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DOJ, SEC Announce Anti-Bribery Enforcement Actions Against U.S. Metals Firm
On January 9, the SEC and the DOJ announced the resolution of parallel FCPA enforcement actions against a major U.S. extractive industries firm and one of its subsidiaries. The actions related to improper payments to officials of a foreign government, and to a “middle man” serving as an intermediary to secure contracts to supply a government controlled aluminum plant. The SEC’s cease and desist order asserts the parent firm lacked sufficient internal controls to prevent and detect bribes made through foreign subsidiaries, which were improperly recorded in the parent company’s books and records as legitimate commissions or sales. The order directs the parent firm to disgorge $175 million, $14 million of which would be satisfied by forfeiture required in the parallel DOJ action. As a result of that action, the parent company pleaded guilty to one count of violating the FCPA’s anti-bribery provisions and consented to entry of a judgment that requires the company to pay a criminal fine of $209 million and forfeit $14 million. The plea agreement also requires the parent firm to maintain and implement an enhanced global anti-corruption compliance program, and both the parent and subsidiary companies must cooperate with the DOJ in its continuing investigation of individuals and institutions that were involved in the subject activities.
SEC Announces Senior Enforcement Staffing Changes
On January 3, the SEC announced that George Canellos, co-director of the SEC’s Enforcement Division, will leave the agency this month. Mr. Canellos has been in the position since April 2013, after serving as acting director for several months prior. The Enforcement Division now will be led solely by Andrew Ceresney, who also was appointed co-director last April. On January 6, the SEC named Michael J. Osnato, Jr. chief of the Complex Financial Instruments Unit of the Enforcement Division. Mr. Osnato joined the SEC in 2008 and has served as an assistant director in the New York Regional Office since 2010. The SEC stated that he has played a key role in a number of significant SEC enforcement actions and will now lead a unit comprised of attorneys and industry experts investigating potential misconduct related to asset-backed securities, derivatives, and other complex financial products.
CFPB Director Discusses Enforcement Against Individuals
On January 8, in a Daily Show interview, CFPB Director Richard Cordray discussed with host Jon Stewart some of the Bureau’s efforts to date, including implementation of the CFPB’s mortgage rules and the Bureau's credit card add-on product enforcement actions. Director Cordray added that the Bureau will continue to take enforcement actions against individual officers and employees responsible for company wrongdoing, including by imposing officer-director bans, seeking disgorgement, and referring matters for criminal investigation. “There’s always officials and people in the company that make the decisions. So going after them for money, making them feel at risk, sometimes going after them to take them out of the business for a period of time, or referring them criminally if that is appropriate, that’s part of what we’re doing,” Cordray stated.
These comments mirror statements Director Cordray made last year, in which he cautioned that “[i]ndividuals need to know they’re at risk when they do bad things under the umbrella of a company.” The agency has already pursued individuals in several enforcement actions, and Director Cordray’s remarks suggest the Bureau will continue to devote resources toward investigating individual involvement in alleged company misconduct, along with the entities themselves.
DOJ Alleges Community Bank's Unsecured Loan Pricing Violated ECOA
Last month, the DOJ announced a settlement with a three-branch, $78 million Texas bank to resolve allegations that the bank engaged in a pattern or practice of discrimination on the basis of national origin in the pricing of unsecured consumer loans. Based on its own investigation and an examination conducted by the FDIC, the DOJ alleged that the bank violated ECOA by allowing employees “broad subjective discretion” in setting interest rates for unsecured loans, which allegedly resulted in Hispanic borrowers being charged rates that, after accounting for relevant loan and borrower credit factors, were on average 100-228 basis points higher than rates charged to similarly situated non-Hispanic borrowers. The DOJ claimed that “[a]lthough information as to each applicant's national origin was not solicited or noted in loan applications, such information was known to the Bank's loan officers, who personally handled each loan transaction.”
The consent order requires the bank to establish a $159,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. Prior to the settlement, the bank implemented uniform pricing policies that substantially reduced loan officer discretion to vary a loan’s interest rate. The agreement requires the bank to continue implementing the uniform pricing policy and to (i) create a compliance monitoring program, (ii) provide borrower notices of non-discrimination, (iii) conduct employee training, and (iv) establish a complaint resolution program to address consumer complaints alleging discrimination regarding loans originated by the bank. The requirements apply not only to unsecured consumer loans, but also to mortgage loans, automobile financing, and home improvement loans.
The action is similar to another fair lending matter referred by the FDIC and settled by the DOJ earlier in 2013, which also involved a Texas community bank that allegedly discriminated on the basis of national origin in its pricing of unsecured loans.
