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FDIC Announces New Regulatory Actions Against Florida-based Bank
On December 30, the FDIC announced new regulatory actions against a Florida-based bank. Along with the Florida Office of Financial Regulation, the FDIC issued a new Consent Order against the $121.5 million-asset bank, based on allegations that the bank had engaged in “unsafe or unsound” banking practices, or practices which constituted a violation of law or regulation in the following areas: (i) weakness in asset quality, (ii) capital adequacy, earnings, (iii) management effectiveness, (iv) liquidity, (v) sensitivity to market risk, and (vi) compliance with the Bank Secrecy Act (BSA).
Among other things, the Order notes that the bank currently falls short of FDIC requirements for qualifying as “well capitalized,” qualifying merely as “adequately capitalized,” and therefore must boost its capital levels or face continued restrictions on its operations. The Order also states that the bank—which consented to the Order without admitting or denying the charges—now has 120 days to meet its capital requirements and 60 days to submit a capital plan to both: (i) achieve and maintain the capital requirements; and (ii) provide for a contingency plan to sell or merge the bank.
FINRA Fines Brokerage Firm $5.75M for Lax Anti-Money Laundering Program
On December 28, FINRA entered into an acceptance, waiver, and consent (AWC) agreement with a Puerto-Rican-based brokerage firm based upon allegations that the firm’s anti-money laundering (AML) program “was not reasonably designed to achieve and monitor compliance with the requirements of the Bank Secrecy Act.” In deciding to levy a $5.75 million fine, FINRA noted, among other things, that the firm improperly “relied on manual supervisory review of securities transactions” that was “not sufficiently focused on AML risks.” The firm neither admitted nor denied the findings set forth in the AWC agreement, but agreed to address deficiencies in their AML program within 180 days. According to a firm spokeswoman, the firm is “pleased to have this matter from 2013 resolved and we continue to improve, manage and monitor our AML efforts.”
FTC Files Complaint Against Device Maker Concerning Alleged Failures to Reasonably Secure Routers and Internet Protocol (IP) Cameras
On January 5, the FTC announced that it was initiating and enforcement action against a Taiwanese computer networking equipment manufacturer and its U.S. subsidiary. In a complaint filed with the Northern District of California, the FTC charged that the device-manufacturer failed to take reasonable steps to secure its routers and Internet Protocol (IP) cameras, potentially compromising sensitive consumer information, including live video and audio feeds from D-Link IP cameras. Specifically, the FTC alleged that hackers could exploit these vulnerabilities using any of several “simple methods.”
According to its press release, the complaint filed today is part of broader FTC’s efforts to protect consumers’ privacy and security in the “Internet of Things” (IoT), which includes cases the agency has brought against a computer hardware manufacturer, and a marketer of video cameras. In a statement, Jessica Rich, director of the FTC’s Bureau of Consumer Protection, explained “[h]ackers are increasingly targeting consumer routers and IP cameras -- and the consequences for consumers can include device compromise and exposure of their sensitive personal information.” Accordingly, Ms. Rich explained further, “[w]hen manufacturers tell consumers that their equipment is secure, it’s critical that they take the necessary steps to make sure that’s true.” The FTC has provided guidance to IoT companies on how to preserve privacy and security in their products while still innovating and growing IoT technology.
PHH v CFPB Update: PHH and U.S. Solicitor General Respond to CFPB's Petition for En Banc Review
On December 22, PHH filed its brief opposing the CFPB’s petition for en banc review of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. PHH argued that the case is not worthy of review by the full D.C. Circuit because, although the majority of the panel determined that the CFPB’s structure violated the constitutionally-mandated separation of powers, that “conclusion, which horrifies the CFPB, simply means that an agency of the Executive Branch will be answerable to the Chief Executive.” With respect to the panel’s unanimous decision that the CFPB incorrectly interpreted RESPA, PHH argued that en banc review is inappropriate because, among other reasons, the D.C. Circuit could not side with the CFPB without “creat[ing] a circuit split with every other court to have considered the proper scope of RESPA.”
