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On December 9, the SEC announced a settlement with a broker to resolve allegations concerning the improper handling of pre-released American Depositary Receipts (ADRs), or “U.S. securities that represent foreign shares of a foreign company.” The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. According to the SEC’s order, the broker improperly borrowed pre-released ADRs from other brokers that it should have known did not own the foreign shares necessary to support the ADRs. The SEC also found that the broker failed to implement policies and procedures to reasonably detect whether its securities lending desk personnel were engaging in such transactions. The broker neither admitted nor denied the SEC’s allegations, but agreed to pay more than $2.2 million in disgorgement, roughly $468,000 in prejudgment interest, and a $1.25 million penalty. The SEC’s order acknowledged the broker’s cooperation in the investigation and that the broker had entered into tolling agreements.
On December 10, the U.S. District Court for the Eastern District of New York issued a memorandum and order denying an international bank’s motion to dismiss a DOJ suit filed in 2018. As previously covered in InfoBytes, the DOJ alleges the bank and several affiliates violated the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) by misleading investors and rating agencies in offering documents and presentations regarding the underwriting quality and other important attributes of the mortgages they securitized into residential mortgage-backed securities (RMBS) for sale to investors during the financial crisis. Specifically, the complaint alleges (i) “mail fraud affecting federally-insured financial institutions (FIFIs)”; (ii) wire fraud affecting FIFIs; (iii) bank fraud; (iv) “fraudulent benefit from a transaction with a covered financial institution (FI)”; and (v) “false statements made to influence the actions of a covered FI.” The DOJ seeks the maximum civil penalty.
According to the district court’s memorandum, the bank’s motion to dismiss sets forth a number of arguments, including, among other things, a failure to sufficiently plead fraudulent intent and the particular circumstances constituting fraud, and a lack of personal jurisdiction, all with which the court rejected. Specifically, the bank suggested that the DOJ’s complaint did not show that the bank “acted with fraudulent intent,” or that the bank committed “bank fraud, [made] fraudulent bank transactions, and [made] false statements to banks.” The memorandum rejects the bank’s claims, adding that personal jurisdiction over the bank and its affiliates is shown “based on [the bank’s] origination of loans” in New York.
On December 9, the CFPB released a special edition of its fall 2019 Supervisory Highlights, focusing on recent supervisory findings in the areas of consumer reporting and information furnishing to consumer reporting companies (CRCs). This is the second special edition to focus on consumer reporting issues, and follows a report that the Bureau released in March 2017 covered by InfoBytes here. According to the Bureau, recent supervisory reviews of FCRA and Regulation V compliance have identified new violations as well as compliance management system (CMS) weaknesses at CFPB-supervised institutions. However, the Bureau noted that examiners have also observed significant improvements, such as continued investment in FCRA-related CMS.
Highlights of the supervisory findings include:
- Recent examples of CMS weaknesses and FCRA/Regulation V violations (where corrective action has either been taken or is currently being taken) in which one or more (i) mortgage loan furnishers did not maintain policies and procedures “appropriate to the nature, size, complexity, and scope of the furnisher’s activities”; (ii) auto loan furnishers’ policies and procedures failed to provide sufficient guidance for investigating indirect disputes containing allegations of identity theft; (iii) debt collection furnishers’ policies and procedures failed to differentiate between FCRA disputes, FDCPA disputes, or validation requests, leading to a lack of consideration for applicable regulatory requirements when handling these matters; and (iv) deposit account furnishers lacked written policies and procedures for furnishing or validating the information provided to specialty CRCs.
- Examiners found that one or more furnishers provided information they knew, or had reasonable cause to believe, was inaccurate. Examples include inaccurate derogatory status codes due to coding errors and unclear addresses for consumers to submit disputes.
- Examiners discovered several instances where furnishers failed to send prompt notifications to CRCs after determining that information previously furnished was inaccurate, including situations where furnishers failed to promptly update or correct information after consumers paid charged-off balances in full or discharged them in bankruptcy.
- Examiners found that some furnishers reported the incorrect date of the first delinquency in connection with their responsibility to provide notice of delinquent accounts to CRCs.
- Examiners found several instances where furnishers failed to investigate disputes, complete investigations in a timely manner, or notify consumers of certain determinations related to “frivolous or irrelevant” disputes.
The Bureau also discussed supervisory observations concerning CRC compliance with FCRA provisions, and commented that CRCs continue to (i) improve procedures concerning the accuracy of information contained in consumer reports; (ii) implement improvements to prevent consumer reports from being furnished to users who lack a permissible purpose; (iii) strengthen procedures to “block information that a consumer has identified as resulting from an alleged identity theft”; and (iv) investigate and respond to consumer disputes.
On December 9, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) published two new Venezuela-related FAQs. FAQ 808 stipulates that a specific license from OFAC is not “ordinarily required” when initiating or continuing U.S. legal proceedings against persons designated or blocked pursuant to OFAC’s Venezuela sanctions programs. Specific licenses are also not required for a U.S. court or court personnel to hear such a case. However, a specific license from OFAC is required in order to enter into a settlement agreement or to enforce a lien, judgment, or other order “through execution, garnishment, or other judicial process purporting to transfer or otherwise alter or affect property or interests in property blocked pursuant to the Venezuela Sanctions Regulations.” OFAC also provides a list of measures where a specific license is required. Additionally, FAQ 809 clarifies when a specific license is required to conduct an auction or other type of sale involving shares of a Venezuelan government entity whose property and interests in property are blocked pursuant to the Venezuela Sanctions Regulations. Additionally, OFAC “urges caution in proceeding with any step in furtherance of measures which might alter or affect blocked property or interests in blocked property.”
Visit here for additional InfoBytes coverage of actions related to Venezuela.
On December 10, the U.S. Supreme Court, in an eight-to-one decision, held that the one-year time limit for filing an FDCPA action starts on the date of the violation, and that no “discovery rule” applies. According to the opinion, the respondent law firm sued the petitioner seeking payment of credit card debt. The respondent attempted service on the petitioner at his old address, where the occupant accepted service. After the petitioner did not respond, a default judgment was entered against him in 2009. The petitioner claimed that he had no knowledge of the default judgement until 2014. He then sued the respondent in district court in 2015 alleging that the respondent “purposely served process in a manner that ensured he would not receive service,” and that the respondent violated the FDCPA by filing the debt collection suit against the petitioner “after the state-law limitations period expired,” and thus had no “lawful ability to collect.” The district court dismissed the action, rejecting the petitioner’s assertion of the U.S. Court of Appeals for the Ninth Circuit holding that a “discovery rule” exists, which delays the one-year limit to the date when the violation is discovered. The district court held that the FDCPA does not include a discovery rule, relying on the FDCPA’s “plain language.”
On appeal, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s decision, holding that “there is no default presumption” of a discovery rule in the FDCPA.
Upon review by the Court, Justice Thomas, who penned the majority opinion, averred that the FDCPA explicitly provides a one-year limitation starting on “the date on which the violation occurs.” Moreover, the opinion points out that Congress would have added a provision to delay that limitation until after a violation was discovered if it meant for the FDCPA to have such a provision.
According to Justice Ginsberg’s dissenting opinion, though she agreed with the one-year limitation for filing suit under the FDCPA, she added that the discovery rule should be observed when fraud prevents the petitioner from filing within the one-year period, distinguishing the “fraud-based discovery rule” from general “equitable tolling” principles.
On December 10, in a speech before the National Association of Attorneys General Capital Forum, CFPB Director Kathy Kraninger discussed partnership with the states, as well as recent efforts between the Bureau and states in the areas of supervision and enforcement, including innovation policies. Kraninger also discussed the Bureau’s small dollar and debt collection rules. Noting that the Bureau will “effectively enforce the law to fulfill our consumer protection mission … after thoroughly reviewing the facts,” Kraninger recapped FY 2019 enforcement actions and settlements, which have resulted in more than $777 million in total consumer relief, which included over $600 million in consumer redress and more than $174 million in other relief. These actions, Kraninger stated, have resulted in more than $185 million in civil money penalties, not taking into account suspended amounts. Kraninger also highlighted several joint efforts with states and other agencies over the past year, including (i) a multi-agency action resolving a 2017 data breach (InfoBytes coverage here); (ii) a joint action with the New York Attorney General against a network of New York-based debt collectors that allegedly engaged in improper debt collection tactics (InfoBytes coverage here); (iii) a coordinated action with the Minnesota Attorney General’s Office, the North Carolina Department of Justice, and the Los Angeles City Attorney concerning a student loan debt relief operation (InfoBytes coverage here); and (iv) an action with the South Carolina Department of Consumer Affairs against an operation that offered high-interest loans to veterans and other consumers in exchange for the assignment of some of the consumers’ monthly pension or disability payments (InfoBytes coverage here).
Kraninger also discussed the Bureau’s recently-announced American Consumer Financial Innovation Network (ACFIN), which is designed to enhance coordination among federal and state regulators to facilitate financial innovation. (InfoBytes coverage here). ACFIN currently includes nine state attorneys general and four state financial regulators. Kraninger noted that the Bureau is presently reviewing approximately 190,000 comments concerning proposed changes related to certain payday lending requirements and mandatory underwriting provisions (InfoBytes coverage here), as well as over 14,000 comments submitted in response to its Notice of Proposed Rulemaking issued in May concerning amendments to the debt collection rule (InfoBytes coverage here). Kraninger stressed that the Bureau plans to release a Supplemental Notice of Proposed Rulemaking “very early” in 2020, and will be “interested in practical and pragmatic ideas of how to make time-barred debt disclosures work.”
On December 10, the FTC announced a settlement with a for-profit school and its parent company to resolve allegations that they employed deceptive advertisements in violation of the FTC Act that gave the impression that the school had relationships and job opportunities with various technology companies and tailored curricula to those jobs. In the complaint, the FTC claims the defendants relied upon false and misleading advertisements to attract prospective students that gave the impression that the school’s relationship with certain companies would create employment opportunities. In addition, the FTC alleges that while the defendants claimed the companies also worked with the school to develop its courses, in reality the partnerships were primarily marketing relationships that did not create jobs or curricula for the school’s students. Moreover, the FTC claims that some of these advertisements specifically targeted current and former military members and Hispanic consumers. Under the terms of the settlement, the school is required to pay $50 million in consumer redress and cancel approximately $141 million in student loan debts owed to the school by former students who first enrolled during the covered period.
The FTC’s press release notes, however, that the “settlement will not affect student borrowers’ federal or private loan obligations,” and directs borrowers to the Department of Education’s income-driven repayment plans for guidance on lowering monthly payments. The FTC also states that borrowers who believe they may have been defrauded or deceived can apply for loan forgiveness through the Borrower Defense to Repayment procedures.
On December 9, parties filed briefs in Seila Law LLC v. CFPB. As previously covered by InfoBytes, the U.S. Supreme Court granted cert in Seila to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II, while also directing the parties to brief and argue whether 12 U.S.C. §5491(c)(3), which sets up the CFPB’s single director structure and imposes removal for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional. While both parties are in agreement on the CFPB’s single-director leadership structure, they differ on how the matter should be resolved.
According to Seila Law’s brief, the CFPB’s single-director leadership structure is a blatant violation of the Constitution’s separation of powers clause. Seila Law proposes that the Court eliminate the CFPB entirely, leaving Congress to determine how to address the unconstitutionality of the Bureau, rather than save the law by making the director an at-will employee of the President. Removing the director at will, Seila Law argues, “would radically reshape the CFPB, creating a mutant version of the agency that Congress envisioned—one that would still be unaccountable to Congress, yet fully within presidential control.” Discussing the U.S. Court of Appeals for the Ninth Circuit’s reliance in part on a 1935 Supreme Court decision in Humphrey’s Executor v. United States (which dealt with removal protections for members of a nonpartisan, multimember commission) in its May ruling which held that the Bureau’s single-director structure is constitutional (InfoBytes coverage here), Seila Law states that the Court’s ruling in Humphrey’s Executor was “badly reasoned, wrongly decided, and should be overruled,” and, in any event, is distinguishable when addressing the CFPB’s single-director leadership structure. Whether the Court distinguishes or overturns Humphrey’s Executor’s precedent, Seila Law argues, it should hold that the Bureau’s structure violates the separation of powers clause and reverse the 9th Circuit’s judgment.
“By insulating the director of the CFPB from removal at will by the President while empowering him to exercise substantial executive power, Congress breached the President’s core prerogatives under Article II of the Constitution,” Seila Law further asserts, claiming that the appropriate remedy for the constitutional violation would be to deny the CFPB’s petition to enforce the CID and ultimately let Congress determine how to address the “constitutional defect in the CFPB’s structure.” Seila Law also argues that should the Court decide to engage in severability analysis, it should invalidate all of Title X of Dodd-Frank, which does not allow the current leadership structure to be altered to a multi-member commission.
In contrast, though the CFPB concedes that Dodd-Frank’s restriction on the President’s ability to remove the Bureau’s director violates the “separation of powers” principles of the Constitution, it contends in its brief that, should the removal provision be found unconstitutional, it should be severed from the rest of the law in accordance with Dodd-Frank’s express severability clause. “Even considering only the Bureau-specific provisions contained in Title X . . . , there is no basis to conclude that Congress would have preferred to have no Bureau at all rather than a Bureau headed by a Director who would be removable like almost all other single-headed agencies,” the CFPB wrote. “Nothing in the statutory text or history of the Bureau’s creation suggests, much less clearly demonstrates, that Congress would have preferred, for example, that the regulatory authority vested in the Bureau revert back to the seven federal agencies that previously administered those responsibilities if a court were to invalidate the Director’s removal restriction.”
Oral arguments are scheduled for March 3, 2020.
On December 9, the OCC released its Semiannual Risk Perspective for Fall 2019, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations, including credit, operational, and interest rate risks. While the OCC commented that “bank financial performance is sound,” it also advised that “[b]anks should prepare for a cyclical change while credit performance is strong,” emphasizing that “[c]redit risk has accumulated in many portfolios.” The OCC also highlighted that competition with nonbank mortgage and commercial lending could pose a risk as well.
Specific areas of concern that the OCC described include: elevation of operational risk as advances in technology and innovation in core banking systems result in a changing and increasingly complex operating environment; increased use of third-party service providers that contribute to continued threats of fraud; need for prudent credit risk management practices that include “identifying borrowers that are most vulnerable to reduced cash flows from slower than anticipated economic growth”; “volatility in market rates [leading] to increasing levels of interest rate risk”; Libor’s anticipated cessation and whether banks have started to determine the potential impact of cessation and develop risk management strategies; and strategic risks facing banks as non-depository financial institutions (NDFI) use evolving technology and expand data analysis abilities (the OCC commented that NDFIs “are strong competitors to bank lending models”). The OCC also noted that there is increased interest from banks in sharing utilities with NDFIs to implement Bank Secrecy Act/anti-money laundering compliance programs and sanctions processes and controls.
On December 11, NYDFS issued proposed guidance to create two “coin adoption or listing options” for virtual currency licensees. According to NYDFS, these proposed guidelines are intended to provide “regulatory clarity and efficiency, and to ensure that [NYDFS’s] approach to regulating virtual currency businesses reflects the realities of an evolving market.” Recognizing that its virtual coin licensees “have asked to list new virtual currencies . . . in addition to those included in their initial applications to [NYDFS],” NYDFS proposes, among other things, to provide a list of coins on an NYDFS web page that have been approved for permitted use. Virtual currency licensees may choose to list any of these coins as long as the licensee provides notice to the Department and the listed coins are not modified, divided, or changed after being listed on the NYDFS webpage. The proposal would also allow licensees to create their own “company coin-listing policy” tailored to their specific business models and risk profiles that, if approved by NYDFS would permit a licensee to self-certify the listing or adoption of new coins without prior approval. According to NYDFS Superintendent Linda Lacewell, the proposal is “designed to make it easier for those who have obtained a New York license to periodically add new coins to their existing products.” The deadline for submitting comments on the proposed guidance is January 27, 2020.