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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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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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.

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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.

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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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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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.

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