SCRA Compliance, Cybersecurity, and Responsible Innovation Remain Top Priorities at OCC

On August 31, Grovetta Gardineer, the OCC’s Deputy Comptroller for Compliance Operations and Policy, delivered remarks at the Association of Military Bankers of America annual workshop in Leesburg, VA. Throughout her presentation, Gardineer highlighted issues affecting financial institutions focused primarily on lending to servicemembers. Gardineer discussed the OCC’s ongoing efforts to identify and correct deficiencies within bank and thrift compliance practices and noted improved Servicemembers Civil Relief Act (“SCRA”) compliance by regulated institutions. Specifically, Gardineer observed that in 2014, the OCC cited sixty-five SCRA violations among large, midsized, and community institutions. For the first quarter of 2015, however, Gardineer reported that OCC examiners cited only seven SCRA violations. Gardineer also referenced recent amendments to the Military Lending Act (“MLA”) which expanded consumer protections to both open-end and closed-end consumer credit for servicemembers; she emphasized that banks should be proactive in updating their internal policies and procedures to reflect the MLA’s changes. Reiterating the OCC’s commitment to cybersecurity, Gardineer advised that OCC examiners intend to use the cybersecurity assessment tool “to supplement exam work to gain a more complete understanding of an institution’s inherent risk, risk management practices, and controls related to cybersecurity.” Finally, Gardineer discussed innovation within the industry, such as the emergence of various mobile payments transfer systems and peer-to-peer lending. She stressed that the OCC intends to facilitate a responsible regulatory environment that will encourage innovative financial products and services while also implementing regulations to ensure adequate consumer protections.

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Leading International Financial Services Institution Pays $1.7 Million to Settle Sanctions Liability

On August 27, Treasury’s OFAC announced a settlement agreement requiring a Switzerland-based financial institution to pay slightly over $1.7 million to resolve potential liability over alleged violations of the Global Terrorism Sanctions Regulations, 31 C.F.R. part 594. According to OFAC, over a five-year period ending in 2013, the financial institution processed over 220 securities and other investment transactions involving an individual included on OFAC’s Specially Designated Nationals and Blocked Persons List. As part of the agreement, OFAC highlighted important mitigating factors leading to its reduced settlement amount with the financial institution noting that the bank has in place an adequate global sanctions compliance program, and that the “[institution] took remedial action in response to the apparent violations, including by conducting a thorough internal investigation regarding the apparent violations.”

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Former Ohio Deputy Treasurer Extradited to Serve 15 Years in Prison for Role in Bribery and Money Laundering Scheme

On August 26, a former deputy treasurer of Ohio was extradited from Pakistan to serve a 15-year prison term in the U.S. for his involvement in a bribery and money laundering scheme spanning from January 2009 through January 2011. According to his 2013 guilty plea, the former deputy treasurer misused his position as a state official to direct official state of Ohio business to a securities broker in return for bribes. With the assistance of a Chicago businessman, the deputy treasurer concealed the broker’s payments by funneling them through (i) accounts connected to a landscaping business; and (ii) an attorney and lobbyist who was both a friend and business partner. The broker, who paid more than $500,000 in bribes, collected roughly $3.2 million in commissions as a result of 360 securities trades on behalf of the Office of the Ohio Treasurer.

Sentenced in abstentia on December 1, 2014 by a Ohio federal judge, the former state official was also ordered to forfeit $3.2 million in illegal profits. The securities broker, lobbyist, and the Chicago businessman were each sentenced in late 2014 to serve 45 months, 48 months, and 18 months in prison, respectively, for their roles in the scheme.

