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Government Investigations and White Collar Litigation Group
Anti-Money Laundering, Compliance, Financial Institution Regulation

FinCEN Associate Director for Enforcement Delivers Remarks at Title 31 Conference, Stresses Importance of Culture of Compliance

On thThinkstockPhotos-76800277_jpge day after his appointment in August 2016, the Associate Director for Enforcement for the Financial Crimes Enforcement Network (FinCEN), Thomas Ott, addressed the National Title 31 Suspicious Activity & Risk Assessment Conference in Las Vegas, Nevada.  In his remarks, he (1) covered recent enforcement actions, (2) sought to dispel myths or misconceptions about suspicious activity reports (SARs), (3) provided context for the value to law enforcement of the Title 31 reporting information, and (4) outlined factors considered when FinCEN sets civil money penalties.  Ott is part of the new leadership of FinCEN, which lost its hard-driving Director, Jennifer Shasky Calvery, to the private sector at the beginning of the summer.  For those working in gaming compliance, Ott’s remarks were notable for several reasons, including their consistency with FinCEN’s recent messages and enforcement actions.

In addressing recent FinCEN enforcement actions, Ott emphasized the importance of creating and maintaining a culture of compliance within a financial institution.  These comments echoed FinCEN’s August 2014 guidance (FIN-2014-A007) that highlighted the importance of a strong culture of BSA/AML compliance for “senior management, leadership and owners of all financial institutions.”  According to Ott, at a minimum, a culture of compliance means the adoption and implementation of policies and procedures that are risk-based and reasonably designed to assure compliance with the BSA.  In describing the enforcement actions, Ott noted that FinCEN’s enforcement actions are intended both to remediate compliance deficiencies – particularly in financial institutions that have failed to correct identified shortcomings – and to educate regulated entities.

In explaining the value of SAR information to law enforcement, Ott set out statistics intended to demonstrate law enforcement’s reliance on reported information, even in the case of “low-dollar SARs.”  He also attempted to dispel certain myths and misconceptions about SARs.  He repeated the message of the former FinCEN Director that under the regulations “casinos are required to be aware of a customer’s source of funds under current AML requirements.”  He observed that under the BSA, casinos must have reasonably-designed procedures that use all available information to identify and report suspicious transactions, which include funds derived from illegal activity and funds or assets derived from illegal activity.  Ott stated that the SAR obligations “explicitly” require casinos to file SARs on funds “derived from illegal activity including ‘ownership, nature, source, location, or control of such funds or assets.’”

We note, however, that while the regulation he apparently cited, 31 CFR § 1021.320(a)(2)(i), does refer to the “source” of funds, that provision arguably refers to a transaction a casino knows, suspects, or has reason to suspect “is intended or conducted in order to hide or disguise funds or assets derived from illegal activity.”  A reasonable interpretation of that provision could be that unless a casino has a reason to suspect the transaction is being conducted or attempted in order to hide or disguise funds (or the source or control of those funds), the regulations do not “explicitly” require a casino to investigate a patron’s source of funds.  Of course a casino must use all available information to assess financial transactions.  And there are countless ways in which suspicion may arise that warrants discussion by casino management whether a SAR should be filed.  But FinCEN has yet to identify the affirmative regulatory obligation for a casino to investigate and determine each patron’s source of funds.

Ott also stressed that a casino cannot avoid its SAR filing obligation by claiming it has a larger appetite for risk or broader experience with unusual behavior and therefore a higher subjective standard for what constitutes suspicious activity.  Risk appetite should not drive the decision to file a SAR.   One casino may be more willing than another to permit a patron to continue gaming, but as Ott said:  “if you have a reason to suspect [illicit activity], then you are required to file.”

             Shifting to liability, Ott noted that it may attach to entities and individuals, and it may not be limited to civil money penalties.  He closed by summarizing the factors and considerations FinCEN evaluates when determining the amount of a civil monetary penalty.  These include:  (1) the nature and seriousness of violations; (2) knowledge and intent; (3) remedial measures; (4) financial condition of the financial institution or individual; (5) payments and penalties related to other enforcement actions; and (6) other factors.

The Associate Director’s remarks indicated a continuation of the overarching policies that FinCEN has followed in the past few years.  The Bank Secrecy Act and the Title 31 regulations impose compliance responsibilities upon financial institutions, which Ott recognized as requiring “significant resources.”  In recognition of these efforts, FinCEN has the stated goal of partnership.  However, a failure to comply – particularly in cases where IRS examinations have previously uncovered deficiencies – will quickly turn the partnership into a supervisory relationship, one with severe penalties and possibly more onerous obligations imposed in the form of “undertakings” than exist in the regulations.  Stated succinctly, financial institutions – including casinos and card clubs – should ensure they have appropriate resources invested in their compliance programs and periodically review the state of their program.

Compliance, Enforcement and Prosecution Policy and Trends, Financial Institution Regulation

Payment Processor Challenges CFPB’s Allegation That It Engaged in Unfair Practices

The 77006468.jpegConsumer Financial Protection Bureau’s (“CFPB”) lawsuit against payment processor Intercept Corporation remains pending, and recent briefing sheds light on what could result in broad implications for the payment processing industry and CFPB enforcement at large.

