Regulatory and Enforcement Trends

Agenda We will provide an overview of the regulatory and enforcement trends that may affect financial institutions focusing on: the SEC FINRA the CFPB the banking agencies This is MoFo. 2

SEC Priorities This is MoFo. 3

SEC Developments The SEC s Enforcement Division has been implementing new strategies and approaches, including the following: Topical expertise: the Division has established various task forces, including, for example, an asset management unit and a structured products unit Use of complex analytics Aberrational Performance Inquiry ; Risk Fin analysis Relying on better information obtained through the Whistleblower process Conducting targeted sweeps Bringing more cases The SEC has been focused on a few specific areas, including the following: Ponzi schemes Insider trading Private equity Money laundering Foreign Corrupt Practices Act This is MoFo. 4

FINRA Priorities This is MoFo. 5

FINRA Exam Priorities 2013 Letter Yield-chasing behaviors in slow growth, low interest rate environment Suitability rule (2111) includes reasonable basis suitability Insider Trading Information Barriers Products Business Development Companies ETFs, ETNs Non-traded REITs VAs Cyber-Security and Data Integrity Private Placements Rule 5123 AML FINOP High Frequency Trading This is MoFo. 6

FINRA Exam Priorities Other recent focuses Conflicts of Interest recent sweep Structured Products Suitability liquidity, risks, fees Disclosure risks inherent in products Supervision procedures, training, etc. Mark-ups it s so hard to let go of the 5% threshold New Rules Suitability FINRA claims it s nothing new. Is that right? Communications effective 2/14/13 Reduces categories from 6 to 3 New filing requirements Approval and record-keeping requirements This is MoFo. 7

The CFPB This is MoFo. 8

The Bureau in Year Two What Has Changed What does the CFPB look like today? Staffing Funding Ongoing political challenges What are the CFPB s priorities? Mortgages Credit cards Prepaid cards Credit reports, including furnishers Debt collection Supervision of service providers This is MoFo. 9

The Bureau in Year Two What Has Changed (cont d) The CFPB s approach Guidelines vs. rulewriting Use of enforcement to set policy Data acquisition and analysis Impact on confidential and privileged records Rulemaking examples Larger participant rules Credit cards and CARD Act review Confidential information Prepaid cards Fair lending Overdrafts Home Mortgage Disclosure Act Small business data collection This is MoFo. 10

The Bureau in Year Two What Has Changed (cont d) Final Mortgage Rules Qualified Mortgage/Ability to Repay Rule Servicing Mortgage Loan Origination Compensation Appraisals (Interagency) Appraisals (Regulation B) HOEPA and Counseling Provisions Escrow Accounts Proposed Mortgage Rules RESPA/TILA Integration Project Qualified Mortgage/Ability to Repay Rule Non-Mortgage Rules Remittance transfers Credit cards ability to pay This is MoFo. 11

CFPB: Enforcement Authority of Bureau Unlawful for Covered Person or Service Provider to Violate a Federal Consumer Financial Law Existing authority and remedies Engage in any unfair, deceptive or abusive act or practice Fail to keep records, permit access, or make reports as required by Bureau Aider/Abettor Liability Unlawful to knowingly or recklessly provide substantial assistance to a Covered Person or Service Provider in violation of unfair deceptive or abusive acts or practices prohibition This is MoFo. 12

CFPB: Enforcement Authority of Bureau (cont d) Any person who violates Federal Consumer Financial Law ( 1054) Covered Persons Large banks exclusive ( 1025) Other banks recommendation to prudential regulator ( 1026) Non-banks shares with FTC ( 1024) May bring cases administratively or in federal court Remedies Injunctions Money damages Costs Penalties up to $1 million/day Similar to FIRREA, SEC Remedies Act of 1990 Civil Penalty Fund established Can be used for redress and consumer education Compare other federal agencies: penalties go to U.S. Treasury This is MoFo. 13

CFPB: Enforcement Authority of Bureau (cont d) CFPB view on enforcement Enforcement personnel involved at every level Enforcement is not the last option; it is part of every option Like FTC historically, CFPB views enforcement as a way to establish standards for industry This is MoFo. 14

CFPB Enforcement Actions $210M Settlement $214M Settlement Sale of ancillary products payment protection, credit monitoring, wallet and identify theft protection Call center vendors and telemarketers Joint action by CFPB and another regulator (FDIC or OCC) This is MoFo. 15

CFPB Enforcement Actions (cont d) $112.5M Settlement Deceptive advertising: promised monetary benefit then failed to deliver Debt collection: promised paying off debts would improve credit rating, but debts had aged off credit reports Excessive late fees: violated CARD Act by assessing late fees exceeding permissible percentage of debt Discriminatory practices: credit scoring system discriminated against applicants over 35 Credit reporting: failure to report accounts in dispute This is MoFo. 16

CFPB Enforcement Actions (cont d) Four enforcement actions against mortgage issuers for improper kickbacks. The proposed consent orders require the four mortgage insurers to pay more than $15 in penalties to the CFPB. Genworth Mortgage Insurance Corporation United Guaranty Corporation Radian Guaranty, Inc. Mortgage Guaranty Insurance Corporation The mortgage insurance companies have agreed to: End the practice Pay more than $15 million in penalties Compliance monitoring and reporting This is MoFo. 17

