On February 26, Senators Jeff Merkley (D-OR), Elizabeth Warren (D-MA), and other Democratic Senators, together with Representatives Elijah Cummings (D-MD), Maxine Waters (D-CA), and other Democratic House members, sent a letter to Attorney General Eric Holder encouraging the DOJ to “continue a vigorous review of potential payment fraud, anti-money-laundering violations, and other illegal conduct involving payments by banks and third-party payment processors.” The lawmakers highlighted a number of specific issues on which the DOJ should focus: (i) know-your-customer obligations, which they believe should include a review of whether a lender holds all required state licenses and follows state lending laws; (ii) use of lead generators, including those that auction consumer data; (iii) high rates of returned, contested, or otherwise failed debits or the regular use of remotely created checks, which they state may indicate payment fraud; and (iv) lenders’ failure to incorporate or maintain a business presence in the U.S., which they assert can be indicative of fraud and other payment system violations, including money-laundering.
FTC Settles Suit Against Tribe-Affiliated Lenders; Dispute Over CFPB Investigation Of Tribe-Affiliated Lenders Moves To Federal Court
On April 11, the FTC announced that a tribe-affiliated payday lending operation and its owner agreed to pay nearly $1 million to resolve allegations that they engaged in unfair and deceptive acts or practices and violated the Credit Practices Rule in the collection of payday loans. The FTC alleged that the lenders illegally tried to garnish borrowers’ wages and sought to force borrowers to travel to South Dakota to appear before a tribal court, and that the loan contracts issued by the lenders illegally stated that they are subject solely to the jurisdiction of the Cheyenne River Sioux Tribe. The announced settlement payment includes a $550,000 civil penalty and a court order to disgorge $417,740. The companies and their owner also are prohibited from further unfair and deceptive practices and are barred from suing any consumer in the course of collecting a debt, except for bringing a counter suit to defend against a suit brought by a consumer.
Also on April 11, in a separate matter related to federal authority over tribe-affiliated lending, a group of tribe-affiliated lenders responded in opposition to a recent CFPB petition to enforce civil investigative demands (CIDs) the Bureau issued to the lenders. In September 2013, the CFPB denied the lenders’ joint petition to set aside the CIDs, rejecting the lenders’ primary argument that the CFPB lacks authority over businesses chartered under the sovereign authority of federally recognized Indian Tribes. The lenders subsequently refused to respond to the CIDs, which the CFPB now asks the court to enforce. The CFPB argues that the lenders fall within the CFPB’s investigative authority under the terms of the Consumer Financial Protection Act, which the CFPB argues is a law of general applicability, including with regard to Indian Tribes and their property interests. The lenders continue to assert that they are sovereign entities operating beyond the CFPB’s reach.
On February 27, the Senate Permanent Subcommittee on Investigations (PSI) issued a report and held a hearing related to its multi-year investigation of offshore tax evasion and the DOJ’s efforts to pursue Swiss banks who allegedly aid U.S. citizens in evading taxes. The hearing and report focused on one Swiss bank alleged to have facilitated tax evasion and criticized the DOJ for its supposedly “lax enforcement” approach towards numerous Swiss banks. The report states that U.S. law enforcement authorities have failed to prosecute more than a dozen Swiss banks the PSI staff believes facilitated U.S. tax evasion, and failed to take action against the thousands of U.S. citizens who have been revealed as tax evaders. The report also criticizes Swiss officials who the PSI alleges have worked to preserve Swiss bank secrecy by intervening in U.S. criminal investigations and hampering progress. The PSI report urges the DOJ to “use all available U.S. legal means” to obtain the names of alleged tax evaders, and to hold accountable “tax haven banks that aided and abetted” in the alleged evasion. The report also states that U.S. banking regulators should “institute a probationary period of increased reporting requirements for, or to limit the opening of new accounts by, tax haven banks that enter into deferred prosecution agreements, non-prosecution agreements, settlements, or other concluding actions with law enforcement for facilitating U.S. tax evasion, taking into consideration repetitive or cumulative misconduct.” Finally, the subcommittee recommended that the Senate promptly ratify a pending U.S.-Switzerland tax treaty that would allow for increased sharing of information by the Swiss.
