United States: Financial Services Report – Fall 2015

BELTWAY

Straight Out of the Seventh Circuit

The Seventh Circuit recently affirmed a lower court's ruling that the SEC cannot be sued in district court to stop it from bringing an administrative action. Bebo v. SEC, No. 15-1511, 2015 U.S. App. LEXIS 14844 (7th Cir. Aug. 24, 2015). The ruling is significant because district courts in Georgia and New York recently decided to freeze similar administrative proceedings on the grounds that the appointment of certain SEC judges was "likely unconstitutional." Although this ruling shields the SEC's administrative process from attack in the Seventh Circuit, it does not impact a defendant's ability to file proceedings for review of an administrative law judge's ruling on the merits.

For more information, contact Joe Rodriguez at jrodriguez@mofo.com.

Where's the Beef?

The GAO has called on federal financial regulators to conduct an in-depth study on the effects that new mortgage rules, such as the CFPB qualified mortgage standard, are having on the mortgage market. Noting that federal agency officials took the position that the qualified mortgage regulations would not have broad-reaching effects on the mortgage market, the GAO has essentially asked the agencies to prove it, calling on them to conduct a retrospective review of the mortgage regulations that were put in place in response to the financial crisis. The GAO also made recommendations with respect to the availability of data in the mortgage market.

For more information, contact Leonard Chanin at lchanin@mofo.com.

DFS Don't Mess

Recently, the New York Department of Financial Service alleged that Promontory Financial Group "sanitized" reports it submitted to the regulator about its client's alleged assistance provided to Iranian clients in accessing the U.S. banking system in violation of an embargo. Specifically, DFS alleged that Promontory employees assigned to review its client's compliance with the Bank Secrecy Act and anti-money laundering regulations regularly altered their findings or presented them in such a way as to minimize the extent of potential violations. After vowing to take the matter to court, Promontory ultimately settled with DFS, admitting as part of the settlement that, in certain instances, its work did not meet the DFS's "current requirements for consultants performing regulatory compliance work for entities supervised by the department." Promontory agreed to pay a $15 million fine and agreed to a sixmonth ban on taking on new work for clients regulated by the DFS.

For more information, contact Barbara Mendelson at bmendelson@mofo.com.

The Regulators are Coming!

The Treasury Department is wading into marketplace lending. It issued a Request for Information seeking public comment on the various business models and products offered by online marketplace lenders to small businesses and consumers; the potential for online marketplace lending to expand access to credit to historically underserved market segments; and how the financial regulatory framework should evolve to support the safe growth of this industry. The Treasury also is hosting roundtables on online marketplace lending.

For more information, contact Jeremy Mandell at jmandell@mofo.com.

Can the Little Guys Get a Break?

On July 15, 2015, Federal Reserve Chair Janet Yellen was pressed by several members of the House Financial Services Committee regarding the regulatory burden faced by community banks. Chair Yellen stated that the Federal Reserve is seeking to focus the regulatory burdens on larger banks and that "we share the goal of minimizing burdens on community banks." She also noted that the Federal Reserve will be tailoring exams based on individual bank's risk factors and looking to reduce the amount of documentation and time spent in community banks.

For more information, contact Joe Rodriguez at jrodriguez@mofo.com.

BUREAU

The Bureau Is Coming!

In June, the CFPB issued a long-awaited final rule permitting Bureau supervision of larger nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year. The Bureau estimates the Rule will cover approximately 90% of the market. The final rule counts automobile leases toward the 10,000 threshold, but excludes motor homes, recreational vehicles, golf carts, and motor scooters from the count (so all you Vespa dealers are off the hook . . . for now!). Purchases or acquisitions made by special-purpose entities for purposes of asset-backed securitizations generally aren't counted either. The Bureau provided guidance to these newly regulated entities in examination procedures released with the final rule. The Bureau's press release indicated that its exams will focus on UDAAP issues associated with marketing and disclosures, FCRA issues around accurate furnishing of information to credit bureaus, FDCPA and UDAAP issues associated with collection of debt, and fair lending concerns regarding underwriting and pricing practices and methodologies.

For more information, contact Joe Rodriguez at jrodriguez@mofo.com.

Don't Keep the Change

The CFPB and FDIC entered into a consent order with a depository institution in August in connection with the bank's failure to credit consumers for the full amounts of deposited funds when the customers' receipts did not match the actual money transferred into the account. If the amount transferred exceeded the amount on the customer's deposit slip, the Bureau alleged, the bank would keep the overage without investigation if the discrepancy did not exceed a certain sum. The consent order required the bank to refund approximately $11 million to customers and pay a $7.5 million penalty.

For more information, contact Michael Miller at mbmiller@mofo.com.

