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NYDFS fines international bank $15 million after whistleblower investigation
On December 18, NYDFS announced a $15 million settlement with an international bank and its New York branch resolving allegations stemming from an investigation into the governance, controls, and corporate culture relating to the bank’s whistleblower program. According to the announcement, NYDFS’ investigation determined that several members of senior management failed to follow or apply the bank’s whistleblower policies and procedures, which allegedly allowed the bank’s CEO to attempt to identify the author(s) of two whistleblowing letters criticizing his and bank’s management’s roles in recruiting and employing a recently hired senior executive. Additionally, the investigation found that, in alleged violation of New York Banking Law, the bank (i) failed to devise and implement effective governance and controls with respect to the whistleblower program; and (ii) failed to submit a report to NYDFS immediately upon discovering misconduct.
NYDFS acknowledged the bank’s substantial cooperation in the investigation, including engaging an outside consultant to perform an independent review of the whistleblowing policies, processes, and controls. Additionally NYDFS stated the bank has already addressed certain deficiencies noted in the Consent Order, including implementing (i) procedures which recognize that concerns raised outside whistleblowing channels may nevertheless constitute whistleblows; (ii) procedures which would avoid escalating a whistleblow to the subject of the concern; and (c) procedures to preserve whistleblower anonymity. In addition to the $15 million penalty, the bank must create a written plan to improve compliance and oversight of the whistleblower program and submit a report to NYDFS that contains all instances of whistleblower complaints since January 2017, attempts to identify whistleblowers, and any reported or sustained instances of whistleblower retaliation.
District court grants judgment in favor of loan servicer on remand
On December 10, the U.S. District Court for the District of Minnesota ruled on a motion for summary judgment concerning whether the Minnesota Mortgage Originator and Servicer Licensing Act’s (MOSLA) provision prohibiting “a mortgage servicer from violating ‘federal law regulating residential mortgage loans’” provides a cause of action under state law when a loan servicer violates RESPA but where the consumer ultimately has no federal cause of action because the consumer “sustained no actual damages and thus has no actionable claim under RESPA.”
As previously covered by InfoBytes, the U.S. Court of Appeals for the 8th Circuit reviewed the district court’s earlier decision to grant summary judgement in favor of a consumer who claimed the mortgage loan servicer failed to adequately respond to his qualified written requests concerning erroneous delinquency allegations. The 8th Circuit overturned that ruling, opining that while the loan servicer failed to (i) conduct an adequate investigation following the plaintiff’s request as to why there was a delinquency for his account, and (ii) failed to provide a complete loan payment history when requested, its failure did not cause actual damages.
Now, revisiting the issue on remand, the district court stated that any MOSLA violation or injury is predicated on the RESPA violation or injury. Reasoning that since there were “no actual damages under RESPA, then there are no actual damages under MOSLA,” the court concluded that the consumer did not have a viable cause of action under MOSLA and dismissed the action with prejudice.
Agencies release proposed community bank Volcker Rule exemption
On December 18, the FDIC, the Federal Reserve Board, the OCC, the SEC, and the CFTC (collectively, the Agencies) issued a notice of proposed rulemaking to amend regulations implementing Section 13 of the Bank Holding Company Act (known as, the “Volcker Rule”) to be consistent with Sections 203 and 204 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). (Previously covered by InfoBytes here.) Consistent with Section 203 of the Act, the proposal would exempt community banks from the restrictions of the Volcker Rule if they, and every entity that controls them, have (i) total consolidated assets equal to or less than $10 billion; and (ii) total trading assets and liabilities that are equal to or less than five percent of their total consolidated assets.
The proposal also, consistent with Section 204 of the Act, would permit a hedge fund or private equity fund organized and offered by a banking entity to share a name with a banking entity that is its investment advisor, if (i) the advisor is not an insured depository institution, does not control a depository institution, and is not treated as a bank holding company under the International Banking Act; (ii) the advisor does not share a name with any such entities; and (iii) the shared name does not include "bank."
Comments will be due 60 days after publication in the Federal Register.
District Court holds “dead air” is indicative of a predictive dialer, denies TCPA dismissal bid
On December 10, the U.S. District Court for the District of New Jersey denied a medical laboratory’s motion to dismiss a putative TCPA class action against the company, holding the plaintiff sufficiently alleged the equipment used to make unsolicited calls qualified as an “autodialer.” According to the opinion, the plaintiff filed the class action against the company after receiving an unsolicited call to her cell phone and hearing a “momentary pause” before a representative started speaking, allegedly indicating the company was using an automatic telephone dialing system (autodialer). The plaintiff argues the company violated the TCPA by placing non-emergency calls using an autodialer without having her express consent. The company moved to dismiss the action, arguing the plaintiff did not sufficiently allege the company called her using an autodialer. The court disagreed, stating that “[d]ead air after answering the phone is indicative that the caller used a predictive dialer.” The court noted that a predictive dialer is a device considered an autodialer under binding precedent, citing to the opinion of the U.S. Court of Appeals for the 3rd Circuit in Dominguez v. Yahoo, which held that it would interpret the definition of an autodialer as it would prior to the FCC’s 2015 Declaratory Ruling, which was invalidated by the D.C. Circuit. (Previously covered by InfoBytes here.) The court acknowledged that the actual configuration of the dialing equipment should be explored in discovery, but at this stage, the plaintiff sufficiently alleged the use of an autodialer for purposes of the TCPA.
