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CFPB updates Mortgage Servicing Examination Procedures
On January 18, the CFPB released an updated version of its Mortgage Servicing Examination Procedures, detailing the types of information examiners should gather when assessing whether servicers are complying with applicable laws and identifying consumer risks. The examination procedures, which were last updated in June 2016, cover forbearances and other tools, including streamlined loss mitigation options that mortgage servicers have used for consumers impacted by the Covid-19 pandemic. The Bureau noted in its announcement that “as long as these streamlined loss mitigation options are made available to borrowers experiencing hardship due to the COVID-19 national emergency, those same streamlined options can also be made available under the temporary flexibilities in the [agency’s pandemic-related mortgage servicing rules] to borrowers not experiencing COVID-19-related hardships.” Servicers are expected to continue to use all the tools at their disposal, including, when available, streamlined deferrals and modifications that meet the conditions of these pandemic-related mortgage servicing rules as they attempt to keep consumers in their homes. The Bureau said the updated examination procedures also incorporate focus areas from the agency’s Supervisory Highlights findings related to, among other things, (i) fees such as phone pay fees that servicers charge borrowers; and (ii) servicer misrepresentations concerning foreclosure options. Also included in the updated examination procedures are a list of bulletins, guidance, and temporary regulatory changes for examiners to consult as they assess servicers’ compliance with federal consumer financial laws. Examiners are also advised to request information on how servicers are communicating with borrowers about homeowner assistance programs, which can help consumers avoid foreclosure, provided mortgage servicers collaborate with state housing finance agencies and HUD-approved housing counselors to aid borrowers during the HAF application process.
CFPB: Negative option marketing practices could violate the CFPA
On January 19, the CFPB released Circular 2023-01 to reiterate that companies offering “negative option” subscription services are required to comply with federal consumer financial protection laws. According to the Circular, “‘negative option’ [marketing] refers to a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer.” The Bureau clarified that negative option marketing practices could violate the CFPA where a seller: (i) misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program; (ii) fails to obtain consumers’ informed consent; or (iii) misleads consumers who want to cancel, erects unreasonable barriers to cancellation, or fails to honor cancellation requests that comply with its promised cancellation procedures.
The Bureau described receiving consumer complaints from older consumers about being repeatedly charged for services they did not intend to buy or no longer wanted to continue purchasing. Other consumers reported being enrolled in subscriptions without knowledge of the program or the costs. Consumers also submitted complaints regarding the difficulty of cancelling subscription-based services and about charges on their credit card or bank account after they requested cancellation.
The Bureau also warned that negative option programs can be particularly harmful when paired with dark patterns. The Circular noted that the Bureau and the FTC have taken action to combat the rise of digital dark patterns, which can be used to deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent. The Bureau noted that consumers could be misled into purchasing subscriptions and other services with recurring charges and be unable to cancel the unwanted products and services or avoid their charges.
FinCEN offers suspicious activity reporting guidance for human smuggling along U.S.- Mexico border
On January 13, the Financial Crimes Enforcement Network (FinCEN) issued an alert advising financial institutions on how to detect and report suspicious financial activity that may be related to human smuggling along the southwest border of the United States. Highlighting that human smuggling is one of the eight Anti-Money Laundering and Countering the Financing of Terrorism National Priorities identified by FinCEN, the agency pointed out that human smuggling along the southwest border generates an estimated $2 billion to $6 billion in yearly revenue for illicit actors. The alert, which builds on FinCEN’s 2020 and 2014 human smuggling and human trafficking advisories (covered by InfoBytes here and here), provides trends, typologies, and red flag indicators to help financial institutions better identify and file suspicious activity reports potentially related to such activity. “Financial institutions need to know that their vigilance and prompt Bank Secrecy Act reporting matters—it aids investigations tied to human smuggling and transnational organized crime, and can ultimately save lives,” FinCEN Acting Director Himamauli Das said in the announcement.
OFAC issues Russia-related general licenses for some transactions
On January 17, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued several Russia-related General Licenses (GLs), including: (i) General License (GL) 6C, which authorizes transactions related to agricultural commodities, medicine, medical devices, replacement parts and components, or software updates, Covid-19 pandemic, or clinical trials; (ii) GL 54A, which authorizes certain transactions involving certain holdings prohibited by Executive Order 14071; and (iii) GL 28B, which authorizes the wind down and rejection of certain transactions involving a public joint stock company and Afghanistan. OFAC also announced that it is amending four Russia-related Frequently Asked Questions 982, 1054, 1055, and 1059.
States file brief in support of Biden’s student loan debt-relief program
On January 11, a coalition of 22 state attorneys general from Massachusetts, California, Colorado, Connecticut, Delaware, the District Of Columbia, Hawaii, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, filed an amicus brief with the U.S. Supreme Court in two pending actions concerning challenges to the Department of Education’s student loan debt relief program. At the beginning of December, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the Department of Education’s debt relief plan is “statutorily authorized” and “adopted in a procedurally proper manner” (covered by InfoBytes here). Oral arguments in both cases are scheduled for February 28.
