United States: Financial Services Report – Fall 2016

Editor's Note

So much for summer! The weather is cooling, the kids are back to school, and we better not see you wearing white so long after Labor Day! For those of you having a little trouble getting back in the swing of things, we thought we'd lead with just a few of the animals making headlines recently:

a skateboarding cat made her way into the Guinness Book of World Records by performing 20 skateboarding tricks in one minute; a bear spent the day hanging out on a Colorado University campus; and a cockatoo stole its owner's breakfast. If you are thinking of another career path, a traveling cat circus is seeking a stage assistant.

If you'll be sticking with your day job, read on for news about the CFPB's largest assessment of civil money penalties, the Supreme Court's decision to hear the latest effort of municipalities to hold mortgage lenders responsible for lost tax revenue due to foreclosures, and the latest on the Privacy Shield.


The Risk of Being a Third Wheel

The FDIC recently released proposed guidance addressing banks' obligations when they participate in third-party lending programs. The proposed guidance reminds banks of their duty to establish risk-management programs to evaluate whether to enter into third-party lending programs and how to manage risks for such programs. Want to know more? Read our Client Alert.

Sometimes it's Hard to Be a Banker

In July 2016, the OCC issued its Semiannual Risk Perspective Report. The report addresses the key risks facing federally chartered banks and notes that strategic risk remains an "ongoing concern." The Report also identifies other risks, including: credit risks, commercial real estate concentration, operational risks (to address cybersecurity and reliance on third parties), and compliance risks (BSA/AML, implementation of the CFPB integrated mortgage rule, and implementation of DoD rules implementing the Military Lending Act).

I Want to Be a NACHA Man

The Electronic Payments Association recently issued two papers-- one for financial institutions and one for businesses--to provide guidance on account validation services for ACH payments. The papers discuss the importance of using account validation to better ensure transactions are not returned and to reduce potential fraudulent payments. They also discuss a number of validation methods, including manual methods, third-party validation services, ACH validation tests, and use of micro-deposits to verify an account number.

Is it Safe to Swim in the Online Banking Water?

Not wanting to be left behind in the rush to address online marketplace lending, the Treasury issued a white paper on online marketplace lending activities, including recommendations to the industry and government on how to facilitate "safe growth" of online lending. The white paper addresses small business credit as well as consumer credit and recommends the development of "protections" for loans made to small businesses. In addition, the white paper recommends the establishment of a "working group" comprised of the federal banking agencies, as well as other federal agencies, to monitor developments in the online lending marketplace.

Everyone Into the Pool

In August 2016, FinCEN issued proposed changes to its anti-money laundering rules addressing the duty of banks and credit unions that don't have a federal functional regulator to have anti-money laundering (AML) and customer identification programs (CIP). The comment period ends on October 24, 2016. The proposed rule provides that the all banks and credit unions, even those that lack a federal regulator, are subject to AML and CIP requirements. This would include private banks, non-federally insured credit unions, and certain trust companies. According to FinCEN, the proposed amendments would remove a gap in coverage for such institutions.


Different Product, Same Telemarketing Practices

After Regulation E's prohibition on permitting overdraft services for ATM and one-time debit transactions without the customer's specific opt-in took effect in 2010, some financial institutions started marketing overdraft services as they might once have done for credit-card add-on products. The CFPB's July 2016 settlement echoes the allegations in the Bureau's add-on product consent orders, claiming that the Bank used telemarketers to persuade customers to opt into overdraft services and fees, allegedly incentivizing telemarketers with higher hourly rates after they hit specified enrollment targets, and enrolling customers in overdraft services without their consent. The settlement bars the Bank from using telemarketers to sell overdraft services, requires increased telemarketer oversight, and imposes a $10 million fine. The Order does not require the Bank to refund overdraft fees to its customers.

Proposed Short Leash for Short-Term Lenders

The CFPB has issued a Notice of Proposed Rulemaking for short-term loans. Under the Proposed Rule, it would be an abusive and unfair practice to make a covered loan unless the consumer has the ability to repay the loan or the loan meets the requirements necessary to be considered conditionally exempt from the ability-to-repay determination. The Proposed Rule would also create new requirements for recurring loan payments: if a lender has initiated two consecutive failed payment transfers on a covered loan, it would be prohibited from initiating another payment transfer unless it provides disclosures and obtains additional authorization from the consumer. Read our Client Alert for a closer look at the proposed rule and its implications for consumer lending.

Bureau Settles Self-Serve Lawyering Claims

Three individuals connected with debt settlement firm World Law Group reached a settlement with the Bureau in July 2016, agreeing to a $107 million suspended judgment in exchange for turning over the frozen assets in their personal bank accounts, a commercial property, and at least a dozen vehicles. The Bureau's August 2015 Complaint alleged that World Law Group deceived more than 20,000 consumers into believing that the firm would provide legal services to assist in settling debt in order to circumvent the Telemarketing Sales Rule's ban on charging consumers advance fees for debt-relief services. Instead, the Complaint alleged that few customers ever interacted with a lawyer, and customers were instead given forms for legal filings and instructed to file them pro se.

