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Government Investigations and White Collar Litigation Group
Compliance, Enforcement Actions, FCPA, FCPA Investigations, UK Bribery Act

Anti-Corruption Enforcement in Brazil is in High Gear

iStock_000010878337MediumHeadlines of Brazil’s push to fight corruption are everywhere. The Petrobras scandal involves contracts worth billions of dollars, and prosecutors have uncovered a U.S. connection. The public is outraged and has called for President Dilma Rousseff’s impeachment, as the speaker of Brazil’s lower house of Congress and a former president of Brazil face recently filed corruption charges. In light of this cascading wave of corruption enforcement, companies operating in Brazil would be wise to scrutinize the adequacy of their compliance programs there and beyond. Fortunately, recent regulations further implementing Brazil’s Clean Company Act provide guidance that will help them move forward with confidence.

Efforts to Fight Corruption

Some of the more significant headlines related to Brazil’s recent anticorruption push include the following:

  • In March, Brazil’s Supreme Court approved an investigation of 54 high-ranking officials, including former President Fernando Collor de Mello, current Senate Leader Renan Calheiros, and the leader of the lower house Eduardo Cunha. All three are allegedly involved in the Petrobras scandal. Now, federal authorities have charged Collar and Cunha with corruption-related crimes, and charged former federal deputy Solange Almeida with helping Cunha collect bribes.
  • In July, prosecutors opened a probe into another former president, Luiz Inacio Lula da Silva, focused on whether Lula improperly helped construction giant Oderbrecht win billion-dollar deals in South America and Africa. This follows the arrest of Oderbrecht’s CEO in connection with the Petrobras scandal.
  • In early August, it surfaced that prosecutors had charged Jorge Zelada, the former head of Petrobras’ international division, and Hsin Chi Su, the chief executive of the Taiwanese shipping firm TMT, for allegedly favoring Houston-based Vantage Drilling in a bid with Petrobras. Su and others allegedly paid $31 million in bribes to Zelada, other ex-Petrobras officials, and Brazil’s PMDB political party. In an SEC filing, Vantage Drilling disclosed it had voluntarily informed the DOJ and SEC of the issues.
  • In late August, prosecutors in the Vantage Drilling case alleged that Su and Hamylton Padilha, who worked as a third-party agent for Vantage Drilling, met in New York in November 2008 to discuss the bribery scheme. This allegation is the first in the Petrobras scandal to include a connection to the U.S.
  • Also in late August, demonstrators took to the streets of several Brazilian cities and called for President Rousseff’s impeachment. Some even called for a military takeover of the government. It appears the discontent for the widespread corruption plaguing the country and its economy sparked the protests.

The Petrobras matter is far reaching, and more charges against high-ranking officials are likely to come. It is equally likely that more Brazilian and non-Brazilian companies operating in the country will come under scrutiny before the matter resolves, both from local authorities enforcing the Clean Company Act and from U.S. and other authorities with a potential jurisdictional hook under the FCPA or similar laws.

Recent Regulation Under the Clean Company Act

As we have discussed before, the Clean Company Act imposes civil and administrative liability on companies for wide-ranging corrupt activities. It allows Brazilian enforcement agencies to bring actions against companies with a presence in Brazil for acts occurring anywhere in the world.

The law imposes strict liability for violations, but companies can mitigate fines through cooperation and by demonstrating an effective compliance program. Decree No. 8,420 is a recent regulation that clarifies what a company must do to earn a reduction in penalties. First, a company that cooperates and enters a leniency agreement with the government may have a fine reduced by up to two-thirds. That company must be the first to cooperate and admit to its wrongdoing. It also needs to help identify other involved parties, and produce information or documents that evidence wrongdoing.