CFPB Loves a Person in Uniform

The CFPB sued Security National Automotive Acceptance Company (SNAAC), an Ohio-based auto finance company that specializes in lending to active-duty and former military to buy used motor vehicles. The CFPB claimed that SNAAC leveraged servicemembers' military status in collecting debts, allegedly exaggerating the potential that the servicemembers could face adverse career consequences or actions under the Uniform Code of Military Justice for nonpayment. The abusiveness claim in the SNAAC litigation echoes some of the allegations in last year's complaint against Freedom Stores, Inc., alleging that Freedom Stores had taken unreasonable advantage of military consumers' inability to protect their interests by including Virginia forum selection clauses in contracts with servicemembers stationed far from Virginia.

For more information, read our blog post on the SNAAC settlement or contact Michael Agoglia at magoglia@mofo.com.

Summer Supervisory Highlights

The CFPB's Summer Supervisory Highlights continued to focus on debt collectors, including a couple of observations related to collectors' FCRA compliance. The CFPB criticized the practice of deleting a trade line in response to a consumer dispute without conducting an investigation. The Supervisory Highlights also discussed fair lending, loss mitigation, and other topics this quarter.

For more information, read our blog or contact Obrea Poindexter at opoindexter@mofo.com.

If You Can't Say Anything Nice . . .

. . . You will feel right at home reading the CFPB's newly augmented web-based public-facing complaints database. In accordance with its Final Policy Statement issued on March 19, 2015, the CFPB began publishing consumer complaint narratives. As of June, there were about 7,700 narratives in the database. Complaints about mortgages, debt collection, and credit reporting accounted for about 70% of those received between March and June 2015 and about 70% of the narratives posted so far. Debt collection narratives slightly outpaced mortgage narratives even though the number of mortgage complaints received during this time period exceeded the number of debt collection complaints. Payday loans are at the other end of the spectrum. Despite the CFPB's intense scrutiny and criticism of these products, payday loans accounted for less than 1% of the total complaints received since March 19, 2015.

For more information, contact Nancy Thomas at nthomas@mofo.com.

Add-On, and On, and On . . .

The CFPB agreed in July to settle claims against Affinion Group Holdings, Inc. (and affiliates) and Intersections Inc., two of the vendors that offered credit monitoring and identity theft insurance add-on products that were the subject of prior consent orders between the CFPB and financial institutions who marketed, sold, or administered the products. Affinion allegedly engaged in deceptive conduct during retention calls. Intersections allegedly provided "substantial assistance" to its financial institution marketing partners in an unfair practice by "instruct[ing] its depository institution clients to bill affected consumers . . . knowing those consumers were not receiving full product benefits." These new settlements (you can find them here and here) apparently cover accounts that were not part of prior settlements with financial institutions. Both defendants will pay restitution and penalties.

For more information, contact David Fioccola at dfioccola@mofo.com.

And On . . . New Consent Order Makes Ten

One more credit card issuer joined nine other large financial institutions this July in entering into a consent order with the CFPB and OCC concerning the allegedly unfair and deceptive practices in connection with the marketing and sale of credit card add-on products. The credit card issuer agreed to pay $700 million in consumer redress, plus $70 million in civil monetary penalties to the Bureau and the OCC. This settlement, unlike the prior deals, also addressed the issuer's expedited pay-by-phone fees.

For more information, contact David Fioccola at dfioccola@mofo.com.

Debt Collection Takes Center Stage Yet Again

In July, the CFPB announced its largest UDAAP settlement to date with a credit card issuer in connection with debt sales and collection litigation. The OCC and 47 State Attorneys General were part of the settlement. The CFPB alleged that the sale of debts the issuer knew or should have known were unenforceable, and the selling of debts with inaccurate or inadequate evidence that the stated amount of the debts were owed, constitute unfair practices. The CFPB also alleged that the issuer provided substantial assistance to debt collectors who purchased and attempted to collect the unsubstantiated, inaccurate, and/or unenforceable debts. On the debt litigation claims, the Bureau alleged that robo-signing of sworn statements to support collection lawsuits was both unfair and deceptive. But the CFPB went further, alleging failure to provide notice to consumers and courts that judgments were obtained based on robo-signed sworn statements constitutes an unfair practice, as does failure to remediate alleged miscalculation of amounts owed that were incorporated into erroneous judgments.

For more information, read our Client Alert or contact Nancy Thomas at nthomas@mofo.com.

Peppercorn Penalty in Student Aid Case

The CFPB imposed a civil monetary penalty of just one dollar on Student Financial Aid Service, Inc., when it settled allegations that Student Financial engaged in deceptive acts or practices, violated the Telemarketing Sales Rule, and violated the Electronic Funds Transfer Act by initiating recurring, preauthorized transfers from consumer accounts without the required authorization. The CFPB said in its complaint that consumers who used the sites were unknowingly billed for an annual subscription when they signed up for the service and entered their payment information, but did not authorize a transaction. The CFPB also alleged that the sites implied they were affiliated with government programs, creating confusion. Student Financial did not admit or deny wrongdoing, but has since publicly denied the CFPB's allegations.

