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Federal Reserve Board Announces BSA/AML Enforcement Action against Bank Holding Company
On March 26, the Federal Reserve Board released a recent enforcement action against a bank holding company related to deficiencies in certain of its bank subsidiaries’ Bank Secrecy Act and anti-money laundering (BSA/AML) compliance programs, as reflected in 2012 orders from the OCC and the FDIC requiring the subsidiary banks to remedy certain BSA/AML compliance deficiencies. Nearly a year later, the Federal Reserve Board order charges that the holding company lacked effective systems of governance and internal controls to adequately oversee the activities of the banks with respect to legal, compliance, and reputational risk related to the banks’ respective BSA/AML compliance programs. The order requires the holding company to (i) submit a plan to continue to improve the governance, structure, and operations of its BSA/AML and OFAC regulations compliance risk management program; and (ii) complete a review of the effectiveness of its firmwide BSA/AML compliance program and prepare a report. In addition, the company’s board must (i) submit a written plan to continue ongoing enhancements to its oversight of the company’s firmwide BSA/AML compliance risk management program; (ii) review the above-referenced BSA/AML compliance program report and submit a plan with specific actions the company will take to continue to strengthen the management and oversight of its firmwide compliance program; and (iii) submit quarterly progress reports. The Federal Reserve Board order does not include a civil money penalty.
Fannie Mae and Freddie Mac Stress Importance of Lender Data Accuracy
On March 26, Fannie Mae and Freddie Mac reminded lenders of the importance of data accuracy to improve the overall quality of loan delivery data submitted to each entity and ensure that it is complete and fully reflective of the terms of the mortgage. The announcement clarifies information about certain data points and provides examples for lenders.
Fannie Mae Announces Miscellaneous Servicing Policy Updates
On March 27, Fannie Mae issued Servicing Guide Announcement SVC-2013-06, which announces policy updates regarding (i) redelivery of balloons, (ii) property value ordering process, and (iii) Mortgage Release and REOgram Submissions. The announcement states that Fannie Mae is eliminating Servicing Guide procedures for removing a balloon mortgage loan from an MBS pool when a refinance is effective after the balloon maturity date, and that servicers should contact their Investor Reporting Business Analyst for specific instructions on the process for past-due balloon mortgage loans serviced in a special servicing option MBS pool. The announcement also provides detailed instructions about a new servicer requirement to place orders directly with Fannie Mae (i) to determine the market value of property for short sales, and (ii) for Mortgage Releases and foreclosure sale bidding, if required by Fannie Mae or a mortgage insurer. Finally, effective immediately, servicers are no longer required to obtain recordation of the release of the subordinate lien within 60 days of the borrower’s acceptance of the offer for a Mortgage Release and instead, evidence of recordation of the subordinate lien release will be required with submission of the REOgram.
FHFA Announces Streamlined Modification Initiative
On March 27, the FHFA announced that Fannie Mae and Freddie Mac will begin a new loan modification initiative on July 1, 2013. As described in more detail in Fannie Mae Servicing Guide Announcement SVC-2013-05 and Freddie Mac Bulletin Number 2013-5, servicers will be required to offer eligible borrowers who are at least 90 days delinquent on their mortgage a way to lower their monthly payments and modify their mortgage without requiring financial or hardship documentation. Eligible borrowers will need to demonstrate a willingness and ability to pay by making three on-time trial payments, after which the mortgage will be permanently modified. Borrowers will still have the option to document income and financial hardship, which could result in a modification with additional savings. The program will expire on August 1, 2015.
FHFA Proposes Ban on Lender-Placed Insurance Sales Commission and Reinsurance Activities
On March 26, the FHFA released a notice seeking comment on certain restrictions it expects Fannie Mae and Freddie Mac (the Enterprises) will put in place with regard to lender placed insurance practices. The FHFA anticipates that the Enterprises will (i) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers; and (ii) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer. The final restrictions will be issued by the Enterprises as aligned guidance to sellers and servicers four months after the close of the comment period, which will run for 60 days from the date of publication of the notice in the Federal Register. Pursuant to that timeline, a final policy could be expected in late September or early October.
