Compliance Insights - September 2017

Compliance Insights - September 2017
1. SCOTUS Amends Federal Bankruptcy Rules; 2. CFPB Takes Action Against Bank for Inadequate Consumer Reporting Processes; 3. CFPB Issues Guidance on Pay-by-Phone Fees; 4. NY Branch of Foreign Bank Seeks to Close in Response to Regulatory Action; 5. New OFAC Sanctions Restrict Venezuela’s Access to U.S. Markets.

SCOTUS Amends Federal Bankruptcy Rules

In April 2017, the Supreme Court of the United States (SCOTUS) submitted to Congress amendments to the Federal Rules of Bankruptcy. The amendments will take effect December 1, 2017 and will have an impact on a creditor’s bankruptcy process. While each bankruptcy case is unique, there are standard requirements that must be met by all creditors. The amendments serve to clarify existing bankruptcy rules and to make certain processes more efficient. Key changes to the amendments include:

  • Plan Objection and Confirmation Hearing (Amended Rule 2002): The amended rules require that the clerk of the federal bankruptcy court, or some other person as the court may direct, must provide to the debtor, trustee of the federal bankruptcy court and creditors at least 21 days’ notice by mail of the deadline to file proofs of claims (which outline the amount that is owed to the creditor or lender as of the date the bankruptcy petition is filed) and to object to a confirmation of a Chapter 12 or 13 plan (a bankruptcy plan is a document filed with the court that outlines the debtor’s “plan” to repay debts owed). The amended rules also require that the clerk provide at least 28 days’ notice by mail to the debtor, bankruptcy court trustee and creditors of the hearing on a confirmation of a Chapter 12 or 13 plan. Currently, such timeframes vary across the country; the amended rules will allow for a more uniform process across jurisdictions in terms of timing of the bankruptcy plan confirmation.
  • Proof of Claim Changes (Amended Rule 3002): At the onset of a bankruptcy case, all creditors, secured and non-secured, are required to file a proof of claim with the bankruptcy court. Currently, creditors have 90 days from the petition date to file their claims. Under the amended rules, creditors will be required to file a proof of claim within 70 days of the bankruptcy petition date. Recognizing that this will shorten the timeframes for creditors to react, the court will allow creditors to file a motion with the court for a 60-day extension under specific circumstances.
  • Priority of Secured Claims (Amended Rule 3012): Under the amended rules, bankruptcy courts may now determine the amount of priority claims by motion or claim objection (a motion or objection is a written request filed with the court that seeks to obtain an order, ruling or direction). Priority claims are those debts that the Bankruptcy Code gives priority over all other debts. Examples include child support, spousal support and payroll taxes. A request to determine the amount of a secured claim (a claim that has a lien on a property, vehicle or a tax lien) must be made by either motion or claim objection. These changes assist creditors by relieving the need to review the debtor’s plan in detail in order to determine whether an objection is necessary. It should be noted, however, that amended Rule 3015 (described below) requires that any determination made in the plan under amended Rule 3012 in regard to the amount of a secured claim is binding, even if a creditor files an opposing proof of claim.
  • Model Chapter 13 Plan (Amended Rule 3015): Under the amended rules, debtors will be required to use an official form for a Chapter 13 plan. Previously, an official form was not required and debtors could utilize different formats for their plans. There will now be a section in the model form for “non-standard” provisions. The benefit of this change to creditors is that the use of a uniform, standard format will make the review process of debtors’ Chapter 13 plans more streamlined.

It is important for financial institutions, in particular lenders, to review and understand how these changes will impact existing bankruptcy practices, including timeframes for responding to debtor filings and ensuring the creditor’s interest is protected. Further, lenders should evaluate how the changes will impact their collections systems, customer communications templates and employee training.

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CFPB Takes Action Against Bank for Inadequate Consumer Reporting Processes

Historically, discussion regarding “consumer reporting” has been largely framed as “credit reporting,” in which lenders furnish information about a consumer’s loan performance to large, nationwide consumer reporting agencies. That information is, in turn, used to determine a customer’s eligibility for credit, insurance or employment. These terms are used interchangeably, but they are not the same thing – in fact, “consumer reporting” refers to information about a consumer that is much broader than just his or her credit performance.