The states first pointed out that under the Higher Education Act, Congress gave the Secretary “broad authority both to determine borrowers’ loan repayment obligations and to modify or discharge these obligations in myriad circumstances.” The Secretary was also later granted statutory authority under the HEROES Act to take action in times of national emergency, which includes allowing “the Secretary to ‘waive or modify any statutory or regulatory provision applicable to the student financial assistance programs’ if the Secretary ‘deems’ such actions ‘necessary’ to ensure that borrowers affected by a national emergency ‘are not placed in a worse position financially’ with respect to their student loans.” The states stressed that while “the magnitude of the national emergency necessitating this relief is unprecedented, the relief offered to borrowers falls squarely within the authority Congress gave the Secretary to address such emergencies and is similar in kind to relief granted pursuant to other important federal student loan policies that have concomitantly advanced our state interests.”
The states went on to explain that the Secretary tailored the limited debt relief using income thresholds to ensure that “the borrowers at greatest risk of pandemic-related defaults receive critical relief, either by eliminating their loan obligations or reducing them to a more manageable level,” thus meeting the express goal of the HEROES Act to “prevent[] affected borrowers from being placed in a worse position because of a national emergency.” The states also stressed that the Secretary reasonably concluded that targeted relief is necessary to address the impending rise in pandemic-related defaults once repayment restarts. The HEROES Act expressly permits the Secretary to “exercise his modification and waiver authority ‘notwithstanding any other provision of law, unless enacted with specific reference to [20 U.S.C. § 1098bb(a)(1)],” the states asserted, noting that “relevant statutory and regulatory provisions related to student loan repayment and cancellation contain no such express limiting language.”
Secretary Miguel Cardona issued the following statement in response to the filing of more than a dozen amicus curiae briefs: “The broad array of organizations and experts—representing diverse communities and different perspectives—supporting our case before the Supreme Court today reflects the strength of our legal positions versus the fundamentally flawed lawsuits aimed at denying millions of working and middle-class borrowers debt relief.” A summary of the briefs can be accessed here.
Fed announces climate scenario exercises
On January 17, the Federal Reserve Board provided additional details regarding its upcoming pilot climate scenario analysis exercise and the information on risk management practices that will be gathered from the program. As previously covered by InfoBytes, the Fed announced in September 2022, that six of the nation’s largest banks will participate in a pilot climate scenario analysis exercise intended to enhance the ability of supervisors and firms to measure and manage climate-related financial risks. According to the Fed, the banks will analyze the impact of scenarios for both physical and transition risks related to climate change on specific assets in their portfolios. The Fed noted that it will collect qualitative and quantitative information during the pilot, including details on governance and risk management practices, among other things. Additionally, the banks will be asked to consider the effect on corporate loans and commercial real estate portfolios using a scenario based on current climate policies and one based on reaching net-zero greenhouse gas emissions by 2050. The Fed noted that though no firm-specific information will be released, it anticipates publishing insights at an aggregate level, reflecting what has been learned about climate risk management practices and how insights can identify possible risks and promote risk management practices.
DOJ revises corporate enforcement policy applicable to all criminal matters including FCPA cases
On January 17, Assistant Attorney General Kenneth A. Polite, Jr. delivered remarks at Georgetown University Law Center, during which he announced changes to the DOJ’s Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy. Polite provided background information on the DOJ Criminal Division’s voluntary self-disclosure incentive program, the FCPA Pilot Program, that was announced in 2016 and expanded in 2017 to become the FCPA Corporate Enforcement Policy (covered by InfoBytes here). This policy, Pilot said, has been applied to all corporate cases prosecuted by the Criminal Division since at least 2018, and provided, among other things, that “if a company voluntarily self-discloses, fully cooperates, and timely and appropriately remediates, there is a presumption that [the DOJ] will decline to prosecute absent certain aggravating circumstances involving the seriousness of the offense or the nature of the offender.” The policy also provided a maximum 50 percent reduction off the low end of the applicable sentencing guidelines penalty range to companies that self-disclosed violations where a criminal resolution is warranted. Last year, following a request by the Deputy Attorney General to have all DOJ components write voluntary self-disclosure policies, the Criminal Division conducted an assessment of its existing policy. Pilot said the division is now announcing the first significant changes to the policy since 2017.
Under the updated policy, companies are offered “new, significant and concrete incentives to self-disclose misconduct,” Polite said, explaining that “even in situations where companies do not self-disclose, the revisions to the policy provide incentives for companies to go far above and beyond the bare minimum when they cooperate with [DOJ] investigations.” He emphasized that the revisions clarify that companies will face very different outcomes if they do not self-disclose, meaningfully cooperate with investigations, or remediate. However, the revisions provide a path that incentivizes even more robust compliance on the front-end in order to prevent misconduct and requires even more robust cooperation and remediation on the back-end should a crime occur.
