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  • CFPB in Focus: Navigating Investigational Hearings
    April 23, 2014
    Jonice Gray Tucker & Amanda M. Raines

    The Consumer Financial Protection Bureau has been actively engaged in investigations of banks and nonbanks since it was established nearly three years ago. To further its mission “to ensure that consumer financial markets actually work for people,” the bureau has stated that it will use “strong and vigilant enforcement” to “root out unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services.” The recent proliferation of public enforcement actions demonstrates that the CFPB is putting words into action.

    Like many government agencies before it, the CFPB has relied heavily on the use of Civil Investigative Demands (“CIDs”) in its investigations to carry out its mission. Although the final rules relating to investigations, including those related to CIDs, were drawn from investigative procedures used by other government entities, most heavily the Federal Trade Commission, the CFPB’s execution of these rules can be quite different in a number of important ways.

    The process for investigative hearings, which are noticed through CIDs and used to take oral testimony during the bureau’s investigations, is another instance in which the CFPB’s rule of the road diverges from those of many other government agencies. Thus, enforcement lawyers and the institutions they represent are working within a new rubric in many ways. This article provides an overview of the CFPB’s rules relating to investigational hearings and practical tips for preparing and defending such hearings.

    Originally published by Law360; reprinted with permission.

  • The British (Financial Regulatory Principles) Are Coming!
    April 11, 2014
    Manley Williams, Valerie L. Hletko & Leslie L. Meredith

    Regulation of financial products and services in the U.S. historically has relied on rules-based regulatory policy, governing business processes including disclosures relating to terms, pricing, structure and marketing. The U.K. has been a leader in applying principles-based regulation, which governs conduct at a higher level of generality. Over the past few decades, researchers in cognitive psychology and behavioral economics have produced a body of findings that are beginning to fundamentally alter understandings of what regulation should do, particularly with respect to the design of consumer “nudges.”

    Originally published in Law360; republished with permission.

  • Trust and Transparency in the Era of 'Bring Your Own Device'
    April 10, 2014
    Elizabeth E. McGinn, James T. Shreve & Purvi S. Patel

    Information, including proprietary business information and personally identifiable information, is one of a financial institution’s most precious assets, and protecting this asset is necessary to establishing and maintaining long-standing relationships between a financial institution and its customers. Moreover, the reputation  and success of a financial institution are linked to its management and protection of sensitive information. The increasing prevalence of the BYOD trend — “bring your own device,” in which employees use their personal mobile devices for work purposes — has drastically changed the rules of engagement when it comes to protecting a financial institution’s information assets.

    Originally published in Westlaw Journal Computer & Internet; reposted with permission.

  • The Superlien Dilemma
    April 1, 2014
    Andrea Lee Negroni, Steven vonBerg & Derrick Pitts

    Who pays delinquent dues when it comes to shared-interest communities governed by homeowner associations? This is a growing problem that is nowhere close to being solved. Lenders stand to lose big unless the issue is addressed.

    Originally published in Mortgage Banking magazine; reprinted with permission.

  • Banker Beware: EB-5 Programs Can Be Fraught With Peril
    March 16, 2014
    Thomas A. Sporkin & Michael F. Zeldin

    Originally published here by KYC360. Reposted with permission.

    The EB-5 visa, created by Section 203(b)(5) of the United State's (U.S.) Immigration Act of 1990, was established to attract foreign capital and create U.S. jobs by providing a method of obtaining a Green Card for foreign nationals who invest either $1,000,000 generally or at least $500,000 in a "Targeted Employment Area." Under the program, immigrants are granted conditional residence, and after two years, permanent residence status, if they invest in a commercial enterprise that will benefit the U.S. economy. An example of this could be an investment that created or preserved at least 10 jobs for U.S. workers, excluding the investor and his/her immediate family. While there have been fewer applications under the program than anticipated, U.S. Citizenship and Immigration Services data indicates that changes made to the application process in 2011 have created a surge in applications.  

