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OFAC announces settlement with aviation investment company for sanctions violations
On November 7, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $210,600 civil settlement with a U.S. aviation investment company to resolve 12 alleged violations of the Sudanese Sanctions Regulations (SSR), which prohibit U.S. persons from dealing in property and interests in property of the Government of Sudan. The settlement addressed allegations that the company leased three aircraft engines to a United Arab Emirates-incorporated entity, which then subleased the engines to a Ukrainian airline that had the engines installed on an aircraft that was “wet leased” to a Sudanese airline. According to OFAC, the company violated SSR regulations because OFAC’s List of Specially Designated Nationals and Blocked Persons identified the Sudanese airline as meeting the definition of “Government of Sudan” at the time of the alleged transactions.
In arriving at the settlement amount, OFAC considered various mitigating factors, including that (i) company personnel were not aware of the conduct leading to the alleged violations; (ii) OFAC has not issued a violation against the company in the five years preceding the earliest date of the transactions at issue; and (iii) the company cooperated with the investigation. OFAC also noted that the company undertook several remedial measures in response to the alleged violations, including implementing additional compliance processes such as improving its “Know-Your-Customer screen procedures” and employee training, and obtaining “U.S. law export compliance certificates from lessees and sublessees.”
OFAC also considered various aggravating factors, including that the violations harmed U.S. sanctions program objectives, and that the company failed to properly monitor the precise whereabouts of the engines during the life of the leases.
Government says CFPB should have authority to continue enforcement actions even if declared unconstitutional
On November 6, the CFPB and the DOJ filed a brief with the U.S. Supreme Court arguing that the Bureau should still “have the authority to commence or continue enforcement proceedings” in the event that the Court declares the Bureau’s structure unconstitutional. The brief was filed in response to a petition for writ of certiorari by two Mississippi-based payday loan and check cashing companies (collectively, “petitioners”) urging the Court to grant certiorari before the U.S. Court of Appeals for the Fifth Circuit renders a decision on a challenge to the Bureau’s single-director structure. The petitioners are not only challenging the Bureau’s structure but also arguing that the asserted constitutional violation requires the dismissal of the underlying lawsuit brought by the Bureau.
The government argues that dismissal of the underlying enforcement action is not the way to remedy a constitutional structure violation, at least in a situation where “an official fully accountable to the President determines that it should go forward.” The brief notes that, in this case, then-Acting Director Mulvaney, to whom the Bureau has argued the limitation to for-cause removal did not apply, had ratified the enforcement action against petitioners at issue. While the Bureau and the DOJ acknowledge that lower courts “have not yet addressed the particular issue here,” they make the case that “the few reasoned decisions that address related issues are in accord: A separation-of-powers problem with an agency does not compel invalidation of the agency’s actions if those actions are subsequently approved in compliance with separation-of-powers requirements.”
In its brief, the Bureau and the DOJ also argue that questions presented to the Court do not warrant review of the case before the 5th Circuit has an opportunity to rule. The government emphasizes that the Court has already agreed to hear a different case, Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II (covered by InfoBytes here). In doing so the Court also directed the parties to that action to brief and argue whether 12 U.S.C. §5491(c)(3), which established removal of the Bureau’s single director only for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional.
Fed giving foreign banks more time to comply with SCCL
On November 8, the Federal Reserve Board announced a proposal to extend the initial compliance dates for foreign banks subject to its single-counterparty credit limit rule by 18 months, which would require the largest foreign banks to comply by July 1, 2021 and smaller foreign banks to comply by January 1, 2022.
As previously covered by InfoBytes, in June 2018, the Federal Reserve Board approved a rule to establish single-counterparty credit limits for U.S. bank holding companies with at least $250 billion in total consolidated assets, foreign banking organizations operating in the U.S. with at least $250 billion in total global consolidated assets (as well as their intermediate holding companies with $50 billion or more in total U.S. consolidated assets), and global systemically important bank holding companies (GSIBs). The rule, which implements section 165(e) of the Dodd-Frank Act, requires the Board to limit a bank holding company’s or foreign banking organization’s credit exposure to an unaffiliated company. Under the rule, a GSIB’s credit exposure is limited to 15 percent of its tier 1 capital to another systemically important firm. A U.S. bank holding company and other applicable foreign institution is limited to a credit exposure of 25 percent of its tier 1 capital to a counterparty.
Comments on the proposal to extend the compliance dates will be accepted for 30 days after publication in the Federal Register.
