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  • FinCEN Designates Foreign Private Bank Under Patriot Act

    Consumer Finance

    On July 17, FinCEN named FBME Bank Ltd., formerly known as the Federal Bank of the Middle East, as a foreign financial institution of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act. As detailed in a notice of finding, FinCEN asserts that the bank attracts illicit finance businesses by soliciting high-risk customers and promoting its weak AML controls. FinCEN explains that the bank changed its country of incorporation numerous times, partly due to its inability to adhere to regulatory requirements, and has established itself with a nominal headquarters in Tanzania. However, according to FinCEN, it transacts over 90 percent of its global banking business through branches in Cyprus and has taken active steps to evade oversight by the Cypriot regulatory authorities in the recent past. FinCEN is proposing a rule that, once final, will prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for FBME, and for other foreign banks being used to process transactions involving FBME. The proposal also would require covered financial institutions to apply special due diligence to their correspondent accounts maintained on behalf of foreign banks to guard against processing any transactions involving FBME. Comments on the proposed rule are due 60 days after publication in the Federal Register.

    Anti-Money Laundering FinCEN Patriot Act

  • Education Department OIG Reports On Borrower Complaints Against Collection Agencies

    Consumer Finance

    On July 15, the Department of Education’s Office of Inspector General (OIG) published a report on its audit of the Department’s Federal Student Aid (FSA) office, which revealed that the FSA has failed to effectively: (i) monitor borrower complaints against private collection agencies (PCAs) and ensure that corrective action is taken; (ii) ensure PCAs are abiding by federal debt collection laws and the related terms of their contracts; and (iii) consider borrower complaints in its evaluation and compensation of PCAs. The audit covered the period October 1, 2009, through September 30, 2012. The OIG recommended that FSA, among other things, (i) enforce the contract requirement that PCAs submit all complaints to FSA and establish procedures that include ensuring PCAs take corrective action; and (ii) require relevant staff to monitor, review, and evaluate the PCA deliverables and reconcile the management/fiscal reports with recorded complaints. The FSA concurred with the findings and most of the recommendations and stated that it has taken a number of steps over the past two years to strengthen its PCA oversight efforts. The FSA further stated that it has planned additional improvements that will further enhance its ability to effectively oversee PCA’s interactions with defaulted borrowers.

    Student Lending Debt Collection Consumer Complaints

  • Massachusetts Adds "Borrower's Interest" Safe Harbor For QM Loans

    Lending

    Recently, the Massachusetts Division of Banks published final amendments to its regulation concerning documentation and determination of borrower’s interest to establish an additional safe harbor for any home loan that meets the definition of a “Qualified Mortgage” under the CFPB’s ability-to-repay/qualified mortgage rule. A Qualified Mortgage now will be deemed to be in the borrower’s interest under the regulation. The amendments also clarify that the exemption under the borrower’s interest regulation applies to all Qualified Mortgages which are eligible for safe harbor consideration under TILA, including the small creditor exemption, provided that the Qualified Mortgage is not higher cost. The amendments became effective July 18, 2014.

    CFPB Mortgage Origination Qualified Mortgage

  • CFPB Proposes Publishing Consumer Complaint Narratives

    Consumer Finance

    Yesterday, in advance of a field hearing being held today on consumer complaints, the CFPB released a proposal to expand the amount of information that will be included in the Consumer Complaint Database to include certain consumer complaint narratives, along with any response to the complaint submitted by the identified financial institution. The CFPB already collects the narrative information as part of the complaint intake process, but to date has not published narratives over privacy concerns it believes it now has addressed. The CFPB describes the proposed change as a natural extension of a policy designed to “provide consumers with timely and understandable information about consumer financial products and services, and improve the functioning, transparency, and efficiency of markets for such products and services.” The CFPB will accept comments on the proposal for 30 days following publication in the Federal Register.

    The Proposal

    Under the proposed policy, the CFPB would seek consumer consent for publication of the complaint narrative, and would “scrub” personal information from each such narrative.  The CFPB would also allow the identified company to submit a response to the narrative to be published.  A company that wishes to publish a response would be instructed not to provide direct identifying information in its public-facing response, and the CFPB would take reasonable steps to remove personal information from the response to minimize the risk of re-identification.

