Lawmakers needle regulators about lack of tailored regulations

By Katalina M. Bianco, J.D.

Representative Scott Tipton (R-Colo) has written a letter, signed by more than 130 bipartisan lawmakers, to federal bank regulators “to express our deep concern over the crushing impact that ever-expanding regulatory burdens are having on the ability of our nation’s financial institutions, particularly community banks, to serve the economic needs of our growing economy.” Tipton and his colleagues are disputing regulators’ claims that they are effectively tailoring regulation and requested detailed information on what steps the agencies are taking to tailor regulations to fit the business models of the institutions they regulate.

Specific information requested. In their letter to the heads of the Consumer Financial Protection Bureau, Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and National Credit Union Administration, the legislators wrote, “Increasingly, duplicative and ‘one-size-fits-all’ regulations, imposed by multiple federal agencies, stifle financial institutions’, including community banks, abilities to serve their local communities.” The representatives asked regulators to identify specific major areas in which they have taken action to tailor rules to the business model and risk of institutions or classes of institutions and in which areas the regulators lack the authority to tailor regulations. The lawmakers also want to know if there are any specific areas in which regulators are contemplating taking additional steps to tailor regulations and how they plan on doing so.

Legislation. On March 2, the House Financial Services Committee passed legislation authored by Tipton, the Taking Account of Institutions with Low Operation Risk (TAILOR) Act of 2015 (H.R. 2896). The measure would promote tiered regulation of the banking industry by requiring federal regulatory agencies to tailor regulations to fit the business model and risk profile of institutions. H.R. 2896 passed the committee 34-22.

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Debt collection complaints still #1:CFPB snapshot

By Katalina M. Bianco, J.D.

Debt collection has been the most-complained-about financial product to the Consumer Financial Protection Bureau, with approximately 219,200 complaints submitted as of March 1, 2016. This represents 26 percent of the total complaints submitted. The bureau's latest monthly complaint snapshot focuses on consumer's debt collection complaints, and according to the report, the most common complaint is about attempts to collect on a debt that the consumer said was not owed.

 

“Today’s report shows that inaccurate information about debts continues to be a source of frustration for many consumers,” said CFPB Director Richard Cordray. “We will continue to hold debt collectors accountable for ensuring that they are collecting the right amount from the right person.”

 

 Highlights. Some of the key highlights in the snapshot include the following:

 

• First-and-third party debt collectors attempting to collect debts that consumers said were not owed made up 38 percent of all debt collection complaints.
• Debt collectors called consumers weekly, or even daily, after being told the alleged debtor was not at that number.
• Consumers were not given enough information to verify whether they owed the debt in question.
• The most complained about companies were Encore Capital Group and Portfolio Recovery Associates, Inc., two of the largest debt buyers in the country. They averaged more than 100 complaints each month between October and December 2015. The CFPB noted that in 2015, it took enforcement actions against these companies for using deceptive tactics to collect bad debts.

National overview. As of March 1, 2016, the CFPB has handled 834,400 complaints nationally. Complaints submitted relating to credit reporting rose 13 percent between January and February 2016. The top three companies about which the CFPB received the most complaints between October and December of 2015 were Equifax, Experian, and Transunion.

 

Spotlight on Florida. This month's snapshot included trends seen in complaints from consumers in Florida. As of March 1, 2016, consumers in Florida have submitted 80,200 of the 834,400 complaints the CFPB has handled. Complaints from the three largest metro areas in Florida—Miami, Orlando, and Tampa Bay—accounted for nearly 60 percent of the complaints submitted from the state.

 

Mortgages are the most-complained-about product in Florida, accounting for 30 percent of all complaints. Complaints about debt collection accounted for 24 percent of total complaints from Florida. Equifax, Bank of America, and Experian were the three most-complained-about companies from consumers in Florida.

 

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

NYDFS BSA/AML proposal deemed ‘unnecessarily prescriptive and potentially problematic’

By John M. Pachkowski, J.D.

The Clearing House, a banking association and payments company that is owned by the largest commercial banks, has commented on a December 2015 proposal that would require banking institutions supervised by the New York Department of Financial Services to maintain transaction monitoring and watch list filtering programs (collectively, transaction monitoring and filtering programs) as part of their Bank Secrecy Act/Anti-Money Laundering compliance programs. In addition to the transaction monitoring and watch filtering programs, a senior officer of each banking institution would be required to certify that the institution’s monitoring and filtering programs are sufficient to “detect, weed out, and prevent illicit transactions.”

Shortcomings addressed. The proposal was the end result of a series of investigations conducted by NYDFS into terrorist financing, sanctions violations, and anti-money laundering compliance at financial institutions. The proposal noted that “the Department has become aware of the shortcomings in the transaction monitoring and filtering programs of these institutions and that a lack of robust governance, oversight, and accountability at senior levels of these institutions has contributed to these shortcomings.”

Potentially problematic requirements. Although TCH noted in its comment letter, that it was “deeply committed to the shared public and private sector objective of detecting and combating financial crimes and terrorist financing,” it was concerned “that certain elements of the proposal would introduce unnecessarily prescriptive and potentially problematic requirements.”

Specifically, TCH contended that: the proposal was redundant and, in some cases, inconsistent with the existing federal BSA/AML/OFAC framework; and the proposed certification requirement would likely undermine institutional compliance programs and recommends its removal from the proposal.

The trade association suggested that as an alternative to adoption of the proposal, NYDFS establish a public/private sector task force to discuss emerging issues and supervisory expectations for transaction monitoring and filtering programs as each evolves. Additionally, TCH provided technical recommendations on certain aspects of the proposal’s monitoring provisions.

For more information about Bank Secrecy Act/Anti-Money Laundering compliance, subscribe to the Banking and Finance Law Daily.

Federal Reserve launches survey to better understand finance company industry

By Thomas G. Wolfe, J.D.

