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On October 15, the DOJ announced charges against a Turkish bank alleging fraud, money laundering, and sanctions offenses related to the bank’s alleged participation in a scheme to evade U.S. sanctions on Iran. According to the indictment, the bank used money service businesses and front companies to evade U.S. sanctions against Iran and “avoid prohibitions against Iran’s access to the U.S. financial system.” The bank allegedly lied to U.S. regulators and foreign banks about its participation in the fraudulent transactions. The concealed funds, the DOJ claimed, “were used to make international payments on behalf of the Government of Iran and Iranian banks, including transfers in U.S. dollars that passed through the U.S. financial system in violation of U.S. sanctions laws.” Additionally, the DOJ asserted that the conduct—which allowed Iran access to “billions of dollars’ worth of Iranian oil revenue”—was protected by high ranking government officials in Iran and Turkey, some of whom received millions of dollars in bribes to promote and protect the scheme from U.S. scrutiny.
District Court allows NCUA to substitute plaintiff, denies dismissal of breach of contract claim in RMBS action
On October 15, the U.S. District Court for the Southern District of New York held that the NCUA may substitute a new plaintiff to represent the agency’s claims in a residential mortgage-backed securities (RMBS) action against an international bank serving as an RMBS trustee. In the same order, the court dismissed certain tort claims, but allowed claims for breach of contract to move forward against the trustee.
According to the opinion, NCUA brought the action on behalf of 97 trusts for which the international bank served as the trustee, even though NCUA only had direct interest in eight of the trusts. NCUA argued it had derivative standing to pursue the claims on behalf of the other 89 trusts “on the theory that it had a latent interest in the [the 89 trusts] after they wound down and as ‘an express third-party beneficiary under the [89 trusts] Indenture Agreements.’” The trustee moved to dismiss the action and after hearing oral arguments on the motion, the court stayed the case pending the outcome of NCUA’s appeal regarding derivative standing in similar action before the U.S. Court of Appeals for the Second Circuit. In August 2018, the 2nd Circuit held that NCUA lacked standing to bring the derivative claims because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. (Previously covered by InfoBytes here.) Based on the appellate court decision in the similar action, NCUA moved to file a second amended complaint and substitute a newly appointed trustee as plaintiff for the claims made on behalf of the 89 trusts for which it did not have direct standing.
Despite the trustee’s objections, the district court granted NCUA’s request, concluding that NCUA’s claims were timely and allowing the NCUA’s “Extender Statute”—which gives the agency the ability to bring contract claims at “the longer of” “the 6-year period beginning on the date the claim accrues” or “the period applicable under State law”—to apply to the new substitute plaintiff. Additionally, the court denied the bank’s motion to dismiss NCUA’s breach of contract claim alleging the trustee had notice of the defects in the mortgage files held in the various trusts. The court concluded that NCUA sufficiently plead that the trustee “did indeed receive notice [of the defective mortgages] and should have thus acted,” under the Pooling and Servicing Agreements.
On October 15, the FDIC approved the final rule revising stress testing requirements for FDIC-supervised institutions, consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule remains unchanged from the proposed rule, which was issued by the FDIC in December 2018 (previously covered by InfoBytes here). The final rule (i) changes the minimum threshold for applicability from $10 billion to $250 billion; (ii) revises the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduces the number of required stress testing scenarios from three to two. FDIC-supervised institutions that are covered institutions will “be required to conduct, report, and publish a stress test once every two years, beginning on January 1, 2020, and continuing every even-numbered year thereafter.” The final rule also adds a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. The final rule requires certain covered institutions to still conduct annual stress tests, but this is limited to covered institutions that are consolidated under holding companies required to conduct stress tests more frequently than once every other year. Lastly, the final rule removes the “adverse” scenario—which the FDIC states has provided “limited incremental information”—and requires stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios. The final rule is effective thirty days after it is published in the Federal Register.
As previously covered by InfoBytes, on October 4, the OCC issued its final rule incorporating the same revisions as the FDIC.
On October 15, the CFPB Private Education Loan Ombudsman published its annual report on consumer complaints submitted between September 1, 2017 and August 31, 2019. The report, titled Annual Report of the CFPB Student Loan Ombudsman, is based on approximately 20,600 complaints received by the Bureau relating to federal and private student loan servicing, debt collection, and debt relief services. The report focuses primarily on complaints and student loan debt relief scams, which are, according to Private Education Loan Ombudsman Robert G. Cameron, “two subjects that, if promptly addressed, may have the greatest immediate impact in preventing potential harm to borrowers.” Of the 20,600 complaints, roughly 13,900 pertained to federal student loans with approximately 6,700 related to private student loans. Both categories reflect a decrease in total complaints from previous years. The report also notes that the Bureau handled roughly 4,600 complaints related to student loan debt collection.
The report goes on to discuss collaborative efforts between federal and state law enforcement agencies, including the CFPB, FTC, Department of Education, and state attorneys general, to address student loan debt relief scams. According to the report, the FTC’s Operation Game of Loans (previous InfoBytes coverage here) has yielded settlements and judgments totaling over $131 million for the past two years, while Bureau actions (taken on its own and with state agencies) have resulted in judgments exceeding $17 million.
The report provides several recommendations, including that policymakers, the Department of Education, and the Bureau “assess and consider the sharing of information, analytical tools, education outreach, and expertise” to prevent borrower harm, and that when harm occurs, “reduce the window in which harm is occurring through timely identification and remediation.” With regard to student loan debt relief scams, the report recommends, among other things, that enforcement should be expanded “beyond civil enforcement actions to criminal enforcement actions at all levels.”
