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On February 23, the FTC announced a proposed settlement with a global online payments system company (company) to resolve a complaint filed in 2016 concerning allegations that its payment and social networking service (service) violated the FTC Act when it, among other things, failed to adequately disclose to consumers that transfers to external bank accounts were subject to review and that funds could be frozen or removed based on a review of the underlying transaction. According to FTC allegations, many consumers who relied on notifications from the service that funds were available for transfer found themselves unable to pay rent or other bills. In some instances, the service reversed transactions after initially notifying consumers the funds were available. Additionally, the service allegedly violated the Gramm-Leach-Bliley Act’s Privacy and Safeguard Rules (GLBA Rules) by misleading consumers about protections for their accounts when it claimed to use “bank-grade security systems” and failed to have a written security program or implement basic security safeguards. As a result, the FTC claims unauthorized users were able to, in certain cases, withdraw funds from consumer accounts or change passwords and/or associated email addresses without consumers being notified.
Under the proposed settlement, the company—which did not admit or deny liability and is not required to pay a fine—has agreed that it will not misrepresent any material restrictions on the use of its service, the extent of control provided by any privacy settings, and the extent to which it “implements or adheres to a particular level of security.” The company will also, among other things, make certain disclosures to consumers about its transaction and privacy practices, obtain biennial third-party assessments of its compliance with these rules for 10 years, and refrain from violating any provisions of the GLBA Rules.
On February 12, the Securities Exchange Commission (SEC) announced that it reached an agreement with an international bank and its former head trader for allegedly selling commercial mortgage-backed securities (CMBS) to customers by using false and misleading statements. The bank has agreed to repay more than $3.7 million to the affected customers According to the order, the bank misled customers about the original purchase price of the CMBS and failed to institute proper compliance and surveillance procedures in order to detect and prevent the misconduct. Additionally, the order states that the bank’s former head trader failed to properly supervise the traders making the allegedly false statements and failed to take appropriate action when he became aware of the statements.
In addition to the customer repayment, the bank has agreed to pay a $750,000 civil money penalty to the SEC, while the former head trader has agreed to a $165,000 civil money penalty and a 12-month suspension from the securities industry. According to the SEC, the settlement amounts reflect substantial cooperation by both parties during the investigation and remedial efforts taken by the bank to improve surveillance and compliance controls. Both parties consented to the order without admitting or denying the findings.
On February 7, Virginia’s Attorney General, Mark R. Herring, announced a $2.7 million settlement with a Virginia affiliate of a New York-based internet lender to resolve alleged violations of the Virginia Consumer Protection Act (VCPA). According to the announcement, between January 2017 and July 2017, the online lender (i) offered installment loans with interest rates as high as 359 percent without qualifying for an exception to the state’s 12 percent interest cap; (ii) falsely claimed it was licensed by Virginia’s Bureau of Financial Institutions; and (iii) charged state residents an unlawful check-processing fee of $15 for payments made by check on closed-end installment loans. The attorney general’s office stated that the settlement requires the lender to disgorge more than $2 million in illegal interest payments received, provide over $300,000 in refunds to affected state consumers, and pay the state $30,000 in civil money penalties, costs, and fees. The settlement also contains a permanent injunction that prohibits the lender from misrepresenting its status as a licensed Virginia lender.
On February 7, the OCC and DOJ announced settlements with a Netherlands-based lender’s California branch, in which the branch pled guilty to one count of conspiracy to defraud the U.S. Government for impeding and obstructing a 2012 OCC examination when it concealed deficiencies in its Bank Secrecy Act and anti-money laundering (BSA/AML) compliance programs. According to the DOJ’s press release, the branch will pay over $368 million as a result of allowing “hundreds of millions of dollars in untraceable cash, sourced from Mexico and elsewhere, to be deposited into its rural bank branches” without conducting adequate BSA/AML review, and for conspiring with several former executives to hide information from OCC officials during the 2012 examination. Among other things, the plea agreement states that the branch “created and implemented a number of policies and procedures that prevented adequate investigations into suspicious customer activity,” which included (i) creating a “Verified List” of customers whose transactions needed no further review even if there was a change in the customer’s activity from when it was verified; and (ii) instructing BSA/AML staff to “aggressively increase the number of bank accounts on the Verified List.” Further, the branch admitted it failed to both monitor and conduct adequate investigations into these transactions and submit suspicious activity reports to the Financial Crimes Enforcement Network, as required by the BSA. Additionally, in an effort to conceal deficiencies in its BSA/AML program, the branch demoted or terminated two employees who risked “contradicting” the branch’s findings. Two months before the branch's guilty plea, a former executive entered into a deferred prosecution agreement for his role in the misconduct, and agreed to cooperate with the DOJ's continuing investigation.