    Unwary investors and financial institutions providing banking services to EB-5 programs should be aware of the risks that this increase in applications may bring, notably highlighted by two emergency actions brought by the Securities and Exchange Commission (SEC):  SEC v. Marco A. Ramirez, et al. (February 2013) and SEC v. A Chicago Convention Center, et al. (October 2013).  Although no financial institutions were charged with wrongdoing, these cases emphasize the potential jeopardy facing banks if they support EB-5 programs without firstly conducting initial due diligence on the bona fides of promoters and investors and secondly continually monitoring the flow of funds into and out of the accounts. The SEC alleged that the promoters promised above average returns and the opportunity to obtain EB-5 visas. To participate, investors were required to send funds to designated U.S. financial institutions at the direction of the promoter. Instead of using the funds in a manner consistent with the disclosure documents and EB-5 rules, the SEC alleges that the promoters diverted the funds for personal use.

    While these cases raise red flags for would-be foreign investors and suggest the importance of caution before making an investment into any purported EB-5 program, the cases also raises potential Know Your Customer/Due Diligence (KYC) concerns for financial institutions looking to provide banking services to EB-5 promoters. At a minimum, financial institutions should consider:

    1. reviewing disclosure documents provided to investors;
    2. understanding the interplay of any master and sub-accounts;
    3. understanding risk profiles of sub-account holders;
    4. understanding the proposed use of funds; and
    5. having a process in place to confirm the identity of the ultimate recipient of funds.

    Additionally, financial institutions involved in EB-5 programs should consider adding institutional protections by incorporating into relevant agreements special terms such as a right to:

    1. audit the promoter's books and records,
    2. independently confirm the use of proceeds, or
    3. review the promoter's prospectus for warning signs of fraud.  

    Finally, the risk profile of these prospective customers and the EB-5 product itself should be addressed in the financial institution's risk assessment and transaction monitoring rules.

    Although the SEC cases indicate a likelihood that EB-5 promoters misled, and the SEC elected not to file charges against, those institutions where the promoters banked, this should not be interpreted to mean the programs pose no risk for financial institutions. Indeed, the SEC is increasingly focused on the role of financial institutions in such matters. Andrew J. Ceresney, Co-Director of the SEC's enforcement division, indicated as much regarding the $15 million SEC settlement with TD Bank resulting from the Scott Rothstein Ponzi Scheme: "Financial institutions are key gatekeepers in the transactions and investments they facilitate and will be held to a high standard of accountability when their officers enable fraud."1

    Beyond the risks that EB-5 promoters may present to financial institutions, care should also be taken in evaluating the bona fides of the investors themselves; one can easily image scenarios where an EB-5 investment vehicle could be used in the placement or layering stages of the money laundering process. While the application of KYC principles to financial institutions' direct clients (EB-5 promoters) appears to be a business imperative, financial institutions with inadequate processes to know their customers (foreign investors) could also fall foul of regulatory expectations.

    Despite these risks, the EB-5 program has sound underpinnings and promoters and their clients may ultimately prove worthy customers of financial institutions with proper risk mitigation processes in place. However, given the potential for abuse outlined in Ramirez and Chicago Convention Center, and increasing focus from the SEC, prudent financial institutions should consider careful planning at the outset of the client relationship and ongoing diligence over its course.

    About the Authors

    Michael Zeldin, Special Counsel with BuckleySandler LLP, helps lead the firm’s Anti-Money Laundering and Economic and Trades Sanctions practice. He has served as the Independent Consultant appointed by federal and state banking regulators on numerous occasions for a wide array of domestic and global financial institutions. He can be contacted at mzeldin@BuckleySandler.com.

    Thomas A. Sporkin, a partner at BuckleySandler LLP, previously served as a senior U.S. Securities and Exchange Commission enforcement official. He currently represents individuals and entities in matters before the SEC, self-regulatory organizations and other federal and state agencies. He can be contacted at tsporkin@BuckleySandler.com. 


