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New Fed. R. Crim. P. 41(b) Takes Effect; Cyber Warrants Can Now Cross State Borders
A change to Rule 41(b) of the Federal Rules of Criminal Procedure took effect on December 1. Amended Rule 41(b) now allows courts to issue warrants for remote access to electronic data outside their jurisdiction if the location of the information has been “concealed through technological means” or when the data is in five or more districts. Thus, under the revised rule, a magistrate judge has the authority to issue a warrant outside of their district without specific knowledge of the location of the computers being searched. By contrast, warrant requests were previously limited to the search and seizure of property within the court’s own district.
NYDFS to Oppose Any Effort to Federalize Regulation of FinTech Companies
On December 2, NYDFS Superintendent Maria T. Vullo issued a public statement stating the NYDFS’ opposition to “any effort to federalize” regulation of Fintech companies, such as that proposed recently by the OCC in its announcement on Fintech charters. According to Superintendent Vullo, state regulators have “long-standing expertise in this arena” and are therefore best positioned to balance innovation with a tailored regulatory regime.”
NYDFS Unveils Consumer Bill of Rights for Mortgage Foreclosures; Announces New Regulations for "Zombie Properties"
On December 7, Governor Andrew M. Cuomo announced the publication of the NYDFS Residential Foreclosure Actions Consumer Bill of Rights – intended to offer guidance to homeowners facing foreclosure in New York. Concurrently, the New York Governor also announced new NYDFS regulations intended to curb the threat to communities posed by vacant and abandoned properties (“zombie properties”) by “expediting foreclosure proceedings, improving the efficiency and integrity of the mandatory settlement conferences, and obligating banks and mortgage servicers to secure, protect and maintain vacant and abandoned properties before and during foreclosure proceedings.”
The Consumer Bill of Rights acts as guidance for homeowners facing foreclosure, and specifies that homeowners have certain rights and obligations, including, among others: (i) the right to stay in the home unless and until a court orders the homeowner to vacate the property; (ii) the right to be represented by an attorney; (iii) the right to be free from harassment and foreclosure scams; (iv) the right to avoid foreclosure by making a full or negotiated payment prior to foreclosure sale; (v) the right to be notified at least 90 days prior to a foreclosure suit being filed; (vi) the right to explore loss mitigation options; and (vii) the right to receive a copy of legal papers in a lawsuit. The Consumer Bill of Rights also outlines various obligations of a homeowner, including to respond to complaints, appearing at court, and negotiating in good faith. Under the law, the court must provide homeowners a copy of the Consumer Bill of Rights at the initial mandatory settlement conference.
With respect to vacant and abandoned properties, the new regulations target blight caused by such zombie properties by, among other things, requiring that bank and mortgage servicers: (i) complete an inspection of a property subject to delinquency within 90 days; (ii) secure and maintain the property where the bank or servicer has a reasonable basis to believe that the property is vacant and abandoned; (iii) report all such vacant and abandoned properties to NYDFS; and (iv) submit quarterly reports detailing both their efforts to secure and maintain the properties and the status of any foreclosure proceedings. The NYDFS Superintendent is authorized under the new regulations to issue civil penalties of $500 per day per property for violations of the new regulations.
FINRA Fines Credit Suisse over Anti-Money Laundering Policies
In a December 5 press release, FINRA announced that it has fined Credit Suisse Securities (USA) LLC $16.5 million for anti-money laundering (AML), supervision and other violations. FINRA’s determination and penalty were based primarily on two deficiencies in the investment bank’s suspicious activity monitoring program. First, Credit Suisse relied too heavily on its registered representatives “to identify and escalate potentially suspicious trading, when, in practice, such high-risk activity was not always escalated and investigated, as required.” And, second, FINRA found that the firm failed to properly implement its automated surveillance system to monitor for potentially suspicious money movements.
Jury Finds Mortgage Company and CEO Liable for Fraud; Awards $92 Million in Damages
A federal jury has ordered two Texas-based home mortgage entities and their chief executive to pay nearly $93 million for defrauding the U.S. government into insuring thousands of risky loans, the Department of Justice announced on November 30.
The mortgage companies and their former CEO were found liable for violating the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by, among other things, failing to maintain an adequate quality control program; and submitting false annual certifications regarding quality control requirements. Specifically, the government contended that defendants operated over 100 “shadow” branch offices that originated FHA-insured mortgage loans without obtaining the necessary HUD approval, and which were therefore not subject to HUD oversight.