As part of the plea agreement, the OCC announced it had terminated a December 2013 consent order entered into with the branch over its BSA/AML failures and stated, “the OCC has determined that the bank has implemented all of the corrective actions required by the 2013 consent order and has achieved compliance with the requirements set forth in that order.” On February 6, the branch agreed to pay $50 million civil money penalty to the OCC, which will be credited towards the overall amount assessed by the DOJ.
CFTC reaches spoofing settlements with banks; joint investigation with DOJ leads to civil and criminal charges against traders
On January 29, three global banks agreed to pay a combined $46.6 million fine to settle civil allegations by the Commodity Futures Trading Commission (CFTC) that their traders engaged in a practice known as spoofing to manipulate futures markets, which involves placing bids or offers with the intent to cancel before execution. While neither admitting nor denying any wrongdoing in connection with the settlements, the banks agreed, among other things, to pay the fines, maintain controls in order to detect and prevent spoofing among traders, and implement new training programs. As part of a larger investigation conducted by the CFTC and the criminal divisions at the DOJ and FBI, the CFTC stated within the same announcement that civil enforcement actions were filed against six individuals for alleged spoofing violations. Additionally, according to a press release issued the same day, the DOJ announced criminal charges against eight individuals who allegedly participated in various deceptive trading practices, including the six traders named in the CFTC’s civil complaints. The DOJ alleged the defendants’ spoofing trades were designed to defraud individuals and entities by artificially depressing or inflating the prices of futures contracts traded on several exchanges.
On January 5, the Supreme Court dismissed a servicemember’s petition for a writ of certiorari after receiving a Stipulation of Dismissal from both parties who agreed to settle the dispute. As previously covered by InfoBytes, the servicemember filed the petition after the U.S. Court of Appeals for the Fourth Circuit affirmed the lower court’s decision that the servicemember was not entitled to the protections against non-judicial foreclosures under the Servicemembers Civil Relief Act (SCRA). The lower court concluded that because the servicemember “incurred his mortgage obligation during his service in the Navy, the obligation was not subject to SCRA protection” even through the servicemember, after a discharge period, later re-enlisted with the Army.
On January 5, the U.S. Government reached a $5 million settlement with a national bank and its affiliates (together, the bank parties) to resolve a lawsuit concerning allegations that the bank parties violated the False Claims Act (FCA) by engaging in improper foreclosure-related practices. The settlement is not an admission of liability by the bank parties. Specifically, as previously covered in InfoBytes, the lawsuit primarily alleged that the bank parties knowingly used rubber-stamped surrogate signed endorsements and false mortgage assignments to support false claims for mortgage insurance from the Federal Housing Administration. The lawsuit also asserted a reverse FCA claim alleging that the bank parties made false statements when entering into the 2012 National Mortgage Settlement. The U.S. Government, the bank parties, and the relator who initially brought the suit stipulated to the dismissal with prejudice concerning 39 “Implied Certification and False Statement Claims,” along with all claims brought or that could have been brought by the relator, but without prejudice as to any other claims that could be brought by the U.S. Government. Under the terms of the settlement agreement, the bank parties are required to pay $3.4 million to the U.S. Government—$891,000 of which will be paid to the relator who originally brought the suit. In addition, the bank parties will pay the relator an additional $1.6 million in attorneys’ fees and litigation costs and expenses.
On December 22, the California Attorney General announced a $125 million settlement with an international bank to resolve allegations of misrepresentations while selling residential mortgage-backed securities to California’s public employee and teacher pension funds. According to Attorney General Xavier Becerra’s office, an investigation found that descriptions of the RMBS “failed to accurately disclose the true characteristics of many of the underlying mortgages” to the state investors. Additionally, the international bank allegedly failed to adequately perform due diligence checks to remove poor quality loans from the investment pool, leading to millions of dollars of loss to the pension funds.
