2014-06-19_Website-Regulatory - Bcac

A Presentation Before
The Bank Compliance Association of Connecticut
25th Anniversary Celebration
June 19, 2014
By David J. Wiese
[email protected]
► And Many More to Come
Objectives for Today’s Program
► To Cover Assorted Compliance Topics
– A Veritable Alphabet Soup
– Some Current Effective Concerns
– Plus Some Observations and Predictions on Things to Come
► Questions & Comments Are Encouraged
Cyber Security
► The Threats Are Real & Alarming
– Constantly in Motion
► The Supervisory Expectations Are Ramped-Up
► Every Institution Should Make It a Priority Mission
– Multi-Disciplinary
– Dedication of Resources
– Attention at the Top
Mortgage Related Developments
► Change of Guard at FHFA
– Demarco Out
– Mel Watt In
► One of First Steps Was to Suspend a G-Fee Proposal That Would
– Raised the G-Fee For All Mortgages
– Adjusted Up-Front Fees to Borrowers Based on Risk Categories
– Suspended 25 BP Up-Front “Adverse Market Fee”
 Except For Four States
 Including Connecticut
► On June 5, FHFA Requested Input on Proposed Increases to the
– Over a Dozen Questions Posed
– Comments Due By August 4
Mortgage Related Developments (cont.)
► On May 13, FHFA Announced a New Strategic Plan, Which
Included the Following Components (Among Others)
– FHFA Will Not Alter Loan Limits
– FHFA Will Not Seek to Affirmatively Reduce Fannie’s/Freddie’s
 But Will Try to Encourage Entry of Private Capital
– FHFA Will Continue to Allow the Use of Compensating Factors
For Loans With DTI in Excess of 43%
Mortgage Related Developments (cont.)
► On May 28, CFPB Ordered an Alabama Estate Company to Pay
$500,000 to Settle Claims Related to RESPA’s AfBA Requirements
– In February of This Year, the CFPB Also Fined a Connecticut
Lender For RESPA Section 8 Violation
► In Its Order Against the Real Estate Company, the Bureau Noted
Deficiencies in the Company’s AfBA Disclosure
– Did Not Follow “Format” Found in Appendix D
– Company Ordered to Use Disclosure That Does Not “Materially
Deviate” From the Model Disclosure
Mortgage Related Developments (cont.)
Dodd-Frank Relief Coming From Congress???
H.R. 2673
► All Portfolio Loans Would Qualify as QM Under ATR Rule
H.R. 4521
► Provides Exemption From Escrow Requirements For Creditors
With $10 Billion or Less in Assets
► Directs CFPB to Provide Regulatory Relief For Mortgage
Servicers that Serve 20,000 or Fewer Mortgages
H.R. 3211
► Would Remove Certain Items From “Points and Fees”
Calculation Under ATR QM Rule
Mortgage Related Developments (cont.)
► On April 30, CFPB Proposed Certain Narrow Amendments to New
Mortgage Rules
– Possible Cure Opportunity for ATR QM “Points and Fees” Test
– CFPB Admitted That the “calculation of points and fees is
complex and can involve the exercise of judgment that may
lead to inadvertent errors.”
Mortgage Related Developments (cont.)
More on CFPB Proposal
► Comment Requested On Possible Cure Opportunity For ATR QM
43% DTI Ratio Test
► Feedback and Comments Requested From Small Creditors On How
Origination Activities Have Changed As a Result of New ATR Rules
► Feedback and Data Also Requested On 5000 Loan Limit For “Small
Creditor” Status Under ATR QM Rules
Mortgage Related Developments (cont.)
► In April, the CFPB Hosted a Mortgage Closing Process Forum
– Expanding Upon a CFPB Report Concerning the Challenges That
Consumers Face When Closing On the Purchase of a Home
– Report Identifies the “Pain Points” Regularly Experienced By
 Too Many Documents - - Too Little Time to Read (Never
Mind Actually Understanding Them)
 Lack of Resources to Explain Documents
 Minor Errors in Paperwork Can Lead to Disruptful Delays
► Forum Is an Extension of “Know Before You Owe Initiative”
Mortgage Related Developments (cont.)
