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Court holds credit union must face breach of contract claims over overdraft practices
On November 8, the U.S. District Court for the District of Massachusetts granted in part and denied in part a credit union’s motion to dismiss a putative class action challenging the institution’s overdraft practices. As summarized in the order, the plaintiff alleged the credit union improperly charged overdraft fees when the “available balance” of her account, which was calculated by deducting pending debits and deposit holds, was insufficient to cover a transaction, even though the “actual” or ledger balance would have covered the transaction. The plaintiff brought multiple claims against the credit union, including breach of contract and Electronic Funds Transfers Act (EFTA) claims.
The credit union moved to dismiss arguing, in part, that the relevant account agreements referenced the “available balance” method for overdraft purposes and that the term is a “well-known bank term that has long been understood to mean the money in an account minus holds placed on funds to account for uncollected deposits and for pending debit transaction.”
The court disagreed, concluding that “available balance” is not a defined term, is ambiguous, and therefore its meaning presents a factual dispute that cannot be resolved on a motion to dismiss. The court allowed, however, the EFTA claim to proceed only for violations that occurred within one year of the complaint filing.
FTC emphasizes need for privacy and data security legislation
On November 13, the FTC submitted comments in response to the Department of Commerce’s National Telecommunications and Information Administration (NTIA) request for input on developing the Administration’s approach to consumer data privacy protections. In its comment letter, the FTC noted that it supported a balanced approach to privacy, weighing the risks of data misuse with the benefits of data to innovation and competition, and reiterated its support for data privacy legislation. Specifically, the FTC renewed its call for Congressional action that clarifies the FTC’s authority and the rules relating to data security and breach notification. According to the FTC, any such legislation should balance “consumers’ legitimate concerns about the protections afforded to the collection, use, and sharing of their data with business’ need for clear rules of the road, consumers’ demand for data-driven products and services, and the importance of flexible frameworks that foster innovation.”
The FTC emphasized it is “uniquely situated” to balance consumers’ interest in privacy, innovation, and competition and argued it should continue to be the primary enforcer of the laws related to “information flows in the marketplace,” whether it’s under the existing or new privacy framework. The FTC noted, however, that the existing framework places a number of limitations on its powers, including (i) its lack of authority over non-profits and common carriers; (ii) its inability to levy civil money penalties; and (iii) its lack of broad rulemaking authority under the APA for consumer protection issues such as privacy and data security.
Federal Reserve Board summarizes banking conditions and supervisory and regulatory activities
On November 9, the Federal Reserve Board (Board) released the inaugural issue of a new publication, Supervision and Regulation Report (Report), which summarizes banking system conditions, Board supervisory and regulatory activities, trends dating back to the financial crisis, and differing approaches for large financial institutions and regional/community banking organizations. The Report discusses the safety and soundness of the banking industry, and states that the “strong economy” has had a positive effect on the return on equity and return on average assets for banks, with figures showing that industry profitability ratios in the second quarter of 2018 are at a 10-year high.
However, the Board also discusses several areas of concern including, among other things, that firms assigned “less-than-satisfactory-ratings generally exhibit weaknesses in one or more areas such as compliance, internal controls, model risk management, operational risk management, and/or data and information technology [] infrastructure.” The Board also cites weaknesses in Bank Secrecy Act/anti-money laundering (BSA/AML) programs. The Report outlines future supervisory priorities, which continue to address risk management controls and cyber-related risks, and also include (i) a focus on four specific components: capital; liquidity; governance and controls; and recovery and resolution planning for the largest firms; and (ii) a focus on credit risk, operational risk, sales practices and incentive compensation, and BSA/AML compliance for regional and community banks. In addition, the report discusses plans to minimize regulatory burdens, tailor bank examinations to risk, and optimize supervision resources.
