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Financial Services Law Insights and Observations


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  • D.C. Federal Court Dismisses Lawyer, Service Provider Challenge to CFPB Probe

    Consumer Finance

    On October 17, the U.S. District Court for the District of Columbia granted the CFPB’s motion to dismiss an attorney and service provider’s lawsuit challenging the authority of the CFPB.  The court declined to exercise jurisdiction in the case and did not reach the merits of the service provider’s constitutional challenge.  The court agreed with the CFPB’s argument that the service provider could obtain complete relief on its constitutional claim in an enforcement action currently pending in the Central District of California, and thus, injunctive and declaratory relief in the D.C. District Court was inappropriate.  The court also held that the attorney, who is not a party to the Central District of California action, lacked standing to raise her claim, because she had failed to demonstrate a substantial probability of being forced to produce privileged information to the Bureau.

    CFPB Enforcement Single-Director Structure

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  • CFPB Deputy Director Discusses Supervisory Framework

    Consumer Finance

    As reported last week, the CFPB has decided to stop sending enforcement attorneys to routine examinations of financial institutions effective November 1.  In a recent interview, CFPB Deputy Director Steven Antonakes said that the decision followed an “assess[ment of] the effectiveness and efficiency of the operation” over the past two years.  He clarified that the presence of enforcement attorneys was “absolutely not” intended to intimidate supervised institutions but rather reflected the CFPB’s ongoing efforts to ensure “strong communication” between supervision and enforcement teams throughout the examination process.

    Going forward, Antonakes explained that enforcement attorneys will continue to have a “line of sight throughout the beginning, middle, and end of the exam process,” in addition to serving other important functions, like conducting independent investigations.  He noted the recent action targeting a debt settlement payment processor as “just one example of an independent investigation [the] enforcement team conducted completely outside of the supervisory process”.  Antonakes further explained that “charter or license type is becoming less relevant in determining how we will prioritize and schedule our examinations.”  Rather, the CFPB has “begun to implement a prioritization framework” that allocates resources based on potential consumer risk, assessed through consideration of several qualitative and quantitative factors, including:

    • the size of a product market;
    • a regulated entity’s market share in that product market;
    • the potential for consumer harm related to a particular product market; and
    • field and market intelligence that encompasses a range of issues including, but not limited to, the quality of a regulated entity's management, the existence of other regulatory actions, default rates, and consumer complaints.

    Antonakes also noted that, although the Bureau has “sacrificed some timeliness” in issuing examination reports to date in exchange for “strong quality control [] [that] ensure[s] consistency in [] findings across the country and across banks and non-banks,” the Bureau is “now positioned to ensure consistency while also improving timeliness.”  Specifically, he stated that, while “[t]here will always be some variance,” he would like exam reports to be issued “within 90-120 days from the time the examiner leaves the institution.”

    In terms of staffing, Antonakes noted the Office of Enforcement currently has approximately 150 employees, including more than 100 attorneys.  He said that the targeted staffing level for the supervision offices is about 600.  The offices are currently 75-80% staffed, but the CFPB hopes to have them fully staffed by the end of the year.

    CFPB Examination Enforcement

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  • CFPB To Stop Sending Enforcement Attorneys to Exams

    Consumer Finance

    The CFPB has decided to end its policy of sending enforcement attorneys to routine examinations of supervised financial institutions. The policy change will take effect on November 1, 2013.

    The CFPB decision followed an internal review designed to streamline the examination process and make it less costly. The CFPB asserts that the change was not in response to criticism it has received from supervised institutions and others. Bank and nonbank financial service providers and their trade associations have objected to the CFPB’s policy from its start, arguing that it differs from the traditional approach taken by other federal regulators and limits the effectiveness of the examination process. Hearing those concerns, last November the CFPB Ombudsman’s Office identified the presence of enforcement attorneys at supervisory examinations as one of several “systemic issues” at the Bureau and recommended that the CFPB review its implementation of the policy. In addition, the Federal Reserve Office of Inspector General, which also serves as the CFPB’s inspector general, was in the process of reviewing the policy and was set to release its report in the coming weeks, and just recently the Bipartisan Policy Center called on the CFPB to end the policy.

    CFPB Examination Enforcement

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  • Special Alert: CFPB Announces First HMDA Enforcement Actions, Issues HMDA Guidance


    On October 9, the CFPB (or Bureau) announced it had assessed civil money penalties totaling $459,000 against two financial institutions—one bank and one nonbank—after examinations identified significant data errors in mortgage loans reported pursuant to the Home Mortgage Disclosure Act (HMDA). The Bureau simultaneously issued a HMDA bulletin to all mortgage lenders regarding the elements of an effective HMDA compliance management system, resubmission thresholds, and factors the Bureau may consider when evaluating whether to pursue a public HMDA enforcement action and related civil money penalties.