► More on CFPB Closing Process Forum
– CFPB Expressed Belief That “E-Closings” Can help to Reduce “Pain
– CFPB has Launched a “Pilot Project” to Evaluate Whether E-Closings
 Increase Consumer Understanding
 Minimize Surprise and Delays
– Stay Tuned For Results
 Potential Implications For Industry
Indirect Auto Lending & ECOA Compliance
► CFPB Bulletin 2013-02 (March 21, 2013)
► Focuses on Common Industry Practice of Allowing Dealer to Mark-
Up Buy Rate
► Highlights ECOA Definition of “Creditor” as Including “Assignees”
– Influencing Credit Decision by Communicating Willingness to
– Communicating Buy Rates and Allowing Mark-Ups
Indirect Auto Lending & ECOA Compliance
► Bulletin Asserts That ECOA Violation Claims Can Be Grounded in
– Disparate Treatment
– Disparate Impact
 U.S. Supreme Court Test Case on Its Way?
► Highlights Argument That Assignee Cannot Rely on Defense Based
– Lack of Direct Participation
– Lack of Knowledge
► It is Enough That the Assignee Establishes Mark-Up and
Compensation Policies That Ultimately Result in Dealer
Indirect Auto Lending & ECOA Compliance
► Bulletin States That Indirect Lenders “Should Take Steps”,
– Imposing Controls on Dealer Mark-Ups
 Or Revising Mark-Ups
– Monitoring and Addressing the Effects of Compensation Policies
– OR Eliminating Dealer Discretion on Mark-Ups or Establishing
Flat Fee Compensation
► This is on Top of Traditional Fair Lending Compliance Measures
Indirect Auto Lending & ECOA Compliance
► If Indirect Lender Retains Mark-Up Policies, Additional Measures
“May” Be Necessary
– Dealer Education
– “Conducting Regular Analysis” of Loan Pricing Data “For
Potential Disparities”
 Dealer-Specific
 Portfolio-Wide
– Commencing Prompt Corrective Action Against Dealers When
“Unexplained Disparities” Surface
– Promptly Remunerating Affected Customers
Indirect Auto Lending & ECOA Compliance
► How Do You Monitor Compliance and Look For Unexplained
– Unlike HMDA, Information on Race, Ethnicity and Gender is Not
► CFPB Recommends the Use of a “Proxy Methodology” in a
November 4, 2013 Blog Post
– Use First Name Data Base From Social Security Administration
to Predict Probability of Gender
– Use Last Name Data Base From Census Bureau to Predict
Probability of Ethnicity and Race
– Other Options?
Indirect Auto Lending & ECOA Compliance
► CFPB Enforcement Action Against Ally Bank
– Consent Order (December 20, 2013)
– Required Ally to Pay $80 Million in Damages to Consumers
– Plus $18 Million Civil Money Penalty
► Under Consent Order, Going Forward Ally Must Either
– Monitor Dealer Mark-Ups
 With Prompt Corrective Measures When Necessary
– Or Move Away From Discretionary Mark-Ups
Indirect Auto Lending & ECOA Compliance
► Members of Both the House and Senate Have Requested
Information From the CFPB on Its Fair Lending Analysis and Proxy
Methodologies, Including
– Proxies Used to Determine Applicant Background
– Factors Used to Isolate Pricing as Sole Reason For Disparate
– Numerical Threshold at Which CFPB Determines Disparate
Impact is Present
► To Date, CFPB Has Not Responded to Multiple Requests For
Indirect Auto Lending & ECOA Compliance
“The Bureau’s continued refusal to provide any details … stands in
stark contrast to your explicit promise to at least 48 Members of
Congress to be open and transparent … . By refusing to disclose this
information, the Bureau has deliberately deprived indirect auto
lenders of any meaningful way to tailor their company’s lending
practice and compliance systems …”.
Remarks of Jeb Hensarling
Chairman, House Committee on Financial Services
In a Letter to CFPB Director Richard Cordray
Dated March 7, 2014
Time-Bar Provisions in Deposit Contracts
► In 2012, a Connecticut Trial Court Voided the Time-Bar Provisions
in a Commercial Deposit Account Contract
► Those Time-Bar Provisions Would Have Prevented Customer From
Bringing Claim Against Bank For An Unauthorized Transaction
– Unless Claim Was Made Within 60 Days of Receipt of Statement
► Also Would Have Barred Claims For Repeated Unauthorized
Transactions By Same Person
– Unless Claim Was Made Within 30 Days After Closing Date of
Statement Containing the First Unauthorized Transaction
Time-Bar Provisions in Deposit Contracts (cont.)
► Bank Has Filed Appeal with Connecticut Supreme Court
► Connecticut Bankers Association (“CBA”) Has Filed an Amicus Brief
in Support of Appeal
► Decision is Pending
► Outcome Could Have Significant Impact on Deposit Account
Relationships (and Fraud Loss Management Concerns) in
– Virtually All Banks Use Similar Time-Bar Provisions
Time-Bar Provisions in Deposit Contracts (cont.)
► Case Involved Bank of America and St. Bernard School
► School Employee Was Given Authority to Make Deposits and
Prepare Checks For Signatures By Others
► The Employee
– Opened a Separate Account Which He Controlled (Making
Himself an Authorized Signer)
– Used the School’s Accounting System and Created Fictitious
– Used the School’s Blank Checks
 Drawing Checks to the Fictitious Payees
 Signed By Authorized Individuals
 Then Deposited to the Separate Account Which He
Time-Bar Provisions in Deposit Contracts (cont.)
► School Did Not Spot the Unauthorized Withdrawals and Did Not
Match Checks to Actual Invoices
– Fraudulent Activity Continued Undetected For 2 Years
► After School Brought Claim Against Bank, Trial Court Awarded
Damages (Plus Interest) Amounting to Approximately $950,000
► In So Doing, Court Voided the Time-Bar Provisions That Would
Have Otherwise Prevented the Claims From Being Brought
Time-Bar Provisions in Deposit Contracts (cont.)
► Trial Court Based Its Decision on
– Public Policy
– UCC Provisions Which Prevent Bank From Disclaiming
Responsibility to Act in Good Faith and Exercise Ordinary Care
► In Its Appeal, Bank Argued That Time-Bar Provisions
– Are Consistent With Public Policy
– Do Not Disclaim Liability (They Merely Establish Procedural
Conditions Which a Customer Must Follow)
Time-Bar Provisions in Deposit Contracts (cont.)
► In the Appeal, the CBA Argued
– Case Law Across America Supports the Bank’s UCC Arguments
– Time-Bar Provisions are Common Throughout Industry and
Adverse Decision Would Have Disastrous Repercussions
– Adverse Decision Would Contravene Important Public Policy
 Early Detection and Prevention of Fraud
Time-Bar Provisions in Deposit Contracts (cont.)
► Customers in Best Position to Detect Fraud
► Without Time-Bar Provisions, Customers Would Have No Incentive
to Review Statement and Report Fraud
– Banks Would Become Guarantors of Customer’s Negligence
► Early Detection Makes It More Likely That
– Fraud Can Be Halted
– Criminals Can Be Caught
– Losses Can Be Recovered
► The Federal Government Clearly Recognizes This Same Policy
– TILA (Credit Card Fraud)
– EFTA (Debit Card Fraud)
– The Role of SAR’s in Law Enforcement
► Predictions?
States Begin to Use Dodd-Frank UDAAP
► As a Reminder, CFPB Declined to Issue Regulations (and Request
Public Comment) On the Contours of the New “Abusive” Standard
► In March, 2014, the Illinois Attorney General Became the first
State AG to File Suit Using Title X of Dodd-Frank
► In April, 2014, NY State Department of Financial Services (“DFS”)
Became First State Regulator to File Suit Using Title X
States Begin to Use Dodd-Frank UDAAP
Provisions (cont.)