VA releases Loan Guaranty Red Flag Rules Policy
On December 13, the Department of Veterans Affairs (VA) released Circular 26-18-28, which outlines the VA’s Loan Guaranty Service Red Flag Rules Policy to aid in the detection, prevention, and mitigation of identity theft for certain loans financed by the VA (known as, “Vendee loans”), Native American Direct Loans, and refunded loans held by the VA. The policy lists categories and warning signs monitored by the VA, such as (i) credit reporting agencies alerts; (ii) suspicious documents that look altered or forged; (iii) suspicious or fictitious personal identifying information; and (iv) account activity inconsistent with established patterns. The policy notes that the VA Office of Inspector General will investigate accounts flagged for possible identity theft. Holds will be placed on the suspicious accounts or transactions as necessary.
The VA is required by the FTC’s Red Flags Rule to develop and implement a written identity theft prevention program. Notably, as previously covered by InfoBytes, the FTC is seeking comments on whether the agency should make changes to the Rule. Comments are due by February 11, 2019.
FHFA proposes new process for validating, approving credit score models
On December 13, the Federal Housing Finance Agency (FHFA) issued a proposed rule to establish new requirements for the verification of credit score models used by Fannie Mae and Freddie Mac (the Enterprises), as mandated by Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Under the proposed rule, the Enterprises will use a four-phase process to validate and approve credit score models including: (i) soliciting applications from credit score model developers; (ii) reviewing submitted applications for completeness, which includes the receipt of all required fees; (iii) conducting a credit score assessment, which would require the Enterprises to evaluate each credit score model for “accuracy, reliability and integrity, independent of the use of the credit score in the Enterprise’s systems, as well as any other requirements established by the Enterprise”; and (iv) assessing the model in conjunction with the Enterprises’ business systems. Additionally, the FHFA stated it will not require either of the Enterprises to use a third-party credit score model; however, any credit score used by the Enterprises as a condition to purchase of a loan “must be produced by a model that has been validated and approved by the Enterprise based on the standards and criteria in the [EGRRCPA] and FHFA regulations.” Comments will be due 90 days after publication in the Federal Register.
As previously covered by InfoBytes, the FHFA stated in July that it would set aside an ongoing initiative to evaluate the potential impact of a new credit score model on “access to credit, safety and soundness, operations in the mortgage finance industry, and competition in the credit score market,” in order to focus on implementing Section 310.
VA publishes interim final rule on cash-out refinance loans
On December 17, the Department of Veterans Affairs (VA) published an interim final rule in the Federal Register to amend its rules on VA-guaranteed or insured cash-out refinance loans as required by Section 309 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (codified as 38 U.S.C. § 3709). (See also, VA Circular 26-18-30 and accompanying revision for a summary of the rule.) The interim final rule, which revises the current regulation, 38 CFR 36.4306, bifurcates cash-out refinance loans into two types, (i) Type I, the loan being refinanced is already guaranteed or insured by VA and the new loan amount is equal to or less than the payoff amount of the loan being refinanced; and (ii) Type II, cash-outs in which the amount of the principal for the new loan is larger than the payoff amount of the refinanced loan. Under the interim rule, for both Type I and Type II, the VA will permit a cash-out refinance provided:
- Reasonable Value. The new loan may not exceed an amount equal to 100 percent of the reasonable value of the dwelling or farm residence that secures the loan.
- Funding Fee. The funding fee may be financed in the new loan amount; however, any portion of the funding fee that would cause the new loan amount to exceed 100 percent of the reasonable value of the property must be paid in cash at the loan closing.
- Net Tangible Benefit. The loan must provide a net tangible benefit to the borrower, which can be satisfied in one of eight ways (i) the new loan eliminates monthly mortgage insurance, whether public or private, or monthly guaranty insurance; (ii) the term of the new loan is shorter; (iii) the interest rate on the new loan is lower; (iv) the payment on the new loan is lower; (v) the new loan results in an increase in the borrower’s residual monthly income; (vi) the new loan refinances an interim loan to construct, alter, or repair the home; (vii) the new loan amount is equal to or less than 90 percent of the reasonable value of the home; or (viii) the new loan refinances an adjustable rate loan to a fixed rate loan.
- Disclosure. The lender must provide the borrower, and the borrower must certify, net tangible benefit information, a loan comparison disclosure, and an estimate of the amount of home equity removed from the refinance, in a standardized format, on two separate occasions (not later than 3 business days from the date of application and again at closing).
