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Federal Reserve Issues Cease and Desist Order over Bank's Deposit-Gathering Practice
On June 13, the Federal Reserve issued a cease and desist order to a California-based savings and loan holding company and its wholly-owned, Indiana-based federal savings bank subsidiary. According to the Federal Reserve, between January 8, 2008 and March 5, 2010, the federal savings bank operated a deposit-gathering program (Program) pursuant to which it placed customer funds into deposit accounts at unaffiliated banks (Participating Banks) that had different maturities and different interest rates than those selected by customers under the Program. The Federal Reserve contends that the bank’s deposit-gathering practice was unsafe and unsound, and that the bank “was subject to liquidity risk because customers may have demanded the return of many or all of their deposits before the maturity dates negotiated by [the bank] with the Participating Banks, and/or [the bank] obtained less in interest from deposits at Participating Banks than it owed to customers for the deposit accounts they had selected.” Pursuant to the Federal Reserve’s cease and desist order, the savings and loan holding company and the federal savings bank must: (i) receive written approval from, and (ii) submit a business plan to the Federal Reserve (or the appropriate federal banking agency) prior to engaging in any deposit-gathering program.
OCC Names Beverly Cole Deputy Comptroller for Compliance Supervision
On June 22, the OCC named Beverly Cole its Deputy Comptroller for Compliance Supervision. Effective July 2016, Cole will serve as the operational executive responsible for developing and promulgating compliance operational protocols, examination strategies, and schedules. Cole started at the OCC in 1979 as an Assistant National Bank Examiner. In 1984, she left the OCC to work in the banking industry, but she returned to the OCC three years later. Throughout her tenure with the OCC, Cole has served in various supervisory roles overseeing banks of all sizes.
OFAC Imposes Civil Penalty for Export of Medical Supplies to Iran
On June 23, OFAC announced a $107,691.30 settlement with a North Carolina-based medical device company for apparent violations of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (the Regulations). Specifically, the company violated § 560.204 of the Regulations by exporting a number of its medical products to its United Arab Emirates distributor throughout April and May 2011 with the knowledge or reason to know that the products were ultimately destined for Iran. The settlement amount reflects OFAC’s consideration of the following aggravating factors: (i) the company acted willfully by exporting products it knew or had reason to know were ultimately destined for Iran, editing its destination control statement at the request of its distributor and continuing to conduct business with its distributor after receiving confirmation that the distributor had reexported the company’s products to Iran; (ii) the company’s former CEO and International Sales Manager knew the products were ultimately destined for Iran; and (iii) the company did not have a sanctions compliance program at the time of the apparent violations. OFAC considered the following as mitigating factors when determining the settlement amount: (i) limited harm was inflicted on U.S. sanctions program objectives because OFAC likely would have granted the company a license to export the medical products to Iran, had the company sought permission to do so; (ii) the company had no prior OFAC sanctions history; (iii) the company took remedial steps, such as establishing an OFAC compliance program; and (iv) the company “cooperated with OFAC’s investigation and agreed to toll the statute of limitations for a total of 513 days.”
North Carolina AG Announces $9 Million Settlement with Online Lenders
On June 21, North Carolina AG Roy Cooper, together with Commissioner of Banks Ray Grace, announced a settlement with two online lenders to resolve allegations that they violated state usury laws. According to the complaint, the lenders offered North Carolina consumers personal loans of $850 to $10,000 and charged annual interest rates of approximately 89 to 342 percent, significantly exceeding the rates allowed under state law. In 2015, Special Superior Court Judge Gregory P. McGuire issued a preliminary injunction to ban the companies from making or collecting loans in North Carolina. In addition to permanently barring the companies from collecting on loans made to North Carolina borrowers, the consent judgment requires the companies to (i) cancel all loans owed by North Carolina consumers; (ii) have the credit bureaus remove negative information on consumers’ credit reports related to the loans; (iii) pay $9,025,000 in refunds to North Carolina consumers, with the remaining $350,000 of the settlement allocated to covering the costs of the investigation, lawsuit, and administering the settlement; and (iv) cease unlicensed lending in North Carolina. The settlement represents North Carolina’s first successful action to ban an online payday-type lender that used affiliation with an Indian tribe in an effort to evade state usury laws.