We previously reported on the CFPB’s suit against Intercept, pending in district court in North Dakota.  The CFPB alleges that Intercept violated the Consumer Financial Protection Act (“CFPA”) by engaging in unfair acts and practices.  Intercept moved to dismiss the CFPB’s complaint, and that motion is now fully briefed.  The Third Party Payment Processors Association (“TPPPA”) filed an amicus curiae brief in support of Intercept’s motion to dismiss.  The pleadings highlight concerns regarding both the scope of the CFPA and the ability of the CFPB to reach businesses that do not interact directly with consumers.

First, Intercept and the TPPPA raised the threshold issue of whether a payment processor is subject to the CFPA even though it is not consumer-facing.  To be governed by the CFPA as a “covered person,” one must engage in “offering or providing a consumer financial product or service.”  Intercept argues this requires that services be provided directly to consumers; however, Intercept provides its ACH processing services to businesses, not consumers.

This holds true for all payment processors, as pointed out in the TPPPA’s amicus brief.  Payment processors do not interface with consumers and only have scant information about the consumer.  As summed up by the TPPPA in arguing that payment processors are not “covered persons” within the meaning of the CFPA:  “Payment processors like Intercept never interact with consumers, nor do they provide payments or other financial data processing products to consumers.  Third party payment processors only provide these services for merchants and merchants are not consumers.”

Not surprisingly, the CFPB disagrees with Intercept’s and the TPPPA’s position that a person must interface directly with a consumer to be a covered person under the CFPA.  The CFPB acknowledges that the statutory language contemplates “use by consumers,” but posits that the statutory language does not differentiate between direct and indirect contact.  To reach its conclusion that covered persons can include people that interact only indirectly with consumers, the CFPB relies on rules of statutory interpretation, such as the use of the term “directly” in nearby provisions and an exemption for web-hosting companies from the definition of financial products or services for consumers.

Intercept warns that the CFPB’s interpretation of covered persons under the CFPA can have far-reaching effects if it is allowed to police companies that provide services to other businesses.  For instance, Intercept argues, the CFPB’s interpretation would extend the CFPB’s authority to consumer-facing businesses unrelated to consumer finance, such as grocery stores, hotels, veterinarians, churches, and hospitals.  This, Intercept continues, will lead to the anomalous result that payment processors would have to learn the laws relevant to each of its customers’ businesses and then monitor its customers’ interactions with consumers to ensure compliance with those laws.

Second, the TPPPA points out what it believes is a “glaring omission” in the CFPB’s claim that Intercept engaged in unfair acts and practices – the failure of the CFPB to allege that Intercept violated a National Automated Clearing House Association (“NACHA”) rule.  NACHA is the industry association that provides industry rules and guidance for ACH transactions.  The NACHA rules incorporate relevant federal rules and regulations.  The TPPPA argues that the CFPB’s omission raises due process concerns because any allegation of unfair practices must be predicated on a violation of the NACHA rules.  Otherwise, a payment processor, or any business that finds itself in the CFPB’s crosshairs, could be liable for conduct that “was not unlawful or forbidden by the rules in place at the time of the alleged conduct.”

The CFPB counters that a person need not violate industry practices or guidance in order to engage in unfair acts or practices, describing the TPPPA’s position as an “everyone else is doing it” defense that “would have the perverse effect of immunizing exactly the harmful conduct that is most widespread.”  But, the TPPPA’s concern remains, if a payment processor is acting within the confines of established rules and regulations, what stops the CFPB from effectively legislating around conduct ex post.

Finally, Intercept argues that the CFPB discovered the conduct at issue in the 2016 complaint through an FTC investigation from 2012.  Intercept provided documents to the FTC in 2012 pursuant to a subpoena, and the FTC did not pursue any action at that time.  Because the CFPB is the FTC’s successor, Intercept argues that the FTC’s knowledge is imputed to the CFPB because the two agencies share regulatory priorities.  Intercept also contends that if the rule were otherwise, the FTC and CFPB would be able to “stack” their statutes of limitations – doubling the time period in which to bring a claim – to bring claims alleging unfair acts or practices.  The CFPB denies that it has imputed knowledge of facts learned by the FTC in its earlier investigation.

If the court reaches any of the issues above, it could have far-reaching implications beyond payment processors: (1) do unfair acts and practices under the CFPA require direct interaction with consumers; (2) must unfair acts and practices claims be predicated on underlying rules violations; and (3) can other agencies’ knowledge be imputed to the CFPB to cut off the statute of limitations for bringing claims.

 

Enforcement and Prosecution Policy and Trends

California Court Hands CFPB a Noteworthy Victory Against CashCall, Inc.

In a77006486 closely watched case pending in the United States District Court for the Central District of California, the CFPB obtained a significant victory against CashCall Inc. (“CashCall”) and its affiliates.  The Court’s decision to grant the CFPB summary judgment on the issue of liability is noteworthy because it could have significant ramifications on a variety of lending arrangements and will likely embolden the CFPB in future enforcement actions.