    Perceived Benefits

    The CFPB has been considering publishing complaint narratives for some time, and has faced pressure from consumer advocates seeking publication of narratives. Indeed, the CFPB acknowledges this influence in the proposal, stating that in response to a prior proposed complaint policy statement, “consumer, civil rights, and open government groups supported disclosure on the grounds that disclosing narratives would provide consumers with more useful information on which to base financial decisions and would allow reviewers to assess the validity of the complaints.” In addition, during a March 2013 field hearing on consumer complaints that corresponded with a major expansion of the complaint database, consumer groups repeatedly stressed the need for more specific complaint data, including the full narrative description of complaints submitted by consumers.

    The CFPB now believes that with privacy concerns addressed, the benefits will outweigh risks associated with publishing the complaints. To assess the benefits and risks of disclosing narratives, the CFPB focused on the direct and indirect benefits to consumers, the benefit to the CFPB, and the advancement of open government principles. The CFPB identifies the following as potential benefits:

     

     

     

     

     

     

     

     

     

    • allowing consumers to share specific stories may expand the number of complaints submitted and enhance the CFPB’s consumer response function;
    • additional information will increase use of the complaint database by advocates, academics, and the press; and
    • consumer finance markets will benefit as the narratives influence companies to adjust prices to match product quality and improve customer service to remain competitive

     

    The CFPB has demonstrated through its examination and enforcement activity that consumer complaints play a major role in the Bureau’s risk-based approach to supervision and enforcement, and the proposal admits that by increasing consumer complaint volume, publication of narratives would benefit “the many Bureau functions that rely, in part, on complaint data to perform their respective missions including the Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking.”

    Industry Concerns

    Although it acknowledges that “trade groups and industry commenters nearly uniformly opposed disclosure of consumer complaint narratives,” the CFPB’s proposal makes only a superficial attempt to address those concerns. For example, the CFPB currently takes no steps to verify the accuracy of a complaint before it publishes the complaint, and the policy proposal does not propose to alter that process. The proposal admits that there is a risk that financial institutions could incur “intangible reputational damage” as a result of the dissemination of factually incorrect complaint narratives.  It also briefly mentions the lost opportunity cost of consumers that may have otherwise done business with a particular company but for the (mis)information in a complaint narrative, stating that the company and the consumer that lose business would be disserved. However, the CFPB rationalizes these costs, asserting that “the marketplace of ideas would be able to determine what the data shows.”

    Moreover, the CFPB asserts that its proposal to publicly release company responses to narratives mitigates this risk by assuring that, to the extent there are factual disputes, both sides of the dispute will be made public. The CFPB’s press release states that “in most cases, this response would appear at the same time as the consumer’s narrative so that reviewers can see both sides concurrently.” However, the proposal does not discuss the timing of publication of narratives, and it remains unclear exactly when consumer and company narratives would be published. Under its current practice, the CFPB publishes a consumer complaint before it receives a response from the company. If narratives and responses are not published concurrently, potentially factually incorrect information could be in the public domain before a company has an opportunity to respond. Regardless of timing, financial institutions may be hamstrung in defending themselves in this forum given, among other things, obligations to maintain the confidentiality of customer information.

    Request for Comments

    The CFPB asks stakeholders not to submit comments on the complaint database generally, or current data fields. The CFPB seeks comments in response to the following specific issues:

     

     

     

     

     

    • The need for any additional information to help inform consumer consent, the precise language to most effectively communicate with the consumer, at what point in the complaint process (at complaint submission or later in the complaint handling process) and where on the Bureau website the information in support of the opt-in consent should be displayed.

     

     

     

     

     

     

    • Whether company responses should be distinct and in addition to the response companies send directly to the consumer.

     

     

     

     

     

     

    • The standard and methodology for removing customer information, including suggestions of appropriate analogues to the HIPAA identifiers in the consumer financial domain, and any other identifiers which could reasonably be used to identify individuals.

     

    CFPB Consumer Complaints

  • Illinois AG Sues Student Debt Relief Firms

    Consumer Finance

    On July 14, Illinois Attorney General (AG) Lisa Madigan announced that her office filed separate civil lawsuits (here and here) in state court against two student debt relief firms and their principals.  The lawsuits allege that the defendants violated several state consumer protection statutes relating to their deceptive student debt relief practices and collection of improper fees.  The AG claims that the unlicensed companies and their sole principals improperly accepted upfront fees from student borrowers while claiming to have enrolled them in sham loan forgiveness programs or other legitimate loan relief programs that were available to borrowers free of charge.  The lawsuits also allege that the defendants engaged in extensive false and misleading advertisements that misrepresented their expertise, affiliation with the U.S. Department of Education, and the debt relief programs available to borrowers.