    1. SEC Charges TD Bank and Former Executive for Roles in Rothstein Ponzi Scheme in South Florida

Knowledge + Insights

  • Special Alert: FHA Announces It Will Accept Electronically-Signed Mortgage Documents
    January 31, 2014

    On January 30, HUD issued Mortgagee Letter 2014-03, announcing that FHA will now treat electronic signatures as equivalent to handwritten signatures for certain mortgage documents. The announcement sets forth FHA’s first authorization of electronic signatures on mortgage documents (other than certain third party documents – see Mortgagee Letter 2010-14) and applies to FHA Single Family Title I and II forward mortgages and Home Equity Conversion Mortgages. The announcement is consistent with other government agency initiatives to promote a more streamlined and efficient mortgage process for consumers, particularly through the use of technology such as electronic signatures. Earlier this month, for example, the CFPB issued a request for information containing a questionnaire focused on improving the home loan closing process. “By extending our acceptance of electronic signatures on the majority of single family documents, we are bringing our requirements into alignment with common industry practices,” said FHA Commissioner Carol Galante. “This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process.”

    The announcement indicates that, effective immediately, FHA will accept electronic signatures on (i) any documents associated with servicing or loss mitigation; (ii) any documents associated with the filing of a claim for FHA insurance benefits; (iii) the HUD Real Estate Owned Sales Contract and related addenda; and (iv) all documents included in the case binder for mortgage insurance except the Note.  FHA will begin accepting electronic signatures on the Note for forward mortgages, but not Home Equity Conversion Mortgages, on December 31, 2014. FHA already allows electronic signatures on documents originated and signed outside of the lender’s control, such as the sales contract.

    FHA requires lenders that accept electronic signatures to comply with the ESIGN Act (15 U.S.C. §§ 7001-7006). The ESIGN Act mandates that the signer be presented the document before the electronic signature is obtained, that the document is true and correct at the time it is signed, and that the signature is attached to, or logically associated with, the documents being electronically signed. Lenders must also take steps to confirm the identity of the signer as a party to the transaction and to establish that the signature may be attributed to the purported signer. Lenders must have systems in place to ensure that information generated to confirm the identity of signers is secure and that electronically signed documents cannot be altered without detection.

    In addition to citing the requirements of ESIGN, FHA sets some more specific requirements for certain elements of the signing process. These include requirements for establishing attribution of the signature and authentication of the signer.  FHA also sets requirements for maintaining audit logs, computer systems, controls and documentation, and making them available for FHA inspection.

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    Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Electronic Signatures and Records practice, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: HUD Adopts Its Own QM Rule
    December 17, 2013

    On December 11, 2013, the Department of Housing and Urban Development (“HUD”) issued a final rule defining what constitutes a “qualified mortgage” (“QM”) for purposes of loans insured by the Federal Housing Administration (“FHA”). With limited clarifications and adjustments, the rule tracks the proposal issued by HUD in September.  This final rule, which applies to all case numbers assigned on or after January 10, 2014, replaces the temporary QM definition for FHA loans established by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) in its Ability-to-Repay/Qualified Mortgage Rule (“ATR/QM Rule”).

    Loans that qualify as QMs provide lenders with some legal protection against borrower lawsuits under the Truth in Lending Act (“TILA”) alleging the lender did not sufficiently consider the borrower’s ability to repay the loan.  Under HUD’s final rule, most FHA loans will qualify for the QM safe harbor if they have Annual Percentage Rates (“APRs”) that are no more than 2.5 percentage points over the Average Prime Offer Rate (“APOR”) for a comparable transaction (as opposed 1.5 percentage points over APOR in the CFPB’s ATR/QM Rule).

    Click here to read our Special Alert.

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: Federal Reserve Board Guidance on Managing Outsourcing Risks Mirrors Recent OCC Guidance
    December 11, 2013

    On December 5, 2013, the Federal Reserve Board (FRB or the Fed) issued Supervision and Regulation Letter 13-19, which details and attaches the Fed’s Guidance on Managing Outsourcing Risk  (FRB Guidance).  The FRB Guidance sets forth risks arising out of the use of service providers and the regulatory expectations relating to risk management programs. It is substantially similar to OCC Bulletin 2013-29, which the Office of the Comptroller of the Currency (OCC) issued on October 30, 2013.

