Friday, March 31, 2017

CFPB: Credit card charge disputes still source of consumer complaints

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau’s latest monthly complaint snapshot features consumer credit card complaints. According to the snapshot, consumers continue to complain most about difficulties disputing charges on their credit cards. The March 2017 report (Vol. 21) also highlights trends seen in complaints coming from Massachusetts and the Boston metro area.
"Credit cards are a vital financial tool used daily by more than half of all adults in this country," said CFPB Director Richard Cordray. "Consumers deserve clear guidance and need to be able to resolve problems that arise with their cards."
Spotlight on credit cards. The CFPB began accepting credit card complaints from consumers when the bureau opened its doors in July 2011. As of March 1, 2017, the CFPB had handled approximately 116,200 credit card complaints. According to the snapshot, consumers specifically complain about:
  • being billed for charges that were not initiated by them or other authorized users on their accounts;
  • issues with taking advantage of offered benefits after meeting requirements of bonus points programs, miles programs, cash back programs, and travel benefits programs; and
  • credit card accounts being opened fraudulently in their names even after an alert was placed on their credit files.
The companies with the most credit card-related complaints are Citibank, Capital One, and JPMorgan Chase, the bureau reported.
National overview. Some of the findings from national statistics published in this month’s snapshot report include the following:
For February 2017, debt collection was the most-complained-about financial product or service, followed by credit reporting, and mortgages.
  • Student loan complaints showed the greatest increase of any product or service in a year-to-year comparison examining the three-month time period of December to February;
  • Montana, Georgia, and Missouri experienced the greatest year-to-year complaint volume increases from December 2016 to February 2017 versus the same time period 12 months before.
Spotlight on Massachusetts. As of March 1, 2017, consumers in Massachusetts have submitted 20,600 of the 1,136,000 complaints the CFPB has handled. Of those complaints, 15,400 came from consumers in the Boston metro area. According to the snapshot:
  • Complaints related to debt collection accounted for 20 percent of all complaints submitted by consumers from Massachusetts, lower than the national rate of 27 percent.
  • Consumers in Massachusetts submitted complaints about mortgages at about the national average.
  • The most complained-about companies by Massachusetts consumers are Bank of America, Citibank, and Experian.
For more information about CFPB complaint snapshots, subscribe to the Banking and Finance Law Daily.

Thursday, March 30, 2017

Experian agrees to $3M penalty for deceptive credit score marketing practices

By Katalina M. Bianco, J.D.

Experian Holdings, Inc., one of the nation’s largest credit reporting agencies, has agreed to pay a $3 million civil penalty to settle allegations brought by the Consumer Financial Protection Bureau that Experian deceived consumers about the use of the credit scores they purchased. Experian represented that the "educational" credit scores it sold to consumers were used by lenders to make credit decisions when, in fact, lenders did not use the educational scores, according to the bureau's consent order. The CFPB also charged Experian with violating the Fair Credit Reporting Act by placing advertisements on web pages that consumers accessed when obtaining their free annual credit reports. Experian did not admit any wrongdoing.

Educational credit scores. According to the CFPB, several companies have developed "educational credit scores," which lenders rarely, if ever, use. Experian developed its own proprietary credit scoring model, referred to as the "PLUS Score," which it applied to information in consumer credit files to generate a credit score it sold directly to consumers.

The CFPB alleged that Experian marketed the PLUS Scores to consumers by representing that they were the same scores lenders use to make credit decisions. However, lenders did not use the PLUS scores, and in some instances, there were significant differences between the PLUS Scores and the various credit scores lenders actually use, presenting an inaccurate picture of how lenders view a consumer’s creditworthiness.

The consent order requires that Experian truthfully inform consumers about the nature of the scores it sells to consumers and implement a marketing compliance program.

"Experian deceived consumers over how the credit scores it marketed and sold were used by lenders," CFPB Director Richard Cordray said. "Consumers deserve and should expect honest and accurate information about their credit scores, which are central to their financial lives."

"Free" credit reports. The CFPB also claimed Experian violated the FCRA, which requires a credit reporting company to provide a free credit report once every 12 months. Until March 2014, consumers requesting their free annual report through Experian had to view Experian advertisements before they received their report. The FCRA prohibits these advertising tactics.

Cordray remarks. In prepared remarks before the National Community Reinvestment Coalition on March 29, Cordray noted that the CFPB is "pressing" banks, credit unions, and credit reporting agencies to make their reporting systems more accurate. Fair credit reporting appears to be on the bureau's 2017 agenda.