    The AG maintains that these practices violate several state consumer protection statues, including:

    • The Illinois Consumer Fraud and Deceptive Business Practices Act, prohibiting unfair and deceptive business practices, including making false representations and failing to disclose material facts to consumers;
    • The Credit Services Organizations Act, prohibiting unlicensed parties from acting as “debt settlement providers” or accepting illegal fees; and
    • The Debt Settlement Consumer Protection Act, prohibiting parties from accepting upfront payment for debt relief services.

    The lawsuits seek injunctive and non-monetary relief in the form of permanent injunctions against each defendant and a rescission of all contracts with Illinois residents.  The AG is also pursuing a variety of monetary damages and penalties, including restitution, costs of prosecution and investigation, and civil penalties of $50,000 for each statutory violation with additional penalties for those conducted with the intent to defraud or perpetrated against elderly victims.

    State Attorney General Student Lending Civil Fraud Actions Debt Settlement Elder Financial Exploitation

  • Florida Federal District Court Dismisses Miami's Fair Housing Act Cases

    Lending

    On July 10, the U.S. District Court for the Southern District of Florida dismissed with prejudice the Fair Housing Act claims in three suits filed by the City of Miami against mortgage lenders. City of Miami v. Bank of Am., No. 13-cv-24506, 2014 WL 3362348 (S.D. Fla. July 9, 2014); City of Miami v. Wells Fargo & Co., No. 13-cv-24508 (S.D. Fla. July 9, 2014); City of Miami v. Citigroup Inc., No. 13-cv-24510 (S.D. Fla. July 9, 2014). The city alleged the lenders engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services.

    The court held that under the U.S. Supreme Court’s recent decision in Lexmark Intern., Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1387 (2014), purely economic injury is outside the zone of interest of the Fair Housing Act. The court explained that the “policy behind the Fair Housing Act (FHA) emphasizes the prevention of discrimination in the provision of housing” while the city’s alleged “economic injury from the reduction in tax revenue . . . [and] expenditures” in contrast is not “affected by a racial interest.” Thus, the court held that the city’s claim fell outside the FHA’s zone of interest and the city lacked standing to sue. The court explained that the recent decision in City of Los Angeles v. Bank of America, which allowed that city’s FHA claim to proceed, was not persuasive because, unlike in the Ninth Circuit, controlling Eleventh Circuit precedent requires the application of the zone of interest to FHA claims.

    The court also held that the city could not establish proximate causation because it did not allege facts that isolated the lenders’ practices as the cause of any alleged lending disparity, citing the independent actions of a multitude of non-parties during the financial crisis that “break the causal chain.” The court rejected the city’s statistical correlations as insufficient to support a causation claim. Finally, the court held that the city’s FHA claims were time barred and that the continuing violation doctrine did not apply to extend the time limit. For further discussion of how courts should apply Lexmark to these types of municipal FHA cases the way the court did in this case, see the article published recently by BuckleySandler attorney Valerie Hletko.

    Fair Housing Predatory Lending

  • Massachusetts Regulators Cautions Lenders On Funding Of Mortgages, Third-Party Oversight

    Lending

    On July 2, the Massachusetts Division of Banks published an industry letter regarding mortgage lenders’ obligation to timely fund and disburse mortgage proceeds and oversee internal and third-party compliance with that requirement. The letter advises lenders that numerous recent examinations have revealed issues with timely funding of loans by lenders and disbursement of funds by settlement agents. The letter reminds lenders that the state’s “Good Funds Law” requires a mortgage lender to disburse—in the form of a certified check, bank treasurer’s check, cashier’s check, or wire transfer—the full amount of the loan proceeds prior to recording the mortgage, and that failure to do so may be considered an unfair and deceptive practice. In addition, the letter advises lenders that (i) they must establish and implement policies and procedures to ensure that vendors distribute loan proceeds in the required timeframe, and (ii) internal compliance audits should include testing of the lender’s and any settlement agents’ settlement processes and procedures.