    The FRB Guidance supplements existing guidance relating to risks presented by Technology Service Providers (TSPs) to reach service providers that perform a wide range of business functions, including, among other things, appraisal management, internal audit, human resources, sales and marketing, loan review, asset and wealth management, procurement, and loan servicing.

    While a complete roadmap of the FRB Guidance would be largely duplicative of our recent Special Alert relating to the OCC Bulletin 2013-29, key supervisory and enforcement themes emerge from a comparison of the two guidance documents.  Like the OCC, the Fed signals broadly that failure to effectively manage the use of third-party service providers could “expose financial institutions to risks that can result in regulatory action, financial loss, litigation, and loss of reputation.” The Fed also emphasizes the responsibility of the Board of Directors and senior management to provide for the effective management of third-party relationships and activities.  It enumerates virtually the same risk categories as the OCC, including compliance, concentration, reputational, operational, country, and legal risks, though its discussion of those risks is slightly less comprehensive.

    The FRB Guidance makes clear that service provider risk management programs should focus on outsourced activities that are most impactful to the institution’s financial condition, are critical to ongoing operations, involve sensitive customer information, new products or services, or pose material compliance risk. While the elements comprising the service provider risk management program will vary with the nature of the financial institution’s outsourced activities, the Fed’s view is that effective programs usually will include the following:

    • Risk assessments: Institutions should evaluate the implications of performing an activity in-house versus having the activity performed by a service provider and also consider whether outsourcing an activity is consistent with the strategic direction and overall business strategy of the organization. This section of the FRB Guidance closely aligns with the section titled “Planning” in OCC Bulletin 2013-29.
    • Due diligence and selection of service providers: Institutions should address the depth and formality of due diligence of prospective service providers consistent with the scope, complexity, and importance of the planned outsourcing arrangement. The Fed emphasizes processes designed to diligence a potential service provider’s (i) business background, reputation, and strategy; (ii) financial performance and condition; and (iii) operations and internal controls. This section is less detailed, but nonetheless consistent with the section titled “Due Diligence and Third-Party Selection” in OCC Bulletin 2013-29.
    • Contract provisions and considerations: Service provider contracts should cover certain topics, including, but not limited to: (i) the scope of services covered; (ii) cost and compensation; (iii) right to audit; (iv) performance standards; (v) confidentiality and security of information; (vi) indemnification; (vii) default and termination; (viii) limits on liability; (ix) customer complaints; (x) business resumption and contingency plan of the service provider; and (xi) use of subcontractors. The key provisions noted generally mirror the “Contract Negotiation” section of OCC Bulletin 2013-29.
    • Incentive compensation review: Institutions should establish an effective process to review and approve any incentive compensation arrangements that may be embedded in service provider contracts to avoid encouraging “imprudent” risk-taking. While OCC Bulletin 2013-29 does not break out incentive compensation as a separate program feature (it is included among factors to be considered in due diligence and selection), it does identify the need for banks to review whether fee structure and incentives would create burdensome upfront fees or result in inappropriate risk-taking by the third party or the bank.
    • Oversight and monitoring of service providers: Institutions should set forth the processes for measuring performance against contractually-required service levels and key the frequency of performance reviews to the risk profile of the service provider. This section of the FRB Guidance, consistent with the “Ongoing Monitoring” section of OCC Bulletin 2013-29, also recommends the creation of escalation protocols for underperforming service providers and monitoring of service provider financial condition and internal controls, which may also trigger escalation if the service provider’s financial viability or adequacy of its control environment are compromised during the course of the relationship.
    • Business continuity and contingency plans: Institutions should develop plans that focus on critical services and consider alternative arrangements in the event of an interruption. The Fed specifically notes that financial institutions should: (i) ensure that a disaster recovery and business continuity plan exists with regard to the contracted services and products; (ii) assess the adequacy and effectiveness of a service provider’s disaster recovery and business continuity plan and its alignment to their own plan; (iii) document the roles and responsibilities for maintaining and testing the service provider’s business continuity and contingency plans; (iv) test the service provider’s business continuity and contingency plans on a periodic basis to ensure adequacy and effectiveness; and (v) maintain an exit strategy, including a pool of comparable service providers. Notably, OCC Bulletin 2013-29 addresses business continuity and contingency plans under third-party risk management, rather than as separate program features.