FDIC, bank reach RESPA settlement
On November 6, the FDIC announced that a Washington-based bank agreed to settle allegations that it violated RESPA by paying fees to real estate brokers and homebuilders in exchange for mortgage business referrals. Section 8(a) of RESPA “prohibits giving or accepting a thing of value for the referral of settlement service involving a federally related mortgage loan.” According to the FDIC, the bank’s discontinued mortgage banking line allegedly entered into arrangements with real estate brokers and homebuilders to co-market services through online platforms. The FDIC also alleged that the bank’s mortgage banking business rented desk space in brokers’ and homebuilders’ offices, which resulted in the payment of fees by the bank for referrals of mortgage loan business. The FDIC further stated, “While co-marketing arrangements and desk rental agreements are permissible where the fees paid bear a reasonable relationship to the fair market value of marketing or rental costs, such arrangements and agreements violate RESPA when the amounts paid exceed fair market value and the excess is for referrals of mortgage business.” The bank, which has neither admitted nor denied the charges, has agreed to pay a $1.35 million civil money penalty under the terms of the settlement order, and has terminated all of its co-marketing and desk rental agreements.
FHFA seeks input on GSE pooling practices for UMBS
On November 4, the FHFA issued a Request for Input (RFI) on Fannie Mae’s and Freddie Mac’s (the GSEs) pooling practices as they relate to the formation of the “To-Be-Announced”-eligible Uniform Mortgage-Backed Securities (UMBS). The RFI follows the June launch of the UMBS—a common security through which GSE mortgage-backed securities will be issued (previously covered by InfoBytes here)—and seeks input to assist FHFA in determining whether further action or alignment is required to ensure reasonably consistent security cash flows and continued fungibility of the GSEs’ UMBS so they “remain a source of stable, affordable liquidity for the U.S. housing finance system.” In addition, FHFA requests input on whether having more aligned pooling practices could facilitate the issuance of UMBS by market participants beyond the GSEs, and seeks comments on other policies and practices that might affect UMBS compatibility. Comments are due December 19.
CFPB holds small business lending symposium
On November 6, the CFPB held a symposium covering small business lending and Section 1071 of the Dodd-Frank Act, which amends ECOA to require financial institutions to compile, maintain, and submit to the Bureau certain information concerning credit applications by women-owned, minority-owned, and small businesses, and also directs the Bureau to promulgate regulations to implement these requirements. In her opening remarks, Director Kraninger, noted that the symposium was being convened to assist the Bureau with information gathering for upcoming rulemaking and emphasized that the Bureau is focused on a rulemaking that would not impede small business access to credit by imposing unnecessary costs on financial institutions. The symposium consisted of two panels, with the first covering policy issues related to small business lending, while the second discussed specific aspects of the requirements of Section 1071. Highlights of the panels include:
- Panel #1. During the policy discussion, panelists focused on non-traditional lenders, namely fintech firms, that have entered the small business lending market, with most noting that these online alternative lenders have filled a necessary lending gap left by traditional banks and depository institutions. While concerns around bad actors in the online lending space were discussed, most panelists agreed that online financing may provide an opportunity for women and minority-owned businesses to avoid potential biases in underwriting, with one panelist noting that his company does not collect gender or race information in its online application.
- Panel #2. Panelists focused their discussion on specific implementation concerns of Section 1071, including compliance costs, definitions of small business and financial institutions, data elements to be reported, and privacy concerns. Among other things, panelists noted that the definition of “small business” should be limited to businesses under $1 million in revenue, which is a figure included in other regulations such as ECOA and the CRA. Panelists disagreed on whether the Bureau should exercise its exemptive authority under Section 1071 for the definition of “financial institution.” While some panelists believe that the broad definition included in the Act is necessary to hold all the players in the market accountable, others argued that large financial institutions that receive an “outstanding” CRA rating should be excluded from the reporting requirements. As for data elements, most agreed that the Bureau should only require the statutorily mandated elements and not include any others in the rulemaking, while one panelist suggested that APR must be included in order to ensure that approval rates for minority-owned small businesses are the result of actual innovation and effective business models and not just the charging of high rates. Moreover, panelists reminded the Bureau to be cognizant of the small business lending reporting requirements of the CRA and HMDA and cautioned the Bureau to keep Section 1071 data requirements compatible.
