InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
DOJ announces task force on market integrity and consumer fraud
On July 11, the Deputy Attorney General, Rod Rosenstein, announced the establishment of a new task force on market integrity and consumer fraud pursuant to an Executive Order (EO) issued by President Trump on the same day. The task force, led by Rosenstein, will provide guidance for the investigation and prosecution of cases involving fraud on the government, financial markets, and consumers. The announcement lists a wide range of fraudulent activities, including (i) cyber-fraud; (ii) fraud targeting older Americans and service members; (iii) securities and commodities fraud; and (iv) corporate fraud affecting the general public, such as money laundering and other financial crimes. Rosenstein emphasized that the task force will work to achieve “more effective and efficient outcomes” to identify and stop fraud “on a wider scale than any one agency acting alone.”
While the EO requests senior officials from numerous federal agencies be invited by the DOJ to participate in the task force, Rosenstein was joined by acting Director of the CFPB, Mick Mulvaney; Chairman of the SEC, Jay Clayton; and Chairman of the FTC, Joe Simons in the announcement. Mulvaney stated, “[t]he Bureau takes its mandate to enforce the law seriously, and the Bureau will continue to apply the law to achieve this end of combatting fraud against Americans…. This task force is an example of the growing cooperation of the Bureau’s work with other federal and state authorities to combat a multitude of bad actors out there today.”
New York Attorney General: Don’t delay action if CFPB appeals constitutionality determination
On July 9, the New York Attorney General and a New Jersey-based litigation funding company and its affiliates filed a joint letter in the U.S. District Court for the Southern District of New York addressing how the parties would like to proceed in the legal matter after the court terminated the CFPB as a party to the action. As previously covered by InfoBytes, in June, the district court held the agency’s structure is unconstitutional and therefore not allowed to bring claims under the Consumer Financial Protection Act (CFPA), but allowed the Attorney General to continue the action. The letter discusses the parties’ desired path for the litigation should the Bureau choose to appeal the court’s constitutionality determination. If the Bureau should appeal, the defendants request the court allow the immediate appeal and stay the current litigation, while the Attorney General disagrees with allowing the immediate appeal and “would like the case to proceed as expeditiously as possible.”
As for whether the court continues to have jurisdiction over the remaining claims, the Attorney General argues that the federal district court continues to have subject matter jurisdiction over the Consumer Financial Protection Act (CFPA) claims and supplemental jurisdiction over the state law claims. The defendants disagree and interpret the June decision to strike all substantive provisions of the CFPA that would form the basis for federal jurisdiction.
The letter states the Bureau has not yet decided if it will pursue an appeal of the court’s determination.
California Court of Appeal: State required to return $331 million to mortgage settlement fund
On July 10, the California Third District Court of Appeal reversed in part a Superior Court’s 2015 decision to abstain from issuing a writ directing the Legislature to appropriate funds to restore the money the state allegedly unlawfully took out of the National Mortgage Settlement Deposit Fund (the NMS Deposit Fund). The NMS Deposit Fund was created in 2012 to hold the state’s share of $2.5 billion allocated as part of a settlement agreement reached between the federal government, 49 states, and five of the largest U.S. mortgage servicers. (See previous InfoBytes coverage here on the 2012 settlement.) According to the opinion, three groups filed a lawsuit in 2014 against California Governor Jerry Brown and the state’s director of finance and controller alleging they unlawfully diverted money from the NMS Deposit Fund to make bond payments and offset general fund expenditures. The groups sought a writ of mandate compelling the state government to pay back approximately $350 million in diverted funds. While the Superior Court agreed that the money had been improperly diverted, the court asserted it lacked “constitutional authority” to restore the funds; however, the court ordered the state to restore the funds “as soon as there is a sufficient appropriation ‘reasonably’ and ‘generally’ available for such purpose.” Conversely, the Third District Court of Appeal disagreed, citing to case law supporting the groups’ position that the court could order the money back. Among other things, under the law, the money still belongs in the NMS Deposit Fund, and not in the state’s General Fund. Furthermore, the fact that the state’s director of finance unlawfully diverted the money in contravention of state law and the settlement’s terms only makes for a “more compelling case” that the Superior Court should have issued a writ.
FDIC implements updated interagency forms
On July 11, the FDIC issued Financial Institution Letter FIL-38-2018 announcing the implementation of revisions to several interagency forms. The updates, based upon recommendations from representatives from the FDIC, Federal Reserve, and the OCC, reflect new laws, regulations, capital requirements, and accounting rules. The changes are intended to improve the clarity of the requests, delete unnecessary information requests, and add transparency for filers concerning information required to consider a proposal.
The following revised forms may be used going forward for all applicable applications filed with the FDIC and are effective immediately:
FTC, CFPB discuss scope of Fair Credit Reporting Act during Senate Banking Committee hearing
On July 12, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “An Overview of the Credit Bureaus and the Fair Credit Reporting Act” to discuss the scope and enforcement of the Fair Credit Reporting Act (FCRA), the measures undertaken by the CFPB and the FTC to oversee credit bureau data security and accurate credit reporting, and other laws and regulations as they pertain to credit bureaus. Committee Chairman Mike Crapo, R-Idaho, opened the hearing by discussing the need to understand the “current state of data security, data accuracy, data breach policy” given consumers’ increased reliance on technology and recent cybersecurity incidents.