Second, a company can reduce its penalty if it has an effective compliance program. The decree contains guidance in this area that largely mirrors the guidance given by the DOJ and SEC in relation to the FCPA, and by the UK Ministry of Justice in relation to the UK Bribery Act. Specifically, a company may earn a reduced fine if it can demonstrate: (i) the commitment of senior management, (ii) policies and procedures applicable to employees and third parties, (iii) compliance training, (iv) periodic reviews of the program’s effectiveness, (v) various internal controls, (vi) whistleblower channels and protections, (vii) disciplinary measures, (viii) due diligence procedures, and (iv) specific procedures related to public sector interactions.


The push to rid Brazil of graft impacts each company operating in the country. The recent regulatory guidance under the Clean Company Act provides those companies with standards by which to measure a successful compliance program. Every company with Brazilian operations or business activities should take action. Compliance initiatives need to be tailored to specific risks and implemented throughout an organization. Even those multinationals with compliance programs built to address FCPA or UK Bribery Act risk should reassess whether Brazil’s law, regulations, and now-roiling enforcement environment demand changes.


CFPB Announces Results of eClosing Pilot Project

binarydataOn August 5, 2015, the CFPB published a report titled “Leveraging technology to empower mortgage consumers at closing,” which concluded that borrowers can benefit from electronic closings or “eClosings” – that is, closings in which a borrower can view and sign documents electronically. According to CFPB Director Richard Cordray, “Using the power of technology has shown the potential to simplify the closing process and empower consumers with better organized information, more time to review that information, and the ability to embed educational resources.” Cordray went on to emphasize that “Closing on a mortgage remains one of the most significant, yet stressful, times in the lives of consumers. However, this report offers promise that technology could be an important tool to break down a complex process into one that is easier to understand.”

The report is the latest component of the CFPB’s “Know Before You Owe” mortgage initiative, which is designed to improve the home buying experience for consumers. It comes on the heels of a 2014 report that outlined “the major pain points” associated with the mortgage loan closing process, which included lack of sufficient time to review closing documents and feeling overwhelmed by the scope and breadth of the documents. The CFPB identified electronic closings, also known as eClosings, as a method for addressing some of these concerns, and thereafter initiated a pilot program to study the matter.

According to the CFPB, the pilot project “took place over a four-month period and involved seven lenders, more than 3,000 consumers, four technology companies, and many settlement agents and real estate professionals. Some consumers used traditional paper documents, others used a complete eClosing process, and others used a hybrid of electronic resources and paper documents. Borrowers who completed mortgage transactions during the pilot were invited to complete a follow-up survey.” Ultimately, about 1,200 surveys were completed and analyzed. The CFPB summed up the report with the following findings:

  • Better consumer understanding: The CFPB measured whether consumers felt like they understood the process. The CFPB asked consumers questions about important loan information, such as the terms and fees. And it asked consumers if they understood the justifications for any differences between quotes and final costs. The study found a 7 percent positive difference in perceived understanding scores for borrowers using eClosings compared to borrowers using paper documents.
  • A more efficient process: The survey asked consumers about their perceptions of how efficient the overall process was. This included their perceptions about delays, errors in the documents, and the time between important steps. The study found a 17 percent positive difference in scores for borrowers using eClosings compared to borrowers using paper documents.
  • Greater feelings of consumer empowerment: The CFPB asked consumers how empowered they felt after the process. The survey asked consumers to respond to statements such as, “I felt I had control over the closing process” or “I felt empowered to play an active role in my closing process.” Other questions asked about having sufficient time to review documents, ask questions, and flag concerns. The study found a 15 percent positive difference in the scores for the eClosing borrowers compared to borrowers using paper documents.

According to the CFPB, while the report was not part of any official rulemaking process, it was “initiated to promote best practices in the marketplace.” Given the report’s findings, the mortgage lending industry should expect more CFPB focus on eClosings in the future.

The full report on the pilot project is available here.