The Federal Reserve has launched a survey of finance companies to obtain a “comprehensive view of the range of companies in this sector of the U.S. financial system” and to further develop its understanding of the finance company industry. In 2015, the Fed sought to identify all nonbank financial institutions that extend credit or supply lease financing to households and businesses in America. Now, the Fed is conducting a follow-up survey to obtain a more detailed picture of the industry.

According to the Fed’s March 23, 2016, release, the survey is designed to collect “balance sheet data on major categories of household and business credit receivables and liabilities” from the finance companies. Not only will the collected data provide a clearer benchmark for the Fed’s Finance Companies statistical release, the input also will better equip the Fed when it compiles figures and estimates for its Consumer Credit and Financial Accounts of the United States releases.

As part of the survey initiative, Fed Chair Janet Yellen is sending a letter to approximately 2,300 finance companies, explaining the Fed’s undertaking and urging the companies to participate in the survey. In her letter, Yellen emphasizes that the “availability of credit to consumers and businesses is important to our economy, and finance companies play a very important role in U. S. credit markets.”

For more information about issues of interest to the finance company industry, subscribe to the Banking and Finance Law Daily.

CFPB’s HELP Act rule expands access to credit

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has issued an interim final rule that broadens the availability of certain special provisions for small creditors that operate in rural or underserved areas. The interim rule, which takes effect March 31, 2016, implements Congress’s recent legislation, the Helping Expand Lending Practices in Rural Communities (HELP) Act.

The HELP Act was a legislative response to concerns that the CFPB’s series of mortgage regulations issued in January and May 2013 had impacted small creditors operating in rural or underserved areas.

“Predominantly operated." Although the 2013 mortgage regulations imposed, among other things, an ability-to-repay requirement, a qualified mortgages provision, a prohibition on balloon payments for high-cost mortgages, and required escrow accounts for higher-priced mortgages, the CFPB fine-tuned the mortgage regulations to allow small creditors that “predominantly operated” in rural or underserved areas to originate qualified mortgages and high-cost mortgages with balloon payments. The small creditor provisions also did not require these creditors to establish escrow accounts for higher-priced mortgages. The bureau construed “predominantly operated” to mean that the small creditor made more than half of its covered mortgage loans on properties located in rural or underserved areas in the prior calendar year.

The HELP Act amended the “predominantly operated” requirement to provide that a small creditor now will be eligible for these provisions if it operates in a rural or underserved area, even if that is not the predominant area of its operations.

Cordray comments. CFPB Director Richard Cordray said, “The Consumer Bureau today has acted to implement the recent law that extends to more small creditors the specific provisions for operating in rural or underserved areas. This rule provides broader eligibility for lenders serving those areas to originate balloon-payment qualified and high-cost mortgages.”

ICBA weighs in. The Independent Community Bankers of America voiced its support of the CFPB rule, stating that the bureau's "updated rule expands the number of community banks eligible for exemptions on mandatory escrows for higher-priced mortgages and Qualified Mortgage safe harbor status for balloon payment mortgages they hold in portfolio. Community banks that are small creditors will be able to continue to offer balloon payment mortgages and be exempt from mandatory escrow rules for higher-priced mortgages if they make at least one loan in a rural or underserved area. This will allow many more community banks in rural or underserved areas to meet the needs of their customers and communities." The ICBA added, "“The CFPB rule marks another important step in the enactment of ICBA-advocated regulatory changes broadening small-creditor and rural designations under the CFPB’s Regulation Z mortgage rules."

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

KeyBank plans $16.5B community investment related to First Niagara merger

By J. Preston Carter, J.D., LL.M.

KeyBank has agreed to lend or invest $16.5 billion in low- and moderate-income communities as part of a community benefits agreement signed with the National Community Reinvestment Coalition. The commitment includes mortgage, small business, and community development lending, and philanthropy in low- and moderate-income communities, to be carried out over five years, beginning in 2017.

KeyBank’s summary of the plan explains that it addresses concerns expressed by the NCRC and NCRC member organizations in light of KeyBank’s pending acquisition of Buffalo, N.Y.-based First Niagara, scheduled for Q3 2016. KeyBank is headquartered in Cleveland, Ohio.

The Plan covers all 23 of KeyBank’s current markets, from Alaska to Maine, five of which, pre-acquisition, overlap with First Niagara: Buffalo/Niagara Falls, Rochester, Syracuse, Albany, and Hudson Valley. In addition, the Plan covers four First Niagara markets that will be new to KeyBank in: Philadelphia (and Allentown), Pa.; Pittsburgh, Pa.; Hartford, Conn. (including eight branches in Springfield, Mass.); and New Haven, Conn.

“This commitment is the result of a collaborative process with community members and bank leaders after months of give and take, resulting in a substantive and detailed commitment of resources and services to communities throughout the KeyBank and First Niagara Bank footprints,” said NCRC President and CEO John Taylor.

Key features of the $16.5 billion plan include:

• $5.0 billion in mortgage lending to low- and moderate-income communities;
• $2.5 billion in small business lending to low- and moderate-income communities;
• $8.8 billion in community development lending and investment;
• $175 million in philanthropic activities; and
• $5 million annually in marketing and communications outreach.

A KeyBank release stated that a partnership with the NCRC, including over 80 community organizations, provided valuable input to develop the National Community Benefits Plan. Beth Mooney, KeyCorp Chairman and CEO, said, "For us, balancing mission and margin is about a commitment that goes above and beyond what is required. It is simply the right thing to do, and it is good business. As evidence of that balance and our ongoing commitment to shareholders, we remain confident in and committed to meeting the growth and financial objectives of the KeyBank/First Niagara acquisition."

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Prepaid cards are covered by customer information programs

By Richard A. Roth, J.D.

Banks issuing general purpose prepaid cards that have the features of bank accounts must apply their customer information programs to their customers, according to interagency guidance issued by the banking regulatory agencies and the Financial Crimes Enforcement Network. This requirement applies to cards sold or marketed by third parties, even if the third party operates the card program, the guidance makes explicit. According to the agencies, CIP rules must be applied due to the vulnerability of prepaid cards for money laundering and other financial crimes (FIL-21-2016, SR 16-7, OCC 2016-10).

