Liquidity profile disclosure requirements adopted for large institutions

By Andrew A. Turner, J.D.

Large banking organizations will be required to publicly disclose their liquidity coverage ratios (LCRs) and some of the factors that go into calculating that ratio with Federal Reserve Board approval of a final rule. Large financial institutions that are subject to the liquidity coverage ratio rule will be required to disclose publicly, on a quarterly basis, quantitative information about its LCR calculation and a discussion of the factors that have a significant effect on its LCR. The implementation timeline for the disclosure requirements includes compliance dates ranging from April 2017 through October 2018.

The amendments require large banking organizations to disclose their consolidated LCRs each quarter based on averages over the prior quarter. Firms also are required to disclose their consolidated high-quality liquid assets (HQLA) amounts, broken down by HQLA category. Additionally, firms are required to disclose their projected net stressed cash outflow amounts, including retail inflows and retail deposit outflows, derivatives inflows and outflows, and several other measures.

The LCR rule applies to bank holding companies and certain savings and loan holding companies that, in each case, have $50 billion or more in total consolidated assets or $10 billion or more in total consolidated on-balance sheet foreign exposure. Nonbank financial companies the Financial Stability Oversight Council has designated for Fed supervision are also covered if the Fed has made the companies subject to the rule. A modified LCR requirement applies to certain smaller, less complex banking organizations.

Transition and timing. While generally similar to the rule proposed in November 2015, in response to comments, the final rule extends the implementation timeline of the public disclosure requirements by nine months. The effect of this extension will be:

• covered companies that have $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody will be required to comply with the public disclosure requirements beginning on April 1, 2017;

• other covered companies, other than modified LCR holding companies, will be required to comply with the public disclosure requirements beginning on April 1, 2018;

• modified LCR holding companies that are currently subject to the modified LCR rule will be required to comply with the public disclosure requirements beginning on Oct. 1, 2018; and

• a covered company that becomes subject to the LCR rule in the future will be required to make its first public disclosures for the calendar quarter that starts on its LCR rule compliance date (i.e., three months after the company becomes subject to the LCR rule).

Modified LCR holding companies also would benefit from an extended LCR rule compliance requirement. They would not become subject to the modified LCR rule until one year after they passed the $50 billion threshold.

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

CFPB has busy regulatory 2016, but possible end looms

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau adopted two major final rules in 2016, one addressing mortgage servicer conduct and the other regulating prepaid accounts. The bureau also proposed rules on permissible predispute arbitration clauses and on short-term or payday loans, and it outlined its ideas for governing third-party debt collections. However, the Republican election victory and a decision by the U.S. Court of Appeals for the District of Columbia Circuit combine to cast doubt on whether the bureau will be able to finalize these rules before presidential or congressional action either restructure it or simply block further action.

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

Top 5 CFPB enforcement actions in 2016, by the numbers

By Lisa M. Goolik, J.D.   

This year marked the fifth anniversary of the Consumer Financial Protection Bureau, and the bureau’s enforcement activity did not slow in its quinquennial year. In 2016, the CFPB continued to secure large dollar judgments and settlements in its mission to protect consumers from unfair and deceptive acts or practices. The CFPB brought actions against credit card companies, for-profit colleges, auto lenders, and debt collectors, among others, while the activities at issue encompassed the entire lending process, from questionable assurances and disclosures to illegal debt collection practices.

This article, previously published in the Banking and Finance Law Daily, highlights the five largest monetary recoveries by the CFPB in 2016.



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

New White Paper: Trump’s Win Expected to Bring Significant Legal and Regulatory Changes

In a white paper produced by WK editorial staff, "Trump’s Win Expected to Bring Significant Legal and Regulatory Changes," contributor John M. Pachkowski, J.D. discusses the impact of the Trump Administration on the Dodd-Frank Act and the Consumer Financial Protection Bureau, among other issues:

Banking & Financial Services

By John M. Pachkowski, J.D.

With an unconventional campaign that resulted in the election of [Donald J.] Trump, along with Republican control of Congress, the stage is set to bring about changes in regulation of the banking and financial services industries.

On the campaign trail, as he secured the delegates needed to become the Republican nominee, Trump called the reforms in the Dodd-Frank Act harmful to the economy and said he planned to overhaul Dodd-Frank. In an August 2016 speech before the Detroit Economic Club, he called for a temporary moratorium on new agency regulations and stated that every federal agency will be required to prepare a list of all of the regulations that are “not necessary, do not improve public safety, and which needlessly kill jobs.”

Dodd-Frank Act

After winning the presidential election, the Financial Services Policy Implementation team, which is part of the Trump presidential transition, said the “Dodd-Frank economy does not work for working people.” The team added it will be working “to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” Steven Mnuchin, the nominee for Treasury Secretary, said the incoming Trump Administration will strip back parts of Dodd-Frank that prevent banks from lending.

Total repeal

Although Republicans control both houses of Congress, the entirety of the Dodd-Frank Act will probably not be repealed once the Trump Administration takes office. Total repeal on “Day 1” probably will not occur due to the small majority the Republicans hold in the Senate. For any legislation to move forward, roughly eight or nine Democrat senators will need to side with the Republican senators. It is possible that Senate Majority Leader Mitch McConnell (R-Ky) could remove the 60-vote cloture rule for legislation to move forward, but he is also deemed to be an “institutionalist” and may retain the cloture rule.

However, total repeal of Dodd-Frank maybe a possibility following the 2018 mid-term elections. At that point in time, Democrats will have to defend 25 of the 33 seats being contested.

Roll back of Dodd-Frank

Rolling back provisions of the Dodd-Frank Act maybe more feasible. Legislation introduced by Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee in the 114th Congress, could be used as a template. The Financial CHOICE Act, which Hensarling labeled a “new legislative paradigm” for banking and the capital markets, would allow strongly capitalized banks to opt out of burdensome regulations, end too-big-to-fail, and impose greater accountability on regulatory agencies. The plan also would repeal Dodd-Frank’s controversial Volcker Rule.

Other provisions of the Financial CHOICE Act would: incorporate a new “bankruptcy not bailout” chapter into the Bankruptcy Code so that a large financial institution that takes on unsustainable risks could fail without disrupting the financial system; require cost-benefit tests of new regulations; convert financial regulatory agencies now headed by single directors, such as the Office of the Comptroller of the Currency, into bipartisan commissions; and require that the Federal Reserve Board “describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment” of its policy instruments.

A precursor to the roll back or repeal of the Dodd-Frank Act once Republicans take control of the White House and Congress occurred late in the 114th Congress. The House of Representatives approved H.R. 6392, the Systemic Risk Designation Improvement Act of 2016. The legislation would have specified when bank holding companies may be subject to certain enhanced supervision by the Federal Reserve Board. Among other things, the bill would have replaced the $50 billion asset threshold with business activity standards to determine an institution’s systemic risk.

What the industry is saying

Recently, in an investor presentation, JPMorgan Chase’s James Dimon remarked that “We’re not asking for wholesale throwing out Dodd-Frank.” Also, John Gerspach of Citigroup Inc. added, “The first thing I would ask for is nothing new, no new rules. If you haven’t figured out yet how all the existing rules work together, don’t put on anything else.”

Fate of CFPB

Since its inception, Republican lawmakers have sought to abolish or diminish the role of the Consumer Financial Bureau; in fact the 2016, Republican platform called the CFPB a “rogue agency” with a director exercising “dictatorial powers unique in the American Republic.” Republican lawmakers have consistently sought to replace the single directorship with a commission and to make the bureau subject to normal congressional appropriations process.

