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CFPB Issues Consent Order to a National Bank Over Student Loan Servicing Practices
On August 22, the CFPB issued a consent order to a national bank to resolve allegations that its student loan servicing practices were unfair and deceptive in violation of the Dodd-Frank Act and that its payment aggregation practices violated the Fair Credit Reporting Act. The CFPB alleged that the bank failed to disclose key aspects related to its payment allocation process, including that partial payments would be distributed across all loans, even if a payment was sufficient to satisfy the minimum payment required for an individual loan. According to the consent order, the bank’s “allocation of a Partial Payment proportionally to all loans in the account sometimes caused consumers’ payments to satisfy fewer, if any, of the loan amounts due in the account than if the Partial Payment had been allocated in a manner that satisfied as many of the loan amounts as possible.” According to the CFPB, the bank’s failure to properly disclose its method for payment allocation resulted in consumers incurring improper late fees, which, if left unpaid for more than 30 days at the end of the month, were reported as delinquent to consumer reporting agencies. The CFPB further alleged that the bank’s payment processors used a late fee monitoring report that had a system coding error that improperly charged consumers late fees if a payment was made on the last day of a grace period, or if consumers chose to make partial payments instead of one payment. The CFPB contended that the bank failed to update, correct, or remove negative information that was inaccurately reported to credit reporting agencies. Pursuant to the consent order, the bank must (i) pay $410,000 in consumer redress; (ii) pay a civil penalty of $3.6 million; (iii) improve its student loan servicing practices to ensure that consumers’ partial payments are distributed in such a way that the amount due is satisfied for as many loans as possible, unless the consumer requests otherwise; (iv) enhance its disclosure statements; and (v) remove or correct errors on consumers’ credit reports.
FTC Bans New York Debt Collector; Resolves 2015 "Operation Collection Protection" Action
On August 24, the FTC, in coordination with New York AG Schneiderman, announced that it issued a final order banning a debt collector and his four companies from the debt collection business. According to the order, the defendants engaged in deceptive and abusive debt collection practices in violation of the FTC Act, the Fair Debt Collection Practices Act, and New York General Business Law. The final order resolves a 2015 Operation Collection Protection action alleging, among other things, that the defendants “regularly threatened, pressured, and harassed consumers into paying debts [they] did not owe,” continuing to “collect on these fake debts even after the supposed creditor notified them that the debts were bogus.” The final order imposes a judgment of more than $18.4 million, which will be partially suspended due to the defendants’ inability to pay. AG Schneiderman and the FTC issued a separate order to the owner’s ex-wife, imposing a $418,000 judgment, which also will be partially suspended.
Thomas Ott Named FinCEN's Associate Director of Enforcement
On August 16, FinCEN named Thomas P. Ott Associate Director for FinCEN’s Enforcement Division. In his new role, Ott will oversee the agency’s Bank Secrecy Act compliance and enforcement program. Ott’s responsibilities will include “developing and implementing compliance and enforcement strategies, supervising investigations, enforcement actions, and other activities that have industry-wide, national, and international impact.” Ott has served as FinCEN’s Acting Associate Director of Enforcement since March 2016.
Houston-Based Company Disgorges $5 Million to Settle SEC Enforcement Action
In an SEC cease and desist order filed on August 11, Key Energy Services, Inc., a Houston-based provider of rig-based oil well services, agreed to disgorge $5 million to settle charges that the company violated the books and records and internal control provisions of the FCPA. According to the order, from August 2010 through at least April 2013, Key Energy’s Mexican subsidiary paid bribes of at least $229,000 to a contract employee at Petroleos Mexicanos (Pemex), the Mexican state-owned oil and gas company. In exchange, the subsidiary received Pemex non-public information, advice and assistance on contracts with Pemex, and lucrative amplifications or amendments to those contracts. The funds were allegedly funneled through an entity purporting to provide consulting services, but for which there was no evidence of appropriate authorization of the relationship, and no supporting documentation regarding the purported consulting work performed. According to the SEC, the subsidiary improperly recorded the transfers to the consulting firm as legitimate business expenses, which were consolidated into Key Energy’s books and records. Key Energy allegedly failed to implement and maintain sufficient internal controls, including within the subsidiary relating to interactions with Pemex officials, and failed to respond to indications that the subsidiary was improperly using consultants.
It is notable that Key Energy was not required to pay a civil fine in addition to disgorgement. The SEC identified three reasons for accepting Key Energy’s offer of settlement and not imposing a separate civil penalty. First, the SEC praised Key Energy for cooperating with and assisting in its investigation. Key Energy was first contacted by the SEC in January 2014 concerning possible FCPA violations. In April 2014, Key Energy was informed by employees of its subsidiary of possible bribes, at which time the company reported the allegations to the SEC and “undertook a broad internal investigation and risk assessment of [its] international operations.” The SEC specifically noted that, “to the extent the internal investigation identified additional issues of concern, Key Energy provided updates to the Commission staff.”
Second, the SEC considered not only the “cooperation Key Energy afforded to the Commission staff,” but also the “remedial acts undertaken by [the company].” The SEC noted that Key Energy, during its internal review, “promptly and simultaneously undertook significant remedial measures including … a renovation and enhancement of [its] compliance program.” Specific remedial measures included (i) stronger vendor oversight; (ii) enhanced financial controls; (iii) increased training of all international employees; (iv) developing and/or reviewing policies and procedures pertaining to the FCPA, codes of business conduct, and more; and (v) a coordinated wind-down and exit from all markets outside of North America, including a commitment to exit Mexico by the end of 2016.
Finally, “in determining the disgorgement amount and not to impose a penalty,” the SEC “considered Key Energy’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.” This third justification indicates the SEC is not only aware of the current financial strains within the oil and gas services sector, but is uninterested in unnecessarily putting companies out of business. It is also possible that Key Energy’s cooperation and remediation, coupled with its tenuous financial condition, factored into the DOJ’s decision in April to close its investigation of the same conduct without bringing charges.
CFPB Announces Staff Changes
On July 20, the CFPB announced various senior leadership changes. Chris D’Angelo will now serve as Associate Director for Supervision, Enforcement and Fair Lending. D’Angelo joined the CFPB in June 2011 from the U.S. Treasury Department and has held a number of roles at the CFPB, the most recent of which was senior advisor to Director Cordray. Additional leadership changes include Richard Lepley serving as the CFPB’s Principal Deputy General Counsel in the Office of the General Counsel in the Legal Division, and Nellisha Ramdass serving as the Deputy Chief Operating Officer.
SEC Names Kurt Gottschall Associate Regional Director
On July 20, the SEC named Kurt Gottschall Associate Regional Director of Enforcement in its Denver office. Gottschall began his SEC career in 2000 as a staff attorney and has since served as Branch Chief and Assistant Regional Director. Throughout his career, Gottschall has investigated or supervised numerous enforcement matters related to various securities law violations. The announcement notes several of Gottschall’s career highlights, which include pursuing fraud charges and an emergency asset freeze against promoters of a $30 million Ponzi scheme and a financial fraud case against six executives of an insurance agency franchisor and lender.
FTC Approves Consent Order Against Two Ohio-Based Auto Dealers
On July 14, the FTC announced the approval of a final consent order against two Ohio-based auto dealers to resolve allegations that they failed to make certain advertising disclosures in violation of the FTC Act, the Consumer Leasing Act (CLA), and the CLA’s implementing Regulation M. Specifically, according to the FTC’s November 2015 complaint, the auto dealers’ lease advertisements (i) failed to disclose, or adequately disclose, that typical consumers would not qualify for advertised terms; and (ii) displayed a monthly payment amount without clearly and conspicuously disclosing terms required by the CLA and Regulation M. Pursuant to the consent order, the auto dealers are prohibited from, among other things, (i) advertising the amount of any payment, or the length or any payment term, without also clearly and conspicuously disclosing all related qualification restrictions, such as those based on the consumer’s credit score; (ii) misrepresenting payment terms; and (iii) advertising payment terms without clearly and conspicuously disclosing terms required by the CLA and Regulation M.