Prudential Regulators Announce Coordinated Action Against Technology Service Provider
Recently, the OCC released a formal agreement it entered with the FDIC, the Federal Reserve Bank of St. Louis, and a banking software company to resolve allegations of unsafe and unsound practices relating to the software company’s disaster recovery and business continuity planning and processes. The action reportedly resulted from the third-party service provider’s (TSP) delay in reestablishing full operations at a processing center in the wake of Hurricane Sandy. The agreement requires the TSP to continue to maintain a compliance committee, which must submit quarterly written reports to the TSP’s board. The agreement also details minimum requirements for (i) an enhanced disaster recovery and business continuity planning (DR/BCP) process; and (ii) a DR/BCP risk management program and audit process. The agreement also reaffirms the TSP board’s responsibility for proper and sound management of the TSP. The action demonstrates the OCC’s and other federal authorities’ continued focus on third-party service providers. While in this instance the regulators employed the Bank Services Company Act to directly address concerns about a TSP, recent Federal Reserve Board and OCC guidance also focuses on financial institutions’ responsibilities with regard to managing risks related to third parties’ disaster recovery and business continuity.
CFPB Continues Add-On Products Crackdown
On December 23, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and certain subsidiaries alleged to have violated multiple consumer protection laws with respect to credit card add-on products. The action, which is the fourth action taken by the CFPB relating to credit card add-on products, and the fifth add-on product action overall, extends the CFPB’s intense supervisory and enforcement focus on ancillary products and oversight of third-party service providers.
In coordination with the FDIC and the OCC, the CFPB ordered the companies to refund an estimated $59.5 million to more than 335,000 customers for certain credit card practices, including allegedly unfair billing tactics and deceptive marketing. The company must also pay an additional $9.6 million in civil penalties, submit to an independent review of other credit card add-on products, and continue to implement enhanced third-party oversight.
The consent orders allege that the company misled consumers about the benefits, fees, length of coverage, and terms and conditions of certain payment protection products, and that the company billed consumers for services they did not receive, unfairly charged consumers for interest and fees, and failed to comply with federal requirements to inform consumers about their right to a free credit report.
The coordinated action follows another taken by federal regulators last year, in which the same companies were ordered to refund approximately $85 million in connection with alleged UDAAP violations related to the offering of a rewards card and certain debt collection practices.
CFPB, DOJ Announce First Joint Fair Lending Action Against Indirect Auto Finance Company
This morning, the CFPB and the DOJ announced their first ever joint fair lending enforcement action to resolve allegations that an auto finance company’s dealer compensation policy, which allowed for auto dealer discretion in pricing, resulted in a disparate impact on certain minority borrowers. The $98 million settlement is the DOJ’s third largest fair lending action ever and the largest ever auto finance action.
Investigation and Claims
As part of the CFPB’s ongoing targeted examinations of auto finance companies’ ECOA compliance, the CFPB conducted an examination of this auto finance company in the fall of 2012. This finance company is one of the largest indirect automobile finance companies in the country which, according to the CFPB and DOJ’s estimates, purchased over 2.1 million non-subvented retail installment contracts from approximately 12,000 dealers between April 1, 2011 and present. The CFPB’s investigation of the finance company allegedly revealed pricing disparities in the finance company’s portfolio with regard to auto loans made by dealers to African-American, Hispanic, and Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ just last month, and the DOJ’s own investigation resulted in findings that mirrored the CFPB’s.
Specifically, the federal authorities claim that, based on statistical analysis of the loan portfolios, using controversial proxy methodologies, the investigations showed that African-American borrowers were charged on average approximately 29 basis points more in dealer markup than similarly situated non-Hispanic whites for non-subvented retail installment contracts, while Hispanic borrowers and Asian/Pacific Islander borrowers were charged on average approximately 20 and 22 basis points more, respectively. The complaint also faults the finance company for not appropriately monitoring pricing disparities or providing fair lending training to dealers.
The CFPB and the DOJ did not claim that the finance company intentionally discriminated against any borrowers. Instead the federal agencies alleged that the finance company’s facially neutral pricing policy allowed auto dealers to price in such a manner that resulted in certain minority groups, on average, paying more for credit than non-Hispanic white borrowers. The federal authorities employed disparate impact theory of discrimination, which allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). When announcing the settlement, CFPB Director Cordray stated that “[w]hether or not [the finance company] consciously intended to discriminate makes no practical difference. In fact, we do not allege that [the finance company] did so. Yet the outcome, and the harm to consumers, is the very same here.”
Resolution
The investigation and potential enforcement action were disclosed by the finance company earlier this year. The final terms, formalized in a CFPB administrative consent order and a DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan, require the finance company to pay an $18 million penalty and provide $80 million for a settlement fund to compensate borrowers allegedly harmed between April 2011 and December 2013. The CFPB and the DOJ will identify borrowers to be compensated and the amount to be paid to each identified borrower using an undisclosed methodology, and the payments will be administered by a third party administrator paid for by the finance company.