The October 2106 case of PHH Corporation v. Consumer Financial Protection Bureau called into question the constitutionality of the bureau’s structure, with the U.S. Circuit Court of Appeals for the District of Columbia “remedying” the constitutional deficiency by placing the CFPB under the Executive Branch, thereby allowing the President to
dismiss the director at will.

This ruling in the PHH case could allow President Trump to dismiss the current director, Richard Cordray, and replace him with a person that would take a less vigorous approach to enforcement of consumer financial laws. Since the CFPB has filed a petition for the full appeals court to rehear the case, it might be unlikely that Trump would dismiss Cordray until the case is fully resolved, which may include an appeal to the U.S. Supreme Court. Depending upon how the full court of appeals rules in the PHH case, since CFPB may have a difficult time with an appeal to the Supreme Court since the bureau is required to seek concurrence from the U.S. Attorney General, who under the Trump Administration, would be Jeff Sessions, currently A U.S. Senator from Alabama. Without the Attorney General’s concurrence, the Trump administration effectively blocks the CFPB's decision to appeal to the Supreme Court.

On the other hand, if Trump does succeed in removing Cordray in favor of a person less inclined to pursue enforcement actions, it is conceivable that states such as California, Illinois, Massachusetts, and New York, which all have Democrats as attorneys general,
could fill any void left by the CFPB’s inaction.

Staffing of agencies

Even if Congress is not successful in making changes to the Dodd-Frank Act, the incoming president’s appointments to various independent financial regulatory agencies could, as noted by Justin Schardin, director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, provide “wide latitude to reinterpret or roll back new rules and regulations.”

Although some of the agencies may be headed up by members that could reinterpret or roll back regulations, any type of action would still need to go through the normal proposal and comment process.

It was also observed with the various agency appointments that the role of the Financial Stability Oversight Council could change, with the new Treasury Secretary using FSOC’s statutory mandate as a means for coordinating regulators to streamline existing regulations.

Housing finance reform

As the conservatorships of Fannie Mae and Freddie Mac begin their ninth year, Congress may address housing finance reform. The last time Congress attempted to tackle the issue was in 2013 and 2014. It expected that Sen. Mike Crapo (R-Idaho) will assume the chairmanship of the Senate Banking Committee. He was one of the senators who drafted legislation that passed the committee on a bipartisan vote in 2014.

Capital and liquidity

To address the causes and effects of the global financial crisis, the Basel Committee on Banking Supervision established the Basel III capital framework which set higher levels for capital requirements and introduced new global liquidity requirements.

The U.S. bank regulatory agencies have implemented most of the Basel III capital and liquidity requirements, and banks, depending on their size, have been complying with the new capital and liquidity requirements. 

Banks have argued these various requirements have hampered lending, and other stakeholders have contended that these requirements have put U.S. banks at a competitive disadvantage on the world stage. Some have called for the U.S. not to adhere to these international standards, since other countries seek “capital neutrality.” The Vice Chairman of the Federal Deposit Insurance Corporation, Thomas M. Hoenig, cautioned, “The United States should not follow this path nor allow its capital mandates to be compromised in this fashion.”

For more information about the impact of the election on the banking and financial services industry, subscribe to the Banking and Finance Law Daily.

CFPB brings the axe down on payday lender Moneytree for misleading consumers

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau has entered into a consent order and stipulation with Moneytree, Inc., a financial services company that offers payday loans and check-cashing services, for misleading consumers with deceptive online advertisements and collections letters. According to the bureau, the company also made unauthorized electronic transfers from consumers’ bank accounts. The CFPB has ordered the company to cease its illegal conduct, provide $255,000 in refunds to consumers, and pay a civil penalty of $250,000.

"Consumers deserve honesty and transparency from the financial institutions they rely on," said CFPB Director Richard Cordray. "Moneytree’s practices meant consumers were making decisions based on false and deceptive information, and today’s action will give the company’s customers the redress they are owed."

Moneytree, Inc., is a financial services company based in Seattle, Wash., that offers payday loans, check-cashing, and other services to consumers. After conducting multiple supervisory examinations of Moneytree’s lending, marketing, and collections activities, the CFPB has identified significant weaknesses in the company’s compliance-management system in each of them. The Consent Order states that the company failed to address those weaknesses and deceived consumers about the price of check-cashing services, made false threats of vehicle repossession when collecting overdue unsecured loans, and withdrew funds from consumers’ accounts without written authorization. Specifically, the CFPB found that Moneytree:

• Used deceptive online ads: In early 2015, Moneytree ran advertisements online offering to cash consumers’ tax refund checks for "1.99." The actual fee for the service was 1.99 percent of the amount of the check cashed, rather than $1.99, as the company’s advertisements implied. Consumers were required to visit one of Moneytree’s physical branches to take advantage of the advertisement’s offer, which appeared online tens of thousands of times.
• Deceptively told consumers their vehicles could be repossessed: From late 2014 through early 2015, Moneytree mailed letters to hundreds of consumers indicating that their vehicles could be repossessed if they did not make past-due payments on their installment loans. But none of these consumers had loans secured by their vehicles, and Moneytree had no right or ability to repossess them.
• Withdrew money from consumers’ accounts without authorization: Moneytree failed, in over 700 instances, to obtain preauthorization from consumers for withdrawals from their bank accounts, in violation of federal law.

Moneytree stipulated to the CFPB’s findings.

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

Schools and banks scolded for not putting students first

By Andrew A. Turner, J.D.

 

Colleges continue to maintain deals with large banks to market products with costly features that are not in the best financial interests of their students, according to a Consumer Financial Protection Bureau report analyzing marketing deals for school-sponsored accounts. The CFPB also reminded colleges and universities they are required to publicly disclose marketing agreements with credit card companies (CFPB Bulletin 2016-04).

 

“Deals between big banks and schools can drive students into accounts that contain high fees,” said CFPB Director Richard Cordray. “Today’s report shows that many schools are more focused on their bottom line than their students’ well-being when they agree to sponsor financial accounts. Many young people struggle to manage money while at school and we urge schools to put students’ financial interest first.”

 

Key findings. The CFPB’s analysis of roughly 500 college marketing deals for prepaid and debit accounts found that many deals allow for risky features that can lead students to rack up hundreds of dollars in fees per year. The analysis revealed:

• Dozens of deals with banks for school-sponsored accounts do not place limits on account fees, such as overdraft fees, out-of-network ATM fees, or other common charges.
• College students may pay hundreds per year in overdraft fees when using student banking products.
• Marketing agreements between colleges and banks often contain extensive details about how the school and the bank can profit, but offer few financial benefits for students.

Some schools have not complied with Department of Education requirements to disclose key details of marketing deals with banks. The CFPB found some agreements publicly announced by banks or colleges missing from the DoE’s public database of agreements.

 

College credit card agreements. The report also examines trends in the school-sponsored credit card market, showing a continuing market decline, with a shift to college-sponsored checking and prepaid accounts. The CFPB noted its concern about the lack of transparency in these contracts. A prior year review of 25 colleges and universities with active credit card agreements found most did not provide copies of these agreements on their websites or provide ways to access the agreements.

The CFPB bulletin outlines options for disclosing this information and warns that marketing agreements with credit card issuers must be disclosed publicly without delay. Schools are advised to begin publishing these agreements on their websites if they are not already doing so.

The CFPB promised that it will continue to monitor the accessibility of college student credit card agreements. Industry participants are encouraged to contact the CFPB if not in compliance, with the bureau promising that self-reporting and cooperation “will be taking into account when resolving such matters.”

For more information about student credit card issues, subscribe to the Banking and Finance Law Daily.

