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Financial Services Law Insights and Observations


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  • CFPB issues Winter 2020 Supervisory Highlights

    Federal Issues

    On February 14, the CFPB released its winter 2020 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of student loan servicing, payday lending, debt collection, and mortgage servicing. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between April and August of 2019. Highlights of the examination findings include:

    • Debt collection. The Bureau cited violations of the FDCPA’s requirement that debt collectors must, after the initial written communication, disclose that their communications are from a debt collector. The report also included the failure of some debt collectors to provide a written validation notice to consumers within five days after the debt collector initially contacts the consumer regarding the collection of a debt.
    • Payday lending. The Bureau found violations of the CFPA, including among other things, lenders failing to apply consumer payments to their loan balances and treating the accounts as delinquent. The Bureau also found weaknesses in employee training that resulted in providing consumers with inaccurate annual percentage rates in violation of Regulation Z.
    • Mortgage servicing. The Bureau pointed out that servicers had violated Regulation X by failing to provide written acknowledgement of receipt of consumer loss mitigation applications, including whether the applications were complete or incomplete, within five days of receipt. Servicers also failed to provide in writing a list of loss mitigation options for which the consumer was eligible within 30 days of receiving a complete loss mitigation application.
    • Student loan servicing. The Bureau noted that after loans were transferred, some servicers billed incorrect monthly amounts to the consumers.

    The report notes that in response to most examination findings, the companies have taken or are taking remedial and corrective actions, including by identifying and compensating impacted consumers and updating their policies and procedures to prevent future violations. Lastly, the report also highlights the Bureau’s recently issued rules and guidance.

    Federal Issues CFPB Debt Collection FDCPA Payday Lending Student Loan Servicer Mortgage Servicing Supervision Enforcement RESPA TILA ECOA Examination

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  • CFPB updates FCRA exam procedures

    Agency Rule-Making & Guidance

    On February 11, the CFPB issued updates to its Supervision and Examination Manual to include requirements of the FCRA created by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The updates apply to the examination procedures covering consumer reporting, larger participants, and education loans, and aim to reduce instances of consumer compliance law violations by companies that provide consumer financial products and services. According to the CFPB, the larger participants examination procedures provide guidance to examiners covering a number of areas including, among other things, (i) “accuracy of information and furnisher relations”; (ii) “contents of consumer reports”; (iii) “consumer inquiries, complaints, and disputes and the reinvestigation process”; (vi) “consumer alerts and identity theft provisions”; and (v) “other products and services and risks to consumers.” The Bureau’s guidance to examiners on education loan exam procedures concentrates on servicing and origination. Some of the topics included are: (i) “advertising, marketing, and lead generation”; (ii) “customer application, qualification, loan origination, and disbursement”; (iii) “student loan servicing”; (iv) “borrower inquiries and complaints”; and (v) “information sharing and privacy.”

    Agency Rule-Making & Guidance Consumer Finance CFPB Federal Issues Examination Supervision EGRRCPA FCRA

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  • House task force holds hearing on AI bias

    Federal Issues

    On February 12, the House Financial Services Committee’s Task Force on Artificial Intelligence (AI) held a hearing entitled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.” As previously covered by InfoBytes, the Committee created the task force to determine how to use AI in the financial services industry and examine issues surrounding algorithms, digital identities, and combating fraud. According to the Committee’s memorandum regarding the hearing, AI’s key technology is machine learning (ML)—“a process that may rely on pre-set rules to solve problems (also known as algorithms) without” or with only limited involvement of humans. Witnesses largely from the fields of computer science and AI delved into AI and ML at the hearing, discussing how human biases can be perpetuated in algorithms using historical data as input and how to best ensure fairness and accuracy. It was agreed that fairness has many different definitions that must be considered when creating algorithms. Witnesses provided testimony that when striving for fairness for one protected class, there may necessarily be tradeoffs resulting in less fairness to another protected class. Among other things, committee members questioned whether it is possible to formulate an algorithm that guarantees fairness and were urged not to focus too much on algorithms, but to also consider the data—where it came from, its quality and appropriateness—as potentially flawed data that could likely result in flawed outputs.

    Federal Issues House Financial Services Committee Consumer Finance Artificial Intelligence Fintech

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  • FDIC introduces deposit insurance application for nonbanks

    Agency Rule-Making & Guidance

    On February 10, the FDIC issued FIL-8-2020, which incorporates Procedures for Deposit Insurance Applications from Applicants that are Not Traditional Community Banks into its Deposit Insurance Application Procedures Manual (manual). In addition to the updating the manual, the agency also issued a handbook, entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions (handbook), advising that the updated manual together with the handbook provide comprehensive instructions for completing deposit insurance applications. According to the letter, the updated manual and the handbook contain mostly “technical edits and clarifications” and are meant to “provide transparency and clarity” for applicants. The letter also supplies the definitions of “non-bank” and “non-community bank.”

    Agency Rule-Making & Guidance Deposit Insurance Nonbank Federal Issues Community Banks Supervision

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  • FTC seeks injunction against online investment training academy for deceptive claims

    Federal Issues

    On February 12, the FTC filed a complaint in the U.S. District Court for the Central District of California against a California-based investment training operation alleging use of deceptive claims to sell costly “training programs” targeting older consumers. According to the complaint, the operation allegedly violated the FTC Act and the Consumer Review Fairness Act by using false or unfounded claims to market programs that purportedly teach consumers investment strategies designed to generate substantial income from trading in the financial markets “without the need to possess or deploy significant amounts of investable capital.” The FTC also alleges that the operation’s instructors claim to be successful traders who have amassed substantial wealth using the strategies, but are actually salespeople working on commission. However, the FTC asserts, among other things, that the operation fails to track customers’ trading results and that its earnings claims are false or unsubstantiated. Moreover, the FTC alleges the operation requires that dissatisfied customers requesting refunds sign agreements barring them from posting negative comments about the operation or its personnel, and specifically prohibits customers from reporting potential violations to law enforcement agencies. Among other things, the FTC seeks injunctive relief against the operation, as well as “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.”

    Federal Issues FTC Enforcement Consumer Protection FTC Act UDAP Deceptive Consumer Review Fairness Act

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  • CFPB denies debt collector’s request to set aside CID

    Federal Issues

    On February 6, the CFPB released a Decision and Order denying a debt collection company’s (petitioner) request to set aside or modify a third-party Civil Investigative Demand (CID) issued by the Bureau, and directing the petitioner to provide all information required by the CID. The CID in dispute was issued to the petitioner by the CFPB in November and seeks documents and written responses pertaining to the petitioner’s business practices and its relationship with a New York-based debt collection law firm. The CID requests information regarding whether “debt collectors, furnishers, or associated persons” had, among other things, (i) violated the Consumer Financial Protection Act by ignoring warnings regarding debts resulting from identity theft “in a manner that was unfair, deceptive or abusive”; (ii) violated the FDCPA by disregarding cease-and-desist requests or by failing to provide required notices or making false or misleading statements; or (iii) violated the FCRA by “fail[ing] to correct and update furnished information, or fail[ing] to maintain reasonable policies and procedures.”

    In its petition to set aside or modify the CID, the petitioner set out four primary arguments: (i) the structure of the CFPB is unconstitutional, and it therefore “lacks authority to proceed with enforcement activity”; (ii) the CID improperly seeks attorney-client privileged information; (iii) the CID is “overly broad,” does not apply to the petitioner, and does not sufficiently provide the “nature of the conduct under investigation and the applicable provisions of law”; and (iv) the CID improperly seeks information beyond the applicable statute of limitations.

    The Bureau’s denial of the petitioner’s request addresses each of the petitioner’s arguments. Regarding the constitutionality of the CFPB’s structure, the order asserts that “the administrative process set out in the [B]ureau’s statute and regulations for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the [B]ureau’s statute.” In response to the petitioner’s attorney-client privilege argument, the order states that the petitioner “does not ask…to modify the CID to avoid seeking privileged information—it only asks that the CID be quashed in its entirety.” The Bureau states that because the petitioner makes a “blanket assertion” of attorney-client privilege rather than providing the required privilege log in order to properly claim privilege over materials requested in the CID before filing its petition, the petitioner’s argument is “procedurally improper” and does not show that the “CID should be set aside on these grounds.” To the petitioner’s lack of specificity argument, the order states that the CID “sets forth in detail both the conduct under investigation and applicable laws,” adding that there is no requirement that the Bureau disclose the targets of its “ongoing and confidential law-enforcement investigations.” The order also rejects the petitioner’s statute of limitations argument, explaining that the Bureau is not limited to the three years preceding the CID, but “instead what matters is whether the information is relevant to conduct for which liability can be lawfully imposed.”

    Federal Issues CFPB Enforcement Consumer Finance CIDs Debt Collection Single-Director Structure Statute of Limitations Dodd-Frank FDCPA FCRA

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  • FinCEN focuses on securities industry BSA/AML information sharing

    Financial Crimes

    On February 6, Financial Crimes Enforcement Network (FinCEN) Deputy Director Jamal El-Hindi delivered remarks at the Securities Industry and Financial Markets Association’s 20th Anti-Money Laundering (AML) and Financial Crimes Conference discussing, among other things, the agency’s focus on the Bank Secrecy Act (BSA). Specifically, El-Hindi stressed the importance of information sharing in the BSA context, remarking that the financial sector is “in an evolutionary state” dealing with “new technologies and new payment systems, such as those that involve virtual currency.” He asserted that innovators in the development of cryptocurrencies and messaging systems “cannot turn a blind eye to illicit transactions that they may be fostering,” and noted that FinCEN will regulate these emerging systems in accordance with existing principles that underlie the BSA and AML rules and regulations for the financial sector. El-Hindi encouraged the securities industry to share information, observing that only 14 percent of eligible securities companies are registered to take part in the 314(b) business-to-business information sharing program. He suggested that the industry needs better communication and cooperation to increase the effectiveness of BSA information collection. El-Hindi also discussed how cooperation has helped FinCEN’s cross-agency coordination and enhanced the agency’s rulemaking and guidance—specifically in the establishment of the Customer Due Diligence and Beneficial Ownership rule, but recognized that the lack of information collected regarding the formation of new corporations can frustrate the agency’s risk assessment abilities. To motivate information sharing, El-Hindi emphasized the importance of BSA information financial companies collect, sharing that SARs filings by securities companies have “increased roughly eight-fold” from 2003 to 2019, and that data provided from BSA filings is used frequently by law enforcement and regulators to inform their investigations and examinations and to “identify trends and focus resources.”

    Financial Crimes Federal Issues FinCEN Anti-Money Laundering Bank Secrecy Act Combating the Financing of Terrorism Supervision Customer Due Diligence SARs Securities

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  • Mobile banking company approved for FDIC deposit insurance

    Federal Issues

    On February 7, the FDIC approved a proposed national bank’s application for deposit insurance and consent to merge with its parent company. The FDIC found that financial projections show the bank, which will offer banking products through mobile, online, and phone-based banking channels, will be “well capitalized” based on initial paid-in capital funds of no less than $104.4 million to be provided through the transfer of assets and liabilities. During the first three years of operation, the bank must maintain a Tier 1 leverage ratio of 10 percent or greater, and may also be required to maintain higher minimum capital requirements as dictated by the bank’s operating plan or as required by the OCC pursuant to its regulatory authority. According to the FDIC, the proposed national bank will be located in Utah, and while it will have no branches, deposit-taking ATMs, or offices available to the public, it will offer full-service banking products and combine “traditional retail banking approaches with modern technology.”

    The FDIC noted that deposit insurance will not take effect until the bank has been granted a charter and its banking operation has been fully approved by the OCC to operate as a depository institution (in August 2018, the OCC granted preliminary conditional approval of the bank’s de novo chapter application). According to the FDIC, approval is conditioned on the Federal Reserve Board granting final approval to the parent company to become a bank holding company.

    Federal Issues FDIC OCC Federal Reserve Mobile Banking Deposit Insurance

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  • Powell discusses CRA, LIBOR at House hearing

    Federal Issues

    On February 11, Federal Reserve Chairman Jerome Powell provided testimony to the House Financial Services Committee during a hearing titled “Monetary Policy and the State of the Economy,” discussing regulatory issues concerning, among other things, proposed rulemaking related to the Community Reinvestment Act (CRA) and the transition away from reliance on LIBOR as an interest rate benchmark in financial products. During the hearing, Powell fielded a number of questions concerning the Fed’s plan to update CRA regulations. Reaffirming his support for Fed Governor Lael Brainard’s disapproval of how quickly the FDIC and OCC issued their notice of proposed rulemaking (covered by a Buckley Special Alert), Powell stated that he is “very comfortable with. . .the thinking” Brainard recently outlined in a speech describing alternative approaches to the CRA modernization process (covered by InfoBytes here). Powell emphasized, however, that the ideas in Brainard’s speech do not yet represent a formal framework, stating “[w]e want to be very, very sure. . .that what comes out of this is a proposal. . .from us that will leave all major participants in CRA better off. And so we think it’s important that each metric, each change that we make is grounded in data.”

    Powell also discussed the upcoming transition from LIBOR to the Secured Overnight Financing Rate (SOFR), stating that federal regulators are working to ensure financial institutions are prepared for LIBOR’s possible cessation. When asked whether Congress should “simply give the Fed the right to prescribe backup rates when the debt instruments do not do so,” or explicitly adopt SOFR, Powell responded that he did not believe a federal law change is necessary at this time. Powell further responded that the Fed will inform Congress if a change in federal law is needed, emphasizing that the Fed’s “process is ongoing” and that it is “committed to having the banks ready by the end of next year to switch. . .away from LIBOR in case [the rate] is no longer published.” Powell noted that while SOFR will be the main substitute for LIBOR, the Fed is “working with regional [banks] and some of the larger banks, too, about the idea of also having a credit sensitive rate.”

    Federal Issues House Financial Services Committee Federal Reserve CRA LIBOR Of Interest to Non-US Persons SOFR

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  • Treasury announces anti-terrorist financing plan

    Financial Crimes

    On February 6, the U.S. Treasury Department announced the 2020 National Strategy for Combating Terrorist and Other Illicit Financing. The report provides an overview of the anti-money laundering/countering the financing of terrorism (AML/CFT) program in the U.S. and details how the program can be updated to be more efficient and effective. Among other things, the report covers the most noteworthy threats to the financial system such as fraud, drug trafficking, and human trafficking, and highlights that one of the greatest vulnerabilities to the U.S. financial system is a failure to collect beneficial ownership information when new companies are formed or when company ownership changes. The report also focuses on ways to make the AML/CFT framework stronger, including through increased transparency and improved financial institution regulation and supervision. Additionally, the report advocates boosting the AML/CFT operational framework through the use of technologies, expanded data analytics, increased information sharing, and promotion of worldwide standards.

    Financial Crimes Federal Issues Department of Treasury Anti-Money Laundering Combating the Financing of Terrorism Bank Regulatory Supervision Of Interest to Non-US Persons

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