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Eleventh Circuit Holds Bank Accounts Containing Commingled Criminal, Non-Criminal Funds Are Not Subject to Forfeiture as "Proceeds" of the Crime
On June 12, the U.S. Court of Appeals for the Eleventh Circuit held that bank accounts in which funds traceable to the defendant’s criminal activity were commingled with funds unrelated to such activity were not subject to forfeiture as “proceeds” of the criminal activity. In re Rothstein, Rosenfeldt, Adler, P.A., 2013 WL 2494980, No. 11-10676 (11th Cir. June 12, 2013). The defendant pleaded guilty to violating the Racketeer Influenced and Corrupt Organizations Act by using his law firm to perpetrate a Ponzi scheme over a four-year period. Funds traceable to the criminal activity were deposited in the law firm’s bank accounts, where they were commingled with funds earned from the law firm’s substantial legitimate activities. The trustee of the law firm’s bankruptcy estate appealed a trial court order granting the government’s request that the firm’s bank accounts be forfeited as the “proceeds” of the criminal activity. The Eleventh Circuit reversed, noting that the government must establish the “requisite nexus between the property and the offense,” which requires that the tainted and untainted property be distinguishable “without difficulty.” The government was unable to clearly distinguish between the tainted and untainted funds, in part because of the size and number of transactions in the bank accounts. Because the government could not establish that the bank accounts were the proceeds of the criminal activity, the court remanded to allow the government to pursue forfeiture of “substitute assets.”
HUD Announces REO Agreement with Bank, Fair Housing Organizations
On June 6, HUD announced an agreement to resolve an administrative complaint filed last year by the National Fair Housing Alliance (NFHA) and numerous individual fair housing organizations alleging that a national bank engaged in discriminatory practices with regard to real estate owned (REO) properties. The complaint was one of several that followed an investigation conducted by the fair housing groups, which allegedly revealed that REO properties in predominantly minority neighborhoods are more likely to have maintenance problems and are less likely to have a “For Sale” sign than properties in predominantly white neighborhoods. The report suggested that poor maintenance practices and other alleged neglect can result in properties being vacant for longer periods and can increase the likelihood that a property eventually will be purchased by an investor at a discounted price, as opposed to an owner-occupier. Under the conciliation agreement, the bank will invest $39 million in 45 communities to support homeownership, neighborhood stabilization, property rehabilitation, and housing development. The bank also will (i) use a revised Real Estate Broker Procedure Manual and property inspection checklist, (ii) implement an enhanced training program for real estate brokers and agents who list REO properties, and bank staff responsible for managing REO properties, and (iii) extend the amount of time that individual REO properties will be available exclusively for purchase by an owner-occupant or a non-profit organization.
New York AG Signals Crackdown on Bank Foreclosure Practices
On June 4, New York Attorney General Eric Schneiderman (AG) announced a lawsuit against a major financial institution for allegedly violating state law by failing to timely file in foreclosure cases “requests for judicial intervention” (RJI), which would trigger court-supervised settlement conferences. The suit seeks to compel the financial institution to file the RJI immediately in all cases in which it has filed a proof of service, and to file an RJI simultaneously with proof of service in all future cases. The suit also seeks (i) to compel the firm to prepare an accounting of interest charges, penalties and fees that accrued beginning 60 days after the filing of proof of service on the homeowner; (ii) to toll and waive all accrued interest charges, fees and penalties that accrued, or will accrue, beginning 60 days after the filing of proof of service on the homeowner; (iii) restitution for interest charges, fees and penalties paid by the homeowner that accrued beginning 60 days after the filing of proof of service on the homeowner; and (iv) damages for homeowners injured by the alleged practices. The suit results from an AG investigation that sampled foreclosure filings in four New York counties, and the AG stated that he is committed to bringing similar actions against other lenders.
FTC Sues Payment Processor for Assisting Allegedly Fraudulent Credit Card Debt Relief Operation
On June 5, the FTC announced that it has added a payment processor as a defendant in an existing suit against a debt relief firm that the FTC alleges operated a credit card interest rate reduction scam. The FTC claims that the debt relief firm cold-called consumers and charged them up-front fees for promises of credit card interest rate reductions that the firm never obtained. The FTC charges that the payment processor knew, or consciously avoided knowing, the supposedly illegal nature of the operation and facilitated allegedly deceptive and abusive telemarketing acts or practices in violation of the Telemarketing Sales Rule. The FTC also alleges that the processor ignored the “alarmingly high” chargeback rates.
New York AG Obtains Health Care Credit Card Settlement
On June 3, AG Schneiderman announced an agreement with a credit card issuer to resolve an investigation into alleged consumer protection concerns arising from the offering of credit cards through medical care providers. The AG cited a Health Care Bureau investigation that found the health care provider application process is often rushed and occurs when treatment is set to begin, resulting in consumers feeling pressured into applying for the card and being charged the full amount for treatment in advance of receiving services. The AG claimed that, in many instances, providers failed to inform consumers of the terms of the card and represented that the account had “no interest,” when it carried retroactive interest of 26.99% if not paid in full during a promotional period. Other consumers allegedly thought that they were signing up for an in-house, no-interest payment plan directly with their provider, or a line of credit with 0% interest. Under the agreement, the issuer will establish an appeals fund for certain card holders who disputed a claim and were denied, which could result in refunds or credits of up to $2 million to approximately 1,000 card holders. The issuer also must implement consumer protection and compliance measures, including, among others: (i) offering a three-day “cooling off” period, such that no transaction over $1,000 can be charged within three days of an initial application, (ii) adding a set of “Transparency Principles” to provider contracts to ensure that providers accurately describe card terms, and implementing other health care provider training and oversight measures, (iii) revising promotional interest rate and other disclosures, and (iv) standardizing complaint management procedures.