ICYMI: Fed raises federal funds rate, primary credit ‘discount’ rate

By Thomas G. Wolfe, J.D.

Based on information it has received since it last met in November, the Federal Open Market Committee has unanimously decided to raise the target range for the federal funds rate to a .50- to .75-percent range, a .25 percent increase in the target range previously set a year ago. Similarly, the Federal Reserve Board unanimously voted to approve a .25 percentage increase to the primary credit "discount" rate to establish a new 1.25 percent level, effective Dec. 15, 2016.

The FOMC stated that economic activity has been "expanding at a moderate pace since mid-year" and that inflation has "increased" since earlier this year. According to the FOMC, near-term risks to the economic outlook appear "roughly balanced," and the "the labor market has continued to strengthen." Still, the Committee expects inflation to "rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further."

Economic outlook. The FOMC reported that the unemployment rate "has declined" and job gains "have been solid." In addition, household spending has been "rising moderately" while business fixed investment has "remained soft."

The FOMC further observed that while inflation increased, it still is "below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports." Further, while market-based measures of inflation compensation "have moved up considerably" but "are still low," most survey-based measures of longer-term inflation expectations "are little changed, on balance, in recent months." The Committee will continue to closely monitor inflation indicators as well as global economic and financial developments.

In communicating its economic outlook, the FOMC released charts and graphs depicting its economic projections.

Asset purchases. The FOMC stated that it is "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction." Moreover, the FOMC anticipates continuing this policy "until normalization of the level of the federal funds rate is well under way." In the FOMC’s view, by keeping the Committee's holdings of longer-term securities at sizable levels, the policy "should help maintain accommodative financial conditions."

Federal funds rate. In view of realized and expected labor market conditions and inflation, the FOMC decided to raise the target range for the federal funds rate to a .50- to .75-percent range. In connection with future determinations of the timing and size of an adjustment, the Committee "will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation." According to the FOMC, this assessment "will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."

Primary credit rate. As reflected in its Dec. 14, 2016, "Decisions Regarding Monetary Policy Implementation," the Fed raised the primary credit "discount" rate, which is the interest rate charged for short-term credit extensions to depository institutions. The discount rate was increased to the 1.25 percent level, effective Dec. 15, 2016. In taking this action, the Fed approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.




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

Wells Fargo victims’ ‘day in court’ bill introduced

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

Legislation that would allow victims of Wells Fargo’s practice of opening unauthorized deposit and credit card accounts to seek their day in court, even if they signed contracts that included arbitration for their legitimate accounts in the past, has been introduced in Congress. The Justice for Victims of Fraud Act of 2016 was sponsored by Sen. Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, and Rep. Brad Sherman (D-Calif), a member of the House Financial Services Committee.

"Forced arbitration is shielding Wells Fargo from being held accountable for tanking customers’ credit scores and charging them fraudulent fines," said Brown. "Wells Fargo’s customers never intended to sign away their right to fight back against fraud and deceit."

CFPB oversight rule. According to Brown and Sherman, their measure will work "hand in hand" with an oversight rule that the Consumer Financial Protection Bureau proposed in May to strengthen protections for consumers. They noted that, while the CFPB proposal would apply only to contracts signed after the rule is final, their bill would allow victims of Wells Fargo’s fraud to seek their day in court even if they signed contracts that included arbitration for their legitimate accounts in the past.

CLR applause. The Center for Responsible Lending applauded the bill’s introduction. "Forced arbitration should not shield Wells Fargo from its deliberate efforts to defraud their customers," said CRL Senior Policy Counsel Melissa Stegman. "Opening fraudulent accounts is not the only abusive tactic Wells Fargo has committed—they are also notorious for manipulating transactions in order to charge excessive overdraft fees to their customers."

For more information about consumer finance dispute resolution, subscribe to the Banking and Finance Law Daily.

Fraud against customer can be fraud against bank, says High Court

By Richard A. Roth

The Supreme Court has unanimously rejected a criminal prosecution defendant’s claim that he was not guilty of bank fraud because he intended to take money a bank customer had on deposit, not money belonging to the bank. In a point-by-point opinion written by Justice Breyer in Shaw v. U.S., the Court said that:

1. The bank had a property interest in the customer’s deposits.
2. The bank fraud statute requires neither proof that the bank suffered a loss nor that the defendant intended the bank to suffer a loss.
3. The defendant’s ignorance of the application of property laws to bank deposits was not a defense.
4. The bank fraud statute does not require the government to prove that the defendant intended that the bank would suffer a loss; rather, his knowledge that the bank likely would suffer a loss was sufficient.
5. The two subsections of 18 U.S.C. §1344—one of which applies to schemes to defraud a bank and the other to schemes to obtain property of a bank by fraud—overlap, but only in part. A scheme that was prohibited by the second subsection also could violate the first.

However, the Court vacated the Ninth Circuit’s decision affirming the conviction and remanded it to the appellate court for consideration of whether a claimed defect in the jury instructions was properly preserved for appeal, whether the instructions were correct, and whether any error was harmless.

Fraudulent scheme. Simply put, the defendant, Lawrence Shaw, had access to Stanley Hsu’s Bank of America account statements. Using the information in the statements, Shaw was able to convince the bank that he was Hsu and to transfer money to his account at the Internet payment service provider PayPal. From there, he transferred the money to accounts at another bank. The Ninth Circuit opinion noted that the loss of more than $275,000 was borne by PayPal and Hsu. Bank of America lost nothing (U.S. v. Shaw).

Bank fraud. The bank fraud statute (18 U.S.C. §1344) 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.

The government prosecuted Shaw for violating 18 U.S.C. §1344(1), but not (2). Shaw was convicted, and his conviction was affirmed by the Ninth Circuit.

Claims on appeal. While the oral arguments in Shaw v. U.S. seemed to indicate some uncertainty over what position Shaw precisely intended to present, the question presented in his petition for certiorari was whether, under 18 U.S.C. §1344(1), the government had to prove “a specific intent not only to deceive, but also to cheat, a bank.” According to Shaw, he had not violated 18 U.S.C. §1344(1) because he intended to take money from Hsu, not from Bank of America.

During the oral argument, Shaw’s counsel also raised a challenge to one aspect of the jury instructions. The questioned instruction told the jury that it needed to find that Shaw had the “intent to deceive, cheat, or deprive a financial institution of something of value.” Bell attempted to convince the Court that, dues to the use of “or,” “deceive” and “cheat” were separated improperly from “deprive,” allowing a conviction for deception without proving deprivation.

Supreme Court analysis. Breyer’s opinion opened by saying Shaw “argues here that the provision [U.S.C. 18 U.S.C. §1344(1)] does not apply to him because he intended to cheat only a bank depositor, not a bank. We do not accept his arguments.” Breyer then explained why those arguments were not accepted.

To begin with, a bank has property rights in a customer’s deposits, Breyer said. While a depositor retains the right to withdraw his money, the bank has the right to use the deposits to fund loans. In fact, even if the deposit contract provided that the depositor retained ownership, the bank would be a bailee that had the right to assert ownership of the funds against anyone in the world other than the depositor. As a result, a scheme to cheat a depositor of his deposits would be a scheme to deprive the bank of at least some property rights.

It was irrelevant that Shaw might not have intended to cause Bank of America any financial harm, Breyer wrote. The bank’s loss of the use of the deposits caused the bank harm, even if it later was reimbursed for the money it paid out.

Shaw’s lack of knowledge that Bank of America had a property interest in Hsu’s deposits was equally irrelevant, the opinion continued. Shaw knew the bank held the deposits, and he made false statements to the bank knowing that the statements would induce the bank to release the deposited funds to his PayPal account. That was enough to constitute a scheme to defraud the bank. It would be arbitrary to base a conviction or exoneration of a defendant based not on his actions but, rather, on his knowledge of “bank-related property law niceties.”