It may also include information about a consumer’s payments to utility companies, property owners, and medical providers; public record information about judgments, bankruptcies and other similar actions; and it may include information about a customer’s driving history, employment history, and deposit account activities. These disparate types of information may be used in different ways, but they are all subject to the Fair Credit Reporting Act (FCRA), and consumer reporting agencies and data furnishers are subject to specific requirements regarding consumers’ rights to obtain, understand, and dispute the information that is collected about them.

Under the Dodd-Frank Act the Consumer Financial Protection Bureau (CFPB) was provided, under the Dodd-Frank Act the unique authority, to regulate this process and supervise consumer reporting agencies and data furnishers alike. Though again its focus has been most evident in its evaluation of “credit reporting,” the CFPB recently took action in August 2017 against a large national bank for violations of the FCRA related to its furnishing of information to certain specialty consumer reporting agencies regarding its customers’ deposit account activities.

Information regarding deposit accounts may be furnished by banks to what is referred to as “specialty” consumer reporting agencies.” These agencies collect and report on limited data sets specific to the products they offer to financial institutions and non-financial institutions. Consumers may not know that their information is being collected and used in this manner unless a negative experience occurs in which the consumer needs to investigate why a specific action occurred. This may include collecting and reporting information regarding account balances, transactions/account histories, bounced checks and account closures (and the related reasons for the closures, including suspected fraudulent activities). This information may be used to help financial and non-financial institutions make more informed decisions regarding account openings and processing of payment transactions. Institutions that furnish such information must, under the FCRA, establish internal programs with processes, controls and oversight to ensure that they furnish data to the specialty consumer reporting agencies regarding deposit accounts accurately and with integrity.

In its August 2017 consent order, the CFPB cited deficiencies in the bank’s procedures to accurately furnish information to specialty consumer reporting agencies regarding its customers’ checking account histories. In addition, the CFPB cited the bank as obscuring relevant information related to the status of consumers’ disputes regarding the information furnished, and failing to provide key details in its adverse action notifications to consumers that were denied checking accounts regarding the name and contact information of the specialty consumer reporting agency from which the bank obtained the information.

The consent order highlights the applicability of the FCRA’s data accuracy and integrity requirements, as well as customer notification and dispute processing requirements, to this historically less-scrutinized form of consumer reporting. Financial institutions should take steps to evaluate all types of consumer reporting within which they engage, or consumer reporting that they obtained from various sources, and ensure that their consumer reporting policies, programs, controls and oversight fully address all manners in which consumer information is furnished or obtained. Financial institutions should evaluate the adequacy of policies and procedures to report information accurately and to investigate and respond to consumers regarding the disputes. This should include how the information is furnished, as well as address quality assurance, systems testing, training, and change management.

Financial institutions that obtain information from consumer reporting agencies in the course of evaluating consumer applications should ensure that adverse action notifications completely and accurately disclose the source(s) of consumer reports employed in application determinations.

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CFPB Issues Guidance on Pay-by-Phone Fees

In July 2017, the CFPB issued guidance to providers of consumer financial products and services regarding the assessment of fees for pay-by-phone services (“phone pay fees”). As noted by the CFPB, financial institutions (or their third-party service providers) offer many options to consumers to make payments for consumer financial products and services. In some cases, these options include making payments by phone (either through an automated system or by speaking with a representative), which may include the use of a credit card, debit card, electronic check, or other means. In certain instances, the CFPB notes that financial institutions may assess consumers a fee for choosing this payment option.

