On October 31, the Federal Reserve Board released a BSA/AML enforcement action against a Pakistani bank and its New York branch. The Written Agreement addresses examiners’ findings of alleged compliance and risk management deficiencies in the branch’s international remittance services. The agreement requires the bank and branch to, among other things, (i) retain an independent consultant to conduct a compliance review, and (ii) implement enhanced BSA/AML compliance and SAR programs. The agreement also requires interim transaction monitoring procedures and a third-party review of the branch’s international remittance transaction activity over a six-month period.
On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…
On October 22, the CFPB released the procedures its examiners will use in assessing financial institutions’ compliance with the remittance transfer requirements of Regulation E. Amendments to those regulations, finalized by the CFPB earlier this year, are set to take effect October 28, 2013. In general, the rule requires remittance transfer providers that offer remittances as part of their “normal course of business” 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 rule does not apply to financial institutions that consistently provide 100 or fewer remittance transfers each year, or to transactions under $15.
The new examination procedures detail the specific objectives examiners should pursue as part of the examination, including to: (i) assess the quality of the regulated entity’s compliance risk management systems with respect to its remittance transfer business; (ii) identify acts or practices relating to remittance transfers that materially increase the risk of violations of federal consumer financial law and associated harm to consumers; (iii) gather facts that help to determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law; and (iv) determine whether a violation of a federal consumer financial law has occurred and, if so, whether further supervisory or enforcement actions are appropriate. In doing so, CFPB examiners will look not only at potential risks related to the remittance regulations, but also outside the remittance rule to assess “other risks to consumers,” including potential unfair, deceptive, and abusive acts and practices and Gramm-Leach-Bliley Act privacy violations. Finally, consistent with other examination procedures published by the CFPB, the examiners are instructed to conduct both a management- and policy-level review as well as a transaction-level review to inform the stated examination objectives.
Also on October 22, the CFPB announced a new tool designed to make it easier for the public to navigate the regulations subject to CFPB oversight. To start, the new eRegulations tool includes only Regulation E, which implements the Electronic Funds Transfer Act and includes the remittance requirements discussed above. Noting that federal regulations can be difficult to navigate, the CFPB redesigned the electronic presentation of its regulations, including by (i) defining key terms throughout, (ii) providing official interpretations throughout, (iii) linking certain sections of the “Federal Register preambles” to help explain the background of a particular paragraph, and (iv) providing the ability to see previous, current, and future versions. The CFPB notes that the tool is a work in progress and that suggestions from the public are welcome. Further, the CFPB encourages other agencies, developers, or groups to use and adapt the system.
On August 8, the CFPB released an updated small business guide for the remittance transfer rule it finalized last year and revised in May 2013. The updated guide summarizes the remittance rule and discusses the new requirements, which take effect on October 28, 2013. The CFPB also issued technical corrections to the May 2013 amendments, and released a video that provides an overview of the rule and the recent changes, as well as implementation guidance.
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 January 22, the CFPB announced that the effective date for its international remittance transfer rule, originally set for February 7, 2013, is delayed, and that a new effective date will be announced later this year. The CFPB recently proposed making the rule effective 90 days after proposed revisions to the rule are finalized.
On December 21, the CFPB proposed revisions to the remittance transfer rule it finalized earlier this year and already once modified. The proposed revisions follow a November 2012 bulletin from the CFPB in which it stated its intent to pursue a fast-track rulemaking to delay the effective date of the rule while addressing certain industry-raised concerns. The proposed revised rule would (i) provide increased flexibility and guidance with respect to the disclosure of taxes imposed by a foreign country’s central government, as well as fees imposed by a recipient’s institution for receiving a remittance transfer in an account, (ii) require disclosure of foreign taxes imposed by a country’s central government, but would eliminate the requirement to disclose taxes imposed by foreign regional, provincial, state, or other local governments, and (iii) require a provider to attempt to recover funds without bearing the cost of funds that cannot be recovered, when the provider can demonstrate that the consumer provided an incorrect account number and certain other conditions are met. The proposed rule also would push back the effective date of the remittance transfer rule from February 7, 2013, to 90 days after the revised rule is finalized. The CFPB is accepting comments on the delayed effective date for 15 days following publication in the Federal Register, and it is accepting comments on the substantive revisions for 30 days following publication in the Federal Register.