The bank fraud law says that the knowing execution of a scheme to harm a bank’s property interests is illegal, the opinion pointed out. Requiring more than knowledge—such as requiring a specific purpose of inflicting such harm, as Shaw asserted was needed—would unnecessarily require different states of mind for the fraudulent scheme and the scheme’s fraudulent elements.

The Court’s analysis concluded by rejecting Shaw’s assertion that because the scheme he was accused of carrying out clearly would have violated 18 U.S.C. §1344(2), it could not be charged under 18 U.S.C. §1344(1). The two subsections did overlap, but not completely. If conduct would be banned by 18 U.S.C. §1344(1), it could be prosecuted under that subsection even if it also would have violated 18 U.S.C. §1344(2).

For more information about bank fraud requirements, subscribe to the Banking and Finance Law Daily.

New York publishes Consumer Bill of Rights for rule limiting “zombie properties”

By Stephanie K. Mann, J.D. 

New York Governor Andrew M. Cuomo has announced that the Department of Financial Services has published a Consumer Bill of Rights for New Yorkers facing foreclosure. Additionally, the Department has finalized a regulation protecting communities from the blight of “zombie properties” by requiring banks and mortgage servicers to report and maintain vacant and abandoned properties.

Both actions follow legislation the Governor signed in June that curbs the threat “zombie properties” pose to communities by expediting foreclosure proceedings, improving the efficiency and integrity of the mandatory settlement conferences, and obligating banks and mortgage servicers to secure, protect, and maintain vacant and abandoned properties before and during foreclosure proceedings.

“These reforms help ensure New Yorkers at risk of foreclosure know their rights, that banks and mortgage servicers are held to their obligations, and that neighborhoods across the state are protected from the blight of zombie properties, which threaten property values, as well as public safety,” Cuomo said. “These steps will help protect the quality of life in our communities and preserve the American Dream in New York.”

The Department is required to publish a Consumer Bill of Rights no later than 60 days after the new law takes effect. The new law also requires the court overseeing a foreclosure proceeding to provide homeowners a copy of the Consumer Bill of Rights at the initial mandatory settlement conference.

Inspection of properties. Under the law, 3 NYCRR 422, bank and mortgage servicers must complete an inspection of a property subject to delinquency within 90 days and must secure and maintain the property where the bank or servicer has a reasonable basis to believe that the property is vacant and abandoned. Banks and mortgage servicers are required to report all vacant and abandoned properties to the Department, submit quarterly reports detailing their efforts to secure and maintain the properties, and report on the status of any foreclosure proceedings. If the Department determines that a property that is vacant and abandoned is not being properly maintained by the bank or mortgage servicer, the Superintendent will exercise her authority to hold the bank or mortgage servicer accountable. Violations are subject to a civil penalty of $500 per day per property.

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

Bureau reviews current rulemaking agenda

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has provided an outline to its rulemaking agenda for fall 2016, addressing current and developing supervisory initiatives. Under the Regulatory Flexibility Act, federal agencies must publish regulatory agendas twice a year. The Unified Agenda "largely mirrors" items described in the past several editions, the bureau said in a post to its blog. The agenda includes rulemaking actions in pre-rule, proposed rule, final rule, long-term, and completed stages.

Know Before You Owe mortgage disclosures. The bureau issued a notice of proposed rulemaking intended to make small clarifications to its Know Before You Owe integrated mortgage disclosures rule. The comment period ended on Oct. 18, 2016, and the CFPB is reviewing comments submitted on the proposal.

HMDA implementation. The bureau also is working to facilitate implementation of the new Home Mortgage Disclosure Act requirements, including follow-up rulemaking "where warranted," the CFPB said in the post. Though certain elements of the rule take effect in January 2017, most new data collection requirements take effect in January 2018.

Larger participants. The CFPB noted that it is "continuing rulemaking activities that will further establish the Bureau’s nonbank supervisory authority by defining larger participants of certain markets for consumer financial products and services." The CFPB said it "expects" its next larger participant rulemaking to focus on the markets for consumer installment loans and vehicle title loans for purposes of supervision.

Arbitration. In May 2016, the CFPB issued a notice of proposed rulemaking concerning the use of arbitration clauses in consumer financial agreements. The comment period for the notice ended in August, and the bureau said it is in the process of reviewing comments.

Payday, auto title, and similar lending products. A notice of proposed rulemaking issued in June 2016 addressed practices related to payday loans, vehicle title loans, and other similar credit products. The CFPB said that the bureau particularly is concerned with consumer "debt traps" stemming from such practices. The comment period for the notice ended on Oct. 7, 2016. The comment period for a related request for information ended on Nov. 7, 2016. Currently, the bureau is in the process of reviewing comments.

Debt collection. According to the post, the CFPB is developing proposed rules intended to regulate debt collection practices. Although the Fair Debt Collection Practices Act prohibits debt collectors from engaging in unfair, deceptive, abusive, and other unlawful collection practices, no federal agency had the authority to issue general implementing regulations prior to the creation of the CFPB. The bureau released materials in July 2016 in advance of convening a panel under the Small Business Regulatory Enforcement Fairness Act to consult with small businesses that are considered "debt collectors" under the FDCPA. Finally, the CFPB has been analyzing the results of a survey to obtain information from consumers about their experiences with debt collection and said it plans to publish a report on the survey in coming months.

Long-term initiatives. Long-term CFPB initiatives include potential rulemaking to address consumer issues in the markets for student loan servicing and credit reporting. The CFPB said it has been monitoring both markets for trends and developments through its supervisory, enforcement, and research efforts.

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

Curry observes how banks, OCC can sharpen community reinvestment focus

By Thomas G. Wolfe, J.D.

Speaking before the National Association of Affordable Housing Lenders (NAAHL) at its “Policy and Practice Conference,” Comptroller of the Currency Thomas Curry stressed the importance of Community Reinvestment Act (CRA) performance and compliance by financial institutions and noted how the Office of the Comptroller of the Currency is sharpening its focus on CRA supervision as well. In his Dec. 1, 2016, remarks, Curry noted that the OCC’s new “Compliance and Community Affairs” department reflected an allocation of resources to make the OCC’s “priorities and policies clearer internally and externally.”

Banks. Curry told the NAAHL members that “[b]anks that integrate CRA performance and compliance into their core business operations and commit the dedicated leadership, staff, and resources necessary to produce strong performance in these areas are best positioned to succeed and grow over the long term.” “Your bank’s performance related to CRA and fair lending is integral to its overall reputation and success, and your role within your organization can help your institution maintain a strong compliance culture,” he stated.

Curry indicated that the impact of a financial institution having an insufficient compliance program or subpar CRA performance could prove to be “very significant.” For instance, when evaluating corporate applications concerning proposed mergers or acquisitions, the OCC considers CRA performance of both the acquiring bank and the target bank. An unfavorable CRA rating could greatly affect a merger or acquisition and the business goals of the companies involved, Curry related.

OCC. Turning to the efforts of the OCC, Curry commented that “it’s just as critical for regulators to dedicate resources to compliance and CRA as it is for financial institutions to do so.” Along these lines, Curry underscored the OCC’s new Compliance and Community Affairs department. According to Curry, one of the top priorities for the Compliance and Community Affairs department is “to improve the OCC’s CRA performance evaluation process.”

In addition, Curry observed that some of the changes that the OCC has implemented to improve its supervision of CRA performance and compliance are driven by technological developments in the financial services industry “that are reinventing how loans are made and bank account services are accessed.” “At the OCC, we are working to ensure 21st century banks have 21st century supervision,” he stated.

