Enforcement and Compliance Fall 2015 Update

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1 Enforcement and Compliance Fall 2015 Update DEPARTMENT OF JUSTICE ANNOUNCES SETTLEMENT WITH CALIFORNIA BANK March 11, 2015 The Department of Justice has settled civil and criminal charges against CommerceWest Bank concerning its failure to comply with the Bank Secrecy Act. The matter arises out of the bank?s relationship with one of its customers, a third party payment processor. The case underscores the impact of Project Choke Point and the increasing emphasis regulators and the Department of Justice are placing on the mantra "know your customer." The complaint alleges that the bank?s customer, a third party payment processor, processed transactions for fraudulent merchants including a pay day lender who in turn made unauthorized withdrawals from consumer accounts. The complaint alleges that the bank ignored a series of "glaring red flags" including the following: thousands of complaints from consumers, complaints from other banks expressing their concern that the transactions were fraudulent, and an abnormally high return rate on transactions involving its customer. The complaint alleges that the bank failed to use due diligence in monitoring its customer and failed to comply with its statutory obligation to notify the government of suspicious illegal activity involving consumer fraud. The consent decree requires the bank to engage in certification requirements for a period of ten years. Additionally, the bank has agreed to pay a $1 million civil penalty and an additional $1 million to the United States Postal Inspection Service?s Consumer Fraud Fund. The Department of Justice further reports that as part of the resolution of the criminal charges, the bank has agreed to give up any claim to the $2.9 million previously seized from the third party payment processor?s bank account. SMITH DEBNAM NARRON DRAKE SAINTSING & MYERS, LLP 4601 SIX FORKS ROAD, SUITE 400 RALEIGH, NORTH CAROLINA Smith Debnam Narron Drake Saintsing & Myers, LLP

2 CFPB ISSUES COMPLIANCE BULLETIN/ADMONITION TO MORTGAGE LENDERS May 13, 2015 The CFPB has issued a compliance bulletin directed to mortgage lenders. In Bulletin , the Bureau targets disparate treatment and?reminds?creditors of their obligation to provide non-discriminatory access to credit for mortgage applicants using income derived from the Section 8 Housing Choice Voucher Homeownership Program. The Bulletin appears to stem from the Bureau?s identification of two issues: (1) institutions excluding or refusing to consider income derived from Section 8 HCV vouchers during the mortgage loan application and underwriting processes; and (2) institutions restricting the use of vouchers to certain home loan mortgage loan products or delivery channels. The Section 8 HCV Homeownership Program is funded by HUD and was created to assist low-income first time homebuyers. Under the Program, eligible consumers may be provided with a monthly house assistance payment to assist with the homeownership expenses associated with a housing unit purchase with a monthly housing assistance payment to assist with the homeownership expenses associated with a housing unit purchase in accordance with the HUD regulations. Under the Equal Credit Opportunity Act (?ECOA?) and Reg B, creditors are prohibited from discriminating in any aspect of a credit transaction against an applicant?because all or part of the applicant?s income derives from any public assistance program.?public assistance payments include?mortgage supplement or assistance programs.?the Section 8 HCV vouchers, therefore, are considered public assistance payments for purposes of ECOA and are protected under ECOA. Under Reg B, a creditor may not automatically discount or exclude protected information from consideration and can only discount or exclude protected income based on the applicant?s actual circumstances. The Bulletin cautions lenders against disparate treatment emanating from a creditor either excluding Section 8 HCV vouchers as a source of income or from accepting the vouchers only for certain mortgage loan products. The Bureau notes that ECOA and Reg B may be violated?if an underwriting policy regarding income has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact." The Bureau counsels lenders to take the following steps: The Bulletin cautions lenders against disparate treatment emanating from a creditor either excluding Section 8 HCV vouchers as a source of income or from accepting the vouchers only for certain mortgage loan products. - Clearly articulate their underwriting policies regarding income derived from public assistance programs; - Provide proper training to their underwriters, originators and others involved in the mortgage loan origination concerning public assistance payments; and - Carefully monitor for compliance with such underwriting policies. The Bureau notes that ECOA and Reg B may be violated?if an underwriting policy regarding income has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact."