CFPB Issues Guidance on Indirect Auto Finance
On March 21, the CFPB issued Bulletin 2013-02, which provides guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and specifically addresses the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The CFPB explains that indirect auto lenders are creditors under ECOA and Regulation B if they regularly participate in making credit decisions. Based on information the Bureau has collected to date, it believes the “standard practices” of indirect auto lenders constitute participation in a credit decision.
The CFPB contends that by permitting dealer markup and compensating dealers on that basis, lenders may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios. As such, the CFPB urges indirect lenders to (i) impose controls on, or otherwise revise, dealer markup and compensation policies, and monitor the effects of those policies and address unexplained pricing disparities on prohibited bases; or (ii) eliminate dealer discretion to mark up buy rates and compensate dealers in some other way.
The guidance also identifies what the CFPB considers to be core aspects of a robust fair lending compliance program, including: (i) an up-to-date fair lending policy statement; (ii) regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and board members; (iii) ongoing monitoring for compliance with fair lending and other policies and procedures intended to reduce fair lending risk; (iv) review of lending policies for potential fair lending violations, including potential disparate impact; (v) depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction; (vi) regular assessment of the marketing of loan products; and (vii) meaningful oversight of fair lending compliance by management and, where appropriate, the institution’s board.
Insights Into The Financial Fraud Enforcement Task Force Priorities for 2013
On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.
The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes -- including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things -- that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.” He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about -- or are willfully blind to -- the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system -- that is, if we can stop the scammers from accessing consumers’ bank accounts -- then we can protect the consumers and starve the scammers.”
Mr. Bresnick stated that the Task Force’s message to banks is this: “Maintaining robust BSA/AML policies and procedures is not merely optional or a polite suggestion. It is absolutely necessary, and required by law. Failure to do so can result in significant civil, or even criminal, penalties under the Bank Secrecy Act, FIRREA, and other statutes.” He noted that banks should endeavor not only to know their customers, but also to know their customers’ customers: “Before they agree to do business with a third-party payment processor, banks should strive to learn more about the processors’ merchant-clients, including the names of the principals, the location of the business, and the products being sold, among other things.” They further should be aware of glaring red flags indicative of fraud, such as high return rates on the processor’s accounts: “High return rates trigger a duty by the bank and the third-party payment processor to inquire into the reasons for the high rate of returns, in particular whether the merchant is engaged in fraud.” (See BuckleySandler’s previous Spotlight on Anti-Money Laundering posts here, here and here.) Mr. Bresnick underscored this point by mentioning a recent complaint filed by the DOJ in the Eastern District of Pennsylvania.
With respect to the financial institutions’ relationships with the payday lending industry, Mr. Bresnick stated that “the Bank Secrecy Act required banks to have an effective compliance program to prevent illegal use of the banking system by the banks’ clients.” He explained that financial institutions “should consider whether originating debit transactions on behalf of Internet payday lenders – particularly where the loans may violate state laws – is consistent with their BSA obligations.” Although he acknowledged that it was not a simple task for a financial institution to determine whether the loans being processed through it are in violation of the state law where the borrower resides, he suggested “at a minimum, banks might consider determining the states where the payday lender makes loans, as well as what types of loans it offers, the APR of the loans, and whether it makes loans to consumers in violation of state, as well as federal, laws.”
In concluding, Mr. Bresnick said, “It comes down to this: When a bank allows its customers, and even its customers’ customers, access to the national banking system, it should endeavor to understand the true nature of the business that it will allow to access the payment system, and the risks posed to consumers and society regarding criminal or other unlawful conduct.”
The agenda outlined by Mr. Bresnick reinforces ongoing efforts by FinCEN and the FDIC, and adds to the priorities recently sketched out by CFPB and the OCC. Together they describe an ambitious, and increasingly aggressive, financial services enforcement agenda for federal regulators and enforcement authorities.