The key to determining whether a bank’s CIP applies to a prepaid card is determining whether an account has been created at the bank. Under the guidance, there are two criteria. An account has been created if:

1. the card can be reloaded, either by the cardholder or by a third party; or
2. the card offers access to credit or overdraft protection.

Who’s the customer? A bank’s CIP requires the bank to acquire and verify information about the identity of the customer, the guidance says. However, the cardholder and the customer are not necessarily the same. Who is the customer—the person about whom information is required—depends on whether the cardholder can reload the card or has access to credit.

The guidance outlines the requirements for several different, common prepaid cards. According to the agencies:

General purpose prepaid cards—If the cardholder can reload the card or gain access to credit features, the cardholder is the customer. A third-party program manager is the bank’s agent, not its customer.

Payroll cards—If only the employer can add value to the card, the employer is the customer and the bank’s CIP should be applied to the employer. It is not necessary to apply the CIP to each employee unless an employee can add value to the card or gain access to credit, even if the bank maintains a subaccount for each individual employee.

Government benefit cards—If only government benefits can be added to the card and there is no access to credit, the cardholder is not the bank’s customer. Moreover, since government agencies are not considered to be customers under the CIP rule, the bank has no CIP duties.

Health benefit cards—How a bank’s CIP should be applied to health benefit cards, which are used by employers to cover medical care costs of employees or their dependents, depends on whether the card applies to a Health Savings Account, Flexible Spending Arrangement, or Health Reimbursement Arrangement. An HSA account is established by the employee and both the employee and employer can add value, so the employee is the bank’s customer. On the other hand, in the case of an FSA or HRA card, the employer establishes the account, loads value, and makes payments, so the employer is the bank’s customer for purposes of the CIP.

For more information about customer information program requirements, subscribe to the Banking and Finance Law Daily.

New York zaps payday loan lead generator

By Stephanie K. Mann, J.D. 

In order to further its initiative to crack down on unfair, deceptive, or abusive acts and practices affecting its citizens, New York Department of Financial Services has announced a settlement with Blue Global LLC, an online payday loan lead generator, for violations of New York law, under which the company must pay a $1 million penalty, cease payday loan lead generation activities in New York, and provide new consumer warnings and disclosures. The company’s Chief Executive Officer was personally found to be in violation of New York law under the Consent Order.

An investigation by the Department found that Blue Global misrepresented to New York customers and others the legal status of payday loans the company advertised primarily through websites, including 1OODayLoans.com. Additionally, the company misrepresented the safety and security of personal information that consumers entered on websites operated by Blue Global in violation of New York state law Financial Services Law Sec. 408. As a result, Blue Global’s New York customers’ personal information was available to persons who used it to attempt to commit fraud and harass consumers.

Under the agreement, Blue Global is also required to pay damages to any New York consumer who has suffered identity theft traceable to a data security breach of the company’s systems or to certain conduct by Blue Global and must adhere to data security measures to protect consumers’ personal information.
Blue Global, an Arizona limited liability corporation, is said to have sold the leads consisting of sensitive personal information of approximately 180,000 New York consumers, and collected personal information from approximately 350,000 New York consumers, according to the Department.

Blue Global released a statement calling the agreement “in our company’s and our stakeholders’ best interests” and lauding the “satisfactory resolution” to the issue.

Unsecured customer information. Blue Global offered payday loans and other financial products and services on its websites. The company allegedly offered to sell or share leads consisting of consumers’ sensitive personal and financial information captured from their websites with buyers. The information includes any or all of the following: a person’s first and last name; address; Social Security number; date of birth; driver’s license number; bank account number; routing number; email address; and other information that may be used to identify an individual.

Blue Global’s online advertisements promised consumers that protecting consumers’ personal information was “at the top of our priority list” and that securing such information was “completely 24/7 guaranteed.” Contrary to these representations, the Department’s investigation revealed that Blue Global did not take any protective measures when sharing consumers’ sensitive information with third parties.

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'Dictator’ Cordray testifies before Financial Services Committee

By Katalina M. Bianco, J.D.

The House Financial Services Committee held a hearing on the Consumer Financial Protection Bureau’s semi-annual report to Congress on March 16, 2016. The hearing featured the testimony of CFPB Director Richard Cordray and was opened by Chair Jeb Hensarling (R-Texas) who stated, “Congress has made Mr. Cordray a dictator. And when it comes to the well-being and liberty of American consumers, he is not a particularly benevolent one.”

In his opening remarks, Hensarling charged that Corday “will presume” to decide whether Americans will be able to take out a small-dollar loan or resolve contract disputes through arbitration. He referred to auto loans, stating, “Already Mr. Cordray has decided that countless Americans should pay more for auto loans based upon junk science and a dubious legal theory of statistical unintentional discrimination.” The committee chair went on to criticize the CFPB’s Qualified Mortgage rule “which when fully implemented will disqualify almost one-fourth of all Americans who qualified for a home mortgage just a few years ago.”

Hensarling dismissed the citing of millions of dollars in fines imposed by the bureau via enforcement actions, stating that this argument is raised by “apologists” for the bureau. Rather, he continued, the bureau “operates as legislature cop on the beat, prosecutor, judge and jury all rolled into one.”

Waters remarks. In her opening remarks, Rep. Maxine Waters (D-Calif), Ranking Member of the Financial Services Committee, expressed views of the CFPB and its director that were in direct contrast to those presented by Hensarling. She praised the bureau’s accomplishments that she said have helped more Americans “participate in a financial system that is fair and strong.” She commended the bureau for the $11.2 billion dollars it returned to consumers through its supervision and enforcement efforts. The lawmaker also highlighted “particularly important efforts” such as its work so far on payday lending, discrimination in the auto lending industry, and the “unscrupulous” for-profit college that “deceived students into taking out expensive private loans and engaging in illegal debt collection practices.”