Associate Director for the Division of Privacy and Identity Protection at the FTC, Maneesha Mithal, discussed in prepared remarks the FTC’s role in implementing, enforcing, and interpreting the FCRA, as we all as the importance of educating consumers and businesses about FCRA requirements. According to Mithal, the FCRA continues to be a “top priority” for the FTC as the consumer reporting system evolves and new technologies emerge. Mithal discussed consumer reporting agency (CRA) FCRA compliance requirements concerning, among other things, dispute resolution processes, furnisher obligations, and credit reporting accuracy. Specifically, Mithal commented on the FTC’s more than 30 FCRA enforcement actions, in addition to the more than 60 law enforcement actions taken against companies for allegedly failing to implement reasonable data security practices. Mithal also touched upon the FTC’s business guidance and consumer education efforts concerning FCRA rights and obligations.
Assistant Director for Supervision Policy at the Bureau, Peggy Twohig, similarly discussed the Bureau’s authority over CRAs and furnishers with respect to the agency’s supervisory and enforcement authority, and noted, among other things, that while the agency possesses broad authority to promulgate rules as required to enforce the FCRA, it lacks rulemaking authority under certain sections of the FCRA related to red flags and the disposal of records, which fall under the FTC’s purview. Twohig further commented on the Bureau’s efforts to educate consumers on a variety of topics, including data breaches, credit freezes, and credit and identity monitoring.
Fannie Mae announces Enterprise-Paid Mortgage Insurance Pilot
On July 10, Fannie Mae announced the Enterprise-Paid Mortgage Insurance (EPMI) pilot program, which offers an alternative to the standard borrower-paid mortgage insurance and lender-paid mortgage insurance options offered by private mortgage insurance companies. The EPMI program will allow lenders to deliver Fannie Mae a loan with a greater than 80 percent loan-to-value without lender-acquired private mortgage insurance as long as the lender pays a loan-level price adjustment fee. The EPMI option would then cover the loan under a forward insurance arrangement, which is acquired by Fannie Mae. Fannie Mae would also be responsible for filing the insurance claims and performing monthly reporting.
The initial roll-out was offered to “a diverse, representative cross-section of large, medium, and small lenders” and is subject to a volume limit. Participating lenders may begin delivering EPMI loans to Fannie Mae on or after August 1.
NYDFS recommends online lenders be subject to state licensure and usury limits in new report
On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.) In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”
In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….” Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents. NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.
NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank. The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”
Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….” To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.
Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).
Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.
Trump issues Executive Order removing ALJs from competitive service
On July 10, President Trump issued an Executive Order (EO) excepting Administrative Law Judges (ALJs) from the federal government’s competitive hiring service. The EO is in response to the recent Supreme Court decision in Lucia v. SEC, which held that ALJs are “inferior officers” subject to the Appointments Clause of the Constitution. (Previously covered by InfoBytes here.) The EO allows federal agencies to hire ALJs without going through the Office of Personnel Management (OPM) competitive selection process, which will give agencies the ability to select candidates who meet the agency’s specific needs— providing greater “flexibility and responsibility for ALJ appointments,” according to the White House announcement. The announcement emphasizes that the EO “reduces the legal uncertainty” over new ALJ appointments under the Appointments Clause in order to safeguard agencies’ enforcement of federal laws.
FDIC provides relief for storm-hit areas of Texas
On July 3, the FDIC issued Financial Institution Letter FIL-37-2018 to provide regulatory relief to financial institutions and facilitate recovery in areas of Texas affected by severe storms and flooding from June 19 through the present. The FDIC is encouraging institutions to consider, among other things, extending repayment terms and restructuring existing loans that may be affected by the natural disasters. Additionally, the FDIC notes that institutions may receive favorable Community Reinvestment Act (CRA) consideration for community development loans, investments, and services in support of disaster recovery.
SEC and broker-dealer settle charges for allegedly failing to report suspicious transactions
On July 9, the SEC announced it had reached a settlement with a broker-dealer for allegedly failing to file suspicious activity reports (SARs), as required by the Bank Secrecy Act. According to the SEC’s complaint, the broker-dealer allegedly “knew, suspected, or had reason to suspect” that at least 47 advisors previously terminated by the broker-dealer had engaged in suspicious transactions. However, the broker-dealer filed SARs related to only 10 of the advisors—3 of which were filed after the SEC brought an enforcement action against the advisors. Suspicious transactions by the advisors involved (i) engaging in suspicious transfers of funds; (ii) engaging in “cherry-picking” patterns; (iii) charging excessive advisory fees; (iv) improperly accessing customer accounts to make trades; and (v) using the broker-dealer’s custodial platform despite registration lapses. The SEC asserted that the broker-dealer’s failure to file SARs for suspicious transactions violated the Securities Exchange Act. While neither admitting nor denying the allegations, the broker-dealer has agreed to the entry of a permanent injunction and will pay a $2.8 million civil penalty.