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…

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.

On April 22, the SEC announced that George Canellos and Andrew Ceresney will share responsibilities as co-directors of the SEC’s Division of Enforcement. Mr. Canellos has been serving as Acting Enforcement Director since January. He previously had been the division’s Deputy Enforcement Director since June 2012, prior to which he served as Director of the SEC’s New York Regional Office. Mr. Ceresney previously served as a Deputy Chief Appellate Attorney in the United States Attorney’s Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. Most recently, he was in private practice with recently-confirmed SEC Chairman Mary Jo White. On April 23, the SEC named Anne Small as General Counsel. Ms. Small is a former Special Assistant to the President and Associate Counsel in the White House Counsel’s Office where she advised on legal policy questions with a focus on economic issues. She previously worked at the SEC as Deputy General Counsel for Litigation and Adjudication and now becomes the first woman to be named General Counsel.

On April 22, the DOJ and the SEC announced parallel actions against a clothing company to resolve allegations that a subsidiary of the company paid bribes to Argentine officials over a several-year period to obtain improper customs clearance of merchandise. The SEC action included the agency’s first non-prosecution agreement (NPA) related to FCPA misconduct, which the SEC determined was appropriate given “the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation.” According to the SEC’s NPA, the company’s cooperation involved (i) reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts, (ii) voluntarily and expeditiously producing documents, (iii) providing English language translations of documents to the staff, (iv) summarizing witness interviews that the company’s investigators conducted overseas, and (v) making overseas witnesses available for staff interviews and bringing witnesses to the U.S. The SEC agreement also required the company to pay over $700,000 in disgorgement and prejudgment interest, while the DOJ required the company to pay a nearly $900,000 penalty.

On April 4, the CFPB announced enforcement actions against four mortgage insurers against which it filed complaints alleging that their captive reinsurance arrangements with mortgage lenders violated Section 8 of the Real Estate Settlement Procedures Act (RESPA). The actions are the first public actions the CFPB has taken to enforce RESPA, and follow investigations started by HUD and transferred to the CFPB in July 2011. The insurers did not admit the allegations but agreed to pay a combined $15.4 million to end the investigations. The consent orders also (i) prohibit the insurers from entering into any new captive mortgage reinsurance arrangements with mortgage lenders or their affiliates, and from obtaining captive reinsurance on any new mortgages, for a period of ten years, (ii) require the insurers to forfeit any right to the funds not directly related to collecting on reinsurance claims in connection with pre-existing reinsurance arrangements, and (iii) subject the insurers to compliance monitoring and reporting. The orders must be approved by the U.S. District Court for the Southern District of Florida before taking effect.

On April 4, the DOJ announced that two mortgage servicers will pay a combined $39 million to 316 servicemembers pursuant to SCRA settlements from 2011. Those settlement agreements resolved allegations that the mortgage servicers unlawfully foreclosed upon servicemembers between 2006 and 2010. One of the servicers also is subject to the national mortgage servicing settlement, which required an audit to identify violations of SCRA’s foreclosure provisions between January 1, 2006 and April 4, 2012 and its 6 percent interest rate cap provision between January 1, 2008 and April 4, 2012. DOJ stated that the payment is separate from the national servicing settlement review and represents only the non-judicial foreclosures conducted by the bank during the relevant time period. As the national settlement audits progress, the DOJ will require the servicer to make additional payments for alleged judicial foreclosure and interest rate violations uncovered in the audit.

On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.

The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes — including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things — that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.”  He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about — or are willfully blind to — the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system — that is, if we can stop the scammers from accessing consumers’ bank accounts — then we can protect the consumers and starve the scammers.”   Read more…

Recently, the Federal Reserve Board’s Office of Inspector General (OIG), which also serves as the OIG for the CFPB, released an updated Work Plan. The Work Plan includes as a “work in progress,” an evaluation of the CFPB’s integration of enforcement attorneys into its examinations of financial institutions. According to the Plan, the OIG is assessing (i) the potential risks associated with this examination approach and (ii) the effectiveness of any safeguards that the CFPB has adopted to mitigate the potential risks associated with this approach. Banks and nonbanks have previously expressed concern with the CFPB’s approach, which differs from the traditional approach taken by other federal regulators. In fact, in November 2012, the CFPB Ombudsman recommended that the CFPB review its implementation of the policy. The Work Plan states that the OIG expects to complete its review during the second quarter of 2013.