The CFPB notes that certain Federal consumer financial laws may restrict such fees, such as for payments on credit card accounts or fees charged by debt collectors; however, the CFPB’s guidance stops short of restricting or mandating any particular actions in its guidance. The CFPB does caution that pay-by-phone services do pose the risk of unfair, deceptive, or abusive acts or practices (UDAAP) if not conducted in a responsible and transparent manner. Institutions should evaluate the examples provided by the CFPB, including: 

  • Failure to Disclose the Prices of All Available Phone Pay Fees: In cases where different phone pay fees may apply depending on the payment method used by the consumer, institutions should evaluate how they disclose to consumers the different prices of the available phone pay options, and avoid only disclosing the higher-cost option and/or failing to disclose the material price differences between the available options.
  • Misrepresentation of Available Payment Options and Associated Fees: Institutions should avoid potentially misrepresenting that phone pay is the only payment option available to a consumer when other payment options are available, particularly if the other options do not carry a fee, or misrepresenting that a particular phone pay option is required in order to avoid an untimely payment and related consequences, such as incurring a late fee or adverse credit reporting.
  • Failure to Disclose the Addition of a Phone Pay Fee to an Authorized Payment Amount: Institutions should avoid indicating to a consumer that only the consumer’s authorized payment amount will be charged in instances where a phone pay fee will be assessed in addition to, rather than as part of, this amount. Instead, institutions should disclose that the consumer will be charged the authorized payment amount, as well as the additional phone pay fee.

In its guidance, the CFPB details a number of steps that it expects institutions should take to mitigate UDAAP- and collections compliance-related risks associated with pay-by-phone service fees, including:

  • Confirming that such fees are allowed by federal or state law, as well as any underlying debt agreements or other relevant product disclosures provided to consumers.
  • Establishing controls such that employees utilize scripts, are provided training, and are properly incentivized to fully disclose phone pay fees to consumers.
  • Providing ongoing oversight, such as through call monitoring, internal audits, and reviews of complaints, of internal practices, as well as those of any third-party service providers, related to phone pay options and fees disclosures.

The CFPB notes that it has taken actions against institutions due, in part, to the misrepresentation of phone pay fees. Financial institutions and third-party service providers that assess fees for pay-by-phone services should take steps to review this detailed guidance and conduct a thorough review of such practices, paying particularly close attention to the manner in which such fees are presented and discussed with consumers, so as to mitigate and manage associated risks.

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NY Branch of Foreign Bank Seeks to Close in Response to Regulatory Action

In August 2017, the New York Department of Financial Services (NYDFS) issued a statement of charges announcing its intent to seek a nearly $630 million civil money penalty against the NY branch of a large foreign bank for violating Bank Secrecy Act (BSA) / anti-money laundering (AML) rules and regulations. At approximately the same time, and in response to the NYDFS action, the bank issued a public disclosure noting that it had submitted an application to the NYDFS to close the branch altogether. In early September 2017, the branch and NYDFS settled for $225 million for failure to comply with New York laws and regulations designed to combat money laundering, terrorist financing, and other illicit financial transactions.

As indicated in the NY DFS statement, the bank had a history of BSA/AML-related problems and several regulatory actions had been taken by the NYDFS. In December 2006, the bank entered into a Written Agreement with DFS and the Board of Governors of the Federal Reserve Board System (FRB) for failing to comply with Office of Financial Assets Control (OFAC) economic sanctions laws as well as BSA/AML laws and regulations. In December 2015, the bank entered a Consent Order after the NYDFS and FRB identified repeat deficiencies. Similar issues were noted by the NYDFS and FRB in 2016. General areas within the program where deficiencies were identified included:

  • The branch failed to implement an appropriate compliance management system, including providing training to employees, conducting independent testing and internal audits.
  • Customer risk ratings and foreign correspondent due diligence were severely lacking. In one particular case, a third-party private bank with terrorist financing ties had insufficient information in its customer due diligence file.
  • Governance and oversight from senior management and the branch’s home office was insufficient including several instances of failed management reporting, a failure to fully staff the AML program, and a failure to track, escalate, and close BSA/AML issues.
  • OFAC and sanctions screening was lacking including one instance when the home office excluded screening of more than 4,000 transactions.

