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  • To Restore Trust in Banks, Build Ethics Into Business Decisions
    December 8, 2014
    Jeremiah S. Buckley & Thomas A. Sporkin

    Trust is the bedrock upon which the banking business is built. However, revelations of unethical conduct at some banks have put that trust at risk. Senior officers of the Federal Reserve and other financial regulators recently met with management at leading banks to emphasize the need for a stronger ethical culture in the wake of activities like Libor manipulation, front running in high-frequency trading and money laundering cover-ups. William Dudley, the president of the Federal Reserve Bank of New York, said in a recent speech that there should be a "consistent application of 'should we' versus 'could we' in business decisions." The Financial Conduct Authority in the United Kingdom has expressed similar concerns.

    Bank leaders understand the importance of trust and the need to demonstrate their commitment to maintaining an ethical infrastructure at their institutions. In this regard, bankers can take personnel and policy initiatives to put ethics front-and-center and show they "get it."

    Originally published by American Banker; reprinted with permission. 

  • Social Media and the Mortgage Industry
    December 4, 2014
    Jonathan Cannon

    Jonathan Cannon participated on a Q&A panel in the fall 2014 issue of California Mortgage Finance News. The article was titled "Social Media and the Mortgage Industry."

    Q: What are some common mistakes lenders and their employees make on social media that can put the company at risk?

    Cannon: One of the most common mistakes is for companies and individuals to treat materials shared on social media differently than other public-facing materials. Advertising is advertising, whether it takes the form of a print ad, an online banner ad, or a posting to social media. Because the barriers to entry are so low for social media postings, lenders and their employees may sometimes fail to recognize the compliance obligations that still apply to social media materials. But all advertising has to keep in mind, for instance, the requirements under TILA when rates or other trigger terms are stated, the requirements under the SAFE Act and state laws related to licensing disclosures, and the requirements under the Federal Trade Commission Act related to topics such as deceptive advertising and the use of testimonials. But specifically, it may be most common for lenders to fail to put adequate recourses into their social media program. Just because it may be difficult for a lender’s compliance department to monitor what its branch employees may be sharing online does not mean that the lender is not obligated to monitor this activity. Having strong social media policies and procedures, along with sufficient training and monitoring, are necessary if a lender and its employees will be sharing material through social media.

    Click here to read the full article at www.cmba.com.

  • Board Review on OCC's Heightened Risk Management "Guidelines"
    November 26, 2014
    David Baris

    David Baris co-authored the Banking Exchange article "Board View on OCC's Heightened Risk Management 'Guidelines,'" published November 26, 2014. 

    Last September, the Comptroller of the Currency finalized “guidelines” to require national and federal savings banks (and certain foreign banks) with assets of $50 billion or more to establish and implement a risk governance framework to manage and control the bank’s risk-taking activities. The guidelines—"Guidelines Establishing Heightened Standards for Certain Large Insured National Banks..."—also require boards of banks subject to the guidelines to engage in heightened oversight.

    Wrongly labeled

    It is a misnomer to call them “guidelines.” They are enforceable rules. And by their adoption pursuant to OCC’s safety and soundness rule authority, banks are deprived of due process protections normally afforded them.

    The guidelines allow OCC to unilaterally impose a broad-based order on a bank that could govern entirely the risk management process in the bank (and the activities, services, and products of the bank) without any independent third-party review.

    This contrasts with alternative procedures under a different statute that would require OCC to prove in administrative court that an unsafe or unsound bank practice has occurred and that the remedy is appropriate. Under the alternative procedure, the administrative judge’s recommendation would then be reviewed by the Comptroller of the Currency, whose decision would be reviewed in a federal appeals court.

    The guidelines also can apply to any-sized national or federal savings bank if the Comptroller decides that they are at heightened risk or their operations are complex.

    They may also begin to be viewed by the banking agencies as “best practices” that might be applied informally to smaller banks—even state banks regulated by FDIC or Federal Reserve.

    This is the first time that federal banking agency rules specifically require bank boards to obtain formal training and conduct self assessments.

    The guidelines are an improvement over OCC’s proposed rules, which required bank directors who served at banks subject to the guidelines to assume certain management responsibilities over risk management. OCC did adopt a number of our suggestions in our comment letter on the proposed rules that would make it clear that bank boards should not assume management responsibilities.

    Click here to read the full article at www.bankingexchange.com. 

  • Blocking CAFA Remand: Lessons From A Prevailing Defendant
    November 17, 2014
    Robyn C. Quattrone, Dustin A. Linden & Stephen M. LeBlanc

    The Class Action Fairness Act[1] was designed, at least in part, to allow defendants to remove to federal court class actions strategically filed by plaintiffs in sympathetic state court jurisdictions. This newfound ability for defendants to have a say in which venue hears their case fundamentally changed the class action litigation landscape, creating a whole new set of procedures to learn and navigate — and with them, a whole new set of strategies to employ and hurdles to clear.

    Originally published in Law360; reposted with permission. 

  • Justices' Questioning in Jesinoski May Be Cause for Concern
    November 4, 2014
    Kirk Jensen, Sasha Leonhardt & Sara Ruvic

    Section 1635 of the Truth in Lending Act provides that a borrower may rescind certain mortgage loans within three days as a matter of right, and within three years if certain conditions are satisfied. The three-year extended rescission right applies only if a borrower does not receive certain material disclosures at loan closing.

    But what if the creditor disagrees with the borrower regarding whether the borrower qualifies for the extended rescission period? For several years, the circuit courts have been split on whether in such cases a borrower who has provided notice of rescission within three years must also file a lawsuit within that three-year period, or whether such a borrower may file a lawsuit even after the three-year period lapses. 

    To date, four other circuits agree with the Eighth Circuit’s position that rescission is only effective under TILA if the borrower files suit within three years of rescission. Three circuits, however, have held that a borrower need only provide notice to a creditor to rescind a loan transaction. On Nov. 4, 2014, the U.S. Supreme Court heard oral arguments in Jesinoski v. Countrywide to resolve this circuit split. In their questioning, the justices pressed counsel on whether the statutory text was clear and, if not, what steps a borrower must take to rescind.

    Originally published in Law360; reprinted with permission. 

Knowledge + Insights

  • Special Alert: CFPB Takes Enforcement Action Against "Buy-Here, Pay-Here" Auto Dealer for Alleged Unfair Collection and Credit Reporting Tactics
    November 20, 2014

    On November 19, the CFPB announced an enforcement action against a ‘buy-here, pay-here’ auto dealer alleging unfair debt collection practices and the furnishing of inaccurate information about customers to credit reporting agencies. ‘Buy-here, pay-here’ auto dealers typically do not assign their retail installment sale contracts (RISCs) to unaffiliated finance companies or banks, and therefore are subject to the CFPB’s enforcement authority. Consistent with the position it staked out in CFPB Bulletin 2013-07, in this enforcement action the CFPB appears to have applied specific requirements of the Fair Debt Collection Practices Act (FDCPA) to the dealer in its capacity as a creditor based on the CFPB’s broader authority over unfair, deceptive, or abusive acts practices.

    Alleged Violations

    The CFPB charges that the auto dealer violated the Consumer Financial Protection Act, 12 U.S.C. §§ 5531, 5536, which prohibits unfair, deceptive, or abusive acts or practices, by (i) repeatedly calling customers at work, despite being asked to stop; (ii) repeatedly calling the references of customers, despite being asked to stop; and (iii) making excessive, repeated calls to wrong numbers in efforts to reach customers who fell behind on their auto loan payments. Specifically, the CFPB alleges that the auto dealer used a third-party database to “skip trace” for new phone numbers of its customers. As a result, numerous wrong parties were contacted who asked to stop receiving calls. Despite their requests, the auto dealer allegedly failed to prevent calls to these wrong parties or did not remove their contact information from its system.

    In addition, the CFPB alleges that the auto dealer violated the Fair Credit Reporting Act by (i) providing inaccurate information to credit reporting agencies; (ii) improperly handling consumer disputes regarding furnished information; and (iii) not establishing and implementing “reasonable written policies and procedures regarding the accuracy and integrity of the information relating to [customers] that it furnishes to a consumer reporting agency.” Specifically, the CFPB alleges that, since 2010, the auto dealer did not review or update its written furnishing policies, despite knowing that conversion to its third-party servicing platform had led to widespread inaccuracies in furnished information. Also, the consent order alleges that the auto dealer received more than 22,000 credit disputes per year, including disputes regarding the timing of repossessions and dates of first delinquency for charged-off accounts, but nevertheless furnished inaccurate information.


    The consent order requires the auto dealer to (i) end its alleged unfair collection practices; (ii) provide collection options to customers explaining how customers can limit the times of day that the auto dealer can contact them; (iii) provide affected customers with a free annual credit report from one or more of the credit reporting agencies which received inaccurate information; and (iv) pay an $8 million dollar civil money penalty.

    Further, the auto dealer must (i) cease reporting inaccurate repossession information; (ii) correct inaccurate credit reporting information; (iii) implement an audit program to assess the accuracy of information furnished to credit reporting agencies on at least a monthly basis; and (iv) retain an independent consultant to review the auto dealer’s collection and furnishing policies, procedures, and practices and then implement any recommendations or explain in writing why it is not implementing a particular recommendation.