Cordray testimony on consumer initiatives. In his written testimony, Cordray discussed the efforts that the bureau has undertaken to fulfill its mission mandated by the Dodd-Frank Act as outlined in the CFPB’s latest semi-annual report. First and foremost, the CFPB listens and responds to consumers, a task that is central to its mission, Cordray said. The CFPB director discussed improvements made to the CFPB’s Office of Consumer Complaints and the fact that the bureau has begun publishing consumer complaint narratives. In July 2015, the CFPB launched the first in a new series of monthly reports to highlight key trends from consumer complaints submitted to the agency. Cordray added that the CFPB also is working to provide tools and information intended to develop practical skills and support sound financial decision-making by consumers.

Supervision and enforcement. Discussing the bureau’s supervision and enforcement functions, the CFPB director noted that in the six months since its last semi-annual report, supervisory actions have led to more than $95 million in redress to over 177,000 consumers. During the same period, the CFPB also announced orders through enforcement actions for approximately $5.8 billion in total relief for consumers, along with over $153 million in civil money penalties. Cordray outlined for the committee specific enforcement actions taken by the CFPB during the same timeframe and its partnership with other agencies, federal and local, to enforce consumer compliance laws.

Rulemaking. Cordray listed the bureau’s rulemaking efforts during the past six months, including a final rule defining larger participants of the automobile financing market and defining certain automobile leasing activity as a financial product or service, “which extends the Bureau’s supervision relating to consumer financial protection laws to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more loans or leases in a year, and a request for information regarding student loan servicing.”

The CFPB director said that the bureau “seeks to serve as a resource, by writing clear rules of the road, enforcing consumer financial protection laws in ways that improve the consumer financial marketplace, and by helping individual consumers resolve their specific issues with financial products and services.”

Committee view on hearing. In a release issued after the hearing, the Financial Services Committee provided its view as to key “takeways.” First, the CFPB is not accountable to Congress or the American people because it is not subject to checks and balances. According to the committee, “real” consumer protection puts power in the hands of consumers. Finally, the bureau does have an important mission, and if properly designed and led, it is “capable of great good.” However, when the CFPB acts in ways that are not accountable or transparent, it is “also capable of great harm to the consumers it is supposed to protect.” A link to a video of Hensarling’s questioning of Cordray and the CFPB director’s testimony is included in the release.

For more information about Cordray and the Financial Services Committee, subscribe to the Banking and Finance Law Daily.

Fintech: Friend or foe?

By John M. Pachkowski, J.D.

The Federal Reserve Bank of Atlanta has published an article as part of its online publication Economy Matters examining the issues surrounding the relationship between banks and fintech companies.

The article entitled “Fintech Companies: Banks' Allies or Rivals?,” which was written by Robert Canova, a senior policy analyst in the Atlanta Fed's Supervision and Regulation Division, noted that “tension is slowly creeping into the banking world as fintech firms increase their foothold in a more important part of the financial industry sector.” He added, “banks see competition from fintech firms as the biggest threat facing the banking industry.”

What is fintech? For purposes of the article, the definition of “fintech” has evolved from just those companies that developed software that was seen as “disruptive” to any company, either start-up or established, that develops software used in providing financial services. The activities that fall into the fintech spectrum include: crowdfunding, peer-to-peer lenders, and payments, as well as providing data collection, credit scoring, and cybersecurity.

Given the universe of fintech companies, Canova observed that it was easier to discuss fintech “in terms of whether it's an ally or rival to the banking industry.”

Allies. Fintech companies act as strategic allies to the banking industry in several ways with many banks having had long relationships with a few large firms that now fall into the fintech definition. In addition, some bank are using newer fintech companies as technology vendors and avoiding competition with larger banks or other fintech companies in adopting new technology. Finally some banks are entering into strategic partnerships.

Rivals. On the flip, many fintech companies are still perceived as rivals since they offer technology-based services that dramatically reduce overall friction and difficulty in the transactional process that are “highly desired by customers, especially younger ones.”

Greater scrutiny. Regardless of being considered an ally or rival, Canova noted that it is “only a matter of time” before fintech companies face greater scrutiny from regulators. For example, The Clearing House, a trade association of the 24 largest banks, noted that there was an overall lack of consumer regulations applicable to fintech firms that often leave their customers more vulnerable than a typical bank would.

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CFPB argues state’s debt-collecting special counsel are covered by FDCPA

By Katalina M. Bianco, J.D.

Private attorneys acting as special counsel to Ohio’s Attorney General for general debt-collecting purposes are not state officers under the Fair Debt Collection Practices Act, according to the Consumer Financial Protection Bureau. In an amicus curiae brief filed with the Supreme Court in Sheriff v. Gillie, the CFPB argues that the attorneys actually are debt collectors who are subject to the FDCPA’s requirements.

 

The FDCPA applies only to debt collectors, and the act’s definition of “debt collector” includes an explicit exception for “any officer or employee of the United States or any State to the extent that collecting or attempting to collect any debt is in the performance of his official duties . . .” (15 U.S.C. §1692a(7)(C)). A federal district court judge decided that, as special attorneys general, the private attorneys were officers of the state who enjoyed the protection of that exception.

 

The U.S. Court of Appeals for the Sixth Circuit disagreed, relying on a combination of state law and the FDCPA to determine that the attorneys were not state officials. According to the panel majority, the attorneys did not meet the Dictionary Act definition of "officer," which was the definition to be used because the word was not defined by the FDCPA. Under Ohio law, the attorneys were independent contractors, and independent contractors cannot be officers. Finally, if applied to the private attorneys, the FDCPA would not violate principles of federalism because it would not be an attempt to regulate the state or challenge the structure of the state’s government. The act would apply only to debt collectors, who were third parties.