    Enforcement Actions

    According to the consent orders (available here and here), both financial institutions maintained inadequate HMDA compliance systems that resulted in the reporting of “severely compromised mortgage lending data.” The nonbank, which reported 21,015 applications in its 2011 HMDA Loan Application Register (LAR), agreed to pay a penalty of $425,000. The consent order notes previous violations identified by the state regulator and states that the Bureau sampled 32 loans and concluded that the sample error rate unreasonably exceeded the Bureau’s resubmission threshold, although the error rate was not disclosed. The investigation of the nonbank was conducted in cooperation with the Massachusetts Division of Banks, which announced its own consent order imposing a $50,000 administrative fine at the same time that the CFPB announced its order. The bank, which reported 5,785 applications in its 2011 HMDA LAR, agreed to pay a penalty of $34,000. The consent order against the bank states that the bank’s sample error rate was 38 percent but does not disclose the size of the sample. Both institutions will be required to correct and resubmit their 2011 HMDA data and develop and implement an effective HMDA compliance management system to prevent future violations. Neither of the orders reveals the specific deficiencies in the institutions’ HMDA compliance programs.


    As noted above, the Bureau also issued a bulletin regarding HMDA compliance along with HMDA resubmission guidelines. The bulletin discusses the components of an effective HMDA compliance management system, including: (i) comprehensive policies, procedures, and internal controls; (ii) comprehensive and regular internal, pre-submission HMDA audits; (iii) a process for reviewing regulatory changes; (iv) reporting systems commensurate with lending volume; (v) one or more individuals responsible for oversight, data entry, and data updates, including timely and accurate reporting; (vi) appropriate, sufficient, and periodic employee training on HMDA, Regulation C, and reporting requirements; (vii) a process for effective corrective action in response to deficiencies identified; and (viii) appropriate board and management oversight.

    In addition, the bulletin announces the Bureau’s new HMDA Resubmission Schedule and Guidelines, which sets forth thresholds that will apply when determining whether resubmission is required when errors are discovered in a HMDA data integrity examination. The new resubmission schedule creates a two-tier system in which resubmission thresholds are lower for institutions reporting fewer than 100,000 entries on the HMDA LAR. Under the guidance, institutions that report 100,000 or more entries on their LAR should correct and resubmit their entire HMDA LAR if the error rate exceeds four percent of the total sample (or two percent in any individual data field), while institutions with fewer than 100,000 entries on their LAR should correct and resubmit their LAR if the error rate exceeds ten percent in the total sample (or five percent in any individual data field). The guidance states that resubmission for error rates below the applicable thresholds may be called for if “the errors prevent an accurate analysis of the institution’s lending.” Under the Bureau’s current standards, institutions, regardless of size, must resubmit a corrected LAR if any “key fields” have an error rate of five percent, or if at least ten percent of the institution’s records have an error in at least one of the key fields. The new resubmission schedule and guidelines will apply to all HMDA data integrity reviews initiated on or after January 18, 2014.

    Finally, the bulletin provides a non-exclusive list of factors the Bureau may consider when evaluating whether to pursue a public HMDA enforcement action, including: (i) size of the institution’s HMDA LAR and observed error rates; (ii) whether errors were self-identified and independently corrected outside of an examination; and (iii) history of previous HMDA errors that exceed the permissible threshold. In addition, the guidance states that the Bureau may seek civil money penalties for HMDA violations depending on such factors as (i) size of financial resources and good faith effort of compliance by the institution; (ii) gravity of the violations or failure to pay; (iii) severity of harm to consumers; (iv) history of previous violations; and (v) such other matters as justice may require.


    These recent CFPB announcements reinforce BuckleySandler’s experience to date that the CFPB is stepping up scrutiny of HMDA practices both at banks and nonbanks. These examination and enforcement initiatives dovetail with the CFPB’s other recent HMDA-related activities. The CFPB recently launched new tools to allow the public—including consumer and housing advocates—to leverage HMDA data to attempt to identify lending patterns. The CFPB also has started internally drafting a proposed rule to implement changes to HMDA data collection requirements, as required by the Dodd-Frank Act. Though a final rule is a distant prospect, once finalized the CFPB may require institutions to report, among other things: (i) ages of loan applicants and mortgagors; (ii) the difference between the annual percentage rate associated with the loan and benchmark rates for all loans; (iii) the term of any prepayment penalty; (iv) the term of the loan and of any introductory interest rate for the loan; (v) the origination channel; and (vi) the credit scores of applicants and mortgagors.

