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  • Independent auditor agrees to $149.5 million settlement with DOJ over potential FCA liability

    Federal Issues

    On February 28, the DOJ announced a $149.5 million settlement with an independent auditor for potential False Claims Act (FCA) liability related to its auditing work of a failed mortgage origination company. According to the announcement, between 2002 and 2008, the company served as an independent auditor of a mortgage originator, which issued Fair Housing Administration (FHA) insured loans through HUD’s Direct Endorsement Lender program. The program requires mortgage companies to submit to HUD annual audit reports on financial statements and compliance with certain HUD requirements. The DOJ alleges that during that time, the now failed mortgage originator engaged in a fraudulent scheme, which, among other things, resulted in the originator’s financial distress to not be reflected in its financial statements. The DOJ alleges that the independent auditor “knowingly deviated from applicable auditing standards” and therefore, failed to detect the misleading financial statements and the originator’s allegedly fraudulent conduct, which allowed the originator to continue issuing FHA loans until it declared bankruptcy in 2009. The DOJ notes that the settlement relates to allegations only and there was no determination of actual liability against the independent auditor.

    Federal Issues DOJ False Claims Act / FIRREA Mortgages FHA HUD Mortgage Origination

  • GAO recommends the CFPB review the effectiveness of TRID guidance for small institutions

    Federal Issues

    On February 27, the U.S. Government Accountability Office (GAO) released a report of recommendations to financial regulators on actions to take related to the compliance burdens faced by certain small financial institutions. The report is the result of a study the GAO initiated with over 60 community banks and credit unions (collectively, “institutions”) regarding which financial regulations were viewed as the most burdensome. Among others, the report includes a recommendation to the CFPB that it should assess the effectiveness of its TILA/RESPA Integrated Disclosure Rule (TRID) guidance and take affirmative steps to address any issues that are necessary. In a response to the GAO that is included in the report, the CFPB Associate Director David Silberman said, “the Bureau agrees with this recommendation and commits to evaluating the effectiveness of its guidance and updating it as appropriate.” Among other recommendations, the GAO highlights the need for the CFPB to coordinate with the other financial regulators on their periodic Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) reviews.

    In addition to the compliance concerns with TRID disclosures, the GAO reports that the institutions also consider the data reporting requirements under HMDA, and the transaction reporting and customer due diligence requirements of the Bank Secrecy Act and related anti-money laundering laws the most burdensome. The GAO includes specific recommendations to the other financial regulators to strengthen and streamline regulations through the EGRPRA process.

    Federal Issues GAO CFPB Mortgages TRID HMDA Bank Secrecy Act Anti-Money Laundering EGRPRA Customer Due Diligence

  • House passes bill to ease operational risk capital requirements for banks

    Federal Issues

    On February 27, in a bipartisan vote of 245-169, the House passed H.R. 4296, which would ease the operational risk capital requirements for banks based on several factors. Specifically, the bill would prohibit the establishment of such requirements unless they are based primarily on the risks posed by a bank's current activities and are determined by a forward-looking assessment of its potential losses and not solely on historic losses. The requirements must also allow for certain adjustments based on certain operational risk mitigants. House Financial Services Committee Chairman Jeb Hensarling stated in a press release issued by the Committee that “H.R. 4296 simply amends the method of how reserve capital is calculated” and that “banks would still retain sufficient reserves to weather an economic storm, but they would also be able to put the billions of dollars currently sitting on the sidelines to work to help fuel the economy.”

    Federal Issues Federal Legislation U.S. House House Financial Services Committee

  • Fed issues proposal to amend internal appeals process

    Federal Issues

    On February 27, the Federal Reserve Board (Board) published proposed amendments to its guidelines on the internal appeals process for institutions that receive an adverse material supervisory determination. According to the proposal, the goal of the amendments is to improve and expedite the appeals process, which was established in 1995 and applies to any material supervisory determination, including matters related to an examination or inspection, which does not have an alternative, independent appeals process. The current guidelines allow for an institution to file a written appeal, which will be reviewed by a panel selected by the Federal Reserve Bank (Bank). The panel is made up of persons who are not employed by the Bank and have no affiliation with the material supervisory determination in question. Institutions also have further appeal rights to the Bank’s president and then a member of the Board. Proposed changes to the process include:

    • reducing the number of appeal levels to two and providing a separate independent review at both appeal levels;
    • establishing an accelerated process for appeals that relate to institutions becoming “critically undercapitalized” under the Prompt Corrective Action (PCA) framework as a result of the material supervisory determination, in order to ensure the review occurs within the required PCA timeframe; and
    • instituting specific standards of review at both appeals stages. The first panel of review would be required to review the documentation “as if no determination had previously been made.” The final panel, made up primarily of Board staff, would review whether the initial appeals determination is “reasonable and supported by a preponderance of the evidence in the record,” and the decision of the final review panel would be made public.

    The proposed amendments also contain changes to the Board’s Ombudsman policy, which, among other things would allow the Ombudsman—if requested by the institution or Federal Reserve personnel—to attend hearings or deliberations relating to the appeal as an observer. The proposal also would formalize many of the Ombudsman’s current activities, including receiving all complaints related to the Board’s supervisory process and facilitating informal resolution of institution’s concerns.

    Federal Issues Federal Reserve Bank Supervision Compliance

  • FDIC fines banks for flood insurance violations, releases January enforcement actions

    Federal Issues

    On February 23, the FDIC released a list of 12 administrative enforcement action orders taken against banks and individuals in January. Civil money penalties were assessed against two banks, including one against a Michigan-based bank citing violations of the Flood Disaster Protection Act (FDPA) and the National Flood Insurance Act (NFIA) for allegedly: (i) failing to obtain flood insurance on a borrower’s behalf at origination in multiple instances, and twice failing to maintain adequate flood insurance; (ii) failing twice to follow force placed flood insurance procedures; and (iii) failing to notify borrowers in multiple instances that the “collateral for the loan was in a designated special flood hazard area.” The other civil money penalty was assessed against a Wisconsin-based bank for allegedly engaging in a pattern of violating requirements under the FDPA and the NFIA, which included failing to provide borrowers with a “Notice of Special Flood Hazard and Availability of Federal Disaster Relief Assistance” in a timely fashion.

    Also on the list are four Section 19 orders, which allow applicants to participate in the affairs of an insured depository institution after having demonstrated “satisfactory evidence of rehabilitation,” and three terminations of consent orders, among others.

    There are no administrative hearings scheduled for March 2018. The FDIC database containing all 12 enforcement decisions and orders may be accessed here.

    Federal Issues FDIC Enforcement Flood Insurance Flood Disaster Protection Act National Flood Insurance Act

  • OCC makes technical changes to stress testing rule; regulators submit unified stress test report for OMB approval

    Federal Issues

    On February 23, the OCC finalized technical changes to its annual stress testing rule. Specifically, the final rule (i) changes the range of possible “as-of” dates used in the global market shock component to conform to changes already made by the Federal Reserve Board (Fed) to its annual stress testing regulations; (ii) extends the transition process for covered institutions with $50 billion or more in assets (“a national bank or federal savings association that becomes an over $50 billion covered institution in the fourth quarter of a calendar year will not be subject to the stress testing requirements applicable to over $50 billion covered institutions until the third year after it crosses the asset threshold”); and (iii) makes certain technical clarifications to the requirements of the OCC’s stress testing rule. The final rule takes effect March 26.

    The same day, the Fed, the OCC, and the FDIC submitted a notice to the Office of Management and Budget (OMB) requesting approval of a new stress test report form (FFIEC 016) to be implemented for the stress test report due July 31. If approved, FFIEC 016 would replace the agencies’ three separate, yet identical, forms currently used to collect information from financial institutions and holding companies with total assets of more than $10 billion but less than $50 billion. Comments on the proposed change must be received on or before March 26.