In CFPB v. CashCall, et al., No. CV 15-7522-JFW, the CFPB alleged that Defendants engaged in unfair, deceptive and abusive acts and practices in violation of the Consumer Financial Protection Act of 2010 (“CFPA”), 12 U.S.C. § 5536(a)(1)(B).  The CFPB specifically targeted a business arrangement between CashCall and Western Sky Financial (“Western Sky”), a South Dakota limited liability company licensed to do business by the Cheyenne River Sioux Tribe (“CRST”).  Under the parties’ business arrangement, Western Sky originated loans online and over the phone to customers across the country and then subjected the loan agreements “to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation.”  These loans contained interest rates that greatly exceed state usury laws.  CashCall, while a separate entity, funded Western Sky’s operations.  Additionally, CashCall purchased every Western Sky loan almost immediately after origination.

In its decision, the Court initially analyzed whether CashCall or Western Sky was the “true lender.”  Considering the “totality of the circumstances,” the Court determined that CashCall was the “true lender” since “the entire monetary burden and risk of the loan program” was with CashCall as opposed to Western Sky.

Having determined that CashCall was the true lender, the Court next concluded that the CRST choice of law provision found in the loan agreements should be disregarded.  Specifically, by reference to the Restatement (Second) of Conflict of Laws § 187(2), the Court concluded: 1) the CSRT had no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ CRST choice of law; and 2) application of the laws of the CRST would be contrary to a fundamental policy of the borrowers’ home states which had a materially greater interest in the issues at hand.  Accordingly, the Court concluded that under the Restatement (Second) of Conflict of Laws § 188, the laws of the borrowers’ home states should apply.

Under applicable state laws, Western Sky’s loans were usurious, rending the loan agreements void or relieving borrowers of their obligations to pay any usurious charges.   Additionally, CashCall’s failure to obtain a consumer lending license in several states also voided those loan contracts.  By servicing and collecting on these loans, CashCall created the impression that these loans were enforceable and borrowers were obligated to repay them in accordance with their stated terms.  According to the Court, “that impression was patently false – the loan agreements were void and/or the borrowers were not obligated to pay” under their state laws.

The Court’s holding, and in particular the “true lender” determination, raises questions about the validity and enforceability of other lending arrangements.  Parties that use tribal entities and federally insured banks to secure favorable interest rates without regard to state usury laws must be aware that these arrangements are being targeted by federal and state regulators, especially when an institution funding and closing loans does not bear a substantial financial risk relative to those loans.  Parties engaged in similar lending arrangements must carefully assess the terms to ensure that they will not become the next target of the CFPB or a class action lawsuit.

This decision is also noteworthy because it gives credence to the notion that violations of state law, in this case state usury laws, can constitute per se violations of the federal consumer protection laws, here the CFPA.  Commentators have recognized that this decision may embolden the CFPB to identify other ways to “federalize” state law violations.

Compliance, Financial Institution Regulation

CFPB Issues Safe Harbors under FDCPA for Mortgage Servicers

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On August 4, 2016, in conjunction with issuing the final mortgage servicing rule, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule under the Fair Debt Collection Practices Act (FDCPA).  Although a mortgage servicer’s conduct is not always governed by the FDCPA, as the CFPB explains in the interpretive rule, servicers that acquire a mortgage loan following default are subject to the FDCPA with respect to that loan.  In situations where the prohibitions of the FDCPA apply, a conflict arises between the requirements under the 2016 Servicing Final Rule and the FDCPA.  The CFPB stated that the interpretive rule “constitutes an advisory opinion for purposes of the FDCPA,” creating safe harbors from liability for certain actions taken in compliance with the mortgage servicing rules under the Real Estate Settlement Procedures Act (RESPA) and implementing Regulation X, and the Truth in Lending Act (TILA) and implementing Regulation Z.

The safe harbors apply in three situations: (1) when communicating about the mortgage loan with confirmed successors in interest in compliance with specified mortgage servicing rules in Regulation X or Z; (2) when providing the written early intervention notice required by Regulation X § 1024.39(d)(3) to a borrower who has invoked the cease communication right under FDCPA section 805(c); and (3) when responding to borrower-initiated communications concerning loss mitigation after the borrower has invoked the cease communication right under FDCPA section 805(c).

Confirmed Successors in Interest

Section 805(b) of the FDCPA generally prohibits debt collectors from communicating with third parties in connection with the collection of a debt in the absence of a court order or prior consumer consent given directly to the debt collector.  The 2016 Servicing Final Rule extends the protections of Regulations X and Z to cover “confirmed successors in interest” whether or not a successor has assumed the mortgage loan obligation.  This extension of the TILA and RESPA protections to confirmed successors in interest requires servicers to communicate with these third-party successors regarding the debt.

In order to avoid the conflict, the CFPB interpreted the term “consumer” for purposes of Section 805 to include a confirmed successor in interest as defined in Regulation X §1024.31 and Regulation Z § 1026.2(a)(27)(ii). Under this interpretation, servicers do not violate section 805(b)’s prohibition on communicating with third parties by communicating with a confirmed successor in interest about a mortgage loan secured by property in which the confirmed successor in interest has an ownership interest.  The CFPB noted because of the expanded interpretation of “consumer” under section 805, confirmed successors in interest are entitled to the protections under 805(a) and (c), including the obligation to cease communicating and communicating only at convenient times or places.  The CFPB was also careful to note that the expanded definition of consumer under the interpretive rule applies only to the use of the term in section 805 and “it does not affect the definition of consumer under the remaining FDCPA provisions.”