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CFPB asks: How much control do consumers have over financial records?

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has asked consumers for their input on difficulties accessing, using, and securely sharing their financial records. The bureau also wants to know how much choice consumers have over the use of their records, how secure it is for them to share their records, and the amount of control they have over their records.

The CFPB said its goal is to foster an environment where competing providers can securely obtain, with the consumer’s permission, the information needed to deliver innovative products and services that will benefit consumers.

“The technology around digital financial records continues to develop, and so far there are many unanswered questions about how the information is being shared, by and to whom, and how safely,” CFPB Director Richard Cordray said in prepared remarks for a field hearing on consumer access to financial records. “As with any emerging industry, we are hearing about some bumps in the road. Both FinTech companies and financial institutions, as well as consumer groups, are describing to us the various challenges, risks, and technological obstacles to further progress in this area.”

Request for information. The bureau is seeking public comment through a Request for Information to better understand the consumer benefits and risks associated with market developments that rely on access to consumer financial account and account-related information. Specifically, the CFPB is seeking information from consumers on:

• whether consumers are being given appropriate opportunities to access and allow others to securely access their personal financial records and what business burdens must be addressed to facilitate access and use of financial records;
• what options consumers are given for ensuring that financial records are securely obtained, stored, and used; and
• what information consumers are given about how their records will be accessed and used and to what extent consumers are able to control how the information will be used by companies. 

Blog post. In a post to its blog, the bureau asked consumers to share their stories on difficulties they face when accessing and sharing their financial records with other financial companies. If consumers are using products or services that access their financial records stored by another company, the CFPB wants to know about their experiences. Consumers can comment on Facebook or Twitter, but those who want to provide more details can share their stories via the bureau’s website.

For more information about consumer access to financial records, subscribe to the Banking and Finance Law Daily.

Payday lenders move to throttle 'Operation Choke Point'

By J. Preston Carter, J.D., LL.M.

Two payday lenders have filed an emergency request for preliminary injunctive relief with a federal district court to stop "Operation Choke Point," the program created by the Department of Justice to "choke out" companies that were seen as posing a high risk of payment fraud, money laundering, or other abuses by denying them access to the banking and payments system. The lenders, the Community Financial Services Association of America (CFSA) and Advance America, are co-plaintiffs in a case, CFSA et al. v. Federal Deposit Insurance Corp. et al., that is pending discovery before the U.S. District Court for the District of Columbia.

CFSA’s press release states that the emergency filing results from a "stepped up government campaign of strong-arm tactics against banks forcing them to end business relationships with payday lenders." CFSA’s memorandum in support of its motion and proposed order says the effects of Operation Choke Point "are now reaching crisis stage as banks have continued terminating their relationships with payday lenders."

"The need for immediate relief is more urgent than ever," said CFSA CEO Dennis Shaul. "Our largest member very recently had its final national banking relationship terminated. This effectively cuts off our member’s access to basic banking services for more than 1,200 of its stores and affects even its ability to pay employees and vendors."

Court ruling. On Sept. 15, 2015, the D.C. District Court ruled that it has jurisdiction to entertain the suit brought by the lenders. The court dismissed the counts of the complaint pertaining to alleged violations of the federal Administrative Procedure Act but refused to dismiss the counts pertaining solely to the regulators’ alleged violations of the payday lenders’ procedural due process rights under the Fifth Amendment to the U.S. Constitution. Since the initial ruling, the parties in the case have been awaiting further ruling from the Court before discovery proceedings may ensue.

OIG report. According to CFSA, a September 2015 audit by the FDIC’s Office of Inspector General confirms that "FDIC officials had used their regulatory leverage to coerce banks to close the accounts of law-abiding companies—specifically short-term lenders." The OIG reported that, although there was no evidence that the FDIC used the high risk list to target financial institutions, the agency "created the perception" that it discouraged institutions from conducting business with certain merchants, particularly payday lenders.

For more information about the DOJ's Operation Choke Point, subscribe to the Banking and Finance Law Daily.

Absence of concrete injury helps doom TILA class action

By Richard Roth

Two of the four Truth in Lending Act disclosure claims raised in a class action failed because the consumer who filed the suit would not have suffered any concrete injury from a TILA violation, the U.S. Court of Appeals for the Second Circuit has decided. The consumer’s other two claims failed to describe a TILA violation, the court said in affirming a pretrial judgment in favor of a credit-card issuing bank (Strubel v. Comenity Bank, Nov. 23, 2016, Raggi, R.).

The consumer was complaining about disclosures provided to her by Comenity Bank when she opened a Victoria’s Secret-branded credit card. According to the consumer, the bank violated 15 U.S.C. §1637(a)(7) because its disclosures were not substantially similar to those specified by Model Form G-3(A). Specifically, she asserted the bank did not clearly disclose that:

• cardholders who wanted to stop payment under an automatic plan needed to satisfy certain obligations;
• the bank was obligated, as part of the error resolution process, to advise the consumer of any corrections made during the 30-day acknowledgment term;
• some consumer rights applied only to disputed purchases for which full payment had not been made and did not apply to cash advances or checks that drew against the credit card account; and
• consumers who were not satisfied with a purchase paid for using the card had to contact the bank either in writing or electronically. 

Injury and standing. The bank raised the issue of the consumer’s constitutional standing to sue for the first time as part of defending against her appeal. Since constitutional standing is an aspect of a federal court’s subject matter jurisdiction, the appellate court was required to consider it. The consumer did not have constitutional standing to raise two of her claims, the court decided.

Article III of the Constitution gives federal courts jurisdiction over cases and controversies, and showing a case or controversy requires a person to demonstrate an injury in fact that arises from the challenged conduct. An essential part of a consumer’s injury in fact is a concrete or particularized injury, the court said. The need for an injury that is both concrete and particularized was emphasized in the Supreme Court’s recent Spokeo, Inc. v. Robins decision.

No concrete injury. The consumer could not demonstrate even a risk of a concrete injury arising from two of the violations she claimed, the court said. That meant the court had no jurisdiction over them.

The consumer had not enrolled in any automatic payment plan—in fact, Comenity had not offered such a plan while she held the credit card, the court pointed out. That being the case, an inadequate disclosure about such a plan could not have given rise to any risk arising from the consumer’s uninformed use of credit, the harm that TILA was intended to address.

Any failure by the bank to disclose clearly its obligation to describe corrections made shortly after a claim of error was made would have been a “bare procedural violation” that did not show the material risk of harm to the consumer that could be a concrete injury, the court continued. The consumer had never made any error claims, so her ability to deal with an error could not have been affected. If there were an error, it would not have affected the consumer’s use of credit.

Injury could exist. On the other hand, the other two claimed violations would have posed a risk of concrete injury, according to the court. Inadequate disclosures that some rights applied only to disputed purchases for which full payment had not been made and that a consumer who was dissatisfied with a purchase paid for using the card had to contact the bank either in writing or electronically related to the consumer’s ability to make informed decisions on how to use credit.

A consumer who was not notified of these obligations might be less likely to satisfy them, the court explained. That could cause the consumer to lose rights that TILA was intended to protect.

No violation described. After rejecting the bank’s argument that consumers have no right to statutory damages for violations of Reg. Z—Truth in Lending (12 CFR Part 1026)—as opposed to violations of TILA—the court decided that the claims which survived the standing challenge failed to describe violations.

