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SCOTUS To Hear Recess Appointment Case, Potential Implications for CFPB Director
This morning, the U.S. Supreme Court agreed to hear the federal government’s challenge to a January 2013 decision by the Court of Appeals for the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281. Last month, the Third Circuit similarly invalidated a different NLRB recess appointment made by President Obama.
CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia. Mr. Cordray, whose recess appointment is due to expire at the end of this year, was re-nominated by President Obama this year to serve a full term as director, but his confirmation is being held up in the Senate. All but two Senate Republicans have pledged to oppose Mr. Cordray for the position unless oversight of the CFPB is altered, including by changing its governance structure to a commission structure.
In its review, the Supreme Court will address two questions presented by the government, as well as a third the Court added. The government’s petition asked the court to determine (i) whether the President’s recess appointment power may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions and (ii) whether the President’s recess appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess. The Court also signaled its intent to address the issue of Senate pro forma sessions with a question it added - whether the President's recess appointment power may be exercised when the Senate is convening every three days in pro forma sessions. The Court is likely to hear the case in the fall and issue its opinion next year.
New York Announces Agreement to Resolve Alleged International Sanctions Violations
On June 20, New York announced a consent order with the New York branch of a foreign bank to resolve charges that the bank — over a five year period that ended more than five years ago — violated Bank Secrecy Act, Anti-Money Laundering and international sanctions rules by stripping from wire transfer messages information that could have been used to identify government and privately owned entities in Iran, Sudan, and Myanmar, and entities on the Specially Designated Nationals list issued by the OFAC and moving billions of dollars through New York on their behalf. The order requires the bank to pay a $250 million penalty, conduct a compliance review, and revise written compliance and management oversight plans. The compliance review must be conducted by an independent consultant that will be subject to the new DFS code of conduct for bank consultants described in a prior Byte. This is at least the second time in the last year that New York has taken a major action against a domestic branch of a foreign bank related to money laundering and international sanctions violations. In a previous instance, federal authorities followed with substantial civil and criminal penalties related to the same conduct.
U.S. Supreme Court Holds FAA Permits Class Arbitration Waivers
On June 20, the U.S. Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a class arbitration waiver “on the ground that the plaintiff’s cost of individually arbitrating a federal statutory claim exceeds the potential recovery.” American Express Co. v. Italian Colors Restaurant, 570 U.S. ___ (2013). The Court reversed a Second Circuit decision that held that because the costs for the individual plaintiff to arbitrate its claims would be prohibitive, the class action waiver was unenforceable and arbitration could not proceed. The Court explained that the Second Circuit’s “effective vindication” doctrine is a judge-made exception to the FAA that “finds its origin in the desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies,’. . . [b]ut the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” The Court added that there is no congressional command to reject the waiver of class arbitration, and that congressional approval of Rule 23 does not establish an entitlement to class proceedings for the vindication of statutory rights.
North Carolina Increases Maximum Installment Loan Rates, Adds Servicemember Protections
On June 20, North Carolina enacted SB 489 to increase from $10,000 to $15,000 the maximum installment loan amount, and to increase the maximum allowable interest rates on installment loans. Under the new tiered rate structure, effective July 1, 2013, lenders may charge 30 percent on loans up to $4,000, 24 percent on loans $4,000 to $8,000, and 18 percent on loans $8,000 to $15,000. The bill also (i) extends the allowable terms of such loans to 96 months, (ii) allows lenders to charge late and deferral fees, and (iii) adds new protections for military servicemembers.
National Mortgage Settlement Monitor Identifies Few Servicing Violations
On June 19, the National Mortgage Settlement Monitor, Joseph A. Smith, Jr., released summaries of the mortgage servicing compliance reports he submitted to U.S. District Court Judge Rosemary Collyer — the judge presiding over the consent judgments that constitute the National Mortgage Settlement. The summaries indicate that the five servicers subject to the national agreement were largely compliant with the agreement’s mortgage servicing requirements and currently are taking actions to address certain potential violations. Still, the Monitor stated that consumer and state attorney general complaints indicated that some issues may remain with regard to the loan modification process, single points of contact, and billing and statement inaccuracies, and that he is negotiating more stringent testing with the banks to address these issues.