Required Early Intervention Notice

Section 805(c) of the FDCPA prohibits a debt collector from communicating with a consumer (subject to enumerated exceptions) where a consumer refuses in writing to pay a debt or requests that a debt collector cease communicating with the consumer about the debt.  At the time of the CFPB’s initial and modified rules concerning mortgage servicing in 2013, it provisionally had exempted servicers from the early intervention requirements when a borrower had properly invoked the FDCPA’s cease communication protections.  However, in the interpretative rule, the CFPB partially eliminated the exemption, exempting servicers from the written early intervention notice only (1) if no loss mitigation option is available or (2) while any borrower on the mortgage loan is a debtor in chapter 11 bankruptcy.  Where these conditions are not met, the servicer is required to provide a modified written early intervention notice as set forth in the model language in the 2016 Servicing Final Rule.

In interpreting the FDCPA to permit the modified early intervention notice, the CFPB noted that the notice is “closely linked to a servicer’s ability to invoke its specified remedy of foreclosure,” and therefore, falls under the exception allowing the debt collector to notify the consumer that the debt collector or creditor intends to invoke a specified remedy.  The CFPB emphasized that this interpretation provides only a “narrow safe harbor” and that all other provisions of the FDCPA remain unchanged, which would impose liability on a servicer to the extent that anything in the notice violates any other provision of the FDCPA.”

Borrower-Initiated Communications Concerning Loss Mitigation

In addition to requiring the early intervention notice, the CFPB permits servicers to communicate to borrowers who have invoked the cease communications protection where the borrower initiates the communication concerning loss mitigation options.  This safe harbor applies only to a servicer’s communications relating to loss mitigation.  If the borrower provides a communication to the servicer specifically withdrawing the request for loss mitigation, the cease communication prohibition then extends to loss mitigation communications.

In extending this safe harbor, the CFPB emphasized that the cease communication prohibition continues to apply to a servicer’s communications with a borrower about payment of the mortgage loan that are outside the scope of loss mitigation.  The CFPB’s interpretation does not protect against pretextual communications seeking to circumvent the prohibition under the FDCPA; instead, the communications must be part of a good faith effort to discuss loss mitigation options.  Examples of prohibited communications include initiating conversations with the borrower related to repayment of the debt that are not for the purposes of loss mitigation, demanding that the borrower make a payment, requesting that the borrower bring the account current or make a partial payment on the account, or attempting to collect the outstanding balance or arrearage, unless such communications are immediately related to a specific loss mitigation option.

Although the CFPB addresses many servicers concerns relating to the Servicing Final Rule by issuing the separate advisory opinion to create safe harbors under the FDCPA, servicers still must be cautious whenever a mortgage falls within the FDCPA’s scope.  The safe harbors offer limited protections to servicers and unforeseen conflicts may still arise.

Financial Institution Regulation

CFPB’s Proposed Arbitration Rule Prompts Thousands of Comments

contractThe comment period for the Consumer Financial Protection Bureau (CFPB)’s proposed arbitration rulemaking ended on Monday, and the Bureau received nearly 11,000 comments both strongly supporting and opposing the proposed rule.  As proposed, the rule would prohibit the use of ar
bitration clauses that preclude consumer class action lawsuits in consumer financial services contracts, but would allow companies to require consumers to pursue individual claims in arbitration.

Those supporting the rule – including Democratic Vice Presidential Candidate Tim Kaine and 37 other senators – argue that “forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked.”  Another letter, from a group of 19 state attorneys general, argues that consumer class actions “have been a vehicle to prompt rapid reform through settlement across a variety of industries.”

A number of organizations – including the Securities Industry and Financial Markets Association and the National Association of Insurance Commissioners – have weighed in to oppose the rule, with particular focus on the industries they represent.  And, in a 103 page submission yesterday, the U.S. Chamber of Commerce argued that in crafting this proposed rule, the Bureau ignored data from its own study demonstrating both the benefits of arbitration to consumers and the failure of class-action lawsuits to provide meaningful benefits to consumers . . . and has closed its eyes to the inevitable real-world consequence of its proposed rule: the elimination of arbitration, which would leave consumers without any means of redressing the injuries they most often suffer.”

Financial Institution Regulation

CFPB Proposes Multiple Changes to TRID “Know Before You Owe” Rule

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The Consumer Financial Protection Bureau (“CFPB”) recently issued 293 pages of proposed changes (the “Amendments”) to the federal mortgage disclosure requirements it propounded in October 2015 commonly known as the TILA/RESPA Integrated Disclosure (“TRID”) or “Know Before You Owe” rule.  The changes are many, but the rulemaking is not intended to review policy decisions behind TRID, and does not include major changes “that could involve substantial reprogramming” of industry systems, compliance, and implementation efforts.  Instead, the Amendments are designed to formalize CFPB guidance on TRID and facilitate compliance through greater clarity and certainty.  However, despite the requests of industry participants, the Amendments do not provide additional clarity and further defined cure provisions for errors made in Loan Estimates or Closing Disclosures.

