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State Banking Associations Object To Senators' Request For Increased Bank Payment System Security Oversight
On March 5, 53 state bankers associations sent a letter to Federal Reserve Board Chair Janet Yellen defending banks’ efforts to secure consumer financial data and highlighting the responsibilities of other parties, in particular merchants, to do the same. The banking associations, representing bankers in every state and Puerto Rico, took issue with a letter Democratic Senators Dick Durbin (D-IL) and Al Franken (D-MN) sent last month to the Federal Reserve Board Chair seeking information about the Board’s oversight of card issuers’ fraud prevention policies and recommending that the Board do more to verify the effectiveness of such policies. The banking associations contend that the Senators’ letter is a “thinly veiled effort to once again advance the regulation of interchange under the guise of current concerns over data security,” and criticize the Senators for converting a discussion about security responsibilities into one about interchange fees.
Comptroller Curry Comments On Outsourcing Risks
On March 4, Comptroller of the Currency Thomas Curry addressed the annual meeting of the Independent Community Bankers Association where he stressed the need for banks to effectively manage risk presented by the outsourcing of data security and information technology. The Comptroller explained that “[t]hird parties can be the weak link in [a bank’s] information systems security and resiliency; and especially where that third party is providing security services.” Referencing guidance the OCC issued last year, the Comptroller described the OCC’s due diligence expectations for banks’ third-party relationships as “substantial” and stressed that a bank’s due diligence needs to cover not only the vendor, but the vendor’s own third-party relationships. Mr. Curry also focused on other concerns he has about third-party relationships, including: (i) consolidation of service providers, which can increase the number of banks impacted when deficiencies occur at a single vendor; (ii) increased reliance by banks on foreign-based service providers; and (iii) third parties’ access to “large amounts of sensitive bank or customer data.”
New Jersey Appellate Court Clarifies Debt Buyers' Burden Of Proof
On March 5, the Superior Court of New Jersey, Appellate Division issued an opinion clarifying the proof necessary for debt buyers to prevail on efforts to collect an assigned debt on a closed and charged-off credit card account. New Century Fin. Servs. Inc. v. Oughla, Nos. A-6078-11T4, A-6370-11T1, 2014 WL 839180 (N.J. Sup. Ct. App. Div. Mar. 5, 2014). In a consolidated appeal of two trial court decisions, debtors sought to reverse the trial court’s orders granting summary judgment to two debt buyers seeking to collect on charged-off credit card debt they had purchased from sellers who derived their ownership from credit card issuers. The appeals court explained that to collect such debt, debtors must prove (i) ownership of the charged-off debt, which it can do through business records documenting its ownership, and (ii) the amount due at the time the card issuer charged off the debt. The court also determined that (i) an electronic copy of the last billing statement is sufficient to demonstrate the amount due at charge-off; (ii) the validity of a debt assignment is not undermined by a failure to provide notice of the assignment to the debtor, and (iii) that a debt can be assigned without specifically referencing the debtor’s name or account number. The court held in these companion cases that one of the debt buyers established ownership through proper authentication and certification of business records, while the other debt buyer failed to provide sufficient proof of the full chain of ownership of its claim to meet its burden. The court affirmed summary judgment for one buyer and reversed and remanded the other buyer’s case accordingly.
EDNY Judge Substantially Narrows Claims In Consolidated Overdraft Class Actions
On March 5, the U.S. District Court for the Eastern District of New York held that the named plaintiffs lack standing to bring claims in a multidistrict class action alleging illegal overdraft practices by a national bank. In re HSBC Bank, USA, N.A., Debit Card Overdraft Fee Litigation, No. 13-md-2451, 2014 WL 868827 (E.D.N.Y. Mar. 5, 2014). The three consolidated actions are similar to numerous actions filed against national banks across the country in which bank customers have alleged, generally, that banks manipulated debit card transactions to increase the number of overdraft fees charged to customers by re-ordering daily transactions from highest to lowest dollar amount, resulting in a higher number of individual overdraft transactions. On the bank’s motion to dismiss in this case, the court held that the named plaintiffs never lived or conducted business in 10 of the 12 states where the allegations arose and therefore lacked standing under the applicable state statutes giving rise to the claims. The court added that if the plaintiffs sought to add representatives from the other states, it would be difficult for the court to adjudicate the claims given the discrepancies between state laws. The court dismissed numerous claims under the laws of the two remaining states (California and New York), but allowed the plaintiffs breach of implied covenant and good faith and fair dealing claims under both New York and California law, and claims under California’s Unfair Competition Law and False Advertising Law, to proceed.
SWIFT Announces Development Of New KYC Compliance Registry
On March 4, SWIFT, the bank member-owned cooperative based in Belgium, announced that it signed a Memorandum of Understanding with six of its major member banks to develop a central utility for the collection and distribution of standard information required by banks as part of their know your customer (KYC) due diligence processes. The KYC registry is intended to help banks manage KYC compliance challenges and reduce associated costs by providing bank users centralized access to details on their counterparties, while allowing participating banks to retain ownership of their own information and maintain control over which other institutions can view their data. SWIFT states that an initial working group will establish processes for providing information to the registry and documentation necessary to fulfill KYC requirements across multiple jurisdictions. The group expects more banks to join in the coming months.
UK FCA Identifies Additional Improvements For Retail Banks' Sales Incentive Schemes
On March 4, the UK FCA released the results of its most recent review of sales incentives at retail financial firms. The FCA’s review revealed that retail banks have made progress in changing their financial incentive structures in response to the FCA’s supervisory focus on the issue starting in September 2012, which led to new guidance issued in January 2013. The FCA’s initial focus on the issue derived from its concerns about incentive structures that, among other things, allegedly fueled the sale of payment protection plans and other add-on products. Despite the broad progress, the FCA reports that roughly one in 10 firms with sales teams had higher-risk incentive scheme features where it appeared they were not managing the risk properly at the time of the FCA’s assessment. It believes firms should concentrate on, among other things (i) checking for spikes or trends in the sales patterns of individuals to identify areas of increased risk; (ii) better monitoring behavior in face-to-face sales conversations; and (iii) managing risks in discretionary incentive schemes and balanced scorecards, including the risk that discretion could be misused. The FCA states that given the progress made, it is not proposing any rule changes at this time, but it intends to keep financial incentives on its agenda for 2014.
South Dakota Clarifies Revolving Credit Account Requirements
On March 3, South Dakota enacted HB 1131, which amends state banking laws to make clear that banks can offer revolving lines of credit not tied to the issuance of a credit card.
California AG Suggests Cybersecurity Measures
On February 27, California Attorney General Kamala Harris issued a guide to assist small businesses in defending against the threat of cybercrime. The guide, which was developed with the California Chamber of Commerce and Lookout, a mobile security company, stresses that small businesses should assume that they are a target for cybercrime and act accordingly. In addition to providing actionable steps to prevent cyber-attacks, the guide encourages every small business to develop a “game plan” for responding to the inevitability of an actual incident: “Experience has shown that many organizations wait until they have actually suffered a serious data breach before attempting to come up with a process for dealing with such a situation – which amounts, effectively, to building an airplane in the air.”
UK FCA Finalizes New Consumer Credit Rules
On February 28, the UK Financial Conduct Authority (FCA) announced final rules for consumer credit providers, including new protections for consumers in credit transactions. The FCA states that the most drastic changes relate to payday lending and debt management. For example, with regard to “high-cost short-term credit,” the new rules will (i) limit to two the number of loan roll-overs; (ii) restrict to two the number of times a firm can seek repayment using a continuous payment authority; and (iii) require creditors to provide a risk warning. Among other things, the new rules also establish prudential standards and conduct protocols for debt management companies, peer-to-peer lending platforms, and debt advice companies. The policy statement also describes the FCA’s risk-based and proactive supervisory approach, which the FCA states will subject firms engaged in “higher risk business” that “pose a potentially greater risk to consumers” to an “intense and hands on supervisory experience” and will allow the FCA to levy "swift penalties” on violators. The new rules take effect April 1, 2014. The FCA plans next to propose a cap on the cost of high-cost, short-term credit.
CFPB Releases Snapshot of Servicemember Complaints
On March 6, the CFPB released a “snapshot” of servicemember complaints prepared by the Office of Servicemember Affairs (OSA), which analyzes the military consumer complaints received since July 2011. According to the report, servicemembers, veterans, and their families have submitted 14,100 complaints to the Bureau since its opening and have recovered more than $1 million. The volume of servicemember complaints has continued to increase over time, rising 148% from 2012 to 2013.
Notably, although “debt collection” was not added as a complaint category until July 2013, approximately 3,800 complaints received relate to collection practices. Nearly half of these complaints concern attempts to collect non-existent debts, with the remainder concerning improper collection tactics and procedural issues related to collection. The category that received the most complaints—approximately 4,700—was mortgage. Concerns raised relate primarily to practices undertaken when a borrower defaults, but also to loan origination and making payments. The remainder of the complaints received relate to consumer loans, private student loans, payday loans, credit cards, credit reporting, banking services, and money transfers. Along with debt collection practices, the report identifies payday loans—and specifically, compliance with the Military Lending Act's interest-rate restrictions—as a point of focus for OSA.