According to the consumer, Comenity omitted from its disclosures about unsatisfactory purchases two paragraphs that were included in Model Form G-3(A). These paragraphs limited a consumer’s protections to purchases made using the credit card and to any unpaid amounts. However, any variation was small enough that the bank’s disclosures remained substantially similar to the model form, the court said. A creditor that provided disclosures that met the “substantially similar” standard was protected by Reg. Z’s model form safe harbor.

Failing to disclose that consumers who were not satisfied with a purchase paid for using the card had to contact the bank either in writing or electronically was not a violation, the court said, because neither TILA nor Reg. Z imposed that requirement. Moreover, even if Model Form G-3(A) added a restriction about the type of communication, that particular disclosure was among those described as optional. Failing to give an optional disclosure cannot amount to a violation, the court said.

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Ally to pay $52 million to settle issuance of mortgage-backed securities claims

By Stephanie K. Mann, J.D.

A settlement agreement has been reached between Ally Financial Inc. and the Office of the Special Inspector General for the Troubled Asset Relief Program for Ally’s allegedly improper subprime residential mortgage-backed securities (RMBS) in 2006 and 2007. Ally has agreed to pay $52 million in relation to 10 subprime RMBS, and the settlement resolves an investigation into alleged violations of the Financial Institutions Reform Recovery and Enforcement Act, specifically conduct related to the packaging, securitization, marketing, sale, and issuance of the RMBS.

“Ally received substantial TARP bailout funds. With this agreement, Ally acknowledges that the underwriting and diligence process was deficient in connection with the securitization of 40,000 toxic subprime mortgage loans by its subsidiaries—exactly the type of abuse that contributed to the financial crisis,” said Christy Goldsmith Romero, the Special Inspector General for the Troubled Asset Relief Program.

Penalties. Under the settlement agreement, Ally is required to pay a $52 million civil penalty and to immediately discontinue operations of its registered broker-dealer, Ally Securities, LLC, which served as the lead underwriter on the subprime RMBS at issue. The broker-dealer served as the lead underwriter on the 10 subprime RMBS offerings issued in the RASC-EMX series between 2006 and 2007. Ally Securities dedicated a specialized marketing effort to create the RASC-EMX brand, securing investors for the RMBS offerings, and directing third-party due diligence on samples of the mortgage loan pools underlying the RMBS to test whether the loans comply with disclosures made to investors in the public offering documents.

As the lead underwriter, Ally Securities recognized in 2006 and 2007 that there was a consistent trend of deterioration in the quality of the mortgage loan pools underlying the RASC-EMX Securities that stemmed from deficiencies in the subprime mortgage loan underwriting guidelines, and diligence applied to the collateral prior to securitization. All RASC-EMX Securities sustained losses as a result of underlying mortgage loans falling delinquent.

Ally response. Following the settlement announcement, Ally Financial reaffirmed its commitment to remain focused on its strategic plan to build on its strengths in digital financial services, further grow its customer and deposit bases, and continue to deliver strong earnings growth.

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‘One size fits all’ NY cybersecurity reg opposed by industry groups

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

"We strongly disagree with the ‘one size fits all’ approach" taken by a proposed regulation that would require institutions regulated by the New York State Department of Financial Services to establish and maintain a cybersecurity program, states a letter from the Independent Bankers Association of New York State and the Independent Community Bankers of America. Their letter to the DFS stresses that limited resources are a concern for community banks. The organizations contend that the DFS proposal does not reflect that those banks set their risk parameters and determine how best to allocate resources to combat cyber threats in accordance with their own risk assessment.

DFS proposal. The proposed regulation would require New York banks, insurance companies, and other financial services institutions regulated by the State Department of Financial Services to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of the state’s financial services industry.  In a press release announcing the proposal, Governor Andrew M Cuomo called it a "first-in-the-nation" regulation that would protect New York State from the ever-growing threat of cyber-attacks.

Groups' response. The organizations object to the proposal’s application of a "uniform and unequal application of risk mitigation tactics" to community banks, some of which "may go beyond the risk profile of the institutions." They urge the DFS to allow community banks to adopt a reasonable risk assessment tool that would be used by the DFS in conducting an examination for compliance with the cybersecurity regulations.

In addition, the letter states, the DFS proposal does not recognize that community banks may participate in shared resource arrangements to achieve compliance and economies of scale. The organizations believe that the DFS should encourage information sharing through the existing channels, such as those promoted by the federal Cybersecurity Information Sharing Act of 2015, rather than mandating excessive reporting requirements.

The groups conclude by requesting that the DFS not issue a final rule but, instead, issue a revised proposal incorporating their comments and requesting additional comments from the industry.

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Fifth Third Bank commits to $30 billion community development plan with NCRC

By Thomas G. Wolfe, J.D.

As part of a collaborative effort with the National Community Reinvestment Coalition (NCRC), Fifth Third Bank is committing $30 billion in lending and investments to low-and moderate-income borrowers and communities over a five-year period—from 2016 to 2020. According to Fifth Third’s Nov. 18, 2016, release, the bank’s recently enhanced community development plan includes mortgage, small business, and community development lending as well as investing, philanthropy, and financial services for low- and moderate-income communities.

Plan highlights. According to the NCRC’s “Summary of the Community Action Plan” between the coalition group and Fifth Third, the bank’s $30 billion commitment represents 21 percent of Fifth Third’s assets, or 29 percent of its deposits. Fifth Third’s commitment covers locations in 10 states where the bank has branches: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Pennsylvania, and Tennessee. Approximately 145 community-based organizations of the NCRC’s membership in these states provided input before the agreement between the NCRC and Fifth Third was finalized.

Among other things, the community development plan is designed to fund:

• $11 billion in mortgage lending to low- to moderate-income individuals and communities;
• $10 billion in small business lending in all markets and communities to businesses with gross annual revenue below $1 million;
• $9 billion in “Community Reinvestment Act” community development loans and investments, including support for affordable housing, revolving loan funds, Community Development Corporations, Community Development Financial Institutions, community pre-development resources, housing rehab loan pools, and community land trusts and land banks; and
• $93 million in philanthropic work to “ensure adequate access to bank branches in LMI communities and communities of color, including opening at least 10 new branches.”

For more information about financial institutions' community development plans or compliance with the Community Reinvestment Act, subscribe to the Banking and Finance Law Daily.

CFPB charges pawnbroker misled consumers with low rate

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has filed an enforcement action in federal court against B&B Pawnbrokers, Inc. for deceiving consumers about the cost of its pawn and auto title loans because it did not include storage fees or processing fees in the finance charge. The CFPB’s lawsuit seeks to end B&B Pawnbrokers' illegal practices, obtain restitution for victims, and impose penalties.

“When consumers take out a loan, the lender by law must tell them the terms, including the actual annual cost of the loan,” said CFPB Director Richard Cordray. “B&B Pawnbrokers deceived consumers about what that true cost was.”

The CFPB alleges that Virginia based B&B Pawnbrokers misled its customers about the cost of its loans in more than 2,400 contracts. Specifically, the CFPB alleges that B&B Pawnbrokers unlawfully disclosed a misleadingly low annual percentage rate that did not reflect all of the fees and charges tacked on to the loan, which grossly understated the cost to consumers.

For example, when B&B Pawnbrokers made a $200 loan due in a month, it charged the consumer a $10 finance charge, a $10 storage fee, and a $20 processing fee. Each fee is a finance charge that must be included in calculating the annual percentage rate. The sum of these fees, $40, yields an annual percentage rate of 240 percent. B&B Pawnbrokers disclosed an annual percentage rate of only 120 percent.

The bureau’s complaint alleges that B&B Pawnbrokers' actions violated the Truth in Lending Act and Consumer Financial Protection Act and seeks monetary relief, injunctive relief, and penalties.