FDIC Announces Enforcement Action Against Debit Card Issuer, Affiliated Service Provider
On May 31, the FDIC announced enforcement actions against a California bank and an affiliated service provider for alleged unfair and deceptive practices in the marketing and servicing of a prepaid reloadable MasterCard. According to the FDIC, the service provider’s website contained a number of misrepresentations while omitting other information. Specifically, the FDIC claimed that the firm deceptively advertised free online bill pay, promoted features that were not available to cardholders, and charged fees that were not clearly disclosed. Additionally, the service provider’s ACH error resolution procedures imposed additional, undisclosed requirements on card holders. Neither the bank nor the service provider admitted the allegations, but they agreed to establish a restitution fund of approximately $1.1 million for over 64,000 card holders, and pay civil money penalties of $600,000 and $110,000, respectively. The consent orders (i) direct both entities not to engage in further violations of law, (ii) establish specific corrective actions, and (iii) require enhanced compliance management systems and periodic reporting to the FDIC. The bank is further required to strengthen its oversight of third parties.
CFPB Seeks Injunction Against Debt Relief Firm's "Abusive" Practices
On May 30, the CFPB filed a complaint in federal district court against a Florida debt-relief company the CFPB alleges violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by promising certain debt relief services in exchange for upfront payment and then failing to provide the promised services. The complaint alleges publicly for the first time violations of the “abusive” standard established in the Dodd-Frank Act. The CFPB claims the company and its owner (i) misled consumers by falsely promising them it would begin to settle their debts within three to six months and then failed to provide the services within the promised time frame, if at all; (ii) enrolled consumers despite knowing that their income level made it highly unlikely that they could complete the debt-relief programs; and (iii) collected upfront “enrollment” fees from consumers even though the company knew that the consumers could not afford the monthly payments required by these debt-relief programs. Because these practices took “unreasonable advantage” of consumers, the CFPB charges they are abusive. The CFPB announced that it plans to file a proposed order that, if approved, would (i) require the company to pay a $15,000 penalty; (ii) permanently enjoin the company from advertising, marketing, promoting, offering for sale, or selling any debt-relief product or service; and (iii) establish a two-year compliance monitoring and reporting period for the company.
CFPB, State Regulators Announce Supervision Framework
On May 21, the CFPB and the CSBS released an agreement to coordinate supervision of entities subject to concurrent jurisdiction of the CFPB and one or more state regulators. The Supervisory Coordination Framework is a nonbinding guide that builds off of the parties' 2011 Memorandum of Understanding, which has since been signed by 59 state regulators. The Framework establishes processes for information sharing, consulting on corrective actions, and coordinating exam schedules and supervisory plans. The Framework also includes a general process for resolving disputes between the CFPB and state regulators, and directs the parties to develop additional processes and procedures to ensure standardization and consistency in implementing the Framework.
CFPB Announces RESPA Action against Homebuilder
On May 17, the CFPB announced an enforcement action against a homebuilder the CFPB alleges violated Section 8(a) of RESPA through joint venture arrangements. According to the CFPB, the homebuilder created two joint ventures, one with a state bank and the other with a nonbank mortgage company. The CFPB consent order alleges the homebuilder referred mortgage customers to the joint ventures in exchange for payments from those ventures, and that such payments violate RESPA’s prohibition on the acceptance of any fee, kickback, or thing of value in exchange for referral of customers for real estate settlement services. The homebuilder did not admit to the allegations, but agreed to disgorge over $100,000 and cease from performing any real estate settlement services, including mortgage origination. The CFPB investigation resulted from an FDIC referral. That agency issued an enforcement action in June 2012 against the state bank for related alleged activities.
OCC, FDIC Announce Overdraft Enforcement Actions
On April 30, the OCC and the FDIC announced parallel enforcement actions against a national bank and an affiliated state bank to resolve allegations that the institutions violated Section 5 of the FTC Act in their marketing and implementation of overdraft protection programs, checking rewards programs, and stop-payment processes for preauthorized recurring electronic fund transfers. The OCC claims that (i) bank employees failed to disclose technical limitations of the standard overdraft protection practices opt-out, (ii) the bank’s overdraft opt-in notice described fees that the bank did not actually charge, (iii) the bank failed to disclose that it would not transfer funds from a savings account to cover overdrafts in linked checking accounts if the savings account did not have funds to cover the entire overdrawn balance on a given day, even if the available funds would have covered one or more overdrawn items, (iv) the bank failed to disclose technical limitations of its preauthorized recurring electronic fund transfers that prevented it from stopping certain transfers upon customer request, and (v) the bank failed to disclose posting date requirements for its checking reward program. The OCC orders require the bank to pay approximately $2.5 million in restitution and a $5 million civil money penalty. In addition, the bank must (i) appoint an independent compliance committee, (ii) update its compliance risk management systems with appropriate policies and procedures, and (iii) adjust its written compliance risk management policy. The FDIC order requires the state bank to refund customers roughly $1.4 million and pay a $5 million civil penalty.