Know Before You Owe Background

The primary purpose of TRID was to integrate the mortgage loan disclosures required under the Truth in Lending Act and the Real Estate Settlement Procedures Act.  Thus, it combined the previously required Good Faith Estimate and early Truth-In-Lending disclosures into a single Loan Estimate form provided to borrowers.  It also created a single Closing Disclosure form that replaced the previously required HUD-1 and final Truth-In-Lending forms.  The goal was to create a simplified and streamlined disclosure process that allowed borrowers to more easily understand and compare mortgage terms.

Proposed Amendments

As evidenced by industry requests for greater clarity, additional procedures for curing errors, and improved guidance for existing cure provisions; implementation of TRID proved difficult and disruptive.  Market participants reported high levels of errors on the Loan Estimate and Closing Disclosure forms.  Private investors and secondary market players rejected loans due to TRID violations.  While the industry has adapted to some extent, uncertainties remain with respect to private suits from borrowers against lenders and investors.

While the proposed rulemaking is intended to remove some of these uncertainties and provide increased clarity to the mortgage industry, the CFPB has acknowledged that it “does not and cannot address every concern that has been raised to the Bureau.”  The major changes highlighted by the CFPB  include the following:

  • Creation of tolerances for the total of payments – Pre-TRID calculation of total of payments included finance charges. TRID eliminated the specific use of finance charges in such calculations.  The Amendments essentially roll-back the TRID approach and make the treatment of the total of payments disclosure consistent or “parallel” to the pre-TRID approach of including finance charges as part of the calculation.  The Amendments create new tolerances based on that approach.
  • Housing assistance lending – The Amendments clarify that fees and transfer taxes may be charged in connection with housing assistance loans without making such loans ineligible for the Rule’s partial exemption from disclosure requirements.
  • Co-ops – The Amendments clarify that loans involving cooperatives are covered by the Rule.
  • Privacy and information sharing – The Amendments clarify how a creditor and other market participants may provide disclosure forms and share information with each other while remaining compliant with the disclosure restrictions of the Gramm-Leach-Bliley Act and state laws.

The Amendments also contain “minor changes and technical corrections” regarding affiliate charges, calculating cash to close table (used for transactions without a seller), construction loans, escrow account disclosures and notices, expiration dates for closing costs identified on the Loan Estimate, seller and lender credits, agent responsibilities, written list of providers, property tax and property value estimates, as well as other items.

Comments on the proposed Amendments are due by October 18, 2016.

 

Compliance, Financial Institution Regulation

CFPB Issues Final Mortgage Servicing Rules

OnGovernment-Regulatory-and-Criminal-Investigations.jpg August 4, 2016, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited final mortgage servicing rule under the Real Estate Settlement Procedures Act (RESPA) and implementing Regulation X, and the Truth in Lending Act (TILA) and implementing Regulation Z.  The rule finalizes many of the proposed amendments that the CFPB issued in November 2014, revising portions of Regulation X, Regulation Z, and the CFPB’s official interpretations related to mortgage servicing.  The CFPB presented its changes to the servicing rules in a 900-page document, and grouped them into several broad categories.  Some of the most significant changes are discussed below:

