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  • OCC issues guidance on appraisal management company registration

    Agency Rule-Making & Guidance

    On September 16, the OCC issued Bulletin 2019-43, “Appraisals: Appraisal Management Company Registration Requirements,” which reminds covered institutions of the new registration requirement for appraisal management companies (AMC) that became effective on August 10. Specifically, under 12 CFR 34, subpart H, AMCs are now required to register with the state or states in which they do business; however, an AMC that is owned and controlled by an insured depository institution and regulated by the OCC, Federal Reserve Board, or FDIC is not subject to the registration requirement. The Bulletin reminds covered institutions that they should conduct sufficient due diligence to confirm that third-party AMCs are registered as required, including (i) checking the Appraisal Subcommittee of the Federal Financial Institutions Examination Council’s (ASC) national AMC registry; (ii) checking the relevant state’s AMC registry if the AMC is not listed on the national registry; and (iii) if no electronic registry check is available, requesting evidence of registration directly from the AMC. Moreover, if a covered institution determines that a federally related transaction is in a state that is not registering AMCs, an institution may instead use an individual appraiser, a staff appraiser employed by the institution, a smaller AMC not subject to the regulation, or a federally regulated AMC.

    Agency Rule-Making & Guidance OCC Appraisal

  • CFPB issues summer 2019 Supervisory Highlights

    Federal Issues

    On September 13, the CFPB released its summer 2019 Supervisory Highlights, which outlines its supervisory and enforcement actions in the areas of automobile loan origination, credit card account management, debt collection, furnishing, and mortgage origination. The findings of the report cover examinations that generally were completed between December 2018 and March 2019. Highlights of the examination findings include:

    • Auto loan origination. The Bureau noted that one or more examinations found that guaranteed asset protection (GAP) products were sold to consumers with low loan-to-value (LTV) loans, resulting in those consumers purchasing a product that was not beneficial to them. The Bureau concluded these sales were an abusive practice, as “the lenders took unreasonable advantage of the consumers’ lack of understanding of the material risks, costs, or conditions of the product.”
    • Credit card account management. The Bureau found several issues with credit card account servicing, including violations of Regulation Z for failing to clearly and conspicuously provide disclosures required by triggering terms in online advertisements and for offsetting consumers’ credit card debt against funds that the consumers had on deposit with the issuers without sufficient indication that the consumer intended to grant a security interest in those funds.
    • Debt collection. The Bureau noted violations of the FDCPA’s prohibition on falsely representing the amount due when debt collectors claimed and collected interest that was not authorized by the underlying contracts between the debt collectors and the creditors.
    • Credit information furnishing. The Bureau found multiple violations of the FCRA, including furnishers failing to complete dispute investigations within the required time period and failing to promptly send corrections or updates to all applicable credit reporting agencies after a determination that the information was no longer accurate.
    • Mortgage origination. The Bureau noted that creditors had violated Regulation Z by disclosing inaccurate APRs for closed-end reverse mortgages and also by using a unit-period of one month instead of one year to calculate the total annual loan cost (TALC) rate and the future value of all advances, leading to inaccurate TALC disclosures.

    The report notes that in response to most examination findings, the companies have taken, or are taking, remedial and corrective actions, including by identifying and compensating impacted consumers and updating their policies and procedures to prevent future violations.

    Lastly, the report also highlights the Bureau’s recently issued rules and guidance.

    Federal Issues CFPB Supervision Examination Auto Finance Credit Cards Debt Collection FDCPA Regulation Z TILA FCRA Mortgages Mortgage Origination

  • FTC lawsuits allege student loan scams

    Federal Issues

    On September 12, the FTC announced two separate suits filed in the U.S. District Court for the Central District of California against various entities and individuals who allegedly engaged in deceptive practices when promoting student loan debt relief schemes.

    In the first complaint, filed jointly with the Minnesota attorney general, a debt relief company and its owners (collectively, the “Minnesota defendants”) were alleged to have violated the FTC Act, TILA, the Telemarketing Sales Rule (TSR), and various state laws, by charging consumers who sought student loan payment reduction programs an advance fee of over $1,300 while falsely representing that the payment would go toward their student loans. The advance fee, the FTC contends, was allegedly financed through high-interest loans from a third-party finance company identified as a co-defendant in both complaints. The stipulated order entered against the Minnesota defendants prohibits them from, among other things: (i) making material misrepresentations related to their financial products and services, or any other kind of product or service; (ii) making unsubstantiated claims about their financial products and services; (iii) engaging in unlawful telemarketing practices; or (iv) collecting payments on accounts sold prior to the order’s date. The stipulated order also requires the Minnesota defendants to notify its customers that none of their prior payments have gone towards a Department of Education repayment program or towards their student loans, and orders the payment of $156,000, with the total judgment of approximately $4.2 million suspended due to inability to pay.