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4 continued from previous page personal secured property is owned by a SCRA-protected CFPB CONTINUES ITS FOCUS ON LOAN ORIGINATION COMPENSATION servicemember before referring a loan for foreclosure or June 10, Policies and procedures for determining whether real or repossession and during the foreclosure or repossession process in order to determine whether a court order is required pursuant to the SCRA prior to foreclosure or repossession; - Processes to ensure that all factual assertions in affidavits of military service are accurate, complete and In the span of a week, the CFPB has made it clear that it will not tolerate compensation to loan originators based upon interest rates. These are the second and third cases resolved by the CFPB regarding loan originator compensation in the past six months and are based upon Regulation Z?s Loan Originator Compensation (?LOC?) Rules. reliable; - Procedures for searching the Department of Defense Manpower Data Center database or an equivalent database before filing an affidavit in connection with a default judgment on an account, initiating the foreclosure or repossession process, or making a determination of eligibility for SCRA benefits; Procedures for filing an affidavit in connection with obtaining a default judgment on an account; - Procedures for initiating and pursing a waiver of rights; - Procedures regarding applicable state laws which may provide more benefits or protections that the SCRA; - A record retention policy to protect records which demonstrate compliance with the SCRA (including documentation of the calculation of benefits; assessment of eligibility for benefits; correspondence with servicemembers; and method, dates and results of military status verification); - Policies and procedures to ensure risk management, periodic audits for quality assurance, vendor RPM Mortgage: On June 4th, the CFPB and RPM Mortgage entered into a proposed consent order which requires RPM to pay $18 million dollars in monetary relief and a $1 million civil money penalty. It additionally requires RPM?s CEO to pay an additional $1 million civil money penalty. The complaint alleged generally that RPM instituted a compensation plan which incentivized loan originators to steer consumers to higher rate mortgage loans. Specifically, the Complaint alleged that RPM established employee expense accounts into which RPM deposited profits from an originator?s closed loans. The Loan officers could receive bonuses from the accounts or use the accounts to offset interest rate or provide other incentives to consumers to avoid losing transactions. The CFPB contended that by doing so, the officers were able to close and earn commissions on accounts they would have otherwise lost to competitors. All of the actions of RPM occurred prior to January 1, 2014 and therefore fell under the prior version of the LOC Rule. management and corporate compliance with the SCRA; Policies and procedures for training of employees; - Policies and procedures for compliance of third party vendors; and - Documented processes for ongoing monitoring, testing, and reporting. Guarantee Mortgage Company: On June 5th, the CFPB entered into a consent order with Guarantee Mortgage Corporation to resolve violations of the LOC Rules. The consent order requires Guarantee, which is no longer in business, to pay $228, to the CFPB?s Civil Penalty Fund. continued on next page

