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Eleventh Circuit Reverses District Court Ruling in FCRA Case
On July 11, the U.S. Court of Appeals for the Eleventh Circuit reversed and remanded a decision from the District Court for the Southern District of Georgia, concluding that the district court had erred in dismissing the plaintiff’s claims under Section 1681s-2(b) of the FCRA. Hinkle v. Midland Credit Mgmt., Inc. et al., No. 15-10398 (11th Cir. July 11, 2016). Pursuant to 15 U.S.C. § 1681s-2(b), after receiving notice of a dispute, furnishers of information are required to either verify disputed information via investigation or to notify the credit reporting agencies (CRAs) that the disputed information cannot be verified. At issue in Hinkle was whether the debt buyer’s search of its internal records was a reasonable investigation to verify debt accounts when the plaintiff disputed their validity. The debt buyer argued that, “once it compared the information the CRAs possessed with its own internal records and confirmed a match, it was entitled to report the accounts as having been ‘verified.’” The plaintiff maintained that, without obtaining account-level information beyond its internal records, the debt buyer should have reported the results of its reinvestigation to the CRAs as “cannot be verified.” The court agreed with the plaintiff, determining that a reasonable jury could find that the debt buyer’s failure to attempt to consult account-level documentation to confirm that it was seeking to collect the debts from the right person, was an unreasonable investigation on the facts of this case.
NCRC Releases Fair Lending Report
On July 18, the National Community Reinvestment Coalition (NCRC) released a report analyzing data related to mortgage lending in St. Louis, Milwaukee, Minneapolis, and surrounding areas. According to the report, low- and moderate-income neighborhoods and predominantly minority neighborhoods lack access to mortgage credit. The report makes various key findings, including that: (i) the racial composition of neighborhoods in St. Louis and Milwaukee is a predictor of mortgage activity, with lending allegedly greater in predominantly white populated neighborhoods than in predominantly African American neighborhoods; (ii) 70 percent of the Milwaukee Metropolitan statistical area population is white and receives 81 percent of the loans, while African Americans make up 16 percent of the population and receive four percent of the loans; and (iii) median family income of a neighborhood is the variable that best predicts home loan activity in Minneapolis. The report follows a similar analysis of alleged racial disparities in mortgage lending in Baltimore, Maryland released by NCRC last year.
FINRA Elects New Chairman of Board of Governors
On July 15, the FINRA Board of Governors elected John J. Brennan as its new Chairman. Effective August 15, Brennan will succeed Richard G. Ketchum, who previously announced his retirement.
SBM Offshore Enters Into Settlement Agreement With Brazilian Authorities
On July 15, Petrobras announced that SBM Offshore NV had entered into a settlement agreement with Brazilian authorities to resolve allegations stemming from the Petrobras bribery probe. Under the terms of the agreement, the Dutch drilling company, which had been accused of paying bribes to Brazilian state-owned oil company Petrobras, will be immune to new legal actions stemming from the probe. In exchange, SBM Offshore agreed to pay approximately $342 million in fines, comprising $13.2 million to the Brazilian government and $328.2 million to Petrobras, of which $179 million “represents the nominal value to be deducted from future payments owed by Petrobras to SBM based on prevailing contracts.”
According to Petrobras, the leniency agreement is the outcome of negotiations that began in March 2015. Petrobras further stated that it will resume its normal business relationship with SBM Offshore.
The agreement is the latest settlement for SBM Offshore in connection with the Petrobras bribery probe. In 2014, SBM Offshore settled with Dutch authorities. In February 2016, SBM Offshore announced that the U.S. DOJ had re-opened its investigation into the company.
Special Alert: Maryland Ruling Opens New Front in Battle Over Bank Partnership Model
On June 23, the Maryland Court of Appeals affirmed a lower court judgment holding that a non-bank entity assisting consumers obtain loans from an out-of-state bank and then repurchasing those loans days later qualifies as a “credit service business” under the Maryland Credit Services Business Act (MCSBA), requiring a state license among other obligations. CashCall v. Md. Com’r of Financial Reg., No. 24-C-12-007787, 2016 WL 3443971 (Md. Ct. App. June 23, 2016). This holding is of particular importance to marketplace lending platforms that rely on bank partnerships to originate consumer loans because, in addition to requiring a license, the MCSBA prohibits licensees from arranging loans for out-of-state banks above Maryland’s usury ceiling.