    Finally, the FRB Guidance notes a number of “additional risk considerations” not singled out by OCC Bulletin 2013-29, which cover: (i) confidentiality of Suspicious Activity Report (SAR) reporting functions; (ii) compliance by foreign-based service providers with U.S. laws, regulations, and regulatory guidance; (iii) prohibitions against outsourcing internal audit functions in violation of Sarbanes-Oxley; and (iv) alignment of outsourced model risk management with existing Fed Guidance on Model Risk Management (SR 11-7).

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • CFPB Finalizes Rule Combining TILA and RESPA Mortgage Disclosures
    December 2, 2013

    On November 20, 2013, the CFPB finalized its long-awaited rule combining the mortgage disclosures consumers receive under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the Federal Reserve Board (“FRB”) and the U.S. Department of Housing and Urban Development (“HUD”).  In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) transferred authority over TILA and RESPA to the Bureau and directed the Bureau to create “rules and model disclosures that combine the disclosures required under [TILA] and sections 4 and 5 of [RESPA], into a single, integrated disclosure for mortgage loan transactions covered by those laws.” Congress did not, however, amend TILA and RESPA provisions governing timing, responsibility, and liability for the disclosures, leaving it to the Bureau to resolve the inconsistencies. The final rule generally applies to covered transactions for which the creditor or mortgage broker receives an application on or after August 1, 2015.

    Click here to read our Special Alert.

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: Settlement in Key Fair Housing Case Moves Forward, Supreme Court Unlikely to Hear Appeal
    November 14, 2013

    Last night, the Mount Holly, New Jersey Township Council voted to approve a settlement agreement that will resolve the underlying claims at issue in a closely watched Fair Housing Act (FHA) appeal pending before the U.S. Supreme Court, Township of Mount  Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507. The agreement is subject to approval by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.

    The Court had agreed to address one of two disparate impact-related questions presented in the appeal—specifically, the threshold question of whether disparate impact claims are cognizable under the FHA. Under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). Though not a lending case, the appeal could have offered the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plain­tiffs to bring claims under a disparate impact theory.

    Instead, for the second time in two years, it appears likely that opportunity has been eliminated by a settlement entered shortly before the Court could decide the matter. Last year, the parties in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010) similarly settled and withdrew their Supreme Court appeal before the Court had an opportunity to decide the case. The Magner parties’ decision to settle and withdrawal the appeal was followed by numerous congressional inquiries into whether federal authorities intervened to assist the parties in reaching a settlement in order to avoid Supreme Court review of a prized legal theory. One member of Congress has already initiated a similar inquiry with regard to the resolution of Mt. Holly.

    To date, eleven federal Circuits have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court’s then-current Title VII jurisprudence regarding employment discrimination – which the appellate courts interpreted as permitting disparate impact claims – and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company’s neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, most significantly in Smith v. City of Jackson, 544 U.S. 228 (2005), that call prior appellate court precedent into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII’s specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, federal courts have offered almost no guidance as to whether the FHA’s statutory text permits disparate impact claims.

    It is worth noting that in Mt. Holly, the Court could have bypassed certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in Mt. Holly in a multi-part second question on which cert. was not granted, which would have required argument on “burden shifting,” “balancing” and other tests that have been developed by various Circuits. Additionally, the question before the Court was whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court’s analysis, the question of whether Section 805 of the FHA—the section specifically applicable to mortgage financing—permits disparate impact claims may have remained an open issue. Still, the Supreme Court generally does seem willing to review at least some aspects of disparate impact analysis in the fair housing context.

    With the settlement of the underlying Mt. Holly litigation, attention will likely shift to a matter that is pending in the U.S. District Court for the District of Columbia, but which is currently stayed pending the conclusion of the Supreme Court appeal in Mt. Holly. In that action, insurance trade associations challenge a rule issued by the Department of Housing and Urban Development on the use of disparate impact analysis under the FHA, which codified the three-step burden-shifting approach to determine liability related to a disparate impact claim.