Supreme Court upholds ‘disparate impact’ under the FHA but emphasizes that claims cannot rely on statistics alone

In a much-anticipated decision, the U.S. Supreme Court held in Texas Department of Housing and Community Affairs v. Inclusive Communities Project (“Inclusive Communities”) that claims of disparate impact discrimination are cognizable under the Fair Housing Act (“FHA”). In the case, the Inclusive Communities Project (“ICP”) accused the Texas state housing agency of violating the FHA by causing continued segregated housing patterns through disproportionately allocating low-income housing tax credits. ICP alleged that Texas granting too many tax credits for developments in predominantly African American inner-city neighborhoods and too few in predominantly Caucasian suburban neighborhoods in the Dallas area resulted in a disparate impact based on race in violation of the FHA.

To read the full client alert, please click here.

FinCEN Speech Outlines “Core Principles” on Enforcement

A recent Reed Smith Client Alert discusses a June 2015 speech by Stephanie Brooker, Associate Director for Enforcement at the Financial Crimes Enforcement Network (“FinCEN”). Although Ms. Brooker’s comments were specifically directed at the casino and card club industries, she discussed six “core principles” that have and will continue to guide FinCEN’s BSA/AML enforcement activities against all financial institutions, including banks and mortgage lenders. In particular, the alert discusses FinCEN’s focus on transparency, supervisory goodwill, recidivism, targeting individual directors, officers, and other employees of regulated entities, developing a remedial framework to correct prior deficiencies, and accountability. As to this last point, the alert discusses the extent to which FinCEN – and other regulators (e.g., the OCC) – have required respondents to actually admit liability for the charged violations, rather than merely “neither admit nor deny” as has been the historical practice. Additionally, the alert discusses FinCEN’s expectations that regulated entities develop and exhibit a “culture of compliance.” While insured depository institutions will likely be familiar with this mantra, which has been sounded by federal bank regulators for decades, other regulated entities, such as mortgage lenders, money services businesses, and casinos, might not be accustomed to FinCEN’s expectations. To read the alert in full, click here.

Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and Co-Chair of the Anti-Money Laundering & Trade Sanctions Group, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in regulatory compliance, corporate governance, transactions, and examinations and enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation, editor-in-chief of the ABA’s Banking Law Committee Journal, and Vice-Chair of the Banking Law Section of the New Jersey State Bar.

 

Travis Nelson Elected to Leadership Role in New Jersey Banking Bar

On May 15, 2015, the Banking Law Section of the New Jersey State Bar Association (“NJSBA”) held its annual meeting in Atlantic City, N.J., in conjunction with the NJSBA’s Annual Meeting. In addition to other informational and educational programs, the Banking Law Section conducted its biannual election of officers, electing Reed Smith’s Travis Nelson as vice chair. Travis, resident in Reed Smith’s Princeton and New York offices, is a member of the firm’s Financial Services Regulatory Group, and co-chair of the firm’s new Anti-Money Laundering and Trade Sanctions team. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department; editor-in-chief of the ABA’s Banking Law Committee Journal; and adjunct faculty at Villanova Law School, where he teaches Regulation of Financial Institutions. Travis regularly advises institutions and individuals on all aspects of financial services regulatory compliance, enforcement, and transactional issues.

Travis joins several other Reed Smith attorneys who have also served in leadership positions within the Banking Law Section. Specifically, Len Bernstein, chair of the firm’s Financial Services Regulatory Group, previously served as chair. Additionally, Princeton partner Robert Jaworski previously served as section chair.

The Banking Law Section includes practitioners from throughout New Jersey and beyond, who come from law firms, in-house positions, and other organizations. The section provides educational programs, as well as professional and social networking opportunities for its members and for the general public. In addition to the section’s board of directors, there are several committees with which non-board members can get involved. These committees are: Bank Regulatory, Financial Services Litigation, Financial Transactions, and Legislative. Contract Travis Nelson for more information on how to get involved in the Banking Law Section.

CFPB’s Federal Court Action Against PayPal Sheds Further Light on the Meaning of ‘Abusive’ Acts or Practices

On May 19, 2015, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) filed a complaint and proposed consent order against PayPal, Inc. and its subsidiary Bill Me Later, Inc. (collectively, “PayPal”) in the U.S. District Court for the District of Maryland. If approved by the court, the settlement will require PayPal to pay $15 million in redress to consumers and a $10 million civil money penalty. Although the case is not the largest settlement in CFPB history, it is interesting for at least two reasons: (1) it sheds important new light on the meaning of “abusive” acts and practices, which is slowly being defined through the CFPB’s enforcement actions; and (2) it continues a recent trend of filings in federal court instead of in an administrative proceeding.