Hot Button Issues: Third-Party Vendors Financial institutions are responsible for actions taken by third-party service provider and vendors Contract terms require compliance with laws, set standards, and provide for monitoring Policies and procedures for monitoring compliance Response to consumer complaints This is MoFo. 18

Hot Button Issues: Fair Lending New definition for fair lending Fair, equitable, and nondiscriminatory access to credit for consumers Office of Fair Lending with Associate Director established This is MoFo. 19

Hot Buttons: All Other Things Mortgage Until January 2013, focus on finalizing proposed mortgage rules Mortgage servicing Ability to pay/ qualified mortgage Appraisal proposal Loan compensation High-cost mortgages Then, watch out for HMDA Escrow Home equity/reverse mortgage etc. inherited from FRB This is MoFo. 20

Hot Button Issues: UDAAP The Bureau has broad authority to issue regulations prohibiting unfair, deceptive or abusive acts or practices But UDAAP enforcement is more efficient and flexible Easier to pursue than challenge of statutory compliance UDAAP allows CFPB to interpret requirements as it goes New approach Consumer perspective vs. regulatory perspective Lots of room for subjective interpretation How will the CFPB find it and define it? Gotcha mentality: Enforcement rather than rulemaking Triggers Exams Complaints Court of public opinion This is MoFo. 21

Hot Button Issues: UDAAP (cont d) What does it mean? Authorized by law or contract is not Lack of express prohibition is not enough Full disclosure may not be enough, even if disclosure is not misleading Paternalistic approach: Obligation to ensure consumer understands risks Obligation to ensure consumer understanding This is MoFo. 22

CFPB Cooperation & Information Sharing Broad information sharing and cooperation agreements State AGs State Banking Commissioners FTC and Prudential Banking Agencies (FDIC, FRB, NCUA, OCC) Concerns about protection for confidential and privileged information Confidentiality/privilege are not grounds for withholding requested information Discretion to ignore FOIA exemption for these materials As a general rule, production of privileged materials to regulator waives the privilege Statutory exception for materials submitted to federal banking agencies does not apply This is MoFo. 23

CFPB Supervisory Highlights On October 31, 2012, the CFPB released a report, entitled Supervisory Highlights: Fall 2012, which contains an overview of the CFPB s supervisory and enforcement actions through September 30, 2012. The overview focuses on high-level examples of compliance failures and violations of consumer financial law that the CFPB detected during supervisory activities. According to the report, several institutions exhibited weak or nonexistent compliance management systems, including in the fair lending and credit reporting contexts. Specifically, the institutions failed to properly communicate policies and procedures to managers and employees, failed to properly train employees to be able to detect compliance weaknesses, or failed to have compliance management systems for entire product lines. In one instance, these deficiencies led to an institution s failure to report that information reported to consumer reporting agencies was disputed by customers. This is MoFo. 24

CFPB Supervisory Highlights (cont d) There also were several failures by institutions to institute proper controls over third-party service providers. For example, one institution and its third-party service provider mailed conflicting interest rate information to delinquent card holders, causing a TILA violation when a penalty rate was later applied to the accounts. Other examinations found multiple violations of the Credit Card Accountability Responsibility and Disclosure Act, including: An institution that increased the credit line of a cardholder who was under 21 years of age without notifying or seeking authorization from the adult coapplicant ; and An institution that failed to establish policies and procedures or perform rate reviews on acquired portfolios within six months, as required by Regulation Z. This is MoFo. 25

Adapting to the New Paradigm This is not business as usual The CFPB employs a consumer perspective at every stage of the process Role of complaints in supervision, enforcement and policy Know your customer: anticipate problems based on actual experience Marketing Know your audience Watch use of fine print Consider location/placement Use focus groups Use experience gained from questions/complaints This is MoFo. 26

Adapting to the New Paradigm (cont d) Customer service Monitoring scripts Training employees Monitoring actual calls Third-party vendors: compensation, oversight This is MoFo. 27

Banking Agencies This is MoFo. 28

Banking agencies About 800 formal enforcement actions issued in 2012 by the banking agencies (lower than 2010 and 2011) These involved significant civil money penalties The actions involved: Consumer protection matters Anti-money laundering and OFAC Bank safety and soundness This is MoFo. 29

Mortgage settlements In February 2012, settlements were reached with banks relating to servicing and foreclosure practices: Funds allocated among state and federal authorities, homeowner relief programs, refinancing, and the FHA Additional settlements (smaller) were reached in August 2012 OCC and FRB approved action plans from settling banks relating to their servicing practices Settling firms also had to engage consultants for a foreclosure review. This has been the subject of recent commentary. This is MoFo. 30

AML Actions The banking agencies also have been active in pursuing violations of the Bank Secrecy Act and enforcement of AML regulations. Dec 2012 settlement ($1.9bn) involved AML and OFAC violations ( will find failure to maintain an effective AML program ) This is MoFo. 31