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Insights Into The Financial Fraud Enforcement Task Force Priorities for 2013
On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.
The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes -- including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things -- that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.” He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about -- or are willfully blind to -- the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system -- that is, if we can stop the scammers from accessing consumers’ bank accounts -- then we can protect the consumers and starve the scammers.”
Mr. Bresnick stated that the Task Force’s message to banks is this: “Maintaining robust BSA/AML policies and procedures is not merely optional or a polite suggestion. It is absolutely necessary, and required by law. Failure to do so can result in significant civil, or even criminal, penalties under the Bank Secrecy Act, FIRREA, and other statutes.” He noted that banks should endeavor not only to know their customers, but also to know their customers’ customers: “Before they agree to do business with a third-party payment processor, banks should strive to learn more about the processors’ merchant-clients, including the names of the principals, the location of the business, and the products being sold, among other things.” They further should be aware of glaring red flags indicative of fraud, such as high return rates on the processor’s accounts: “High return rates trigger a duty by the bank and the third-party payment processor to inquire into the reasons for the high rate of returns, in particular whether the merchant is engaged in fraud.” (See BuckleySandler’s previous Spotlight on Anti-Money Laundering posts here, here and here.) Mr. Bresnick underscored this point by mentioning a recent complaint filed by the DOJ in the Eastern District of Pennsylvania.
With respect to the financial institutions’ relationships with the payday lending industry, Mr. Bresnick stated that “the Bank Secrecy Act required banks to have an effective compliance program to prevent illegal use of the banking system by the banks’ clients.” He explained that financial institutions “should consider whether originating debit transactions on behalf of Internet payday lenders – particularly where the loans may violate state laws – is consistent with their BSA obligations.” Although he acknowledged that it was not a simple task for a financial institution to determine whether the loans being processed through it are in violation of the state law where the borrower resides, he suggested “at a minimum, banks might consider determining the states where the payday lender makes loans, as well as what types of loans it offers, the APR of the loans, and whether it makes loans to consumers in violation of state, as well as federal, laws.”
In concluding, Mr. Bresnick said, “It comes down to this: When a bank allows its customers, and even its customers’ customers, access to the national banking system, it should endeavor to understand the true nature of the business that it will allow to access the payment system, and the risks posed to consumers and society regarding criminal or other unlawful conduct.”
The agenda outlined by Mr. Bresnick reinforces ongoing efforts by FinCEN and the FDIC, and adds to the priorities recently sketched out by CFPB and the OCC. Together they describe an ambitious, and increasingly aggressive, financial services enforcement agenda for federal regulators and enforcement authorities.
Banking Agencies Update Leveraged Lending Guidance
On March 21, the Federal Reserve Board, the OCC, and the FDIC issued final interagency guidance to ensure institutions provide leverage lending in a safe and sound manner by: (i) identifying the institution's risk appetite for leveraged finance, establishing appropriate credit limits, and ensuring prudent oversight and approval processes; (ii) establishing underwriting standards that clearly define expectations for cash flow capacity, amortization, covenant protection, collateral controls, and the underlying business premise for each transaction, and consider whether the borrower’s capital structure is sustainable; (iii) concentrating valuation standards on the importance of sound methods in the determination and periodic revalidation of enterprise value; (iv) accurately measuring exposure on a timely basis, establish policies and procedures that address failed transactions and general market disruptions, and ensure periodic stress tests of exposures to loans not yet distributed to buyers; (v) developing information systems that accurately capture key obligor characteristics and aggregate them across business lines and legal entities on a timely basis, with periodic reporting to the institution’s board of directors; (vi) considering in risk rating standards the use of realistic repayment assumptions to determine a borrower’s ability to de-lever to a sustainable level within a reasonable period of time; (vii) establishing underwriting and monitoring standards similar to loans underwritten internally; and (viii) performing stress testing on leveraged loans held in portfolio as well as those planned for distribution. The new guidance took effect on March 22, 2013, and institutions have until May 21, 2013 to comply.
