Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On February 13, the U.S. Attorney for the Eastern District of California announced a $3.67 million joint settlement with HUD and the Fair Housing Administration (FHA) to resolve allegations that a mortgage lender violated the False Claims Act by falsely certifying compliance with FHA mortgage insurance requirements. According to the settlement agreement, between 2007 and 2009, the mortgage lender, a participant in HUD’s Direct Endorsement Lender program, allegedly knowingly submitted false claims to the FHA loan insurance program by failing to ensure the loans qualified for FHA insurance when they were originated. The announcement notes that the settlement relates solely to allegations, and that there has been no determination of actual liability by the mortgage lender, which did not admit to liability in the settlement.
On February 12, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2018, through September 30, 2018. The report, which is required by the Dodd-Frank Act, addresses issues including problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau when acting Director Mick Mulvaney was still in office. The report is the first to be released under Kathy Kraninger, who was confirmed as Director in December 2018. In her opening letter, Kraninger emphasized that during her tenure the Bureau will “vigorously and even-handedly enforce the law,” and will make sure the financial marketplace “is innovating in ways that enhance consumer choice.” Among other things, the report focuses on credit invisibility and mortgage shopping as two significant problems faced by consumers, noting that credit invisibility among adults tends to be concentrated in rural and highly urban areas and, based on recent studies, more than 75 percent of borrowers report applying for a mortgage with only one lender.
The report also includes an analysis of the efforts of the Bureau to fulfill its fair lending mission. The report highlights the most frequently cited violations of Regulation B (ECOA) and Regulation C (HMDA) in fair lending exams during the reporting period and emphasizes that during the reporting period the Bureau did not initiate or complete any fair lending public enforcement actions or refer any matters to the DOJ with regard to discrimination.
On February 12, the Federal Reserve Board, Farm Credit Administration, FDIC, National Credit Union Administration, and the OCC issued a joint final rule amending regulations governing loans secured by properties in special flood hazard areas to implement the provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 concerning private flood insurance. As previously covered by InfoBytes, the provisions, among other things, require regulated lending institutions to accept policies that meet the statutory definition of “private flood insurance,” and clarify that lending institutions may choose to accept private policies that do not meet the statutory criteria for “private flood insurance,” provided the policies meet certain criteria and the lending institutions document that the policies offer “sufficient protection for a designated loan, consistent with general safety and soundness principles.” The final rule takes effect July 1.
U.S. Treasury concerned with European Commission's identification of AML/CFT-deficient U.S. territories
On February 13, the U.S. Treasury Department issued a statement responding to a list of jurisdictions published by the European Commission as having strategic deficiencies related to anti-money laundering and countering the financing of terrorism (AML/CFT). The list—which includes certain jurisdictions with strategic deficiencies that were already identified by the Financial Action Task Force (FATF) (see previous InfoBytes coverage here)—also identifies 11 additional jurisdictions, including the U.S. territories of American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands. According to the European Commission, the “banks and other entities covered by EU anti-money laundering rules will be required to apply increased checks (due diligence) on financial operations involving customers and financial institutions from these high-risk third countries to better identify any suspicious money flows.”
In its response, the Treasury Department stated that it has “significant concerns about the substance of the list and the flawed process by which it was developed,” noting that the same AML/CFT legal framework that applies to the continental U.S. also generally extends to its territories. Treasury said it does not expect U.S. financial firms to take account of the European Commission’s list in their AML/CFT policies and procedures, and stressed that the FATF already develops a list of high-risk jurisdictions “as part of a careful and comprehensive process,” which does not list the U.S. territories.
Hawaiian executive's bribery guilty plea leads to Micronesian official charged with money laundering conspiracy
On February 11, the Department of Justice (DOJ) unsealed conspiracy to commit money laundering charges against a Micronesian government official alleged to have taken bribes to secure engineering and project management contracts from the government of the Federated States of Micronesia (FSM). The charges follow the recent guilty plea by a Hawaiian executive to a charge of conspiracy to bribe the Micronesian official in violation of the FCPA.
According to the DOJ, a Micronesian citizen was a government official in the FSM Department of Transportation, Communications and Infrastructure who administered FSM’s aviation programs. Between 2006 and 2016, the Hawaiian executive’s Hawaii-based engineering and consulting company allegedly paid around $440,000 in bribes in the form of cash, vehicles, and entertainment to FSM officials, including the citizen, to obtain and retain contracts with the FSM government valued at nearly $8 million. The complaint unsealed on Monday contains specific examples of requests by the citizen to the executive for cash gifts and a 2014 Chevy Silverado. According to the executive’s guilty plea, he fulfilled the citizen’s requests and sent wire transfers and the automobile internationally for the citizen’s personal use.
On February 11, a bipartisan group of 29 state Attorneys General, the District of Columbia Attorney General, and an official from the Hawaii Office of Consumer Protection, responded to the FTC’s request for comment on whether the agency should make changes to its identity theft detection rules (the Red Flags Rule and the Card Issuers Rule), which require financial institutions and creditors to take certain actions to detect signs of identity theft affecting their customers. (Covered by InfoBytes here.)
In their response, the Attorneys General urge the FTC not to repeal the Rules, arguing that it “would place consumers at greater risk of identity theft, especially consumers in states that have not enacted” laws that complement the Rules. Instead, the response letter requests the FTC modify the Rules to “ensure their continued relevance” and “keep pace with the ingenuity of identity thieves.” The suggestions include: (i) that notices of changes to email addresses and cell phone numbers be sent to both the prior and updated addresses and phone numbers, an expansion of the current use of mailing addresses; (ii) the encouragement of more current forms of authentication, including multi-factor authentication, to replace examples which imply that knowledge-based authentication by itself is sufficient; and (iii) the addition of new suspicious activity examples related to the use of an account, such as a covered account accessed by unknown devices or IP addresses, an unauthorized user unsuccessfully trying to guess account passwords through multiple attempts, and attempts by foreign IP addresses to access multiple accounts in a close period of time.
