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Federal Reserve Board Finalizes Rule Allowing Debit Fraud-Prevention Adjustments
On July 27, the Federal Reserve Board issued a final rule that amends Regulation II. The rule allows a debit issuer that is subject to the interchange fee standards to charge—in addition to interchange fees—a fraud-prevention fee to defray costs associated with implementing policies and procedures that reduce fraudulent electronic debit transactions. The fee cannot exceed one cent per transaction, unchanged from the Federal Reserve’s interim final rule on this issue. The final rule details fraud-prevention program requirements that an issuer must meet in order to charge the fee. An issuer charging such a fee must annually review and update its fraud-prevention program and notify its payment card networks that it complies with the rule’s fraud prevention standards. The rule takes effect October 1, 2012.
Bank Officers Charged With Concealing Nonperforming Assets
On July 11, four former bank officers and two of their former customers were indicted in the U.S. District Court for the Eastern District of Virginia on eighteen counts of fraud. Indictment, United States v. Woodard, No. 12-105 (E.D. Va.). The indictment alleges that in the run-up to the financial crisis, the bank more than doubled its assets primarily through brokered deposits, while the directors administered a lending program that violated industry standards and the bank’s internal controls. In connection with the financial crisis, the indictment states, the bank’s loan portfolio deteriorated and the directors conspired to conceal the institution’s financial condition. Ultimately, the bank failed, leaving the federal government insurance fund to cover approximately $260 million in deposits, the indictment claims. In addition to the criminal charges, the U.S. Attorney is seeking forfeiture of the defendants’ assets. Other bank officers, employees, and customers already have pled guilty to related charges.
DOJ Finalizes Settlement Over Bank's Mortgage Lending Practices
On July 12, the DOJ announced a settlement with a national bank to resolve allegations that the bank engaged in a pattern or practice of discrimination against qualified African-American and Hispanic borrowers in its mortgage lending from 2004 through 2009. Pursuant to a consent decree awaiting approval by the U.S. District Court for the District of Columbia, the bank will pay $125 million in compensation to wholesale borrowers who, the DOJ alleges, were steered into subprime mortgages or who paid higher fees and rates because of their race or national origin, and $50 million in direct down payment assistance to borrowers in communities identified by the DOJ as having large numbers of discrimination victims. In addition to the combined $175 million payment, the bank also agreed to separately compensate individual African-American and Hispanic borrowers identified through an internal review of its retail mortgage lending operations. Finally, the agreement will subject the bank to other compliance, training, recordkeeping, and monitoring requirements. In addition to resolving the federal allegations, the consent decree resolves a fair lending suit based on similar allegations brought by the Illinois Attorney General. The DOJ’s Fair Lending Unit in the Civil Rights Division’s Housing and Civil Enforcement Section worked with the U.S. Attorney’s Office for the District of Columbia and the Illinois Attorney General to obtain this agreement. The Fair Lending unit was established in 2010, and since that time has filed a complaint in or resolved 19 matters, a pace far surpassing that of previous years. This matter also is the most recent to be concluded under President Obama’s Financial Fraud Enforcement Task Force, an interagency effort to investigate and prosecute financial crimes.
State Law Update: Oklahoma, Georgia, New York
Oklahoma Updates Uniform Consumer Credit Code. On May 1, Oklahoma enacted House Bill 2742, which amends the state’s Uniform Consumer Credit Code. The bill increases the dollar threshold for transactions exempt from the Code from $45,000 to $50,000 and requires that the threshold be adjusted annually henceforth. With regard to mortgages particularly, the bill (i) expands the language required to be included in the disclosure statement, (ii) requires that the creditor mail the disclosure statement at least seven business days before the transaction, and (iii) requires the creditor to send a new statement at least three days before closing if the interest rate changes. It further requires that (i) a consumer cannot be charged any fee prior to receipt of the statement, except for a fee to obtain a credit report; and (ii) a consumer can waive the disclosure statement timing requirements. The law also increases the penalties for violations of the mortgage disclosure statement or right to rescind rules and requires that, within 30 days of the sale or transfer of a mortgage loan, the new creditor must notify the borrower that the loan has been transferred and provide contact and other relevant information.
Georgia Enacts Mortgage-Related Bills. On May 1, Georgia enacted two mortgage-related bills. House Bill 110 permits local jurisdictions to create vacant and foreclosed property registries and establishes uniform requirements for such registries. The law takes effect July 1, 2012. House Bill 237 expands the state’s mortgage fraud law to cover the foreclosure process.
New York Extends Temporary Mortgage Servicer Rules. On May 2, the New York Department of Financial Services published an extension of its emergency rules to implement the 2008 Mortgage Lending Reform Law. The rules will remain in effect through July 11, 2012, unless further extended or permanently adopted.
FinCEN Reports Increased Mortgage Fraud SARs
On April 23, the Financial Crimes Enforcement Network (FinCEN) released an update on mortgage loan fraud suspicious activity reports (SARs) for 2011. The report indicates that mortgage fraud SARs increased 31 percent in 2011 compared to 2010, a spike that FinCEN states is directly attributable to mortgage repurchase demands and special filings generated by several institutions. Based on a sample analysis, FinCEN found that in 40 percent of cases resulting in a SAR, the institution turned down the subject’s loan application, short sale request, or debt elimination because of the suspected fraud, indicating improvement in mortgage lending due diligence. Among other things, the report highlights short sales, appraisals, and identity theft as new fraud patterns in 2011 SARs.