Banking Agencies Propose Revised CRA Guidance
On March 18, the Federal Reserve Board, the FDIC, and the OCC proposed revisions to the “Interagency Questions and Answers Regarding Community Reinvestment” (Q&As). Focused primarily on community development, the revised Q&As aim to (i) clarify how the agencies consider community development activities outside an institution’s assessment area, both in the broader statewide or regional area and in nationwide funds, (ii) clarify how to determine whether recipients of community services are low- or moderate-income; (iii) explain the consideration of certain community development services, (iv) address the treatment of qualified investments to organizations that use only a portion of the investment to support a community development purpose, and (v) clarify that community development lending should be evaluated in such a way that it may have a positive, neutral, or negative impact on the large institution lending test rating. In remarks to the National Community Reinvestment Coalition on March, 20, 2013, Comptroller Thomas Curry described the proposed changes and stressed that they are the first steps the agencies will take to address issues raised during a 2010 outreach effort to reappraise the CRA and identify gaps between CRA implementation and changes in the structure of the banking industry, and how customers access and use credit and financial products. Mr. Curry also promised training and revised examination procedures to ensure more consistent application of CRA rules. The agencies will accept comments on the revisions for 60 days following publication in the Federal Register.
OCC Requests Comment on Annual Stress Test Reporting
On March 15, the OCC requested comment on its new regulatory reporting requirement for national banks and federal savings associations, which the OCC adopted in an October 2012 final rule. The notice and request for information describes the proposed scope of the reporting and the proposed reporting requirements for covered institutions with consolidated assets between $10 and $50 billion. The OCC also released copies of the reporting templates and instructions referenced in the notice. Comments on the notice are due by May 10, 2013.
Regulators, Lawmakers Scrutinize BSA/AML Compliance and Enforcement
On March 7, the Senate Banking Committee held a hearing entitled “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement,” which featured testimony from representatives of the Treasury Department, the Comptroller of the Currency; and the Federal Reserve Board. During the hearing, Senators challenged the regulators on what they view as insufficient civil and criminal enforcement of the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules, and pressed them to act more aggressively in bringing criminal actions against banks. Senators also pressed lawmakers on comments made by Attorney General Holder at a hearing the day before where he expressed concern that some of the world’s biggest banks have become “too big to jail” because a potential punishment could negatively impact the broader economy. With regard to possible regulatory and legislative changes, Comptroller of the Currency Thomas Curry stated that the OCC is drafting guidance for banks on BSA/AML compliance, in part, to make it easier for the OCC to remove bank officers who violate federal anti-money laundering laws. Curry said the OCC also would support expanded safe harbors for banks submitting and sharing Suspicious Activity Reports. Comptroller Curry’s comments at the hearing follow remarks he made earlier in the week when he called on banks to devote more resources to BSA/AML compliance. Mr. Curry stressed that controls with regard to international activities – e.g., foreign correspondent banking and remote deposit capture – need to be commensurate with risk. He also directed banks to focus on third-party relationships and payment processors. Finally, the Comptroller cautioned banks to understand risks presented by deployment of new technologies and payment activities, including prepaid access cards, mobile banking, and mobile wallets.
Federal Reserve Board and OCC Release Amended Foreclosure Consent Orders
On February 28, the Federal Reserve Board and the OCC jointly released amendments to their enforcement actions against multiple mortgage servicers to resolve allegations that the servicers engaged in improper mortgage servicing and foreclosure processing practices. The amendments resolve consent orders issued in April 2011 by memorializing several recent agreements in principle that provide for $3.6 billion in cash payments and $5.7 billion in other assistance, such as loan modifications and forgiveness of deficiency judgments, to 4.2 million borrowers whose homes were in foreclosure in 2009 or 2010. For the participating servicers, the amendments also replace the requirements related to the Independent Foreclosure Review process set out under the original consent orders. The servicers are also required to undertake loss mitigation efforts focused on foreclosure prevention, and will continue to be monitored by examiners for implementation of corrective actions to address alleged deficient servicing and foreclosure practices.