In light of the ruling, the MCSBA could provide a roadmap for other states to test the limits of federal law, which specifically authorizes banks to export interest rates permitted by their home state notwithstanding another state’s usury limitations. Perhaps in view of a potential future challenge on federal preemption grounds, the CashCall Court appears to have gone out of its way to state in dictum that the non-bank entity was the “de facto lender” based on its efforts to market, facilitate, and ultimately acquire the loans it arranged. In so doing, the Court provides a strong suggestion that it might have reached the same result relative to the state’s usury laws under the “true lender” theory that has gained some traction in other actions against non-bank entities.
While the most immediate impact of the Court’s ruling is to uphold the state financial regulator’s cease and desist order and $5.65 million civil penalty, the case also creates additional risk and uncertainty for marketplace lending platforms and other FinTech companies seeking to maintain a regulatory safe harbor through the bank partner model. We analyze here the import of this latest case as part of the appreciable tension building as state law theories appear to be increasingly penetrating chinks in the armor of federal preemption principles.
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeremiah S. Buckley, (202) 349-8010
- Joseph M. Kolar, (202) 349-8020
- John P. Kromer, (202) 349-8040
- Jeffrey P. Naimon, (202) 349-8030
- Walter E. Zalenski, (202) 461-2910
- Christopher M. Witeck, (202) 349-8051
- Clinton R. Rockwell, (310) 424-3901
- Heidi M. Bauer, (202) 349-8044
- Jeffrey S. Hydrick, (202) 349-7952
- Donald T. Meier, (202) 461-2946
FinCEN Issues FAQs Regarding Customer Due Diligence Requirements
On July 19, FinCEN issued FAQs to clarify the scope of the May 2016 Customer Due Diligence (CDD) final rule. As previously covered by InfoBytes, and as outlined in Question 2 of the recently-released FAQs, the final rule imposes standardized CDD requirements for federally regulated banks and federally insured credit unions, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities (collectively, covered financial institutions). While the FAQs provide a detailed description of the CDD requirements, they state that, “[i]n short, covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers.” Notably, Question 5 of the FAQs clarifies that the CDD rule amends the AML program requirements to explicitly require covered financial institutions to implement and maintain risk-based procedures for conducting ongoing customer due diligence, including, but not limited to, (i) understanding the nature and purpose of the customer relationship; and (ii) conducting ongoing monitoring to identify and report suspicious transactions, as well as maintain and update customer information on a risk basis. The FAQs also note that covered financial institutions must include CDD procedures in their AML compliance program. In addition to discussing definitions for certain terms within the CDD rule, such as “account” and “beneficial owner,” the FAQs outline, among other things, the type of beneficial ownership information that covered financial institutions must collect for legal entity customers. Finally, as reiterated in the FAQs, the CDD rule has an effective date of July 11, 2016 and an applicability date of May 11, 2018.
FHFA Releases Update Regarding the GSEs' Single Security and Common Securitization Platform
On July 7, the FHFA released an update entitled An Update: An Implementation of the Single Security and the Common Securitization Platform (the Update) regarding Fannie Mae’s and Freddie Mac’s (collectively, the GSEs) joint venture – Common Securitization Solutions (CSS) – to develop and implement a Common Securitization Platform (CSP). As part of a multi-year initiative beginning as early as February 2012, the FHFA has been developing and reporting on the principles and functions for a new securitization platform that supports single-family residential mortgage-backed securitization activities guaranteed by the GSEs. FHFA’s recently issued Update outlines the CSS’s progress made to date, describes expected upcoming milestones, and summarizes the various phases of required testing for Release 1 and Release 2 of the CSP. Importantly, Release 1 will allow Freddie Mac to use the CSP and its Data Acceptance, Issuance Support, and Bond Administration modules to “perform activities related to its current single-class, fixed-rate securities—Participation Certifications (PCs) and Giant PCs—and certain activities related to the underlying mortgage loans (such as tracking unpaid principal balances).” Release 2 will allow both GSEs to use the CSP’s Data Acceptance, Issuance Support, Disclosure, and Bond Administration modules to “perform activities related to their current fixed-rate securities, both single- and multi-class; to issue Single Securities, including commingled resecuritizations; and to perform activities related to the underlying loans,” as well as to allow the GSEs to use the CSP “to issue and administer certain non-TBA mortgage securities, including Fannie Mae securities backed by adjustable rate mortgages.” According to the Update, the Single Security features of the CSP described in the FHFA’s May 2015 update have not been altered and are final. The Single Security features are fundamentally the same as those of the current Fannie Mae MBS and include: (i) payment delay of 55 days; (ii) certain pooling prefixes; (iii) mortgage coupon pooling requirements; (iv) minimum pool submission amounts; (v) general loan requirements such as first lien position, good title, and non-delinquent status; and (vi) seasoning requirements. As outlined in FHFA’s December 2015 publication of the 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions, the GSEs are expected to implement Release 1 in 2016 and Release 2 in 2018.