Virginia has a pending action against B&B Pawnbrokers for violations of the Virginia Consumer Protection Act, and the CFPB coordinated with Virginia in its investigation.

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Did Wells Fargo retaliate against whistleblowers? Senators ask

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

In a letter to Wells Fargo's new CEO, Timothy J. Sloan, Sens. Elizabeth Warren (D-Mass), Ron Wyden (D-Ore), and Bob Menendez (D-NJ) question whether the bank’s filings with the Financial Industry Regulatory Authority, relating to the termination of employees for creating more than two million unauthorized checking and credit card accounts, reveal that the company took retaliatory action by reporting defamatory information on whistleblowers. The senators wrote that new information obtained from FINRA revealed that from 2011 to 2015, Wells Fargo filed over 200 termination reports (Form U5) with FINRA for employees who were fired for actions related to the unauthorized accounts scandal.

"These reports...confirm that Wells Fargo had ample information about the scope of fraudulent sales practices occurring at the bank long before the CFPB settlement, and they raise additional questions about Wells Fargo's response to this illegal activity," according to Warren’s press release. "If this is the case, then it would appear that Wells Fargo concealed key information from regulators that may have revealed the bank's misdeeds long before the September 2016 settlement."

Additionally, the senators wrote, recent public news reports suggest that Wells Fargo may have violated FINRA rules by filing incomplete or inaccurate U5s for many fired employees, raising questions about whether the company took retaliatory action by reporting defamatory information on whistleblowers.

The senators wrote, "According to these reports, Wells Fargo terminated employees...for failing to meet the bank's aggressive sales quotas; others were terminated after reporting illegal activity to Wells Fargo management. In an unknown number of these cases, Wells Fargo may have filed Form U5s that did not accurately reflect the reasons why employees were fired...If Wells Fargo submitted false or incomplete information about the fired employees in its mandatory disclosures to FINRA, the bank may have violated FINRA rules and misled regulators about the scope of the fraud."


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Claims about protected benefits violated debt collection law, CFPB argues

By Richard Roth

A debt collector’s misrepresentations about what a consumer needed to do to protect his Social Security benefits from garnishment violated the Fair Debt Collection Practices Act, the Consumer Financial Protection Bureau says. In an amicus curiae brief, the CFPB argues that the debt collector would have made misrepresentations and engaged in unfair collection practices even if it technically complied with New York law on establishing garnishment exemptions (Arias v. Gutman, Mintz, Baker & Sonnenfeldt, PC).

The suit began with a law firm’s effort to collect a judgment for back rent on behalf of a client. The firm served the consumer’s bank with forms required by a New York law that is intended to help consumers protect Social Security benefits or other exempt funds from garnishment. Under the state law, $2,500 (adjusted for inflation) in a consumer’s bank account automatically is protected from being garnished if exempt benefits have been deposited in the previous 45 days.

The remainder of the account balance is temporarily restrained. However, the consumer can secure the release of the funds by sending an exemption claim to the bank and creditor. The creditor then must either instruct the bank to release the restraint or begin a proceeding in state court to demonstrate that the funds in the account are not exempt.

Law firm’s actions. According to the brief, after setting aside the funds in the consumer’s account that were protected, the bank restrained nearly $1,300. The consumer had the bank send the firm account statements demonstrating that the restrained amount comprised protected Social Security benefits and included comparable information in his exemption claim. However, the firm refused to release the restraint and began the statutory court proceedings.

The affidavit on which the firm relied when it objected to the exemption claimed the firm could not determine whether the funds were exempt because the consumer had not supplied account records that started with a zero balance. The affidavit also asserted that Social Security benefits lost their exempt status if they were commingled with nonexempt funds and that the consumer had not proved he had not commingled the funds.

At the hearing, the firm agreed to release the restraint after an attorney reviewed records produced by the consumer—records that duplicated what the consumer had provided twice before, the bureau noted in its brief.

The consumer then sued the firm under the FDCPA, but the federal district court judge dismissed the suit.

Misrepresentations. The judge was wrong in deciding that the firm had not made an actionable misrepresentation, the bureau’s brief says. A misrepresentation that could discourage a least sophisticated consumer from exercising his legal rights is an FDCPA violation.

In this case, the state law imposes no requirement that the consumer produce account records starting from a zero balance. Neither was the consumer obligated to prove that he had never commingled exempt and nonexempt funds. Whether funds had been commingled was irrelevant, the CFPB adds, because it would not have altered the effect of the firm’s statements on the least sophisticated consumer.

The brief also noted that, in this case, the consumer had not been protected by an attorney. That increased the risk that the consumer could be misled.

Unfair collection practices. The law firm’s objection to the exemption claim was a baseless pleading that denied the consumer access to his exempt funds and could have resulted in his loss of those funds, the brief also argues. That constituted an unfair or unconscionable collection practice.

In fact, the FDCPA says that taking nonjudicial action to dispossess a consumer of exempt property is a per se violation, the brief says. This provision was included in the act specifically because of the consumer harm that could result.

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PHH Mortgage to pay $28M fine to New York regulator

By Charles A. Menke, J.D.

PHH Mortgage Corporation and its affiliate, PHH Home Loans LLC, have agreed to pay a $28 million fine and engage a third-party auditor for a 12-month period under a consent order entered into with the New York Department of Financial Services (DFS), Governor Andrew M. Cuomo has announced. The consent order follows a series of DFS examinations dating back to 2010 that revealed repeated deficiencies in the companies’ mortgage origination and servicing practices, including discrepancies relating to the documentation and processing of mortgage foreclosures. PHH Mortgage and PHH Home Loans are principally located in Mount Laurel, N.J. PHH Mortgage is a wholly-owned subsidiary of PHH Corporation, which is a publicly-traded company incorporated in Maryland.

DFS examinations. According to the order, multistate and DFS examinations revealed discrepancies in the companies’ origination of mortgage loans, including failing to give borrowers accurate good faith estimates on loans, imposing greater fees on unsuspecting borrowers at closings and, in some instances, failing to provide documentation showing that borrowers received agreed-to discounts. The examinations also showed that:

• PHH Mortgage lacked formal and comprehensive policies and processes for executing foreclosure-related documents;
• PHH Mortgage did not adequately monitor the operations of outside vendors it had engaged to perform mortgage servicing related tasks, including foreclosure attorneys;
• PHH Home Loans failed to establish adequate controls to prevent mortgage loan originators employed by one PHH entity from originating loans in another PHH entity’s name, or to prevent employees whose mortgage loan originator licenses had expired or been withdrawn from taking loan applications;
• PHH Home Loans lacked adequate controls to ensure that electronic signatures appearing on loan applications were those of the mortgage loan originators who actually took the application from the borrower; and
• PHH Home Loans’ mortgage loan originator compensation plan failed to prevent against steering borrowers into risky or unnecessarily high-cost loans or basing a mortgage loan originator’s compensation on the terms of the particular loan brokered.

Persistent deficiencies. Additional DFS examinations found that deficiencies in PHH Mortgage’s business practices persisted. According to the DFS: (1) unlicensed individuals were allowed to originate mortgage loans; (2) PHH Mortgage failed to retain copies of required pre-application disclosures to some customers; and (3) some consumers failed to receive discounted rates they had been promised. Moreover, in January 2016, PHH Mortgage disclosed it had improperly assessed $1.2 million in attorneys’ fees against New York borrowers in default as a result of a coding error in an automated invoice processing system that was initially discovered in 2014. PHH has represented to the Department that it has made full financial restitution to borrowers affected by this error, the order stated.