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

Tuesday, March 28, 2017

Indiana Supreme Court: No law firm exemption available under four consumer-protection laws

By Thomas G. Wolfe, J.D.

The Indiana Supreme Court recently addressed whether law firms are entitled to an exemption under four state consumer-protection laws, regardless of whether an attorney exemption is available. In rejecting arguments raised by two defendant law firms and their principal on appeal in Consumer Attorney Services, P.A. v. State of Indiana, the court determined that Indiana’s Credit Services Organizations Act, Mortgage Rescue Protection Fraud Act, Home Loan Practices Act, and Deceptive Consumer Sales Act, do not provide law firms with any express or implied exemption from liability. The Indiana high court's March 21, 2017, decision stemmed from a lawsuit by the State of Indiana against Consumer Attorney Services, P.A., The McCann Law Group, LLP, and Brenda McCann—individually and in her capacity as owner or officer of the two law firms. After Indiana homeowners registered complaints with the Indiana Attorney General's Office about the defendants’ treatment of the homeowners’ loan-modification matters or foreclosures, the Indiana Attorney General claimed that the law firms and McCann violated the four state consumer-protection laws.

According to the court’s opinion, Consumer Attorney Services, P.A. (CAS) is a Florida corporation “that purports to specialize in foreclosure- and mortgage-related legal defense work, requiring non-refundable retainers and monthly fees up front to be automatically deducted from bank accounts.” McCann was an attorney licensed in Florida “who acted as CAS’s manager.” CAS entered into various “Partnership,” “Associate,” and “Of Counsel” agreements with several Indiana attorneys to handle Indiana cases, and all of these agreements “were entered into before CAS registered as a foreign entity authorized to do business in Indiana.”

Investigation, complaint. After Indiana homeowners complained, the Indiana Attorney General investigated CAS’s practices. Among other things, the Indiana AG’s investigation revealed that the majority of pertinent Indiana homeowners did not have any personal contact with an Indiana-licensed attorney after the attorney’s retention, and the homeowners received “perfunctory” legal services. Moreover, the Indiana AG found no resident homeowners having obtained a successful loan modification.

Based on the investigation, the State of Indiana filed a lawsuit against CAS, McCann, and the McCann Law Group under the four state consumer-protection laws. Eventually, the defendants requested summary judgment in their favor, contending that they were all “statutorily exempted from liability” under the state laws. The Indiana Supreme Court disagreed.

CSOA, MRPFA. The defendants argued that they were exempt from the Indiana Credit Services Organizations Act (CSOA) because; (i) the statute excludes liability for any “person admitted to the practice of law in Indiana if the person is acting within the course and scope of the person’s practice as an attorney;” (ii) the statute defines a “person” as “an individual, a corporation, a partnership, a joint venture, or any other entity;” and (iii) Kansas precedent, addressing similar statutory language in the defendants’ favor, should be found persuasive.

In rejecting the defendants’ contentions, the court pointed out that, unlike the Kansas situation, the Indiana CSOA did not furnish the court with the same clear and convincing legislative history to resolve an ambiguity in the statutory language. Instead, the court emphasized that the CSOA should be interpreted “liberally,” given its broad consumer-protection purposes. Next, the court noted similar “exemption” language in the Indiana Mortgage Rescue Protection Fraud Act (MRPFA) but acknowledged its more limited scope: “an attorney licensed to practice law in Indiana who is representing a mortgagor.”

Against this backdrop, the court determined that the MRPFA “unambiguously exempts attorneys as individuals, not the law firms with which they are affiliated, because only an individual can be ‘licensed to practice law in Indiana’.” The court further determined that, “given the overlap in coverage between the MRPFA and the CSOA, we believe it would be odd indeed to read an expansive exemption into the CSOA which is unavailable under the MRPFA.”

In the court’s view, this interpretation of the CSOA and the MRPFA was also compatible with the judiciary's “disciplinary authority.” The court asserted, “We thus find it reasonable that our General Assembly would choose to exempt attorneys specifically (who are subject to far more extensive disciplinary action by this Court) while not exempting their firms.” Accentuating this point, the court clarified that “although a law firm may qualify as a ‘person’ with respect to other provisions of the CSOA, it does not qualify for an exemption under Indiana Code section 24-5-15-2(b)(6).”