Ohio Enacts Cyber Fraud Enforcement Legislation
On March 9, Ohio Governor Kasich signed SB 223, which will give the Ohio Attorney General the authority investigate suspected cyber fraud cases, and to subpoena phone records, IP addresses, payment information, and witness testimony when the AG has reasonable cause to believe that a person or enterprise has engaged in, is engaging in, or is preparing to engage violations of state cyber fraud laws. The bill also alters the thresholds for determining the severity of cyber fraud charges, creating a new charge of first degree felony for frauds involving $1 million or more. The changes will take effect on June 7, 2012.
Jury Convicts Stanford on Ponzi Scheme Charges
On March 6, a federal jury in the U.S. District Court for the Southern District of Texas convicted Allen Stanford on thirteen of fourteen fraud counts for orchestrating a major Ponzi scheme. U.S. v. Stanford, No 09-00342 (S.D. Tex. Mar. 6, 2012). The jury found that, over the course of twenty years, Mr. Stanford and others at his firm, Stanford International Bank Ltd., misappropriated $7 billion in certificates of deposit purchased by investors. The jury subsequently found that $330 million sitting in various frozen accounts controlled by Mr. Stanford could be pursued as proceeds from the scheme. The court has set June 14, 2012 as the sentencing date, following which Mr. Stanford plans to appeal the conviction.
FFETF Launches Federal-State Financial Fraud Consumer Protection Working
On February 10, the Financial Fraud Enforcement Task Force (FFETF) launched the Consumer Protection Working Group, which is charged with coordinating federal and state law enforcement and regulatory efforts to address consumer financial fraud, including fraud targeting unemployed persons, students, active-duty military personnel and veterans. The group is co-chaired by Assistant Attorneys General Tony West and Lanny Breuer, U.S. Attorney for the Central District of California André Birotte, Director of the FTC Bureau of Consumer Protection David Vladek, and CFPB Director of Enforcement Kent Markus. The Department of Justice’s press release states that meeting participants set priorities for the group as it seeks to address fraud in (i) payday lending, (ii) high-pressure telemarketing and Internet scams, (iii) business opportunity schemes, (iv) for-profit colleges, and (v) third-party payment processors. The meeting also addressed plans to establish a best-practices tool kit, policy initiatives (including legislative and regulatory proposals), and an information-sharing structure for Working Group participants.
U.S. Sentencing Commission Proposes Harsher Sentences for Securities and Mortgage Fraud
On January 19, the U.S. Sentencing Commission proposed more severe sentencing guidelines for certain securities and mortgage fraud violations. The proposal implements two directives of the Dodd-Frank Act, which require the Commission to re-evaluate penalties in cases involving (i) securities fraud and similar offenses, and (ii) mortgage fraud and financial institution fraud. Generally, the Commission seeks comment on whether the current guidelines appropriately account for potential and actual harm to the public and financial markets from securities, mortgage, and financial institution fraud. With regard to securities fraud, the Commission proposes amendments to address sophisticated insider trading and frauds conducted by individuals holding certain positions of trust. In addressing the mortgage fraud directive, the Commission proposes changes to the calculation of loss in cases of a fraud involving a mortgage loan, including that (i) the loss should be determined by the amount recovered from the foreclosure sale where the collateral has been disposed of at a foreclosure sale; and (ii) reasonably foreseeable administrative costs to the lending institution associated with foreclosing on the mortgaged property may be included as reasonably foreseeable pecuniary harm provided that the lending institution exercised due diligence in the initiation, processing, and monitoring of the loan and the disposal of the collateral. Finally, with regard to more general financial institution fraud, the proposal seeks to provide an enhancement for offenses involving specific financial harms, such as jeopardizing the financial institution. The deadline for written public comments regarding the proposed amendments is March 19, 2012.
SEC Announces Change to Settlement Policy in Securities Fraud Cases
On January 6, multiple media outlets reported that the Securities and Exchange Commission (SEC) announced a policy change related to settlement of securities fraud cases. Under the new policy, settling defendants no longer will be permitted to neither admit nor deny civil liability, while concurrently being convicted of, or admitting guilt with regard to, criminal charges. The policy change also will apply to civil cases in which a defendant has entered into a deferred or non-prosecution agreement in a parallel criminal matter. Under the traditional SEC approach, a defendant found guilty of criminal conduct still could settle civil claims brought by the SEC without admitting or denying those civil charges. Going forward, in cases with parallel criminal actions, the SEC will (i) remove the "neither admit nor deny" language from its settlement agreements, (ii) recite the fact and nature of the criminal conviction, and (iii) allow staff to determine whether to include in the settlement facts obtained from the criminal conviction. The SEC's current prohibition on defendants denying the SEC's allegations or making statements those allegations are without merit will be retained. The new policy will not alter the "neither admit nor deny" approach used when settling cases that involve neither a criminal conviction nor allegations of criminal law violations.