Cordray and Curry Address AGs Regarding Enforcement Initiatives
On February 26, CFPB Director Richard Cordray and Comptroller of the Currency Tom Curry addressed the National Association of Attorneys General. Mr. Cordray’s remarks were largely duplicative of those given a week earlier to the CFPB Consumer Advisory Board, and again identified several “problems” observed by the CFPB. Those problems were (i) deceptive and misleading marketing of consumer financial products and services, (ii) “debt traps” that trigger a cycle of debt, such as short-term credit products, (iii) “dead ends” in markets such as debt collection, loan servicing, and credit reporting where consumers cannot choose their provider and lack typical market influences, and (iv) discrimination. With regard to short-term loans, Mr. Cordray identified as an enforcement challenge lenders that lack a physical presence, and acknowledged ongoing efforts by the CFPB to address “loans that involve off-shore or other jurisdictional issues.” In his remarks, Mr. Curry first stressed the similar objectives of, and close working relationship among, the OCC, the CFPB, and the attorneys general. He then spent the majority of his remarks explaining why most OCC enforcement actions are resolved by settlement, adding that the first enforcement goal of the OCC as a “prudential bank supervisor” is remediation. Mr. Curry also responded to criticisms that OCC enforcement actions are “insufficiently severe,” and noted that the OCC is prepared to litigate if an institution refuses to consent.
House Members Reiterate Small Bank Concerns over Basel III
On February 19, House Financial Services Committee members Shelley Moore Capito (R-WV) and Carolyn Maloney (D-NY) sent a letter to the Federal Reserve Board, the OCC, and the FDIC regarding the lawmakers’ concerns about the implementation of Basel III. Citing potential compliance costs and the potential derivative impact on consumers, Representatives Capito and Maloney ask that the agencies carefully tailor the Basel III capital requirements to ensure they are appropriate for community banks. The House and Senate have in recent months placed significant focus on the Basel III rulemakings, with both houses recently holding hearings on the issue and lawmakers previously sending letters to the regulators.
House Financial Services Ranking Member Seeks Additional Information Regarding Foreclosure Review Settlements
On February 15, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent an amended set of requests to the Federal Reserve Board and the OCC regarding the recent agreements in principle to end the Independent Foreclosure Review (IFR) established by consent orders issued in April 2011. Ms. Waters asks that, in advance of finalizing the terms of the agreements, the agencies produce by March 1, 2013: (i) policies and procedures about how loan files were to be reviewed by the IFR independent consultants, and any checklists used; (ii) calls or reports from the consultants to the agencies regarding error rates of reviewed files, or errors by analysts conducting the reviews; (iii) guidelines issued by the agencies to any consultant related to interpretation of the remediation framework; (iv) correspondence between the agencies and any consultant with regard to the servicing platform identified as “Loss Mitigation Notes,” and inconsistencies between the reported availability of borrower records provided by such a program and records entered into any other part of the servicing platform; and (v) any proposed plan for future reform or modification of servicing platforms or procedures generated or submitted by any consultant to the agencies. This request follows related requests made by Ms. Waters and other Democratic lawmakers seeking details pertaining to the settlement.
OCC Updates Effective Dates for CMP Inflation Adjustment and New Flood Insurance Penalties
On February 8, the OCC issued Bulletin OCC 2013-7, which clarifies that the maximum amount of the OCC's civil money penalties (CMP) as adjusted for inflation last fall apply to violations that occurred on or after December 6, 2012. The Bulletin also states that new flood insurance penalties that also were adopted last fall, apply to violations that occurred on or after July 6, 2012, and not to violations that occurred on or after December 6, 2012, as originally announced.