CFPB issues semi-annual report to Congress
On November 9, the CFPB issued its semi-annual report to Congress, covering the Bureau’s work from October 1, 2017 to March 30, 2018. The report, which is required by the Dodd-Frank Act, addresses, among other things, 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 during the majority of acting Director Mick Mulvaney’s tenure. Specifically, the report includes (i) a summary of five “significant” state Attorney General actions pursuant to Section 1042 of the Dodd-Frank Act, which allows states to enforce the federal law; (ii) a review of the Bureau’s fair lending efforts, noting that it “conducted fewer fair lending supervisory events. . .than in the prior period,” but “cleared a substantially higher number of MRAs or MOU items from past supervisory events than in the prior period”; (iii) a discussion of non-prime and secured credit cards marketed to consumers; and (iv) a list of upcoming initiatives, which includes requests for information regarding, among other things, the Bureau’s consumer complaint and consumer inquiry handling processes, the Bureau’s inherited regulations and inherited rulemaking authorities, the Bureau’s adopted regulations and new rulemaking authorities, Bureau rulemaking processes, Bureau public reporting practices of consumer complaint information, Bureau external engagements, the Bureau’s supervision program, and the Bureau’s enforcement processes.
Notably, the report also discusses the budget for FY 2018, acknowledging the unusual January 2018 request for zero dollars in funding for the Bureau’s quarterly operations (previously covered by InfoBytes here). As for FY 2019, Mulvaney most recently requested nearly $173 million for Q1, which is still significantly below former Bureau Director Richard Cordray’s FY 2017 Q1 request of $217 million.
OCC policy and procedure update addresses institution-affiliated party enforcement actions
On November 13, the OCC issued OCC Bulletin 2018-41, announcing the release of Policies and Procedures Manual 5310-13 (PPM 5310-13), which outlines the OCC’s policy and framework for taking enforcement actions against institution-affiliated parties (IAP) of national banks, federal savings associations, and foreign banks’ federal branches and agencies. Among other things, PPM 5310-13 explains the definition of an individual who qualifies as an IAP and describes common enforcement actions taken against current or former IAPs, which include “violations of law, regulation, final agency orders, conditions imposed in writing, or written agreements; unsafe or unsound practices; or breaches of fiduciary duty.” PPM 5310-13 also outlines procedures and processes related to most informal and formal IAP enforcement actions.
Additionally, the OCC issued updated policies and procedures (see PPMs 5310-3 and 5000-7) concerning bank enforcement actions and related matters, as well as civil money penalties, to ensure consistency with PPM 5310-13. All three PPMs are effective immediately.
Pennsylvania amends state Check Casher Licensing Act
On October 24, the Pennsylvania governor signed HB 2453, which amends the state’s Check Casher Licensing Act to make several changes in the licensing process for check-cashing entities. Specifically, the amendments (i) allow for check-cashing licenses to be issued for up to 14 months; (ii) require a licensee to demonstrate that it is conducting business in accordance with the law for annual renewal; and (iii) allow for the suspension or revocation of licenses for certain activities, including material misstatements in the application and engaging in dishonest, fraudulent, or illegal practices or conduct in connection with the check casher business. The amendments also, among other things, clarify that a licensee may not cash or advance any money on post-dated personal checks, but allow for the cashing of post-dated government checks if the check is dated no more than five days after it is presented to the licensee and the fee does not exceed the maximum permitted under the Act. Additionally, the amendments authorize fines of up to $10,000 for violations of the act. The amendments are effective on December 23, 2018.
OFAC sanctions individuals connected to Hizballah, IRGC-QF networks in Iraq
On November 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against four Hizballah-affiliated individuals for their alleged leadership roles in the group’s terrorist financial activities in Iraq, including providing support for the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF). According to OFAC, the sanctions were issued pursuant to Executive Order 13224, which “targets terrorists and those providing support to terrorists or acts of terrorism.” OFAC’s designations follow the Hizballah International Financing Prevention Amendments Act of 2018—signed into law October 25—along with the reimposition of Iran-related sanctions on November 5 (see previous InfoBytes coverage here), and reinforces U.S. efforts to “protect the international financial system by targeting Hizballah’s supporters, financial networks, and those that facilitate and enable its destabilizing activities worldwide.” Furthermore, OFAC states that the four Specially Designated Global Terrorists are also subject to secondary sanctions under the Hizballah Financial Sanctions Regulations, which implement the Hizballah International Financing Prevention Act of 2015, and allows OFAC to “prohibit or impose strict conditions on the opening or maintaining in the [U.S.] of a correspondent account or a payable-through account by a foreign financial institution that knowingly facilitates a significant transaction for Hizballah.” As a result, all property and interests in property belonging to the identified individuals subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from entering into transactions with them.