Compliance, Corporate Compliance, Enforcement Actions, Market Manipulation, SEC, SEC Enforcement, Securities Litigation, White Collar Crime

SEC Issues Wells Notice to Pimco Over Fund Valuations


On Monday, August 3, 2015, Pacific Investment Management Co. LLC (Pimco) announced that it had received a Wells notice from the Securities and Exchange Commission concerning the valuation of certain nonagency mortgage-backed securities in its popular, exchange-traded Pimco Total Return ETF fund. The notice indicated that the SEC staff had made a preliminary determination to recommend that the SEC commence a civil action against PIMCO stemming from a nonpublic investigation relating to the fund.

At issue here are the fund’s performance disclosures from February 29, 2012, to June 30, 2012, and whether they contained an improper valuation of the ETF fund. The SEC has been investigating whether the fund bought these investments at discounted prices, but relied on higher valuations for the investments when the fund calculated the value of its holdings thereafter. The SEC also is likely looking at whether investors were given inaccurate information about the fund’s performance. Advertised performance reports are a common focus for SEC enforcement staff.

According to the Wall Street Journal, Pimco co-founder William H. Gross helped launch the Pimco Total Return ETF as a companion to Pimco’s popular Total Return Bond fund in February 2012, with about $103 million in assets. The fund made large gains early, returning 8.7 percent in its first six months, compared with 5.2 percent for the Pimco Total Return fund and 2.9 percent for the Barclays Capital U.S. Aggregate bond index, according to fund-research firm Morningstar Inc. In the first six months, the fund gathered $2.4 billion in assets, which, according to the Journal, analysts viewed as surprising for an exchange-traded fund.

In September 2014, Gross made a sudden departure from Pimco, and joined rival Janus Capital Group Inc. This senior management change came eight months after CEO Mohamed El Erian left the company. The Journal reports that Gross was interviewed by the SEC before he left.

As Pimco noted in its August 3 press release, a Wells notice is not a formal allegation of wrongdoing and may not lead to an enforcement action. Pimco now has an opportunity to respond to the SEC, and demonstrate that the securities’ pricing was consistent with the appropriate regulations. If the SEC is not convinced by Pimco’s response, it may bring administrative proceedings. It also may bring actions against individuals at the firm, such as the chief compliance officer, portfolio managers, members of the pricing committee or pricing group, or others.


Anti-Money Laundering, Compliance, Financial Regulation, FinCEN Guidance, Suspicious Activity Reports

FinCEN Proposes Rule Requiring Investment Advisor AML Compliance

Investment advisors may soon face increased costs and scrutiny thanks to a proposed rule issMoneyued by the Financial Crimes Enforcement Network (FinCEN).  On Tuesday, August 25, FinCEN proposed a rule that would require many investment advisors to implement AML compliance programs, including the filing of suspicious activity reports (SARs) and currency transaction reports (CTRs). The CTR requirement comes with FinCEN’s proposal to include investment advisers in the definition of “financial institution” in the operative regulation.

FinCEN Director Jennifer Shasky Calvery explained in the agency’s press release, “Investment advisers are on the front lines of a multi-trillion dollar sector of our financial system . . . .  If a client is trying to move or stash dirty money, we need investment advisers to be vigilant in protecting the integrity of their sector.”

As the proposed rule explains, “The investment advisers FinCEN proposes to cover by these rules are those registered or required to be registered with the U.S. Securities and Exchange Commission.” The issuance of this proposed rule means that affected investment advisors should begin to plan for what appears inevitable. The industry has anticipated – and often feared – this news. FinCEN has consistently broadened the definition of “financial institution” and its oversight of financial services providers of all stripes. However, in this era of ever-expanding government oversight and concern for the integrity of the U.S. financial markets, regulation of AML compliance is the new norm.

FinCEN has proposed for the SEC to act as the examiner of investment advisors for AML compliance. Further, the proposed rule explains that in this rulemaking, FinCEN is not proposing customer identification program requirements or regulatory requirements associated with the USA PATRIOT Act.