CFPB Orders National Bank to Pay $10 Million Over Overdraft Practices
On July 14, the CFPB ordered a Delaware-based national bank to pay a $10 million civil penalty to settle allegations that its overdraft fee practices were deceptive and violated Regulation E of the Electronic Fund Transfer Act because the bank allegedly charged consumers overdraft fees in connection with ATM and one-time debit card transactions without obtaining their affirmative consent. The CFPB alleges that the bank incentivized sales representatives of a third-party telemarketing vendor to market its overdraft service through “Opt-in Call Campaigns.” According to the consent order, vendor representatives deviated from sales scripts approved by the bank and provided consumers with incomplete, inaccurate, or misleading information to persuade them to enroll in the overdraft service. The CFPB alleges that the bank failed to properly monitor the vendor and detect “widespread problems” throughout the Opt-in Call Campaigns, including, but not limited to: (i) enrolling consumers in the bank’s overdraft program without their consent; (ii) falsely advertising the overdraft program as free, when in fact consumers were charged $35 per overdraft; (iii) misleading consumers into believing they would be charged overdraft fees regardless of whether or not they signed up for the program, or telling consumers they would face additional charges if they opted out of the program; and (iv) falsely claiming that the purpose of the call was “not a sales call” but rather to let consumers know that the bank had changed its name. In addition to imposing a $10 million civil penalty, the consent order requires the bank to, among other things, (i) validate that all consumers who were enrolled in the program through its vendor wish to remain in the program; (ii) stop using a vendor to conduct the marketing of its overdraft service; and (iii) develop and implement a new or revised written policy to govern vendor management for Service Providers engaged in telemarketing of consumer financial products or services.
OCC Releases Semiannual Risk Perspective Report
On July 11, the OCC released its Semiannual Risk Perspective for Spring 2016, which generally provides an overview of supervisory concerns for the federal banking system and specifically presents data as of December 31, 2015 in the following areas: (i) operating environment; (ii) bank performance; (iii) key risk issues; and (iv) regulatory actions. Similar to the fall 2015 report, the current report identifies cybersecurity, third-party vendor management, business continuity planning, TRID, and BSA/AML compliance, among other things, as key areas of potential operational and compliance risk. Further, the report highlights the new Military Lending Act rule, effective October 3, 2016, as a new key potential risk. According to the report, the OCC’s supervisory priorities for the next twelve months will generally remain the same; moreover, the outlook for the OCC’s Large Bank Supervision and Midsize and Community Bank Supervision operating units will remain broadly similar.
FTC Continues Operation Collection Protection Efforts
On July 14, the FTC announced that two debt collectors and three companies (collectively, Defendants) previously charged with using false threats and other illegal collection tactics in violation of the FTC Act and the FDCPA have agreed to a stipulated final order. According to the FTC, the Defendants purchased consumer debts and then collected payment by intimidating consumers with false threat of lawsuits, wage garnishment and arrest, and by impersonating attorneys or process servers. In addition, the FTC alleged that the Defendants (i) failed to disclose to consumers their right to receive verification of a debt; (ii) did not identify themselves as debt collectors; and (iii) disclosed debts to third parties. The final order imposes a $4,802,646 judgment, which the FTC partially suspended upon the surrender of certain assets, and requires that the two individual debt collectors separately pay $59,207 and $50,562. The action is part of the FTC’s Operation Collection Protection, a nationwide initiative designed to combat alleged abusive and deceptive debt collection practices.