Financial Services Law

OCC, CFPB Charge Bank With Illegal Credit Card Practices

Two regulators have forced one bank to pay $35 million for allegedly improper credit card practices—including fines owed to both the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB).

What happened

Regulators allege that, from 1997 to 2012, First National Bank of Omaha engaged in unfair billing practices, while relying on deceptive enrollment practices between 2010 and 2012 to encourage customers to enroll in add-on products such as the “Secure Credit” and “Payment Protection” debt cancellation products and “Privacy Guard” and “IdentitySecure” credit monitoring products. A 2012 examination supposedly revealed the illegal activities.

The bank allegedly disguised that it was selling consumers a product by having consumers listen to a sales pitch for the add-on products while their credit cards were ostensibly “activating.” However, the activation process was almost instantaneous, the Bureau alleged, and there was no need for customers to remain on the phone with the bank.

In other instances, regulators say that customers were purportedly duped into purchasing the products when the bank confirmed enrollment by requesting other information (such as the customer’s city of birth) and not explicitly asking whether the customer wanted to purchase the product. Some consumers did not realize a purchase occurred because First National implied they were updating their accounts, receiving a benefit, or simply agreeing to receive more information about the product, the CFPB alleged.

The bank’s marketing likely allegedly neglected to disclose the eligibility for certain products, encouraging customers to make a purchase even where they would be ineligible. For example, customers were apparently pitched debt cancellation products even when they had disclosed information suggesting they could not receive the benefits because they were retired or self-employed, the Bureau alleged.

Consumers who did purchase the debt cancellation product were sometimes hindered in obtaining their benefits by the bank, according to the CFPB, as First National allegedly took a hard line on eligibility requirements by blocking coverage for consumers with preexisting health conditions, which included conditions appearing within six months after enrollment. The Bureau claims that the bank made cancellation of the products difficult, rewarding its customer sales representatives when they were able to talk a customer out of an attempt to cancel.

As for the bank’s billing practices, the regulators said First National billed customers for credit monitoring services that were not provided.

To settle the allegations that the bank engaged in unfair and deceptive practices in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the consent order with the CFPB requires the bank to provide approximately $27.75 million in refunds and other fees (including associated over-limit fees, overdraft fees, and finance charges) to an estimated 257,000 customers.

First National also agreed to change its practices with regard to add-on products, putting an end to deceptive marketing and billing customers if they don’t receive the promised benefits.

The bank will pay a $4.5 million penalty to the CFPB and an additional $3 million fine to the OCC for running afoul of Section 5 of the Federal Trade Commission Act’s prohibition on unfair or deceptive acts or practices.

To read the CFPB’s consent order in In the Matter of First National Bank of Omaha, click here.

To read the OCC’s consent order, click here.

Why it matters

Although the financial industry continues to wind down its ancillary products operations, credit card add-on practices remain top of mind for the CFPB, which noted that the action against First National Bank of Omaha was its twelfth overall and eighth taken in coordination with another regulator on the issue. “First National Bank of Omaha violated the trust of its customers by illegally signing them up for credit card add-on products,” CFPB Director Richard Cordray said in a statement about the action. “The CFPB’s track record, and this result today, shows strong and consistent action against credit card companies that dupe consumers into buying a product they do not want.”

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DoD Publishes Guidance on MLA Amendments

With the July 2015 amendments to the Military Lending Act (MLA) set to take effect on October 3, the Department of Defense (DoD) published an interpretive rule to help financial institutions achieve compliance with the changes.

What happened

Enacted in 2006, the MLA caps the interest rate on covered loans to active duty servicemembers at 36 percent (referred to as the Military Annual Percentage Rate (MAPR)), requires disclosures to inform servicemembers of their rights, and prohibits the use of arbitration clauses in contracts with servicemembers.

The law also provided the DoD with the power to define the scope of credit covered by the statute. Initially, the agency used a narrow definition of credit that covered only three products. The Department more recently determined that a far broader scope of coverage was necessary and amended its MLA implementing regulations just last year. See here, extending the MAPR, ban on mandatory arbitration, and other limitations to a larger range of credit products for military servicemembers and their families.

With the effective date of the changes in sight, the DoD has followed up with an interpretive rule in a Q-and-A format intended to address ambiguities in the amendments. “This interpretive rule does not substantively change the regulation implementing the MLA, but rather merely states the Department’s preexisting interpretations of an existing regulation,” the agency explained.

