InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB examines potential impact of high vehicle costs on consumers with deep subprime credit scores
On September 28, the CFPB published a blog post examining the potential impact of high vehicle costs on borrowers with deep subprime credit scores (credit scores below 540). The findings follow a separate recent CFPB blog post, which explored the potential relationship between high vehicle costs and changes in auto loan characteristics and performance (covered by InfoBytes here). Pointing out that many lenders do not provide information on deep subprime auto loans to consumer reporting agencies (CRAs), the Bureau’s newest findings rely on a statistical database containing information on vehicles and vehicle loans pulled from various sources, including vehicle titles and registrations, auto lenders, and auto manufacturers. The Bureau found that the median value of vehicles purchased by consumers with deep subprime credit scores has increased by roughly 60 percent since 2019, as compared to only a 30 percent increase for consumers with prime credit scores. The Bureau expressed concern that many consumers with deep subprime credit scores have been priced out of the auto loan market, noting that “the rapid increase in vehicle prices has had the largest impacts on the most vulnerable consumers.” The Bureau will continue to monitor these trends, but said the lack of data on monthly payments or delinquency rates for auto loans that are not furnished to CRAs limits its ability to study affordability concerns.
CFPB releases report on elder financial exploitation
On September 28, the CFPB published a report examining recovery from elder financial exploitation (EFE). In the report, the Bureau presents a framework for financial recovery derived from insights gathered through interviews with older adults, caregivers, and professionals, as well as existing research and literature across a range of disciplines. The EFE financial recovery framework consists of a series of hypotheses regarding the key factors that could make recovery more or less likely at four stages: (i) identification that EFE has occurred; (ii) reporting of suspected EFE to authorities; (iii) investigation of suspected EFE; and (iv) return of funds to the victim. According to the report, these stages represent a logical sequence of steps that are often necessary, if not individually sufficient, for achieving financial recovery. The Bureau also found that there are “eight cross-cutting factors that can be influential throughout the four stages of the recovery process, and thus may play an important role in more cases.” The factors include, among other things, a prior relationship between the perpetrator and victim, cognitive decline, physical health factors, social support networks, and the method and number of transactions. The report also noted important implications for policy, research, and practice regarding EFE as a result of the study, such as increasing public awareness of successful prosecutions and enforcement actions resulting in financial recovery.
DOJ announces redlining settlement with New Jersey bank
On September 28, the DOJ announced a settlement with a New Jersey bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in the Newark metropolitan area in violation of the Fair Housing Act and ECOA. The DOJ’s complaint alleges that from at least 2015 to 2021, the bank failed to provide mortgage lending services to Black and Hispanic neighborhoods in the Newark metropolitan area. The DOJ also alleges that all of the bank’s branches were located outside of majority-Black and Hispanic neighborhoods and that these neighborhoods were also largely excluded from the bank’s marketing and outreach efforts.
Under the proposed consent order, the bank will, among other things, (i) invest a minimum of $12 million in a loan subsidy fund for majority-Black and Hispanic census tracts in the Newark metropolitan area, of which at least $150,000 per year will go towards advertising, outreach, consumer education, and credit counseling, and $400,000 will be spent on services to increase access to residential mortgage credit; (ii) establish new branches in neighborhoods of color, including at least one in the city of Newark, that will provide a full range of mortgage products; (iii) assign at least four mortgage loan officers dedicated to serving all neighborhoods in and around Newark; (iv) employ a full-time community development officer to oversee the continued development of lending in neighborhoods of color in the Newark area; and (iii) provide ECOA and fair lending training to employees and officials. The announcement cited the bank’s cooperation with the DOJ to remedy the identified redlining concerns. According to the announcement, this settlement represents the third-largest redlining settlement in DOJ’s history.
OCC issues $6 million penalty against national bank, terminates formal agreement
On September 27, the OCC announced a $6 million civil money penalty against a national bank for alleged unsafe or unsound practices related to a low-document mortgage loan program offered by the bank. According to the OCC, from mid-2011 to December 2019, the bank allegedly, among other things: (i) originated numerous loans that had false or fraudulent loan applications; (ii) falsified applicants’ information on supporting loan documents; (iii) failed to make a reasonable and good faith determination of applicants’ ability to repay; (iv) failed to ensure that documents used to verify applicants’ employment, income, and assets obtained from third parties, were reasonably reliable and accurate; (v) failed to properly disclose fees to third-party mortgage brokers on loan estimates and closing disclosures; and (vi) failed to implement an adequate system of Bank Secrecy Act/anti-money laundering internal controls and failed to file Suspicious Activity Reports in a timely manner. The bank must pay a $6 million civil penalty to the U.S. Treasury Department. The OCC also terminated a 2019 formal agreement between the OCC and the bank to remediate unsafe or unsound practices and violations of law. The OCC found that the bank implemented corrective actions required by the agreement and is in compliance with the enforcement action. The OCC also noted that it is continuing “to review the conduct of institution-affiliated parties subject to OCC jurisdiction who were associated with the now-ceased [program],” and that the “work remains ongoing.”