 

CFPB arguments. The bureau argues that the special counsel are not state officers because they do not hold any state office and do not exercise any part of the state’s sovereignty. Their authority is derived strictly from contracts with the state’s attorney general, and those contracts explicitly declare them to be independent contractors.

 

The purpose of the FDCPA is to control the practices of third-party debt collectors, the bureau notes. Exempting private attorneys who are acting to collect debts on behalf of a state government would undermine that purpose.

 

The CFPB adds that the appellate court was correct in saying that the application of the FDCPA to the private attorneys would not intrude on the state’s sovereignty. Ohio can use its own employees or officers to collect debts without being affected by the act. Only third parties acting for the state would be affected, and there was no Supreme Court precedent for the proposition that federal regulation of a state’s independent contractors intruded on the state’s sovereignty.

Letter head issues. The brief also supports the appellate court decision that the collection letters sent by the attorneys could have contained misrepresentations. The letters used the attorney general’s letterhead but were signed by the private attorneys as “Outside Counsel for the Attorney General’s Office” or as “Special Counsel to the Attorney General.” The consumers claimed that this created a false impression about who sent the letters.

 

The CFPB argues in its brief that whether the letters were false, deceptive, or misleading was to be judged according to the perspective of an unsophisticated consumer. According to the CFPB, a reasonable jury could decide that an unsophisticated consumer could be misled into believing that the attorneys were employees of the attorney general, so the suit should not be dismissed.

 

The case is No. 15-388.

 

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Reform National Flood Insurance Program before renewing it, AAF paper urges

By Thomas G. Wolfe, J.D.

In her research paper for the American Action Forum, author Meghan Milloy urges policymakers to make several major changes to the National Flood Insurance Program (NFIP). Noting that the NFIP is slated for renewal by Congress in 2017, Milloy exhorts policymakers to “avoid a blanket stamp of approval” and to make necessary improvements to the NFIP, which she characterizes as an “indebted and inefficient program.” In her March 9, 2016, paper, titled “The NFIP is Due for Some Major Reforms,” Milloy sketches the history of the NFIP, outlines the program’s current problems and challenges, and offers recommendations for its reform.

Milloy is the Director of Financial Services Policy at the American Action Forum.

In Milloy’s estimation, the NFIP’s biggest problems and challenges are threefold. First, there is a low rate of compliance with the NFIP. Only 53 percent of the nearly 1.5 million structures in designated Special Flood Hazard areas that are required to be covered under the NFIP are actually covered. Moreover, since there are fewer flood insurance policies in place than are required, there is less revenue for the program. According to Milloy, the NFIP “has been in debt to taxpayers for over 10 years.”

Second, in connection with insurance premiums for the program, Milloy discerns several flaws: (1) the premiums don’t reflect the risk; (2) there are artificially low caps on premium increases; (3) “full risk” premiums are too low; and (4) the premium rates “rely on inaccurate data.”

Third, given the structure of the NFIP and the exceptional strain on the program that resulted from Hurricane Katrina in 2005 and Superstorm Sandy in 2012, the potential losses generated from the NFIP “have created substantial exposure for the federal government and U.S. taxpayers.” Milloy cites a 2013 report issued by the Government Accountability Office in support of the gravity of the NFIP’s indebtedness.


Based on these findings, Milloy offers several options for reforming the NFIP:

• Employ stronger enforcement measures to increase the number of NFIP policyholders, not only to ensure compliance but also to increase the amount of revenue coming into the NFIP via additional premium payments.
• Charge policyholders premiums that better reflect the actual amount of risk of loss to their properties and implement the “grandfathering” of existing policies to minimize any “rate shock” to the program.
• Return the NFIP to a status of self-sufficiency by sharing the risk of loss with the private flood insurance market—thus allowing the federal government to focus on “flood risk mitigation” while letting the private market focus on underwriting flood insurance policies.
• Update the NFIP’s technology in general and create a central repository for flood elevation data in particular.

For more information about the implications of flood insurance for the financial services industry, subscribe to the Banking and Finance Law Daily.

Maloney: ‘Unmask’ anonymous shell corporations sheltering money laundering activities

By Katalina M. Bianco, J.D.

Representative Carolyn B. Maloney (D-NY) is promoting action on legislation that is intended to stop anonymous money laundering operations by requiring disclosure of shell corporation beneficial owners. Reps. Maloney and Peter King (R-NY) originally introduced the Incorporation Transparency and Law Enforcement Assistance Act (H.R. 4450) in the 113th Congress. Maloney was joined by various law enforcement officials, including Manhattan District Attorney Cyrus Vance and former Federal Bureau of Investigation Special Agent Konrad Motyka from the Society of Former Special Agents of the FBI.

“ISIS and other terrorists are remarkably sophisticated, and they are looking for any opportunity to exploit our legal and financial systems,” said Maloney. “We are aiding and abetting terrorists and criminals when we allow them to set up anonymous shell companies and funnel money into the United States.” The lawmaker added, “The level of ineptitude in dealing with this problem in Washington is shocking.”

Maloney said that her bill simply would require that to form a U.S. corporation, the true owners must be revealed. “I think the American people would be shocked to learn that isn’t the law already.”

Legislation. According to Maloney, the introduction of H.R. 4450 followed an investigation by Global Witness that exposed the common practice of using U.S.-based shell corporations to launder money linked to criminal enterprises. An investigation last year by The New York Times documented how streams of foreign wealth shielded by shell corporations are used to purchase more than half of all properties in New York City that cost more than $5 million.

The bill directs the Treasury Department to issue regulations requiring corporations and limited liability companies formed in a state that does not already require basic disclosure to file information about their beneficial ownership with Treasury as a backup. The measure also provides minimum disclosure requirements for states and civil penalties for those who submit fraudulent, incomplete, or outdated information when setting up a corporation.






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Florida bank penalized for compliance deficiencies leaving Ponzi scheme undiscovered

By Andrew A. Turner, J.D.

