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Prudential Regulators Announce Coordinated Action Against Technology Service Provider
Recently, the OCC released a formal agreement it entered with the FDIC, the Federal Reserve Bank of St. Louis, and a banking software company to resolve allegations of unsafe and unsound practices relating to the software company’s disaster recovery and business continuity planning and processes. The action reportedly resulted from the third-party service provider’s (TSP) delay in reestablishing full operations at a processing center in the wake of Hurricane Sandy. The agreement requires the TSP to continue to maintain a compliance committee, which must submit quarterly written reports to the TSP’s board. The agreement also details minimum requirements for (i) an enhanced disaster recovery and business continuity planning (DR/BCP) process; and (ii) a DR/BCP risk management program and audit process. The agreement also reaffirms the TSP board’s responsibility for proper and sound management of the TSP. The action demonstrates the OCC’s and other federal authorities’ continued focus on third-party service providers. While in this instance the regulators employed the Bank Services Company Act to directly address concerns about a TSP, recent Federal Reserve Board and OCC guidance also focuses on financial institutions’ responsibilities with regard to managing risks related to third parties’ disaster recovery and business continuity.
Second Circuit Revives Terrorism Victims' Suit Against Foreign Bank
On October 18, the U.S. Court of Appeals for the Second Circuit vacated and remanded a district court’s judgment and held that subjecting a foreign bank to personal jurisdiction in New York was within the reach of New York’s long-arm statute and comported with due process protections provided under the U.S. Constitution. Licci v. Lebanese Canadian Bank SAL, No. 10-1306, 2013 WL 5700963 (2d Cir. Oct. 18, 2013). The complaint, brought by individuals who were harmed by rocket attacks in Israel carried out by the terrorist group Hezbollah, alleges that the foreign bank used its correspondent bank account in New York to wire millions of dollars to Hezbollah, knowing that the money would enable the group to carry out terrorist attacks. The New York Court of Appeals had accepted the Second Circuit’s certification question concerning the scope of New York’s long-arm statute and explained that a foreign bank’s use of a New York correspondent account to execute dozens of wire transfers is sufficiently purposeful conduct to constitute a “transaction of business” under the state’s long-arm statute. After resolving the question of personal jurisdiction under state law, the Second Circuit also held that subjecting the defendant bank to personal jurisdiction did not violate due process under the Constitution, finding that the alleged conduct—the deliberate and “repeated use of New York’s banking system” for the purpose of “repeated, intentional execution of U.S.‐dollar‐denominated wire transfers”—satisfied the minimum contacts test established by the Supreme Court in International Shoe. The court further noted that the bank should have foreseen that “it might be subject to the burden of a lawsuit” in that same forum for wrongs related to, and arising from, that use. The Second Circuit specifically noted that a foreign defendant’s “mere maintenance” of a correspondent account in the U.S. is not by itself sufficient to support the constitutional exercise of personal jurisdiction over the account-holder.
FinCEN Supplements Guidance On Restrictions On U.S. Currency Transactions By Mexican Banks
On September 27, FinCEN issued Advisory FIN-2013-A007, which informs U.S. financial institutions about the potential impacts of 2010 Mexican finance ministry restrictions placed on U.S. currency transactions by Mexican banks on the repatriation of illicit proceeds. The Advisory references a “best practices” guide for Mexican banks prepared by Mexico’s financial institution regulator to guide Mexican banks in establishing or maintaining relationships with U.S. banks. FinCEN also reiterates existing guidance to U.S. institutions to monitor the potential use of alternative methods to move funds linked to the laundering of criminal proceeds and to report that information as required under the Bank Secrecy Act and its implementing regulations.
U.K. FCA Proposes Consumer Credit Regulatory Regime, New Payday Lending Rules
On October 3, the U.K. Financial Conduct Authority (FCA) proposed a framework for its regulation of consumer credit when those authorities transfer to the FCA from the Office of Fair Trading on April 1, 2014. As part of the U.K.’s ongoing regulatory reform and restructuring, after that date the FCA will supervise more than 50,000 firms who have existing credit licenses. The FCA proposes, among other things, (i) requiring lenders to conduct affordability checks on borrowers, (ii) requiring clear, fair and not misleading advertisements, and (iii) banning misleading advertisements. The regime would include additional new rules for payday lenders, which would: (i) restrict loan roll-overs to a maximum of two, (ii) require lenders to provide borrowers who roll-over loans with information about debt advice resources, (iii) restrict to two the number of times an automatic payment deduction authority can be used, and (iv) restrict the content of payday lending advertisements. The Consultation Paper is open for comment through December 3, 2013. The FCA plans to publish the final rules and guidance in February 2014.
US, Switzerland Announce Tax Evasion Program
On August 29, the DOJ announced a program to encourage Swiss banks to cooperate in its ongoing efforts to prosecute offshore tax evasion. The program—which, according to a joint statement with the Swiss Federal Department of Finance, Switzerland will encourage Swiss banks to consider participating in—requires, among other things, Swiss banks to make significant disclosures to the DOJ about cross-border activities and accounts that affect U.S. taxpayers in exchange for non-prosecution agreements or non-target letters.
CFPB Seeks To Ratify Director's Pre-Confirmation Actions
Earlier today, the CFPB published a “Notice of Ratification” in the Federal Register in response to concerns about the legal validity of its actions during the period that Director Richard Cordray served as recess appointee. In the notice, Director Cordray states that:
The President appointed me as Director of the Bureau of Consumer Financial Protection on January 4, 2012, pursuant to his authority under the Recess Appointments Clause, U.S. Const. art. II, § 2, cl. 3. The President subsequently appointed me as Director on July 17, 2013, following confirmation by the Senate, pursuant to the Appointments Clause, U.S. Const. art. II, § 2, cl. 2. I believe that the actions I took during the period I was serving as a recess appointee were legally authorized and entirely proper. To avoid any possible uncertainty, however, I hereby affirm and ratify any and all actions I took during that period.
August Beach Read Series: Understanding FIRREA
FIRREA is a financial fraud statute that has been on the books for decades, and is fast-becoming a valuable weapon in the Department of Justice’s efforts to combat alleged financial fraud. FIRREA’s reach is broader than other civil fraud statutes available to the government, making it an especially powerful tool.
- It allows civil liability for violations of any of 14 enumerated criminal statutes, including mail and wire fraud;
- It allows for whistleblower recovery, and the potential for significant monetary penalties for the government;
- It has a 10 year statute of limitations; and
- Unlike the False Claims Act, there need not be a link between government funds and the alleged fraud; instead, the fraud need only affect a federally-insured financial institution, which arguably can include the defendant institution.
To learn more about FIRREA and how it impacts the financial services industry, please review some of our recent articles on the issue. BuckleySandler partner, Andrew Schilling, recommends what steps to take if your institution receives a FIRREA subpoena in his article, “U.S. Using Subpoenas Under 1989 Act as New Tool to Probe Financial Firms.” BuckleySandler attorney Andrew Schilling use a small civil bank fraud case to shed some light on how penalties in FIRREA cases are determined in “Finally, 8 Factors Governing FIRREA Civil Penalty Awards”. Matthew Previn discuss the first time the court permitted DOJ to use FIRREA against an institution engaging in fraud that “affects” the same institution in their article, “A Financial Institution’s Fraud on Itself Triggers FIRREA.” Visit our False Claims Act and FIRREA Practice Resource Center for additional information.
Congress Passes Reverse Mortgage Legislation; Senate Banking Committee Approves Broader FHA Reform Legislation
On July 30, the U.S. Senate passed by unanimous consent the Reverse Mortgage Stabilization Act, H.R. 2167. The bill, which was passed by the House in June and now goes to the President for his signature, will allow HUD to use notices or mortgagee letters to establish additional or alternative requirements necessary to improve the fiscal safety and soundness of the Home Equity Conversion Mortgage (HECM) program.
On July 31, the Senate Banking Committee voted 21-1 to approve the FHA Solvency Act of 2013, S. 1376, as amended during committee markup. As previously reported, that bill also includes reverse mortgage provisions, as well as measures to more broadly reform the FHA. The bill as approved by the committee includes amendments that would, among other things, (i) provide that in addition to the principal dollar amount limitation on all insured HECM loans, fixed rate HECMs may not involve a principal limit with a principal limit factor in excess of .61, (ii) allow HUD to promulgate rules to require servicers of FHA loans to enter into a subservicing arrangement with any independent specialty servicer approved by HUD, and (iii) prohibit FHA from insuring a mortgage executed by a borrower who was the borrower under any two residential properties that have been previously foreclosed upon. In addition, during the markup committee members offered and then withdrew numerous amendments that later could be included in the bill that is considered by the full Senate. For example, those amendments would (i) create a statutory requirement that HUD/FHA repay Treasury for any funds needed to stabilize the MMI Fund, (ii) revise the indemnification provisions to provide certainty for lenders, and (iii) provide the FHA additional flexibility in times of financial crisis to ensure it can play a countercyclical role. Finally, committee members agreed to work with the FHA to expand loss mitigation options for individuals who receive income from sources other than employment.
Special Alert: CFPB Enforcement Action Targets Marketing of Auto Loans, Add-On Products to Servicemembers
This morning, the Consumer Financial Protection Bureau (CFPB) announced enforcement actions against a national bank and its service provider related to alleged deceptive marketing of auto loans and add-on products to active-duty servicemembers. The CFPB claims that the companies failed to disclose or mischaracterized certain fees charged and ancillary products offered through a program developed to finance auto loans to servicemembers. These are the first public enforcement actions by the CFPB related to auto finance, and according to CFPB Director Richard Cordray, were precipitated by a complaint received from an individual servicemember’s relative. The actions demonstrate the CFPB’s focus on auto finance and its increasing coordination with the Department of Defense (DOD) and the individual branches of the military on servicemember protection issues.
Scope of Alleged Violations
The CFPB charges that the bank violated Regulation Z (TILA) by failing to accurately disclose the finance charge, annual percentage rate, payment schedule and total of payments for the subject loans, and also violated the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices by (i) failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for the subject loans; and (ii) deceptively marketing the prices and coverage of add-on service contracts. Specifically, the bank allegedly failed to inform servicemembers that they would be charged a monthly processing fee for automatic payroll allotments; (ii) failed to disclose that the allotments would be deducted from servicemember paychecks twice per month, but only credited once a month; and (iii) failed to regularly review and validate its vendor’s marketing related to the cost and coverage of add-on service contracts. As with the CFPB’s actions last year related to certain add-on products marketed by credit card issuer vendors, the CFPB focused on the marketing of the products and did not directly address their value. This action also applies the CFPB’s guidance on vendor management, which outlines the CFPB’s expectations for oversight and management of third-party vendors involved in the offering of ancillary products.
The service provider is alleged to have violated the CFPA’s prohibition on unfair, deceptive, or abusive practices by (i) deceptively marketing the prices of an add-on vehicle service contract and an add-on GAP insurance product; and (ii) deceptively marketing the scope of the coverage of a vehicle service contract. The CFPB asserts that the company understated the costs of the vehicle service contract and insurance product and overstated the reach of their coverage.
Resolution
The orders require the companies to cease the alleged practices, improve disclosures, and pay combined restitution of approximately $6.5 million - $3.2 million by the bank, $3.3 million by the vendor. Neither order includes a civil money penalty.
In addition, the bank must (i) develop a comprehensive compliance plan within 60 days; (ii) submit compliance progress reports within 90 days and after one year, as well as within 14 days of receiving a request from the CFPB after the one-year report; and (iii) implement certain recordkeeping requirements. The service provider has 15 days to retain an independent consultant to develop a compliance plan. Within 90 days of when the CFPB approves the consultant, the service provider must submit a compliance management system and written compliance plan. It also is subject to similar reporting and recordkeeping requirements.
Application of “Responsible Conduct” Guidance
Earlier this week, as detailed in our prior Special Alert, the CFPB issued guidance setting forth its expectations for companies subject to enforcement activity. Among other things, the CFPB stated that “responsible conduct” may be rewarded by the exercise of its discretion to resolve an investigation with no public enforcement action or to reduce any sanction or penalty imposed. According to the CFPB, in the actions announced today, the companies proactively addressed aspects of the loan program at issue and worked cooperatively with the Bureau to provide refunds to servicemembers. While the matters nonetheless resulted in public enforcement actions, the Bureau states expressly that this “responsible conduct” was one of several factors it considered in electing not to impose civil money penalties.
CFPB’s Focus on Auto Finance & Servicemember Protection
In addition to marketing of loans and add-on products, the CFPB has continued to focus on the fair lending implications of certain practices of indirect auto lenders. Just last week, the CFPB sought to explain to members of Congress its rationale for pursuing auto fair lending claims, largely reiterating the information set forth in the guidance issued in CFPB Bulletin 2013-02, and the CFPB reportedly has several ongoing auto finance investigations. We expect to see additional auto finance actions from the Bureau addressing the marketing and pricing of auto loans and add-on products.
Today’s CFPB announcement notes that the DOD and the Judge Advocate General Corps of each of the service branches assisted the CFPB in this matter. Concurrent with the announcement, the CFPB published information for servicemembers related to military allotments, announced that the DOD has established a working group that will consult with the CFPB and other federal regulators to look at the use of military discretionary allotments, and reiterated the Bureau’s general commitment to working with the DOD on protecting servicemembers in the consumer financial marketplace.”
U.K. Parliamentary Commission Report Offers Comprehensive Bank Governance Reforms
On June 19, the U.K. Parliamentary Commission on Banking Standards published a report titled “Changing Banking for Good.” The Commission, established in July 2012 after the alleged rigging of LIBOR was revealed, was tasked “to conduct an inquiry into professional standards and culture in the U.K. banking sector and to make recommendations for legislative and other action.” The report covers a broad range of banking sector issues, but focuses on the impacts of a perceived misalignment of incentives in banking. Some of the key recommendations include: (i) establishing a new regime to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks ; (ii) creating a new licensing regime underpinned by Banking Standards Rules; (iii) creating a new criminal offense of reckless misconduct in the management of a bank for senior bank officers; (iv) adopting a new remuneration code to better align risks taken and rewards received that would also defer more remuneration for a longer period of time; and (v) giving the bank regulator a new power to cancel all outstanding deferred remuneration for senior bank employees in the event their banks require taxpayer support.