Thursday, October 27, 2016

CFPB now subject to executive orders? Hensarling says yes

By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau now is an executive agency subject to the president’s executive orders, according to House Financial Services Committee Chair Jeb Hensarling (R-Texas). In a letter to CFPB Director Richard Cordray, Hensarling stated that the Oct. 11, 2016, decision by the D.C. Circuit Court in PHH v. CFPB requires the bureau to follow executive orders requiring agencies to ensure the benefits of their proposed regulations outweigh the costs.
The CFPB also must abide by executive orders requiring consultation with Indian tribal governments and state and local officials about its rulemaking activities, Hensarling wrote.
These executive orders issued by presidents Clinton and Obama are modest attempts to ensure that executive agencies are accountable to the American people and do not recklessly write regulations that damage our economy,” Hensarling stated. “The court’s ruling makes clear that the Constitution requires the CFPB to operate as an executive agency, making the Bureau obligated to fully comply with these executive orders.”
Court ruling. The U.S. Court of Appeals for the District of Columbia Circuit ruled in PHH v. CFPB that “the CFPB is unconstitutionally structured but can continue to operate as an executive agency rather than an independent agency,” noted Hensarling. The committee chair stated to Cordray that because the Court severed the for-cause removal provision from Section 1011(c) of the Dodd-Frank Act, “the President now will have the power to remove you (and any future Director) from office at will, and to supervise and direct your actions.”
Executive orders apply to CFPB. Hensarling referred in his letter to several executive orders by Obama and past presidents that govern the rulemaking activities of executive agencies, orders under which the CFPB now is bound, according to the chair. “Because some of these orders were advisory rather than mandatory for independent regulatory agencies, you and your staff may have been previously under the mistaken impression that these orders did not apply to the CFPB,” Hensarling wrote. The PHH decision makes it clear that the CFPB no longer can function as an independent agency. Therefore, he stated, “it is also clear that Executive Orders applicable to executive agencies” now include the bureau.
Summary of executive orders. The committee chair summarized several of the executive orders that he claims now pertain to the CFPB.
Executive Order 12866: Regulatory Planning and Review—issued by President Clinton in 1993, the order mandates that federal agencies “promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need.” Agencies must assess the costs and benefits of available regulatory alternatives, including the alternative of not regulating.
Executive Order 13563: Improving Regulations and Regulatory Review—issued by President Obama in 2011, the executive order reiterates the general principles of regulation outlined in Executive Order 12866. Agencies must: propose or adopt a regulation only after a reasoned determination that its benefits justify its costs; tailor regulations to impose the least burden on society; and select regulatory approaches that maximize net benefits.
Executive Order 13132: Federalism—issued by President Clinton in 1999, the order requires an agency to prepare a “federalism summary impact statement” whenever it issues a rule with “significant federalism implications.” The statement must include a description of the agency’s prior consultation with state and local officials and detail the officials’ concerns and the agency’s position supporting the regulation.
Executive Order 13175: Consultation and Coordination with Indian Tribal Governments—issued by President Clinton in 2000, the executive order requires agencies to have an “accountable process” that ensures “meaningful and timely input by tribal officials” when developing regulations that have tribal implications. No agency can adopt a regulation that has tribal implications and preempts tribal law without first consulting with tribal officials, providing the Office of Management and Budget with a statement on the tribal impact and any written communications submitted to the agency by tribal officials.
Online lender uses decision in CFPB action. Integrity Advance, LLC, an online lender, has been granted a stay in its appeal of an administrative law judge’s Recommended Decision by using the holding in PHH as intervening law. The ALJ had recommended that Integrity pay more than $38 million in restitution to consumers who were allegedly deceived by the costs associated with the company’s short-term loans. Cordray, granted Integrity’s motion to stay and remanded the case to a Hearing Officer.
Integrity argued that the ALJ decision “directly contradicts the D.C. Circuit’s decision in PHH, and cannot stand in light of the substantial, intervening change in controlling law.” The D.C. Court’s holding that statutes of limitation apply to CFPB administrative proceedings “directly affects the hearing officer’s decision,” according to Integrity’s motion. Integrity maintains that the statutes of limitation had run before the bureau filed its claims against the online lender.
ALJ Decision. The administrative law judge agreed with the CFPB’s allegations that Integrity and its CEO, James R. Carnes, deceived consumers about the cost of short-term loans. The judge determined that the lender:
  • violated the Truth in Lending Act by disclosing incorrect finance fees and annual percentage rates in its loan agreements; 
  • violated the Electronic Funds Transfer Act by conditioning its loans on repayment by electronic means; and 
  • violated the Consumer Financial Protection Act’s prohibition against deceptive acts or practices by, among other things, using a loan agreement that was likely to mislead consumers, and violated the CFPA’s prohibition against unfairness by using remotely created checks to obtain funds from consumers’ accounts after those consumers blocked authorization for electronic debits.
In addition to recommending more than $38 million in restitution, McKenna also recommended a civil penalty against Integrity Advance of more than $8.15 million and a civil penalty against Carnes for more than $5.4 million.
Both Integrity Advance and the CFPB appealed the decision. Integrity Advance objected to all findings of liability and all recommended relief against them in the Recommended Decision, while the CFPB also appealed portions of the judge’s recommended decision in its enforcement action.
For more information about PHH and its impact on the CFPB, subscribe to the Banking and Finance Law Daily.