HLPA, DCSA. Next, addressing Indiana’s Home Loan Practices Act (HLPA), and Deceptive Consumer Sales Act (DCSA), the court stressed that neither law “contains an express attorney exemption of any kind, but CAS still sought exemption, on the grounds that the underlying alleged violation of the HLPA and the DCSA falls within the scope of the MRPFA and the CSOA.” The court explained that since it did not find any available law firm exemption under the CSOA or the MRPFA, no law firm exemption could be extended to the ancillary claims under the HLPA and the DCSA.

McCann not exempt. Lastly, the court determined that because Brenda McCann “was never licensed as an attorney in the State of Indiana, she too cannot claim the exemptions contained in the CSOA or the MRPFA, nor can she extend them to the HLPA and the DCSA.”

For more information about judicial interpretations of attorney or law firm exemptions under state consumer-protection laws, subscribe to the Banking and Finance Law Daily.

Thursday, March 23, 2017

Civil penalty of $1.75 for HMDA violations is largest yet by CFPB

By Stephanie K. Mann, J.D.
The Consumer Financial Protection Bureau has ordered Nationstar Mortgage LLC to pay a $1.75 million civil penalty for violating the Home Mortgage Disclosure Act by consistently failing to report accurate data about mortgage transactions for 2012 through 2014. The enforcement action is the largest HMDA civil penalty imposed by the bureau to date, which stems from Nationstar’s market size, the substantial magnitude of its errors, and its history of previous violations, said the bureau’s press release
“Financial institutions that violate the law repeatedly and substantially are not making serious enough efforts to report accurate information,” said CFPB Director Richard Cordray. “Today we are sending a strong reminder that HMDA serves important purposes for many stakeholders in the mortgage market, and those required to report this information must make more careful efforts to follow the law.”
Compliance requirements. Nationstar, a nationwide nonbank mortgage lender headquartered in Coppell, Texas, is a wholly owned subsidiary of Nationstar Mortgage Holdings Inc. The Home Mortgage Disclosure Act of 1975 requires many mortgage lenders to collect and report data about their mortgage lending to appropriate federal agencies and make it available to the public. Federal regulators, enforcement agencies, community organizations, and state and local agencies can use the information to monitor whether financial institutions are serving housing needs in their communities. 
In its supervision process, the CFPB found that Nationstar’s HMDA compliance systems were flawed, and generated mortgage lending data with significant, preventable errors. Nationstar also failed to maintain detailed HMDA data collection and validation procedures, failed to implement adequate compliance procedures, and produced discrepancies by failing to consistently define data among its various lines of business. In the samples reviewed, the CFPB found error rates of 13 percent in 2012, 33 percent in 2013, and 21 percent in 2014.
Order. The CFPB’s order requires Nationstar to:
  • pay a $1.75 million penalty;
  • develop and implement an effective compliance management system; and
  • fix HMDA reporting inaccuracies.
Since the CFPB’s examination, Nationstar has been taking further steps to improve its HMDA compliance management system and increase the accuracy of its HMDA reporting, as detailed in its Form 10-K to the Securities and Exchange Commission. 
For more information about mortgage loan reporting, subscribe to the Banking and Finance Law Daily.

Tuesday, March 21, 2017

Repeal Durbin Amendment, says ABA

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

Calling the Durbin Amendment a "windfall for the nation’s largest merchants," the American Bankers Association, along with hundreds of banks and 49 state bankers associations, sent a letter to Congress urging its repeal. Section 1075 of the Dodd–Frank Act, known as the Durbin Amendment, requires the Federal Reserve Board to cap the debit card interchange fees that large banks charge.
The ABA’s letter states that, rather than resulting in lower prices for consumers at the register, as retail lobbyists promised, the Durbin Amendment has "shifted higher profits to big-box stores," and banks have restricted the availability of free checking accounts and free debit rewards. The letter adds that "retailers have pocketed this windfall at the precise time that their underinvestment in cybersecurity has permitted massive payment data breaches on their systems—costing consumers, banks of all sizes, and credit unions many hundreds of millions of dollars to remedy."
As the House Financial Services Committee considers how best to protect the interests of American consumers, the letter concludes, "we urge you to support efforts to repeal the Durbin Amendment."
For more information about effects of the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.

Has administration change created separation of powers trap for CFPB?

By Richard Roth

The Dodd-Frank Act provision allowing the Consumer Financial Protection Bureau’s director to be removed only for cause is unconstitutional, but the CFPB should not be eliminated, according to the Department of Justice. In an amicus curiae brief filed in PHH Corp. v. CFPB, Justice argues that the for-cause termination restriction violates the Constitution’s separation of powers principles but that severing the restriction from the rest of the Dodd-Frank Act, not the elimination of the bureau, is the proper remedy.

At the request of the CFPB, a three-judge panel decision in the case was vacated and an en banc hearing scheduled. In PHH Corp. v. CFPB, the panel majority decided that:
  1. The CFPB’s single-director structure is impermissible for an independent agency.
  2. The proper remedy for the violation is to sever the section permitting the CFPB director to be removed only for cause from the remainder of the Dodd-Frank Act, which would permit the President to remove the director at will.
  3. The CFPB misinterpreted RESPA when it tried to enforce against PHH Corp. a new interpretation of how the act applied to the use of captive reinsurers, resulting in a $109 million disgorgement order.
The Justice Department’s brief addresses only the first two issues.

Separation of powers. The brief frames the separation-of-powers dispute as whether the Supreme Court’s 1935 decision in Humprey’s Executor v. U.S., 295 U.S. 602, which upheld the Federal Trade Commission’s removal-for-cause structure, should be extended to the CFPB. It should not be extended, according to the Justice Department.

The core of the position is that the Constitution requires the President to “take Care that the Laws be faithfully executed.” As part of doing so, the President has the authority to appoint administrative officers to act under his direction. The President cannot ensure that the nation’s laws are faithfully executed if he does not have the ability to remove from office those persons who are failing to act according to his directions, the brief argues.

Humphrey’s Executor created an exception to the President’s removal power that applied to the five-member FTC. It is important to understand that the FTC is a multiple-member commission whose members are appointed on a staggered basis, the brief says. This arrangement creates an agency that has “long-term continuity and expertise” and that has some ability to avoid the appearance of partisanship. It also facilitates group decision-making.

The Constitution vests in the President the power to enforce the laws. However, “The principles animating the exception in Humphrey’s Executor do not apply when Congress carves off a portion of that quintessentially executive power and vests it in a single executive officer below the President who is not subject to the President’s control,” the Justice Department asserts.

Practical concerns. Extending the Humphrey’s Executor exception to a single-director bureau could create an exception that “swallows the rule” that the President can remove officers who are not executing the laws to his satisfaction, the brief warns. Moreover, the CFPB’s single-director structure actually makes such a conflict more likely.

First, when an agency’s power is vested in a single individual, that individual becomes more able to act independently rather than under the direction of the President. Second, when an agency’s head has a term longer than that of the President, such as the CFPB director’s five-year term, a President who has only a for-cause removal authority could not select a replacement.

As a result, the President would have neither the “front-end” appointment power nor the “back-end” removal power, the Justice Department says.

Severability. The brief supports the panel’s decision not to invalidate the entire CFPB, asking the full court instead to agree with severing the removal-for-cause provision from the remainder of the Dodd-Frank Act. This remedy would allow the bureau to remain fully functional. As noted in the panel decision, a severability clause was included in the act, and that clearly expressed Congress’s intent.

Related case. In a footnote, the Justice Department noted that its brief takes a position contrary to what Justice has previously asserted in another suit. In State National Bank of Big Spring v. Mnuchin, the Justice Department, representing the Treasury Department and the CFPB, defended the constitutionality of the CFPB’s structure. Based on its new position on the issue, Justice said it is working with the CFPB to allow the bureau’s own attorneys to take over the Big Spring litigation.

Possible future effect. Under the Dodd-Frank Act, the CFPB can rely on its own attorneys “in any action, suit, or proceeding to which the Bureau is a party” (12 U.S.C. §5563(b)). However, there is a potentially significant exception to that authority.

The CFPB’s ability to represent itself before the Supreme Court is restricted. Within 10 days of the entry of a judgment that could be appealed, the bureau must ask the Attorney General for permission to represent itself. The bureau can represent itself only if the AG either consents or fails to object within the following 60 days (12 U.S.C. §5563(e)).

It seems unlikely that the Justice Department would consent to allowing the CFPB to argue before the Supreme Court a legal position with which Justice disagrees. This could leave the bureau unable to attempt to vindicate its organization in the Supreme Court regardless of how the D.C. Circuit rules on the issue:
  • If the appellate court rules that the single-director structure is constitutional, PHH Corp. could request a Supreme Court review. The Justice Department then could deny the CFPB’s request to represent itself and concede the separation-of-powers issue before the Supreme Court. That would leave only the remedy at issue.
  • If the appellate court rules that the single-director structure violates separation-of-powers principles and that severance is the proper remedy, the Justice Department likely would not consent to allowing the bureau to appeal the issue to the Supreme Court. Instead, it would defend the decision, should PHH Corp. appeal. (However, such an appeal by PHH Corp. is unlikely, as the appellate court decision would free the company from the bureau’s $109 million disgorgement order, which would be a clear victory for the company.)
  • If the appellate court rules that the single-director structure violates separation-of-powers principles and that the Dodd-Frank Act’s creation of the bureau must be disregarded, the Justice Department again likely would not consent to allowing the bureau to appeal the issue to the Supreme Court. Instead, it would file the appeal and argue for severance as the proper remedy.
As a result, the best result for the CFPB might be for the appellate court to decide the case based only on PHH Corp.’s claim that the bureau’s RESPA interpretation was wrong. This would allow the appellate court to defer consideration of the separation of powers issue, at least until the likely appeal in Big Spring.

Preserving the ability to raise the issue before the Supreme Court was cited by a group of attorneys general from 17 states and the District of Columbia when they asked for permission to intervene in the en banc appeal. That request was denied.

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

Friday, March 17, 2017

The Community Financial Institution Exemption Act: An Analysis of Its Potential Impact

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

On February 28, 2017, Congressman Roger Williams (R-TX) introduced H.R. 1264, the Community Financial Institution Exemption Act. It was referred to the House Committee on Financial Services, one of the committees on which Congressman Williams serves. The bill would (i) define the term "community financial institution" as "an insured depository institution or credit union with less than $50,000,000,000 [i.e., $50 billion] in consolidated assets," and (ii) exempt those institutions "from all rules and regulations issued by the [Consumer Financial Protection] Bureau."

Under current law, the term "community financial institution" is defined as an insured institution that has less than $1 billion in total assets, based on average total assets for the preceding three years. [12 USC 1422(10)] That $1 billion figure is adjusted annually based on the movement of the Consumer Price Index for all urban consumers, and it currently stands at between $1.1 billion and $1.2 billion. The Community Financial Institution Exemption Act does not amend that definition.

The Federal Reserve Board uses the related term "community bank" to refer generally to banks owned by organizations with less than $10 billion in assets. The enactment into law of a new definition in the context of community banking -- one that directly conflicts with existing law and common usage -- has the potential to dilute the meaning of the affected term and thereby de-focus attention that is devoted to community banking issues.

As of December 2016, there were 5,083 banks in the United States. According to a January 10, 2017, post on the Forbes web site titled "Full List: Ranking America's 100 Largest Banks," only 20 U.S. banks have assets in excess of $50 billion. As of the end of the 3rd quarter of 2016 (the most recent data available from the NCUA), there are 5,844 credit unions in the United States. Only one of those credit unions (Navy FCU) has assets in excess of $50 billion. Based on that data, one could deduce that if the Community Financial Institution Exemption Act were to be enacted, only 21 financial institutions in the United States, out of more than 10,900 currently doing business, might be subject to rules and regulations issued by the CFPB.

Owing to the Fed's repeal of regulations regarding (i) truth in savings, (ii) consumer privacy, and (iii) unfair or deceptive acts or practices (12 CFR parts 230, 216, and 227), more than 10,900 insured institutions might be, at least temporarily, without authoritative regulatory guidance on those issues. Regulatory enforcement regarding those issues might undergo a corresponding lapse. And because the CFPB's and Fed's versions of several consumer compliance regulations have diverged from one another during the past six years, authoritative guidance and agency enforcement regarding (iv) truth in lending, (v) real estate settlement procedures, (vi) equal credit opportunity, and (vii) electronic fund transfers could be similarly affected.

The bill would allow the CFPB to revoke the exemption of a specific rule or regulation, as applied to a specific class of community financial institutions. But any revocation would be effective only if "the Bureau makes a detailed, written finding that such class of community financial institutions has engaged in a pattern or practice of activities that have been detrimental to the interests of consumers and are of a type that the specific rule or regulation is intended to address." It is difficult to imagine that specific classes of institutions would begin to engage in repeated violations of the laws and regulations alluded to in the previous paragraph -- i.e., violations that would satisfy the "pattern or practice" standard. It is, therefore, possible that those pillars of consumer compliance might not be re-established quickly or easily.