Eleventh Circuit Holds Bank Security Procedure Insufficient to Provide Safe Harbor from Liability for Fraudulent Wire Transfer
On November 27, the U.S. Court of Appeals for the Eleventh Circuit held that a bank may be liable for an allegedly fraudulent in-person wire transfer because it failed to implement a commercially reasonable security procedure to verify the authenticity of the wire transfer order and to detect transmission or content errors. Chavez v. Mercantil Commercebank N.A., No. 11-15804, 2012 WL 5907151 (11th Cir. Nov. 27, 2012). The plaintiff, a Venezuelan resident who opened an account at a Florida bank, elected a security procedure under the account’s Funds Transfer Agreement that provided only that the bank require written authorization by him in order to process any orders for the account. The plaintiff sued the bank for lost funds, claiming that the bank allowed an unauthorized individual to initiate a fraudulent in-person wire transfer of funds out of the account. The district court granted summary judgment in favor of the bank, holding that state law creates a safe harbor that relieves banks of liability for fraudulent payment orders if the bank and the customer agree to a commercially reasonable security procedure and the bank follows that procedure in good faith. The appellate court held that the agreed-upon security procedure was not in fact a security procedure as defined by statute. The court explained that state law disavows security procedures that require only a comparison of a signature on a payment order with an authorized specimen signature of the customer. In this case, the security procedure required written authorization, but was silent as to how the bank was to verify that authorization, i.e., it did not even require that the signature be compared to one on file. The court held that because the bank and the account holder did not agree to a security procedure, the bank could not seek safe harbor protection and reversed the district court’s order. One judge dissented from the majority opinion and argued that the Funds Transfer Agreement encompassed both the required and discretionary security procedures, which, taken together, were commercially reasonable and followed in good faith, therefore affording the bank safe harbor protection.
On November 27, the CFPB issued a bulletin announcing that it intends to delay the effective date of the new remittance transfer rule finalized earlier this year and already once modified. Per Bulletin 2012-08, the CFPB plans to pursue a fast-track rulemaking next month to alter provisions of the final rule relating to: (i) situations in which incorrect account numbers are provided by senders of remittance transfers, and (ii) the disclosure of certain foreign taxes and fees charged by financial institutions receiving remittance transfers. The rulemaking also will propose an extension of the February 7, 2013 effective date of the rule until 90 days after the CFPB finalizes the rulemaking. The CFPB’s Bulletin follows pleas from industry groups and Members of Congress to change the rule and the implementation timeline. The CFPB action also follows an announcement this week by the Federal Home Loan Bank of New York (FHLBNY) that it plans to stop processing international wire transfers for its members on December 31, 2012, based on its concern that the CFPB rule would create potential risks that are too great for what the FHLBNY considers a non-core service.
On October 16, the CFPB hosted a webinar regarding the new remittance transfer rule, set to take effect February 7, 2013. The presentation reviewed (i) the types of transactions covered, (ii) the definition of “remittance transfer provider” and the “normal course of business” safe harbor, (iii) disclosure requirements, including the use of estimates, and (iv) cancellations, refunds, and error resolution. For example, the disclosure requirements discussion covered the timing and form of disclosures, the application of the ESIGN Act in the remittance context, and appropriate reliance on sender representations. The webinar included certain practical compliance tips and the CFPB stated that it will accept email and phone requests for legal compliance guidance. In advance of the webinar the CFPB issued a compliance guide for small businesses.
On October 16, the CFPB will host a webinar on the new requirements for remittance transfer providers. The CFPB issued a final remittance rule at the beginning of this year, and subsequently modified the rule to exempt certain institutions from its disclosure requirements. To further assist industry stakeholders with implementation of the remittance rule, the CFPB has also released a list of countries that qualify for the safe harbor exception to the rule’s disclosure requirements. Under the exception, providers may disclose estimates of the amounts to be received in a foreign currency, fees, and taxes for transfers to Aruba, Brazil, China, Ethiopia, and Libya, in lieu of exact amounts. The remittance rule, and its safe harbor exception, becomes effective February 7, 2013.
On September 20, CFPB Director Richard Cordray appeared before the House Financial Services Committee in connection with the CFPB’s Semiannual Report issued July 30, 2012. During the House hearing the Director faced questions on topics covered during prior committee hearings, including (i) the status and potential impact of the CFPB’s qualified mortgage/ability to repay (QM) rule, (ii) whether that rule will provide a safe harbor or a rebuttable presumption, (iii) whether the CFPB will commit to a definition of “abusive” practices, and (iv) whether the CFPB will raise the threshold for banks exempt from compliance with new CFPB remittance rules. Mr. Cordray reiterated that the QM rule will be finalized before the end of 2012, and that while the final regulations are still under consideration, the CFPB intends to provide bright line standards to help limit litigation risk. He continued to avoid offering a definition or description of abusive practices and did not express a willingness to revisit the remittance standards. Mr. Cordray also revealed that the CFPB has determined that it cannot resolve through the issuance of guidance a problem with the application of the Federal Reserve Board’s credit card ability to repay rule that is restricting access to credit for stay-at-home spouses. Mr. Cordray committed to releasing a proposed rule to remedy the problem prior to Congress’ return following the November elections.
On August 16, a group of thirty-two Members of the House of Representatives sent a letter to CFPB Director Richard Cordray asking that the Bureau delay the effective date of recently adopted remittance transfer rules and examine the potential impact of the rules on consumers. The legislators state that the rules, which are set to take effect in February 2013, include “arbitrary and unworkable requirements . . . that will drastically curtail the availability of international transfers to consumers.” Specifically, the letter argues that the final rule (i) includes disclosure requirements that are infeasible for the majority of financial institutions, (ii) will work against the statutory mandate that policymakers expand the use of the automated clearinghouse system, and (iii) risks increasing fees for consumers.