This is only a proposed rule, and the eventual final rule will likely contain some changes. For now, investment advisors targeted by the proposed rule should assess the impact that AML compliance will have on their businesses, including operations, budgets, and staffing.

If you have questions about BSA/AML compliance and how this proposed rule may affect your institution, McGuireWoods can assist you. Our attorneys offer experience and skills in advising financial institutions on all areas of BSA/AML compliance.





Consumer Financial Protection Bureau Takes Action Against Payment Processing Company and Mortgage Servicer

Government-Regulatory-and-Criminal-Investigations.jpgThe Consumer Financial Protection Bureau (CFBP) recently took action against a payment processing company, Paymap Inc. (Paymap), and mortgage servicing company, LoanCare, LLC (LoanCare), for deceptive conduct in connection with a mortgage payment program. Paymap partnered with more than thirty mortgage servicers, including LoanCare, to offer customers an accelerated payment program, allowing customers to make automatic mortgage payments on a weekly, biweekly, or semimonthly basis. LoanCare identified potential customers for the program and provided Paymap with specific account information regarding potential customers it identified. Paymap then used the information to create customized advertisements on LoanCare letterhead. According to the CFPB, Paymap and LoanCare advertised that customers would enjoy savings by making the additional payments contemplated by the automatic payment program.

In reality, however, the additional payments were not immediately credited to customers’ accounts on the accelerated schedule. Though customers’ accounts were debited more frequently, funds were simply held in a separate custodial account until the end of the month and then transferred to LoanCare, who then applied the funds on customers’ original monthly schedule. The CFPB claimed that any savings customers enjoyed were a result of a higher annual payment. The companies required a $295 enrollment fee plus an additional $2.50 transaction fee for each automatic payment. Roughly 125,000 consumers enrolled in the program, which resulted in Paymap generating $33.4 million in fees. LoanCare received $110 of the enrollment fee and $0.75 of each transaction fee.

Under the terms of the Consent Orders, Paymap and LoanCare are enjoined from further misrepresentations regarding the nature of the program and each must submit a compliance plan to the CFPB to ensure that future marketing materials comply with Federal consumer financial laws. Paymap will be required to return the full $33.4 million it received to provide redress to affected consumers and LoanCare must pay a $100,000 civil penalty to the CFPB’s Civil Penalty Fund. In addition, Paymap and LoanCare must adhere to a variety of other compliance provisions, including reporting requirements, order distribution and acknowledgment requirements, and record keeping requirements. Clearly, the CFPB is keeping a watchful eye on businesses that offer loan payment products to consumers.

Compliance, Financial Regulation

Rising Conflict Among Federal Courts – Whether an Account Number Visible on a Debt Collection Envelope Violates the FDCPA

Shredded PaperSection 1692f(8) of the Fair Debt Collection Practices Act (“FDCPA”) prohibits the use of any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by mail. The purpose of that prohibition is to protect the debtor’s privacy and avoid disclosing to anyone who might see the envelope that a debt collection letter is inside. Last year, in Douglass v. Convergent Outsourcing, 765 F.3d 299 (3d Cir. 2014), the U.S. Court of Appeals for the Third Circuit ruled that a mere string of numbers (subsequently identified as an account number) displayed through a glassine window on the envelope of a debt collection letter violated Section 1692f(8). Following Douglass, federal courts have been inundated with similar claims. A string of recent decisions reflects discord among the district courts as to the viability of such claims.