To read the full client alert, please click here.

Nicholas F. B. Smyth is a member of Reed Smith’s Financial Industry Group, in the Pittsburgh and Washington, D.C., offices. Nick advises clients on examinations and investigations by the CFPB and other bank regulators. He can also advise clients on investigations and can represent them in litigation with the FTC, DOJ, and state attorneys general. Prior to joining Reed Smith, Nick spent four years as an Enforcement Attorney at the CFPB and a year at the U.S. Treasury Department, where he helped draft the statute that created the CFPB.

OCC Issues Final Rule on Integration of Federal Savings Association – National Bank Licensing Rules

Title III of the Dodd-Frank Act transferred to the OCC all functions of the former Office of Thrift Supervision (“OTS”) and the Director of the OTS relating to federal savings associations.  12 U.S.C. § 5412(b)(2)(C).  This effectively dissolved the OTS and brought the chartering and primary supervisory responsibilities as to federally chartered banks and savings associations under one agency.  As part of its efforts to streamline the supervisory process, reduce regulatory duplication, promote fairness in supervision, eliminate unnecessary burden consistent with safety and soundness, and create efficiencies for both national banks and federal savings associations, the OCC initiated a review of the existing separate regulations for the two types of institutions.  As part of this review, the OCC issued a notice of proposed rulemaking designed to integrate its rules relating to corporate activities and transactions involving national banks and federal savings associations.  See 79 Fed. Reg. 33260 (June 10, 2014).

On May 18, 2015, the OCC published in the Federal Register its final rule on integration of licensing-related regulations.  80 Fed. Reg. 28346 (May 18, 2015).  When the OCC speaks in terms of “licensing,” it is not referring to a license in the sense of receiving a license to engage in a certain activity.  Rather, it is referring to activities that are subject to review by the District Licensing Division of one of the OCC’s four regional districts.  The revised regulations will consolidate most licensing provisions for federal savings associations into the existing national bank rule in 12 C.F.R. Part 5, and eliminate several of the existing rules applicable only to federal savings associations.  For example, some of the consolidated rules are: (a) organizing an institution (§ 5.20); (b) charter conversion (§ 5.25); (c) fiduciary powers (§ 5.26); (d) business combinations (§ 5.33); (e) investments in bank service companies (§ 5.35); (f) investment in bank premises (§ 5.37); (g) change in location of main office (§ 5.40); (h) corporate title (§ 5.42); (i) voluntary liquidation (§ 5.48); (j) change in control (§ 5.50); (k) changes in directors and senior executive officers (§ 5.51); (l) change of address (§ 5.52); and (m) substantial asset change (§ 5.53).

While several of the regulations respecting licensing and other corporate activities will change, others will not.  Examples of regulations that will not change for federal savings associations include: (a) federal mutual savings association charter and bylaws (§ 5.21); (b) federal stock savings association charter and bylaws (§ 5.22); (c) conversion to become a federal savings association (§ 5.23); (d) establishment, acquisition, and relocation of a branch, or establishment of an agency office of a federal savings association (§ 5.31); (e) operating subsidiaries of a federal savings association (§ 5.38); (f) increases in permanent capital of a federal stock savings association (§ 5.45); (g) capital distributions by a federal savings association (§ 5.55); (h) inclusion of subordinated debt securities and mandatorily redeemable preferred stock as supplementary (tier 2) capital (§ 5.56); (i) pass-through investments by a federal savings association (§ 5.58); and (j) service corporations of federal savings associations (§ 5.59).  80 Fed. Reg. at 28347.

In addition to the integration of many of the regulations relating to licensing and corporate activities, the OCC is in the latter stages of developing an electronic applications filing system capable of handling applications and other filings from both national banks and federal savings association.  80 Fed. Reg. at 28346.  This is similar to the electronic filing system already in place for regulatory applications filed with the Federal Reserve System – “E-Apps.”  The transition from hard copy to an electric filing system will have substantial benefits akin to the transition among court systems from paper filing to electronic filing.  With respect to OCC filings and communications, the transition to electronic filing, combined with the OCC’s BankNet portal, will vastly simplify the way that banks and their advisors communicate with the OCC.

Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in regulatory compliance, corporate governance, transactions, and examinations and enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation, editor-in-chief of the ABA’s Banking Law Committee Journal, Vice-Chair of the Banking Law Section of the New Jersey State Bar, and president of the OCC Alumni Association.

