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Financial Services Law Insights and Observations

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  • Agencies Issue White Paper Regarding Loss Mitigation Programs

    Lending

    On July 25, FHFA, HUD, and Treasury published a white paper titled “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward.” The paper examines the effect of the 2008 financial crisis on the mortgage servicing industry with a focus on loss mitigation programs. Under the 2009 Making Home Affordable (MHA) program, foreclosure alternatives were established to address the needs of homeowners and to improve the mortgage servicing industry’s loss mitigation practices. According to the paper, between April 2009 and the end of May 2016, 10.5 million modification and mortgage assistance arrangements were completed through government programs and private sector efforts. The paper further notes that, as a result of  FHFA’s, HUD’s, and Treasury’s programs, regulatory actions, and private sector initiatives, the mortgage industry is “generally better prepared now to provide assistance to struggling homeowners than it was before the crisis.” The improvement “is due, in part, to the adoption of certain homeowner engagement standards including continuity of contact, solicitation timeframes, and certain notice and appeal processes required by the [CFPB].” At the end of 2016, MHA programs, such as HAMP, will come to a close. Based on the agencies’ collective experience with MHA programs, the paper identifies  five guiding principles for loss mitigation programs: (i) accessibility, guaranteeing homeowners a simple process for obtaining mortgage assistance; (ii) affordability, “providing homeowners with meaningful payment relief that addresses the needs of the homeowner, the servicer and the investor, to support long-term performance”; (iii) sustainability, offering long-term solutions intended to resolve delinquency; (iv) transparency, “[e]nsuring that the process to obtain assistance, and the terms of that assistance, are as clear and understandable as possible to homeowners, and that information about options and their utilization is available to the appropriate parties”; and (v) accountability, ensuring sufficient oversight of the process to obtain mortgage assistance.

    Foreclosure Mortgage Servicing HUD FHFA Department of Treasury HAMP Loss Mitigation

  • Federal Reserve and CFPB Propose Method for Adjusting TILA and Consumer Leasing Act Exemption Thresholds

    Consumer Finance

    On July 22, the CFPB and the Federal Reserve released  proposed rules detailing the method for adjusting the dollar thresholds in Regulation Z (TILA) and Regulation M (Consumer Leasing Act/CLA) for exempt consumer credit and lease transactions. Pursuant to the Dodd-Frank Act, the exemption thresholds in TILA and the CLA are adjusted annually based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The recently released proposals seek to clarify, among other things, that in the years following a year in which there is no annual percentage increase in the CPI-W, the CFPB and Federal Reserve will not adjust the exemption thresholds. Comments on the proposals are due within 30 days of publication in the Federal Register.

    CFPB TILA Federal Reserve Consumer Leasing Act

  • Agencies Propose Method for Adjusting Small-Loan-Exemption Threshold under HPML Appraisal Rules

    Lending

    On July 22, the CFPB, the Federal Reserve, and the OCC issued a joint proposal “detailing the method that will be used to make annual inflation adjustments to the threshold for exempting small loans from higher-priced mortgage loan appraisal requirements.” The Dodd-Frank Act amended TILA to establish special appraisal requirements for higher-priced mortgage loans (HPMLs). To implement these requirements, the OCC, NCUA, CFPB, Federal Reserve, FDIC, and FHFA issued final rules that became effective on January 18, 2014. The rules exempt transactions of $25,000 or less and require that the $25,000 threshold be adjusted annually to reflect any percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The recently-issued joint proposal would memorialize the calculation method for determining such adjustments and further clarify that, if there is no annual percentage increase in the CPI-W, the exemption threshold from the prior year will not be adjusted. Comments on the proposal are due within 30 days of publication in the Federal Register.

    CFPB TILA Dodd-Frank Federal Reserve OCC

  • DOJ Files SCRA Complaint against Credit Union

    Consumer Finance

    On July 26, the DOJ filed a complaint against a Michigan-based credit union for alleged violations of the SCRA’s prohibition against motor vehicle repossession from an active-duty servicemember without a court order. Under the SCRA, a court must “review and approve a lender’s repossession of any motor vehicle owned by a servicemember if the servicemember took out the loan and made a deposit or an installment payment before entering military service.” According to the complaint, the credit union failed to, among other things, (i) establish vehicle repossession procedures that included checking the Department of Defense’s database to determine customers’ military status; (ii) implement written policies concerning compliance with the SCRA; and (iii) obtain the necessary court order to initiate and complete repossession of a motor vehicle owned by a member of the U.S. Army. The DOJ further alleges that the credit union’s conduct was “intentional, willful, and taken in disregard for the rights of servicemembers.” The complaint seeks monetary consumer relief, civil penalties, and changes to the credit union’s repossession procedures.