    Mortgage Origination Vendors

  • Mortgage Company Resolves HAMP-Related Criminal Allegations

    Financial Crimes

    On July 3, the DOJ announced the resolution of a multi-agency criminal investigation into the way a large mortgage company administered the federal Home Affordable Modification Program (HAMP). According to a Restitution and Remediation Agreement released by the company’s parent bank, the company agreed to pay up to $320 million to resolve allegations that it made misrepresentations and omissions about (i) how long it would take to make HAMP qualification decisions; (ii) the duration of HAMP trial periods; and (iii) how borrowers would be treated during those trial periods. In exchange for the monetary payments and other corrective actions by the company, the government agreed not to prosecute the company for crimes related to the alleged conduct. The investigation was conducted by the U.S. Attorney for the Western District of Virginia, as well as the FHFA Inspector General—which has authority to oversee Fannie Mae’s and Freddie Mac’s HAMP programs—and the Special Inspector General for TARP—which has responsibility for the Treasury Department HAMP program and jurisdiction over financial institutions that received TARP funds. This criminal action comes in the wake of a DOJ Inspector General report that was critical of the Justice Department’s mortgage fraud enforcement efforts, and which numerous members of Congress used to push DOJ to more vigorously pursue alleged mortgage-related violations. In announcing the action, the U.S. Attorney acknowledged that other HAMP-related investigations are under way, and that more cases may be coming.

    Freddie Mac Fannie Mae FHFA DOJ Enforcement HAMP TARP Financial Crimes

  • Federal Reserve Takes Action Against Bank For Vendor's Allegedly Deceptive Practices

    Consumer Finance

    On July 1, the Federal Reserve Board announced a joint enforcement action with the Illinois Department of Financial and Professional Regulation against a state bank that allegedly failed to properly oversee a nonbank third-party provider of financial aid refund disbursement services. The consent order states that from May 2012 to August 2013, the bank opened over 430,000 deposit accounts in connection with the vendor’s debit card product for disbursement of financial aid to students. The agencies claim that during that time, the vendor misled students about the product, including by (i) omitting material information about how students could get their financial aid refund without having to open an account; (ii) omitting material information about the fees, features, and limitations of the product; (iii) omitting material information about the locations of ATMs where students could access their account without cost and the hours of availability of those ATMs; and (iv) prominently displaying the school logo, which may have erroneously implied that the school endorsed the product. The regulators ordered the bank to pay a total of $4.1 million in civil money penalties. In addition, the Federal Reserve is seeking restitution from the vendor, and, pursuant to the order against the bank, may require the bank to pay any amounts the vendor cannot pay in restitution to eligible students up to the lesser of $30 million or the total amount of restitution based on fees the vendor collected from May 2012 through June 2014. The consent order also requires the bank to submit for Federal Reserve approval a compliance risk management program in advance of entering into an agreement with a third party to solicit, market, or service a consumer deposit product on behalf of the bank.

    Federal Reserve Prepaid Cards Student Lending Vendors Enforcement

  • S.D.N.Y. U.S. Attorney Obtains FHA, GSE False Claims Settlement

    Lending

    On July 1, the U.S. Attorney for the Southern District of New York announced that a large bank agreed to pay $10 million to resolve allegations that prior to 2011 it violated the False Claims Act and FIRREA by failing to oversee the reasonableness of foreclosure-related charges it submitted to the FHA and Fannie Mae for reimbursement, contrary to program requirements and the bank’s certifications that it had done so. The government intervened in a whistleblower suit claiming that, notwithstanding FHA program requirements and the bank’s annual FHA certifications, prior to 2011, the bank failed to create or maintain an adequate FHA quality control program to review the fees and charges submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to FHA for reimbursement. The government also claimed that the bank failed to create or maintain Fannie Mae audit and control systems sufficient to ensure that the fees and expenses submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to Fannie Mae for reimbursement, were reasonable, customary, or necessary. In addition to the monetary settlement, the bank was required to admit to the allegations and agreed to remain compliant with all rules applicable to servicers of mortgage loans insured by FHA and to servicers of loans held or securitized by Fannie Mae and Freddie Mac.

    Fannie Mae HUD FHFA DOJ Enforcement FHA False Claims Act / FIRREA

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