Multiple decisions from district courts within the Second and Seventh Circuits expressly reject the holding in Douglass, dismissing the claims against the debt collectors. Perez v. Global Credit Collection, Corp., No. 14-9413 (S.D.N.Y. July 27, 2015); Gelinas v. Retrieval-Masters Creditors Bureau, Inc., No. 15-116 (W.D.N.Y. July 22, 2015); Davis v. MRS BPO, LLC, No. 15-2303 (N.D. Ill. July 15, 2015); Gonzalez v. FMS, Inc., No. 14-9424 (N.D. Ill. July 6, 2015); Sampson v. MRS BPO, LLC, No. 15-2258 (N.D. Ill. Mar. 17, 2015). In declining to follow Douglass, these district court decisions aligned with the Fifth and Eighth Circuits’ as well as the Federal Trade Commission’s interpretations of Section 1692f(8), which limit violations to the use of letters and symbols on envelopes indicating that the contents pertain to debt collection. Each of these decisions dismisses the relevance of the “account numbers” because any link to the debtor’s account is only discoverable upon review of the enclosed letter, not on the face of the envelope. The holder of the letter is faced with a string of numbers without any knowledge or ability to infer that the numbers are linked to a debt. See e.g., Sampson, No. 15-2258 (N.D. Ill. Mar. 17, 2015) (“any hypothetical member of the public who views the envelope…would have to be blessed (or cursed?) with x-ray vision that enabled him or her to read the letter contained in the sealed…envelope” to perceive that it involved debt collection). Only one court outside of the Third Circuit has adopted Douglass. See Baker v. Credit Control, LLC, No. 14-00083, (N.D. Ind. July 15, 2015). In this unpublished opinion, Magistrate Judge Paul R. Cherry declined to adopt the interpretation of Section 1692f(8) limiting violations to the use of symbols indicating that the contents of the letter pertain to debt collection. Instead, the court adopted Douglass’ assertion of a privacy interest in the account number.

While district courts outside of the Third Circuit are distancing themselves from the ruling in Douglass, at least one federal judge within the Third Circuit is expanding the scope of Douglass to include barcodes and quick response (QR) codes referencing account numbers. In two recent decisions, Judge William J. Nealon ruled that disclosure of either a barcode or QR code on a debt collection envelope that revealed a consumer’s account number when electronically scanned constituted a FDCPA violation. See Kostik v. ARS Nat. Services, Inc., No. 14-2466 (M.D. Pa. July 22, 2015); Styer v. Professional Medical Management, No. 14-2304 (M.D. Pa. July 15, 2015). Because third parties could access the account information through smart phone apps designed to read barcodes and QR codes, the court held that even though the account number was encoded, the QR code was “susceptible to privacy intrusions.” Another court within the Third Circuit has slightly lessened the expansion of Douglass in the area of barcodes and QR codes. In vacating a default judgment in Kokans v. ACB Receivables Management, Inc., No. 14-6560 (D.N.J. Aug. 4, 2015), Magistrate Judge Douglas E. Arpert found that a barcode that requires scanning software interfaced with the defendant’s computer system to reveal any information would likely fall outside of Douglass as it would not reveal any identifying information to the public. While the decision in Kokans indicates that expansion by Judge Nealon will continue in the Third Circuit, the courts have not yet adopted a blanket prohibition of barcodes or QR codes that would not reveal consumer account information.

Even though the Douglass decision remains the law in the Third Circuit, thus far the vast majority of federal courts outside of the circuit have limited its reach. The question remains as to whether the privacy concerns associated with barcodes and QR codes containing customer information will invoke invasion of privacy claims outside of the debt collection industry.

CFPB, Compliance

45 Day Warning: A Brief Overview of the New TRID Disclosure Requirements in Advance of the October 3, 2015 Implementation

Government-Regulatory-and-Criminal-Investigations.jpgWith the new TILA-RESPA Integrated Disclosures (TRID) going into effect Saturday, October 3, 2015, it is important for lenders and consumers alike to review the new forms and understand the timelines which will soon govern most consumer lending transactions secured by real property.

Effective October 3, 2015, TRID disclosure requirements will apply to the majority of closed-end consumer credit transactions secured by real property.  The notable exceptions are home equity lines of credit, reverse mortgages, or loans secured by a mobile home.

Two forms created by the Consumer Finance Protection Bureau (CFPB) comprise the new TRID disclosure requirements: (1) Loan Estimate and (2) Closing Disclosure.