On December 21, the New York Department of Financial Services (NYDFS) entered into a consent order with a Korean bank and its New York branch to resolve issues regarding alleged deficiencies in the branch’s Bank Secrecy Act and other anti-money laundering (BSA/AML) compliance and risk management. The alleged deficiencies were discovered during three examinations between 2014-2016 by NYDFS and the Federal Reserve Bank of New York. According to the consent order, among other things, the branch failed to maintain adequate transaction monitoring and suspicious activity reporting (SAR), lacked compliance staff with proper BSA/AML background experience, and lacked adequate BSA/AML and OFAC risk assessments.
The Korean bank and its branch are required to pay an $11 million civil money penalty, and in addition must submit the following documentation (i) a BSA/AML compliance program; (ii) a customer due-diligence program; (iii) a SAR program; (iv) a revised internal audit program; and (v) a plan to enhance oversight of the branch’s BSA/AML compliance requirements. The Korean bank and branch are also required to submit quarterly reports for two years with updates on the branch’s compliance progress.
California Department of Business Reaches $1.1 Million Settlement With South Carolina-Based Mortgage Lender and Servicer
The California Department of Business Oversight (DBO) announced on December 11 that it had reached a $1.1 million settlement with a South Carolina-based mortgage lender and servicer to resolve allegations that the company (1) violated California’s statutory restriction on per diem interest and (2) serviced loans without a California license. This settlement marks the second time in five years that examiners discovered alleged per diem overcharges in the company’s loans. Under California law, lenders are prohibited from charging interest on mortgage loans prior to the last business day that immediately precedes the day the loan proceeds are disbursed. In addition, it is a violation of state law to service residential mortgage loans without obtaining proper licensure.
According to the terms of the settlement—which resolves violations identified during a 2016 supervisory examination—the company must: (i) refrain from loan servicing activities until licensed by the state; (ii) pay $1 million in penalties to DBO for past violations; (iii) pay $125 for each additional violation identified by an independent audit of its loan originations; and (iv) issue per diem interest refunds totaling more than $141,000 to at least 1,347 borrowers. The company has also agreed to revise its policies and procedures to prevent future violations of California law.
- Valerie L. Hletko to discuss "Forecasting litigation and settlement trends in the mortgage servicing and fair lending context" at the American Conference Institute National Forum on Residential Mortgage Regulatory Enforcement & Litigation
- Michelle L. Rogers and Jonice Gray Tucker to discuss “Building a govt affairs program; Government investigations” at the TechGC National Summit
- Tina Tchen to deliver keynote address at the American Bar Foundation Montgomery Summer Research Diversity Fellowship 30th Anniversary Celebration
- Douglas F. Gansler to discuss "Privacy, security and protection of your assets in contracts; Security exercises and tactical measures" at the TechGC National Summit
- H Joshua Kotin will discuss federal regulatory developments in mortgage lending and servicing at the Mortgage Bankers Association of Arkansas Fall Conference
- Kate Shrout to discuss "Conducting workplace investigations" at the TechGC National Summit
- Kathryn R. Goodman to discuss "HECM servicing policies and updates" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Fredrick S. Levin to discuss "Reverse mortgage litigation trends" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Melissa Klimkiewicz to speak at the "Digital marketing compliance roundtable" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Hank Asbill to discuss "The role of the media in white collar criminal investigations and the Mueller probe" at the American Bar Association White Collar Crime Town Hall
- John C. Redding to discuss "Regulatory compliance update" at PowerSports Finance
- Matthew P. Previn to discuss "Enforcement trends: Who is doing what and how?" at the Cambridge Forums Inc. Forum on Consumer Finance Litigation & Enforcement
- Jonice Gray Tucker to discuss "Protect yourself from a CFPB investigation" at the National Association of Settlement Purchasers Conference
- Tina Tchen to deliver keynote address at the American Bar Association Professional Success Summit
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "New CDD Rule: Pitfalls in compliance" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference