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FINRA Sanctions 10 Banks for Conflicts-Of-Interest Violations
On December 11, FINRA fined 10 financial firms a total of $43.5 million dollars for allegedly violating the industry-regulator’s conflict of interest rules. According to FINRA, in pitch meetings, the firms’ equity research analysts offered favorable research coverage in exchange for an underwriting role in a 2010 planned IPO of a large retail company.
Massachusetts Fines Bank for Data Breach
On December 8, a large bank settled with the state of Massachusetts for $825,000 over a data breach that exposed the personal information of at least 260,000 customers. In March 2012, the bank allegedly lost unencrypted backup tapes with customer information and failed to report the missing tapes until October 2012. According to the Massachusetts AG, the bank violated state law by failing to (i) sufficiently protect information; and (ii) provide timely notification of the data breach. In the settlement agreement, Massachusetts credited the bank with $200,000 to upgrade its security procedures, while $325,000 will be paid in civil penalties, $75,000 in attorney’s fees and costs, and $225,000 to a consumer aid education fund.
Second Circuit Overturns Two Insider Trading Convictions
On December 10, the U.S. Court of Appeals for the Second Circuit overturned, and further, dismissed two of the DOJ’s insider trading convictions. United States of America v. Newman and Chiasson, Nos. 13-1837-cr(L), 13-1917-cr(con) (2nd Cir. Dec. 10, 2014). In a 28-page decision, the Court noted “erroneous” jury instruction, the Government’s lack of evidence that personal benefit was received by the alleged insiders, and the inability to prove the alleged insiders actually knew that they were trading on inside information. The ruling now narrows the scope of what constitutes insider trading and will likely impact other pending insider-trading cases. It is anticipated that the Government will appeal the Court’s decision.
CFPB Fines Debt-Settlement Firm
On December 4, the CFPB fined a New Jersey-based debt-settlement service provider $69,075 in civil monetary penalties for alleged violations of the FTC’s Telemarketing Sales Rule (TSR). The CFPB alleged that the firm charged upfront fees to consumers which are prohibited for debt-settlement services. Further, the CFPB charged that the firm failed to provide debt-settlement services to consumers which harmed their credit history. In addition to the civil money penalty, the consent order requires the firm submit a compliance plan that includes (i) written policies and procedures designed to prevent violations of the TSR; (ii) training programs addressing the TSR and Federal consumer financial laws; (iii) written compliance monitoring processes; (iv) consumer complaint monitoring process; and (v) specific deadlines for when the compliance plan will be completed.
FinCEN Fines Small Credit Union for BSA Violations
On November 25, FinCEN fined a small Florida-based credit union $300,000 in civil monetary penalties for violating the Bank Secrecy Act (BSA). From 2009 through 2014, FinCEN charged that, among other deficiencies within its anti-money laundering program, the credit union lacked proper internal controls and failed to designate a BSA compliance officer to monitor suspicious transactions. The credit union admitted that it violated Section 314(a) of the USA PATRIOT ACT, which requires financial institutions to search their records of accounts and transactions of individuals who may be involved in money laundering or terrorist financing activities. The credit union, with assets of $4 million and five employees, contracted with a third party vendor to provide services and subaccounts to 56 money services businesses located in Central America, Middle East, and Mexico. FinCEN stated that 90% of the credit union’s annual revenue was generated from these accounts.
OFAC Settles with Independent Manufacturer for Alleged Violations of the Cuban Assets Control Regulations
Recently, OFAC settled with a Portland, Oregon based manufacturer for allegedly violating the Cuban Assets Control Regulations, 31 C.F.R. part 515. The manufacturer agreed to pay $2,057,540 for the actions of its subsidiary, which “purchased nickel briquettes made or derived from Cuban-origin nickel between on or about November 7, 2007, and on or about June 11, 2011.” OFAC concluded that the manufacturer self-disclosed the supposed violations and such violations “constitute a non-egregious case.” Under the Economic Sanctions Enforcement Guidelines, OFAC noted that the manufacturer “acted with reckless disregard for Cuba sanctions program,” and caused “significant harm to…its policy objectives by conducting large-volume and high-value transactions in products made or derived from Cuban-nickel.”
Financial Conduct Authority Announces Fines Against Banks For Foreign Exchange Practices
On November 12, the FCA announced that it was fining five banks for their foreign exchange practices. Specifically, ineffective controls at the banks allegedly allowed traders to strategize and manipulate exchange rates for their benefit. Additionally, confidential bank information was compromised in online chat rooms, including “the disclosure of information regarding customer order flows and proprietary Bank information, such as [foreign exchange] rate spreads.” The combined amount of civil money penalties against the banks is $1.7 billion.
CFPB Enforcement Action Targets Bank's Add-On Product Billing Practices
On September 24, the CFPB announced a consent order with a large national bank to address alleged unfair practices related to add-on identity theft protection products marketed by the bank and sold and administered by a third-party service provider to the bank’s customers from 2003–2012. Specifically, the CFPB alleged that customers were unfairly billed by the service provider for certain products that offered credit monitoring and credit report retrieval services without receiving the full benefit of the services. Customers who enrolled in these add-on identity theft products were required to provide sufficient written authorization and personal verification before the customers’ credit bureau reports could be accessed. However, according to the Bureau, in many instances time passed before a customer’s authorization was obtained or a customer’s authorization was never obtained. In other instances, the credit bureau could not match the customer’s identification information with its records. Although the bank’s vendor, rather than the bank itself, was directly responsible for selling and administering the products, the CFPB found that the bank’s compliance monitoring, service provider management, and quality assurance functions had failed to prevent, identify, and correct the unfair practices, resulting in substantial injury to more than 420,000 consumers. According to the CFPB’s order, this injury was not reasonably avoidable by consumers, and was not outweighed by any countervailing benefit to consumers or competition, and, therefore, the bank engaged in unfair practices.
The consent order requires the company to pay $47,900,000 in redress to compensate consumers injured by the alleged unfair billing practices, as well as a $5 million penalty to the CFPB. In addition, the consent order requires the bank to: (i) correct all unfair practices related to improper customer billing for add-on identity protection products and take numerous additional corrective actions to ensure that neither the bank nor its service providers or affiliates engage in such practices in the future; (ii) obtain CFPB non-objection prior to marketing, selling, or referring customers to identity protection products in the future; and (iii) review and, if necessary, revise the bank’s third-party risk management and responsible banking programs to ensure that, among other things, the bank conducts periodic onsite reviews of any add-on service provider’s controls, performance, and information systems. A separate OCC consent order also requires the bank to pay an additional $4 million civil money penalty to the OCC.
CFPB Sues For-Profit College For Alleged Predatory Lending
On September 16, the CFPB filed a civil action against a for-profit college for allegedly engaging in an “illegal predatory lending scheme.” Specifically, the CFPB alleges that the school engaged in unfair and deceptive practices by: (i) inducing enrollment through false and misleading representations about job placement and career opportunities; (ii) inflating tuition to require students to obtain private loans in addition to Title IV aid; (iii) persuading students to incur significant debt through private loans that had substantially high interest rates (as compared to federal loans) and required repayment while students attended school; (iv) misleading students to believe that the school did not have an interest in the private loans offered; and (v) knowing its students were likely to default on the private loans made. In addition, the CFPB alleges that the school violated the FDCPA by taking aggressive and unfair action, including pulling students out of class, blocking computer access, preventing class registration, and withholding participation in graduation, to collect payments on the private loans as soon as they became past due. The CFPB is seeking to permanently enjoin the school from engaging in the alleged activity, restitution and damages to consumers, disgorgement, rescission of all private loans originated since July 21, 2011, civil money penalties, and costs and other monetary relief.
The CFPB’s lawsuit was filed after a similar action was filed against the school by the Massachusetts Attorney General (AG) alleging that the school engaged in unfair or deceptive acts or practices by: (i) aggressively enrolling students by misrepresenting, among other things, employment and career opportunities, the nature and quality of the education provided, credit transferability, the utility of its career services, and its financial aid; (ii) recruiting students that would not benefit from the programs and/or were legally unable to obtain employment in the field studied; (iii) offering private loans that were guaranteed and/or funded by the school and steering students to such loans; and (iv) engaging in harassing debt collection practices. The Massachusetts AG is seeking to permanently enjoin the school from engaging in the alleged conduct, restitution to students, civil penalties, and attorneys’ fees and other monetary relief.
CFPB Offers More Details On Plans To Supervise Auto Finance Market
On September 17, the CFPB released new information about its plans to supervise and enforce auto finance companies’ compliance with consumer financial laws, including fair lending laws. As it indicated it would earlier this year, the CFPB released a proposed rule that would allow it to supervise certain nonbank auto finance companies. Also as previously promised, the CFPB published a white paper on its method to proxy for race and national origin in auto finance transactions. Finally, the CFPB published its most recent Supervisory Highlights report, which is dedicated to its supervisory findings at depository institutions with auto finance operations.
The CFPB released the materials in connection with its September 18th field hearing on auto finance issues. These actions come roughly 18 months after the CFPB first provided guidance to auto finance companies regarding its expectations related to dealer “reserve” (or “participation”) and fair lending.
Larger Participant Rule
The Dodd-Frank Act grants the CFPB authority to supervise, regardless of size, nonbanks offering (i) certain mortgage-related products and services; (ii) private education loans; and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, provided that it first conducts a rulemaking to define “larger participants” within a particular market.