CFPB Publishes Ninth Semi-Annual Report to Congress
On June 30, the CFPB published its ninth Semi-Annual Report to Congress covering supervisory and enforcement actions, rulemaking activities, newly designed consumer tools, and published reports from October 1, 2015 through March 31, 2016. The Semi-Annual Report provides an overview of relevant topics addressed in previous CFPB reports and bulletins, including monthly Consumer Complaint reports, Supervisory Highlights, and the February 2016 compliance bulletin regarding Regulation V. The report outlines, among other things, the CFPB’s (i) efforts to monitor the effectiveness of the SAFE Act; (ii) fair lending activities, including its risk-based fair lending prioritization process and recent public enforcement actions; and (iii) ongoing efforts to define larger participants in markets for consumer financial services and products which are subject to the Bureau’s supervisory authority. According to the report, the Bureau’s supervisory actions during the six month period covered in the report provided over $44 million in compensation to over 177,000 consumers, while enforcement actions in the same time period resulted in “approximately $200 million in total relief for consumers who fell victim to various violations of consumer financial protection laws, along with over $70 million in civil money penalties.”
CFPB and DOJ Take Action Against Bank over Mortgage Lending Practices
On June 29, the CFPB announced a joint action with the DOJ against a regional bank with operations in Memphis, Tennessee for allegedly engaging in discriminatory mortgage lending practices in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). According to the CFPB’s and the DOJ’s complaint, between January 1, 2011 and December 31, 2015, the bank (i) engaged in redlining practices in the Memphis area by structuring its business to meet the credit needs of majority-White neighborhoods while ignoring the credit needs of individuals in majority-minority neighborhoods; (ii) discriminated against African American borrowers by allowing its employees to practice discretion in making credit decisions on mortgage loans, which ultimately resulted in African Americans being denied certain mortgages at significantly greater rates than similarly situated white applicants; (iii) charged African Americans, on average, 30 basis points more for first lien and 64 basis points more for second lien mortgage loans than similarly situated white borrowers; and (iv) implemented a policy under which loan officers were advised to deny minority applicants more quickly than other applicants and to deny credit assistance to “borderline” applicants. The complaint further alleges that a series of matched-pair tests at Memphis branches “revealed that the Bank treated African American testers less favorably than similarly situated white testers.”
Subject to approval, the proposed consent order would require the bank to take several remedial actions to improve its allegedly discriminatory mortgage lending practices, among which include: (i) allocating $4 million to a loan subsidy program that offers mortgage loans on a more affordable basis to applicants in majority-minority neighborhoods; (ii) spending at least $300,000 on a targeted advertising and outreach campaign that considers the results of a credit needs assessment performed by an independent third-party auditor, advertises the loan subsidy program, and generates mortgage loan applicants from qualified residents in majority-minority neighborhoods; (iii) spending $500,000 on local partnerships that provide education, credit repair, and other assistance in majority-minority neighborhoods; (iv) opening an additional branch or loan production office in a high-minority neighborhood; (v) extending credit offers to African American consumers who were denied mortgage loans as a result of the bank’s allegedly discriminatory underwriting policy; and (vi) implementing policies that ensure employees provide equal assistance to mortgage loan applicants, regardless of race or other prohibited characteristics. Under the proposed consent order, the bank would pay $2.78 million in consumer redress and a $3 million civil penalty. The CFPB’s proposed consent order notes that the bank has “recently taken a number of steps to improve its compliance management system, reduce its fair lending risk, and increase its lending in minority areas.”
CFPB Takes Action Against North Dakota Payment Processor for Alleged Unauthorized Withdrawal Practices
On June 6, the CFPB filed a complaint against a North Dakota-based third-party payment processor and two of its senior executives for alleged violations of the Dodd-Frank Act’s prohibition against unfair acts and practices. Acting on behalf of its clients, the payment processor transferred funds electronically through a network called the Automated Clearing House, and in the process, according to the CFPB, the payment processor “ignored numerous red flags about the transactions they were processing, including repeated consumer complaints, warnings about potential fraud or illegality raised by banks involved in the transactions, unusually high return rates, and state and federal law enforcement actions against their clients.” The CFPB contends that the defendants failed to: (i) heed warnings, including federal and state enforcement actions taken against the defendants’ clients, from banks and consumers regarding potential fraud or unauthorized debits; (ii) adequately monitor and respond to “enormously” high return rates; and (iii) investigate “red flags” throughout its clients’ application processes that “should have caused it to… perform enhanced due diligence prior to accepting a client for processing.” Regarding the individuals’ involvement in the allegedly unlawful activity, the CFPB’s complaint alleges that both engaged in unfair acts and practices by “actively ignoring” a number of red flags associated with the payment processor’s business activities. The CFPB’s complaint seeks monetary relief, injunctive relief, and penalties.