Thursday, January 28, 2016

Tennessee bank settles allegations of discrimination against recipients of disability income

By Andrew A. Turner, J.D.

Evolve Bank & Trust of Memphis, Tenn. has agreed to maintain revised policies, conduct employee training, and compensate victims to resolve Justice Department claims that it discriminated against loan applicants receiving Social Security disability benefits in violation of the Fair Housing Act and Equal Credit Opportunity Act. The FHA prohibits lenders from discriminating on the basis of disability, and the ECOA prohibits lenders from discriminating on the basis of receipt of public assistance.

Bank practices. The Justice Department alleged that mortgage applicants were asked to document their disability and that loan applications were denied if they did not comply. "The requirement that borrowers with a disability provide a letter from a doctor or other information about the borrower’s disability to show that income will continue is an intrusive and burdensome requirement that Evolve imposed on borrowers with a disability and did not impose on other borrowers," according to the Justice Department complaint.

Settlement. The terms of the settlement require Evolve to establish a settlement fund of $86,000 to compensate eligible mortgage loan applicants who were asked to provide a letter from their doctor to document their disability income. Evolve will also be required to conduct training for its underwriters and loan officers, and monitor loan applications to ensure that applicants with disabilities are not asked for a letter from a doctor.

“Loan applicants who rely on disability income should not be treated differently than other applicants,” warned Principal Deputy Assistant Attorney General Vanita Gupta, head of the Justice Department’s Civil Rights Division. “This settlement not only provides restitution for mortgage applicants that were harmed by the bank’s discriminatory practices, but ensures that the bank institutes new, fair policies and trains its staff to implement them, added Federal Reserve Governor Lael Brainard.”

The lawsuit originated with a referral from the Board of Governors of the Federal Reserve System to the Civil Rights Division. Evolve is a member of the Federal Reserve System.

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Wednesday, January 27, 2016

Payment card chargebacks—half caused by fraud; three-quarters paid by merchants

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

A Working Paper released by the Federal Reserve Bank of Kansas City reveals that about 70 to 80 percent of payment card chargebacks are resolved as merchant liability and that half of all chargebacks are due to fraud. The authors, Fumiko Hayashi, Zach Markiewicz, and Richard J. Sullivan, write that although chargebacks are perceived as one of the major cost components for merchants to accept card payments, little research has been done on them. Their paper—“Chargebacks: Another Payment Card Acceptance Cost for Merchants”—attempts to “fill that gap” by generating detailed statistics on chargebacks in order to describe the current chargeback landscape.

The authors collected data from merchant processors that processed more than 20 percent of all signature-based transactions in the United States. The data revealed that, for Visa and MasterCard transactions, chargebacks merchants receive are, on average, 1.6 basis points (bps) of sales number and 6.5 bps of sales value. About 70 to 80 percent of chargebacks are resolved as merchant liability.

The most common chargeback reason is fraud, the data revealed. This accounts for about 50 percent of the total chargebacks. The merchant fraud loss rate is 0.7 bps in number and 2.6 bps in value. For American Express and Discover transactions, the total and fraud chargeback rates are somewhat lower. For all of the four networks, the total and fraud chargeback rates are significantly higher for card-not-present transactions than for card-present transactions. They also vary by merchant category. The authors note that the fraud results are generally consistent with other available fraud statistics.



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Tuesday, January 26, 2016

Mortgage assistance services rule can’t apply to attorneys practicing law

By Richard A. Roth

The Consumer Financial Protection Bureau’s Reg. O—Mortgage Assistance Relief Services (12 CFR Part 1015) cannot be applied to attorneys who are performing services that are part of the licensed practice of law, a federal district court judge has decided. The regulation’s exemptions for attorneys are too narrow because they would permit the CFPB to regulate the practice of law, which the Dodd-Frank Act placed beyond the bureau’s authority. The judge also deferred ruling on the validity of the regulation as a whole until the CFPB and the defending attorneys can offer arguments on the effects of partial invalidity (CFPB v. The Mortgage Law Group, LLC, Jan. 14, 2016, Crabb, B.).

The CFPB essentially inherited Reg O, often referred to as the “MARS Rule,” from the Federal Trade Commission. The Dodd-Frank Act also explicitly denies the bureau the ability to exercise authority over an attorney’s activities that are part of the practice of law in a state in which the attorney is licensed (12 U.S.C. §5517(e)). When the CFPB brought an enforcement suit against two law firms and four individual attorneys, the interaction between the bureau’s authority to regulate mortgage assistance services and the Dodd-Frank Act’s protection of the practice of law came into play.

MARS Rule and exemptions. The CFPB claims that The Mortgage Law Group, LLP, Consumer First Legal Group, LLC, and four associated attorneys violated the MARS Rule by misrepresenting their services, omitting required disclosures, and collecting prohibited advance fees. The Mortgage Law Group is in bankruptcy, but the remaining firm and the four attorneys are contesting the bureau’s claims.

The firm and attorneys would be exempt from the misrepresentation and disclosure rules if:
  • the services were rendered as part of the practice of law;
  • the attorneys were licensed to practice in the state where the consumer lived or the home was located; and
  • the attorney complied with all state laws and rules that covered his conduct (12 CFR 1015.7(a)).
To be exempt from the ban on charging advance fees, the firm and attorneys were required to deposit the fees in a client trust account and comply with all state laws and rules on trust accounts (12 CFR 1015.7(b)).

