On May 14, Senator Elizabeth Warren (D-MA) sent a letter to Federal Reserve Board Chairman Ben Bernanke, Attorney General Eric Holder, and SEC Chairman Mary Jo White seeking additional information about the agencies’ respective approach to enforcement actions. Specifically, the letter asks whether the agencies have conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilt and going forward with litigation to obtain an admission. The letter notes that the OCC recently informed Ms. Warren that it does not have any such internal research or analysis and reiterates Ms. Warren’s concern that “if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial . . . the regulator has a lot less leverage in settlement negotiations.
Federal Reserve Board, Illinois Regulator Issue Joint Enforcement Action Against U.S. Subsidiaries of Foreign Bank, OCC Issues Parallel Action
On May 17, the Federal Reserve Board released an April 29, 2013 written agreement between the Federal Reserve Board, an Illinois state regulator, a foreign bank, and its U.S. bank holding company subsidiary (the Holding Company) regarding certain Bank Secrecy Act/Anti-Money Laundering (BSA/AML) deficiencies at the foreign bank’s Chicago branch (the Branch) and an OCC regulated subsidiary of the Holding Company. The OCC took parallel action on the same date against the Holding Company’s Chicago bank subsidiary. The Federal Reserve Board agreement requires that the Holding Company conduct a comprehensive review of its BSA/AML compliance program within 60 days, and within 90 days submit a report of its findings and recommendations, a written enhanced program, and a written plan to strengthen board oversight. Also within 90 days, the Branch must submit a written plan to improve its BSA/AML compliance, and the foreign bank, the Holding Company, and the Branch must submit an enhanced customer due diligence program. The OCC agreement requires that the Chicago bank’s board establish a compliance committee and within 90 days submit a compliance action plan. Within 30 days, the bank’s board must review its current engagement with an independent consultant, and within 90 days (i) develop a staffing plan for its internal BSA compliance department, (ii) conduct an MIS assessment, (iii) develop customer due diligence controls, and (iv) develop written suspicious activity policies and procedures. Both agreements require quarterly reporting, and neither includes a monetary penalty.
On May 14, the U.S. District Court for the Northern District of California reinstated a prior order enjoining a national bank from engaging in false or misleading representations relating to certain overdraft practices and requiring the bank to pay approximately $203 million in restitution. Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2013 WL 2048030 (C.D. Cal. May 14, 2013). After trial the district court enjoined the bank’s practice of ordering withdrawals from “high-to-low” and ordered the restitution for a class of bank customers who alleged that the bank’s ordering practice was designed to maximize the number of customer overdrafts and related fees and, as such, violated the California Unfair Competition Law (UCL). In December 2012, the U.S. Court of Appeals for the Ninth Circuit vacated the trial court’s order, holding that (i) the bank’s ordering practice is a pricing decision the bank can pursue under federal law, (ii) the National Bank Act preempts the unfair business practices prong of the UCL, and (iii) both the imposition of affirmative disclosure requirements and liability based on failure to disclose are preempted. The appeals court preserved the customers’ claim of affirmative misrepresentations under the fraud prong of the UCL. On remand, the district court held that even though, after the Ninth Circuit’s holding, liability cannot be predicated on the posting method, the result is the same because the harm from the bank’s affirmative misrepresentations is the same. The court explained that it is not penalizing the bank for a federally protected practice, but rather because it violated the fraud prong of the UCL by affirmatively misleading customers about the practice. Further, although the Ninth Circuit order prohibits injunctive relief that requires the bank to use a specific system of posting or make specific disclosures, the court enjoined the bank from making or disseminating any false or misleading representations relating to the posting order of debit card purchases, checks, and ACH transactions.