For more information, contact Michael Miller at mbmiller@mofo.com.

Do Military Student Lenders Pass Muster?

The realities of military life can amplify issues with student loan servicing, the CFPB said in a Report released this July. The Report indicated that student loan servicers failed to implement military deferment due to servicer error, at times failed to process requests for the SCRA interest rate cap of 6 % in a timely manner or failed to convey clear information about the application process, and did not effectively grant loan discharges to severely disabled veterans.

For more information, contact Michael Agoglia at magoglia@mofo.com.

Friend of the Court Report

The CFPB filed two amicus briefs in FDCPA cases this summer. In Bock v. Pressler & Pressler, LLP, No. 15-1056 (3d Cir.), the CFPB, joined by the FTC, argued that an attorney engages in a deceptive debt collection practice in violation of the FDCPA when he or she files a debt collection lawsuit without meaningfully reviewing it first—a practice it argues occurs when debt collection law firms "mass-file" collection lawsuits. In Ho v. ReconTrust Co., N.A., No. 10- 56844, the Ninth Circuit invited the CFPB to weigh in on the question of whether a trustee who forecloses on a deed of trust in a non-judicial action in California can qualify as a "debt collector" under the general definition of that term in the FDCPA. The CFPB argued that a trustee engages in debt collection if it sends consumers notices stating that foreclosure will occur unless the consumers make payment on their debt. The brief also argues that such conduct can qualify as debt collection under the general definition regardless of whether the conduct is also related to the enforcement of a security interest.

For more information, contact Angela Kleine at akleine@mofo.com.

DC Circuit Revives Constitutionality Challenge

The DC Circuit revived a small Texas bank's challenge to the CFPB's constitutionality in July, reversing a lower court decision dismissing the claim for lack of standing. State Nat'l Bank of Big Spring v. Lew, Nos 13- 5247, 13-5248, 2015 WL 4489885 (D.C. Cir. July 24, 2015). The court did not address the substance of the bank's constitutionality challenge— its opinion was limited to the issue of whether a regulated entity had standing to challenge agency regulations before they were subject to enforcement actions. The court held that the bank had standing because the regulations affect a market in which it does business and that it made little sense to force a regulated entity to violate a law and trigger an enforcement action just so a constitutionality challenge could be sustained.

For more information, contact David Fioccola at dfioccola@mofo.com.

MOBILE & EMERGING PAYMENTS

D-Day: October 1st

Payments industry participants have had October 1, 2015 circled in red on their calendars for quite some time. On that date, liability for in-store fraud under the card association rules will shift to merchants that have not installed EMV-compliant point-of-sale card readers, assuming that the issuing bank has upgraded its technology. The EMV liability shift has been a boon to contactless payments providers and applications because EMV-compliant hardware typically is also able to accept contactless payments. Most industry observers expect that fraud will move in two directions: towards small- and medium-sized business that have not invested in EMV-compliant hardware, and towards online payments. Industry participants in online payments should therefore be prepared for increased attention from fraudsters and should consider leveraging additional security measures, such as encryption and tokenization, to help safeguard digital payments.

For more information, contact Trevor Salter at tsalter@mofo.com.

Regulation Suffocation of Innovation?

We have all heard the complaint that regulation can stifle innovation. The virtual currency industry is taking up this refrain in response to the NYDFS's first-in-the-nation licensing requirement for any company engaged in a "virtual currency business activity." Other states (e.g., California) are considering legislation that would impose a more limited licensing requirement, applying only to companies that have "full custody or control" of a consumer's virtual currency. The NYDFS regulation also imposes anti-money laundering requirements, which go beyond federal requirements in several important ways. For example, licensees must collect additional information from New York residents and must keep records for all transactions regardless of dollar amount and including virtual currency to virtual currency transactions. In contrast, as it relates to anti-money laundering, federal regulations only obligate financial institutions to maintain records for transactions under $3,000 and for virtual currency to fiat currency transactions.

For more information, contact Jeremy Mandell at jmandell@mofo.com.

It's Not All About the Speed

The CFPB released its "Vision of Consumer Protection in New Faster Payments Systems," which identifies principles for a faster payment system: affordability, ubiquity, security, and consumer control. The CFPB's stated purpose in releasing these principles is to ensure that consumer interests remain top of mind throughout system development. As Director Cordray explained, "[i]t is a lot easier to build something right from the start than it is to retrofit it."

For more information, read our Client Alert or contact Obrea Poindexter at opoindexter@mofo.com .

To see the full report, please click here

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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