Tuesday, October 25, 2016

Set incentives, reinforce accountability to reform financial services culture, says NY Fed’s Dudley

By Thomas G. Wolfe, J.D.
Speaking at a New York conference on “Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue,” William Dudley, President and CEO of the Federal Reserve Bank of New York, emphasized that, in his experience, “people respond far more to incentives and clear accountability than to statements of virtues and values.” From Dudley’s perspective, statements of virtues and values are “worthy and necessary, but remain aspirational or even illusory unless they are tied to real consequences.” Moreover, observing that “deep-seated cultural and ethical problems have plagued the financial services industry in recent years,” Dudley stressed in his Oct. 20, 2016, prepared remarks that “restoring trustworthiness” must be the ultimate goal of reforming culture and behavior in the industry.
Along these lines, Dudley stated that “a trustworthy financial services sector will be more productive and better able to support the economy. Reliable financial intermediaries can help increase the flow of credit, promote economic growth, and make the financial system more stable.”
Incentives, accountability. “To put it very simply, incentives drive behavior, and behavior establishes the social norms that drive culture,” Dudley stated. “If the incentives are wrong and accountability is weak, we will get bad behavior and cultures.” Accordingly, to assist supervisors and managers in evaluating their firms’ incentive structures, Dudley posed several questions, including:

  • How is compensation determined?
  • In particular, is questionable conduct … consistently reflected in decisions about compensation and promotion?
  • Do risk managers have the appropriate authority to challenge frontline revenue producers and prevent activity that is questionable?
  • When people speak up to point out potential conduct issues, how are they treated? 
Noting that reform requires the efforts of both the private and public sectors, Dudley indicated that he continues to offer proposals toward reforming the financial services industry’s culture. First, there should be a “database of banker misconduct” to combat the problem. Second, there should be a “baseline assessment” of the culture “in order to measure progress,” and he recommends “an industry-wide survey” in that regard. In addition, Dudley suggests that supervisors and managers should be “thinking hard” about how technological change will influence “incentives, behavior and culture.”

For more information about reform efforts concerning the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, October 20, 2016

Credit union template letters misled members about debt collection practices

By Andrew A. Turner, J.D.

Navy Federal Credit Union has agreed to pay $28.5 million to settle Consumer Financial Protection Bureau claims that it falsely threatened to take legal action and contact servicemembers’ commanding officers to collect debts. The CFPB also found that the credit union misrepresented the credit consequences of falling behind on a loan.

Between January 2013 and July 2015, CFPB allegations charged that Navy Federal Credit Union sent template letters to about 193,000 consumers threatening legal action, but only filed 5,000 debt collection lawsuits against its members. A debt collection letter threatening to contact servicemembers’ commanding officers was sent to approximately 115 consumers, but the threat was was not carried out. “Navy Federal Credit Union misled its members about its debt collection practices and froze consumers out from their own accounts,” said CFPB Director Richard Cordray.