    SCRA DOJ

  • FinCEN Expands Reach of Real Estate Geographical Targeting Orders

    Consumer Finance

    On July 27, FinCEN issued temporary Geographical Targeting Orders (GTO) requiring certain U.S. title insurance companies to identify and report the natural persons behind shell companies used to conduct “all-cash” purchases of high-end real estate in six major metropolitan areas. The GTOs cover the following areas: (i) all boroughs of New York City; (ii) Miami-Date, Broward and Palm Beach Counties in South Florida; (iii) Los Angeles County; (iv) San Francisco, San Mateo, and Santa Clara counties; (v) San Diego Country; and (vi) Bexar County, Texas, which includes San Antonio. FinCEN simultaneously released a table outlining the monetary thresholds that trigger the identification and reporting requirements in each jurisdiction. Upon taking effect, the GTOs will remain effective for 180 days absent an extension. As previously covered in InfoBytes, FinCEN remains concerned that all-cash purchases conducted through LLCs or other “opaque structures,” may be conducted by natural persons trying to hide their assets and identity. According to FinCEN’s Acting Director Jamal El-Hindi, “[b]y expanding the GTOs to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”

    Anti-Money Laundering Title Insurance FinCEN GTO

  • OFAC Updates Cuba-Related FAQs

    Federal Issues

    On July 25, OFAC updated its list of frequently asked questions related to Cuba to clarify requirements applicable to persons subject to U.S. jurisdiction that are providing carrier or travel services to Cuba pursuant to 31 C.F.R. § 515.572. According to new FAQ 38, where such a person is providing travel or carrier services to a customer traveling to or from Cuba under a specific license, OFAC will consider the collection and retention of the traveler’s specific license number to be equivalent to collecting and retaining a physical or electronic copy of the specific license, as required by § 515.572(b)(1). The carrier or travel services provider must maintain a record of the specific license number or a copy of the license for at least five years. Revised FAQ 39 reiterates that authorized carrier or travel service providers must also retain a certification from each customer traveling to or from Cuba indicating the provision of the Cuban Assets Control Regulations that authorizes travel and the names and addresses of the individual travelers for at least five years from the date of the transaction.

    OFAC Cuba

  • OFAC Issues Finding of Violation for Alleged Violations of the Foreign Narcotics Kingpin Sanctions Regulations

    Federal Issues

    On July 27, OFAC issued a Finding of Violation to a bank for allegedly maintaining accounts on behalf of two individuals on OFAC’s SDN list. On June 12, 2013, pursuant to the Foreign Narcotics Kingpin Designation Act, OFAC added the two individuals to the SDN list based on their involvement in money laundering operations. From June 12, 2013 to June 3, 2014, OFAC alleged that, due to a misconfiguration in the bank’s sanctions screening software, it failed to identify and block accounts belonging to them. OFAC asserted that the bank had reason to know it maintained accounts on behalf of the designated individuals as an aggravating factor under its Enforcement Guidelines, but noted that the fact that “no managers or supervisors appeared to have been aware of the conduct that led to the apparent violations” was a mitigating factor. The Finding of Violation also noted that the bank took remedial action to respond to the violations and cooperated with OFAC by signing a tolling agreement, as well as two extensions to the tolling agreement.

    Anti-Money Laundering OFAC

  • Chile-Based Airline Company Settles FCPA Charges

    Federal Issues

    On July 25, a Chile-based airline company agreed to settle parallel criminal and civil FCPA matters relating to alleged bribery of Argentine labor union officials through a sham consulting contract with a third party in exchange for the union accepting lower wages and other concessions. The airline company agreed to pay a total of more than $22 million, including a $12.75 million penalty as part of a three-year Deferred Prosecution Agreement (DPA) with DOJ.

    As part of the DPA, the company agreed to continue cooperating with DOJ’s investigation, to make improvements to its compliance program, and to retain a compliance monitor for a period of more than two years. In the DPA and in its press release regarding the settlement, DOJ noted that it took into account certain factors that weighed against the company, including that it did not voluntarily disclose the alleged misconduct (which came to light through Argentinian press reports) or discipline the responsible employees. However, DOJ did note that the company cooperated with DOJ’s investigation once the press reports became public, and “provided all relevant facts known to it, including about individuals involved in the misconduct.”