  1. Successors in Interest. The final rule makes various changes relating to borrowers who are successors in interest to an original borrower, such as individuals who receive property upon the death of a relative or joint tenant, as a result of a divorce or legal separation, or from a spouse or parent. The final rule adopts a definition of “successor in interest” that is modeled on categories of transfers protected in the Garn-St. Germain Depository Institutions Act of 1982. Significantly, the rule applies the mortgage servicing rules contained in Regulations X and Z to successors in interest once the servicer confirms the status of that successor in interest. The CFPB noted that it received more comments on the successor in interest provisions than on any other aspect of the proposal. The CFPB hopes its new rule affords confirmed successors in interest the same protections under the mortgage servicing rules as original borrowers.
  2. Definition of Delinquency. Recognizing that a number of consumer protections under its servicing rules depend on how long a consumer has been delinquent under a mortgage, the CFPB’s new rule defines “delinquency” as a period of time that begins on the date that a periodic payment sufficient to cover principal and interest (and if applicable, escrow) becomes due and unpaid, and runs until such time as no periodic payment is due and unpaid. The rule also provides servicers discretion to consider a borrower as having made a timely payment even if that payment falls short of a full periodic payment (called a “payment tolerance”), but provides that if such a tolerance is given, the borrower cannot be treated as “delinquent” under the CFPB’s new definition.
  3. Force-Placed Insurance. The new rule finalizes amendments to force-placed insurance disclosures and model forms to account for situations when a servicer wishes to force-place insurance, but the borrower has insufficient—rather than expiring or expired—hazard insurance coverage on the property.
  4.  Early Intervention. The final rule clarifies that servicers’ early intervention live contact obligations recur in each billing cycle while the borrower is delinquent. It also attempts to clarify requirements regarding the frequency of written early intervention notices, including when there is a servicing transfer. The rule also finalizes exemptions from servicers’ live contact obligations where the borrower is in bankruptcy or invokes cease communication rights under the FDCPA; however, it now requires that servicers provide written early intervention notices to those borrowers under certain circumstances.
  5.  Loss Mitigation. The final rule implements several significant changes to loss mitigation requirements applicable to servicers under the mortgage servicing rules, including:
    1. Requiring servicers to meet loss mitigation requirements each time a borrower becomes delinquent, specifically addressing delinquent borrowers who bring their loans current and later default again;
    2. Modifying an existing exception to the 120-day prohibition on foreclosure filing to allow a servicer to join the foreclosure action of a superior or subordinate lienholder;
    3. Providing that if a borrower timely submits a complete loss mitigation application after the servicer has already made a first notice or filing, the servicer may not move for a foreclosure judgment or order of sale, or conduct a foreclosure sale, unless the loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement;
    4. Requiring that servicers provide a written notice to a borrower within five days of receiving a complete loss mitigation application;
    5. Requiring servicers to make efforts to obtain required information from third parties that the borrower does not possess, and prohibiting servicers from denying borrowers for loss mitigation due to a lack of such information;
    6. Providing that servicers may stop collecting documents and information from a borrower for a particular loss mitigation option after confirming that the borrower is ineligible for that option; and,
    7. Addressing how loss mitigation procedures apply when a transferee servicer receives a mortgage loan for which there is a pending loss mitigation application, and generally requiring that the new servicer comply with the loss mitigation requirements within the same timeframes that applied to the transferor servicer, with limited extensions under certain circumstances.
  6. Prompt Payment Crediting. The final rule provides that periodic payments made pursuant to temporary loss mitigation programs must continue to be credited according to the loan contract, while payments made pursuant to a permanent loan modification must be credited under the terms of the permanent loan agreement.
  7.  Periodic Statements. The final rule attempts to clarify disclosure requirements for periodic statements relating to mortgage loans that have been accelerated, are in loss mitigation programs, or have been permanently modified, “to conform generally the disclosure of the amount due with the Bureau’s understanding of the legal obligation in each of those circumstances.” It also requires servicers to send modified statements to consumers who have filed for bankruptcy, with content varying based on whether the debtor is in Chapter 7 or 11, or Chapter 12 or 13, bankruptcy. The rule also exempts servicers from the periodic statement requirement for charged-off loans, “if the servicer will not charge any additional fees or interest on the account and provides a periodic statement including additional disclosures related to the effects of charge-off.”
  8.  Small Servicers. The final rule excludes from the 5,000-loan limit for small servicers certain seller-financed transactions and mortgage loans voluntarily serviced for a non-affiliate, even if the non-affiliate is not a creditor or assignee.

In issuing its final rule, the CFPB noted that it “recognizes that [the] industry has incurred costs in the implementation” of its mortgage servicing rules, but “believes that the majority of the provisions in this final rule would impose, at most, minimal new compliance burdens,” and perhaps even reduce compliance costs. The Bureau went on to note that any new requirements were added only “after careful weighing of incremental costs and benefits.”

The CFPB also lent significant discussion to the topic of language access and the struggles faced by consumers with limited English proficiency (LEP), but ultimately concluded that—because it had not had adequate opportunity to test RESPA and TILA disclosures in languages other than English—it would “not impos[e] mandatory language translation requirements or other language access requirements at this time with respect to the mortgage servicing disclosures and other mortgage servicing requirements.” However, the CFPB left the door open to such requirements, noting that it would “consider further requirements on servicer communications with LEP consumers in the mortgage servicing context, if appropriate.”

In conjunction with its final rule, the CFPB issued an interpretive rule under the Fair Debt Collection Practices Act to clarify the interaction between the FDCPA and the mortgage servicing rules in Regulations X and Z. Most of the provisions of the final rule will take effect 12 months after the rule is published in the Federal Register, except for the provisions relating to successors in interest and periodic statements to borrowers in bankruptcy, which will take effect 18 months after publication.

Anti-Bribery and Corruption, Compliance

Awaiting the Finale: France’s Debate Over Its New Anti-Corruption Law

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France will soon change the anti-corruption landscape with a new law aimed at reducing foreign bribery.  Finance Minister Michel Sapin introduced the new law in July 2015 with hopes of aligning France’s efforts with those of the U.S., UK, and other countries.  The draft law was formally introduced in March 2016, but it has since been revised by the French Parliament in many subtle but important ways.  One of the more significant changes in the latest iteration of the bill is the re-introduction of a deferred prosecution process.  Companies operating in France (and those with significant ties to the country) should consider the impact of this imminent law on their compliance efforts.

The new law (known as Sapin II) comes after much criticism of France’s current anti-corruption regime.  Sapin II aims to fix many of the current law’s shortcomings.  It imposes compliance requirements on certain companies by introducing an offense against corporations that fail to prevent corruption.  It eliminates a dual criminality standard for foreign bribery of public officials.  Structurally, Sapin II creates a new agency under the Ministry of Justice with administrative responsibilities.