At the invitation of the D.C. Circuit, the U.S. Solicitor General also filed its brief later the same day. While the Solicitor General supported the CFPB’s petition for en banc review of the constitutional question, it also suggested that, consistent with Judge Henderson’s dissent from the panel opinion, the full D.C. Circuit could simply vacate the CFPB’s order against PHH on the grounds that the Bureau misinterpreted RESPA. Doing so, the Solicitor General notes, would be consistent with the “well-established principle … that normally the Court will not decide a constitutional question if there is some other ground upon which to dispose of the case.” This ruling would vacate the panel majority’s conclusion that the CFPB’s structure was unconstitutional, although the Solicitor General noted that PHH could renew its constitutional challenge if the CFPB continues to pursue the case on remand.
With respect to the separation of powers question itself, the Solicitor General argued that en banc review is warranted because the majority departed from the analysis used by the Supreme Court to decide such questions. Specifically, the Solicitor General suggests that the panel majority erred by concluding “that an agency with a single head poses a greater threat to individual liberty than an agency headed by a multi-member body that exercises the same powers,” noting that the President’s authority over the multi-member FTC was similarly limited and the FTC enjoyed similar powers at the time the Supreme Court upheld its constitutionality.
Finally, after the filing of the Solicitor General’s brief, PHH requested permission to file an additional brief on the grounds that the Solicitor General had raised arguments not presented in the CFPB’s petition.
For additional background, please see our summaries of the panel decision, the CFPB's petition for rehearing, and the D.C. Circuit’s order directing PHH to respond and the Solicitor General to provide views.
US Court Rejects DocuSign e-Signatures as Method to Provide Digital Authorization
Back in July, the United States bankruptcy court for the Eastern District of California held that under its local rules, an attorney submitting electronically signed documents for filing with the court must maintain an originally signed document in paper form bearing a “wet” signature. In re Mayfield, No. 16-22134-D-7, 2016 WL 3958982 (U.S. Bankr. Ct. E.D. Cal.). The United States Trustee (UST) filed a motion for sanctions against a debtor’s attorney who used the an electronic signature platform to have the debtor execute certain documents that were subsequently filed with the court. The court’s local rules 9004-1(C) and (D) provide that if these documents were executed with a “software-generated electronic signature,” the submitting attorney is required to maintain “an originally signed document in paper form” and produce it upon request by the UST. When asked by the UST to produce the original signed versions of the documents he filed, the debtor’s attorney was unable to do so. In response to the motion, the debtor’s attorney argued that the requirements of 9004-1(C) and (D) did not apply because the electronic signatures were manually created by the debtor’s actions taken on the electronic signature platform. As such, they were not “software-generated electronic signatures” within the meaning of the rule, and under the federal ESIGN Act constituted “original” signatures.
Ultimately, the court held that: (i) the ESIGN Act was not applicable because of the express exemption for court rules at 15 USC § 7003(b)(1), thereby permitting the court to establish and interpret its own rules with respect to electronic signatures, (ii) the electronic signatures created using the platform were within the meaning of the term “software-generated electronic signature” under the local rules, and (iii) the local rule’s reference to “an originally signed document in paper form” required the attorney to also maintain a copy of the document bearing a “wet ink” signature. Accordingly, the Court granted the UST’s motion and, as the sanction imposed, required the debtor’s attorney to certify completion of the court’s online e-filing training course.
Shaw v. United States - Supreme Court Holds That Fraud Against Customer Can Be Fraud Against Bank
In Shaw v. United States, No. 15-5991 (Dec. 12, 2016), the Supreme Court ruled 8-0 that Lawrence Eugene Shaw had defrauded a national bank when he used a customer’s personal details to transfer more than $275,000 from that bank’s customer’s account to his own PayPal account. In an opinion written by Justice Breyer, the Court rejected Shaw’s arguments that the conviction was inappropriate because prosecutors could not prove that Shaw intended to defraud the bank. The Court held, among other things, that: (i) the bank had a property interest in the customer’s deposits; (ii) the defendant’s ignorance of the application of property laws to bank deposits was not a defense; and (iii) the bank fraud statute does not require the government to prove that the defendant intended that the bank would suffer a loss; rather, his knowledge that the bank likely would suffer a loss was sufficient.