    All of these developments suggest bank and nonbank mortgage originators should review their HMDA practices and processes to ensure they are reporting data that are accurate or at least within the CFPB’s revised tolerances.

    CFPB Enforcement HMDA Agency Rule-Making & Guidance

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  • New York AG Announces Mortgage Servicing Enforcement Actions


    On October 2, New York Attorney General Eric Schneiderman (NY AG) announced actions to address alleged failures by two servicers to comply with certain of the 304 servicing standards established by the National Mortgage Servicing Settlement. In May, the NY AG threatened to sue both servicers based on borrower complaints that the servicers were not fulfilling their settlement obligations. The NY AG now has initiated proceedings to enforce the terms of the settlement against one of the banks, alleging numerous servicing deficiencies. In exchange for the NY AG suspending planned legal action against the second servicer, that servicer entered an agreement pursuant to which it is required to, among other things, (i) designate staff with decision-making authority to every housing counseling and legal services agency within the NY AG’s Homeowner Protection Program, (ii) revise the letters it uses to request from borrowers missing documents or information needed to complete a loan modification, (iii) halt the sale of mortgage servicing rights to third parties on New York mortgages when borrowers are already in negotiations for a loan modification or are making trial payments on a loan modification, and (iv) allow borrowers' attorneys permission to negotiate loan modifications directly with bank staff, as opposed to the bank's outside foreclosure lawyers.

    Mortgage Servicing State Attorney General Enforcement National Mortgage Servicing Settlement

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  • New York AG Settles with Payday Loan Debt Collectors

    Consumer Finance

    On September 30, the NY AG announced settlements with five companies that collected debts on allegedly illegal payday loans. The AG alleged that the companies collected on behalf of payday lenders who allegedly made illegal loans; under state law, the maximum allowable interest rate is 16% for most lenders not licensed by the state. In August, the NY AG sued payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. In March, the New York Department of Financial Services warned third-party debt collectors that it is illegal to attempt to collect a debt on an illegal payday loan made in New York, even if such loans were made on the Internet, and followed up with a similar warning to lenders in August. The NY AG’s settlement requires the five companies collectively to pay approximately $280,000 in restitution and $30,000 in penalties. One of the companies is required to reverse negative reporting to the credit reporting bureaus related to approximately 8,550 consumer accounts. In addition, all of the companies will be prohibited from collecting on payday loans from New Yorkers in the future.

    Payday Lending State Attorney General Debt Collection Enforcement

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  • Federal District Court Denies Tribal Lenders' Attempt to Block New York Internet Lending Investigation

    Consumer Finance

    On September 30, the U.S. District Court for the Southern District of New York denied a motion filed by two Native American tribes and related entities seeking to enjoin the New York Department of Financial Services (NY DFS) from interfering with the tribes’ online payday lending activities. Otoe-Missouria Tribe of Indians v. N.Y. St. Dept. of Fin. Servs., No 13-5930, 2013 WL 5460185 (S.D.N.Y. Sept. 30, 2013). In August, the NY DFS sent letters to 35 online lenders, including lenders affiliated with Native American tribes, demanding that they cease and desist offering loans to New York borrowers that allegedly violate the state’s 16% usury cap. The plaintiffs filed suit, claiming a right to market and sell short-term, high-interest loans to New York residents via the Internet and that the NY DFS’s actions violate the plaintiffs’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. Citing prior analysis from a Colorado appeals court and the Tenth Circuit, as well as the undisputed facts that the New York DFS’s actions are directed at activity involving New York residents in New York, the court rejected the plaintiffs’ contention that the targeted online lending activity occurs on the tribes’ lands. The court held that the plaintiffs failed to identify an applicable “express federal law” prohibiting the state’s activity and that the tribes are subject to the state’s anti-usury laws. The court denied the plaintiffs’ motion for preliminary injunction and ordered the parties to begin discovery.

    Payday Lending Enforcement Internet Lending

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  • CFPB Enforcement Action Targets Debt Settlement Payment Processing

    Consumer Finance

    On October 3, the CFPB announced an enforcement action against a leading debt-settlement payment processor and its President/CEO for allegedly assisting clients in the debt-settlement industry charge and collect millions of dollars in unlawful fees since October 2010.  According to the complaint, the defendants “knew or consciously avoided knowing” that the company’s services were used to charge illegal upfront fees in violation of the Telemarketing Sales Rule to more than 11,000 consumers across multiple states.  The defendants agreed to a consent order that will:  (i) prohibit the company from processing payments for debt-settlement companies and for members of the related mortgage-settlement industry going forward; (ii) subject the parties to regular monitoring by and reporting to the CFPB, as well as recordkeeping requirements; and (iii) mandate a civil money penalty of $1.376 million.  On the date announced, Deputy Director Steve Antonakes remarked that the action should send a message that the CFPB is “working to ensure federal consumer laws are being followed at every stage of the process, including taking action against those who unlawfully facilitate illegal conduct of others.”