Reed Smith Adds Former HUD Assistant Secretary to its Financial Industry, Financial Services Regulatory, and Government Relations Groups

Reed Smith recently added Steven Nesmith to its Financial Industry, Financial Services Regulatory, and Government Relations Group.  Steven’s practice will focus on, among other areas, assisting bank and non-bank clients with housing/mortgage, banking, financial services and international trade issues before Congress, and the regulatory agencies.

Steven’s background combines extensive experience at senior levels, as in-house corporate counsel, in private practice, and in government service as a former Assistant Secretary of HUD in charge of congressional, regulatory and industry relations, and as a Deputy Assistant Secretary at the Commerce Department’s Economic Development Administration.

Prior to joining Reed Smith, Steven was a senior executive and regulatory counsel for the largest national title insurance company in the U.S.  He has also served as Assistant General Counsel for the largest non-bank mortgage serving company in the U.S., with a focus on regulatory and mortgage business issues before Congress and regulatory agencies, including the Consumer Financial Protection Bureau.

Steven’s expertise and experience as in-house counsel, as a senior government official, and in private practice, will assist clients in solving regulatory/compliance issues and navigating the various federal agencies such as HUD, FHA, Ginnie Mae, Treasury, and the FDIC, as well as Congress. 

“I’m thrilled to join Reed Smith,” Nesmith said. “I was attracted to Reed Smith because its Financial Industry Group provides clients with an integrated approach, combining litigation, regulatory, and transactional teams to find legal and business solutions, to help their clients grow their businesses.  This integrated approach in serving clients, along with Reed Smith’s industry expertise, greatly distinguish the firm from others in the marketplace.”

Steven regularly speaks at mortgage and housing financial services industry groups – for example, the National Mortgage Bankers Association, the Federal Reserve Bank of Atlanta, and many national housing organizations.  Steven was captain of American University’s basketball team, was honored by the Washington, D.C. Basketball Hall of Fame during his senior year, and later played professional basketball in Europe.

Nesmith is the latest addition to Reed Smith’s growing powerhouse of consumer financial services litigation and regulation attorneys.  In addition to Nesmith, Reed Smith’s team also includes a former Associate General Counsel from the Federal Reserve Board, former Enforcement Counsel from the OCC, former Enforcement Counsel from the Consumer Financial Protection Bureau, former Deputy Commissioner of Banking for New Jersey, former Assistant Counsel from the Pennsylvania Department of Banking and Securities, former federal prosecutors, several seasoned trial attorneys, and former general counsels and assistant general counsels from some of the country’s leading financial institutions.

Travis Nelson to Speak on Examinations and Enforcement at NJ Bankers’ Compliance University

On Wednesday, March 25, 2015, Travis Nelson, of Reed Smith’s Princeton and New York offices, will give his annual lecture at the New Jersey Bankers Association’s Compliance University. This year Travis will focus on recent developments and trends in examinations and enforcement, covering a cross-section of topics, including proposed changes to the federal mortgage servicing rules, the CFPB’s focus on furnishers of consumer report information, recent interpretations of the Dodd-Frank Act’s “abusive” practices standard, agency expectations as to third-party oversight, strategies for dealing with examiner requests, among other topics.

Each year Compliance University draws in-house counsel, compliance officers, consultants, and service providers, from throughout New Jersey and the region. If you have not registered for Compliance University and would like to attend, visit the New Jersey Bankers Association’s website. If you are interested in a program on the above issues tailored for the specific needs and concerns of your institution, please contact Travis directly at tnelson@reedsmith.com, or at +1 609 524 2038.

Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and a co-leader of the firm’s Financial Institutions Enforcement and Investigations Task Force, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in government enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation, is the editor-in-chief of the ABA’s Banking Law Committee Journal, and is a member of the board of the Banking Law Section of the New Jersey State Bar Association.

CFPB’s Complaints Policy Spurs Many Complaints (From Industry)

Financial institutions are not happy about the CFPB’s announcement that it will begin posting the narratives of some consumer complaints in June. When the CFPB first proposed the idea last summer, banks and industry groups made several arguments against public complaint posting: the content of the complaints is unverified, complaints describe only negative – not positive – customer experiences, and institutions cannot tell their side of the story because they are required to protect their customers’ privacy.

