Recent enforcement activity has demonstrated the agencies have taken to viewing the SCRA as a strict liability statute. This shift in interpretation makes financial institutions legally responsible for compliance with the SCRA. According to Kirk Jensen, Partner in BuckleySandler’s Washington, DC office, “this is a big game changer in how financial institutions react to the SCRA.”

The Department of Justice has had some success in bringing litigation in these matters against the smaller, unsophisticated companies. However, it is important to note that the court is not hearing all the relevant arguments. There has been an uptick in private litigation and some of the issues raised in the enforcement matters may also be raised in court. It is our hope that the defendants will make the relevant arguments to resolve some of the outstanding issues. Read more…

The Servicemembers Civil Relief Act (SCRA) is designed to provide protection for military members as they enter active duty. The Act has origins dating back to the Civil War, but was first solidified in 1940 with the passage of the Soldiers and Sailors Civil Relief Act (SSCRA). In 2003, the SSCRA underwent modernizations, but the intent and language remained intact, to become what is known today as the SCRA.

Following the 2009 financial crisis and the rising number of foreclosures, reports began surfacing about banks and other financial institutions violating the SCRA. The Department of Justice began actively pursuing actions against institutions with the Office of the Comptroller of the Currency becoming involved later. Read more…

For the first time, all non-bank residential mortgage lenders and originators (RMLOs) are required to file mandatory and voluntary Suspicious Activity Reports (SARs) with the government through the e-filing system established by FinCEN. Similar to the establishment of an AML program, compliance for this regulation is August 13, 2012.

A company may file a voluntary report with FinCEN to alert them of any suspicious transaction they have reason to believe is a possible violation of any law or regulation, without any de minimus amount. A company must file a SAR once they have become aware of a transaction that:

• Is conducted or attempted by, at, or through a RMLO
• Involves or aggregates funds or assets of at least $5,000
• The RMLO knows, suspects, or has reason to suspect that the transaction or pattern of transactions:
  • Involves funds derived from illegal activity or conducted to hide funds or assets derived from illegal activity
  • Is designed to evade BSA requirements
  • Has no business or apparent lawful purpose, i.e., “doesn’t look right”
  • Involves the use of the company to facilitate criminal activity

Read more…

As reported in Part 1 of this series, all non-bank residential mortgage lenders and originators (RMLOs) have until August 13, 2012 to establish an Anti-Money Laundering (AML) program as part of the new rule.

Howard Eisenhardt, Counsel in BuckleySandler’s Washington, DC office, cautions against simply attempting to use a bank model AML template. “Bank models are focused on cash, account monitoring, and include many things that are not part of the business model of an RMLO. In addition, there are many things peculiar to an RMLO that would not be present in the traditional depository AML program.  While some parts may be the same, the RMLO AML Program is not a ‘one size fits all.’ The bank model is like the proverbial square peg, the RMLO model is more like a round hole, and the two just don’t fit together,” explains Eisenhardt.

Read more…

Ongoing concern among regulators, law enforcement, and Congress over abusive and fraudulent sales and financing practices in both the primary and secondary residential mortgage markets prompted the Financial Crimes Enforcement Network (FinCEN) to finalize a rulemaking process concerning regulation of non-bank residential mortgage lenders and originators (RMLOs) that started in 2003.

The Advance Notice of Proposed Rulemaking (ANPRM) issued by FinCEN in 2009 and the Notice of Proposed Rulemaking issued in 2010 were follow-ups to the 2003 APNR and resulted in the Final Rule being issued in 2012.  The Final Rule requires RMLOs – mostly non-bank mortgage lenders – to establish an Anti-Money Laundering (AML) program and to file Suspicious Activity Reports (SARs) as required by the Bank Secrecy Act (BSA).

Read more…

Consumers have a larger platform to submit complaints against vehicle and consumer finance companies directly to regulators. The CFPB has set up an online database that allows the CFPB to receive consumers’ complaints against their lenders and take action or transfer those complaints to another, appropriate regulator.

“We are advising our clients to be aware of this increased focus on individual complaints,” says John Redding, Counsel in BuckleySandler‘s Southern California office. “Because of this new database, companies need to be aware of their customer service response times and make each customer complaint a top priority.”

He suggests:

1. Provide prompt responses to consumer complaints
2. Work with consumers to resolve issues before they become complaints to the CFPB or other regulatory agencies
3. Monitor social media outlets, but don’t overreact to comments or complaints and use care when considering any type of response

“Companies need to recognize that consumers have been given a new outlet that they have not had before,” says Redding. “Consumers now have a greater voice with the regulatory agencies and, as a result, lenders have to be aware of all issues raised by their customers.”

Regulators have made it clear that  they are closely reviewing  consumer complaints and that they are likely to have a  strong impact on regulatory actions.

“The CFPB is likely to focus on standards, like fairness and risk to consumers, as well as specific rules” says Redding. “The regulators are looking to address practices that may cause harm to consumers.”

The federal government is increasing scrutiny of financial services companies’ practices affecting active military members, veterans and their families. Earlier this year, the CFPB along with the FTC, the Department of Defense and the New York Attorney General announced the launch of the Repeat Offenders Against Military (ROAM) database, which will track enforcement actions against companies and individuals who repeatedly scam military personnel, veterans and their families.

According to John Redding, Counsel in BuckleySandler’s Southern California office, this new effort is an important development that the financial services industry needs to be aware of. He says the firm has been advising clients on how to refine their policies and procedures for doing business with servicemembers and their families.

“We are suggesting they be aware of the increased focus on SCRA [Servicemembers Civil Relief Act] issues and, in part because of the new database and other efforts surrounding increased protections, need to review their practices to ensure continued compliance.”

According to the CFPB, law enforcement officials across the country, including state attorneys general, US attorneys, and judge advocates from all five branches of the armed forces, will be able to search the ROAM database for information about completed civil and criminal actions against businesses that have scammed military personnel, veterans, and their families.

Traditionally, non-bank lenders looked to the states and the FTC for industry regulations. But, this has changed with the introduction of the CFPB. Recent reports show that the federal government is stepping up efforts to regulate and review auto finance companies, many of whom have never been subject to bank-style examinations.

“The CFPB has created a new layer of regulation,” according to John Redding, Counsel in the Southern California office of BuckleySandler. “Auto lenders have to be alert and aware of their fair and responsible lending risks.”

Redding says one of the ways to minimize these risks is to be proactive when reviewing a company’s policies, procedures, discretionary underwriting and pricing practices.  The CFPB is likely to conduct statistical reviews for loans that the company has made or purchased to ensure there is no unexplained or improper disparity between protected and non-protected classes , so companies should consider performing such analyses in advance of the regulator conducting such an analysis.

“This will help mitigate risks for the companies by identifying areas that may present risk and allowing them to proactively take steps to modify policies and practices. When the regulators are conducting an exam, companies will have to explain why the business is conducted as it is, including steps taken to ensure fair and responsible lending to all consumers, regardless of status, and address any issues that may arise,” says Redding.

The bottom line: Recognize that there are new regulators and more scrutiny on the industry and begin taking steps to perform these important reviews now.

Redding suggests the following steps auto finance companies can take to prepare for the CFPB:

• Evaluate the institution’s risk profile and prepare an operations and compliance strategy
• Update policies and procedures (review CFPB exam guidelines)
• Monitor, address, and retain records regarding consumer complaints
• Monitor third-party sources of complaints
• Appoint an ombudsman
• Conduct internal audits
• Consider patterns and practices that emerge regarding operations
• Focus on areas that may lead to consumer harm, as well as technical violations
• Include the compliance team to monitor, analyze and advise on specific proposals