Membership in Navy Federal Credit Union is limited to consumers who are, or have been, U.S. military servicemembers, Department of Defense civilian employees or contractors, government employees assigned to Department of Defense installations, and their immediate family members. The CFPB investigation found that the credit union deceived consumers to get them to pay delinquent accounts.

Faulty practices. The CFPB said that Navy Federal Credit Union threatened severe actions when, in fact, it seldom took such actions or did not have authorization to take them. The credit union also illegally cut off members’ electronic access to their accounts and bank cards if they did not pay overdue loans.

According to findings in the consent order, the credit union’s message to consumers of “pay or be sued” was inaccurate about 97 percent of the time, even among consumers who did not make a payment in response to the letters. Similarly, the credit union threatened to garnish wages when it had no intention or authority to do so.

Despite threats to the contrary, the credit union was not authorized and did not intend to contact military chains of command about the debts it was pressuring servicemembers to repay. The credit union also misrepresented its influence on a consumer’s credit rating, implying that it could raise or lower the rating or affect a consumer’s access to credit.

Remedies. The credit union is required to pay roughly $23 million in compensation to consumers who received threatening letters and must create a comprehensive plan to address how it communicates with its members about overdue debt. Navy Federal Credit Union cannot block its members from accessing all their accounts if they are delinquent on one or more account and is required pay a penalty of $5.5 million to the CFPB’s Civil Penalty Fund.

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

Tuesday, October 18, 2016

Payment processor looks to leverage PHH decision for dismissal

By Lisa M. Goolik, J.D.

Last week's decision by U.S. Court of Appeals for the District of Columbia Circuit that the Consumer Financial Protection Bureau’s single-director structure is unconstitutional for an independent agency has already been raised as the basis for a motion to dismiss in another case involving the bureau. Intercept Corporation, a payment processing servicer located in Fargo, N.D., has argued that an action brought by the bureau against the processor should be dismissed because the bureau's claims under the Consumer Financial Protection Act are "analogous" to the Real Estate Settlement Procedures Act claims in PHH Corporation v. CFPB.

In PHH Corporation, the D.C. Circuit appellate court ruled that the bureau's single-director structure is unconstitutional and that the president must have the authority to discharge the CFPB’s director at will and without cause. The court also rejected the bureau’s claims that there is no statute of limitations that restricts its ability to enforce the Real Estate Settlement Procedures Act against a mortgage lender that was accused of taking illegal kickbacks.

The CFPB had brought an action against Intercept in the U.S. District Court for North Dakota, alleging that Intercept engaged in unfair acts or practices in violation of the CFPA. Intercept filed a Notice of Supplemental Authority in support of its motion to dismiss in order to bring the PHH ruling to the district court’s attention. In it's notice, Intercept contended that the appellate court rejected an analogous attempt by the bureau to extend its statutory authority under RESPA. Specifically, Intercept argued that the bureau's claims are time-barred under the CFPA’s three-year statute of limitations, which begins to run on the date of the discovery of the violation.

The bureau has responded that the D.C. Court’s decision does not control the outcome of Intercept’s motion to dismiss, since a district court in North Dakota is not bound by a decision outside the 8th Circuit. The CFPB further stated that the decision is not yet final until the bureau has had an opportunity to petition for rehearing en banc or a writ of certiorari. The bureau's response also stated that the ruling on the applicable statute of limitations under RESPA are irrelevant to the case, where the claims fall under the CFPA and the parties agree on the applicable statute of limitations provision.

For more information about PHH Corporation v. CFPB (D.C. Cir), subscribe to the Banking and Finance Law Daily.

Friday, October 14, 2016

Congressional leaders call Wells Fargo CEO retirement ‘appropriate,’ say questions remain

By Colleen M. Svelnis, J.D.

Beleaguered Wells Fargo Chairman and Chief Executive Officer John Stumpf has retired from the company and its Board, effective as of Oct. 12, 2016. Tim Sloan, the President and Chief Operating Officer, will succeed him as CEO, and Stephen Sanger, its Lead Director, will be the Board’s non-executive Chairman. These changes follow actions against Wells Fargo by the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency which resulted in a record fine of $100 million for Wells Fargo’s widespread practice of secretly opening up two million unauthorized deposit and credit card accounts that dated back to 2011. In a statement, Stumpf said that he is "very optimistic" about Wells Fargo’s future.