On February 11, the U.S. District Court for the District of New Jersey denied a motion by a debt collector and its managers to compel arbitration, concluding that discovery was needed in order to determine whether an arbitration clause applied to the plaintiffs’ claims regarding FDCPA violations. According to the opinion, the plaintiffs filed a proposed class action alleging that the debt collection company’s collection letters violated the FDCPA because they did not “properly identify the name of the current creditor to whom the debt is owed.” The debt collectors moved to compel arbitration, arguing that the debts described in the plaintiffs’ amended complaint arose pursuant to credit card agreements that include an arbitration clause, and submitted a declaration from an employee of the servicing entity for the credit card issuer, with credit card account terms and conditions, including arbitration clauses, as an attachment. The court denied the motion, noting that the Fed. R. Civ. P. 12(b)(6) standard requires that the amended complaint “establish with clarity that the parties have agreed to arbitrate,” and in this instance, no arbitration clause was cited. The court denied the motion to compel pending further development of the factual record by plaintiffs conducting discovery on the issue.
On February 8, the U.S. District Court for the Eastern District of Virginia granted final approval to a $2.5 million putative class action settlement resolving allegations that a student loan servicer violated the TCPA by using an autodialer to contact student borrowers’ credit references without first obtaining their prior express consent. The settlement terms also require the servicer to pay more than $850,000 in attorneys’ fees and expenses. According to the plaintiff’s memorandum in support of its motion for preliminary approval of the class action settlement (as referenced in the final approval order), the servicer allegedly used an autodialer to contact the plaintiff’s cellphone without her prior express consent, which the servicer subsequently denied. The servicer had moved for summary judgment on multiple grounds, arguing, among other things, that the plaintiff could not establish that the servicer used an autodialer to place calls to her and other credit references listed on the delinquent student loans. Citing to the D.C. Circuit’s decision in ACA International v. FCC, which set aside the FCC’s 2015 interpretation of an autodialer as “unreasonably expansive,” (covered by a Buckley Special Alert), the servicer had argued that the decision “governs analysis of the issue” and that the plaintiff could not succeed in demonstrating that the telephone system used falls within the statutory definition of an autodialer. However, prior to the court issuing a ruling on the servicer’s summary judgment motion, the parties reached the approved settlement through mediation.
On February 6, a three-judge panel for the U.S. Court of Appeals for the 4th Circuit affirmed a district court’s denial of a motion to dismiss a proposed class action suit against two tax payment financing companies, finding that (i) the plaintiff had standing under EFTA because he alleged that he suffered an injury in fact; and (ii) a taxpayer payment agreement (agreement) between the plaintiff and the financing companies qualifies as a consumer credit transaction subject to both TILA and EFTA. According to the decision, the plaintiff entered into an agreement to finance the payment of residential property taxes as allowed under state law. The plaintiff subsequently challenged the agreement on several grounds, including that it violated TILA, EFTA, and the Virginia Consumer Protection Act because many of the agreement’s terms had incorrect amounts, there was no itemized list of closing costs, and the agreement did not include “certain allegedly required financial disclosures.” Following the plaintiff’s initiation of a proposed class action, the defendants moved to dismiss for failure to state a claim, arguing, among other things, that the agreement is not a consumer credit transaction and therefore not subject to TILA or EFTA.
The district court, however, determined that the plaintiff had standing under the EFTA because he claimed he suffered an injury in fact—that the agreement was contingent on his agreeing to preauthorized electronic funds transfer payments—and that the agreement was subject to both TILA and EFTA. On appeal, the 4th Circuit agreed that the plaintiff satisfied the injury requirement “because he alleged that he was required to agree to [electronic funds transfer payment] authorization as a condition of the agreement and that the agreement contained terms requiring him to waive EFTA’s substantive rights regarding [electronic funds transfer payment] withdrawal.” Even if the court accepted the defendant’s assertion that there was no injury, it held that the plaintiff would still have standing to challenge the agreement because “there is a ‘realistic danger’ that [the plaintiff] will ‘sustain a direct injury’ as a result of the terms of the [agreement].” The court also found the agreement to be a credit transaction under the meaning of TILA and EFTA because under TILA, a consumer transaction is “one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family or household purposes.”
One judge concurred in part—regarding standing under EFTA—but dissented also, writing that the agreement does not qualify as a “credit transaction” under TILA because the Virginia code, and not a creditor, grants the taxpayer the right to defer payment of a local tax assessment by entering into an agreement with a third party like the defendant. “A[n] [agreement] is not a ‘credit transaction,’ within the meaning of TILA, because the preexisting obligation of the taxpayer is not severed by the third-party payor’s payment, and the third-party payor does not grant any right to the taxpayer that is not conferred already by statute,” the dissenting judge concluded. The judge further opined that protections for taxpayers who enter into an agreement should be resolved by the state, as the entity creating this form of tax payment.
On February 12, the CFPB released its annual list of rural counties and rural or underserved counties for lenders to use when determining qualified exemptions to certain TILA regulatory requirements. In connection with the release of the lists, the Bureau also directed lenders to use its web-based Rural or Underserved Areas Tool to assess whether a rural or underserved area qualifies for a safe harbor under TILA’s Regulation Z.
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program