On May 9, Indiana enacted HB 1081, which makes numerous changes to the state’s consumer lending, licensing, and banking laws. Among those changes, the bill increases the threshold loan amounts under various definitions in the Uniform Consumer Credit Code, including “consumer credit sale,” “consumer loan,” and “consumer related loan.” With regard to mortgage originator licensing, the bill (i) revises the surety bond requirements for creditors and entities exempt from licensing that employ a licensed mortgage loan originator, (ii) prohibits an unlicensed individual or an unlicensed organization to act as a closing agent in a first lien mortgage transaction, and (iii) empowers the Department of Financial Institutions (DFI) to investigate any licensee or person that the DFI suspects is operating without a license or in violation of the First Lien Mortgage Lending Act. The bill provides additional guidelines for filing an article of dissolution of a bank, trust company, or a building and loan association. It also makes changes to the certain powers of banks and trust companies. In addition, the bill make numerous amendments related to debt management companies, lead generators, and other consumer financial service providers, and revises requirements for money transmitter licensing by, for example, authorizing the DFI to designate the NMLS for licensing purposes.
On May 8, an economic and financial analysis and consulting firm issued a report that indicates the FDIC is on pace to file more suits against bank directors and officers in 2013 than it has in any year since the start of the financial crisis. The report states that as of April 22, 2013, the FDIC has seized eight institutions and filed at least 12 lawsuits against officers and directors, and that trends suggest that substantially more FDIC cases may be filed in the coming months. Other key findings from the report include: (i) of the 476 financial institutions that have failed since 2007, 55, or 12%, have been the subject of FDIC D&O lawsuits, (ii) CEOs continue to be the most commonly named defendants, though outside directors have been named in 75 percent of all filed complaints, (iii) the 12 suits filed in 2013 included allegations of gross negligence and breach of fiduciary duty, and (iv) of the 44 settlement agreements involving directors and officers (regardless of whether a lawsuit was filed), as many as 17 agreements, or 39 percent, required out-of-pocket payments by the directors and officers.
On May 8, FINRA announced that it fined three firms a combined $900,000 and suspended four executives for allegedly failing to establish and implement adequate anti-money laundering programs. Specifically, FINRA claims that investigations into the three firms revealed that (i) one firm failed to identify suspicious account activity or did not adequately investigate numerous AML “red flags” and that certain of the firm’s customers’ accounts engaged in a pattern of activity consisting of moving millions of dollars through the accounts while conducting minimal-to-no securities transactions, (ii) a second firm that specialized in online trading and catered to the Chinese community failed to implement an AML program adequate to detect and report suspicious transactions, including potential manipulative trading, and (iii) a third firm failed to create and enforce a supervisory system and written procedures to monitor for unlawful transactions in unregistered penny stocks and failed to establish a program reasonably designed to monitor for and report suspicious activity. The suspended executives included two chief compliance officers who failed to fulfill obligations to monitor in accordance with AML requirements, and two owners. The suspensions range from three to nine months. The firms and the executives did not admit to the allegations, but agreed to pay the fines to resolve the investigation.
On May 6, the U.S. Court of Appeals for the Second Circuit agreed with the CFPB in holding that a single-story unit in a multi-story condominium is a “lot,” as that term is used in the Interstate Land Sales Full Disclosure Act. Berlin v. Renaissance Rental Partners, No. 12-2213, slip op. (2d Cir. May 6, 2013). The CFPB and HUD, the predecessor regulator under the ILSFDA, had previously issued regulations stating that a property could only qualify as a “lot” if it involved the “exclusive use of … land.” The Second Circuit determined that the definition of the term “land” was ambiguous and deferred to the agencies’ interpretation, which equated “land” with “realty.” The case is notable primarily because the dissenting opinion reflects an increasingly unfriendly attitude in the courts towards so-called Auer deference. That deference generally requires courts to defer to any plausible interpretation from an agency of its own regulations. In a 15-page dissent in Berlin, Chief Judge Dennis Jacobs questioned the utility of that deference doctrine in this case, arguing that the agency’s reading was “unnatural” and should not be given effect. Chief Judge Jacobs also disagreed with the majority’s emphasis on the fact that the HUD/CFPB position was consistent. Indeed, Chief Judge Jacobs felt that the CFPB’s “gravity-defying” “misunderstanding” was “not improved by consistency,” particularly given that the agencies’ interpretations rested on guidelines that were “semi-literate.” Interestingly, Chief Judge Jacobs twice cited to Justice Scalia’s recent dissent in Decker v. Northwest Environmental Defense Center, which questions the continuing basis for Auer. (A previous InfoByte discussed the opinions in Decker.) Because Auer may prove relevant in many administrative law cases—including those involving banking and financial regulators—this unfriendly attitude may prove significant for participants throughout the financial industry.
