector’s claim, the letter to the consumer’s attorney was a communication with the consumer, the court said, because a communication can be indirect. It was expected that the consumer’s attorney would explain the letter to her.

The FDCPA bans communicating with a consumer who has an attorney “unless the attorney consents to direct communication,” the court pointed out (15 U.S.C. §1692c(a)(2)). This use of “direct communication” implies that communicating through the attorney constitutes indirect communication.

If the letter to the consumer’s attorney were not a communication to a consumer, then the consumer would have forfeited some of her protection under the FDCPA by seeking legal help. That would an illogical result, in the court’s belief. The ability of a consumer’s attorney to research, discern, and explain the “in writing” requirement did not allow the debt collector to omit the requirement from its disclosures.

Waiver. The appellate court was unimpressed with the debt collector’s claim that it was merely waiving its right to require a written demand and allowing the consumer to ask for verification orally. Nothing in the FDCPA said that a debt collector can reduce the disclosures it must provide by such a waiver.

Misrepresentation. Omitting the “in writing” term in the letter to the attorney also could be a misrepresentation, the court decided. It was true that the misrepresentation would have been delivered to the consumer through her attorney, the court conceded, but the yardstick remained the effect it would have on the “least sophisticated consumer.” There was no “competent lawyer” standard under the FDCPA in the case of a misrepresentation.

Part of the reason, the court said, is that the FDCPA is not intended only to protect consumers. It also is intended to ensure that ethical debt collectors are not at a competitive disadvantage compared to others who use abusive tactics. From that point of view, it was not appropriate to allow misrepresentations, regardless of who received those misrepresentations.

For more information about consumer debt collection protections, subscribe to the Banking and Finance Law Daily.

Friday, April 1, 2016

No maritime lien without owner's authorization

By Lisa M. Goolik, J.D.

The U.S. District Court for the Central District of California has held that the City of Newport Beach, Calif., could not maintain an action in rem against a vessel abandoned by its owner in 2010 because the city could not demonstrate that the vessel's owner authorized the city to provide storage services for the vessel.

According to the complaint, the vessel was impounded in October 2010, after it was found "attached to a mooring without authorization" within the city. The city sent a letter to the vessel's owner in November 2010, advising the owner that he could retrieve the vessel upon payment of certain towing and storage fees. However, the owner never responded to the letter. The owner was arrested in Utah in March 2015, and at the time of the opinion, was in custody there.

The city brought an action in rem against the vessel, seeking to recover accumulated "wharfage" fees of more than $83,000.

Requirement of in rem jurisdiction. The city argued that an action in rem was appropriate because it held a maritime lien on the vessel for the storage fees. As a rule, "a maritime action in rem will be available only in connection with a maritime lien." The only maritime liens recognized today "are those created by statute and those historically recognized in maritime," explained the court.

Maritime liens. Under the Federal Maritime Lien Act, "a person providing necessaries to a vessel on the order of the owner or a person authorized by the owner ... as a maritime lien on the vessel [and] may bring a civil action in rem to enforce the lien."

Assuming that "wharfage services" constituted "necessaries," the court nevertheless concluded that the city had not established that it held a valid maritime lien. The city, explained the court, failed to establish that the owner authorized the charges. In fact, the city expressly alleged that neither the owner, nor anyone on his behalf, responded in any way to the city's letter concerning the impoundment of the vessel.

For more information about City of Newport Beach v. M/Y Bad Habit (C.D. Cal.) subscribe to the Banking and Finance Law Daily.