► New York DFS Suit Notable For a Number of Reasons
– Suit Named the Owner and CEO
– Department Used Third-Party Law Firm
– Alleges “Abusive” Conduct
 No Court Has Ever Ruled On That Standard
– In Connection With Data Security and Privacy Practices, Suit
Alleges That the Defendant “Took Unreasonable Advantage of”
 The Inability of the Customers to Protect Their Own
 The Reasonable Reliance By Customers On the Defendant
to Protect Their Interests
Medical Marijuana and Banking Services
► To Date, Over 20 States Have Adopted Legislation Relaxing
Prohibitions on the Sale and Use of Marijuana (With More on
– Some Permitting Recreational Use
– Most Limited to Medical Use
 In Varying Degrees
► Connecticut Public Act 12-55 – An Act Concerning the Palliative
Use of Marijuana
► Requires Registration of Users (“Patients”)
► Requires Licensing of “Growers” and “Dispensers”
Medical Marijuana and Banking Services (cont.)
► Not Surprisingly, Growers and Dispensers Are Hoping to Have
Access to Banking Services
– Loans
– Deposit & Cash Management Services
– Debit & Credit Card Merchant Services
► Otherwise, Businesses Forced to Do Business on An All-Cash Basis
– Potentially Large Cash Amounts
► Can a Bank Provide Services to a Marijuana-Related Business?
Medical Marijuana and Banking Services (cont.)
► Federal Law Still Prohibits the Sale and Use of Marijuana
– The Controlled Substances Act (“CSA”)
– Potential Criminal and Civil Penalties
► Financial Institutions That Provide Services Are at Risk of Violating
Several Federal Laws
– Anti-Money Laundering Statutes
– Unlicensed Money-Remitter Statutes
– Bank Secrecy Act (“BSA”)
► Congress Enacted These Laws With the Expectation That They
Would Be Enforced!
Medical Marijuana and Banking Services (cont.)
► However, Many Businesses and Political Leaders Argue That
Federal Laws Should Not Be Strictly Enforced
– Provided Business Complies With State Laws
► Without Access to Banking Services, Businesses May Be Forced
Into an Underground Economy
– Dealing Only in Cash
– Stifling Government Monitoring
 Money Laundering
 Tax Evasion
► As a Result, Many Argue That BSA and SAR Requirements Should
Be Amended to Permit Banking Services
– With Enhanced Monitoring Mechanisms
Medical Marijuana and Banking Services (cont.)
► New Guidance From Department of Justice (“DOJ”) and FinCEN
– February 14, 2014
► DOJ Guidance
– Addressed to Federal Prosecutors
– Helping Them Determine Whether and When to Prosecute
Financial Institutions
► FinCEN Guidance
– “Clarifies” How a Financial Institution Might Provide Services to
a Marijuana-Related Business
Medical Marijuana and Banking Services (cont.)
► More on DOJ Guidance
– Clearly States That DOJ Will Enforce CSA and Other Related
– However, Focus Will Be on the “Most Significant Marijuana
Related Cases”
– When Prosecutors Are Determining Whether to Charge
Individuals or Institutions They Should Apply Eight Enforcement
Medical Marijuana and Banking Services (cont.)
► More on DOJ Guidance
– Prosecution “Might Be Appropriate”
– If Financial Institution “Knows” That Business is Infringing
on One of the Eight Priorities
– If Financial Institution is “Willfully Blind” to Problematic
Activities by “Failing to Conduct Appropriate Due Diligence
on the Customer’s Activities”
– Prosecution May Not Be Appropriate
– If Activities “Do Not Implicate Any of the Eight Priority
Medical Marijuana and Banking Services (cont.)
► Notwithstanding the Foregoing, DOJ Also Emphasizes That:
– Guidance “Does Not Alter in Any Way the Department’s
Authority to Enforce Federal Law”
– Guidance “Does Not Provide a Legal Defense to a Violation of
Federal Law”
– “Nothing Herein Precludes Investigation or Prosecution, Even in
the Absence of One of the [Eight Priority] Factors … in
Particular Circumstances Where Investigation and Prosecution
Otherwise Serves an Important Federal Interest.”