Visit here for additional InfoBytes coverage on sanctions involving Hizballah networks.
9th Circuit hears oral arguments on overturning FCPA whistleblower retaliation award
On November 14, 2018, a three judge panel for the United States Court of Appeals for the 9th Circuit heard oral arguments for a life science research and diagnostics company hoping to overturn a February 2017 jury verdict ordering the company to pay its former General Counsel and Secretary $11 million in punitive and compensatory damages. The former employee’s complaint alleged that the company had fired him for being an FCPA whistleblower. As detailed in a previous FCPA Scorecard post, the company paid $55 million in November 2014 to settle DOJ and SEC allegations that the company violated the FCPA in Russia, Thailand, and Vietnam. The former employee’s report to the Audit Committee had involved separate allegations that the company violated the FCPA in China, allegations that did not result in additional penalties against the company.
The company appealed the former employee's award on the grounds that the jury was erroneously instructed that the SEC’s rules or regulations forbid bribery of a foreign official; that the company’s alleged FCPA violations were the result of the former employee’s lack of due diligence; that the trial court wrongly excluded certain impeachment testimony and evidence related to the timing of his pursuit and hiring of a whistleblower attorney; and that he did not qualify as a “whistleblower” under Dodd-Frank in light of his reporting only internally and not to the SEC (pursuant to the U.S. Supreme Court’s decision in another case). During the argument, one member of the circuit panel reportedly expressed doubt concerning the company’s jury instruction argument, and another told counsel for the company, “I don’t see how this can be reversed on the theory you’re offering.”
For prior coverage of the company's matter, please see here and here.
DOJ sues international bank for RMBS fraud
On November 8, the DOJ announced it filed a complaint in the U.S. District Court for the Eastern District of New York against an international bank and several of its U.S. affiliates for allegedly defrauding investors in connection with the sale of residential mortgage-backed securities (RMBS) from 2006 through 2007. Specifically, the DOJ alleges the bank violated the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) based on mail fraud, wire fraud, bank fraud, and other misconduct by “knowingly and repeatedly” making false and fraudulent representations to investors about the quality of the loans backing 40 RMBS deals. The DOJ is seeking an unspecified amount of civil money penalties under five FIRREA claims.
In response to the filing, the international bank issued a statement indicating that it intends to “contest the complaint vigorously,” arguing, among other things, that the risks of RMBS investments were clearly disclosed to investors and that the bank suffered its own losses from investing in the RMBS referred to in the DOJ complaint.
OFAC issues extension of Ukraine-related General Licenses
On November 9, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced the issuance of Ukraine-related General Licenses (GL) 13G, 14C, 15B, and 16C, which amend previous licenses related to permissible wind-down transactions that otherwise would be prohibited by Ukraine-Related Sanctions Regulations with respect to the subject entities. OFAC extended the expiration dates of the licenses from December 12 to January 7, 2019, while reviewing the sanctioned entities’ proposed “substantial corporate governance changes” that may result in significant changes in their control.
GL 13G supersedes GL 13F and authorizes, among other things, activities “ordinarily incident and necessary” to (i) divest or transfer debt, equity, or other holdings in the specified blocked entities to a non-U.S. person; or (ii) facilitate the transfers of debt, equity, or other holdings in those entities by a non-U.S. person to another non-U.S. person. GL 14C, which supersedes GL 14B, relates to specific wind-down activities involving a Russian aluminum producer sanctioned last April as previously covered by InfoBytes here. GL 15B and GL 16C supersede GL 15A and GL 16B, respectively, and authorize permissible activities relating to the maintenance or wind-down of operations, contracts, and agreements with designated entities and subsidiaries that were effective prior to April 6.
Visit here for additional InfoBytes coverage on Ukraine sanctions.