The CFPB’s policy, available here, acknowledges that privacy requirements would prevent companies from providing narratives that meaningfully respond to the customers’ complaints. Therefore, the Bureau will limit what companies can say in the public response by providing a set list of company responses addressing the substance of the consumers’ complaints. The Bureau will also allow companies to recommend additional public-facing responses.

But this is unlikely to satisfy the financial institutions.  While consumer complaint narratives have been available online at rogue websites for years, the concern in the industry is that complaints posted on the CFPB’s website will be given more weight because they appear to have the imprimatur of the government.

In its comment letter opposing the CFPB’s policy, the Financial Services Roundtable (FSR) wrote:  “We also believe that posting unverified and possibly inaccurate accounts on the CFPB’s website will expose providers of consumer financial services to reputational and financial risk for which there is no effective method of mitigation.”

Institutions Must Focus on Preventing Complaints

Now that the CFPB has finalized its policy, banks and others must adapt to this new paradigm. The FSR says there is no method of mitigation, but many consumer complaints can be prevented. The most effective banks have been focusing on minimizing complaints to government agencies since long before the CFPB came along. And for good reason: complaints lead to enforcement actions. In my four years as an enforcement attorney at the CFPB, any time we were considering opening a new investigation, we always looked at the complaint database. Government enforcement agencies have been reading unverified consumer complaint narratives for years, and that will not change with the new policy.  (Of course, before government agencies actually bring enforcement actions, they verify many of the complaints by interviewing the consumers and reviewing the institution’s records.)

Focus on Customer Service

Some institutions do a better job than others at dealing with unhappy customers. What the Bureau’s new policy means is that institutions should double their commitment to customer service. They should closely track consumer complaint data, and they should incentivize their customer service employees to reduce complaints. Banks cannot and should not refund every fee paid by people who complain, but they should strive to ensure that every customer service phone call ends happily. After all, many – if not most – of the consumers who go to the trouble of filing a complaint with the CFPB have already gone directly to the institution and are still unhappy. Banks may wish to consider creating ombudsman programs or special escalation units to ensure that complex customer complaints are dealt with properly and efficiently. Some of our clients use single points of contact to ensure that customers are satisfied.

Find and Solve Recurring Problems

Financial institutions should use consumer complaints as a barometer for what products, offers, or disclosures are sources of legal risk. Sometimes a well-intentioned disclosure just doesn’t give consumers information they need to make the decisions. If consumers are complaining about a particular fee or contract provision, business people should ask themselves what they need to change to prevent those complaints. Sometimes a revised disclosure will do the trick. Other times, a product or an offer may need to be redesigned to ensure consumers understand how it works. Such changes will lead to happier customers and quieter call centers, and government agencies will take their investigations to your competitor.

Nicholas F. B. Smyth is a senior associate in Reed Smith’s Financial Industry Group in Pittsburgh and Washington, D.C. Prior to joining Reed Smith, Nick spent four years as an enforcement attorney at the CFPB, investigating and litigating cases and supporting examinations involving auto lending, student lending, debt collection, credit information furnishing, and military servicemembers. Prior to that, he was at the U.S. Treasury Department, where he helped draft the Consumer Financial Protection Act, which created the CFPB.

“Abusive” further defined by court as CFPB case against ITT Tech moves forward

On March 9, District Judge Sarah Evans Barker issued her long-anticipated order on the motion to dismiss in CFPB v. ITT Educational Services, Inc., No. 1:14-cv-00292 (S.D. Ind.). Judge Barker denied ITT’s motion to dismiss the Bureau’s unfairness and abusiveness claims but granted it on the Bureau’s TILA claim. At 67 pages, the order provides one of the longest and most thorough judicial opinions about the Bureau’s abusiveness authority to date.

Click here to read the full alert on reedsmith.com.

CFPB Report Claims Arbitration “Less Beneficial To Consumers” than Individual or Class Litigation, Foreshadows Attempt to Impose Restrictions in Future

On March 10, Director Richard Cordray of the Consumer Financial Protection Bureau (“Bureau” or “CFPB”) presided over a Field Hearing on Pre-Dispute Arbitration Clauses, discussing what he described as the “key findings” of the Bureau’s long-awaited 700-page Arbitration Report to Congress published earlier that morning. Reed Smith attorney Deepa Zavatsky attended the hearing, where Cordray expressed the CFPB’s view that pre-dispute arbitration is not a “better alternative” to litigation, and he foreshadowed the Bureau’s likely adoption of limitations to such mandatory provisions in consumer contracts.

Click here to read the full client alert on reedsmith.com, written by Deepa J. Zavatsky.

LexBlog