On February 27, the U.S. Supreme Court held that the clock on the five-year statute of limitations for the SEC to pursue civil fraud claims under the Investment Advisers Act begins to run when the fraud occurs, and not when it is discovered, because the “discovery rule” does not apply to government enforcement actions for civil penalties. Gabelli v. SEC, No. 11-1274, 2013 WL 691002 (Feb. 27, 2013). The Court’s holding followed an investment adviser’s appeal from a Second Circuit decision that, under the discovery rule, the statute of limitations had not accrued until the fraud was discovered or could have been discovered with reasonable diligence because the claims sounded in fraud. The Court reversed the Second Circuit’s decision and remanded for further proceedings on the basis that extending the fraud discovery rule to government civil penalty enforcement actions would improperly leave defendants exposed to government action for an uncertain period beyond the five years after their alleged misdeeds. The Court explained that the discovery rule is meant to preserve the claims of parties who have no reason to suspect fraud, but that the government, here the SEC, is different insofar as it is specifically tasked with rooting out fraud and possesses several legal tools to that end. The Court also observed that, unlike a standard victim of fraud seeking only recompense, the government also seeks remedies intended to punish.

On February 26, CFPB Director Richard Cordray and Comptroller of the Currency Tom Curry addressed the National Association of Attorneys General. Mr. Cordray’s remarks were largely duplicative of those given a week earlier to the CFPB Consumer Advisory Board, and again identified several “problems” observed by the CFPB. Those problems were (i) deceptive and misleading marketing of consumer financial products and services, (ii) “debt traps” that trigger a cycle of debt, such as short-term credit products, (iii) “dead ends” in markets such as debt collection, loan servicing, and credit reporting where consumers cannot choose their provider and lack typical market influences, and (iv) discrimination. With regard to short-term loans, Mr. Cordray identified as an enforcement challenge lenders that lack a physical presence, and acknowledged ongoing efforts by the CFPB to address “loans that involve off-shore or other jurisdictional issues.” In his remarks, Mr. Curry first stressed the similar objectives of, and close working relationship among, the OCC, the CFPB, and the attorneys general. He then spent the majority of his remarks explaining why most OCC enforcement actions are resolved by settlement, adding that the first enforcement goal of the OCC as a “prudential bank supervisor” is remediation. Mr. Curry also responded to criticisms that OCC enforcement actions are “insufficiently severe,” and noted that the OCC is prepared to litigate if an institution refuses to consent.

On February 15, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent an amended set of requests to the Federal Reserve Board and the OCC regarding the recent agreements in principle to end the Independent Foreclosure Review (IFR) established by consent orders issued in April 2011. Ms. Waters asks that, in advance of finalizing the terms of the agreements, the agencies produce by March 1, 2013: (i) policies and procedures about how loan files were to be reviewed by the IFR independent consultants, and any checklists used; (ii) calls or reports from the consultants to the agencies regarding error rates of reviewed files, or errors by analysts conducting the reviews; (iii) guidelines issued by the agencies to any consultant related to interpretation of the remediation framework; (iv) correspondence between the agencies and any consultant with regard to the servicing platform identified as “Loss Mitigation Notes,” and inconsistencies between the reported availability of borrower records provided by such a program and records entered into any other part of the servicing platform; and (v) any proposed plan for future reform or modification of servicing platforms or procedures generated or submitted by any consultant to the agencies. This request follows related requests made by Ms. Waters and other Democratic lawmakers seeking details pertaining to the settlement.

On February 8, HUD issued a final rule authorizing so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The rule provides support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a “disparate impact” on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also will permit practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.

In its final rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the final rule states that the defendant would have the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” As proposed, the defendant would have had the burden of proving that the challenged practice “has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests.” Read more…

On February 7, the OCC announced that Larry Hattix will serve as Senior Deputy Comptroller for Enterprise Governance and Ombudsman. The move also elevates enterprise governance to the OCC’s Executive Committee. In the new position, Mr. Hattix will oversee the agency’s enterprise governance function, national bank and savings association appeals program, and the agency’s customer assistance group. Mr. Hattix has served as Ombudsman since January 2008, prior to which he served as Assistant Deputy Comptroller for the Cincinnati/Columbus Field Office, where he directly supervised 40 banks. On the same day, the OCC announced Donna Murphy as Director for Community and Consumer Law, a position that oversees the OCC’s law department division that provides legal interpretations and advice on consumer protection, fair lending, and community reinvestment and development issues. Ms. Murphy had served as Principal Deputy Chief for the Housing and Civil Enforcement Section, Civil Rights Division, at the Department of Justice since October 2010. Prior to that, she served as Deputy Chief and Acting Chief for the Housing and Civil Enforcement Section.