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DOJ and SEC Announce Parallel Action Against Former Investment Banking Analyst and Two Individuals for Alleged Involvement in Insider Trading Scheme

On August 25, the DOJ unsealed an indictment charging three defendants each with (i) one count of conspiracy to commit securities and tender offer fraud; (ii) 13 counts of securities fraud; (iii) 13 counts of tender offer fraud; and (iv) three counts of wire fraud. In a parallel action, the SEC filed a complaint in the Central District of California against the same three individuals, asserting that the three individuals violated certain provisions of the Securities Exchange Act by participating in a scheme that involved “coordinated, illegal trading in stock and stock options of two separate companies that participated in merger activity” in which the same investment bank played an advisory role. According to the SEC, having learned of impending acquisitions involving two of the investment bank’s clients and other companies, one of the investment bank’s former analysts allegedly provided information regarding the transaction to a friend before any public announcements were made. The friend then communicated the information to a third individual, and the two made a series of trades in the two companies’ securities. When the acquisitions were publicly announced, both companies’ stock prices increased, resulting in profits of more than $670,000 for the two individuals on the receiving end of the former analyst’s inside information. The SEC’s complaint seeks a final judgment ordering the three defendants “to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of [certain] provisions of the federal securities laws.”

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CFPB Spotlights Credit Reporting Industry in Latest Complaints Report

On August 25, the CFPB released the second of its monthly complaint reports, highlighting complaints received from consumers regarding the credit reporting industry. In its latest snapshot report, the CFPB revealed a 56 percent increase in the number of credit reporting complaints submitted by consumers between June 2015 and July 2015, and a 45 percent increase in credit reporting complaints from last year. The report also stated that 77 percent of credit reporting complaints involved inaccurate information on consumers’ credit reports. Despite the large volume of data used to prepare the report, the Bureau cautioned that the data is not normalized and that company-specific information should be considered in context of a company’s size.

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Fannie Mae Announces New Mortgage Product for Low- and Moderate-Income Borrowers

On August 25, Fannie Mae announced that it will begin offering HomeReady, a mortgage loan product featuring new flexibilities for lower to moderate income borrowers. For the first time, income from a non-borrower household member can be considered as a means to qualify for a Fannie loan. In addition, borrowers can include funds received from other sources, such as income from non-occupant parents or rental income from a basement apartment, to satisfy income requirements. Both first-time and repeat homebuyers can qualify for a HomeReady mortgage with a down payment as low as 3 percent. The new product requires borrowers to complete an online housing-counseling course. Fannie Mae is expecting to begin accepting deliveries under the HomeReady guidelines towards the end of 2015, and will soon issue additional details to assist lenders through a Selling Guide announcement.

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FinCEN Issues NPRM Establishing BSA/AML Requirements for Investment Advisers

On August 25, FinCEN issued a Notice of Proposed Rulemaking (NPRM) seeking to adopt minimum Bank Secrecy Act (BSA) and anti-money laundering (AML) standards that would be applicable to investment advisers. Under the proposal, investment advisers would be required to implement AML programs and report suspicious activity, among other safeguards. The NPRM states that the proposal would cover investment advisers registered or required to register with the SEC. The proposal would also add such investment advisers to the definition of “financial institution.” This would result in investment advisers being required to file currency transaction reports and to comply with recordkeeping and other requirements applicable to financial institutions. With respect to supervisory authority, FinCEN stated that it would delegate its authority to the SEC for purposes of examining investment advisers for compliance with the proposed requirements.

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CFPB & NYDFS File Suit Against Two Pension Advance Lenders Over Misleading Consumers Related to Costs, Risks Associated to Advance Payments

On August 20, the CFPB, along with the New York Department of Financial Services (NYDFS), filed a joint complaint in federal court against two pension advance lenders and three of their managers for allegedly misleading consumers regarding the costs and risks associated with the companies’ pension advance loans. The CFPB and NYDFS contend that both companies coerced consumers into borrowing against their pensions by marketing the product as a sale rather than a loan, and misrepresented or failed to disclose interest rates and fees on lump-sum cash advances offered for agreeing to redirect the full or partial amount of the consumer’s pension payments over an extended period. In separate allegations, the NYDFS contends that both companies violated New York state specific laws related to usury and deception, and unlawfully transmitted money without a proper license. The complaint follows guidance issued earlier this year highlighting three business practices consumers should avoid when conducting business with pension advance lenders.