SEC fines tech company $23 million for FCPA violations
On September 27, the SEC announced that a multinational information technology company headquartered in Texas (the “Company”) agreed to pay over $23 million to settle claims that its agents and employees of its subsidiaries in Turkey, the United Arab Emirates (UAE), and India violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA. According to the SEC’s order, from at least 2014 through 2019, several subsidiary employees used discount schemes and false marketing reimbursement payments to create slush funds used to bribe foreign officials in exchange for business. The slush funds were also used to provide other benefits, including paying for foreign officials and their families to attend technology conferences around the world and trips to the U.S. The SEC explained that first-level supervisors at the subsidiaries could approve purchase orders under $5,000 without evidence that marketing activity actually took place. By exploiting this loophole in the company’s controls, employees of the Company’s subsidiaries in Turkey, the UAE, and India were able to funnel money into the slush funds undetected. Employees of the Turkish subsidiary allegedly used the funds to bribe government officials and pay for the travel and accommodation expenses of customers, including foreign officials, the SEC claimed. Employees of the UAE subsidiary allegedly used the funds to pay $130,000 in bribes to government officials in exchange for six contracts. Employees in India also allegedly engaged in a similar scheme, with one employee claiming that the Company would lose out on a deal if the Indian Ministry of Railways was not provided a 70 percent software discount. According to the SEC, the Ministry’s procurement website showed that the Indian subsidiary faced no competition because the Ministry required the use of the Company’s products for the project.
The resolution requires the Company to pay a $15 million civil money penalty, $7,114,376 million in disgorgement, and $791,040 in prejudgment interest. The Company neither admitted nor denied the allegations.
This is the second time the Company has resolved FCPA charges with the SEC. In 2012, the Company paid a $2 million penalty to settle allegations that it violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA when it allegedly failed to prevent an India subsidiary from maintaining unauthorized side funds at distributors.
Seven largest U.S. banks answer committee questions on overdraft fees and P2P fraud
On September 22, the Senate Banking Committee held a hearing entitled “Annual Oversight of the Nation’s Largest Banks” where chief executive officers from the seven largest U.S. retail banks testified on bank activities related to topics including peer-to-peer (P2P) payment networks; mortgage practices; overdraft fees; forced arbitration; and environmental, social, and governance agendas. Among other things, senators pushed the CEOs to take more aggressive action to eliminate overdraft fees and compensate P2P payment fraud victims.
- Overdraft fees. Democratic senators stressed that charges still fall too heavily on low-income and minority customers, with Senator Bob Menendez (D-NJ) saying that there is “no reasonable explanation to continue to charge overdraft fees on working families.” The CEOs discussed their respective efforts to relax overdraft policies to reduce fees, with one CEO noting that “there are a lot of occasions where if [overdraft protection] is not used, [customers] would be charged a higher fee on the other side.” These fees, he noted, “can often reduce the cost on the other side and stop them from going to payday lenders.” Another CEO added that he believes “giving people a choice and letting them opt in or out is the proper thing to do.” One bank CEO noted that his bank offers two accounts with no fees and provides customers the opportunity to choose in the moment if they want to return or pay for an item.
- P2P platforms. Senators Sherrod Brown (D-OH) and Elizabeth Warren (D-MA) asked the CEOs if they would give customers their money back if they are defrauded on a certain P2P platform and complain to the bank. The CEOs emphasized that their banks currently reimburse customers for fraud and “unauthorized transactions” and are taking measures to reduce the incidence of fraud, including educating consumers on how to detect scams. “There’s a tremendous amount that we can do as owners of the network to drive down the ability for thieves to take advantage of the network,” one CEO said when asked if banks believe it is their responsibility to make a consumer whole again. “That is what we're working on. That’s what we have to do.” Another CEO pointed out that other P2P platforms have “15 times the number of disputes” coming into the bank than the highlighted platform. One CEO also stressed that banks need to work through partnerships with law enforcement and regulatory agencies “to actually catch the criminals who are perpetuating this fraud against our customers.”
The previous day, the same CEOs discussed similar topics during the House Financial Services Committee’s hearing entitled “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks.” Several proposed bills containing provisions that would impact the banks if enacted were also discussed, including those that would (i) improve dispute procedures and disclosures related to reinvestigations of consumer reports (see H.R. 4120); (ii) amend and modernize bank merger laws (see H.R. 5419); and (iii) amend Community Reinvestment Act provisions to improve the assessment process for financial institutions (see H.R. 8833).