For example, the DoD explains that, for open-end credit products where the MAPR will vary each billing cycle, a creditor can comply with the 36 percent cap “by waiving fees or finance charges, either in whole or in part, in order to reduce the MAPR to 36 percent or below in a given billing cycle.” Fees that a creditor is required to pay by law and passes through to a covered borrower must be included in the MAPR calculation if they are a “finance charge” as defined by Regulation Z, the Department adds.

The MLA requires creditors to provide an oral disclosure of the payment obligation before or at the time the covered borrower becomes obligated or establishes an account. The interpretive rule makes clear that creditors have other options. For example, a creditor may orally provide “a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow,” the DoD says. For oral disclosures provided via toll-free telephone number, the disclosure only needs to be available for a period “reasonably necessary to allow a covered borrower to contact the creditor for the purpose of listening to the disclosure.”

Providing some relief to creditors, the DoD explains that standard written credit agreements used for both covered and non-covered borrowers that contain prohibited terms for covered borrowers (mandatory arbitration, for example) are permissible “if the agreement includes a contractual ‘savings’ clause limiting the application of the proscribed item to only non-covered borrowers, consistent with any other applicable law.”

In addition, assignees are allowed to rely on the safe harbor granted to creditors that determined covered borrower status using the DoD database or a credit report.

The MLA amendments include a prohibition on the use of a check or other method of access to a deposit, savings, or other financial account maintained by a covered borrower. But this ban does not prevent covered borrowers from “tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor,” the Department says, or from authorizing recurring payments that comply with applicable laws like the Electronic Fund Transfer Act.

To read the DoD interpretive rule, click here.

Why it matters

If companies did not believe the MLA applied to them, they may wish to think again. The 2015 regulations dramatically broadened the potential coverage of the law, with the changes effective October 3, 2016, expanding coverage to almost all forms of consumer credit within the scope of the Truth in Lending Act. If those companies have not done so already, financial services providers should review the DoD’s guidance now (although credit card issuers were given an additional year, until October 3, 2017, to achieve compliance).

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To Arbitrate or Not to Arbitrate? Groups Comment on CFPB Proposal

As the deadline for input nears, stakeholders on both sides of the issue filed comments weighing in on the Consumer Financial Protection Bureau’s (CFPB or the Bureau) proposal on arbitration.

What happened

In May, the Bureau released a proposed rule that would prohibit the inclusion of mandatory arbitration clauses in new contracts that foreclose class action lawsuits, although arbitration clauses could be used if the provision explicitly states that consumers are not prevented from taking part in class action litigation. The CFPB opened the proposal for public comment and received input from both ends of the spectrum.

A coalition of 18 state Attorneys General—including the AGs of California, Massachusetts, and New York—sent a letter to the CFPB in support of the proposal. In addition to urging the Bureau to promulgate a final rule, the Attorneys General took the proposal one step further to suggest that “consumers will be best served by the total prohibition of mandatory, pre-dispute arbitration clauses in consumer financial contracts and we encourage the Bureau to consider regulations to that effect.”

As drafted, the proposal still provides “a substantial benefit” to consumers, the AGs wrote, as it “will restore significant and much-needed consumer protections that have been eroded through the inclusion by financial services companies of mandatory arbitration clauses in their contracts with consumers.” Mandatory arbitration clauses have become ubiquitous, the Attorneys General argued, often presented in a manner that prevents consumers from understanding the impact on their rights.

The use of mandatory arbitration clauses waiving class proceedings has resulted in “consumers simply foregoing their rights to pursue claims for small amounts under financial services contracts,” according to the letter. Alternatively, class action litigation “is capable of providing real and meaningful benefits to harmed consumers.” The AGs cited examples such as a challenge to banking overdraft fees that resulted in a court ordering one bank to pay over $200 million in restitution in overdraft charges.

Such cases demonstrate that “restoring the right of consumers with common claims to pursue redress through class actions will provide a valuable check against corporate misconduct,” Massachusetts Attorney General Maura Healey wrote for the group. “The current legal landscape allows financial institutions to use arbitration clauses to suppress consumer claims.”

“The presence of mandatory pre-dispute arbitration clauses in contracts means that many serious violations of law will go undetected, undeterred, and unremedied, either because arbitrations will never be brought or because the evidence presented and decisions rendered in the private arbitration proceedings are not made public, have no binding precedential effect, and do little to discourage others from committing similar violations,” the AGs concluded.

On the other end of the spectrum, industry groups filed a joint letter arguing that the proposal is not in the public interest, will not protect consumers, and is not consistent with the CFPB’s empirical study of arbitration.