Rule exceeded CFPB authority. There was no real question about the CFPB’s ability to regulate the activities of attorneys outside of the practice of law, the judge said. That was within the bureau’s statutory authority. The question was whether the limited effect of the regulation’s exemptions meant the bureau was impermissibly regulating the activities of attorneys who were practicing law.

The judge also noted that, since the question was one of whether the bureau had exceeded its authority in adopting a regulation, the analysis was governed by Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). If the Dodd-Frank Act was clear, the law was to be applied. If the act was ambiguous, the regulation would stand if it was a reasonable interpretation of the act.

The Dodd-Frank Act generally prohibits the CFPB from regulating attorneys when they are practicing law, the judge said, and that prohibition would include trust account activities. However, there is a difference between deciding whether an attorney is practicing law and deciding whether he is complying with state laws—after all, an attorney can provide legal services in ways that violate state laws.

The MARS Rule provisions that conditions exemptions on the attorney’s compliance with state laws thus are too restrictive, the judge decided. The CFPB rule could restrict exemptions to attorneys who were offering servicing as part of the practice of law, but not to attorneys who were in compliance with state laws.

The CFPB’s contrary argument would mean that the bureau was prohibited from regulating attorneys engaged in the practice of law but was able to create an exemption “that swallows the general prohibition.” The Dodd-Frank Act intended to deny the bureau the ability to regulate the practice of law without regard to whether the practice was being carried out legally.

Even if the act was ambiguous, the MARS Rule was an arbitrary and capricious interpretation, the judge continued. There was nothing in the authority of either the FTC or the CFPB that indicated Congress intended the agencies to take on the role of enforcing state laws on the professional conduct of attorneys, which is what the rule would require.

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

Monday, January 25, 2016

CFPB’s Civil Penalty Fund victim identification process generally effective, can be enhanced

By Stephanie K. Mann, J.D.

An audit conducted by the Office of Inspector General for the Consumer Financial Protection Bureau found that the bureau’s Civil Penalty Fund victim identification process is generally effective and efficient, but there is room for improvement. The audit was conducted in order to assess the efficiency and effectiveness of the CFPB’s process for identifying victims eligible to receive compensation from the Consumer Financial CPF.

In the context of the audit, efficiency refers to the resources used in the victim identification process and effectiveness refers to correctly identifying eligible victims. The scope of the audit included three cases in which identified eligible victims received fund distributions as of Dec. 31, 2014. 

Remedying the harm. Under the Dodd-Frank Act, the bureau can bring enforcement actions against those who violate the law. The CFPB or a court may then require a defendant who has violated the law to remedy the harm caused to consumers paying its victims for the harm it caused and, if applicable, by also paying a civil penalty. The bureau is then required to establish a CPF and to deposit civil penalties that it collects into this fund. These civil penalty funds can be used for payments to any eligible victims who do not receive full compensation for their harm from defendants who harmed them.

The victim identification process includes collecting victim-related data, sorting and validating victim-related data, and developing the final list of eligible victims. In some cases, the Office of Technology and Innovation (T&I) is involved in managing victim-related data.

Enhanced responsibilities. In examining the CPF, the OIG found that the Office of the Chief Financial Officer (OCFO) has established internal controls to facilitate the victim identification process and has implemented the procedures and guidelines set forth in the May 2013 Civil Penalty Fund Rule. While this has led to the victim identification process being generally effective and efficient, the OIG did note an opportunity to enhance the process.

The OIG discovered that the OCFO has not documented the roles and responsibilities of the T&I in the victim identification process. The process is data dependent and in some instances, requires the involvement of T&I to produce preliminary lists of eligible victims. By clearly documenting the roles and responsibilities of all parties involved in the victim identification process, said the OIG, the preliminary lists of victims can be properly maintained and all parties involved in the process can be accountable.

The OIG has therefore suggested that the Chief Financial Officer, in coordination with T&I, update the OCFO’s procedures to document the roles and responsibilities of T&I in the victim identification process. The CFO has concurred with this suggestion.

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

Friday, January 22, 2016

FDIC interim rule would allow ‘well-managed’ small banks to use 18-month cycle


The Federal Deposit Insurance Corporation took two actions at its Jan. 21, 2016, meeting of its board of directors, adopting an interim rule that would allow “well-managed” community banks and thrifts with less than $1 billion in assets to qualify for the 18-month exam cycle, and issuing a revised Notice of Proposed Rulemaking on small bank deposit insurance assessments.

Meaningful regulatory relief. Along with the FDIC, the Federal Reserve Board and Office of the Comptroller of the Currency now plan to allow well-managed community banks and thrifts with less than $1 billion in assets to qualify for the 18-month exam cycle. The interim final rule follows authority granted by Congress in December 2015. The 18-month exam cycle has previously been limited to institutions with less than $500 million in assets. In his remarks before the board, Thomas J. Curry, the Comptroller of the Currency, stated that he hopes the change will “offer meaningful regulatory relief to a large group of community banks and thrifts with very little safety and soundness risk.”