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POSTED IN: Consumer Finance, Federal Issues

Large Multinational Financial Services Company Settles FCPA Charges Relating to Internships

On August 18, the SEC announced a settlement with a large multinational financial services company over allegations that the company had violated the FCPA by giving internships to family members of government officials working at a Middle Eastern sovereign wealth fund in hopes of retaining or gaining more business from that fund. The order entered as part of the settlement quoted emails between company employees purportedly demonstrating that the company gave the internships in hopes of keeping and growing the business relationship with the fund. The SEC also alleged that the company gave the internships to the family members without requiring that they pass through the competitive screening process the company typically requires for interns. Finally, the SEC alleged that the company had inadequate controls to prevent the improper hiring of relatives of government officials. The company paid $14.8 million to settle the charges, with $8.3 million in disgorgement, $1.5 million in pre-judgment interest, and a $5 million penalty.

The company previously disclosed in January 2015 that it had received a Wells Notice concerning possible FCPA violations in connection with the internships. The settlement follows earlier press reports of a broad SEC investigation into bank hiring practices in Asia, and appears to be the first settlement resulting from the investigation.

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Department of Treasury Extends Comment Period on Expanding Access to Credit Through Online Marketplace Lending

On August 18, the Department of Treasury extended the comment period for the public to respond to its Request for Information (RFI) on online marketplace lending, entitled Public Input on Expanding Access to Credit Through Online Marketplace Lending. Originally published on July 20, the RFI seeks public input on three areas relating to the online marketplace industry: (i) business models of and products offered to consumers and small businesses; (ii) potential expansion of access to credit to the historically underserved; and (iii) the ways in which the financial regulatory framework can develop to support safe growth within the industry. Since the July 20 publication of the RFI, only four (4) comments have been received. Earlier this month, Treasury held a public forum to discuss online marketplace lending, with roughly 80 participants from the marketplace lending industry, consumer advocates, nonprofit public policy organizations, and the financial services industry. Per the August 18 extension, the public will now have until September 30 to provide comments on the RFI.

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CFPB Orders Subsidiary of Peer-to Peer Lending Company to Provide $700,000 in Restitution over Practices Related to its Health Care Loan Product

On August 19, the CFPB announced a consent order against a subsidiary of an online lending company, ordering the subsidiary to provide $700,000 in monetary relief to affected consumers. According to the CFPB, the subsidiary marketed two loan products at dental offices as part of its health-care services financing program – an installment loan and a deferred-interest loan – to assist consumers in paying for dental services. The CFPB contended that consumers were provided inaccurate information related to the terms and conditions of the deferred-interest loan product, finding that, in certain instances, the loan product was marketed as a “no-interest” loan. However, the dental service providers who marketed the loan product failed to note that the 22.98 percent interest rate would be added to the principal if consumers failed to pay the loan in full before the end of the promotional period.

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FTC Commissioner Wright to Resign

On August 17, the FTC announced the resignation of Joshua D. Wright who served as one of the agency’s five commissioners since January 2013. Prior to being appointed as a Commissioner, Wright previously served at the FTC as an inaugural Scholar in Residence in the Bureau of Competition from 2007 to 2008. Wright’s term was set to expire in September 2019, but his resignation will become effective on August 24. Chairwoman Edith Ramirez noted that, “[t]he agency has benefited greatly from his perspective as a lawyer and economist.” Wright will return to his prior position as a professor at George Mason University School of Law.       