Instead, the proposed rule “would inflict serious financial harm,” the American Bankers Association, Consumer Bankers Association and The Financial Services Roundtable wrote to the Bureau, on consumers, the court system, and financial services providers.

Consumers will be forced to shoulder the increased costs to both state and federal court systems, which are estimated to face an additional 6,042 class actions every five years, as well as face the increased court backlogs that will delay resolution of all cases. Further, “[a]s customers of the providers, they will be saddled with higher prices and/or reduced services, because the billions of dollars in additional class action litigation costs will be passed through to them in whole or in part,” the groups wrote.

The Bureau itself concluded there is nothing per se harmful to consumers about arbitration, the organizations added, and its prohibition would result in a loss “to a fast, efficient, less expensive, and more convenient dispute resolution system” for consumers as well as a higher average recovery ($5,400 for arbitration as compared to $32.35 for a class action).

As for the court system, already overburdened and underfunded courts would face a significant increase in the number of cases on their dockets, the industry groups said. “The Bureau ignores the broader impact of the proposed rule on society,” according to the letter. “Permanently burdening the court system with 6,042 additional class actions every five years in the hope that a few might succeed—and return a negligible $32.35 to the average class member—is indisputably bad public policy and is clearly not in the public interest.”

Financial services providers will also face “unprecedented and staggering” costs, with the Bureau estimating providers will incur between $2.62 billion and $5.23 billion over a five-year basis to defend against the additional class actions.

The groups also challenged the CFPB study that formed the basis of the proposal, pointing to inconsistencies and arguing that the study was “incomplete” because it failed to consider consumer satisfaction with arbitration.

To read the letter from the state AGs, click here.

Why it matters

If the rule becomes final as is, the impact on class action litigation will be significant and detrimental to large swaths of the financial industry. And the Bureau’s bias—in favor of a litigation vehicle that does not appear to be benefiting consumers as much as the plaintiffs’ lawyers who file them—will be grist for many anticipated attacks in federal court. Comments on the controversial proposal were due at the end of August, and the Bureau will now consider the input received before it takes the next step. Given the breadth of opinions shared on the proposed rule, the CFPB faces some serious challenges not just to promulgation but also to enforcement of any finalized prohibition on arbitration.

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CFPB Focuses on Bank Accounts, Services Complaints for August

Bank accounts and services were the focus of the Consumer Financial Protection Bureau’s (CFPB) August snapshot of consumer complaints.

What happened

Each month, the CFPB summarizes recent consumer complaints filed with the Bureau and highlights one particular product or service as well as one geographic location for examination.

In August 2016, the CFPB took a closer look at bank deposit accounts and services. “Deposit accounts are an essential component of millions of consumers’ financial lives,” said CFPB Director Richard Cordray in a statement about the report. “We are concerned that consumers continue to face difficulties accessing and managing this cornerstone financial tool. Consumers who are eligible for a deposit account should be able to get one and use it effectively.”

The category—which includes products offered by banks, credit unions, and nonbank companies—received approximately 94,200 complaints as of August 1, 2016. Checking accounts are the most complained-about product or service in the category, covering 64 percent of the complaints.

A common complaint from consumers: trouble opening an account. In addition to grumbling about credit reporting data used in screening for new accounts, consumers told the CFPB they often learned about negative reporting information for the first time when they tried to open a new deposit account. Trying to address potential errors that prevented opening an account was also the subject of numerous complaints.

For existing accounts, consumers told the CFPB they were unhappy about overdrafts due to “confusion” about the availability of funds in the account or that they were attempting to deposit. “Consumers also regularly complain about the size of overdraft fees when making small dollar purchases,” the CFPB wrote. “Other fees, including insufficient funds fees, extended overdraft fees and monthly maintenance fees are also frequently the subject of complaints.”

In addition, complaints rolled in about bank check holding policies that consumers said delayed the availability of funds for extended periods of time. This area of “major concern” for consumers involved problems with mobile deposit applications, particularly where financial institutions have different funds availability policies for traditional deposits and mobile deposits.

Promotional offers “were the focus of a number of complaints,” according to the report, some having to do with the consumer’s eligibility for the offer and others with whether the consumer met the required terms for an offer.

Another frequent complaint referenced the error resolution procedures at financial institutions, the Bureau reported. For instance, when an unauthorized transaction occurred or a consumer believed he or she was the subject of fraud, the CFPB received complaints about “prolonged” response times and the lack of provisional credit for disputed transactions.