Senator Sherrod Brown (D-Ohio) ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, stated that Stumpf’s retirement "does nothing to answer the many questions that remain." Brown called for "accountability" within Wells Fargo and stated that "We are still waiting for answers as to how Wells Fargo plans to right its wrongs against customers and the low-paid employees who weren’t given the benefit of a retirement package when they were fired for refusing to cheat." Stumpf testified before the Senate Banking Committee on Sept. 20, 2016.

Representative Maxine Waters (D-Calif), ranking member of the House Financial Services Committee, called the retirement "more than appropriate" due to Wells Fargo’s "unconscionable misconduct" for which Waters stated that Stumpf "bears direct responsibility." According to Waters, during his testimony in front of her committee, "it became clear that Mr. Stumpf either knew, or should have known, that this misconduct was happening within his bank and failed to do anything about it until prominent news articles were published." Stumpf testified before the Financial Services Committee on Sept. 29, 2016.
For more information about the Wells Fargo enforcement action and its ramifications, subscribe to the Banking and Finance Law Daily.

Wednesday, October 12, 2016

CFPB's sole director structure unconstitutional; RESPA misinterpreted

By John M. Pachkowski, J.D.

A two-judge majority of the U.S. Court of Appeals for the District of Columbia Circuit has ruled that the Consumer Financial Protection Bureau’s single-director structure is unconstitutional for an independent agency. To remedy this defect, the court found that the President must be deemed to have the authority to discharge the director at will and without cause. The court's cure is surely not to sit well with critics of the CFPB that had sought to abolish the bureau.

The court's ruling resolved an enforcement action brought by the CFPB involving the captive mortgage insurance arrangements by the mortgage lender -- PHH Corporation. The CFPB determined that the activities violated the kickback prohibitions found in section 8 of the Real Estate Settlement Procedures Act and ordered PHH to disgorge $109 million based on the illegal activity. On appeal, PHH Corporation contended that the CFPB changed a long-standing Department of Housing and Urban Development RESPA interpretation that allowed captive reinsurance arrangements as long as the reinsurance was purchased at market prices.

The court found that the CFPB's interpretation of RESPA could not be applied to earlier conduct and the its claims against PHH would be time barred.

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

Tuesday, October 11, 2016

Deciphering ‘injury in fact’ for violations of New York’s mortgage-satisfaction law

By Thomas G. Wolfe, J.D.

While two court decisions, rendered less than three weeks apart, each recognized that an “injury in fact” is required to establish Article III standing for alleged violations of New York’s mortgage-satisfaction law, the respective courts arrived at different conclusions as to whether that injury-in-fact standard had been met.

Most recently, in the October 2016 case of Nicklaw v. CitiMortgage, Inc., the U.S. Court of Appeals for the Eleventh Circuit decided that a mortgage borrower did not demonstrate an “injury in fact” to establish Article III standing to advance his lawsuit against CitiMortgage, Inc., for the company’s failure to record a satisfaction of his mortgage within 30 days as required by New York law. Emphasizing that CitiMortgage had remedied its tardiness by later filing a certificate of discharge before the mortgage borrower brought his proposed class-action lawsuit, the Eleventh Circuit determined that the borrower failed to allege that he lost money, that his credit suffered, or that he experienced any other material risk of harm a court could remedy.

In contrast, in the September 2016 case of Bellino v. JPMorgan Chase Bank, N.A., the U.S. District Court for the Southern District of New York, under similar facts, decided that a mortgage borrower did present an “injury in fact” to establish Article III standing to advance her proposed class-action lawsuit against JPMorgan Chase Bank, N.A., for the bank’s failure to timely record a satisfaction of her mortgage under the same New York laws. Moreover, like CitiMortgage, Chase also filed a certificate of discharge later to rectify the situation.

New York laws. In both federal cases, the mortgage borrowers alleged violations of the New York Real Property Law (§275) and the New York Real Property Actions and Proceedings Law (§1921) because the respective financial institutions did not file a certificate of satisfaction of the pertinent mortgage within 30 days of receipt of the full amount of principal and interest on the mortgage. Also, since its decision, the Bellino court has further clarified the statutory language and practical operations of the two New York laws.