Seventh Circuit Adopts "Net Trebling" Damage Calculation in False Claims Act Case
On March 21, the U.S. Court of Appeals for the Seventh Circuit held that damages awarded in a False Claims Act case should have been calculated using a “net trebling” method. United States v. Anchor Mortgage Corp., No. 10-3122, 2013 WL 1150213 (7th Cir. Mar. 21, 2013). The court affirmed a district court holding that a defendant mortgage company violated the False Claims Act when it made false statements in applying for federal mortgage loan guarantees on eleven loans. The court also affirmed the district court’s holding that the government should be awarded treble damages, finding that the statutory provision that limits damages to double damages for a person who meets certain self-reporting requirements applies only with regard to the specific false claims on which the person self-reports. In this case, although the company had self-reported information on some false claims, it had not self-reported any information about the false claims on the eleven loans on which the government sought damages. The Seventh Circuit disagreed with the district court’s “gross trebling” calculation of damages. Under that method, the district court added together the amounts that the government had paid out on the guarantees on the eleven loans after they defaulted and then trebled that sum, before subtracting any amounts that the government had realized by selling the properties that secured the loans. The Seventh Circuit held that the district court should have employed a “net trebling” method, starting with the amount paid out by the government on a guarantee on a given loan, subtracting from that amount any money the government recovered by selling the property that secured the loan (or if unsold, the fair market value of the property held by the government), and then trebling the difference. In requiring the “net trebling” method, the court noted that most federal appellate decision have adopted that method, and that a Ninth Circuit decision to the contrary was unpersuasive and based on a misreading of the Supreme Court’s holding in United States v. Bornstein, 423 U.S. 303 (1976).
New York Obtains Major Lender-Placed Insurance Settlement
On March 21, the New York Department of Financial Services (DFS) announced that it obtained a settlement from a major lender-placed insurer to resolve an investigation into the company’s practices. According to the DFS, the insurer allegedly drove up the price of lender-placed insurance by effectively offering banks a share in its profits by: (i) paying commissions to insurance agents and brokers affiliated with the banks even though the agents and brokers did not perform the customary tasks that would justify a commission, (ii) paying banks’ “expenses” related to lender-placed insurance, (iii) paying lump sum amounts, such as one bank’s $1 million termination fee for switching its business to another insurer, and (iv) allowing a reinsurance company owned by a bank to take as much as 75 percent of the premium. The DFS cited the insurer’s low loss ratio as evidence of how profitable lender-placed insurance has been for the insurer. The settlement agreement requires the insurer pay restitution to borrowers who were lender-placed after January 1, 2008 and meet certain criteria, as well as a $14 million penalty. The insurer also must (i) take specific steps to lower the cost of non-flood lender-placed insurance, (ii) cease numerous delineated practices, (iii) provide improved disclosures and notices to borrowers; (iv) improve its email retention policy; and (v) ensure that the amount of coverage lender-placed on any homeowner does not exceed the last known amount of coverage.
Freddie Mac Releases Additional Loan-Level Data
On March 21, Freddie Mac released historical loan-level credit performance data on a portion of the fully amortizing 30-year, fixed-rate single-family mortgages it purchased during the past 13 years. The data-set is comprised of 35 loan-level data elements, including credit score, loan purpose, actual unpaid principal balances, and repurchase flag, and covers delinquencies of up to and including 180-days. Specific performance information in the dataset includes voluntary prepayments, repurchases and loan modifications, and loans that were short sales, deeds-in-lieu of foreclosure, third party sales, and REOs. Further, the release includes publication of the (i) name of the seller that delivered each loan at the time Freddie Mac purchased or securitized the loan, and (ii) the name of the servicer as of the earlier loan termination or the active servicer as of June 2012. Freddie Mac plans to update the data each quarter and may in the future include more recent productions, other mortgage product types, and additional data elements.