This week, FinCEN published its semiannual SAR Activity Review, which provides information about the preparation, use, and value of Suspicious Activity Reports (SARs) filed by financial institutions. The report identifies SAR trends, reviews law enforcement cases that demonstrate the importance and value of Bank Secrecy Act (BSA) data to the law enforcement community, and highlights issues related to financial exploitation of older Americans. FinCEN also published an annual companion report, “By the Numbers,” which compiles numerical data gathered from SARs filed by financial institutions.
On April 30, the OCC and the FDIC announced parallel enforcement actions against a national bank and an affiliated state bank to resolve allegations that the institutions violated Section 5 of the FTC Act in their marketing and implementation of overdraft protection programs, checking rewards programs, and stop-payment processes for preauthorized recurring electronic fund transfers. The OCC claims that (i) bank employees failed to disclose technical limitations of the standard overdraft protection practices opt-out, (ii) the bank’s overdraft opt-in notice described fees that the bank did not actually charge, (iii) the bank failed to disclose that it would not transfer funds from a savings account to cover overdrafts in linked checking accounts if the savings account did not have funds to cover the entire overdrawn balance on a given day, even if the available funds would have covered one or more overdrawn items, (iv) the bank failed to disclose technical limitations of its preauthorized recurring electronic funds transfers that prevented it from stopping certain transfers upon customer request, and (v) the bank failed to disclose posting date requirements for its checking reward program. The OCC orders require the bank to pay approximately $2.5 million in restitution and a $5 million civil money penalty. In addition, the bank must (i) appoint an independent compliance committee, (ii) update its compliance risk management systems with appropriate policies and procedures, and (iii) adjust its written compliance risk management policy. The FDIC order requires the state bank to refund customers roughly $1.4 million and pay a $5 million civil penalty.
On April 30, the CFPB issued a revised final rule to amend regulations applicable to consumer remittance transfers of over fifteen dollars originating in the United States and sent internationally. Generally, the rule requires remittance transfer providers to (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds, as well as the amount of funds the recipient will receive, and (ii) investigate consumer disputes and remedy errors. The revised rule makes optional the original requirement to disclose (i) recipient institution fees for transfers to an account, except where the recipient institution is acting as an agent of the provider and (ii) taxes imposed by a person other than the remittance transfer provider. Instead, the revised rule requires providers to include a disclaimer on disclosures that the recipient may receive less than the disclosed total value due to these two categories of fees and taxes. The revised rule exempts from certain error resolution requirements two additional errors: (i) providing an incorrect account number or (ii) providing an incorrect recipient institution identifier. For the exception to apply, a remittance transfer provider must (i) notify the sender prior to the transfer that the transfer amount could be lost, (ii) implement reasonable measures to verify the accuracy of a recipient institution identifier, and (iii) make reasonable efforts to retrieve misdirected funds. In addition, the revised rule provides institutions more time to comply with the new remittance transfer standards. The final regulations, as revised by this rule, take effect on October 28, 2013.
On May 2, the CSBS released its 2012 annual report, which aggregates and reviews the organization’s activities in the prior year, identifies future goals for the organization, and outlines specific priorities for 2013. The paper also incorporates more focused reports on past and future activities by various CSBS divisions and boards, including a report from the Policy and Supervision Division that reviews bank supervision, consumer protection and non-bank supervision, and legislative and regulatory policy, including the CSBS positions on community bank regulatory relief and federal proposed capital rules.
On April 25, the Federal Reserve Board issued a policy statement on deposit advance products. The statement came on the same day that the OCC and the FDIC proposed more formal guidance for such products. The Board statement identifies potential “significant risks” associated with deposit advance products, including UDAP risk and other consumer compliance risk. The statement directs examiners to thoroughly review any deposit advance products offered by supervised institutions for compliance with Section 5 of the FTC Act and reminds banks of their responsibility for vendors hired to offer deposit advance products.