The French Parliament will continue debating the bill over the coming weeks with an expected approval later this year.  Nevertheless, as it stands now, the current bill contains changes to three features that are worth highlighting:

  1. The DPA is back in play . . . for now. The government continues the debate over the availability of a deferred prosecution agreement (DPA) in any new anti-corruption law.  Sapin’s initial DPA process allowed for a corporate entity (but not an individual) to avoid criminal conviction in exchange for implementing or enhancing a compliance program and/or paying a fine.  The latest draft bill includes many of Sapin’s original proposals, including calling for fines of up to 30% of an average annual turnover of a company, compliance obligations for up to three years, and compensation to third parties affected by any corruption.  We will have to wait to know whether the new law will include details about how a judge will review and validate a proposed corporate settlement.
  1. The new anti-corruption agency lacks standalone enforcement power. The original proposed bill called for a replacement of the Service Central de Répression de la Corruption with an agency that had broad supervisory authority over anti-corruption enforcement.  The contemplated agency would have ensured companies implemented compliance programs and continually improved those programs according to appropriate risk.  The agency would also have had investigatory power with the ability to impose penalties for wrongdoing.  After recent debate, however, Parliament has scaled back the proposed agency’s powers, leaving punishment to prosecutors and the judiciary.
  1. Possible retaliation against whistleblowers may impact the effectiveness of internal reporting processes. Current law does not provide general protections to whistleblowers (with the possible exception of specific but unrelated labor laws).  Sapin II originally included broad protection for whistleblowers by prohibiting retaliation and incentivizing people to come forward about instances of actual corruption or influence trafficking.  Recent debate, however, eliminated the anti-retaliation provisions from the bill.

What does all of this mean for multinationals?  Most importantly, the new law may hold companies with a connection to France accountable for misconduct occurring anywhere in the world by the companies’ employees and agents.  Existing compliance programs and internal controls designed to meet the requirements of the U.S. Foreign Corrupt Practices Act and UK Bribery Act may not need to change because of the new law.  But companies will want to confirm whether gaps exist and whether their French-connected activities present new risks.  Also, as with any change to an anti-corruption regime, companies will need to analyze if France’s new law impacts voluntary disclosure decisions and whether those decisions or any discovered misconduct imposes new collateral consequences.  We will keep an eye out for Parliament’s finale.

Financial Institution Regulation

The CFPB Issues New Proposals Overhauling The Debt Collection Industry

Money

On Thursday July 28, 2016, the Consumer Financial Protection Bureau (CFPB) released a series of proposals aimed at overhauling the debt collection business.  The new proposals require debt collectors to take additional steps to substantiate the accuracy of a debt, limit certain types of communications with consumers, and simplify dispute and litigation procedures.

In prepared remarks delivered in Sacramento, California, CFPB Director Richard Cordray explained that nearly a quarter of all complaints filed with the CFPB involved debt collection—more complaints than any other financial service or product that the CFPB regulates.  The new proposals are the CFPB’s attempt to combat some of the most common complaints.  However, given the scale of the proposals, the new regulations are likely to impose significant financial costs on the debt collection industry.

Accuracy

As part of the CFPB’s proposals, collectors would be required to take additional steps to verify and maintain the accuracy of the debt.  Specifically, collectors would be required to substantiate the debt “or possess a reasonable basis, for claims that a particular consumer owes a particular debt.”  Debt collectors would also be responsible for passing certain information about the debt to other debt collectors to help ensure that only valid debt is subject to the collections process.

The proposals further require debt collectors to include a Statement of Rights to consumers when attempting to collect a debt.  The Statement of Rights would outline legal protections that consumers may take advantage of during the debt collections process and would further help consumers verify the accuracy of the debt.

Communications

The new proposals also seek to limit communications between the debt collectors and consumers.  Under the proposals, the CFPB is considering imposing a limit on the number of attempted communications with a consumer at six times per week if the collector does not have confirmed consumer contact and three times per week if the collector has confirmation of contact.  Additionally, debt collectors would be prohibited from attempting to contact a surviving spouse for 30-days after the consumer had passed away.

Disputes and Litigation

Under the new proposals, debt collectors would be required to provide consumers with easier procedures for disputing debts.  The CFPB proposes that debt collectors include a “tear-off” dispute provision on a debt collection notice.  If the consumer wished to dispute the debt, the consumers would be able to simply remove the tear-off portion, mark why they are disputing the debt, and mail the dispute back to the debt collector.  Upon receipt of the dispute tear-off, the debt collector would be responsible for sending a report substantiating the debt to the consumer within 30-days.  If the debt collector failed to do so, the debt collector would be barred from attempting to collect the debt.  Debt collectors would also be prohibited from transferring the debt in an attempt to circumvent the written report requirement.  If a debt collector transferred the debt before it responded to the dispute, the next debt collector would not be allowed to collect on the debt until the dispute was resolved.

The new proposals further require a debt collector to make additional disclosures if a debt collector chooses to sue the consumer over a debt.  Specifically, the debt collector would need to inform the consumer that the collector intended to sue and that if the consumer did not appear in court, the court may rule against the consumer.  The debt collector would also need to include a statement that the consumer may obtain information for legal services through the CFPB website and by calling the CFPB’s toll free number.

The CFPB’s proposals marks the first steps in the rule making process.  Next, the CFPB will convene a Small Business Review Panel and gather feedback before issuing a final proposed rule.