    Federal Issues OCC Stress Test Federal Reserve FDIC OMB FFIEC

  • FTC files charges against operations that target elder Americans as part of DOJ’s elder fraud enforcement sweep

    Federal Issues

    On February 22, the FTC announced two separate legal actions taken against individuals and their operations for allegedly engaging in schemes exploiting elder Americans. The two cases are part of an enforcement sweep spearheaded by the DOJ in conjunction with the FBI, the FTC, the Kansas Attorney General, and foreign law enforcement agencies, which—according to a press release issued the same day by the DOJ—includes cases from around the globe involving over 250 defendants accused of victimizing more than a million U.S. citizens, the majority of whom are elderly. Charges were brought against both transnational criminal organizations and individuals who allegedly engaged in schemes including (i) mass mailings; (ii) telemarketing and investment frauds; and (iii) guardian identity theft. 

    According to the FTC’s announcement, charges were brought against two individuals and their sweepstake operation accusing them of allegedly bilking consumers out of tens of millions of dollars though personalized mailers that falsely implied the recipients had won or were likely to win a cash prize if they paid a fee. Since 2013, the FTC claims consumers have paid more than $110 million towards the scheme. The second complaint was brought against a group of telemarketers who claimed their software and technical support services would prevent cyber threats. However, the FTC alleges that the telemarketers instead charged up to tens of thousands of dollars for “junk” software or older software available for free or for a much lower price, and communicated “phony” reasons for consumers to purchase additional software to avoid the risk of new threats.

    Federal Issues DOJ FTC Elder Financial Exploitation State Attorney General Enforcement

  • FHA offers further relief to eligible borrowers in disaster areas

    Federal Issues

    On February 22, the Federal Housing Administration (FHA) announced it will extend its foreclosure relief for borrowers with FHA-insured mortgages whose homes were affected by presidentially-declared natural disasters in 2017. Under Mortgagee Letter ML 2018-01 (ML 2018-01), the new “Disaster Standalone Partial Claim” loss mitigation option will allow borrowers whose property or employment is located in designated disaster areas to cover up to 12 months of missed mortgage payments through an interest-free second loan on the mortgage without a required trial payment plan. The second loan will become payable only when the borrower sells the home or refinances. Additionally, the loss mitigation option will streamline income documentation and other requirements to expedite relief to eligible borrowers struggling to pay their mortgages. ML 2018-01 instructs mortgagees to implement the policies set forth no later than May 1.

    Find more InfoBytes disaster relief coverage here.

    Federal Issues Disaster Relief FHA Mortgages Loss Mitigation

  • DOJ settles SCRA lease termination allegations against motor vehicle finance company

    Federal Issues

    On February 22, the DOJ announced a settlement agreement with a motor vehicle finance company regarding allegations that the company did not refund a portion of the capitalized cost reduction (CCR), after the motor vehicle leases were terminated early under the Servicemembers Civil Relief Act (SCRA). The DOJ took the position that the CCR was a prepayment subject to refund upon termination. Consistent with industry practice, the finance company treated the CCR as an amount comparable to a down payment in a finance agreement, not subject to refund, rather than a prepayment. Though not admitting any violation of law, the company agreed to refund certain portions of CCR pre-payments and update its policies and procedures, among other relief. Buckley Sandler attorneys John Redding and Sasha Leonhardt represented the company in this matter.

    Federal Issues DOJ SCRA Auto Finance Servicemembers

  • Treasury releases Orderly Liquidation Authority report

    Federal Issues

    On February 21, the U.S. Department of the Treasury released a report on the Orderly Liquidation Authority (OLA) and Bankruptcy Reform. The report is in response to the April 2017 Presidential Memorandum requiring the Treasury Department to review and provide recommendations for improving the OLA under the Dodd-Frank Act, previously covered by InfoBytes here. According to the Treasury Department’s announcement, the recommendations outlined in the report “ensure that taxpayers are protected by strengthening the bankruptcy procedure for a failed financial company and retaining OLA in very limited circumstances with significant reforms.” In addition to recommending a new Chapter 14 of the Bankruptcy Code for distressed financial companies, the report recommends significant reforms to the OLA process, such as (i) creating clear rules administered with impartiality, including restricting the FDIC’s ability to treat similarly situated creditors differently; (ii) ensuring market discipline and strengthening protection for taxpayers by, among other things, only allowing the FDIC to lend on a secured basis; and (iii) strengthening judicial review to provide a stronger check on the decision to invoke OLA.

    Federal Issues Department of Treasury Dodd-Frank Orderly Liquidation Authority Trump Bankruptcy

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