"Drastic Overhaul" of Debt Collection

In July 2016, the CFPB outlined proposals for regulation of debt collection that would, according to Director Richard Cordray, "drastically overhaul" the debt collection market. The outline marks the next step toward implementation of a final rule. The proposal would limit collection communications to six per week through any point of contact, require debt collectors to include more specific information about the debt in initial debt collection letters, and require a new series of mandatory disclosures to assist consumers in understanding and managing debt collection processes, among other wide-ranging proposals. The outline covers proposals for third-party debt collection. Director Cordray indicated the Bureau would address first-party debt collection on a "separate track."

For more information, read our Client Alert.

My CFPB Complaint was Useful (1) Funny (0) Cool (3)

The CFPB, once again striving to be the Yelp of the consumer financial world, is now offering consumers an option to provide feedback on a company's response to and handling of complaints submitted through the Bureau's Consumer Complaints Database. Consumers would have the ability to rate the company's handling of the complaint on a one-to-five scale and provide a narrative description of the rating. The feedback will be shared with the company. The Bureau's notice in the Federal Register does not specify whether half-stars will be available.

Lender, Lender, Who's the True Lender?

In a blow to some online lenders, a federal court awarded the CFPB a victory in its lawsuit against CashCall Inc., granting the CFPB's motion for summary judgment. Consumer Fin. Protection Bureau v. CashCall, Inc., No. 2:15-cv-07522, slip op. 213 (C.D. Cal. Aug. 31, 2016). The Court found that CashCall, a California corporation, not Western Sky, a loan origination company based on a South Dakota Native American reservation, was in fact the true lender in the case. CashCall had claimed Western Sky was the lender, which meant state usury caps did not apply. The Court's finding otherwise supports the Bureau's claim that CashCall's servicing and collection of loans with interest rates that exceeded state usury caps constituted unfair and deceptive acts and practices ("UDAAP").

CFPB Collects Largest. Penalty. Ever.

On September 8, 2016, the CFPB, the OCC, and the City and County of Los Angeles entered into a Consent Order with Wells Fargo in which Wells Fargo agreed to pay civil money penalties totaling $185 million. The CFPB's portion of those penalties is $100 million, which is the largest fine the Bureau has imposed since opening its doors in July 2011. The agencies alleged that in response to an incentive compensation program, Wells Fargo employees opened new deposit and credit accounts, issued debit cards, and initiated online banking services without the knowledge of customers.

For more information, read our Client Alert.


Is the OCC Innovating Along with Fintech?

The OCC provided more substantive details regarding its plans for regulation of the burgeoning financial technology sector at a forum in late June. The "Forum on Supporting Responsible Innovation in the Federal Banking System" invoked the spirit of the United Kingdom's Financial Control Authority's approach to regulating Fintech while maintaining an open atmosphere for innovation. The OCC's guiding principles for the forum were based on fostering an atmosphere of responsible innovation, using the experience and expertise of current agencies to guide the regulatory process, ensuring consumer safety and protection, and mitigating risk. The forum featured a variety of industry experts and insiders divided into three separate panels encompassing the financial services and technology industries.

Digital Heist of Digital Currency

Advocates for the continuing integration of bitcoin into the global financial market were dealt a severe setback on August 2, 2016, when hackers stole some $70 million worth of the digital currency from Hong Kong-based bitcoin exchange Bitfinex. News of the hack resulted in a rapid 13 percent drop in bitcoin's value against the U.S. dollar, and forced Bitfinex to halt all trading, withdrawals, and deposits of the digital currency. This latest incident in a string of bitcoin exchange hacks raises questions about the future of the cryptocurrency as consumers and regulators alike worry about its long-term safety and viability.


Miami Brings the Fair Lending Heat

In Wells Fargo & Co. v. City of Miami, Case No. 15-1111, and Bank of America Corp. v. City of Miami, Case No. 15-1112, the city claims that lenders intentionally targeted minorities for predatory loans (reverse redlining), extended credit on unequal terms, and engaged in other practices that had a disparate impact on minorities. The theory is that, through an attenuated chain of events, these alleged practices eventually caused Miami to lose out on property tax revenues. The cases are far-reaching, but the issues on appeal are narrow and technical: (1) what does it mean to be an "aggrieved person" under the Fair Housing Act and (2) what showing of "proximate cause" is required under the statute? The Court will hear oral argument on November 8, 2016.

Mortgage Mystery Shoppers

CFPB "mystery shoppers" and secret recordings were part of the CFPB's factual allegations in a recent mortgage discrimination settlement. The DOJ and CFPB announced a settlement with BancorpSouth Bank to resolve alleged violations of the Fair Housing Act and Equal Credit Opportunity Act). The complaint alleges that from at least 2011 to 2013, BancorpSouth illegally redlined mortgage loan applicants, denied African Americans loans more often than white applicants, charged African American customers more for loans, and implemented an explicitly discriminatory loan denial policy. The settlement marks the first time the CFPB has publicly disclosed using "mystery shoppers," among other novel methods of investigation.

For more information, read our blog post.

HAMP Is Dead, Long Live HAMP!

On August 2, 2016, the CFPB published guidance titled CFPB's Principles for the Future of Loss Mitigation. The guidance outlines a recommended framework for new industry-driven foreclosure relief programs. It largely follows the July 25, 2016 white paper jointly issued by the Department of the Treasury, HUD, and the Federal Housing Finance Agency, in which the agencies called for industry stakeholders to design and implement a loss mitigation framework tailored to the post-crisis mortgage market. Both the guidance and the white paper come as the Home Affordable Modification Program is set to expire on December 31, 2016.

For more information, read our Client Alert.

To read this newsletter in full, 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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