    The FTC filed a second complaint against a separate student loan debt relief operation for allegedly engaging in deceptive and abusive practices through similar actions, including charging consumers advance fees of up to $1,400 and enrolling consumers in the same finance company’s high-interest loan program. The action against the second student loan debt relief operation is ongoing.

    Both complaints also charge the finance company with violating the assisting and facilitating provision of the TSR by providing substantial assistance to both sets of defendants even though it knew, or consciously avoided knowing, that they were engaging in deceptive and abusive telemarketing practices. The FTC also alleges that the finance company violated TILA when it failed to clearly and conspicuously make certain required disclosures concerning its closed-end credit offers. Separate stipulated orders were entered by the FTC in each case (see here and here) against the finance company. The orders’ terms require the finance company to pay a combined $1 million out of a nearly $28 million judgment, with the rest suspended due to inability to pay, as well as relinquish its rights to collect on any outstanding loans. Among other things, the orders also permanently ban the finance company from engaging in transactions involving secured or unsecured debt relief products and services or making misrepresentations regarding financial products and services.

    Federal Issues FTC Enforcement Student Lending Debt Relief State Attorney General FTC Act Telemarketing Sales Rule TILA UDAP

  • 3rd Circuit: FCA does not guarantee an in-person hearing before dismissal

    Courts

    On September 12, the U.S. Court of Appeals for the Third Circuit held that the False Claims Act (FCA) does not guarantee relators an automatic in-person hearing before a case can be dismissed. According to the opinion, a relator filed a qui tam action against a Delaware non-profit organization, asserting claims on behalf of the United States and the State of Delaware under the FCA and the Delaware False Claims Act (DFCA), alleging the organization received funding from state and federal governments by misrepresenting material information. Delaware and the federal government declined to intervene and, three years later, both moved to dismiss the case. Both governments argued that the relator’s allegations were “factually incorrect and legally insufficient.” The district court granted the motions without conducting an in-person hearing. The relator appealed, arguing that the FCA guarantees an automatic in-person hearing before a case can be dismissed.

    On appeal, the 3rd Circuit disagreed with the relator. The appellate court noted that the government “has an interest in minimizing unnecessary or burdensome litigation costs,” and, once the government moved to dismiss, the burden shifted to the relator to prove that dismissal would be “fraudulent, arbitrary and capricious, or illegal.” The appellate court concluded that the relator failed to do so, and rejected his argument that he should have been allowed to introduce evidence during a hearing to satisfy his burden. While the FCA and the DFCA state that a relator has an “‘opportunity for a hearing’ when the government moves to dismiss,” it is the relator’s responsibility to avail himself or herself of this opportunity, according to the appellate court. The court concluded that the FCA and DFCA do not guarantee an automatic in-person hearing and, because the relator failed to request a hearing and his motions failed to prove the dismissal was fraudulent, arbitrary, capricious, or illegal, the district court did not err in dismissing the action.

    Courts Whistleblower Relator Qui Tam Action False Claims Act / FIRREA Appellate Third Circuit

  • District Court rules cardholder agreement transferred arbitration rights to third party

    Courts

    On September 10, the U.S. District Court for the Eastern District of Arkansas granted a motion to compel arbitration in a putative class action alleging violations of the Arkansas Fair Debt Collection Practices Act (AFDCPA) and the FDCPA. According to the order, the plaintiffs contended that the defendants—a debt buyer and its law firm—attempted to collect charged-off credit card debts “through standardized, form debt collection complaints . . . that fraudulently and falsely averred that [the debt buyer] ‘holds in due course a claim . . . pursuant to a defaulted [bank] credit card account.” While the plaintiffs did not dispute that the arbitration provision contained within the cardholder agreement entered into with the bank was valid and that their state and federal claims fell within its scope, they argued that the debt buyer was not a “holder in due course” of the accounts in questions, and as such, the arbitration provision contained within the cardholder agreement was not assigned to the defendants. The court disagreed, ruling that the cardholder agreements specifically permitted the original creditors to assign their rights to a third party, which includes the right to arbitration and the right to enforce the class action prohibition.