Medical Marijuana and Banking Services (cont.)
► The New FinCEN Guidance
– Focuses on Monitoring and Reporting Obligation Under AntiMoney Laundering Statutes and BSA
– Reiterates That the Sale of Marijuana Remains Illegal Under
Federal Law
– If a Financial Institution Provides Banking Services to a
Marijuana Related Business, That Will Trigger SAR
 That is Not New
Medical Marijuana and Banking Services (cont.)
► So What is New?
– FinCEN Has Created Three New Types of SAR Filings For
Marijuana-Related Businesses
– A “Marijuana Limited” SAR
– Institution “Reasonably Believes”
– Based on Customer Due Diligence
– Business Does Not Implicate One of Eight Priorities
– Or Violate Applicable State Law
Medical Marijuana and Banking Services (cont.)
More on FinCEN Guidance
► “Marijuana Priority” SAR
– If Institution “Reasonably Believes”
– Based on Customer Due Diligence
– That Activities Implicate One of Eight Priorities
– Or Violate Applicable State Law
► “Marijuana Termination” SAR
– Required if Institution Terminates Relationship
– “In Order to Maintain an Effective Anti-Money Laundering
Compliance Program”
Medical Marijuana and Banking Services (cont.)
More on FinCEN Guidance
► Substantial Due Diligence Required
– Before Establishing Relationship
– Afterwards, on an Ongoing Basis
► Due Diligence Tied to SAR
– Implied Message
Medical Marijuana and Banking Services (cont.)
► Due Diligence Standards Include
– Reviewing License Application
– Requesting Information From State Licensing Authorities “to
Develop an Understanding of the Normal and Expected Activity
For the Business, Including the Types of Products to Be Sold
and the Types of Customers to Be Served.”
– Monitoring “Publicly Available Sources” on an Ongoing Basis
Looking for “Adverse Information” on the Business and “Related
– Monitoring For “Suspicious Activities” on an Ongoing Basis
 Including the Presence of Certain “Red Flags”
Medical Marijuana and Banking Services (cont.)
More on FinCEN Guidance
► Roughly Twelve “Red Flags” Are Identified, Including
– Does Business Receive Substantially More Revenue Than May
Reasonably Be Expected?
 In Light of State Law Limitations
 Compared to Competitors
– Does Business Deposit Substantially More Cash Than is
Commensurate With Its Tax Returns?
– Is the Business Unable to Provide “Satisfactory Documentation”
That They Are Operating Consistently With State Law?
► Due Diligence and Red Flag Protocols Also Required For Customers
That Do Business With Marijuana-Related Businesses
Medical Marijuana and Banking Services (cont.)
Summary Observations
► Guidance Clearly Intended to Provide Comfort to Banking Industry
– FinCEN Director Stated That She is “Encouraged” By Receipt of
“Dozens” of SAR’s Under New Regime
– Connecticut Banks?
► Despite Apparent Intent, Guidance Does Not Change the Fact That
It Can Be a Criminal Offense For a Bank to Engage in Financial
Transactions Involving Proceeds Derived From Activities That
Violate Federal Law
– Only Congress Can Change That Fact
 Congressional Proposals??
Medical Marijuana and Banking Services (cont.)
Summary Observations (continued)
► Guidance Suggests That There “May” Be a Lower Risk of
– With No Safe Harbor Guarantee
– Significant Compliance Hurdles
– Will Enforcement Priorities Shift With the Political Winds?
► Under State Ethics Opinion, Lawyers Cannot Advise Clients to
Violate Federal Law
► How Will Prudential Regulators Respond?
– Federal Regulators?
 House Democrats Have Pressed For a Response
– State Regulators?
► Closing Remarks
► Questions & Answers
► Congratulations (Again) to the BCAC!
► Thanks For Having Me!

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