    The CFPB has already taken action against the debt-settlement companies themselves, obtaining judgments against two companies in 2012 and 2013 and filing a complaint against four others in May.

    CFPB Enforcement Telemarketing Sales Rule Payment Processors

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  • CFPB Rejects Tribal Lenders' CID Challenge

    Consumer Finance

    On September 26, the CFPB denied three tribal lenders’ joint petition to set aside civil investigative demands (CIDs) issued in June 2012. The CIDs were issued in connection with the Bureau’s investigation into several lenders that offer a variety of online small-dollar credit products, including payday loans, installment loans, and lines of credit. The July 2012 petition primarily argued that the CFPB does not have jurisdiction over the three lenders, which are organized and chartered under the “sovereign authority of federally recognized Indian Tribes with longstanding traditions of tribal independence.”

    The CFPB’s decision and order rejects the lenders’ claim that the CFPB lacks authority over tribally-affiliated entities under the Consumer Financial Protection Act, stating that the Supreme Court has “long established” that generally-applicable federal statutes apply to Indian tribes, individual Indians, and tribally-affiliated entities. Moreover, in explaining why certain exceptions would not apply to this general rule, the Bureau noted that it “has reason to believe that the Lenders are making loans to non-Indians over the internet, and it seeks to investigate those lending practices for compliance with Federal consumer financial laws.” The decision and order likewise rejects the lenders’ claim of tribal sovereign immunity, finding that “[e]very court of appeals to address the issue has agreed that Indian tribes, like individual States, do not enjoy immunity from suits by the federal government.”

    The lenders’ petition also raised procedural challenges, argued that the requests were vague, overly broad, and unduly burdensome, and sought to incorporate by reference arguments from another entity’s motion to set aside a separate CID. The CFPB rejected all arguments as lacking merit and further announced that it will not consider incorporated arguments going forward. While directing the three tribal lenders to comply with the CIDs within 21 calendar days, the Bureau also noted that the tribal lenders were welcome to continue to discuss issues regarding the scope and burden of individual interrogatories and document requests with the Bureau’s enforcement team.

    In an article published earlier this year, BuckleySandler attorney Amanda Raines analyze the reasoning behind previous decisions to deny such petitions and identify issues that companies must be cognizant of while navigating the investigation and petitioning phases.

    CFPB Payday Lending Enforcement Investigations Internet Lending

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  • Federal Authorities Announce Two BSA/AML Enforcement Actions


    This week, federal authorities announced the assessment of civil money penalties against two financial institutions for alleged Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance failures. In the first action, FinCEN and the OCC alleged that a national bank failed to file suspicious activity reports (SARs) from April 2008 to September 2009 for activity in accounts belonging to a law firm through which one of the firm’s principals ran a Ponzi scheme. The agencies claim that the bank willfully violated the BSA’s reporting requirements by failing to detect and adequately report suspicious activities in a timely manner, even when the bank’s anti-money laundering surveillance software identified the suspicious activity (the bank subsequently filed five late SARs related to this conduct in 2011). FinCEN and the OCC assessed concurrent $37.5 million penalties. The FinCEN penalty is the first assessed by that agency’s recently created Enforcement Division. In addition, the SEC charged the bank and a former executive with related securities violations and ordered the bank to pay an additional $15 million penalty and to cease and desist from the alleged activity, including providing misleading information to investors as to amounts of money in particular accounts and actions the bank had taken to limit fraudulent activity.

    In a second action, coordinated among FinCEN, the OCC, and the U.S. Attorney for the District of New Jersey, federal authorities assessed $8.2 million in total penalties against a now defunct community bank for compliance failures related to Mexican and Dominican Republic money exchange houses. The government alleged that the bank willfully violated the BSA by (i) failing to implement an effective AML program reasonably designed to manage risks of money laundering and other illicit activity, (ii) failing to conduct adequate due diligence on foreign correspondent accounts, and (iii) failing to detect and adequately report suspicious activities in a timely manner. FinCEN and the OCC assessed concurrent $4.1 million penalties, and the DOJ will collect an additional $4.1 million through civil asset forfeiture.

    OCC Anti-Money Laundering FinCEN SEC Bank Secrecy Act DOJ Enforcement

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