- Other. As required by the current regulation, any borrower paid discount must be considered reasonable in accordance with § 36.4313(d)(7)(i) and the loan must also otherwise be eligible for the VA guarantee.
For Type I cash-out refinances, the VA also requires (i) all the fees and incurred costs to be scheduled to be recouped within 36 months after the date of loan issuance; (ii) a loan seasoning period of the later date of 210 days after the date of the first payment made and the date the sixth monthly payment is made on the loan; and (iii) under the net tangible benefit requirement, for a fixed interest rate to a fixed interest rate, the rate must be reduced by 50 basis points and for a fixed to adjustable interest rate, the rate must be reduced by 200 basis points.
For Type II cash-out refinances, if the loan being refinanced is a VA loan, the same loan seasoning requirement applies (the later date of 210 days after the date of the first payment made and the date the sixth monthly payment is made on the loan). There are no additional restrictions on fee recoupment or rate reductions.
The interim final rule takes effect February 15, 2019, with comments due on or before the effective date.
Kraninger rejects CFPB name change
On December 19, new CFPB Director, Kathy Kraninger emailed staff stating she has decided to not move forward with changing the name of the agency to the Bureau of Consumer Financial Protection. Former acting Director Mick Mulvaney—to whom Kraninger previously reported at the Office of Management and Budget—had initiated the change and released an official agency seal referring to the Bureau of Consumer Financial Protection on the grounds that the Dodd-Frank Act generally used that name for the agency rather than Consumer Financial Protection Bureau. In an email to Bureau staff, Kraninger stated the seal and the “statutory name given in Dodd-Frank” will be used for “statutorily required reports, legal filings, and other items specific to the Office of the Director,” but “[t]he name ‘Consumer Financial Protection Bureau’ and the existing CFPB logo will continue to be used for all other materials.” The decision comes soon after an internal report allegedly calculated the name change to cost anywhere between $9 million and $19 million dollars and after a request by Senator Elizabeth Warren for the Bureau’s Inspector General to conduct an investigation into Mulvaney’s decision to change the name.
This appears to be one of the first significant decisions Kraninger has made since becoming the Bureau’s second confirmed Director. While her reversal of the course set by Mulvaney is noteworthy, her views on consumer financial protection issues are still largely unknown, and it remains to be seen whether she will continue with her predecessor’s initiatives on substantive matters.
OFAC reaches settlement with Chinese company for alleged Iranian sanctions violations
On December 12, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $2,774,972 settlement with a Chinese oilfield services company and its affiliated companies and subsidiaries (collectively, the “group”) for 11 alleged violations of the Iranian Transactions and Sanctions Regulations. According to OFAC, the settlement resolves potential civil liability for the group’s alleged involvement in exporting or re-exporting, or attempts to export or re-export, U.S.-based goods to end-users in Iran through China.
In arriving at the settlement amount, OFAC considered the following as aggravating factors: (i) the group “willfully violated U.S. sanctions on Iran by engaging in and systematically obfuscating conduct it knew to be prohibited by company policy and economic sanctions, and continued to engage in such conduct even after the U.S. Government began to investigate the conduct”; (ii) employees, including management, were aware of the transactions and concealed the nature of the transactions from the U.S.; (iii) the group falsified information and provided false statements to the U.S. during the course of the investigation; (iv) the group’s conduct, which occurred over a period of years, provided economic benefits to Iran; and (v) the group is a commercially sophisticated international corporation.
OFAC also considered numerous mitigating factors, including (i) the group has no prior OFAC sanctions history and has not received a penalty or finding of a violation in the five years before the transactions at issue; (ii) the group has cooperated with OFAC and disclosed possible violations involving other sanctions programs; (iii) the group agreed to toll the statute of limitations; and (iv) the group implemented remedial measures and corrective actions to minimize the risk of reoccurring conduct.
Visit here for additional InfoBytes coverage on Iranian sanctions.
Department of Education forgives roughly $150 million in student loans eligible for automatic closed school discharge
On December 13, the Department of Education announced it will automatically discharge approximately $150 million in student loans for roughly 15,000 eligible borrowers as part of implementing the Department’s Final Regulations (81 FR 75926) (also known as the “Borrower Defense Regulations” or “regulations”), which took effect in October following a decision by the U.S. District Court for the District of Columbia that the Department’s move to delay the regulations—finalized in 2016 and originally set to take effect July 1, 2017—was procedurally invalid (see InfoBytes coverage on the ruling here.) The Borrower Defense Regulations are designed to protect student borrowers against misleading and predatory practices by postsecondary institutions and clarify a process for loan forgiveness in cases of institutional misconduct. Of the $150 million, approximately $80 million of the amount is attributable to loans taken out by students who attended now bankrupt, for-profit Corinthian schools. (See InfoBytes coverage on matters related to Corinthian schools here.) The announcement also provides information for loan holders, guaranty agencies in the Federal Family Education Loan program, and schools concerning new closed school discharge requirements.