Gibraltar Private Bank and Trust Company of Coral Gables, Fla., has been assessed with civil money penalties by the Financial Crimes Enforcement Network and the Office of the Comptroller of the Currency for willful anti-money laundering compliance violations that led to its failure to monitor and detect suspicious activity despite red flags. The penalties will be satisfied by payments of $1.5 million to the Treasury Department and $2.5 million for the penalty imposed by the OCC.

The OCC, Gibraltar’s primary regulator, had previously placed it under a consent order to address deficiencies in the bank’s compliance program and customer due diligence and reporting obligations. These deficiencies ultimately caused Gibraltar to fail to timely file at least 120 suspicious activity reports (SARs) involving nearly $558 million in transactions occurring during the period of 2009 to 2013, much of which related to a $1.2 billion Ponzi scheme perpetrated by Scott Rothstein.

“We may never know how that scheme might have been disrupted had Gibraltar more rigorously complied with its obligations under the law. This bank’s failure to implement and maintain an effective AML program exposed its customers, its banking peers, and our financial system to significant abuse,” said FinCEN Director Jennifer Shasky Calvery.

Transaction monitoring. FinCEN found that Gibraltar’s transaction monitoring system contained incomplete and inaccurate account opening information and customer risk profiles, which hindered its compliance staff from adequately spotting unusual account activity. Gibraltar also failed to sufficiently address an automated monitoring system that generated an unmanageable number of alerts, including large numbers of false positives, which caused significant delays in Gibraltar’s review.

The deficiencies of Gibraltar’s SAR reporting were also due in part to Gibraltar’s investigation process. In particular, Gibraltar allowed the Rothstein investigation to languish and did not file a suspicious activity report on Rothstein-related activities until after information regarding his activities appeared in the media.

Risk assessment. Gibraltar did not adequately risk rate its high net-worth private banking customers, like Scott Rothstein, FinCEN said. As a result, the bank applied insufficient scrutiny to his and related accounts, and missed significant red flags. In addition, Gibraltar did not have up-to-date, accurate, and verified information to enable it to conduct its annual risk assessment.

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Will Bitcoin entrepreneurs wait for regulators to catch up?

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

Whether Bitcoin will “significantly alter the way money changes hands around the world” will depend on interactions between factions in the virtual currency world and financial regulators, according to a paper by David Wessel, Director, and Peter Olson, Research Analyst, at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution. Their paper, part of the Hutchins Center Explains series, is titled “How Blockchain could change the financial system (part 1 and part 2).”

Blockchain. The authors contend that Bitcoin and its underlying technology, blockchain, have the potential to challenge the dominance of the big players in payment systems and significantly reduce the cost of financial transactions and the speed with which they are completed. They quote a recent essay by Bank of England economists as saying, “The key innovation of digital currencies is the ‘distributed ledger’ which allows a payment system to operate in an entirely decentralized way, without intermediaries such as banks.” This distributed ledger, blockchain, avoids the centralized ledger of central banking systems.

Virtual currency factions. The authors highlight two factions in the virtual currency world. R3CEV, a blockchain consortium made up of more than 40 of the world’s largest banks, thinks the new technology could make transactions between banks much less costly than under the current system. Its Managing Director, Charley Cooper, says that his firm is willing and eager to work with regulators, but there’s no one person to talk to: “In the U.S. it’s incredibly difficult because it’s unlike many other countries where the regulators fall under a single umbrella.”

Barry Silbert, founder and CEO of the Digital Currency Group, a company that invests in and builds Bitcoin-related companies, warns regulators that innovators “are not going to sit back and wait” for the regulators to act before moving.

Regulators. The authors quote Jeffrey Stehm, now of Promontory Financial, as saying when he was a senior staffer at the Federal Reserve Board that most regulators “don’t wake up in the morning and want to be resisters to new things and don’t want to be resisters to technology, but on the other hand they have a mandate from the governments, whether it’s state or federal, to do certain things.”

The paper also cites Sayee Srinivasan, of the Commodity Futures Trading Commission, as suggesting that entrepreneurs “take the path of least resistance [meaning, use cases where legality isn’t a question] because if you are going to be waiting for regulators to change things, it just takes a lot of time because writing rules is a very, very difficult, challenging, risky, painful process and that’s not in our DNA to go and quickly change rules....”


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Fed proposes single-party credit exposure limits for large holding companies

By Richard A. Roth

The Federal Reserve Board is again proposing rules that would restrict large domestic and foreign bank holding companies’ credit exposures to single counterparties. The proposal offers different restrictions on U.S. and foreign BHCs and would establish stricter limits as the systemic importance of the BHC and the counterparty increases. According to the Fed, only BHCs with total consolidated assets of $50 billion or more would be affected. Comments on the proposal to add a new Subpart H to Reg. YY—Enhanced Prudential Standards (12 CFR Part 252) are due by June 3, 2016.

The proposal would implement Dodd-Frank Act Section 165(e), the Fed says. Rules for U.S. BHCs originally were proposed in December 2011, with proposed rules for foreign BHCs coming in December 2012. The new proposals offer more differentiation among BHCs and counterparties.

Covered companies and exposures. The proposal divides U.S. BHCs into two categories:
major covered companies—BHCs that are global systemically important banking organizations; and
covered companies—BHCs with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures, and BHCs that exceed either threshold but are not G-SIBs.

Counterparties also are divided into two categories:

• major counterparties—G-SIBs or nonbank financial companies that have been designated as systemically important financial institutions; and
• other counterparties—counterparties that do not reach the threshold for being “major.”

The exposure of a BHC to a counterparty would be determined on a consolidated basis. All of the credit exposure of all parts of the banking organization to all entities controlled by the counterparty would be totaled. BHCs would be expected to monitor and control their exposure to counterparties on a consolidated basis.