Loan Estimate [Sample Fixed Rate Loan Estimate]

The Loan Estimate (LE) replaces the Good Faith Estimate and Preliminary TILA forms.

The lender is required to provide the borrower the LE no later than the third business day after receiving a consumer’s application.  An “application” is deemed submitted when a consumer provides their (1) name; (2) monthly income; (3) social security number; (4) property address; (5) estimated value of property; and (6) requested loan amount.  A lender may add additional requirements for a credit decision, but not for providing the LE.  Notably, the CFPB removed from definition of “application” the seventh “catch-all” provision encompassing “any other information deemed necessary by the loan originator.”

Closing Disclosure [Sample Fixed Rate Loan Closing Disclosure]

The Closing Disclosure (CD) supplants the HUD-1 and Final TILA disclosure. The CD must be provided to the borrower three business days before closing.  A delay in providing the CD results in a delay in closing.  In addition, any change in certain loan terms could also warrant an amended CD, which could likewise result in a delayed closing.

While the new forms have been championed by the CFPB as more consumer-friendly and easier to understand, lenders must be aware of potential pitfalls and exposure that the new forms bring.  Both the LE and CD provide the consumer with direct contact information to the CFPB—an open invitation for consumers to contact the Bureau with complaints regarding improper loan figures, confusing terms, or closing delays.  The disclosures also require additional information not in the previous documents, including detailed interest rate lock information, specific loan comparison figures, and future refinance considerations.  The strict timelines for the TRID disclosures could also result in exposure for lenders and problematic delays for consumers.

The clock is ticking.  While lenders have prepared for the changes associated with the TRID rules, they must use these final 45 days to ensure a smooth transition towards compliance with the mandatory procedures. Meanwhile consumers should be prepared to arrive at closing in early October with new loan documents that provide direct contact information to the CFPB.


Financial Crimes, Financial Regulation, FinCEN Guidance

FinCEN Final Rule on Foreign Bank Requires Covered Financial Institutions to Take “Special Measures”

dominioOn July 22, 2015, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published in the Federal Register a final rule pursuant to Section 311 of the Patriot Act against FBME Bank Ltd. (FBME, formerly known as Federal Bank of the Middle East). FBME is based in Tanzania but does most of its global banking business through branches in Cyprus, according to FinCEN.  FinCEN’s final rule largely adopted its July 22, 2014 Notice of Finding, in which FinCEN found that FBME was a financial institution of primary money laundering concern under 31 U.S.C. § 5318A.  FinCEN’s final rule, which becomes effective on August 21, 2015, imposes requirements on certain U.S. financial institutions.  The full text of the final rule can be found here.

Section 311 of the Patriot Act, 31 U.S.C. § 5318A, authorizes FinCEN to require domestic “covered financial institutions” (CFIs) to take “special measures” with respect to certain foreign financial institutions that FinCEN concludes are of “primary money laundering concern.”  In FBME’s case, FinCEN found that FBME facilitated “money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasion, and other illicit activity internationally and through the U.S. financial system.”

FinCEN’s final rule imposes two requirements on U.S. CFIs, which are defined in 31 C.F.R. § 1010.605(e)(1).  First, CFIs are prohibited from “opening or maintaining . . . correspondent or payable-through accounts for FBME” or its subsidiaries.  CFIs must review their account records to insure they maintain no FBME accounts and, if they do, such accounts must be terminated.  Second, CFIs must engage in “special due diligence” of their correspondent accounts to reasonably safeguard against processing transactions involving FBME, including indirect use of correspondent accounts through methods used to hide the beneficial owner of the transaction.  To comply with FinCEN’s “special due diligence” requirement, CFIs must do the following:  (1) provide one-time notification to foreign correspondent account holders that CFIs “know or have reason to know provide services to FBME that such correspondents may not provide FBME with access” to the CFIs’ correspondent accounts and also to foreign correspondent account holders during the account-opening process¹; and (2) “implement risk-based procedures to identify transactions involving FBME” or its subsidiaries, which may include a review of transactional records maintained by CFIs in the ordinary course of business.  Compliance with these requirements must be documented, but need not be reported.