Polite stated that prosecutors might decline to bring charges against a company over crimes with aggravating factors if the company can demonstrate that it: (i) made voluntary disclosures immediately upon becoming aware of an allegation of misconduct; (ii) had an effective compliance program already in place at the time of the misconduct that allowed it to identify the misconduct and led it to voluntarily self-disclose; and (iii) provided exceptional cooperation and extraordinary remediation. Should a company fail to take these steps, it risks “increasing its criminal exposure and monetary penalties,” Polite warned, emphasizing that the DOJ’s “job is not just to prosecute crime, but to deter and prevent criminal conduct.” He added that the DOJ will recommend a reduction in fines of at least 50 percent and up to 75 percent (except in the case of a criminal recidivist) for companies that voluntarily report wrongdoing and fully cooperate with investigations. Even companies that do not voluntarily disclose wrongdoing but still fully cooperate with an investigation and timely and appropriately remediate could still receive a 50 percent reduction off the low end of the guidelines for fines, Polite said. “The policy is sending an undeniable message: come forward, cooperate, and remediate. We are going to be closely examining how companies discipline bad actors and reward the good ones.”
FTC takes action against investment advisor, cites violations of Notice of Penalty Offenses
On January 13, the FTC announced an action against an investment advisor and its owners concerning allegations that the defendants made deceptive claims when selling their services to consumers. While the FTC has brought “several cases” concerning false money-making claims, the action marks the first time the FTC is collecting civil money penalties from cases relating to Notice of Penalty Offenses. As previously covered by InfoBytes, the FTC sent the notice to more than 1,100 companies (including the defendants) warning that they may incur significant civil penalties if they or their representatives make claims regarding money-making opportunities that run counter to FTC administrative cases. Under the Notice of Penalty Offenses, the FTC is permitted to seek civil penalties against a company that engages in conduct it knows is unlawful and has been determined to be unlawful in an FTC administrative order. This action is also the first time the FTC has imposed civil penalties for violations of the Restore Online Shoppers’ Confidence Act (ROSCA).
According to the complaint, the defendants made numerous misleading claims when selling their investment advising services, including that (i) recommendations about the services were based on a specific “system” or “strategy” created by so-called experts who claim to have made numerous successful trades; and (ii) consumers would make substantial profits if they followed the recommended trades (consumers actually lost large amounts of money, the FTC alleged). Moreover, the FTC claimed that company disclaimers “directly contradict the message conveyed by their marketing,” including that featured testimonials and example trade profits “represent extraordinary, not typical results,” “that ‘[n]o representation is being made that any account will or is likely to achieve profits or losses similar to those discussed,’ and that ‘[n]o representation or implication is being made that using the methodology or system will generate profits or ensure freedom from losses.’” By making these, as well as other, deceptive claims, the defendants were found to be in violation of the Notice of Penalty Offenses, ROSCA, and the FTC Act, the Commission said.
Under the terms of the proposed order, the defendants would be required to surrender more than $1.2 million as monetary relief and must pay a $500,000 civil money penalty. The defendants would also have to back up any earnings claims, provide notice to consumers about the litigation and the court order, and inform consumers about what they need to know before purchasing an investment-related service.
FinCEN solicits feedback on beneficial ownership reporting requirements
On January 17, the Financial Crimes Enforcement Network (FinCEN) published two notices and requests for comment in the Federal Register related to the reporting process the agency intends to use to collect beneficial ownership data pursuant to the Beneficial Ownership Information Reporting Requirements final rule (published last September and covered by InfoBytes here). Under the final rule, most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. will be required to report information about their beneficial owners to FinCEN. The first notice and request for comments invites interested parties to provide feedback on the application that will be used to collect information from individuals who seek to obtain an optional FinCEN identifier. The second notice and request for comments requests feedback on a report that certain entities will be required to file with FinCEN. The electronically filed report will identify the reporting entity’s beneficial owners, and—in certain cases—the individual who “directly filed the document with specified governmental authorities that created the entity or registered it to do business, as well as the individual who was primarily responsible for directing or controlling such filing, if more than one individual was involved in the filing of the document.” Comments on both notices are due by March 20.
OFAC issues amended Venezuela-related GL and FAQ
On January 17, the U.S. Treasury Department’s Office of Foreign Assets Control issued Venezuela-related General License (GL) 5J, which supersedes GL 5I and authorizes certain transactions otherwise prohibited under Executive Orders 13835 and 13857 related to, or that provide financing for, dealings in the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or after April 20, 2023. GL 5J does not authorize any transactions or activities otherwise prohibited by the Venezuela Sanctions Regulations. Concurrently, OFAC updated Venezuela-related FAQ 595 to provide clarification on authorized transactions as well as licensing requirements.