Proposed U.S. BHC limits. The proposal would establish three separate limits for U.S. BHCs:

• A covered company with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of its total regulatory capital plus its allowance for loan and lease losses to any counterparty.
• A covered company with more than $250 billion in total consolidated assets or more than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of its tier 1 capital to any counterparty.
• A major covered company would have a credit exposure limit of 15 percent of its tier 1 capital to any major counterparty, and of 25 percent of its tier 1 capital to any other counterparty.

Foreign BHCs. The proposed rule for foreign BHCs also would apply only to organizations with total consolidated assets of at least $50 billion. It would apply to any intermediate holding company that such an organization was required to create.

The limits for foreign BHCs would be comparable to those for U.S. BHCs. They are, however, a bit more complex due to the need to account for intermediate holding companies. Under the proposal:

• A U.S. intermediate holding company with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of the intermediate company’s total regulatory capital plus its ALLL not included in tier 2 capital to any counterparty.
• The combined U.S. operations of a foreign BHC with less than $250 billion in total consolidated assets and less than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of its total regulatory capital to any counterparty.
• A U.S. intermediate holding company with $250 billion or more in total consolidated assets or more than $10 billion in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of the intermediate company’s tier 1 capital to any counterparty.
• The combined U.S. operations of a foreign BHC with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign exposures would have a credit exposure limit of 25 percent of the BHC’s worldwide tier 1 capital to any counterparty.
• A major U.S. intermediate holding company, or the combined U.S. operations of a foreign BHC, would have a credit exposure limit of 15 percent of tier 1 capital to any major counterparty. The limit on exposure to any other counterparty would be 25 percent of tier 1 capital.

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Massachusetts warns banks, consumers against increased ATM fraud

By Stephanie K. Mann, J.D.

Automated teller machine card skimming fraud is increasing, and banks need to ramp up their detection and prevention efforts in response, according to the Massachusetts Division of Banks. A letter from Commissioner David J. Cotney is warning ATM operators to increase their security at their ATMs and to enhance their security programs.

Skimming is the use of a physical device that is somehow attached to an ATM, enabling a criminal to record the information on a card’s magnetic strip or to intercept information being transmitted over the ATM’s telephone or Internet connection. Alternatively, criminals may be able to capture the information wirelessly. The intercepted information can be combined with a PIN that was captured using a hidden camera to allow criminals to carry out fraudulent transactions.

The state regulator is encouraging ATM operators to increase their monitoring, both by enhancing physical security and watching more closely for unusual transaction activity. Physical and technological controls and incident response plans all should be tested regularly. ATM security considerations should be part of financial institution risk assessments, the division also says.

Warning to consumers. Additionally, the Division advised consumers to examine nearby objects that might conceal a camera and to check the card slot for a plastic sheath before using an ATM. Consumers should leave an ATM if they notice someone is watching and to immediately report any suspicions to the machine operator or a nearby law enforcement officer.

The Division further cautioned consumers not to respond to unsolicited requests for bank account numbers or PINs for debit or ATM cards. Consumers should additionally monitor accounts for unauthorized transactions and immediately contact their financial institution if fraud is suspected.

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Sorry, Snoopy, MetLife's SIFI designation can't be shed

By Lisa M. Goolik, J.D.

In case you missed it, the Financial Stability Oversight Council voted this week not to rescind MetLife’s designation as a non-bank systemically important financial institution (SIFI). The SIFI designation subjects the insurance company to the enhanced prudential standards and supervision by the Federal Reserve Board. 

Although the March 2, 2016, meeting readout provides few details of the Council’s discussion, the FSOC noted that, as a general matter, if a company has addressed the key factors in the Council’s basis for its designation, the Council will rescind the designation. MetLife was previously notified of the Council's review and invited to submit information regarding any change that the company deemed relevant to its SIFI designation.

The FSOC provided MetLife and its lead state insurance regulator with a notice explaining the primary bases for the Council’s decision. The notice addresses also the material factors raised by the company in its submission to the Council contesting the determination during the annual reevaluation.

MetLife is currently challenging the designation in the U.S. District Court for the District of Columbia.


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CFPB takes down digital payment processor for deceptive practices

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has ordered Iowa-based online payment company, Dwolla, Inc, to pay a $100,000 civil money penalty for allegedly deceiving consumers about its data security practices. The bureau also ordered the company to “fix its security practices.” This is the bureau’s first data security enforcement action.

“Consumers entrust digital payment companies with significant amounts of sensitive personal information,” said CFPB Director Richard Cordray. “With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”

According to the CFPB, since December 2009, Dwolla has collected and stored consumers’ sensitive personal information and provided a platform for financial transactions. As of May 2015, it had more than 650,000 users and had transferred as much as $5 million per day. For each account, Dwolla collects personal information—including the consumer’s name, address, date of birth, telephone number, Social Security number, bank account and routing numbers, a password, and a unique 4-digit PIN.

Consent Order. According to the bureau’s consent order, Dwolla violated Sections 1031(a) and 1036(a)(1) of the Consumer Financial Protection Act (12 U.S.C. §§ 5563, 5565) by engaging in deceptive acts and practices relating to false representations about its data security practices. The bureau charged that Dwolla falsely claimed its security practices “exceed” or “surpass” industry standards while failing to employ “reasonable and appropriate measures’ to protect consumers’ data. Further, Dwolla claimed that “its information is securely encrypted and stored” while failing to encrypt the data and releasing applications to the public before testing whether they were secure. However, the CFPB charged that the company’s security practices “fell far short of its claims.”

Under the order, in addition to paying $100,000 to the CFPB’s Civil Penalty Fund, Dwolla is required to: (1) stop misrepresenting its data security practices; and (2) properly train employees on company data security policies and procedures and on how to protect consumers’ personal information.

Stipulation. Without admitting or denying any wrongdoing, Dwolla stipulated to the facts described in Section IV of the order and consented to the issuance of the order.

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Philly Fed examines cost of Dodd-Frank on small banks

By John M. Pachkowski, J.D.