Curry also announced that he had approved an identical interim final rule for institutions supervised by the Office of the Comptroller of the Currency. Curry expects that the 18-month cycle will reduce the burden on well-managed community banks and thrifts as well as allow the banking agencies to focus supervisory resources on institutions that “present capital, managerial, or other issues of significant supervisory concern.”

Revised assessments for small banks. The FDIC is seeking comments on its proposal that would amend the way small banks are assessed for deposit insurance. According to the FDIC release, the proposal would revise the methodology that the FDIC uses to determine risk-based assessments for small banks (those with less than $10 billion in assets) to help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts. The agency issued an initial proposal on this issue in June 2015 (see Banking and Finance Law Daily, June 16, 2015). The updated proposal reflects comments received last year on topics including the calculation of asset growth and the treatment of reciprocal deposits and Federal Home Loan Bank advances. Comments must be received by 30 days following publication of the notice in the Federal Register.

In a statement, Chairman Martin J. Gruenberg said that the agency received almost 500 comments on the proposed rule. According to Gruenberg, the revised proposal “would allow assessments to better differentiate riskier banks from safer banks just as well as last year's proposal, and would allocate the costs of maintaining a strong Deposit Insurance Fund accordingly.” Gruenberg stated that the revised proposal is revenue neutral.

Along with the revised proposal, the FDIC is also publishing an online assessment calculator that will allow institutions to estimate their assessment rates under the revised proposal.

Changes from 2015 proposal. According to the FDIC’s Financial Institution Letter, FIL-7-2016, the new proposal would:
  • revise the previously proposed one-year asset growth measure;
  • use a brokered deposit ratio; consistent with a number of comments, this ratio would treat reciprocal deposits and Federal Home Loan Bank advances the same way the current system does––rather than the previously proposed core deposit ratio––as a measure in the financial ratios method for calculating assessment rates for all established small banks;
  • remove the existing brokered deposit adjustment for established small banks, which currently applies to banks outside Risk Category I; and
  • revise the weights assigned to the proposed measures in the financial ratios method based upon a re-estimation of the underlying statistical model.


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

Thursday, January 21, 2016

"Subprime, buy-here, pay-here dealer" settles CFPB charges

By Katalina M. Bianco, J.D.

A Greeley, Colo., used car dealer has agreed to settle Consumer Financial Protection Bureau charges relating to its financing activities by paying $700,000 in consumer redress to its customers. Y King S Corp., which does business as Herbies Auto Sales, also agreed to a $100,000 civil penalty, but the penalty will be suspended if the agreed-on redress payments are made.
 
Herbies Auto Sales is described by the CFPB as a “subprime, buy-here, pay-here dealer,” meaning that the company both sells and finances cars without selling the loans to a third party. The bureau charges that the dealer misrepresented the annual percentage rate that borrowers would pay by not disclosing some finance charges. Herbies has agreed to the entry of a consent order in an administrative proceeding but has not admitted any wrongdoing.
 
Violations charged. According to the consent order, Herbies advertised a 9.9-percent APR. However, customers who financed their car purchases actually paid a higher APR because the company did not disclose:
 
  • the cost of a required repair warranty as a finance charge;
  • the cost of a required GPS payment reminder device as a finance charge; and
  • the fact that customers who paid cash could negotiate lower purchase prices.
These practices not only violated Truth in Lending Act disclosure requirements, they also were abusive practices under the Dodd-Frank Act, the CFPB says.
 
In addition to paying redress, Herbies will have to modify its sales and financing practices. The purchase price of all cars must be clearly posted when financing is offered, and future misrepresentations are barred. Herbies also must give consumers complete information on the car price, APR, finance charges, and loan terms when a loan is offered, and the company must have consumers acknowledge in writing that they received the information no later than when credit is offered.

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

Wednesday, January 20, 2016

Will Metlife’s retail split shed SIFI label?

By John M. Pachkowski, J.D.

Recently, MetLife, Inc. announced that it was considering separating a substantial portion of its U.S. retail segment and currently evaluating structural alternatives for such a separation, including a public offering of shares in an independent, publicly traded company, a spin-off, or a sale. In a press release, the company also noted that it was undertaking preparations to complete the required financial statements and disclosures that would be required for a public offering or spin-off, and that the completion of a transaction taking the U.S. retail segment public would depend on, among other things, the Securities and Exchange Commission filing and review process as well as market conditions.

Once the separation transaction is completed, the new business is to be led by MetLife Executive Vice President Eric Steigerwalt, and the following entities will be included: MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company, and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Company USA.

Commenting on the separation plans, Steven A. Kandarian, MetLife chairman, president and CEO, said “This separation would also bring significant benefits to MetLife as we continue to execute our strategy to focus on businesses that have lower capital requirements and greater cash generation potential. In the U.S., it would allow us to focus even more intently on our group business, where we have long been the market leader. Globally, we will continue to do business in a mix of mature and emerging markets to drive growth and generate attractive returns.”

Metlife’s separation plans come roughly 13 months after the company was formally designated a nonbank systemically important financial institution (SIFI) by the Financial Stability Oversight Council in December 2014, and about a year since the insurance company filed a federal lawsuit, in January 2015, seeking to have the SIFI label removed.