On April 24, the CFPB published a white paper on payday loan and deposit advance products that claims to show those products lead to a “cycle of high-cost borrowing.” On April 25, the FDIC and the OCC proposed guidance relating to deposit advance products based on similar concerns. The CFPB paper reflects the results of what the CFPB characterizes as a year-long, in-depth review of short-term, small-dollar loans, which began with a January 2012 field hearing. Although it acknowledges that demand exists for small dollar credit products, that such products can be helpful for consumers, and that alternatives may not be available, the CFPB concludes that such products are only appropriate in limited circumstances and faults lenders for not determining whether the products are suitable for each customer. The CFPB paper does not propose any rule or guidance, but is instead intended to present a clear statement of CFPB concerns. The paper notes that a related CFPB study of online payday loans is ongoing. The FDIC and OCC proposed guidance outlines the agencies’ safety and soundness, compliance, and consumer protection concerns about deposit advance products, and sets forth numerous expectations, including with regard to consumer eligibility, capital adequacy, fees, compliance, management oversight, and third-party relationships. For example, under the guidance the agencies would expect banks to offer a deposit advance product only to customers who (i) have at least a six month relationship with the bank, (ii) do not have any delinquent or adversely classified credits, and (iii) meet specific financial capacity standards. The guidance also would require, among other things, that (i) each deposit advance loan be repaid in full before the extension of a subsequent loan, (ii) banks refrain from offering more than one loan per monthly statement cycle and provide a cooling-off period of at least one monthly statement cycle after the repayment of a loan before another advance is extended, and (iii) banks reevaluate customer eligibility every six months.
Federal District Court Holds Financial Institution’s Fraud On Itself Triggers Potential FIRREA Liability
On April 24, the U.S. District Court for the Southern District of New York held that a federally insured financial institution may be prosecuted under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for allegedly engaging in fraud that “affects” the same institution. U.S. v. Bank of N.Y. Mellon, No. 11-6969, 2013 WL 1749418 (S.D.N.Y. Apr. 24, 2013). In this case, the government alleges that the bank and one of its employees provided clients with false, incomplete and/or misleading information about the way it determined currency exchange rates for its “standing instruction” foreign exchange transactions, from which the bank profited, and which ultimately exposed it to “billions of dollars in potential liability.” Based on a lengthy analysis of textual meaning and congressional intent, the court concluded that the “text and purpose of FIRREA amply encompass the alleged conduct,” and that the government’s complaint sufficiently alleged that the bank was negatively affected by the fraud. The decision represents the first time a court has interpreted the meaning of the phrase “affecting a federally insured financial institution” under FIRREA to allow the government to prosecute a financial institution for its own alleged misconduct.
OCC Seeks Reconsideration of Order Requiring Disclosure of Non-Public Documents related to Bank’s AML/CTF Compliance
On April 24, the U.S. District Court for the Southern District of New York stayed an order that would have required a bank to disclose non-public supervisory information subject to the bank examination privilege. Wultz v. Bank of China, No. 11-1266 (S.D.N.Y. Apr. 24, 2013). The case was brought by the family of victims of a suicide bombing attack who claim that failures in the bank’s anti-money laundering and counter-terrorism financing compliance program aided and abetted international terrorism. On April 9, 2013, the court compelled the bank and the OCC to produce various investigative files and regulatory communications over their objection that the bank examination privilege protected such production. The court relied in part on a recent and unrelated Senate investigative report’s description of the OCC oversight process. The court reasoned that the OCC’s ideal supervision process, on which it based its claim of privilege, diverges from the actual process described in the Senate report, and that the actual process undermines assumptions on which other courts have relied about the likely effects of overriding the bank examination privilege. The court added that “the OCC’s supervisory mission might in some cases be helped as much as hindered by the intervention of private litigants.” In support of its motion to reconsider, the OCC argued that the court failed to properly weigh long-standing principles and that its decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process.” The OCC also asserted that it never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation, which is designed to provide the OCC with the opportunity to review non-public OCC information in the possession of regulated entities prior to production. The OCC asked the court to vacate its prior order and order the plaintiffs to submit a Touhy request for all materials withheld on the groups of bank examination privilege. The court agreed to stay its prior order and established a briefing schedule on the motion for reconsideration, which will be completed by May 10, 2013.