As always, the Bureau provided an overview of consumer complaints across all categories and geographic locations. The total number of complaints handled by the CFPB reached 954,400 as of August 1 with debt collection maintaining the number one spot for complaints. Of the roughly 24,000 complaints filed in July, 6,546 fell into the category of debt collection. Credit reporting (with 5,382 complaints) and mortgages (3,910 complaints) took the second and third spots.

Comparing trends, the CFPB said a year-to-year comparison between the months of May and July last year and this year showed a 64 percent increase in student loan complaints, with a jump from 639 to 1,050 complaints. The states with the greatest year-to-year complaint volume increase were Alaska, Wyoming, and Colorado, up 29, 24, and 20 percent, respectively.

The August snapshot focused its geographic attention on Ohio, where consumers have submitted 29,400 complaints, with 6,500 coming from the Columbus metro area. Similar to the national data, the most complained-about product or service is debt collection (accounting for 30 percent of all complaints) with a slightly lower than average rate of complaints for mortgages.

To read the CFPB’s Monthly Complaint Report for August 2016, click here.

Why it matters

Whether or not these complaints are valid, the industry pays attention to these summaries for good reason: both the CFPB and the plaintiffs’ bar use these reports to study where to attack next. Some of the problems highlighted by the monthly complaint report with regard to bank products and services have been raised by the Bureau before. Earlier this year, the CFPB released a compliance bulletin cautioning banks and credit unions that “failure to meet accuracy obligations when they report negative account histories to credit reporting companies could result in Bureau action” and urging them to offer lower-risk products, such as “no-overdraft” accounts.

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New York DFS Issues $180M BSA/AML Penalty

New York’s banking regulator cracked down on enforcement of the state’s anti-money laundering (AML) law, issuing a $180 million penalty against Mega International Commercial Bank of Taiwan (Mega Bank) for past violations and requiring an independent monitor going forward.

What happened

What DFS examiners found in the course of their September 2014 examination was “extremely troubling,” the regulator said, with “numerous deficiencies” in Mega Bank’s New York branch’s compliance with state AML law.

The international financial institution, which has approximately $103 billion in assets—$9 million of which are at its New York branch—had an officer assigned to Bank Secrecy Act (BSA)/AML issues. But the officer for the New York branch was based at the bank’s Taiwan headquarters and neither he nor the branch’s chief compliance officer had familiarity with U.S. regulatory requirements, DFS said. Adding to the problem, the chief compliance officer had conflicted interests, with key business and operational responsibilities along with her compliance role.

Other members of the compliance staff, both at the New York branch and the head office, failed to periodically review surveillance monitoring filter criteria that were designed to detect suspicious transactions, according to DFS, and documents relied upon in transaction monitoring were not translated into English from Chinese, limiting their effective evaluation by regulators.

The BSA/AML compliance efforts at the New York branch were seriously lacking, the regulator added. The procedures in place provided “virtually no guidance” about the reporting of continuing suspicious activities, with some of the compliance policies inconsistent, such as transaction monitoring and customer on-boarding, as well as a failure to determine whether foreign affiliates had adequate AML controls in place.

DFS characterized the bank’s head office as “indifferent” toward risks with high-risk money laundering jurisdictions such as Panama. The examination revealed “a number” of suspicious transactions between Mega Bank’s New York and Panama branches and determined that a “substantial number” of customers were formed with the assistance of a Panamanian law firm DFS said is “at the center of the formation of shell company activity, possibly designed to skirt banking and tax laws worldwide, including U.S. laws designed to fight money laundering.”

Pursuant to the consent order, Mega Bank will pay a $180 million penalty and must install an independent consultant to implement changes to its policies and procedures to remedy the compliance deficiencies at the New York branch.

In addition, an independent monitor—who will report directly to DFS—will be engaged for a two-year period and tasked with conducting a comprehensive review of the effectiveness of the branch’s compliance program as well as conducting a Transaction and Office of Foreign Assets Control Sanctions Review to review activity from 2012 to 2014 for possible suspicious activity.

Why it matters

“DFS will not tolerate the flagrant disregard of anti-money laundering laws and will take decisive and tough action against any institution that fails to have compliance programs in place to prevent illicit transactions,” DFS Superintendent Maria T. Vullo said in a statement. The action reiterates the regulator’s commitment to BSA/AML enforcement, particularly with a new regulation set to take effect January 1, 2017, that requires regulated institutions to submit an annual board resolution or senior officer statement attesting to compliance.

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