James DiSalvo and Ryan Johnston of the Federal Reserve Bank of Philadelphia have examined the effects that regulatory changes since the Great Recession have had on small banks—those with assets below $10 billion.

Their analysis, “How Dodd-Frank Affects Small Bank Costs,” appeared in the debut issue of Philadelphia Fed’s Economic Insights and examines three specific areas: the qualified mortgage rule adopted by the Consumer Financial Protection Bureau; regulations implementing the Basel III Capital Accord; and Dodd-Frank’s Durbin Amendment. DiSalvo and Johnston also examined the compliance costs that affect small banks.

Qualified mortgages. Although the CFPB’s qualified mortgage rule was “designed to force banks to maintain higher lending standards for home mortgages” by imposing “rigorous standards of proof that a loan is not high risk,” DiSalvo and Johnston noted that small banks gained a “key benefit” in that they are protected against lawsuits by borrowers and against attempts by borrowers to avoid foreclosure.

As for the effect the qualified mortgage rule has had on small banks’ mortgage lending, the authors found that the qualified mortgage rule “affects a significant share of mortgage lending by small banks, and by some measures, the effect appears to be greatest for the smallest banks.”

Capital requirements. DiSalvo and Johnston found that the changes made by Basel III Capital Accord, especially to risk weighting on commercial real estate (CRE), affected small banks since they invest relatively heavily in commercial real estate. They concluded that the new capital requirements “potentially affect a modest, but certainly not insignificant, portion of small banks’ CRE portfolios.”

Durbin Amendment. The Durbin Amendment of Dodd–Frank requires regulators to impose a ceiling on the interchange fees that covered banks charge for debit card transactions. It was noted by the authors that there was substantial evidence that the ceiling did lower interchange fees collected by banks with assets above $10 billion, from around 44 cents to about 22 cents per transaction’ but no such decline for small banks. DiSalvo and Johnston also found no evidence to support the claim that competitive forces have effectively imposed the interchange fee ceiling on small banks. However, they did caution that “it is possible that longer-term competitive effects might yet put small banks at a disadvantage.”

Compliance costs. Finally, DiSalvo and Johnston touched upon compliance costs affecting small banks. They noted that “reports of the costs of regulatory compliance have been largely anecdotal,” but “the magnitude of the rise in regulatory costs due to Dodd–Frank and the accompanying regulatory changes since the Great Recession is an empirical question that will require more time and analysis to determine.”

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Connecticut Supreme Court rejects MERS’ constitutional challenges to fee system

By Thomas G. Wolfe, J.D.

Recently, the Supreme Court of Connecticut addressed federal and state constitutional challenges by MERSCORP Holdings, Inc., and Mortgage Electronic Registration Systems, Inc. (collectively MERS) to Connecticut’s statutory system for recording fees, under which a nominee operating a national electronic database to monitor residential mortgage loans is required to pay fees approximately three times higher than other conventional mortgagees. However, Connecticut’s high court rejected the constitutional challenges asserted by MERS and upheld the constitutionality of the pertinent Connecticut laws.

As observed by the court in MERSCORP Holdings, Inc. v. Malloy, MERS operates a national electronic registration system that tracks any changes in the ownership and servicing rights of MERS-registered loans between MERS members—including in-state and out-of-state mortgage lenders, servicers, and public finance institutions. Designed to save time and costs associated with the recording of subsequent mortgage assignments in public land records, the recording of a mortgage with MERS as a mortgage nominee “essentially creates a placeholder” for the electronic MERS system in the public land records, which allows the electronic MERS system and public records systems to operate together. MERS remains as the mortgagee of record in the public records “until the mortgage either is released or assigned to a nonmember of MERS.”

In 2013, Connecticut amended its statutes governing recording fees for real estate records. Notably, the parties to the litigation agreed that the Connecticut legislature “crafted the statutory language with MERS specifically in mind.” Although the 2013 statutory amendments do not refer to MERS by name, the parties agreed that MERS was the only entity that qualified as “a nominee of a mortgagee” under the statutory language.

The court recognized that the “net effect of the amendments … is to collect from a nominee of a mortgagee, namely, MERS, substantially more for the filing of deeds, assignments, and other documents in the land records than from any other filer.” In addition, the court observed that the 2013 amendments also shifted how the recording fees on MERS-related transactions were to be allocated. Indeed, the parties agreed that the Connecticut legislature’s amendments were adopted “at least in part as a revenue enhancing measure to help balance the state budget.” At the same time, the parties also agreed that “the recording fees at issue will be collected from the borrowers at closing and not paid by MERS itself.”

As a result of the increased recording fees directed toward mortgage nominees, MERS brought an action against Connecticut’s governor, attorney general, treasurer, state librarian, and state public records administrator. MERS sought injunctive and declaratory relief, alleging that Connecticut’s two-tiered statutory recording fee system violated provisions of the federal and state constitutions as well as civil rights laws.

MERS contended that the recording fees constituted “user fees” because they were “paid in exchange for a discrete service of benefit” to the filer in the system. In contrast the Connecticut state defendants contended that the recording fees were more aligned with taxes because “the statute was enacted primarily to raise revenues for the state and its municipalities.” Ultimately, the court viewed the recording fees as a “hybrid” of taxes and user fees and conducted its analysis of the constitutional issues accordingly.

In rejecting MERS’ challenges and upholding the constitutionality of the Connecticut laws governing recording fees for a nominee operating a national electronic database to track mortgage loans, Connecticut’s high court determined that: (i) even though nominees such as MERS are charged higher recording fees than other mortgagees under the statutory scheme, this did not violate the equal protection guarantees of the state and federal constitutions because the distinctions set forth in the Connecticut laws were “rationally related to legitimate public interests”; and (ii) the Connecticut laws did not violate the dormant commerce clause of the U.S. Constitution because they were not discriminatory on their face, did not place an undue burden on the secondary mortgage market, and did not result in a “tangible detriment” to the MERS business model.

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