On October 10, the California governor signed AB 539, known as the “Fair Access to Credit Act,” which amends the California Financing Law (CFL) to limit the rate of interest on certain installment loans. Specifically, for installment loans with a principal amount between $2,500 and $10,000, lenders are prohibited from charging an annual simple interest rate exceeding 36 percent plus the federal funds rate, excluding an administrative fee (not to exceed $50). Moreover, for loans between $2,500 and $10,000, the bill establishes a minimum 12-month loan term. Among other things, the bill also (i) requires lenders to report each borrower’s payment performance of these installment loans to at least one national credit reporting agency; (ii) requires lenders to offer an approved credit education program or seminar approved by the Commissioner of Business Oversight before disbursing the proceeds to the borrower; and (iii) prohibits lenders from charging or receiving any penalty for prepayment for loans made pursuant to the CFL that are not secured by real property. The bill is effective January 1, 2020.
Additionally, on October 10, the California attorney general released the highly anticipated proposed regulations implementing the CCPA. See the Buckley Special Alert for details of the proposed regulations.
On October 11, the OCC announced that a national bank has agreed to pay a $30 million civil money penalty to resolve allegations relating to the holding period of other real estate owned (OREO). According to the OCC’s consent order, the bank violated the statutory holding period for OREO. (See previous InfoBytes coverage on OCC OREO regulations here.) The OCC asserted that the bank’s processes and controls for identifying and monitoring the OREO holding period were deficient, and following an investigation it determined the bank allegedly “failed to meet its commitment to implement corrective actions, resulting in additional violations.” While the OCC noted that it will continue to monitor the bank’s corrective actions, it determined that the bank’s implementation of effective policies and procedures to ensure OREO compliance over the last 12 months has “significantly reduced its inventory of OREO assets.”
On October 11, the SEC announced it obtained a temporary restraining order through an emergency action filed against two offshore entities that allegedly raised more than $1.7 billion of investor funds. According to the complaint, the entities sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The entities promised that the tokens would be delivered upon the launch of its own blockchain by the end of October 2019. The SEC alleges the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. In addition to the emergency relief, the SEC is seeking a permanent injunction, disgorgement, and civil penalties against the offshore entities.
On October 10, the Senate Banking, Housing, and Urban Affairs Committee released a letter from Senators Sherrod Brown (D-Ohio) and Patty Murray (D-Wash) to the new CFPB Student Loan Ombudsman, Robert Cameron, outlining their expectations for his tenure in the Ombudsman’s Office. The senators state that Cameron should, among other things, (i) advocate for student loan borrowers by utilizing the Bureau’s statutory authority and tools, including policymaking and evidence gathering for supervision and enforcement; (ii) reestablish the information sharing Memorandum of Understanding (MOU) between the U.S. Department of Education and the Bureau; (iii) resume examinations of federal student loan servicers; and (iv) carry out his duties free of conflict of interests. The Senators request that Cameron provide additional information by October 25 regarding a potential conflict of interest (based on his prior work as Deputy Chief Counsel at a student loan servicer), the Bureau’s history of PSLF supervisory examinations, and current staffing in the Ombudsman Office.
On October 11, the SEC, Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN) issued a joint statement to remind persons who engage in digital asset activities or handle cryptocurrency transactions of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). According to the agencies, AML/CFT obligations apply to entities defined as “financial institutions” under the Bank Secrecy Act, which include “futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSB) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC.” The obligations include, among other things, (i) establishing and implementing an effective AML program; and (ii) complying with recordkeeping and reporting requirements such as suspicious activity reporting (SARs).
The agencies note that persons who engage in digital asset-related activities may have AML/CFT obligations regardless of the “label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset.” According to the agencies, the facts and circumstances underlying the asset or service, “including its economic reality and use,” is what determines how the asset is categorized, the applicable regulatory treatment, and whether the persons involved are financial institution under the BSA.
Additionally, FinCEN reminded financial institutions of its supervisory and enforcement authority to “ensure the effectiveness of the AML/CFT regime,” emphasizing that persons who provide money transmission services are MSBs subject to FinCEN regulation. FinCEN also referred to its May 2019 interpretive guidance, which consolidated and clarified current FinCEN regulations, guidance, and administrative rulings related to money transmissions involving virtual currency. (Previous InfoBytes coverage here.)
- Daniel P. Stipano to discuss "BSA/AML culture of compliance roundtable" at the FiSCA Annual Conference
- Daniel P. Stipano to discuss "Is there a better way to fight money laundering" at the FiSCA Annual Conference
- Michelle L. Rogers to discuss "What's trending in enforcement" at the Mortgage Bankers Association Annual Convention & Expo
- Kathryn L. Ryan and Moorari K. Shah to discuss "Today's regulatory environment - Are you in the know?" at the Equipment Leasing and Finance Association Annual Convention
- Buckley Webcast: Smoke and mirrors: Navigating the regulatory landscape in banking the marijuana industry
- H Joshua Kotin to discuss "CMS - Components of a successful monitoring program" at the RegList Annual Workshop
- Tim Lange to discuss "Temporary authority to operate - Are you prepared? Hear what the states are doing" at the RegList Annual Workshop
- Sherry-Maria Safchuk to discuss "Cybersecurity" at the RegList Annual Workshop
- Jeffrey P. Naimon to discuss "Hot topics in mortgage origination" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Sherry-Maria Safchuk to discuss "CCPA: Countdown to compliance – A discussion of common questions and what is next on the CA privacy horizon" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "Adapting to the rapidly changing compliance landscape involving marijuana and marijuana-related businesses" at an ACAMS webinar
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference