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  • Chopra testifies at congressional hearings

    Federal Issues

    On December 14, CFPB Director Rohit Chopra testified at a hearing titled Consumers First: Semi-Annual Report of the Consumer Financial Protection Bureau held by the House Financial Services Committee on the CFPB’s most recent semi-annual report to Congress (covered by InfoBytes here). Chopra’s prepared statement focused on: (i) the current state of the economy and household finance; (ii) promoting an open, competitive, and a decentralized market; and (iii) actions by Congress where bipartisan support is expected. Chopra also cited concerns regarding the accuracy of medical debt credit reporting and noted that the CFPB is continuing “to examine how medical debt burdens are impacting household balance sheets.”

    House Financial Services Chairwoman Maxine Waters (D-CA) praised Chopra’s leadership in her opening statement, stating that the Bureau has combated “redlining, housing discrimination, illegal evictions, and foreclosures, and has worked tirelessly to root out appraisal bias.” However, Ranking Member Patrick McHenry (R-PA) argued that the Bureau’s “lack of transparency is of grave concern.” McHenry discussed the CFPB’s six compliance bulletins, five advisory opinions, five interpretive rules, and seven circulars published this year, which he considers to have fostered “uncertainty” within the financial services industry. McHenry also warned Chopra that he can expect “much more thorough” oversight next year when Republicans take control of the House and when McHenry becomes the chair of the House Financial Services Committee.

    During the hearing, Chopra acknowledged that the Bureau's Section 1071 Rulemaking “is on track to issue a final rule by March 31, 2023”—a deadline established by court order in July as a result of a stipulated settlement reached in February 2020 with a group of plaintiffs, including the California Reinvestment Coalition, related to the collection of small business lending data (covered by InfoBytes here). Chopra added that the Bureau wants to ensure it has “an implementation period that gives the smaller firms more time, and the ability to make sure it’s not duplicative with existing requirements under the Community Reinvestment Act.”

    During the hearing, Republican committee members inquired about the agency’s creation and use of the term “junk fees” to describe, among other things, legal fees that banks charge for financial products and services. According to Rep. Blaine Luetkemeyer (R-MO) “there is no such word in financial services lexicon,” and the Bureau is “making up a word and then using it to go out and enforce something that doesn’t exist.” Republican committee members also inquired about the Bureau’s recent updates to its UDAAP exam manual. As previously covered by a Buckley Special Alert, in March, the CFPB announced significant revisions to its UDAAP exam manual, in particular highlighting the CFPB’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service. Rep. Andy Barr (R-KY) commented that “this is not interpretive guidance,” and said Chopra is “trying to change the law.”

    Chopra reiterated the Bureau’s priorities in his December 15 testimony before the Senate Banking Committee. During the hearing, Ranking Member Sherrod Brown (D-OH) noted that Republican lawmakers proposed legislation to subject the CFPB to appropriations and to change the CFPB's single-director structure to a commission. Chopra was also questioned by Ranking Member Patrick Toomey (R-PA) who raised concerns regarding the Bureau’s “overreach and pursuit of a politicized agenda.” He further argued that “the Dodd-Frank Act exempted the CFPB from appropriations,” and “empowers the CFPB to simply take funds from the Fed, which is itself also not subject to appropriation, thereby doubly insulating the CFPB from any congressional control.” Other topics discussed during the hearing included, among other things, military lending, credit cards, and overdraft fees. 

    Federal Issues CFPB House Financial Services Committee Senate Banking Committee Section 1071 Consumer Finance Overdraft Junk Fees UDAAP

  • FHA announces pandemic assistance on reverse mortgages

    Federal Issues

    On December 15, FHA published Mortgagee Letter 2022-23, COVID-19 Home Equity Conversion Mortgage (HECM) Property Charge Repayment Plan, which provides requirements for a new property charge repayment plan option for senior homeowners with HECMs who have gotten behind on their property charge payments as a result of the Covid-19 pandemic. The eligibility policies of the new repayment plan include, among other things:

    • Making the plan available to borrowers who have applied for Homeowner Assistance Fund (HAF) assistance, if the HAF funds combined with the borrower’s ability to repay will satisfy the servicer’s advances for the delinquent property charges;
    • Permitting the Covid-19 HECM Repayment Plan regardless of whether the borrower has been unsuccessful on a prior repayment plan and whether the borrower owes over $5,000 in property charge advances; and
    • Requiring a verbal attestation from the borrower that they have been impacted by Covid-19.

    Additionally, borrowers may receive a repayment plan regardless of the dollar amount of property charge payments owed. Further, servicers can offer homeowners a repayment plan of up to five full years (60 months) regardless of whether a prior repayment plan has been used.

    Federal Issues Agency Rule-Making & Guidance FHA HECM Mortgages Mortgage Servicing Covid-19 Consumer Finance

  • Mortgage lender agrees to pay $38.5 million to settle False Claims Act underwriting allegations

    Federal Issues

    On December 14, the DOJ announced a $38.5 million settlement with a mortgage lender to resolve alleged False Claims Act (FCA) violations related to its origination and underwriting of mortgages insured by the Federal Housing Administration (FHA). According to the DOJ, a former underwriter filed a lawsuit under the FCA’s whistleblower provisions alleging the lender engaged in an underwriting process that allowed employees to disregard FHA rules and falsely certify compliance with underwriting requirements. These actions, the underwriter claimed, resulted in the government later paying insurance claims on loans that were improperly underwritten. Under the terms of the settlement, the lender will pay $38.5 million to the U.S., with the whistleblower receiving more than $11.5 million. Notably, not only did the DOJ not exercise its right to join the case and take over its prosecution, but also had sought unsuccessfully to have the case dismissed.  The Supreme Court heard oral argument in United States, ex rel. Polansky v. Executive Health Resources, Inc. regarding whether and when the government has authority to force such a dismissal of a False Claims Act brought by a whistleblower. 

    Federal Issues DOJ False Claims Act / FIRREA Enforcement Mortgages FHA

  • District Court approves $4.24 million overdraft settlement

    Courts

    On December 9, the U.S. District Court for the Southern District of Florida granted final approval to a $4.24 million class action settlement resolving allegations related to a defendant bank’s overdraft fee practices. Plaintiff alleged breach of contract claims related to the defendant’s practice of charging overdraft fees on checks and automated clearing house transactions that were paid by the defendant despite customer accounts having insufficient funds. The overdraft fees were allegedly charged after the transaction was resubmitted by a merchant or third party after having previously been returned unpaid by the defendant for insufficient funds. The parties reached a settlement in which the defendant will pay $4.24 million into a settlement fund to provide relief to class members (defined as all current and former consumer checking account holders who were charged at least one retry overdraft fee). The settlement also include $1.4 million in attorneys’ fees. A service award for the class representative was denied, however, with the court explaining that the law in its circuit makes “clear that incentive awards ‘that compensate a class representative for [her] time and rewards her for bringing a lawsuit’ are prohibited.”

    Courts Consumer Finance Class Action Settlement Overdraft

  • NYDFS reminds institutions to seek prior approval before engaging in virtual currency activities

    State Issues

    On December 15, NYDFS released virtual currency guidance for regulated banking institutions and licensed branches and agencies of foreign banking organizations. NYDFS reminded covered institutions that they must seek prior approval at least 90 days before engaging in any new or significantly different virtual currency-related activity. The agency noted that this requirement also applies in situations where any portion of the activity will be handled by a third party. The guidance outlines the process institutions should observe for seeking prior approval and summarizes the following categories of information that the agency will consider when assessing proposals: business plan, risk management, corporate governance and oversight, consumer protection, financials, and legal and regulatory analysis. The guidance includes a supplemental checklist of initial documents and required information.

    NYDFS reiterated that prior approvals “to engage in virtual currency-related activity does not constitute general consent for that institution to engage in other types of virtual currency-related activity, nor does it authorize other Covered Institutions to undertake that same activity.” Institutions already engaging in virtual-currency related activities should immediately notify NYDFS, if they have not already done so. The guidance, which is not intended to limit the scope or applicability of any law or regulation, is effective as of its release date and applies to all regulated institutions for all virtual currency-related activities.

     

    State Issues Bank Regulatory Digital Assets NYDFS Virtual Currency Agency Rule-Making & Guidance

  • FINRA alerts firms about rising ransomware risks

    Privacy, Cyber Risk & Data Security

    On December 14, FINRA issued Regulatory Notice 22-29, alerting member firms about the increasing number and sophistication of ransomware incidents. FINRA explained that the proliferation in ransomware attacks can be attributed in part to the increased use of technology and continued adoption of cryptocurrencies that bad actors use to conceal their identities when collecting ransom payments. Moreover, bad actors who purchase attack services on the dark web “have helped execute attacks on a much larger scale and make attacks available to less technologically savvy bad actors,” FINRA said. Under Rule 30 of the SEC’s Regulation S-P, firms are required to maintain written policies and procedures designed to reasonably safeguard customer records and information, FINRA stated, adding that FINRA Rule 4370 (related to business continuity plans and emergency contact information) also applies to ransomware attacks that include service denials and other interruptions to firms’ operations. The notice provides questions for firms to consider when evaluating their cybersecurity programs and outlines common attack types and considerations for firms’ ransomware threat defenses, as well as additional ransomware controls and relevant resources.

    Privacy, Cyber Risk & Data Security FINRA Ransomware Digital Assets Cryptocurrency SEC

  • OFAC issues sanctions, GL, and FAQ on countering narcotics

    Financial Crimes

    On December 14, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 14059 against an individual for being involved in activities or transactions that materially contributed to, or pose a significant risk of materially contributing to, the international proliferation of illicit drugs or their means of production. According to OFAC, the designated individual is the leader of a Dominican Republic-based criminal organization engaged in various illicit activities, and his organization controls several drug trafficking routes into the U.S. As a result of the sanctions, all property and interests in property belonging to the sanctioned persons subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons.

    The same day, OFAC issued Counter Terrorism General License (GL) 21A, Authorizing Limited Safety and Environmental Transactions Involving Certain Vessel. GL 21 authorizes all activities otherwise prohibited by the Global Terrorism Sanctions Regulations (GTSR), 31 CFR part 594, that are ordinarily incident and necessary to the limited safety and environmental activities described in paragraph (a) of GL 21A involving certain blocked persons and vessels through January 14, 2023. Additionally, OFAC announced it is amending a Counter Terrorism Frequently Asked Question 1097, which clarifies GL 21A.

    Financial Crimes Department of Treasury OFAC Of Interest to Non-US Persons OFAC Sanctions OFAC Designations

  • FinCEN issues proposed beneficial ownership information access and safeguards rulemaking

    Financial Crimes

    On December 15, FinCEN issued a notice of proposed rulemaking (NPRM) to implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information. (See also FinCEN fact sheet here.) The NPRM follows a final rule issued by FinCEN at the end of September (effective January 1, 2024), which establishes a beneficial ownership information reporting requirement (Reporting Rule) and requires most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. to report information about their beneficial owners to FinCEN. (Covered by InfoBytes here.)

    In accordance with CTA requirements related to beneficial ownership information access and safeguard provisions, FinCEN’s NPRM proposes regulations for establishing who may request beneficial ownership information, how the information must be secured, and non-compliance penalties. Specifically, the proposal would limit the disclosure of beneficial information to “[f]ederal agencies engaged in national security, intelligence, or law enforcement activities; state, local, and Tribal law enforcement agencies with court authorization; financial institutions with customer due diligence requirements and regulators supervising them for compliance with such requirements; foreign law enforcement agencies, prosecutors, judges, and other agencies that meet specific criteria; and Treasury officers and employees under certain circumstances.” The proposal would also require authorized recipients to maintain security and confidentiality protocols that align with the scope of access and use provisions.

    Among other things, the NPRM addresses aspects of the secure, non-public beneficial ownership database that is currently in development, and specifies when and how reporting companies may report FinCEN identifiers tied to entities. Under the proposal, foreign requesters would be required to make their requests for beneficial ownership information through intermediary federal agencies, and financial institutions would only be allowed to request this information from FinCEN for purposes of complying with customer due diligence (CDD) requirements and only after receiving consent from the reporting company to which the information pertains.