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, March 16, 2017

CFPB proposes delay in prepaid rule effective date

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is proposing a six-month delay in the effective date of the final prepaid accounts rule. The current effective date is Oct. 1, 2017. The CFPB proposal would extend the date to April 1, 2018. Comments on the proposed rule are due by April 5, 2017.

The CFPB adopted the final prepaid accounts rule in October 2016. The new 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 bureau set an effective date of one year because the agency said the final rule provides "strong consumer protections." However, the CFPB issued the proposed rule to extend the date after learning that some industry participants are concerned about implementing certain provisions of the rule. The bureau stated that delaying the effective date for six months "will be sufficient" for industry members to comply with the rule.

Substantive changes? "At this time," the proposal does not make changes to any other part of the final prepaid accounts rule, according to the bureau. The CFPB said it will take into consideration public comments on difficulties implementing the rule. Should the bureau determine that substantive changes are "necessary and appropriate," it will issue a separate proposal and comment request.

Legislative reaction. Representative Scott Tipton (R-Colo) voiced his approval of the proposed extension, stating, "I am pleased to see that the CFPB has considered the concerns raised by consumers, industry, and members of Congress about its prepaid account rule and took action to delay the rule for six months." He remarked that the 12-month effective date "was unrealistic given the new disclosure and packaging requirements and operational changes necessary to comply with the rule." Delaying implementation of the rule balances the protection of consumers with the growth of prepaid card products, Tipton noted.

Senator David Perdue (R-Ga) stated that the CFPB should "scrap" the prepaid accounts rule. "From its initial stages, this rule was shortsighted and so sweeping that it would have stifled innovation in a growing marketplace millions of consumers rely on," he said. The legislator opposed the implementation of the prepaid accounts rule by introducing a resolution (S.J.Res. 19) in February that would nullify the rule.

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

Tuesday, March 14, 2017

New York Fed VP: How lawyers can help reform financial services culture

By Thomas G. Wolfe, J.D.
Speaking at Yale Law School’s “Chirelstein Colloquium” in New Haven, Conn., Michael Held, Executive Vice President of the Federal Reserve Bank of New York, emphasized that an in-house lawyer “who is both a partner and a guardian—an insider and an outsider—can greatly benefit a financial services firm” by helping to improve the firm’s culture. In his March 8, 2017, remarks, Held provided examples of how lawyers might accomplish that goal through their “independence and insight” without compromising their legal role and without becoming “captive” to a financial services firm’s culture.
Culture. According to Held, while some individuals commit financial crimes because they are greedy, that does not explain the whole picture. From Held’s experience, “the reasons why bankers break the law are varied and complex. And, in many instances, misconduct is related to an organization’s culture.” For instance, Held said that “junior bankers typically don’t consult ‘the law’ for guidance on a day-to-day basis. They take their cues from their peers and immediate supervisors.”
Although Held observed that, given a financial firm’s culture, individuals may not always refer to written policies, consult with in-house counsel or the firm’s compliance department, he asserted that “there is no ‘culture excuse’ when people break the law.”
Lawyers’ role. Held noted that “a proliferation of technical rules prompts us to ask what we can do, not what we should do.” He pointed out that lawyers in financial firms are too often asked by clients, in effect, “How close to the legal line can I get?” Likewise, Held also expressed concern that, given this type of cultural mindset, “lawyers, intentionally or not, enable this kind of thinking. Lawyers are certainly not immune from cultural influences.”
Against this backdrop, Held offered ways in which lawyers might improve a financial services firm’s culture. Among other things, in Held’s view, lawyers should:
  • be “part of the conscience of the organization;”
  • ask questions about the organization to help resolve difficult ethical questions, particularly since the rules governing the legal profession “expressly permit advice on non-legal matters;”
  • identify and combat “troublesome silos of behavior” within the organization to help the firm’s management evaluate whether there is an isolated “rogue” unit or a “more systemic problem” present;
  • explore whether the way the business is organized and run poses a risk of “unacceptable conflicts of interest;”
  • determine whether principles and tasks are communicated clearly and whether problems are addressed early or belatedly;
  • assess whether the firm’s senior leaders set a proper example; and
  • inquire about how the firm treats employees who “escalate issues.” 
Commenting that culture is “contagious,” Held noted that, as a result of current privacy and risk concerns on the part of employers, a banker’s record of misconduct does not always travel with him or her from one financial firm to the next. Held discussed the possibility of a potential “database of banker misconduct,” which was initially introduced by New York Fed President Bill Dudley. Held touched upon the pros and cons of establishing this type of database.
For more viewpoints by regulators and by the financial services industry on improving the business culture, subscribe to the Banking and Finance Law Daily.

Thursday, March 9, 2017

Fed's Powell sees technology challenges for payments system

By Colleen M. Svelnis

Speaking about innovation, technology, and the payments system, Federal Reserve Board Governor Jerome H. Powell focused on three key areas where technological innovation is driving change: creating a real-time retail payments system; using distributed ledger technology (DLT) to develop new clearing and settlement services; and the issuance of digital currencies by central banks.

In his remarks at the Yale Law School Center for the Study of Corporate Law, Powell discussed the impact of new technology on the financial system and businesses. He warned that disruptive new technologies suggest that traditional financial service providers must innovate and adapt or be left behind.

Payments system. The Fed and other central banks have adopted broad public policy objectives to guide the development and oversight of the payments system. At the Fed, Powell states, they have identified efficiency and safety as the “most fundamental” objectives. The payments system must be innovative, while also addressing risks, supporting financial stability, and maintaining public confidence, according to Powell. He stated that “Safe payment systems are built from proven technology and operate reliably and with integrity.”

With regard to the development of real time retail payments, Powell stated that the Fed has been working with a wide range of stakeholders to improve the speed, efficiency, and safety of the U.S. payments system. Powell also discussed the work of the Faster Payments Task Force, which in 2017 will assess proposals covering innovative ways to deliver real-time payments against the task force criteria.

Distributed ledger technologies. Using blockchain technology—which employs a form of DLT—and an open architecture, Powell noted that Bitcoin allows for the transfer of value between participants connected to its ecosystem without reliance on banks or other trusted intermediaries.

Powell noted that some predict that DLT will eventually render parts of the banking and payments system obsolete, as the intermediation of funds through the banking system will become unnecessary. In contrast to Bitcoin’s open architecture, Powell stated that work by the financial industry has focused on the development of “permissioned” systems.
Issues include whether finality of settlement is to be determined by a central trusted party or by a majority of participants, and whether participants are able to view information on other parties’ transactions. Another issue, according to Powell, is the costs for upgrading and streamlining payment, clearing, settlement, and related functions with DLT. Technical issues including whether a particular version of DLT will work for the intended purpose are still being explored, stated Powell, and issues of reliability, scalability, and security remain. Powell also stated that governance and risk management is critical, as well as the legal issues surrounding and supporting DLT.

Digital currencies. Powell discussed the idea of a digital currency issued by a Central Bank. According to Powell, a digital currency issued by a central bank would be a global target for cyber attacks, cyber counterfeiting, and cyber theft, as well as a potential vehicle for global criminal activities, including money laundering. Central banks would have to balance trade-offs between strengthening security and enabling illegal activity. Privacy issues would also need to be considered, stated Powell. According to Powell, “private-sector products and systems already exist or are being developed that will fulfill demands that central-bank-issued digital currencies might otherwise seek to meet.”

For more information about financial technology issues, subscribe to the Banking and Finance Law Daily.

Wednesday, March 8, 2017

Senate Democrats urge OCC to review Santander Bank discriminatory lending charges

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

Senate Democrats are urging the Office of the Comptroller of the Currency to review charges of discriminatory lending by Santander Bank that surfaced in a Committee for Better Banks report. The OCC recently downgraded Santander’s Community Reinvestment Act rating for failure to meet the law’s requirements in serving low-and-moderate-income neighborhoods based on review of performance records from 2011 to 2013. Senator Bob Menendez (D-NJ) and several other Democratic senators have written to Comptroller Thomas J. Curry urging him to review the report’s findings when the agency examines the bank’s most recent record to determine compliance with the Community Reinvestment Act.
The senators said that while they were "pleased that the OCC’s examination considered recent enforcement actions against the bank for illegal overdraft fees and unlawful repossessions of cars from military servicemembers, it is imperative that the OCC also take into account findings which suggest discriminatory lending practices." The letter said the report, which was "based on an analysis of Santander’s mortgage lending in 15 metropolitan areas in 2014 and 2015," includes "alarming findings of disparities in loan origination, denial, and application rates for minority and low-income borrowers."
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Tuesday, March 7, 2017

Return receipt meets RESPA information request acknowledgment requirement

By Richard Roth

The U.S. Court of Appeals for the Eleventh Circuit has set a very low bar for what mortgage loan servicers must do to satisfy Real Estate Settlement Procedures Act regulations requiring mortgage loan servicers to acknowledge having received a homeower’s request for information. While a servicer must provide a written acknowledgment of receipt within five business days, the requirement can be met simply by signing the homeowner’s certified mail return receipt, the court said in a not-for-publication opinion (Meeks v. Ocwen Loan Servicing LLC).

According to the court, the homeowner had his attorney send Ocwen Loan Servicing a written request for information about his loan, and the attorney chose to send the letter using certified mail. Ocwen received the letter, and an employee signed the receipt, which was returned to the attorney in due course. Seven months later, the homeowner sued Ocwen, claiming in part that it had not provided a timely acknowledgment of having received his letter.

Reg. X requirements. Reg. X—Real Estate Settlement Procedures requires a mortgage loan servicer to acknowledge receiving a qualified written request for information, in writing, within five business days (12 CFR 1024.36(c)). However, neither the regulation nor the staff comments offer any details about the form or contents of that acknowledgment.

The court said there is no precedent as to whether a certified mail receipt can constitute a written acknowledgment. However, the court said—without any analysis—that under the facts presented, the return receipt was sufficient.

Applicability. Reg. X is not the only consumer protection regulation that imposes acknowledgment duties. Reg. Z—Truth in Lending requires a creditor to provide a written acknowledgment of a consumer’s billing error claim within 30 days (12 CFR 1026.13(c)). Like Reg. X, Reg. Z gives no details about what providing a written acknowledgment entails.

The Eleventh Circuit opinion gives no hint about whether a certified mail return receipt alone would be adequate in circumstances other than Reg. X.

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Thursday, March 2, 2017

CFPB snapshot reveals consumers continue struggle with credit report errors

By Katalina M. Bianco, J.D.

Consumers continue to complain about the difficulties of resolving credit report errors, according to the Consumer Financial Protection Bureau’s monthly complaint snapshot. This month’s snapshot covers complaints the bureau has received as of Feb. 1, 2017. The snapshot (Vol. 20) also highlights trends seen in complaints coming from Louisiana and the New Orleans metro area.
"Credit reports provide the means for consumers everywhere to take important steps in their financial lives," said CFPB Director Richard Cordray. "The Bureau will continue to work to ensure that credit reports are accurate and when disputed issues arise on credit reports, consumers are able to resolve them quickly and with little hassle."
Credit reporting complaints. As of Feb. 1, 2017, the CFPB has handled approximately 1,110,100 consumer complaints across all products nationally. Approximately 185,700 of those complaints were about credit reporting. According to the snapshot, consumers complained about:
  • difficulties submitting disputes to credit reporting companies;
  • inaccurate information on credit reports; and
  • confusion over the variety of scores and scoring factors that accompany credit score information.
National overview. The snapshot includes statistics about complaints submitted to the CFPB nationally. The findings include the following:
  • Debt collection was the most complained-about financial product or service in January 2017, followed by student loans and credit reporting.
  • Student loan complaints showed the greatest increase of any product or service in a year-to-year comparison examining the three-month time period of November through January.
  • Georgia, South Dakota, and Mississippi had the greatest year-to-year complaint volume increases from November 2016 to January 2017 versus the same time period 12 months before.
  • The top three companies receiving the most complaints from September through November 2016 were Wells Fargo, Equifax, and Transunion. 
Spotlight on Louisiana. As of Feb. 1, 2017, consumers in Louisiana have submitted 12,400 of the 1,110,100 complaints the CFPB has handled to date. Of those complaints, 4,500 came from consumers in the New Orleans metro area. The snapshot includes the following findings: 
  • Debt collection complaints accounted for 34 percent of all complaints submitted by consumers from Louisiana, a rate that is higher than the national rate of debt collection complaints.
  • Consumers in Louisiana submitted complaints about credit reporting at roughly the national average.
  • The most complained about companies were Equifax, TransUnion, and Experian.
For more information about the CFPB monthly complaint snapshots, subscribe to the Banking and Finance Law Daily.