During the hearing (see committee memorandum here), committee members questioned the CEOs on a broad range of topics related to consumer protection compliance, enforcement, diversity initiatives, capital standards, emerging technologies and cybersecurity, merchant category codes for firearm purchases, and banking deserts. The CEOs addressed ways their banks have engaged in “responsible growth” and spoke on measures they have taken to bolster customer relations, including modifying overdraft practices. They also noted they are working on improving data protection and cybersecurity. In discussing P2P digital payment services, one CEO emphasized that “scams are growing daily” and regulators and legislators need to respond. He added that “[i]t’s not enough that we apportion blame after the fact. We need to stop fraud and scams before they occur. Secure [P2P] networks, real-time payments, and potentially FedNow allow for direct authentication with a host bank. They also allow members of the network to identify [] and police against scam accounts. This is not the case with nonbank networks. These networks are not held to the same security standards as banks.” He stated that banks “have zero visibility into where the money went, zero capability to recover the money, and zero capability to close the bad account.”
SEC, CFTC fine Wall Street firms $1.8 billion
On September 27, the SEC and CFTC announced settlements (see here and here) with numerous broker-dealers for alleged recordkeeping failures. According to the SEC, from January 2018 through September 2021, the firms’ employees communicated about business matters using text messaging applications on their personal devices. The SEC further alleged that the firms violated federal securities laws by failing to maintain or preserve the substantial majority of these off-channel communications. The SEC charged each of the firms with violating certain recordkeeping provisions of the Securities Exchange Act of 1934, and with failing to reasonably supervise and detect such violations. Additionally, an investment adviser was charged with violating certain recordkeeping provisions of the Investment Advisers of 1940. In addition to paying a total of $1.1 billion in fines, the firms were ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured. The firms agreed to retain compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices. The SEC recognized the firms’ cooperation with the investigation.
Separately, in a related action, the CFTC announced settlements with many of the same firms for related conduct, totaling nearly $710 million. The CFTC noted that each firm acknowledged to CFTC staff that it was aware employees used unapproved methods to engage in business-related communications. The CFTC also said that as a result of each firm’s failure to ensure that its employees complied with communication policies and procedures, the firms failed to maintain business-related communications. The CFTC found that each firm failed to diligently “supervise its business as a CFTC registrant or registrants, in violation of CFTC recordkeeping and supervision provisions.”
FinCEN releases final rule on beneficial ownership reporting
On September 29, FinCEN issued a final rule establishing a beneficial ownership information reporting requirement, pursuant to the bipartisan Corporate Transparency Act. According to FinCEN, the final rule will require 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. FinCEN noted that the final rule is designed to protect national security and strengthen the integrity and transparency of the U.S. financial system. FinCEN also released a Fact Sheet clarifying the final rule. The final rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information, according to FinCEN. The same day, Treasury Secretary Janet L. Yellen released a statement, noting that the final rule is “a major step forward in giving law enforcement, national security agencies, and other partners the information they need to crack down on criminals, corrupt individuals, and other bad actors who seek to take advantage of America’s financial system for illicit purposes.”
OFAC publishes Cuba FAQ
On September 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published frequently asked question (FAQ) 1090 related to Cuba sanctions. The FAQ clarifies that “U.S. persons send remittances to Cuba using digital payments,” and that OFAC’s general licenses are self-executing, meaning that if U.S. persons assess that their transactions fall within the scope of the authorizations, “they may execute such transactions without further assurance from OFAC. For transactions that do not fall within the scope of these authorizations, U.S. persons may apply for an OFAC specific license.” OFAC further noted that it “will prioritize specific license applications seeking authorization to enable remittances to flow more freely to the Cuban people via digital payments.”
DFPI cracks down on crypto-asset Ponzi schemes
On September 27, the California Department of Financial Protection and Innovation issued desist and refrain orders against 11 entities, including nine crypto asset trading platforms, one metaverse software development company, and one decentralized finance platform for violating California securities laws. While each of the 11 entities allegedly offered and sold unqualified securities through their platforms and promised various fixed rates of return to investors, DFPI claimed that the entities actually engaged in Ponzi-like schemes and used investor funds to distribute supposed profits and returns to other investors. Additionally, DFPI accused the entities of “luring” new investors through referral programs that operated like pyramid schemes in which investors would be paid commissions to recruit new investors. Referring to these as “high yield investment programs (HYIPs),” DFPI claimed the entities provided investors with few details about the people operating the HYIPs, how the HYIPs make money, or how the HYIPs facilitate deposits and withdrawals with crypto assets, among other things. DFPI also accused 10 of the 11 entities of making material representations and omissions to investors about the qualifications of their securities under California law as well as the purported risks. DFPI said in its announcement that it had been directed by an executive order issued by the governor in May (covered by InfoBytes here) to initiate enforcement actions to stop violations of consumer financial laws and to increase residents’ awareness of the benefits and risks associated with crypto asset-related financial products and services.