    Comments on the NPRM are due by February 14, 2023. FinCEN explained that this is the second of three rulemakings planned to implement the CTA. The third rulemaking, which will revise FinCEN’s CDD rule, will occur no later than one year after the effective date of the Reporting Rule.

    Financial Crimes Agency Rule-Making & Guidance FinCEN Of Interest to Non-US Persons Corporate Transparency Act CDD Rule Beneficial Ownership

  • District Court grants defendant’s motion for summary judgment in data collection suit

    Courts

    On December 12, the U.S. District Court for the Northern District of California granted a defendant’s motion for summary judgment in a suit alleging that it collected consumers’ data without first obtaining their consent. According to the opinion, the plaintiffs are users of the defendant’s browser who alleged that they chose not to sync their browsers with the defendant’s accounts while browsing the web from July 2016 to the present. The complaint further noted that the browser’s sync feature permits “users to store their personal information by logging into the browser with their [defendant’s] account.” The district court granted the defendant’s motion for summary judgment after determining that most of the issues are “browser agnostic” rather than specific to the browser. Furthermore, the district court determined that because those issues are not specific to the browser, the defendant’s general privacy policies “governs the collection of those categories of information identified by plaintiffs.” The district court also found that “a reasonable person viewing those disclosures would understand that [the defendant] maintains the practices of collecting its users' data when users use [the defendant’s] services or third-party sites that use [the defendant’s] services and that [the defendant] uses the data for advertising purposes.” The district court also noted that “a reasonable user reviewing these same disclosures would understand that [the defendant] combines and links this information across sites and services for targeted advertising purposes.”

    Courts Data Privacy Data Collection / Aggregation

  • CFTC, DOJ, SEC file charges in crypto fraud scheme

    Federal Issues

    On December 13, the SEC filed a complaint against the former CEO/co-founder (defendant) of a collapsed crypto exchange for allegedly orchestrating a scheme to defraud equity investors. According to the SEC, from May 2019 to November 2022, the defendant raised over $1.8 billion from investors who bought an equity stake in his company in part because they believed his representations that the platform had “top-notch, sophisticated automated risk measures in place.” The complaint alleged, among other things, that the defendant orchestrated “a massive, years-long fraud” to conceal (i) the undisclosed diversion of customers’ funds to the defendant’s privately-held crypto hedge fund; (ii) the undisclosed special treatment afforded to the hedge fund on the company platform, including providing it with a virtually unlimited “line of credit” funded by the platform’s customers; and (iii) the undisclosed risk stemming from the company’s exposure to the hedge fund’s significant holdings of overvalued, illiquid assets, such as the platform-affiliated tokens. The complaint further alleged that the defendant used commingled funds at his hedge fund to make undisclosed venture investments, purchase lavish real estate purchases, and give large political donations. The SEC’s complaint charged the defendant with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking injunctions against future securities law violations; an injunction that prohibits the defendant from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar.

    The defendant was also indicted by a grand jury in the U.S. District Court for the Southern District of New York on wire fraud, commodities fraud, securities fraud, money laundering, and campaign finance charges.

    The CFTC also filed a complaint against the former CEO/co-founder, in addition to the collapsed crypto exchange and the hedge fund for making material misrepresentations in connection with the sale of digital commodities in interstate commerce. Specifically, the CFTC alleged that the exchange’s executives, at the former CEO’s direction, created a number of exceptions to benefit his hedge fund, including adding features in the underlying code to permit the hedge fund to “maintain an essentially unlimited line of credit” on the trading platform through an “allow negative flag,” which allowed the hedge fund to withdraw billions of dollars in customer assets from the company. The CFTC is seeking restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations, as charged.

    Later, on December 21, the SEC and CFTC filed charges (see here and here) against the former CEO of the hedge fund and the former chief technology officer of the collapsed crypto exchange for their roles in the scheme to defraud equity investors. The agencies stated that investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

    Federal Issues Digital Assets Securities SEC CFTC DOJ Cryptocurrency Enforcement Securities Act Securities Exchange Act Commodity Exchange Act Fraud

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