Different perspectives. From the Eleventh Circuit’s vantage point, it was not enough that CitiMortgage did not strictly comply with the statutory 30-day period in which to record the satisfaction of the mortgage. The mortgage borrower needed to adequately allege an injury in fact and failed to do so, the court asserted.

Indeed, Chase argued this point in the Bellino case, contending that the borrower lacked Article III standing to bring her claim because she did not sustain any economic injury resulting from the bank’s tardiness and its “technical violation.” However, that argument did not persuade the Bellino court. Stating that the U.S. Supreme Court “was clear in Spokeo that a concrete harm need not be tangible,” the Bellino court determined that the New York statutes created a “substantive right” for the borrower to have the satisfaction of mortgage timely filed. Since Chase did not do so in a timely manner, “[n]othing more is required, here, to demonstrate an injury-in-fact,” the court concluded.

For more information about state mortgage laws, regulations, and opinions, subscribe to the Banking and Finance Law Daily.

Friday, October 7, 2016

Final prepaid accounts rule provides ‘strong’ consumer protections

By Katalina M. Bianco, J.D.

 The Consumer Financial Protection Bureau has finalized a 2014 proposal intended to provide "strong" federal protections for prepaid account user. The final rule amends Reg. E (12 CFR Part 1005) and Reg. Z (12 CFR Part 1026) and the regulations’ official interpretations to give prepaid account consumers protections similar to those for checking account and credit card consumers.
The rule generally becomes effective on Oct. 1, 2017, but a provision requiring financial institutions to submit their prepaid account agreements to the bureau pursuant to 12 CFR Part 1005.19(b) becomes effective on Oct. 1, 2018.
“Our new rule closes loopholes and protects prepaid consumers when they swipe their card, shop online, or scan their smartphone,” CFPB Director Richard Cordray said in prepared remarks for a press call. He noted that prepaid accounts are among the fastest growing consumer financial products in the United States. “The amount consumers put on general purpose reloadable cards grew from less than $1 billion in 2003 to nearly $65 billion in 2012. And the total value loaded onto them is expected to nearly double to $112 billion by 2018.”
Scope. The final rule “applies specific federal consumer protections to broad swaths of the prepaid market for the first time,” according to the bureau. The rule applies to:
  • traditional prepaid cards, including general purpose reloadable cards; 
  • mobile wallets; 
  • person-to-person payment products; 
  • other electronic prepaid accounts that can store funds; 
  • payroll cards; 
  • student financial aid disbursement cards; 
  • tax refund cards; and 
  • certain federal, state, and local government benefit cards such as those used to distribute unemployment insurance and child support.

EFTA protections. The final rule gives prepaid account consumers protections under the Electronic Fund Transfer Act and Reg. B that are similar to those for checking account consumers. Under the rule, financial institutions must:
  • ensure that account holders have free and easy access to account information by telephone, online, and by written request unless they provide periodic statements;
  • cooperate with consumers who find unauthorized or fraudulent charges, or other errors, on their accounts to investigate and resolve incidents in a timely way and, where appropriate, restore missing funds; and
  • provide timely error resolution and limit consumer’s responsibility for unauthorized charges to $50 provided the consumer promptly notifies the financial institution.

TILA protections. Under the rule, prepaid issuers must give consumers protections similar to those on credit cards if consumers are allowed to use certain linked credit products to pay transactions that their prepaid funds would not fully cover. These protections mainly stem from the Truth in Lending Act, Credit Card Accountability Responsibility and Disclosure Act, and Reg. Z. The final rule uses the term “hybrid prepaid-credit card” to refer to a prepaid card that can access both an overdraft credit feature that is subject to Reg. Z credit card rules and the asset portion of a prepaid account.
Under the rule, prepaid companies are required to:
  • ensure that consumers have the ability to repay the debt before opening a credit card account or increasing a credit line related to a prepaid card unless they consider the consumer’s ability to make required payments—for consumers under 21, companies are required to assess their independent ability to repay;
  • provide consumers with regular statements that detail fees, and if applicable, the interest rate, the amount they have borrowed, how much they owe, and other key repayment information; and
  • give consumers at least 21 days to repay their debt before they are charged a late fee that is “reasonable and proportional” to the violation of the account terms in question.

Prepaid v. credit. To ensure that the prepaid account and the credit feature are distinct, the rule:
  • requires a 30-day waiting period after consumers register the prepaid account before offering the credit feature;
  • prohibits companies from seizing a credit repayment the next time a prepaid account is loaded unless the consumer consents—if the consumer does consent, the company cannot automatically take funds more than once per month; and
  • requires companies to wait to demand payment until 21 days after the statement is mailed.
Pre-acquisition disclosures. In conjunction with the rule, the bureau unveiled new “Know Before You Owe” disclosures for prepaid accounts that are intended to provide consumers with clear, upfront information about prepaid accounts. “The new rule sets an industry-wide standard on fee disclosures for prepaid accounts,” according to the bureau.
Under the final rule, financial institutions generally must provide both a “short form” disclosure and a “long form” disclosure before a consumer acquires a prepaid account. The final rule provides guidance as to what constitutes acquisition for purposes of disclosure delivery. In general, a consumer acquires a prepaid account by purchasing, opening, or choosing to be paid via a prepaid account.
Testing of disclosures. After issuing its 2014 proposal the CFPB conducted testing of the prepaid disclosures. The bureau’s findings are discussed in a report published in October 2015.
For more information about the CFPB's final rule on prepaid accounts, subscribe to the Banking and Finance Law Daily.

Thursday, October 6, 2016

CFPB warns consumers about credit repair services, sues credit repair company

By Andrew A. Turner, J.D.

At the same time as issuing a warning about credit repair scams, the Consumer Financial Protection Bureau has sued a credit repair company for misleading customers and charging illegal fees.

The CFPB’s consumer advisory outlines consumers’ rights and warns them of potentially harmful practices to look out for. As part of the consumer advisory, the bureau is highlighting that consumers do not have to pay anyone to help correct inaccurate information in their credit reports.

Prime Marketing Holdings, LLC allegedly charged consumers a series of illegal advance fees as well as misrepresented the cost and effectiveness of its services. As part of the lawsuit in a California federal district court, the CFPB is seeking monetary relief, injunctive relief, and penalties.

The CFPB alleges that Prime Marketing Holdings lured consumers with misleading, unsubstantiated claims that it could remove virtually any negative information from their credit reports and could boost credit scores by significant amounts. The company attracted customers through its website and sales calls, at times targeting consumers who had recently sought to obtain a mortgage, loan, refinancing, or other extension of credit. According to the complaint, PMH charged certain consumers a monthly fee of up to $89.99 for the services, or "a separate set-up fee of several hundred dollars for the first two months, and then charged the monthly fee in later months."

Deceptive acts and practices. The bureau’s complaint alleges that Prime Marketing Holdings violated the violated Dodd-Frank Act’s prohibition on deceptive acts and practices in the marketing and promotion of its services. Violations of the Telemarketing Sales Rule are also charged. Specifically, the complaint alleges that the defendant:

  • charged illegal advance fees which are barred under federal law;
  • misled consumers about the costs of their services;
  • failed to disclose limits on “money-back guarantee;” and
  • misled consumers about the benefits of the company’s services.

The CFPB asserts that the credit repair offered to consumers by PMH was a consumer financial product or service covered by the Consumer Financial Protection Act.
For more information about actions against credit repair companies, subscribe to the Banking and Finance Law Daily.

Wednesday, October 5, 2016

Collaborate, don’t consolidate, CSBS advises community banks

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

A white paper released by the Conference of State Bank Supervisors (CSBS) describes the benefits of collaboration among community banks by pooling human, technological, or compliance resources in order to reduce costs, increase operational efficiencies, and leverage specialized expertise. The white paper, "Shared Resource Arrangements: An Alternative to Consolidation," states that, by sharing certain resources with comparable institutions, community banks may be able to realize the benefits that come with a larger size and scale, yet preserve their core character, function, and independence.

The white paper states that shared resources often come in the form of contractual agreements, jointly-owned operating subsidiaries, and non-profit entities. Shared resource arrangements may achieve, or exceed, the same regulatory cost savings or economies of scale as consolidation. For example, shared resource arrangements dedicated to Bank Secrecy Act (BSA)/anti-money laundering compliance could provide community banks more latitude to attract and acquire skilled BSA compliance professionals.