As proposed, the CFPB’s auto finance larger participant rule would allow the agency to supervise any nonbank finance company that has at least 10,000 aggregate annual originations. The rule would define “annual originations” as grants of credit for the purchase of an automobile, refinancings of such credit obligations and any subsequent refinancings thereof, and purchases or acquisitions of such credit obligations (including refinancings). It would also include “automobile leases” and purchases or acquisitions of automobile lease agreements. The rule would define “automobile” to include “any self-propelled vehicle primarily used for personal, family, or household purposes for on-road transportation” and to exclude “motor homes, recreational vehicles (RVs), golf carts, and motor scooters.”
The CFPB estimates the rule as proposed will allow it to oversee roughly 38 auto finance companies that the CFPB believes “originate around 90% of nonbank auto loans and leases.” As proposed the rule would not apply to title lending or the securitization of automobile loans and leases, but the CFPB requests comment on an approach that would include such activities. The rule also would not apply to auto dealers or to depository institutions.
Comments on the proposal are due 60 days after the proposed rule is published in the Federal Register.
Proxy Methodology White Paper
Since releasing its guidance on auto finance fair lending—which the CFPB has characterized as a restatement of existing law and which sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for alleged “discretionary pricing policies”—the CFPB has faced pressure from industry stakeholders and lawmakers who have challenged the Bureau to provide additional information to support its approach to determining disparate impact.
The CFPB now provides additional information regarding one aspect of that approach—its method to proxy for race and national origin in the auto finance market, where such data is not collected as part of the financing process. The white paper reiterates that in conducting fair lending analysis of non-mortgage credit products in both supervisory and enforcement contexts, the CFPB’s Office of Research (OR) and Division of Supervision, Enforcement, and Fair Lending (SEFL) rely on a “Bayesian Improved Surname Geocoding (BISG)” proxy method. That method combines geography- and surname-based information into a single probability for race and ethnicity. The paper is intended to explain the construction of the BISG proxy currently employed by OR and SEFL and purports to assess the performance of the BISG method using a sample of mortgage applicants for whom race and ethnicity are reported. The CFPB asserts that “research has found that this approach produces proxies that correlate highly with self-reported race and national origin and is more accurate than relying only on demographic information associated with a borrower’s last name or place of residence alone.”
In its paper, the CFPB states that “it does not set forth a requirement for the way proxies should be constructed or used by institutions supervised and regulated by the CFPB” and that the BISG proxy methodology “is not static; it will evolve over time as enhancements are identified that improve accuracy and performance.”
The paper does not address other aspects of the CFPB’s processes or methods used to determine disparate impact, such as (i) the controls applied to ensure sure that the consumers who are being compared are “similarly situated”; or (ii) the basis point thresholds at which the Bureau determines a prohibited pricing disparity exists.
Concurrent with the release of the white paper, the CFPB provided its statistical software code and an example of publicly available census data used to build the race and ethnicity proxy. Of note in its introduction, the CFPB states that it “may alter this methodology in particular analyses, depending on the circumstances involved.”
Supervisory Highlights and CFPB Expectations
Finally, the CFPB released its latest Supervisory Highlights report, which details alleged discrimination in the auto finance market the CFPB has uncovered at banks over the past two years.
The CFPB states that, generally, its examiners found that bank indirect auto creditors “had discretionary pricing policies that resulted in discrimination against African-American, Hispanic, and Asian and Pacific Islander borrowers. As a result, these borrowers paid more for their auto loans than similarly situated non-Hispanic white borrowers.”
Although it has only publicly announced one enforcement action to resolve such allegations, the CFPB’s report states that non-public CFPB supervisory actions at indirect auto financing institutions resulted in approximately $56 million in remediation for up to 190,000 consumers.
The report again urges auto finance companies to consider three possible ways the CFPB believes institutions can mitigate their fair lending risk by: (i) “monitor[ing] and, if necessary, correct[ing] disparities through a strong compliance management system”; (ii) limiting “the maximum discretionary pricing adjustment to an amount that significantly reduces or eliminates disparities”; or (iii) “compensat[ing] dealers using a non-discretionary mechanism.”
In its press release accompanying the above materials, the CFPB further outlined its expectations for auto finance companies, stating that “given the significance of car ownership in the lives of consumers,” the CFPB expects auto finance companies to:
- Fairly market and disclose auto financing. Specifically the CFPB “would be concerned if consumers are being misled about the benefits or terms of financial products,” and the Bureau is “also looking to ensure that consumers are getting terms they understand and accept.”
- Provide accurate information to credit bureaus. Citing its recent enforcement action against an auto finance company alleged to have inaccurately reported information like the consumer’s payment history and delinquency status to credit bureaus, the CFPB states that it is “looking to prevent inaccurate information from being reported in the future.”
- Treat consumers fairly when collecting debts. The CFPB states that it has received complaints from consumers who claim their vehicles have been repossessed while they are current on the loan or have a payment arrangement in place, and that the CFPB will ensure that collectors are relying on accurate information and using legal processes when they collect on debts or repossess vehicles.