FDIC solicits comments on innovation pilot programs
On November 6, 2019 the FDIC published a notice and request for public comment in the Federal Register seeking input on a new collection of information titled “Information Collection for Innovation Pilot Programs.” The FDIC notes that the innovation pilot program framework is a continuation of the agency’s efforts to engage and collaborate “with innovators in the financial, non-financial, and technology sectors to, among other things, identify, develop, and promote technology-driven innovations among community and other banks in a manner that ensures the safety and soundness of FDIC-supervised and insured institutions.” The framework is intended to provide a regulatory environment to facilitate the testing of innovative and novel approaches or applications involving a variety of banking products and services that may lead to cost reductions, increased access to financial services, and a decrease in operational, risk management, or compliance costs for insured depository institutions. While the FDIC plans on announcing additional details and the framework’s parameters at a later date, the agency stated that “innovators (banks and firms in partnership with banks) will be invited to voluntarily propose time limited pilot programs, which will be collected and considered by the FDIC on a case-by-case basis.”
Comments on the proposal are due January 6, 2020.
FTC, Utah file action against real estate seminar company
On November 5, the FTC and the Utah Division of Consumer Protection filed a complaint in the U.S. District Court for the District of Utah against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to purchase real estate training packages costing thousands of dollars. According to the complaint, the defendants violated the FTC Act, the Telemarketing Sales Rule, and Utah state law by marketing real estate training packages with false claims through the use of celebrity endorsements. The defendants’ marketing materials allegedly told consumers, among other things, that they would (i) receive strategies for making profitable real estate deals during seminars included in the packages; and (ii) learn how to access wholesale or deeply discounted properties. The complaint argues, however, that the promises were false and misleading, as, among other things, the seminars promoted additional workshops costing more than $1,100 to attend where consumers largely received general information about real estate investing, along with promotions for “advanced training” costing tens of thousands of dollars. In addition, the discounted properties were typically sold or brokered to consumers by the defendants at inflated prices with concealed markups, the complaint alleges. Among other things, the FTC and Utah Division of Consumer Protection seek monetary and injunctive relief against the defendants.
FTC offers guidance for social media influencer disclosures
On November 5, the FTC released advertising disclosure guidance for online influencers, titled “Disclosures 101 for Social Media Influencers,” which outlines the FTC’s rules for disclosure of sponsored endorsements and provides influencers with tips and guidance covering effective and ineffective disclosures. The guidance reminds influencers that (i) they should disclose any financial, employment, personnel, or family relationship with the brand; (ii) disclosures should be “hard to miss,” by being placed on pictures, stated in the videos, and repeated throughout livestreams; and (iii) language in disclosures should be simple and clear, and in the same language as the endorsement itself.
For more information on the FTC’s activity covering testimonials and social media influencers, review the recent Buckley Insight, which summarizes several FTC enforcement actions involving online reviews and social media and provides key takeaways for companies considering online advertising and social media campaigns.
9th Circuit allows FCRA action to move forward against national bank
On October 31, the U.S. Court of Appeals for the Ninth Circuit, in a split panel decision, reversed the district court’s dismissal of a consumer’s FCRA action against a national bank alleging the bank obtained her credit report for an impermissible purpose. According to the opinion, the consumer filed the complaint against the bank after reviewing her credit report and noticing the bank had submitted “numerous credit report inquiries” in violation of the FCRA because she “did not have a credit relationship with [the bank]” as specified in the FCRA and, therefore, the inquiries were not for a permissible purpose. The bank moved to dismiss the action, arguing that the consumer did not suffer any injury from the credit inquiries. The district court agreed, and dismissed her claim with prejudice for lack of standing and failure to state a claim.
On appeal, the majority disagreed with the district court, concluding that (i) a consumer suffers a concrete injury in fact when a credit report is obtained for an impermissible purpose; and (ii) a consumer only needs to allege that her credit report was obtained for an impermissible purpose to survive a motion to dismiss. The appellate majority emphasized that the consumer does not have the burden of pleading the actual purpose behind the bank’s use of her credit report; the burden is on the defendant to prove the credit report was obtained for an authorized purpose. Moreover, the majority noted that the consumer alleges she only learned about the bank’s inquiry after reviewing her credit report and, therefore, it is implied “that she never received a firm offer of credit from [the bank],” and taken together with the fact that the bank actually obtained her credit report, she stated a plausible claim for relief.
One panel judge concurred in part and dissented in part, arguing that the consumer had standing but failed to state a plausible claim. Specifically, the judge argued that “the majority characterize[d] [the] plaintiff’s claim in terms of ‘possibility,’” but “mere possibility of liability does not plead a plausible claim.” Moreover, the judge disagreed with the majority’s conclusion that the defendant bears the burden of proof in these instances, stating “the Supreme Court has expressly placed the burden of pleading a plausible claim squarely on the plaintiff rather than on the defendant.”