¹Although the required notice need not be provided in any particular form or by any particular means, FinCEN’s final rule contains a suggested notification that may be used by CFIs to insure their compliance.


What’s Next? Recent Actions Highlight CFPB’s Focus on Student Loans

Government-Regulatory-and-Criminal-Investigations.jpgBeginning with a May 2015 field hearing and request for information – and culminating consent order dated July 22, 2015 – recent actions by the Consumer Financial Protection Bureau (CFPB) highlight its increasing focus on student loans.

Although the CFPB began overseeing the student loan servicing industry in late December 2013, it was not until May 14, 2015, that it requested “information from the public about the student loan servicing practices that may make it harder to get ahead of your debt.” That same day, it held a field hearing on student loan debt in Milwaukee, Wisconsin, and by the deadline for responding to its request for information, the CFPB received thousands of comments from aggrieved borrowers.

More recently, the CFPB highlighted its increasing focus on student loans by entering into an $18.5 million consent order with Discover Bank and two of its subsidiaries (collectively, “Discover”). The consent order relates to Discover’s student loan servicing practices between January 2011 and January 2014, and it accuses Discover of: (1) failing to provide borrowers with the forms necessary to deduct the interest on their student loans, (2) overstating borrowers’ minimum payment amounts, (3) initiating collection calls at inconvenient hours, and (4) failing to comply with requirements in the Fair Debt Collection Practices Act (FDCPA) regarding initial contacts with borrowers whose loans were in default at the time Discover began servicing them.

With regard to Discover’s tax information policies, the consent order alleges that Discover did not provide borrowers with Forms 1098-E unless the borrowers had first submitted Forms W-9S certifying that their student loans were used exclusively for qualified higher-education expenses. Discover did not send Forms W-9S to borrowers without a Form W–9S on file, and only a message at the bottom of October and November account statements informed borrowers of Discover’s requirements. According to the CFPB, these practices resulted in Discover representing to more than 156,000 borrowers that they had not paid deductible student loan interest, and it likely resulted in many of those borrowers failing to realize the tax benefits associated with their student loans.

With regard to overstating minimum payments, the consent order alleges that Discover misrepresented minimum payment by including in borrowers’ online and paper account statements “interest accrued on loans that were still in deferment and thus not required to be paid.” According to the CFPB, Discover’s inclusion of interest accrued on loans still in deferment led to substantial overstatements in nearly 30,000 account statements sent to nearly 7,000 borrowers.

Finally, the consent order accuses Discover of placing more than 150,000 collection calls to borrowers’ cell phones before 8 a.m. or after 9 p.m., and it alleges that, when Discover made initial telephone contact with approximately 252 borrowers, it did not provide them with specific information regarding the source of their debt or their right to contest its validity, in violation of the FDCPA.

Based on the CFPB’s accusations, the consent order restrains Discover from the following:

  • Placing any calls to borrowers before 8 a.m. or after 9 p.m. as determined by both the time zone of the consumer’s home address and the time zone of the consumer’s phone number. (For consumers with home addresses and phone numbers in different time zones, Discover must ensure that telephone calls to those borrowers fall within the 8 a.m. to 9 p.m. window in both locations.)
  • Failing to comply with the FDCPA’s initial contact requirements.
  • Misrepresenting a minimum periodic payment, the amount of interest paid by a borrower, or “any other fact material to consumers concerning the servicing of their loans.”