    Because of the factors weighing against the company, the penalty was within the U.S. Sentencing Guidelines range, and the company did not receive a discount off the bottom of the range, as suggested in DOJ’s recent guidance regarding its FCPA pilot program. As stated in the guidance, in order to be eligible for full mitigation credit, a company must voluntarily disclose the FCPA violations, and the DOJ considers such disclosure as a factor separate from the company’s cooperation in the subsequent investigation. The company must also engage in timely and appropriate remediation, which includes appropriate discipline of employees identified by the company as responsible for the misconduct. The guidance specifically states that a monitor should not be required if the company “has, at the time of resolution, implemented an effective compliance program.”

    In this case, one of the first under the FCPA pilot program, the DOJ followed its guidance by declining to give mitigation credit when the company did not voluntarily self-disclose and did not fully remediate. It is difficult to say what, if any, credit the company received for its cooperation once the investigation began.

    At the same time, the company also settled an SEC administrative enforcement action by agreeing to pay $6.74 million in disgorgement and $2.7 million in prejudgment interest. Earlier this year, the company’s CEO separately settled with the SEC regarding the same alleged scheme, and agreed to pay a $75,000 penalty and attend anti-corruption training.

    FCPA SEC DOJ

  • Department of Agriculture Requests Comments on Continuation of, and Changes to, Registration Form to Request Electronic Access Code Information

    Privacy, Cyber Risk & Data Security

    On July 22, the Federal Register published the U.S. Department of Agriculture’s (USDA) request for comments on the Office of the Chief Information Officer’s (OCIO) intent to “request approval for the continuation of and changes to the [USDA] Registration Form to Request Electronic Access Code information collection to allow USDA customers to securely and confidently share data and receive services electronically.” The USDA’s eAuthentication Service (eAuth) collects customer and employee information in order to provide “public citizens as well as federal government employees with a secure single sign-on capability for USDA applications, management of user credentials, and verification of identity, authorization and electronic signatures.” The online self-registration process and identity proofing service, which is voluntary, permits USDA customers and employees to access to USDA Web applications and services via the Internet. As it currently exists, the eAuth service allows customers to access USDA Web site portals through two Levels of Assurance (LOAs). LOA 1 provides limited access to portals and applications that have minimal security requirements. LOA 2 “enables users to conduct official electronic business transactions via the Internet, enter into a contract with the USDA, and submit forms electronically via the Internet to USDA agencies.” The OCIO is developing LOA 3, which, if authorized, would provide public citizens with accounts. LOA 3 would require the same level of self-registration and identity proofing, but would also incorporate strong multi-factor authentication credentials for access to secure, high risk, or sensitive systems. Comments on the USDA’s notice are due by September 20, 2016.

    Privacy/Cyber Risk & Data Security

  • Florida Judge: "Bitcoin Has a Long Way to Go Before it is the Equivalent of Money"

    Fintech

    On July 25, a Florida judge for the Eleventh Judicial Circuit dismissed criminal charges against an individual engaged in the business of selling bitcoin. Florida v. Espinoza, No. F14-2923 (Fl. Cir. Ct. July 26, 2016). The defendant conducted various bitcoin transactions with an undercover detective. The State of Florida had charged the individual with one count of unlawfully engaging in business as a money services business in violation of § 560.125(5)(a), Fla. Stat. and two counts of money laundering, in violation of § 896.101(5)(a) and (5)(b), Fla. Stat. The State later amended its filing to include charges of unlawfully operating as a “payment instrument seller” in violation of § 560.103(29), Fla. Stat. The judge dismissed the money-transmission-related charges, reasoning that (i) under the plain meaning of § 560.125(5)(a), a “money transmitter” would operate in a similar manner as a middleman in a financial transaction; and (ii) case law “requires that a fee must be charged to meet all the elements of being a money transmitter business.” The defendant, according to the judge, was not a middleman, but rather a seller. The judge further noted that the “difference in the price he purchased the Bitcoin for and what he sold it for is the difference between cost and expenses, the widely accepted definition of profit.” The judge also found that the defendant was not a “payment instrument seller” because bitcoin is not a payment instrument. The judge stated that “[b]itcoin has a long way to go before it is the equivalent of money,” and that “attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole.” The judge further dismissed the counts of money laundering, ultimately concluding that “[w]ithout legislative action geared towards a much needed updated to the particular language within [the relevant statutes], this Court finds that there is insufficient evidence as a matter of law that this Defendant committed any of the crimes as charged, and is, therefore, compelled to grant Defendant’s Motion to Dismiss as to Counts II and III.”

    Money Service / Money Transmitters Virtual Currency

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