    Courts Debt Collection State Issues Arbitration FDCPA

  • OFAC sanctions North Korean cyber groups

    Financial Crimes

    On September 13, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order (E.O.) 13722 against three North Korean state-sponsored cyber groups allegedly responsible for North Korea’s malicious cyber activity on critical infrastructure around the world. OFAC cited cyber attacks using phishing and backdoor intrusions, targeting a range of organizations that included financial institutions. In addition to malicious cyber activities on conventional financial institutions and major companies, North Korea’s cyber operations also targeted Virtual Asset Providers and cryptocurrency exchanges “to possibly assist in obfuscating revenue streams and cyber-enabled thefts that also potentially fund North Korea’s WMD and ballistic missile programs.” As a result of the sanctions, “all property and interests in property of these individuals and entities that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.” OFAC noted that its regulations “generally prohibit” U.S. persons from participating in transactions with the designated persons, and warned foreign financial institutions that if they knowingly facilitate significant transactions for any of the designated individuals, they may be subject to U.S. correspondent account or payable-through account sanctions.

    Financial Crimes Of Interest to Non-US Persons OFAC Department of Treasury Sanctions North Korea

  • FCA claims move forward against California mortgage company

    Courts

    On September 11, the U.S. District Court for the Southern District of California denied a mortgage company’s motion to dismiss an action by the U.S. government alleging the company violated the False Claims Act by falsely certifying compliance with FHA mortgage insurance requirements. According to the opinion, the government intervened in a former employee’s suit against the company and alleged that the company, a participant in HUD’s Direct Endorsement Lender program, had failed to report loans to HUD that presented “material risk and ‘[f]indings of fraud or other serious violations’ discovered during the ‘normal course of business and by quality control staff during reviews/audits of FHA loans.’” The company moved to dismiss the action, arguing that the government failed to allege a scheme that was designed to flout specific FHA requirements. In denying the motion, the court concluded that the government sufficiently alleged the “who, what, where, how, and why” of the company’s misconduct, noting that the company “knew, or should have known, that the certifications of compliance it made at the time of endorsement were false because the falsities were facially apparent from the loan files that it was required to underwrite in accordance with HUD’s requirements.” The court also concluded that the government sufficiently pleaded its breach of fiduciary duty and breach of contract claims.

    Courts HUD False Claims Act / FIRREA FHA Mortgages

  • FinCEN deputy director discusses innovation, non-bank supervision, and “culture of compliance”

    Financial Crimes

    On September 11, Financial Crimes Enforcement Network (FinCEN) Deputy Director Jamal El-Hindi delivered remarks at the 2019 Money Transmitter Regulators Association’s annual conference. El Hindi’s remarks focused on innovation and reform pertaining to the Bank Secrecy Act (BSA), supervision in the non-bank financial institution sector and coordination with state supervisors, and “the importance of a strong culture of compliance and what it means in a national and global security context.” According to El-Hindi, the BSA/anti-money laundering system “is good; but it can always be improved,” including through innovations that can “help better detect and safeguard against illicit activity.” El-Hindi reiterated FinCEN’s policy statement from December 2018, which encouraged innovation in the banking sector. (Previously covered by InfoBytes here.)

    El-Hindi also highlighted recent discussions related to the role artificial intelligence can play in reducing false positives to assist human analysis, and the potential for blockchain technology to enhance transparency through the understanding of customer identity or transaction profiles. He noted that these themes and others emerged from FinCEN’s recent “Innovation Hours Program,” which encourages fintech companies, regtech companies, and financial institutions to present to FinCEN new and innovative products and services for potential use in the financial sector. The program’s upcoming September meeting will focus on innovations in “know your customer” compliance, BSA reporting, and core inter-bank payment and messaging systems associated with industry anti-money laundering/combating the financing of terrorism efforts. Additionally, El-Hindi noted that FinCEN’s enhanced supervision of nonbank financial institutions involves “actively prioritizing and engaging in,” among other activities, (i) conducting examinations of “specialized, rapidly evolving” financial services providers (e.g., virtual currency exchangers and administrators); (ii) identifying sector data to support FinCEN's analytic endeavors; and (iii) developing a stronger framework for risk assessments of the nonbank financial sector “from both the compliance and illicit activity standpoints.” El-Hindi closed his remarks by encouraging FinCEN and other regulators to discuss with foreign counterparts “the concept of a culture of compliance in the United States and what underpins it, and explore with our counterparts concepts that could underpin a culture of compliance in their own jurisdictions.”