The announcement of the separation plans is similar to efforts, announced by General Electric Company in April 2015, to sell its subsidiary General Electric Capital Corporation as a means to shed the SIFI designation that FSOC placed on GE Capital in July 2013.

For more information about systemically important financial institutions/SIFIs, subscribe to the Banking and Finance Law Daily.

Tuesday, January 19, 2016

Auto finance company enjoys Maryland’s ‘safe harbor’ by correcting interest rate

By Thomas G. Wolfe, J.D.

Recently, the U.S. Court of Appeals for the Fourth Circuit reviewed a borrower’s claims against a finance company for alleged violations of the Maryland Credit Grantor Closed End Credit Provisions (CLEC) stemming from the borrower’s purchase of a car. In rejecting the consumer’s CLEC claims, the Fourth Circuit decided that the finance company was entitled to the protection of CLEC’s applicable “safe harbor” provision.

According to the court’s Jan. 11, 2016, opinion in Askew v. HRFC, LLC, the retail installment sales contract for the car purchase contained a 26.99 percent interest-rate provision. Since the maximum allowable rate of interest under CLEC was 24 percent, the stated rate in the contract exceeded the maximum rate by nearly 3 percent. However, the finance company, HRFC, LLC—doing business as Hampton Roads Finance Company—later recognized the discrepancy. About a month after discovering the discrepancy, HRFC sent a letter to the borrower acknowledging that the interest rate applied by the company “was not correct.” Further, HRFC made the necessary credits and adjustments outlined in its letter, and indicated that it would compute interest at a new rate of 23.99 percent.

Under CLEC, “credit grantors” are afforded an opportunity to avoid liability through self-correction. Accordingly, under the safe-harbor provision (§12-1020) a “credit grantor is not liable for any failure to comply with [CLEC] if, within 60 days after discovering an error and prior to institution of an action under [CLEC] or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.”

In support of his claims that HRFC violated CLEC and was not entitled to any protection afforded by the safe-harbor provision, the borrower contended that HRFC was strictly liable for failing to expressly disclose an interest rate below the 24 percent statutory maximum. Rejecting the borrower’s argument, the Fourth Circuit determined that CLEC only mandated that the interest rate be expressed as “a simple interest rate” but did not impose strict liability for an interest rate erroneously expressed in a written contract at a rate higher than 24 percent.

Next, the borrower argued that the “discovery rule”—derived from a statute-of-limitations context—should apply to the pertinent CLEC safe-harbor provision. Noting that the meaning of the term “discovering” in the statutory provision (§12-1020) was “a question of first impression,” the Fourth Circuit again rejected the borrower’s stance.

The court maintained that if the “discovery rule” were to be applied to the CLEC safe-harbor provision, “HRFC would have had little reason to inform [the borrower] of its error, lower his interest rate, and provide a refund. Instead, HRFC might well have chosen to do nothing, leaving it to [the borrower] to discover the error.” Accordingly, the Fourth Circuit asserted that “interpreting the term ‘discovering an error’ in section 12-1020 to mean actually uncovering a mistake constituting a violation of the statute better comports with CLEC’s text, public policy, and the statute’s purpose.”

The borrower further contended that HRFC’s letter to him about the interest-rate error was so vague that it failed to satisfy the safe-harbor provision of CLEC. While the court acknowledged that HRFC’s letter was a bit cryptic, the court concluded that the letter provided adequate notice.

Moreover, despite the borrower’s argument that HRFC should have refunded to him far more than $845 and should not have collected any interest on the car loan, the Fourth Circuit maintained that the borrower was not entitled “to a windfall upon the credit grantor’s cure of an error” and that the “section 12-1020 safe harbor is intended to encourage credit grantors to self-correct, which they would have little incentive to do if forced to refund all interest collected.”

Consequently, the Fourth Circuit upheld the federal trial court’s summary judgment for HRFC on the borrower’s CLEC claims and separate breach-of-contract claims. Because the court also decided that unresolved factual issues remained in the case on the borrower's claims against HRFC under the Maryland Consumer Debt Collection Act, the court remanded the matter for consideration of those claims.

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Friday, January 15, 2016

Sixth Circuit decodes claims to encryption technology

By Lisa M. Goolik, J.D.

In an unpublished opinion, the U.S. Court of Appeals for the Sixth Circuit has held that a debtor’s microchip encryption technology was subject to a security agreement that defined the collateral so as to include the debtor’s intellectual property. Although the debtor subsequently licensed the technology, the licensee’s “exclusive license” was subject to the security interest. As a result, the secured lender, Pro Marketing Sales, Inc., had a superior claim and was entitled to the technology after the debtor filed for Chapter 7 bankruptcy protection (Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., Jan. 11, 2016, Gilman, R.).

At issue was microchip encryption technology developed by Pro Marketing and the licensee's mutual borrower, Priva Technologies, Inc. Pro Marketing based its claim on a 2009 security agreement with Priva, whereas the licensee, Cyber Solutions International, LLC, based its competing claim on its 2012 license agreement with Priva.

The security agreement granted Pro Marketing a first-position lien on all of Priva’s assets. The agreement described the collateral to include Priva’s “Intellectual Property,” which was defined as “all rights, priorities and privileges relating to intellectual property . . . , including without limitation the Copyrights, the Copyright Licenses . . . , and all Goodwill associated with or arising in connection with any of the foregoing.” The agreement also limited Priva’s rights with respect to the collateral, providing that Priva could not “sell, transfer, assign, convey or otherwise dispose of, or extend, amend, terminate or otherwise modify any term or provision of any license of [Priva’s] Intellectual Property …without the prior written consent of [Pro Marketing]…”

The license agreement granted Cyber Solutions an exclusive license to the technology and, in return for the second payment, certain rights in future technologies that Priva developed. The agreement established that all “updates, modifications, or improvements” to the technology that Priva developed with Cyber Solution’s funding would be assigned to and owned by Cyber Solution; however, it also expressly acknowledged Pro Marketing’s preexisting security interest in the technology.

Priva subsequently began developing a second-generation technology product at the behest of Cyber Solutions. These efforts resulted in the completion of a new product known as Tamper Reactive Secure Storage (TRSS). Cyber Solutions argued that as the TRSS was completed, it immediately became the property of Cyber Solutions, free of Pre Marketing's security interest.

The Sixth Circuit determined that upon completion of the TRSS technology, Priva—however briefly—acquired the rights to that modification prior to its assignment. As a result, the TRSS became “items of personal property owned . . . or acquired” by Priva, and those rights were included in the security agreement’s definition of “collateral.” Thus, Pro Marketing acquired a security interest in the TRSS technology that was superior to Cyber Solution’s claim to the technology.

Moreover, the court noted that the license agreement itself acknowledged the existence of Pro Marketing’s security interest, and Cyber Solutions was “assuming the risk” that its rights under the license agreement “might be disrupted” by Pro Marketing’s security agreement.

For more information about Cyber Solutions International, LLC v. Pro Marketing Sales, Inc. (6th Cir.), subscribe to the Banking and Finance Law Daily.

Thursday, January 14, 2016

FTC provides consumers with payback for payday lending deception

By Andrew A. Turner, J.D.

Deceptive practices by payday lenders continues to be a point of emphasis by federal regulators as the Federal Trade Commission has entered into settlement agreements with two online payday lenders resolving allegations that consumers were charged with undisclosed and inflated fees. For example, a contract used by the companies stated that a $300 loan would cost $390 to repay, but consumers were actually charged $975, according to the FTC.

Under the agreements, the lenders, Red Cedar Services Inc. and SFS Inc., will each pay $2.2 million and collectively waive an additional $68 million in fees to consumers that were assessed but not collected. The agreements, combined with previous settlements in the case against Red Cedar, SFS, AMG Services, Inc., and MNE Services, Inc, represent the largest FTC recovery in a payday lending case, with litigation still continuing against other lenders. In total, the FTC has recovered $25.5 million and secured $353 million in waived debt.

“Payday lenders need to be honest about the terms of the loans they offer,” said Jessica Rich, Director of the Bureau of Consumer Protection. “These lenders charged borrowers more than they said they would. As a result of the FTC’s case, they are paying a steep price for their deception.”

FTC allegations. The settlements stem from FTC charges initially filed in April 2012 alleging that the lenders and others violated the Federal Trade Commission Act by misrepresenting the cost of loans to consumers. The FTC also charged that the lenders violated the Truth in Lending Act by failing to accurately disclose the annual percentage rate and other terms of the loans, and made preauthorized debits from consumers’ bank accounts a condition of the loans, in violation of the Electronic Fund Transfer Act.

Settlement orders. In addition to the monetary judgments and extinguishment of debt, the final settlement orders prohibit Red Cedar and SFS from misrepresenting the terms of any loan product, including the payment schedule and interest rate, the total amount the consumer will owe, annual percentage rates or finance charges, and any other material facts. The orders also permanently enjoin the lenders from conditioning the extension of credit on preauthorized electronic fund transfers, and from engaging in deceptive collection practices.

In a prior settlement in the same case, AMG Services, Inc. and MNE Services, Inc. agreed to pay $21 million and waive an additional $285 million in charges that were assessed but not collected.

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Wednesday, January 13, 2016

Precious metals business penalized for paying precious little attention to BSA

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

In its first action against a dealer in precious metals, precious stones, or jewels, the Financial Crimes Enforcement Network assessed a $200,000 civil money penalty against a Los Angeles precious metals business, its owner, and its compliance officer, who admitted to willfully violating the Bank Secrecy Act’s (BSA) anti-money laundering (AML) provisions. Under the assessment of civil money penalty, the parties also agreed to retain an external auditor, provide annual reports to FinCEN regarding their improved AML program, and provide annual copies of, and certify attendance and testing results of, their AML training program.
Director’s statement. “Gold and other precious metals are a highly concealable, transportable, and concentrated form of wealth that can be readily abused by criminals seeking to move and hide dirty money,” said FinCEN Director Jennifer Shasky Calvery. “Dealers in these precious metals must do their part to ensure criminals are not able to use their products and services for such nefarious ends.”
B.A.K.’s business. B.A.K. began business in 2006, but had no AML program until 2011, when IRS examiners instructed it to implement one. In 2013, the examiners returned to find the program materially lacking and often ignored.
B.A.K. failed to adequately assess its risks and did not conduct due diligence on its highest risk customers, FinCEN found. In 2011, the company began dealing in large sums of gold with new customers, with transactions ranging between $14 and $23 million. This helped B.A.K. nearly double its total yearly volume, which reached $120 million by the end of 2012. Despite this significant change in volume and customer base, B.A.K. required no documentation or identification prior to conducting business with many of the new, high-volume customers.
Moreover, FinCEN stated, the purchase orders documenting these transactions, many of which were over $100,000, contained only the business name and included no identifying information on the underlying individuals. These failures presented great risks for criminal abuse, the agency added.
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Tuesday, January 12, 2016