Despite this finding, the Supreme Court ultimately vacated the Ninth Circuit’s decision affirming the conviction and remanded it to the appellate court for consideration of whether a claimed defect in the jury instructions was properly preserved for appeal, whether the instructions were defective, and whether any resulting error was harmless.
FINRA Fines Credit Suisse over Anti-Money Laundering Policies
In a December 5 press release, FINRA announced that it has fined Credit Suisse Securities (USA) LLC $16.5 million for anti-money laundering (AML), supervision and other violations. FINRA’s determination and penalty were based primarily on two deficiencies in the investment bank’s suspicious activity monitoring program. First, Credit Suisse relied too heavily on its registered representatives “to identify and escalate potentially suspicious trading, when, in practice, such high-risk activity was not always escalated and investigated, as required.” And, second, FINRA found that the firm failed to properly implement its automated surveillance system to monitor for potentially suspicious money movements.
Jury Finds Mortgage Company and CEO Liable for Fraud; Awards $92 Million in Damages
A federal jury has ordered two Texas-based home mortgage entities and their chief executive to pay nearly $93 million for defrauding the U.S. government into insuring thousands of risky loans, the Department of Justice announced on November 30.
The mortgage companies and their former CEO were found liable for violating the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) by, among other things, failing to maintain an adequate quality control program; and submitting false annual certifications regarding quality control requirements. Specifically, the government contended that defendants operated over 100 “shadow” branch offices that originated FHA-insured mortgage loans without obtaining the necessary HUD approval, and which were therefore not subject to HUD oversight.
Ultimately, the jury awarded $92,982,775 in total damages, including $7,370,132 against the CEO specifically—a sum that is subject to mandatory tripling. Further penalties relating to the FIRREA violations are expected, which U.S. District Judge George Hanks will set at a later date.
ABA Sues Credit Union Regulator Over Field of Membership Rule
On December 7, the American Bankers Association (ABA) filed a lawsuit in federal court seeking to overturn a final rule published by the National Credit Union Administration (NCUA) in that morning’s Federal Register. The final rule purports to “implement changes in policy affecting: The definition of a local community, a rural district, and an underserved area; the chartering and expansion of a multiple common bond credit union; the expansion of a single common bond credit union that serves a trade, industry or profession; and the process for applying to charter, or to expand, a federal credit union.”
ABA’s law suit contends, among other things, that by “fail[ing] to adhere to the limitations on federal credit unions established by Congress,” the NCUA’s final rule “upsets the balance Congress struck between granting federal credit unions tax-favored status and limiting their operations to carefully circumscribed groups or localities that share a common bond.” Under the final rule, scheduled to take effect Feb. 6, Federal Credit Unions (FCUs) can apply to serve entire geographic regions, so-called “rural districts” up to 1 million people (which include the entirety of Alaska, North Dakota, South Dakota, Vermont or Wyoming), and areas contiguous to their existing service areas. NCUA is also facilitating easier conversions to community charters.
Mortgage Companies Penalized for Deceptive Reverse Mortgage Ads; Must Take Corrective Action
On December 7, the CFPB announced that it had entered into consent orders with three reverse mortgage companies to settle claims that their advertisements for those mortgages were deceptive under the Mortgage Acts and Practices Advertising Rule. The alleged misconduct included deceptive advertising campaigns that misrepresented, among other things: (i) the risk of losing home and the right to remain in the home; (ii) expected costs and mortgage payments; (iii) government affiliations of the mortgage company; and (iv) the effectiveness of a reverse mortgage credit product to eliminate debt.
The consent orders require the companies to make clear and prominent disclosures in their reverse mortgage advertisements and implement systems to ensure they are following all laws. One of the three firms also cannot imply affiliation with the government and must maintain complete and accurate records. In addition, the consent orders impose civil penalties ranging from $65,000 up to $400,000.