Weekly RoundUp
September 20, 2017

Financial Services Weekly News

In This Issue. Federal banking agencies are seeking public comment on their proposed revisions to the Community Reinvestment Act (CRA), the Consumer Financial Protection Bureau (CFPB) released a small entity compliance guide on its arbitration rule and issued its first no-action letter, the Security and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert regarding frequent compliance issues pertaining to advertisements, the SEC charged a dually registered investment adviser with improperly recommending higher-fee mutual funds and the U.S. District Court for the Southern District of Texas awarded nearly $280 million in treble damages against two former mortgage companies and their former president and CEO under the False Claims Act. These and other recent developments are covered below.

Regulatory Developments

Federal Banking Agencies Seek Public Comment on Proposed Community Reinvestment Act Regulation Revisions

On September 20, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (Agencies) published a joint notice of proposed rulemaking in the Federal Register seeking public comment on a proposal that would impact certain requirements under the CRA. The Agencies’ proposal would remove unnecessary cross references and an obsolete reference to the Neighborhood Stabilization Program. The Agencies’ proposal would also amend the existing definitions of “home mortgage loan” and of “consumer loan” and the public file content requirements of the Agencies’ CRA regulations to produce a less burdensome CRA evaluation process by conforming the Agencies’ regulations to the CFPB’s revisions to Regulation C, which implements the Home Mortgage Disclosure Act. The CFPB’s revisions generally become effective January 1, 2018, and the Agencies expect that the proposed revisions to their CRA regulations would become effective contemporaneously. Comments must be received by October 20, 2017.

CFPB No-Action Letter to Upstart Network

On September 14, the CFPB issued a no-action letter to Upstart Network, Inc., a provider of online lending platforms allowing consumers to apply for personal loans, student loans and debt consolidation. Upstart evaluates consumer loan applications using both traditional and nontraditional factors, such as education and employment history. Under the terms of the no-action letter, Upstart Network will regularly report information regarding loan applications, the loan approval process and risk management. In addition to mitigating risk to consumers, the CFPB expects that this information will allow it to understand how Upstart’s use of alternative data impacts access to credit generally and for traditionally underserved populations. This no-action letter was issued under the CFPB’s Project Catalyst, which is designed to encourage consumer-friendly developments in the consumer financial marketplace.

CFPB Issues Small Entity Compliance Guide on Arbitration Rule

On September 15, the CFPB released a small entity compliance guide on its final rule restricting the use of mandatory arbitration agreements in consumer financial contracts. The rule went into effect on Monday, September 18, 2017, and compliance is required on or after March 19, 2018. The compliance guide explains who is covered by the rule, required language in revised pre-dispute arbitration agreements, submission of records and other topics.

OCIE Risk Alert: The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers

On September 14, the SEC’s OCIE issued a Risk Alert outlining the most frequent compliance issues relating to Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (the Advertising Rule), which the SEC identified during the course of over 1,000 examinations of SEC-registered investment advisers. In short, the Advertising Rule prohibits an adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or is otherwise false or misleading. Among the primary issues identified were: (1) presentation of misleading performance results, including presentation of gross prior performance results without corresponding net results adjusted for the deduction of fees, expenses and carried interest borne by investors; (2) misleading one-on-one presentations in which gross performance figures were presented without adequate disclosure that such results did not include the deduction of fees and expenses; (3) representations by advisers that their presentation of performance results complied with voluntary performance standards (such as “GIPS”) without actual adherence to such standards; (4) presentation of only profitable prior investments without adequate disclosures, presenting an even number of the worst performing investments or any indication that an objective, non-performance-based criteria was consistently applied in selecting the presented investments; and (5) failing to maintain compliance policies and procedures reasonably designed to prevent deficient advertising practices. In addition, the OCIE highlighted the results of its “Touting Initiative,” in which it discovered a number of misleading practices such as advertising accolades obtained through submission of false or misleading information, referencing stale rankings or evaluation information, failing to disclose selection criteria in certain rankings presented, presenting false or misleading professional designations and publishing testimonials.

Enforcement & Litigation

Q2 2017 Sees Significant Decrease in Civil Penalties and Consumer Relief

In the second quarter of 2017, Consumer Enforcement Watch tracked 40 enforcement actions taken against consumer financial service providers. This represents a marginal decrease from the 46 enforcement actions taken against consumer financial service providers that we tracked last quarter, and from the 46 enforcement actions tracked in the second quarter of 2016. View the Enforcement Watch blog post.

SEC Charges SunTrust With Improperly Recommending Higher-Fee Mutual Funds

On September 14, SunTrust Investment Services, Inc. (SunTrust), the investment services subsidiary of SunTrust Banks, Inc. offered to settle allegations that it improperly invested client funds in mutual fund share classes that charged higher fees instead of lower-fee share classes of the same funds. During a period from at least December 2011 to June 2015, the SEC learned of the practice where SunTrust investment adviser representatives (IARs) purchased, recommended, or held more expensive Investor Class or Class A shares that charged 12b-1 fees for clients despite the availability of less-expensive Class I or Institutional Class shares. Through this practice, SunTrust and its IARs received at least $1,148,071 in 12b-1 fees. By recommending and purchasing the more expensive shares without disclosing to clients the extent of the conflict of interests and that best execution might not be sought for the purchase of mutual fund shares, SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings, SunTrust agreed to pay a penalty of more than $1.1 million, refund avoidable 12b-1 fees to clients and disgorge any leftover profits.

Court Awards Nearly $280 Million in Treble Damages Against Former FHA Lender

On September 14, the U.S. District Court for the Southern District of Texas issued an opinion and order against two former mortgage companies and their former president and CEO. The order, which followed a previous jury verdict against the company, awarded the Government nearly $280 million in treble damages under the False Claims Act (FCA), approximately $13 million in FCA civil penalties and $6.6 million in penalties under the Financial Institutions Reform, Recovery and Enforcement Act. View the Enforcement Watch blog post.

Federal Reserve Board Announces Penalty Against State Bank for Alleged Violation of the National Flood Insurance Act

On September 14, the Board of Governors of the Federal Reserve System announced the execution of a settlement with a state bank concerning alleged violations of the National Flood Insurance Act (NFIA), 42 U.S.C. § 4012a(f)(4). The Board of Governors asserted that where a pattern or practice of violations of NFIA is found, civil penalties of up to $2000 per violation must be imposed. View the Enforcement Watch blog post.  

Virginia AG Sues Open-End Credit Plan Lender

On September 13, Virginia Attorney General (Virginia AG) Mark R. Herring announced that it had filed suit in Virginia state court against an open-end credit plan lender for allegedly violating the Virginia Consumer Protection Act (VCPA), Virginia Code §§ 59.1-196 to 59.1-207, through its lending practices. The defendant lender allegedly made illegal, unlicensed loans at a 273.75% annual interest, in violation of Virginia’s open-end credit plan lending laws. Defendant also allegedly charged borrowers an illegal $100 origination fee, in violation of the Virginia law prohibiting open-end lenders from charging such fees during finance charge-free grace periods. View the Enforcement Watch blog post.

CFPB Secures $7.9 Million Trial Verdict Against Mortgage Loan Servicer

On September 8, a federal judge in California ordered a national mortgage services company to pay a $7.9 million civil penalty based on false or misleading marketing statements it allegedly made to consumers about its mortgage loan repayment services. The court, however, denied the CFPB’s request for $74 million in restitution, finding that the CFPB failed to meet its burden to show restitution was warranted. View the Enforcement Watch blog post

This week’s Roundup contributors: Alex Callen, Christina Hennecken, William McCurdy, and Matthew Riffee