Bankruptcy Code not sole remedy for discharged debt collection efforts

By Richard A. Roth

Consumers complaining about debt collector post-bankruptcy discharge debt collection efforts can either sue under the Fair Debt Collection Practices Act or return to the bankruptcy court for relief, the U.S. Court of Appeals for the Second Circuit has decided. The Bankruptcy Code neither implicitly repeals the FDCPA nor makes the collection act inapplicable because the two are not in conflict (Garfield v. Ocwen Loan Servicing, LLC).

The consumer in the suit obtained a bankruptcy court discharge of her personal liability for her mortgage loan, but she agreed to pay the arrears and make future payments in order to avoid a foreclosure. However, she soon fell back into default, making only one monthly payment after the discharge order was entered.

The loan servicer, Ocwen Loan Servicing, then demanded payment not only of the delinquent post-discharge payments, but of the entire unpaid loan amount. This included approximately $15,000 that had been discharged in bankruptcy. Ocwen also reported the entire amount as delinquent to a consumer reporting agency.

The consumer’s FDCPA suit, claiming myriad violations, was dismissed. According to the district court judge, the Bankruptcy Code provides the only remedy available to consumers after a bankruptcy court discharge. Even if the Bankruptcy Code does not preclude all FDCPA claims, the specific claims raised by the consumer were precluded because they were in conflict with the Bankruptcy Code’s remedies. The consumer’s sole remedy was to ask the bankruptcy court to hold Ocwen in contempt of court for violating the discharge order, the judge said.

No implied general repeal. The Bankruptcy Code did not implicitly repeal the FDCPA, either in full or in part, the appellate court began. There was no indication that Congress intended that consequence, and an implicit repeal would be found only if the two laws were irreconcilable. Once a consumer’s debts have been discharged by a bankruptcy court, there is no irreconcilable conflict between the two laws. Ocwen could have complied with both.

No repeal of specific FDCPA sections. The appellate court acknowledged that it was at least possible for the Bankruptcy Code to have implicitly repealed specific FDCPA sections even if it did not repeal the entire debt collection act. However, none of the sections relied on by the consumer suffered that fate, again because there was no irreconcilable conflict between the laws.

Included among Ocwen’s arguments for preemption of specific sections was one the appellate court characterized as “somewhat perverse.” According to Ocwen, many of the FDCPA sections cited by the consumer addressed how a debt collector can collect a debt. These sections were in conflict with the Bankruptcy Code because they implied that the debt could be collected, which was contrary to the effect of the bankruptcy court discharge.

However, Ocwen could have complied with the FDCPA and the Bankruptcy Code simply by not attempting to collect the discharged debt, the appellate court pointed out. An effort to do so potentially would violate both laws. There was no conflict.

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Monday, January 11, 2016

Brown urges Obama to implement small dollar loan programs

By Stephanie K. Mann, J.D.

In a letter to President Obama, Sen. Sherrod Brown (D-Ohio) urges the President to implement funding for programs that encourage initiatives for financial products and services that are appropriate and accessible for “millions of Americans who are not fully incorporated into the financial mainstream.” Specifically, Brown is urging the Administration to enact Title XII of the Dodd-Frank Act—Improving Access to Mainstream Financial Institutions.

According to the letter, former Senator Herb Kohl, a primary author of the title, said that “this grant making program will dramatically help to increase the number of small dollar loan options to consumers that need quick access to money so that they can pay for emergency medical costs, car repairs and other items they need to maintain their lives.”

Increasing financial inclusion. The operative sections—1204, 1205, and 1206—authorize the following:
  • the Treasury Department to establish programs with eligible entities to help low- and moderate-income individuals to access accounts at banks and credit unions;
  • eligible entities can provide products and services, such as small-dollar loans, financial education, and counseling;
  • the Treasury Department may establish partnerships with non-profits, federally insured depository institutions, community development financial institutions (CDFI), or state, local, or tribal governments to provide low-cost small dollar loans with reasonable terms; and 
  • amend the Community Development Banking and Financial Institutions to enable to CDFI Fund to help CDFIs defray the costs of operating small dollar loan programs and to encourage CDFIs to establish and maintain small dollar loan programs. 
A 2014 Federal Deposit Insurance Corporation study found that at least 27 percent of households are unbanked or underbanked, representing at least 67.6 million American adults. This results in more than one in four American adults have obtained financial services and products from non-bank, alternative financial services (AFS), which can lead to a dangerous cycle of debt. Brown’s letter cites the fact that the average underserved household has an annual income of $25,500 and spends $2,412 on AFS fees and interest, or 9.5 percent of their income.

According to Brown, Title XII can address the problem of inadequate access to banks and can “potentially lead to alternatives that will enable more people to responsibly manage their finances.”

Continued support.
In support of Brown’s letter, the Consumer Bankers Association released a statement saying that the Office of the Comptroller of the Controller and FDIC “essentially eliminated a very popular and widely used bank product which helped many of these working families make ends meet.” The result has been costly to consumers who now pay higher interest rates through payday and other nonbank industries. “We continue to support sound initiatives which help consumers gain access to credit as they strive to achieve their financial dreams,” said CBA’s President and CEO Richard Hunt.

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

Friday, January 8, 2016

Extension of SCRA mortgage proceedings and foreclosure protection … not yet

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

On December 10, 2015, the U.S. Senate passed without amendment S. 2393, the Foreclosure Relief and Extension for Servicemembers Act of 2015. This bill would amend Sec. 710(d) of the Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012 by extending until December 31, 2017, the one-year period after a service member's military service during which: (i) a court may stay proceedings to enforce an obligation on real or personal property owned by the service member before such military service; and (ii) any sale, foreclosure, or seizure of such property shall be invalid without a court order or waiver agreement signed by the service member.

An analogous bill, H.R. 4252, was introduced in the U.S. House of Representatives on December 15, 2015, and was referred to the House Committee on Veterans' Affairs, and then to the Subcommittee on Economic Opportunity. As of this writing, the U.S. House has not passed that bill, nor has the legislation been presented to the president for his signature. As a result, the mortgage proceedings and mortgage foreclosure protection period provided by Section 303 of the Servicemembers Civil Relief Act (50 USC 3953) reverted to 90 days as of January 1, 2016.

Legislative Review. Prior to passage of the Housing and Economic Recovery Act of 2008, Section 303 of the SCRA provided for a 90 day mortgage proceedings and mortgage foreclosure protection period. Sec. 2203(a) of the 2008 Act changed that to a 9 month protection period, effective until December 31, 2010. That expiration date was extended until December 31, 2012 by Sec. 2 of the Helping Heroes Keep Their Homes Act of 2010, which was signed into law just before the end of the year.

On August 6, 2012, the Honoring America's Veterans and Caring for Camp Lejeune Families Act of 2012 (i) substituted a one-year protection period in place of the 9 month period, and (ii) extended the protection period expiration date until December 31, 2014. In December of 2014, the Foreclosure Relief and Extension for Servicemembers Act of 2014 extended the expiration date through December 31, 2015. As of that date, the SCRA's mortgage proceedings and mortgage foreclosure protection period reverted to 90 days, pending possible further extension if the U.S. House of Representatives approves the bill that is currently before Subcommittee on Economic Opportunity of the House Committee on Veterans' Affairs.

Further information regarding S. 2393 is available online through this link: https://www.congress.gov/bill/114th-congress/senate-bill/2393

Further information regarding H.R. 4252 is available online through this link: https://www.congress.gov/bill/114th-congress/house-bill/4252


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, January 7, 2016

CFPB ends 2015 with enforcement action against law firm

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has filed a proposed consent order in federal court that would resolve a lawsuit against Frederick J. Hanna & Associates, a Georgia-based law firm, and its three principal partners, for operating an illegal debt collection lawsuit mill.
 
The CFPB’s lawsuit, which was filed in July 2014, alleged that the law firm violated the Fair Debt Collection Practices Act and engaged in deceptive or abusive acts or practices in violation of the Dodd-Frank Act. The bureau’s complaint claimed that the firm, its principal owner, and the managing partners operate “like a factory” in processing debt collection suits for its clients, which the bureau says are principally banks, credit card issuers, and debt buyers.
 
The proposed consent order follows a July 15, 2015, court order that rejected a motion to dismiss the CFPB’s case. In that court proceeding, the law firm argued that the bureau was attempting to illegally regulate the practice of law and was violating the firm’s constitutional rights.
 
If approved by the court, the consent order would:
 
  •  prohibit the law firm and its principal partners from filing lawsuits or threatening to sue to enforce debts unless they have specific documents and information showing the debt is accurate and enforceable;
  • require the law firm to create a recordkeeping system documenting that the Hanna law firm and its partners reviewed specific documentation related to the consumer’s debt before filing or threatening debt collection lawsuits;
  • prohibit the law firm and its partners from using affidavits as evidence to collect debts unless the statements specifically and accurately describe the signer’s knowledge of the facts and the documents attached; and
  • require a firm and its principal partners to jointly pay a $3.1 million penalty to the CFPB’s Civil Penalty Fund.
 
The CFPB noted that its latest action is part of an initiative to address illegal debt collection practices across the consumer financial marketplace, including companies who sell, buy, and collect debt. For instance, in separate enforcement actions, the CFPB has ordered three of the Hanna law firm’s clients, JPMorgan Chase, Portfolio Recovery Associates, and Encore Capital Group, to overhaul their debt collection practices and to refund millions to harmed consumers.
 
Commenting on the proposed consent order, CFPB Director Richard Cordray noted, “The Hanna firm relied on deception and faulty evidence to coerce consumers into paying debts that often could not be verified or may not be owed. Debt collectors that use the court system for purposes of intimidation should reconsider how their practices are harming consumers.”
 