    Financial Crimes FinCEN Of Interest to Non-US Persons Bank Secrecy Act Anti-Money Laundering Combating the Financing of Terrorism Fintech Regtech Nonbank

  • CFPB issues final No-Action Letter policy, sandbox policy, and trial disclosure policy

    Agency Rule-Making & Guidance

    On September 10, the CFPB issued three final innovation policies, the No-Action Letter (NAL) Policy, Compliance Assistance Sandbox (CAS) Policy, and Trial Disclosure Program (TDP) Policy. Director Kraninger noted that the new policies will “improve how the Bureau exercises its authority to facilitate innovation and reduce regulatory uncertainty. . .contribut[ing] to an environment where innovation can flourish—giving consumers more options and better choices.” In September 2018, the Bureau published the proposed TDP policy (covered by InfoBytes here), and in December 2018, the Bureau published the proposed NAL and CAS policies (covered by InfoBytes here). Highlights of the final policies include:

    • NAL. The NAL policy provides a NAL recipient reassurance that the Bureau will not bring a supervisory or enforcement action against the company for providing a product or service under the covered facts and circumstances. After an application is considered complete, the Bureau will grant or deny the request within 60 days. The Bureau intends to publish NALs on its website and, in some cases, a version or summary of the application. The Bureau may also publish denials and an explanation of why the application was denied. The policy notes that disclosure of information is governed by the Dodd-Frank Act, FOIA and the Bureau’s rule on Disclosure of Records and Information, which generally would prohibit the Bureau from disclosing confidential information.
    • CAS. The CAS policy will evaluate a product or service for compliance with relevant laws and will offer approved applicants a “safe harbor” from liability for certain covered conduct during the testing period under TILA, ECOA, or the EFTA. The CAS was originally proposed as the “Proposed Sandbox Policy,” and included, in addition to the now listed carve-outs, exemptions by order from statutory provisions of ECOA, HOEPA, and the Federal Deposit Insurance Act (FDIA). The final CAS policy does not include the exemption program. The Bureau noted that, based on the comments received on the proposal, it will issue, at a later date, a new proposal to establish a program for exemptions by order through a separate notice-and comment rulemaking.
    • TDP. The TDP policy creates the “CFPB Disclosure Sandbox,” which carries out the requirements of Section 1032(e) of the Dodd-Frank Act. The Bureau’s first TPD policy was finalized in 2013, allowing for approved company disclosures to be deemed in compliance with, or exempted from, applicable federal disclosure requirements during the testing period. Under the previous policy, the Bureau did not approve a single company program for participation. The updated TDP policy streamlines the application process, including providing formal determinations within 60 days of deeming an application complete. The policy provides procedures for requesting extensions of successful testing programs, as the Bureau expects most testing periods will start at two-years.

    The Bureau also announced the first NAL issued under its new policy in response to a request by HUD on behalf of more than 1,600 housing counseling agencies (HCAs) that participate in HUD’s housing counseling program. The NAL states that the Bureau will not take supervisory or enforcement action under RESPA against HUD-certified HCAs that have entered into certain fee-for-service arrangements with lenders for pre-purchase housing counseling services. Specifically, the Bureau will not take such action against a HCA for including and adhering to a provision in such agreements conditioning the lender’s payment for the housing counseling services on the consumer making contact or closing a loan with the lender, even if that activity could be construed as a referral under RESPA, provided that the level of payment for the services is no more than a level that is commensurate with the services provided and is reasonable and customary for the area. The Bureau issued a template for lenders to seek a NAL for such arrangements, which includes certain anti-steering certifications that (i) the consumer will choose between comparable products from at least three different lenders; (ii) the funding is based on services rendered, not on the terms or conditions of any mortgage loan or related transaction; and (iii) no endorsement, sponsorship, or other preferential treatment will be conveyed to the lender for entering into the arrangement. According to the Bureau, the NAL, “is intended to facilitate HCAs entering into such agreements with lenders and will enhance the ability of housing counseling agencies to obtain funding from additional sources.” In addition to the template, the Bureau has made the HUD NAL application publicly available as well.

    Agency Rule-Making & Guidance CFPB Disclosures No Action Letter Regulatory Sandbox Dodd-Frank Fintech

  • FDIC updates Consumer Compliance Examination Manual

    Agency Rule-Making & Guidance

    On September 10, the FDIC announced updates to its Consumer Compliance Examination Manual (CEM). The CEM includes supervisory policies and examination procedures for evaluating financial institutions’ compliance with federal consumer protection laws and regulations. The recent updates include, among other things, (i) changes to the sections and questions of the Fair Lending Scope and Conclusions Memorandum; and (ii) incorporation of the private flood insurance final rule’s provisions pertaining to the mandatory and discretionary acceptance of private flood insurance by financial institutions.

    Agency Rule-Making & Guidance FDIC Supervision Examination

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