Corrective actions acknowledged. The DFS acknowledged that a 2014 examination found that PHH Mortgage had taken substantial steps to improve its servicing operations, including: (1) outsourcing its internal audit function; (2) implementing comprehensive compliance policies and procedures; and (3) addressing all issues raised in complaint files. The DFS further noted improvement in the company’s Legal and Regulatory Compliance function. However, “these improvements were insufficient to bring PHH Mortgage into material compliance with federal and state law,” the order said.

Auditor. The independent third-party auditor, which must be approved by the DFS, will be responsible for verifying the identity of borrowers impacted by other improper closing costs so PHH can make refunds to those consumers. The auditor will also review PHH’s business practices to ensure compliance with mortgage origination and servicing laws and regulations.

PHH response. In a statement issued by PHH Corporation following the settlement announcement, the company said it “agreed to resolve concerns raised by the DFS arising from legacy servicing and origination examinations conducted between 2010 and 2014 in order to avoid the distraction and expense of litigation.” The company further emphasized its efforts in improving servicing operations “[a]s acknowledged by the DFS in the agreement,” adding that the “enhancements are part of [its] ongoing investments in compliance, technology, process management, and oversight infrastructure.”

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Trump election spurs comments

By Katalina M. Bianco

Comments on Republican Donald Trump’s presidential election win have been coming in fast and furious. Several banking and business organizations have congratulated Trump and expressed their willingness to work with his new administration and Congress to achieve shared goals for the nation. Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, also weighed in on the election as did Timothy Q. Karcher of Proskauer Rose LLP.

Platform on Dodd-Frank Act. As adopted in July 2016, the Republican party’s platform challenged the Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau. Among other things, the platform asserted that the CFPB was "deliberately designed to be a rogue agency.” Moreover, addressing federal regulation in general, Donald Trump stated in his economic plan that, if elected, he would "issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety in order to give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring again, and expanding businesses. We will no longer regulate our companies and our jobs out of existence."

Karcher analysis. Against this backdrop, Karcher offered his analysis of the impact the new Trump administration likely will have on Dodd-Frank regulatory reforms:

"Clearly, Dodd Frank has led to higher regulatory and compliance costs for all banks, and the criticism is that Dodd-Frank actually stifled growth by making it harder for banks to lend money."

"I think large portions of Dodd-Frank are likely to face significant pressure and potential reform in a Trump administration. During his campaign, Trump vowed to stop new regulations on banks, and indicated that he believed the regulatory environment for banks was unduly stifling. It’s probably too early to tell how President Trump, and Congress, will implement the changes or what form they will take."

"While candidate Trump hinted that he would repeal Dodd-Frank, I think it is more likely that it will be remodeled rather than eradicated. One of the results of Dodd Frank was to consolidate rulemaking, enforcement, and regulatory authority over a number of different enumerated consumer protection laws (TILA, RESPA, FDCPA, etc.), which were previously governed by different agencies, and I think it makes sense to keep those laws under a single regulatory umbrella."

"Some argue that the financial industry has gotten used to the reforms. The CFPB has been in existence for more than 5 years, and the financial industry has spent billions adapting to the new rules. To sweep the new rules away in favor of the unknown probably does not make much sense. Moreover, the CFPB is likely facing some structural changes in light of the recent PHH decision, and those changes could complement some of the changes President Trump and the Republican legislators are looking for. Time will tell."

Brown statement. Senator Brown issued a statement following election results that will keep control of the Senate in Republican hands. Senator Mike Crapo (R-Idaho) is expected to be the new chairman of the committee.

"Senator Crapo and I have a history of working together to produce results on the Finance Committee. I look forward to bringing that experience to the Banking, Housing, and Urban Affairs Committee where I hope Senator Crapo and I can find common ground on reasonable, commonsense ideas.” Crapo backed Trump when he became the presumptive Republican nominee in May, but revoked his endorsement in October. At the end of that month, however, he unrevoked his endorsement and said he would vote for the Republican ticket.

"Americans who believe the system is rigged certainly don't want to see Wall Street write the rules," Brown continued. "We must continue fighting to preserve and strengthen Wall Street reforms that protect American families from being on the hook for another bailout.” The senator noted, "We cannot forget the full title of the Committee is Banking, Housing, and Urban Affairs. Both Presidential candidates proposed badly needed infrastructure investments that will help get Americans back to work, so infrastructure should be a top priority for the Committee next year. And I look forward to learning more about the President elect’s plans for revitalizing our cities."

Industry comments on election. American Bankers Association President and CEO Rob Nichols remarked, "We call on the administration and Congress to come together and work for the common good. We look forward to working with members of both parties on policy solutions that will allow banks to help accelerate economic growth, create jobs, better serve their local communities and help their customers and clients succeed."


The ABA expressed its eagerness to work with the Trump Administration to achieve a "vibrant and growing economy." In a letter to Trump, the ABA wrote that in order to ensure the success of American customers, client, and communities, the trade association proposed the following principles and policies that the new Administration should keep in mind: a growing economy in which all Americans can participate;  a thriving housing market that provides stability and mobility; banking technologies that advance competition, convenience, and safety, such as fintech facilitation and cybersecurity requirements. New banking technologies have the potential to increase U.S. competitiveness, promote financial inclusion, and expand access to banking services that drive the economy, such as Fintech facilitation, cybersecurity requirements and data breach reductions, and market pricing for card services.

Mortgage Bankers Association President and CEO David Stevens stated, "Today our industry is operating in the safest and soundest lending environment ever designed." Noting the MBA’s desire to work with a new Trump administration to restore housing as a "lead economic driver," Stevens commented that "it is critical that President Trump focus on three main areas—ensuring an adequate supply of affordable housing, bringing first time homebuyers back into the housing market, and ensuring certainty in regulations."

U.S. Chamber President and CEO Thomas Donohue, acknowledged that "Americans have just lived through a bitter, personality-driven campaign that exposed some deep divisions in our country." Indicating that the Chamber and its members are ready to help the Trump administration accomplish the goal of growing the economy, creating jobs, and lifting incomes for all U.S. citizens, Donohue said, "The number one goal of the Chamber’s political program this cycle was to save the pro-business majority in the Senate. Yesterday voters agreed, and chose pro-business majorities in the Senate and the House to represent them in Washington."

Similarly, Financial Services Roundtable CEO Tim Pawlenty urged Trump and Congress to enact policies that "grow the economy, spur innovation, protect both consumers and taxpayers, add good-paying jobs, and help more Americans reach their financial goals."

The Consumer Bankers Association congratulated the new President-elect and committed to working for a five-person, bipartisan commission at the Consumer Financial Protection Bureau, policies to help banks innovate in the 21st century, and improving the regulatory environment so banks may continue to meet consumer needs. "With a new president-elect and changes to the House and Senate, government and industry leaders have a chance to find workable solutions on issues most important to consumers," said CBA President and CEO Richard Hunt. "This is especially true for banking issues, as a strong banking sector is critical to a strong economy."


According to Dennis Kelleher, President and CEO of Better Markets, the election "was a scream from tens of millions of hardworking Americans for elected officials and policymakers to prioritize their economic circumstances, hopes and dreams." Too many families are still feeling the effects of the 2008 financial crisis. According to a Federal Reserve Board survey, 50 percent of Americans do not have enough money to cover a $400 emergency. The election reflects a "profound loss of faith and trust in government and government officials." Kelleher expressed the trade association’s willingness to work with the incoming Trump Administration to ensure that a "strong and effective financial reform is preserved and protected to prevent another financial crisis."


For more information about the election's impact on banking, The Dodd-Frank Act, and the CFPB, subscribe to the Banking and Finance Law Daily.