Energy Enforcement, Enforcement and Prosecution Policy and Trends, Fraud, Deception and False Claims

Court Holds FERC De Novo Review to Proceed as “Ordinary Civil Action”

Last77006468.jpeg week, a federal district judge ruled for the first time that the “review de novo” promised by section 31(d) of the Federal Power Act (“FPA”), 16 U.S.C. § 823b(d), will be “treated as an ordinary civil action requiring a trial de novo.”  FERC v. Maxim Power Corp., Civ. No. 3:15-30113-MGM, at 2 (D. Mass. Jul. 21, 2016).  This issue has been hotly debated in several of the market manipulation cases FERC is currently litigating,[1] without any court issuing a definitive ruling on the scope and meaning of review de novo, as discussed previously here.  For example, courts in California and Massachusetts—the only two courts with an opportunity to make such a ruling—had only touched on what a review de novo might entail without definitively deciding what procedures would be followed.[2]

The FPA provides that once a party under investigation receives an Order to Show Cause and Notice of Proposed Penalty, that party has the option to have its case heard by an administrative law judge with an evidentiary hearing (which the Maxim court called “Option 1”), or to receive an immediate penalty assessment, with the opportunity for a federal district judge to review the facts and law de novo (which the Maxim court called “Option 2”).  See 16 U.S.C. § 823b.  In Maxim, as in the other market manipulation cases, the targets of the investigation chose Option 2, an immediate penalty assessment followed by “review de novo” in a federal district court.  After 60 days had passed without Maxim paying its penalty, FERC filed a petition seeking an order affirming its civil penalty assessment, and Maxim moved to dismiss.  In addition to substantive arguments about the alleged fraud and “duty of candor” claims, FERC and Maxim disagreed as to what procedures the court should follow, specifically whether FERC’s “petition” should proceed as a standard civil lawsuit.

To resolve the question of de novo review, the court analyzed the language of the statute, FERC’s prior positions and interpretations of the statute (and similar language in parallel statutes), and the lack of binding precedent from other courts,[3] concluding that FERC’s petition to affirm its civil penalty assessment should proceed as any normal civil action would, complete with a trial de novo by jury if necessary.

The court also weighted the due process concerns of both parties, applying the test from Mathews v. Eldridge, 424 U.S. 319, 333 (1976)The court concluded that, while FERC’s interests were strong, the scale tipped in favor of Maxim and proceeding as an “ordinary civil action with a de novo trial.”[4]  Central to the court’s reasoning was the fact that the additional process which FERC made available to Maxim after Maxim’s election of an immediate penalty assessment was not required by the FPA and, more importantly, did not offer a truly “adversarial proceeding.”[5]  If the court were to accept FERC’s arguments, litigants choosing between an administrative hearing and a review de novo would not have a “meaningful choice.”  The conclusion reached by the court offers such a meaningful choice: an evidentiary hearing before an Administrative Law Judge, or an immediate penalty assessment followed by a de novo trial conducted by a district court.

Critical to the court’s conclusion was the fact that within the framework of a “standard” civil action, a judge is given significant discretion to tailor fact discovery to the needs of the case.  In Maxim, the court noted that it would allow some additional factual discovery, but hinted that the presence of the voluminous administrative record, and the fact that most of FERC’s allegations were based on documents and data provided by Maxim, would likely reduce the scope of discovery.

The court also denied Maxim’s motion to dismiss, finding that FERC had pled the allegations of fraud and a violation of FERC’s regulation involving a “duty of candor” with sufficient particularity.  The court also agreed with FERC’s interpretation of the word “entity”, finding that “entity” could mean individuals for the purposes of holding individuals liable for violations of the FPA’s manipulation prohibitions.

*  *  *

Should other courts follow Maxim’s lead and treat the petition for affirmation of a civil penalty assessment as a standard civil action, FERC may decide to reduce the amount of process it provides to investigation targets, for example, in the time period following the issuance of the Order to Show Cause and Notice of Proposed Penalty to avoid duplicating efforts.  This would allow FERC, as well as the investigation target, to conserve resources until the case proceeds to the district court, instead of spending so much time and effort between the issuance of the Order to Show Cause and the Order Assessing Civil Penalties.  It may also impact how FERC chooses to resolve cases based on, for example, the amount of resources it may be required to expend on court cases, the reduced control by FERC over the timing of ultimate resolution, or the possibility that it FERC will receive less deference to its positions in the district court than it might have enjoyed under other adjudicative processes.  Such a shift would seem likely to impact the subject’s decision-making process when faced with a FERC investigation.

[1] See FERC v. City Power Marketing, LLC, Civ. No. 1:15-cv-01428 (JDB) (D. D.C.); FERC v. Powhatan Energy Fund, LLC, Civ. No. 3:15-cv-0452 (E.D. Va.); FERC v. Maxim Power Corp., Civ. No. 3:15-cv-30133 (D. Mass.); FERC v. Barclays Bank, PLC, Civ. No. 2:13-cv-2093-TLN-DAD (E.D. Cal.); FERC v. Silkman, Civ. No. 13-13054-DPW (D. Mass.);  FERC v. Lincoln Paper and Tissue, LLC, Civ. No. 13-13056-DPW (D. Mass.).

[2] See FERC v. Maxim Power Corp., Civ. No. 3:15-30113-MGM, at 16-17 (D. Mass. Jul. 21, 2016) (explaining how the Barclays and Silkman decisions addressed the issue of de novo review without completely resolving the scope and procedure questions).

[3] See id. at 16-17 (discussing the Barclays and Silkman decisions’ treatment of de novo review).

[4] Id. at 21.

[5] Id. at 19-20.