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Spotlight on the Military Lending Act, Part 2: Planning for Compliance

Andrew-Grant-captionManley-Williams-caption Ben-Olson-captionCompliance with the revised Department of Defense (“DoD”) regulations under the Military Lending Act (“MLA”) is not mandatory until October 3, 2016 or, for most credit cards, until October 3, 2017.  However, as the recent implementation of the Dodd-Frank Act mortgage regulations shows, a year or even two can pass quickly.  Therefore, institutions should begin planning now.  The following are answers to three key questions that can help you start the planning process.

  1. Which products will be covered by the revised MLA regulations?

The revised MLA regulations apply far beyond the narrow range of small dollar loan products covered today.  Instead, reflecting the DoD’s desire to match to the definition of consumer credit under the Truth in Lending Act’s Regulation Z, the MLA regulations will apply to credit offered or extended to a covered borrower that is:

  • Primarily for personal, family, or household purposes; and
  • Either subject to a finance charge or payable by a written agreement in more than four installments.

However, the following types of credit are excluded:

  • Residential mortgages: Transactions secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling.
  • Secured motor vehicle purchase loans: Transactions that are expressly intended to finance the purchase of a motor vehicle and are secured by that vehicle.
  • Secured personal property purchase loans: Transactions that are expressly intended to finance the purchase of personal property and are secured by that property.
  • TILA-exempt transactions: Transactions that are exempt from Regulation Z (other than pursuant to a State exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z.

Accordingly, the revised MLA regulations should not affect most mortgage, auto, or commercial lending.  The new regulations will, however, apply to most credit card accounts, overdraft or personal lines of credit, unsecured closed-end loans, and deposit advance products.  Therefore, institutions should focus on preparing the lines of business responsible for these products for compliance with the revised MLA regulations. Read more…

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FinCEN Determines That Issuing a Digital Certificate Evidencing Ownership in Precious Metals, and Buying and Selling Precious Metals, Are Subject to The BSA

On August 14, FinCEN issued an Administrative Ruling, FIN-2015-R001, determining that a company who: i) provides Internet-based brokerage services between buyers and sellers of precious metals; ii) buys and sells precious metals on its own account; and iii) holds precious metals in custody, opens a digital wallet, and issues a digital proof of custody certificates evidencing ownership of such metals, is subject to the BSA.

FinCEN determined that, as a broker or dealer in e-currencies and e-precious metals, the company did not fall under the e-currencies or e-precious metals trading exemption from money transmission:  “when the Company issues a freely transferable digital certificate of ownership to buyers, it is allowing the unrestricted transfer of value from a customer’s commodity position to the position of another customer of a third-party, and it is no longer limiting itself to the type of transmission of funds that is a fundamental element of the actual transaction necessary to execute the contract for the purchase of sale of the currency or the other commodity.” As such, it is acting as a convertible virtual currency administrator (the freely transferable digital certificates being the commodity-backed virtual currency). Further, the purchases and sales of precious metals made on its own account render the Company a dealer in precious metals (subject to certain monetary thresholds and other considerations), and thus a financial institution for purposes of the BSA.

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CFPB, FDIC, and OCC Order Large Financial Institution and Subsidiaries to Pay Nearly $40 Million for Deposit Discrepancies

On August 12, in coordinated enforcement actions, the CFPB, FDIC, and OCC ordered a large financial institution and two of its banking subsidiaries to pay nearly $40 million in fines and restitution for failing to credit consumers the full amounts of their deposited funds. The regulators allege that, from 2008 through 2013, the bank entities (i) failed to credit consumers the full amount of their deposits when the amount scanned on the deposit slip was less than the amount of the checks and cash deposited; and (ii) falsely claimed that they would verify the deposits. The CFPB consent order requires the bank entities to pay approximately $11 million in restitution and a $7.5 million civil money penalty. The FDIC order requires one of the banking subsidiaries to pay nearly $5.8 million in restitution and a $3 million civil money penalty, while the OCC consent order assessed a $10 million civil money penalty on the other banking subsidiary.

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POSTED IN: Banking, Federal Issues