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Wednesday, January 6, 2016

HMDA data shows no immediate effects of ATR/QM rule on lending

By John M. Pachkowski, J.D.

Neil Bhutta, Principal Economist, and Daniel R. Ringo, Economist, at the Federal Reserve Board have used 2014 Home Mortgage Disclosure Act data release to analyze the effects that the Ability-to-Repay and Qualified Mortgage (ATR-QM) regulations have had on mortgage lending.

The Consumer Financial Protection Bureau issued the ATR-QM rules in January 2013 to implement provisions of the Dodd-Frank Act that required lenders to consider certain underwriting criteria and make a good-faith determination that borrowers will have the ability to repay their home loans. Specifically, lenders must consider and verify a number of different underwriting factors, such as a mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be able to pay back the loan.

Lenders are presumed to comply with the ATR requirement when they make a Qualified Mortgage loan, which must meet further underwriting and pricing standards. These requirements generally include a limit on points and fees to 3 percent of the loan amount, along with various restrictions on loan terms and features. QM loans also generally require that the borrower’s total or “back-end” debt-to-income (DTI) ratio does not exceed 43 percent. Lenders also are granted a “safe harbor” on QM loans that are not “higher priced.” Most QM loans achieve safe-harbor status if the spread between the APR of the loan and the average prime offer rate (APOR) does not exceed 150 basis points—1.5 percentage points. For QM loans originated by small creditors, loans up to 350 basis points above APOR that are held in portfolio get safe harbor status.

In their FEDS Notes, Bhutta and Ringo generally found that “some market outcomes were affected by the new rules, but the estimated magnitudes of the responses are small.” They noted that lenders favored loans priced to obtain safe harbor protections.

Although the authors found that the rules did not materially affect the mortgage market in 2014, they cautioned, “This should not be taken, however, as definitive proof that no other changes occurred in response to the rules.” They added the HMDA data lacked information that would be necessary for a more comprehensive review of the mortgage market. For example, they could not directly test if lenders became more reluctant to originate loans above the 43 percent DTI threshold, because all the data necessary to calculate back-end DTI are not reported in HMDA. The HMDA data also lacked information on points and fees, which are limited by rule for QM loans.

Finally, Bhutta and Ringo concluded, “If credit conditions ease in the future and the market regains its appetite for risk, the rules may gain more bite.”

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Tuesday, January 5, 2016

Dismissal of claims in Michaels data-breach litigation underscores ‘injury’ requirement

By Thomas G. Wolfe, J.D.

Although a consumer brought a proposed class action against Michael Stores Inc. (Michaels) in connection with a data breach at the arts-and-crafts retail chain affecting approximately 2.6 million credit and debit cards, the U.S. District Court for the Eastern District of New York recently dismissed the action. In rejecting the consumer’s lawsuit, which asserted state claims for breach of implied contract and for violations of the New York General Business Law provision governing deceptive acts and practices, the court determined that the consumer lacked standing to bring the suit because she failed to sufficiently allege the requisite level of harm and damages resulting from the data breach.

Providing some context for the court’s Dec. 28, 2015, decision in Whalen v. Michael Stores Inc., in April 2014, Michaels reported that hackers had used a “highly sophisticated malware” to obtain credit and debit card information from its computer systems. While the retailer indicated that there was no evidence that the hackers were able to retrieve customer “names, addresses, or PIN numbers,” Michaels offered free credit monitoring to its customers that may have been affected by the data breach that occurred between May 2013 and January 2014.

The consumer contended that, as a result of “unauthorized fraudulent charges” on her credit card, she experienced five different types of injuries. However, the court ultimately rejected the consumer’s contention and ruled that she lacked standing under Article III of the U.S. Constitution to bring her class-action lawsuit against Michaels. The court’s reasoning is instructive for this type of data-breach litigation because the court asserted that the consumer not only failed to sufficiently allege any concrete injury or damages arising out of the data breach, she also failed to explain how she faced any significant future threat of “certainly impending injuries.”

For instance, in reaching its decision, the court emphasized that: (1) the consumer did not allege that she suffered any unreimbursed charges, but only alleged that her credit card was “physically presented” for payment; (2) even if the pending credit card charges had been accepted by the consumer’s bank, she still would not have incurred any liability—given the zero-fraud-liability policy of her card issuer and “of every major card issuer in the country”; (3) the consumer’s contention about lost time and money associated with Michaels’ credit-monitoring offer did not pass muster because the U.S. Supreme Court has previously questioned this argument and because the consumer cancelled her credit card, thereby diminishing a need for identity-theft protection; (4) the consumer failed to allege that Michaels charged a different price for credit card payments and cash payments or that Michaels used any customer payments for its security services; (5) the consumer did not adequately explain how the value of her personal information was diminished by the data breach; (6) the consumer’s threadbare claim that Michaels violated the New York General Business Law was not supported by any “actual injury”; and (7) allegations of some possible future injury or harm were not enough; the consumer failed to allege a threatened injury that was “certainly impending” or a substantial risk that harm would occur.

For more information about data-breach litigation impacting the financial services industry, subscribe to the Banking and Finance Law Daily.