    CFPB’s Continued Focus on Auto Finance

    This action is the latest CFPB enforcement effort in connection with auto finance. In August, the CFPB fined a Texas auto finance company $2.5 million for allegedly failing to have reasonable policies and procedures regarding the accuracy and integrity of customer information furnished to the credit reporting agencies. This action also comes on the heels of the CFPB’s October proposed rule defining the larger participants of the automobile financing market. The comment period on the proposed rule ends December 8th. We anticipate additional CFPB auto finance-related actions as its authority expands.

  • Digital Insights & Trends: "Digital Assets"...or Liabilities?
    November 18, 2014
    Margo Tank

    Delaware’s Fiduciary Access to Digital Assets and Digital Accounts Act (H.B. 345) makes Delaware the latest state to regulate access to “digital assets” after death. Unless the account-holder instructs otherwise, legally appointed fiduciaries will: (1) have the same access to digital assets as they have always had to tangible assets, and (2) the same duty to comply with the account-holder’s instructions. In short, the personal representative or guardian of a digital account-holder can access the emails, documents, audio, video, images, social media content, computer programs, software licenses, usernames and passwords created on the deceased’s digital devices or stored electronically. This access could be very helpful, or extremely problematic, depending on what the digital records reveal.

    Those whose digital data has monetary value, or who do business electronically or through social media should consider digital asset directives in their estate plans, because the terms of service for most online accounts (including Facebook and Yahoo) preclude third party access. Without directives, the prospects could be dim for a blog with embedded advertising if the creator dies and no one else has access to keep the blog going. A social media creator’s intellectual property (blog post content, YouTube videos) can also be valuable, as proved by blogs that became successful books and short videos that spawned movies or advertisements; Adam Sandler is making a movie based on a 2-minute YouTube video. Online gaming items and digital currency like Bitcoin also have monetary value, which is locked up unless someone has access to the deceased’s accounts. For digital data with money value, then, a digital asset estate plan makes sense, and laws like Delaware’s fill the gaps for those who don’t create one.

    But when a deceased’s digital data is highly personal, digital access laws do raise privacy concerns. People use email and social media accounts to reveal themselves only to (what they hope will be) a limited audience. Social media serves some users like the diaries of old, where privacy settings take the place of the little locks and keys. When a personal representative or guardian can access this data, sensitive information is revealed and there’s nothing the deceased can do about it.

    The purpose of “digital access” laws, of course, is to make things easier, not harder or more emotionally wrenching for survivors. However, the law leaves a healthy number of open questions:

    • Does it cover bank accounts? Will national banks be exempt?
    • What is the custodian’s legal exposure if the custodian doesn’t have the necessary passwords for access to the account or to un-encrypt documents, because of the way the custodian’s security systems work?
    • Will the inclusion of agents under durable powers of attorneys, combined with the custodian’s right to rely on the durable power without inquiry, create a new open door to family fraud?
    • How long does the custodian have to hold the records that may be requested?
    • Is the statute worded so that custodians can get the account-holders prior agreement to “opt out”?  And if so, will an “opt out” become standard boilerplate in custody agreements?  Or, will custodians conclude it is better to let the statute operate because the custodian has virtually no due diligence obligation when complying?
    • What about safekeeping agreements that call for automatic destruction of the records upon closing of the account?  Is there an obligation to retrieve the records if they still exist on backup tapes?

    Stay tuned.

  • Special Alert: Lessons Learned from Arab Bank's U.S. Anti-Terrorism Act Verdict
    October 22, 2014

    On September 22, 2014, following a two-month trial, a federal jury in the Eastern District of New York ruled in favor of a group of 297 individual plaintiffs in a civil suit accusing Arab Bank PLC, headquartered in Amman, Jordan, of supporting terrorism. Linde vs. Arab Bank PLC, No. 1:04-CV-2799 (E.D.N.Y. filed July 2, 2004).

    In summary, the plaintiffs alleged that Arab Bank was liable under the U.S. Anti-Terrorism Act, 18 U.S.C. § 2331, et seq. (the “ATA”), for the deaths and/or severe injuries resulting from acts in international terrorism that occurred between 2001 and 2004, because the bank had processed and facilitated payments for Hamas and other terrorist or terrorist-related organizations, their members, the families of suicide bombers, or Hamas front organizations.

    What this means for financial institutions, particularly foreign banks that increasingly face the potential reach of U.S. laws and plaintiffs, remains to be seen. But there are three take-aways worthy of immediate consideration.

    Click here to view the full special alert.