In total, the NYDFS cited in its August 2017 statement approximately 53 violations of relevant BSA/AML and OFAC laws, regulations, orders, and agreements.

Despite repeated actions by its regulators and being provided opportunities to resolve its BSA/AML and sanctions compliance management system deficiencies and strengthen its compliance with technical legal and regulatory requirements, the NYDFS found that the bank failed to take the necessary steps to address its previous regulatory orders. Notably, the NYDFS said, in a separate statement issued after the bank’s request for closure, that its probe of the bank’s compliance would continue even after the closure, and that the NYDFS intended to expand the lookback into transactions for sanctions-related compliance evaluation.

Strong BSA/AML and OFAC programs combined with well-organized, multi-level examination response management can assist financial institutions in avoiding penalties and other regulatory and reputational risks. Further, when addressing U.S. regulatory action, U.S. branches of foreign financial institutions should ensure strong communication and coordination with their home office. U.S. branches of foreign financial institutions should also be able to demonstrate that home office management is providing continual support and direction, is informed on a continual basis, and understands the state of the U.S BSA/AML and OFAC compliance function.

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New OFAC Sanctions Restrict Venezuela’s Access to U.S. Markets

In response to recent political developments in Venezuela, the White House issued an executive order in August 2017 authorizing new economic sanctions prohibiting U.S. investment in Venezuelan government bonds, including investment in Petroleos de Venezuela, S.E. (PdVSA), a state-owned petroleum company, as well as preventing Venezuelan access to U.S. financial markets and limiting its petroleum exports to the U.S. These sanctions are intended as punitive measures in response to the recent human rights crisis and political unrest stemming from a reportedly fraudulent election process. The sanctions follow other targeted sanctions authorized by the White House against thirteen government officials (including Venezuela’s President Maduro) in July 2017 and eight government officials in August 2017.

The sanctions are specifically aimed at preventing the financially-strained Venezuelan government from relying on U.S. financial markets as a conduit for foreign investment. Unless authorized by a general or specific license obtained from OFAC, sanctions were implemented to prohibit:

  • Financing PdVSA through acquisition of new debt and liabilities through bonds or the purchase of petroleum.
  • Investing in bonds issued by Venezuela prior to or following the date sanctions were implemented.
  • Paying dividends or other distributions of profits to the Venezuelan government.
  • Purchasing certain securities qualifying as new debt from the Venezuelan government or from PdVSA.

OFAC authorized four general licenses to authorize activities that would otherwise be prohibited by the sanctions. Notably, OFAC established a 30-day window within which to wind down contracts and other agreements in effect at the time of the sanctions. It also permits certain commercial and financial transactions to continue between U.S. persons, certain bonds and related financial transactions to continue between the Venezuelan government or PdVSA and certain U.S. business entities, and certain business dealings to continue related to the export of agricultural commodities, medicine, medical devices, or replacement parts and components of medical devices to Venezuela.

Petroleum exports account for 96% of Venezuela’s total exports, and foreign investment through government bonds impacts Venezuela’s economic condition. Through these sanctions, the Venezuelan government will have restricted access to the U.S. financial markets to restructure debt, and is blocked from receiving petroleum profits from U.S. business partners. The risk of default on future bond payments is increased by the lack of access to U.S. financial markets, and blocked export of petroleum will certainly have an economic impact on the country.

In analyzing the impact of the recent sanctions against Venezuela, financial institutions should evaluate the impact to customer and correspondent bank relationships, high-risk accounts, ongoing due diligence reviews, and monitoring of financial transactions. Financial institutions should evaluate:

  • Relationships with non-restricted Venezuelan government officials to review the nature of the customer relationship, whether it is personal or advances government business objectives.
  • The effectiveness of internal OFAC compliance controls for detecting and blocking transactions.
  • Their risk appetite and tolerance for conducting financial transactions with Venezuela or the Venezuelan energy industry, and conduct a review of reputation and economic risk management.

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Steven Stachowicz
Steven M. Stachowicz
Managing Director