In addition, the finance company is required to adopt and implement a compliance plan pursuant to which the finance company must: (i) establish a dealer compensation policy that limits the maximum spread between the buy rate and the contract rate to no more than the spread currently permitted; (ii) provide regular notices to dealers explaining ECOA and dealer pricing obligations; (iii) establish quarterly and annual portfolio-wide analysis of markups based on the CFPB and the DOJ statistical methodologies; (iv) take prompt corrective action with respect to dealers identified in such quarterly analysis that culminates in prohibiting a dealer’s ability to mark up the rate or termination of the dealer relationship; and, (v) providing remuneration for affected customers.
While the settlements do not bar discretionary dealer compensation, they provide an incentive for the finance company to eliminate the practice. The agreements permit the finance company to develop a non-discretionary compensation plan for approval by the CFPB and the DOJ, subsequent to which the finance company no longer is required to implement the majority of the compliance plan.
Looking Ahead
Dealer compensation practices have been targeted by the CFPB for the past year, including in guidance issued earlier this year, which the CFPB recently defended at a public forum. We expect the CFPB’s scrutiny of dealer compensation and auto finance companies more generally to continue into next year. Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Auto Finance or CFPB practices, or to any other BuckleySandler attorney with whom you have consulted in the past.
More State AGs File Suits Against Online Payday Lender, Loan Servicers
On December 16, the North Carolina attorney general (AG) filed a lawsuit against an online payday lender, two loan servicers, and a related debt collection company, and the Colorado AG filed suit against the same loan servicers and collection company. The Colorado AG previously filed a separate suit against the lender. In addition, the New Hampshire AG promised to enforce a state banking department order against the same entities targeted in the other state actions. All three actions are parallel to, and were taken in coordination with, a CFPB action filed December 16 purportedly signaling broader pursuit of “regulatory-evasion schemes.” In general, the states are alleging that the lender violated state usury or licensing laws in the online origination of short-term, small dollar loans. The lender asserts that it is a Native American sovereign entity not subject to relevant state laws. The states also allege that a servicer, either in its own name or through a related entity, provided the lender with marketing, web hosting and customer services, collected consumer information, and conducted the loans’ initial underwriting review, and then purchased all loans immediately after origination. The states further allege that either the servicers or a related debt collection company engaged in servicing and collections, and that the totality of the activities violated state lending and licensing laws by, among other things, financing and collecting on illegal payday loans. The state AG suits are similar to suits previously filed by other state attorneys general, including in New York, Georgia, Minnesota, and Virginia.
New Jersey AG Files RMBS Suit
On December 18, New Jersey’s Acting Attorney General John Hoffman announced a lawsuit against a mortgage securitizer and related firms for allegedly violating state securities law by making fraudulent misrepresentations and omissions to promote the sale of RMBS to private investors. Specifically, the suit alleges that the firms misrepresented in the offering documents that mortgages underlying certain securities offered over a 12-month period in 2006-7: (i) were in substantial compliance with the underwriting standards of the originators of the loans; (ii) were originated "in accordance with accepted practices and prudent guidelines;" and (iii) did not have a negative equity. The suit alleges that the firms’ traders warned about the high risks of certain types of loans being securitized. The state claims that after the securities were issued, delinquency rates in the underlying pools increased substantially, and resulted in significantly reduced distributions to investors and write downs in the principal of underlying loans. The New Jersey AG is at least the second state attorney general to file such a suit as part of the federal-state RMBS)Working Group. New York Attorney General Schneiderman filed similar suits under New York law last year.
DOJ, SEC Announce Anti-Bribery Enforcement Actions Against U.S. Agribusiness Firm
On December 20, the DOJ and the SEC announced separate enforcement actions against a major U.S. agribusiness firm and one of its foreign subsidiaries. In the DOJ action filed in the U.S. District Court for the Central District of Illinois, a foreign subsidiary of the U.S. corporate parent pleaded guilty to a single count of conspiracy to violate the anti-bribery provisions of the FCPA, and agreed to pay $17.8 million in criminal fines. The plea agreement resolved allegations that the subsidiary paid bribes through intermediary firms to Ukrainian government officials in exchange for over $100 million in value-added tax (VAT) refunds. The DOJ also entered into a non-prosecution agreement with the U.S. parent to resolve claims that the company failed to implement internal controls sufficient to prevent and detect FCPA violations. Under that agreement, the company must periodically report on its compliance efforts, and continue implementing enhanced compliance programs and internal controls. The SEC’s parallel civil enforcement action resolved charges that the parent firm’s lack of sufficient anti-bribery compliance controls, which contributed to FCPA violations by foreign subsidiaries that generated over $33 million in illegal profits. The U.S. parent corporation consented to entry of a judgment that requires the company to disgorge the illegal profits plus $3 million in interest. The judgment also permanently enjoins the parent company from violating the relevant parts of the Exchange Act and requires compliance reporting for a three-year period.