On September 26, the CFPB denied three tribal lenders’ joint petition to set aside civil investigative demands (CIDs) issued in June 2012. The CIDs were issued in connection with the Bureau’s investigation into several lenders that offer a variety of online small-dollar credit products, including payday loans, installment loans, and lines of credit. The July 2012 petition primarily argued that the CFPB does not have jurisdiction over the three lenders, which are organized and chartered under the “sovereign authority of federally recognized Indian Tribes with longstanding traditions of tribal independence.”
The CFPB’s decision and order rejects the lenders’ claim that the CFPB lacks authority over tribally-affiliated entities under the Consumer Financial Protection Act, stating that the Supreme Court has “long established” that generally-applicable federal statutes apply to Indian tribes, individual Indians, and tribally-affiliated entities. Moreover, in explaining why certain exceptions would not apply to this general rule, the Bureau noted that it “has reason to believe that the Lenders are making loans to non-Indians over the internet, and it seeks to investigate those lending practices for compliance with Federal consumer financial laws.” The decision and order likewise rejects the lenders’ claim of tribal sovereign immunity, finding that “[e]very court of appeals to address the issue has agreed that Indian tribes, like individual States, do not enjoy immunity from suits by the federal government.”
The lenders’ petition also raised procedural challenges, argued that the requests were vague, overly broad, and unduly burdensome, and sought to incorporate by reference arguments from another entity’s motion to set aside a separate CID. The CFPB rejected all arguments as lacking merit and further announced that it will not consider incorporated arguments going forward. While directing the three tribal lenders to comply with the CIDs within 21 calendar days, the Bureau also noted that the tribal lenders were welcome to continue to discuss issues regarding the scope and burden of individual interrogatories and document requests with the Bureau’s enforcement team.
In an article published earlier this year, BuckleySandler attorneys Amanda Raines and A.J. Dhaliwal analyze the reasoning behind previous decisions to deny such petitions and identify issues that companies must be cognizant of while navigating the investigation and petitioning phases.
On September 24, a firm that handles due-diligence matters for financial institutions filed its opposition to a motion filed by the U.S. Attorney’s Office for the District of Connecticut, on behalf of the federal-state RMBS Working Group, to compel production of documents and information the group sought in a July subpoena. In its brief, the firm reviews its cooperation to respond to “six years of subpoenas, investigatory demands, and formal and informal requests for information,” and summarizes the volume and types of information it has provided to the DOJ and the Working Group to date as a third-party witness in connection with the 16 companies the Working Group has identified as subjects of its RMBS investigations. The firm notes the “substantial expense” it has incurred “to educate an ever-growing, and often-changing, number government attorneys and investigators.” The firm argues that the Working Group’s most recent subpoena, which seeks “every document and communication for all 193 clients and for almost 5,000 e-mail custodians,” constitutes a “fishing expedition” and violates the firm’s rights under the Fourth Amendment.
Like many government agencies before it, the CFPB has relied on the use of civil investigative demands (CIDs) in investigations. CIDs are one of the many tools in the CFPB’s toolbox to gather information from the subject of an investigation or third-parties who are in possession of information believed to be relevant to the investigation. While the CFPB drew from other government entities, including the FTC , in drafting its rules related to investigations, the CFPB’s execution of its investigatory procedures, particularly with respect to CIDs, is quite different than the approach taken by the FTC – creating a new playbook for enforcement lawyers and the institutions they represent.
The CFPB’s Final Rule Relating to Investigations sets forth the procedures that apply to CIDs, including certain meet and confer obligations and requirements regarding potential challenges to CIDs. Late last year, we reported on the Bureau’s first decision denying a petition to modify or set aside a CID. To date, the CFPB has issued three decisions, all denying such petitions. Read more…
Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand
On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID). The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests. CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days. In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.
The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA). In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.
In denying the petition, Read more…
How to Handle a Government Investigation: 13 Things You Should You Do Immediately If the Government Comes Knocking
Actions you take, or don’t take, in the early hours of a government investigation can have costly and far-reaching consequences for a company. At the root of this is the importance of having a plan in place should your company come under investigation, as the last thing you want to be is caught flat-footed. Do your key employees and legal department staff know what to do immediately if the government initiates an investigation?