It then orders Discover to take the following actions:

  • Send each borrower without a Form W-9S on file a copy of the form to complete along with a letter clearly explaining that Discover requires the form to issue a Form 1098-E.
  • Provide a system by which borrowers can submit Forms W-9S electronically.
  • Provide “clear and prominent” disclosures on its website, account statements and other notices that each borrower must complete and furnish a Form W-9S before Discover will issue a Form 1098-E.

Finally, the consent order requires Discover to set aside $16 million to provide certain borrowers: (1) free tax consultation, free tax amendment services and subsidized tax preparation services; (2) up to $150 in account credit or cash to each borrower who did not participate in certain tax programs; (3) up to $500 to each borrower who overpaid his or her student loan account; and (4) up to $142 per call for each borrower who received collection calls before 8 a.m. or after 9 p.m. If there are any funds remaining after Discover makes these payments, it must remit them to the CFPB, and the consent order also requires Discover to pay a $2.5 million civil penalty.

The consent order’s severity, coupled with the CFPB’s request for information regarding student loan servicing practices, indicates that the CFPB is taking a hard look at student loan servicers right now, and the CFPB is likely examining other student loan servicers’ practices. It is also very likely that the CFPB will announce extensive student loan servicing regulations in the coming months, and the CFPB’s July 22, 2015, consent order undoubtedly provides a preview of their content. Accordingly, student loan servicers would be well-advised to take a hard look at the consent order and implement its requirements before they, too, find themselves under investigation.

CFPB, Financial Regulation

D.C. Circuit Upholds Standing of Texas Bank in Constitutional Challenge to CFPB

77006468.jpegIn late July, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion upholding a Texas bank’s standing to challenge the constitutionality of the CFPB. The bank filed suit in 2012, raising three challenges to the Bureau’s authority over it.

First, the bank challenged the constitutionality of the CFPB itself on the basis that the Bureau is headed by a single director, rather than multiple members, and that the Dodd-Frank Act’s broad delegation of authority to the Bureau violates the non-delegation doctrine, which limits Congress’s ability to delegate its legislative powers to federal agencies.

Second, the bank contested President Obama’s 2012 recess appointment of CFPB Director Richard Cordray, arguing that the appointment – and therefore Cordray’s actions before his confirmation by the Senate in 2013 – were unlawful because the appointment took place during a congressional recess of insufficient length.

Third, the bank challenged the constitutionality of the Financial Stability Oversight Council, which was created by the Dodd-Frank Act with the authority to promulgate additional regulations governing financial companies deemed “too big to fail.”

Reversing the U.S. District Court for the District of Columbia, which had concluded that the bank lacked standing to assert its claims, the D.C. Circuit concluded that the bank had standing to assert its first two claims, but not the third. The court explained that “there is ordinarily little question that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated,” and concluded that because “there is no doubt” that the bank is regulated by the CFPB, it had standing to challenge the Bureau’s constitutionality and Cordray’s recess appointment.

The only remaining question, the court concluded, is when the bank could bring such a challenge: Must the bank wait for the CFPB to commence an enforcement action and assert its constitutional challenge as a defense, or could it bring that challenge in a pre-enforcement lawsuit? Relying on the Supreme Court’s decision in Abbott Laboratories v. Gardner, 387 U.S. 136 (1967), the D.C. Circuit concluded that the bank was not obligated to wait for a CFPB enforcement action to assert its claims, but that it was free to do so in its own pre-enforcement action. As the court put it: “[I]t would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating agency.” Although the court did not address the merits of the bank’s claims, its holding is significant because it affirms the ability of entities regulated by the CFPB to challenge the Bureau’s constitutional authority.

The court, however, rejected the bank’s standing to bring its third claim challenging the Financial Stability Oversight Council because the bank itself was not a “too big to fail” entity and therefore not subject to its authority. The Court also rejected claims by several states, also plaintiffs in the case, challenging the government’s ability to conduct “orderly liquidation” of troubled financial entities concluding that their claims were not yet ripe. Accordingly, the court remanded the case to the district court for further proceedings on the merits of the bank’s first two claims.