Ultimately, the jury awarded $92,982,775 in total damages, including $7,370,132 against the CEO specifically—a sum that is subject to mandatory tripling. Further penalties relating to the FIRREA violations are expected, which U.S. District Judge George Hanks will set at a later date.
ABA Sues Credit Union Regulator Over Field of Membership Rule
On December 7, the American Bankers Association (ABA) filed a lawsuit in federal court seeking to overturn a final rule published by the National Credit Union Administration (NCUA) in that morning’s Federal Register. The final rule purports to “implement changes in policy affecting: The definition of a local community, a rural district, and an underserved area; the chartering and expansion of a multiple common bond credit union; the expansion of a single common bond credit union that serves a trade, industry or profession; and the process for applying to charter, or to expand, a federal credit union.”
ABA’s law suit contends, among other things, that by “fail[ing] to adhere to the limitations on federal credit unions established by Congress,” the NCUA’s final rule “upsets the balance Congress struck between granting federal credit unions tax-favored status and limiting their operations to carefully circumscribed groups or localities that share a common bond.” Under the final rule, scheduled to take effect Feb. 6, Federal Credit Unions (FCUs) can apply to serve entire geographic regions, so-called “rural districts” up to 1 million people (which include the entirety of Alaska, North Dakota, South Dakota, Vermont or Wyoming), and areas contiguous to their existing service areas. NCUA is also facilitating easier conversions to community charters.
Mortgage Companies Penalized for Deceptive Reverse Mortgage Ads; Must Take Corrective Action
On December 7, the CFPB announced that it had entered into consent orders with three reverse mortgage companies to settle claims that their advertisements for those mortgages were deceptive under the Mortgage Acts and Practices Advertising Rule. The alleged misconduct included deceptive advertising campaigns that misrepresented, among other things: (i) the risk of losing home and the right to remain in the home; (ii) expected costs and mortgage payments; (iii) government affiliations of the mortgage company; and (iv) the effectiveness of a reverse mortgage credit product to eliminate debt.
The consent orders require the companies to make clear and prominent disclosures in their reverse mortgage advertisements and implement systems to ensure they are following all laws. One of the three firms also cannot imply affiliation with the government and must maintain complete and accurate records. In addition, the consent orders impose civil penalties ranging from $65,000 up to $400,000.
Federal District Court Holds Claims Brought by CFPB Alleging Deceptive Conduct Must Meet Heightened Rule 9(b) Standard
In a recent case, a California District Court held that CFPB’s claims alleging deceptive conduct under the Telemarketing Sales Rule (“TSR”) against a credit repair company failed to meet the heightened pleading requirement under Fed. R. Civ. P. 9(b), under which a plaintiff must “state with particularity the circumstances constituting fraud” – including pleading “the time, place, and specific content of the false representations.” CFPB v. Prime Marketing Holdings, LLC, CV 16-07111-BRO, Dkt. No. 32 (C.D. Cal. Nov. 15, 2016).
Specifically, the court in Prime Marketing Holdings concluded that the CFPB’s general allegations of deception “failed to identify any specific instances where the defendant made such a misrepresentation” including, for instance, “what representations were made, when these representations were made and to whom they were made.” Id. at 12-13. Based on this finding, the court dismissed without prejudice the four deception-based claims. Id.
Supreme Court Weighs in on Insider Trading in Salman v United States
In its first insider trading decision in nearly two decades, the US Supreme Court ruled unanimously to uphold an insider trading conviction of an individual who traded while aware of material non-public information received from a friend who received no financial benefit in exchange. Salman v. United States, No. 15-628, 2016 WL 7078448 (U.S. Dec. 6, 2016).
The defendant in Salman was convicted in 2013 for trading on confidential information obtained through his brother-in-law even though Salmon he gained no tangible financial benefit. The appeal thus presented the Justices with the central question of how to define a “personal benefit” garnered from insider information. In upholding Salman’s conviction, the Supreme Court affirmed that a user of financial tips breaches fiduciary duty with respect to “insider information” from a relative, whether or not the person giving the information receives a tangible financial benefit. In so holding, the Court also undercuts a narrower interpretation in a case decided by the Second Circuit in 2014 that held that the person who provides the tips must receive something of value in exchange for inside information given to family or friends.
New Edition of Consumer Compliance Outlook Published by Philadelphia Fed
The Federal Reserve Bank of Philadelphia has posted the latest edition of Consumer Compliance Outlook. This edition features articles on subpart B of Regulation E on Remittance Transfers and the updated interagency questions and answers regarding Community Reinvestment.