Fannie Mae Updates Short Sale Requirements, Issues Servicing Clarifications and Reminders
On June 19, Fannie Mae issued Servicing Guide Announcement SVC-2013-13, which describes policy changes related to its standard short sale requirements, including (i) the multiple listing service requirements, (ii) credit report seasoning, and (iii) streamlined documentation requirements for transition from standard short sale to standard deed-in-lieu of foreclosure. With regard to standard deeds-in-lieu of foreclosure, the announcement addresses (i) property inspection requirements, (ii) REOgram® and subordinate lien release submission requirements, and (iii) title insurance requirements. In a Servicing Notice issued the same day, Fannie Mae clarified its policies related to (i) “full file” reporting to credit repositories, (ii) certain income documentation requirements, and (iii) liquidation reporting requirements for standard short sales and deeds-in-lieu of foreclosure.
SEC Plans to Alter Policy on Seeking Admissions
On June 18, numerous media outlets reported that SEC Chair Mary Jo White indicated that the SEC will shift its policy toward extracting admissions from parties facing allegations of wrongdoing as a condition of resolving those allegations. While a majority of cases likely still will be settled under the current “neither admit nor deny” rubric, the SEC will seek admissions in cases that meet certain criteria, which likely will include “widespread harm to investors.” The shift would extend a policy adopted last year by then-SEC Enforcement Director Robert Khuzami to no longer allow defendants who are convicted of or admit guilt with regard to criminal charges to neither admit nor deny the parallel civil liability. The SEC now may seek an admission even where there is no criminal finding or admission. This change follows increasing pressure from members of Congress on federal regulators and law enforcement authorities to more vigorously pursue allegations of wrongdoing by financial institutions, including, most recently, an inquiry by Senator Elizabeth Warren (D-MA) as to whether the SEC and other agencies have conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation to obtain a judicial finding of unlawful conduct.
U.K. Parliamentary Commission Report Offers Comprehensive Bank Governance Reforms
On June 19, the U.K. Parliamentary Commission on Banking Standards published a report titled “Changing Banking for Good.” The Commission, established in July 2012 after the alleged rigging of LIBOR was revealed, was tasked “to conduct an inquiry into professional standards and culture in the U.K. banking sector and to make recommendations for legislative and other action.” The report covers a broad range of banking sector issues, but focuses on the impacts of a perceived misalignment of incentives in banking. Some of the key recommendations include: (i) establishing a new regime to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks ; (ii) creating a new licensing regime underpinned by Banking Standards Rules; (iii) creating a new criminal offense of reckless misconduct in the management of a bank for senior bank officers; (iv) adopting a new remuneration code to better align risks taken and rewards received that would also defer more remuneration for a longer period of time; and (v) giving the bank regulator a new power to cancel all outstanding deferred remuneration for senior bank employees in the event their banks require taxpayer support.
New York Signals Crackdown on Bank Consultants with Substantial Fine, Temporary Ban
On June 18, New York announced an agreement with a bank consulting firm in connection with the firm’s work for a state-regulated bank alleged to have engaged in deceptive and fraudulent misconduct on behalf of client Iranian financial institutions in violation of anti-money laundering and sanctions rules. An investigation conducted by the New York Department of Financial Services (DFS) found that the consultant (i) failed to demonstrate autonomy and removed a recommendation aimed at rooting out money laundering from a written final report submitted to the DFS, and (ii) violated New York Banking Law § 36.10 by disclosing confidential information of other consulting firm clients to the bank. To resolve that investigation, the consulting firm agreed to (i) a voluntary one-year suspension from consulting work at any DFS-regulated institution, (ii) pay a $10 million penalty, and (iii) adopt a new code of conduct. The DFS intends for the code of conduct to serve as “a new model that will govern independent consulting firms that seek to be retained or approved by DFS.” The code of conduct states, among other things: (i) the financial institution and consultant must disclose all prior work by the consultant for the institution in the previous three years, (ii) the engagement letter must require that the ultimate conclusions and judgments will be that of the consultant based upon the exercise of its own judgment, (iii) the consultant and institution must submit a work plan for the engagement and timeline for completion of work, (iv) the DFS and the consultant must have ongoing communication, including outside the presence of the institution, and (v) the consultant must implement numerous record keeping, training, reporting, and other policies and procedures.
Federal Reserve Board Requires AML Enhancements Prior to Bank Merger
On June 18, the Federal Reserve Board announced the execution of a written agreement with a bank and its bank and non-bank subsidiaries to resolve alleged shortcomings in the institutions’ BSA/AML compliance programs. The bank previously announced that its planned merger with another institution was delayed due to the Federal Reserve Board’s concerns. The bank retained a consultant to assist with compliance enhancements, which under the written agreement include, among other things: (i) a revised firm-wide written BSA/AML compliance program, (ii) a revised written customer due diligence program, (iii) a written suspicious activity monitoring and reporting program, and (iv) a six month suspicious activity look-back review.