New York AG Settles with Auto Dealership over Alleged Deceptive Practices
On June 21, New York AG Eric Schneiderman settled with a New York-based auto dealership to resolve allegations of deceptive sales and advertising practices. Specifically, AG Schneiderman alleged that the company charged consumers up to $5,000 for warranties and service contracts without their authorization and convinced consumers to purchase and finance vehicles on terms they could not afford, falsely promising to refinance the loans on more favorable terms in the subsequent months. In addition, the AG’s office received a number of consumer complaints alleging that the company (i) engaged in various bait and switch tactics, including crediting consumers for less than previously agreed on vehicle trade-ins; (ii) charged consumers a greater price for a vehicle than promised; (iii) charged consumers a higher interest rate on the auto loan than promised; (iv) falsely promised lower yearly mileage limits for lease contracts; and (v) forged consumer signatures on contracts. Pursuant to the settlement agreement, the company must pay restitution ranging from $198 for alleged illegal fee charges to more than $4,000 for unauthorized warranties and services contracts, for a total of more than $101,000 to 119 consumers. The settlement further requires that the company “pay restitution to other consumers who come forward within the next three months and who were subjected to the deceptive and illegal practices uncovered by the investigation, with a cap of $50,000.”
AG’s Schneiderman’s settlement comes after the New York State Police completed a raid and seizure of the company’s business records in May 2012. The company’s finance manager was subsequently arrested for second-degree Scheme to Defraud and third-degree Criminal Possession of a Forged Instrument.
Massachusetts-based Imaging Company and Danish Subsidiary Settle FCPA Charges with the SEC and DOJ
On June 21, the SEC and DOJ announced a nearly $15 million settlement with a Massachusetts-based imaging company and its wholly-owned Danish subsidiary to resolve parallel civil and criminal actions involving FCPA violations. The SEC alleged that, from at least 2001 through early 2011, the subsidiary paid about $20 million to third parties in hundreds of sham transactions with distributors in Russia and shell companies in Belize, the British Virgin Islands, Cyprus, and Seychelles. The sham transactions involved fictitious inflated invoices to the distributors with the over-payments going to third parties identified by the distributors. The subsidiary did not have a relationship with the third parties and did not know if the payments had any business purpose for the distributors.
The settlement is consistent with the settlement offer that the imaging company disclosed last December, and it reflects the company’s agreement to pay $7.67 million in disgorgement and $3.8 million in prejudgment interest to resolve the SEC’s books and records and internal controls charges, and the subsidiary’s agreement to pay $3.4 million in criminal fines in a non-prosecution agreement with the DOJ. The subsidiary’s former CFO also settled with the SEC, agreeing to pay a $20,000 penalty to settle allegations that he knowingly circumvented internal controls and falsified the subsidiary’s books and records.
GAO Report Addresses Borrower Difficulty with Federal Direct Loan Program
On June 15, the Government Accountability Office (GAO) released a report titled “Federal Student Loans: Education Could Improve Direct Loan Program Customer Service and Oversight.” As part of its study into the Department of Education’s (Education) oversight of the Direct Loan program, GAO reviewed, among other things, Education contracts, monitoring plans, policies, procedures, and guidance related to servicers as well as servicer websites, a sample of communications sent to the borrower, the summary results from Education's 2014 and 2015 customer satisfaction surveys of borrowers, and Education’s quarterly and annual servicer performance reports and annual servicer reviews from fiscal years 2010-2015. In addition, GAO interviewed, among others, CFPB and Education officials, servicers responsible for serving more than 95% of Direct Loan borrowers, and a sampling of 24 Direct Loan borrowers – selected at random from Education data – who were in either (i) repayment; (ii) delinquency (less than 270 days); or (iii) deferment of forbearance. The report highlights borrowers’ limited telephone access to their assigned loan servicers to manage their loans as a key area of concern, noting particular limitations for borrowers on the West Coast assigned to a servicer on the East Coast. The results of Education’s 2014 and 2015 borrower satisfaction surveys revealed similar findings. GAO attributed consumers’ lack of access to servicers to Education’s failure to implement a minimum standard for servicer call center hours: “Education’s lack of a minimum standard for servicer call center hours, and the limited hours currently provided, impede borrowers’ access to customer service that is responsive to their needs and puts them a greater risk of delinquency and default.” The report further notes that Education lacks a systematic approach for capturing borrower complaints, including those received through servicers, and that its performance metrics and compensation structure for servicers, which is based on borrowers’ loan status, “can sometimes hinder Education’s strategic goals of providing superior customer service and ensuring program integrity.”
Based on its findings, GAO recommends that Education (i) establish a minimum standard for servicer call center hours to allow for improved access to servicers; (ii) ensure its complaint tracking systems sufficiently capture comprehensive and comparable information from servicers regarding the nature and status of borrower complaints; and (iii) analyze and modify its performance metrics and compensation. Generally, Education agreed with GAO’s findings and recommendations, but suggested that its current performance metrics reflect compliance; GAO maintains that they do not.
Department of Education Proposes Rule to Protect Student Borrowers from Alleged Predatory Practices by Postsecondary Institutions
On June 16, the Department of Education’s (Education) proposed rule to amend the regulations governing the Direct Loan program was published in the Federal Register. The proposal seeks to clarify and expand upon existing regulations intended to protect student borrowers from alleged predatory practices by postsecondary institutions. Specifically, Education proposes to amend existing regulations by, among other things, (i) establishing a more accessible and consistent borrower defense standard and streamlining the borrower defense process to ensure protection from institutions’ alleged predatory actions and omissions resulting in loan discharges; (ii) requiring certain institutions provide Education-issued plain language warnings to prospective borrowers and enrolled students on its Web sites and in all promotional materials and advertisements; (iii) prohibiting the requirement to use arbitration to resolve claims brought by a borrower against the school or waivers of his/her right to initiate or participate in a class action lawsuit regarding such claims; and (iv) prohibiting the requirement for students to engage in internal institutional complaints or grievances before contacting accrediting or government agencies with authority over the school regarding such claims. Comments on the proposed rule must be received by Education on or before August 1, 2016.
FTC Submits Comment to the FCC on Proposal Relating to Debt Collection Robocalls
On June 6, the FTC submitted a comment to the FCC on its Notice of Proposed Rulemaking (NPR) regarding the implementation of recent changes to provisions of the Telephone Consumer Protection Act (TCPA) that permit robocalls “made solely to collect a debt owed or guaranteed by the United States.” Recommending that the FCC proceed cautiously with the expansion of permissible robocalling, the FTC instructed the FCC to establish standards for the collection of government debt that are consistent with the FDCPA, Section 5 of the FTC Act, and the Telemarketing Sales Rule (TSR). Specifically, the FTC’s comment advises the FCC to limit permitted robocalls to only (i) those relating to debts in default status; (ii) persons who actually owe the debts; (iii) those relating to the collection of the government debt; and (iv) collection purposes exclusively. In addition, the FTC’s comment on the NPR suggests that the FCC (i) maintain reasonable security practices over the data collected during covered robocalls; (ii) limit robocalls to the hours of 8:00 am to 9:00 pm; and (iii) require covered callers to “transmit caller ID information that includes a caller number that connects to a live agent representing the debt collector.”
Department of Homeland Security and DOJ Issue Operational Rules to Implement Provisions of CISA
On June 15, the Department of Homeland Security and the DOJ (collectively, Departments) issued final procedures to implement certain provisions of the Cybersecurity Information Sharing Act (CISA) of 2015. The rules establish operational procedures “relating to the receipt of cyber threat indicators and defensive measures by all federal entities under CISA.” The recently issued procedures finalize interim guidance released by the Departments in February 2016.