Shared resource examples. The paper identifies a number of ways two or more financial institutions have successfully shared resources to either improve compliance, increase efficiency, or both:
  • a bank partnered with a smaller community bank without a Chief Information Officer to share information technology services for a fee;
  • a group of community banks partnered together to share ownership of a data processing provider;
  • rural community banks finding it somewhat difficult to attract compliance expertise partnered to share the costs of a compliance team; and
  • multiple community banks looking to share the benefits of a particular software created a separate non-profit that provides the operating systems to member-banks.
The white paper also explains risks and restrictions to shared resource arrangements within current regulation. It concludes by stating that with the proper controls and ongoing oversight, shared resources may be a viable component to a community bank’s overall strategic objectives to remain an independent provider of financial services in the local market.

For more information about community banking, subscribe to the Banking and Finance Law Daily.

Tuesday, October 4, 2016

Narrow bank fraud law interpretation gets quizzical reception

By Richard Roth

The Supreme Court justices seemed disinclined to agree with a defendant’s claim that he should not have been convicted of bank fraud because he did not intend to take money from the bank. The petition for certiorari in Shaw v. U.S. asked the Court whether proving a person had a scheme to defraud a bank in violation of 18 U.S.C. §1344(a)(1) requires proving that he intended that the bank suffer the loss from the fraud. In today's oral arguments, the defendant also challenged the specific wording of one jury instruction that defined the offense, although it’s unclear if that argument was included in his petition.

The bank fraud statute says that:
Whoever knowingly executes, or attempts to execute, a scheme or artifice—
  1. to defraud a financial institution; or
  2. to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
commits bank fraud.

Shaw was convicted of violating 18 U.S.C. §1344(a)(1) by using a fraudulent PayPal account to drain a Bank of America customer’s bank accounts. As a result of the scheme, the customer and PayPal together lost more than $275,000, but Bank of America was unharmed.

Ninth Circuit decision. That scheme violated 18 U.S.C. §1344(a)(1), according to the U.S. Court of Appeals for the Ninth Circuit. A scheme to defraud a bank does not require an intent to take money that belongs to the bank (see U.S. v. Shaw).

Bank property interest. Deputy Federal Public Defender Koren Bell began by arguing that bank fraud requires both an intent to deceive the bank and an intent to harm some property right of the bank. However, she had to concede that a possessory right is a property right.

Justice Breyer queried whether the defendant’s argument would imply that a con man who stole insured property would have defrauded the insurance company but not the property owner. Referencing current events (and implying some skepticism as well), he asked “Even Kardashian’s thief, if there is one, believes that all that jewelry is insured. Indeed over insured. So it’s not theft?”

Bell attempted to clarify her argument by focusing on the defendant’s intent, asserting that 18 U.S.C. §1344(a)(1) would be violated only if his intent was to victimize the bank. Otherwise, the proper charge would have been under 18 U.S.C. §1344(a)(2). In fact, she conceded that the scheme alleged would have violated 18 U.S.C. §1344(a)(2).

Jury instruction. Bell also asserted that the jury instructions incorrectly described the elements of the crime. The jury was improperly told that the government only had to prove the defendant intended to deceive the bank. The instruction should have made clear that a crime also depended on his intent to deprive the bank of property.

The specific instruction told the jury to look for “Intent to deceive, cheat, or deprive a financial institution of something of value.” Bell argued that this separated “deceive” and “cheat” from “deprive,” allowing the defendant to be convicted based on an intent to deceive alone.

Bank's possessory interest. Arguing for the government, Assistant to the Solicitor General Anthony Yang first made clear that an intent to deceive a bank alone is not enough to be a violation of 18 U.S.C. §1344(a)(1). The statute requires that the bank be deprived of some property interest.

According to Yang, whether the defendant intended to take money from the bank or the customer was irrelevant. What mattered was that he had an intent to deceive and, by that deception, to commit fraud. The necessary intent to defraud the bank would be satisfied by his intent to deprive the bank of its possessory interest in the money, regardless of who owned the money.

For more information about financial services laws, subscribe to the Banking and Finance Law Daily.