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6 continued from previous page - Supervised institutions also struggled to comply with the good faith estimate requirements of Regulation X. Particularly, the CFPB found entities: - Failed to timely provide the consumer with the good faith estimate within three business days of receipt of the completed application; - Failed to timely provide the consumer with revised good faith estimates within three business days of receiving information of changed circumstances; Failed to include all fees within the good faith estimate. - Supervised entities failed to ensure that the HUD-1 settlement statements accurately reflect the actual settlement charges paid by the borrower; MORTGAGE SERVICING The CFPB acknowledged that compliance with the CFPB mortgage servicing rules is a high priority. It should come as no surprise, then, that the report details a number of issues in this regard. The CFPB again made the general observation that entities need procedures in place to audit for systemic controls. Particularly as to loss mitigation, the CFPB noted: - A number of issues with acknowledgement notices sent by servicers. The Highlights make clear the expectation that servicers?requests for additional documents should be on point and only request the specific additional documents actually required to complete a loss mitigation application; - Entities also need to protect against system failures and weaknesses to insure that loss mitigation acknowledgement notices are timely sent; and - Entities need to insure that systems and procedures are in place to insure that loans transferred while in loss mitigation are handled appropriately. - Particularly as to foreclosure, servicers?notices of intent to foreclose should take into account any pending loss mitigation plans. - One or more servicer failed to automatically cancel private mortgage insurance as required by the Homeowners Protection Act. - Entities also struggled with the periodic statement requirements of Regulation Z. One or more servicers failed to send periodic statements either because of a sustained system error or because of an erroneous belief that the loans were exempt. Additionally, one or more servicers inaccurately listed fees and transactions in the transaction history. FEDERAL REGULATORS AND STATE ATTORNEY GENERALS "PILE ON" CHASE ENTITIES WITH CONSENT ORDERS July 8, 2015 In an orchestrated fashion, the OCC, CFPB, 47 states and the District of Columbia have entered into consent orders with JP Morgan Chase and related entities. The OCC Consent Order: Today?s OCC Consent Order resolved an enforcement action that was taken against J.P. Morgan Chase Bank and two of its affiliates in At that time, a Consent Order was entered into which required corrective action to address deficiencies with Chase?s debt collection practices, as well as its compliance with the Servicemembers Civil Relief Act (the "SCRA"). The Consent Order entered today requires an additional $30 million civil money penalty which comes on top of the $50 million already paid out in restitution pursuant to the 2013 Consent Order. According to the Statement released by the OCC, today?s consent order comes after the OCC has had a "time to assess the full extent of the deficiencies." Like the prior consent order, the OCC Consent Order includes the following findings: - The bank filed or caused to be filed affidavits which were not based upon the affiant?s personal knowledge or review of the bank?s relevant books and records; - The bank filed or caused to be filed inaccurate sworn documents, resulting in judgments which contained financial errors favorable to the bank; - The bank filed or caused to filed affidavits which were not properly notarized; - The bank did not have effective policies or procedures in place to ensure compliance with the SCRA; - The bank inadequately staffed its sworn documents and collections litigation processes; - The bank failed to provide adequate internal controls, policies and procedures, compliance risk management, internal audit, third party vendor management and training as to its sworn document and collection litigation processes; and - The bank failed to properly oversee its outside counsel and other third party vendors responsible for the sworn document and collection litigation services. continued on next page

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8 continued from previous page FEDERAL REGULATORS AND THE CFPB FINE BANK AND ORDER REMEDIATION AS TO DEPOSIT DISCREPANCIES August 13, 2015 In a joint enforcement action, the CFPB, OCC and FDIC have entered into consent orders with Citizens Bank N.A., Citizens Bank of Pennsylvania and their parent company, Citizens Financial Group, Inc. (the?banks?). Requires Chase to Do Due Diligence Regarding their Relationships with Debt Buyers. The Order: - Requires that the Bank properly vet new relationships with debt buyers; - Requires periodic due diligence reviews of current forward flow contracts; - Prohibits the sale of accounts to debt buyers who cannot certify they or their vendors are not properly licensed or authorized to collect in the states where consumers reside; - Requires Chase to include provisions in their sale agreements prohibiting the resale of accounts, and expressly prohibiting certain specified unlawful conduct by debt buyers; Specifies the contents and other requirements for Chase affidavits relative to collection accounts moving forward including a requirement that all affidavits be signed by hand and based upon the direct knowledge of the person signing based upon their review of Chase?s business records; Specifies how Chase is to conduct any collections litigation moving forward; Requires withdrawal, dismissal or termination of all prejudgment collections litigation pending at any time between January 1, 2009 and June 30, 2014; and The consent orders allege the Banks engaged in unfair and deceptive practices between 2008 and 2013 with respect to their handling of deposit discrepancies. In total, the Banks are being ordered to refund any deposit discrepancies which were not properly credited to customer accounts (estimated to be in excess of $16 million dollars) and pay over $20 million in penalties. Additionally, the Banks are being ordered to remediate their practices and put compliance management programs and audit procedures in place to prevent further issues. Between January of 2008 and November of 2013, the consent order alleges that the banks violated 5 of the FTC Act and 1036 of Dodd Frank by engaging in unfair and deceptive practices regarding their deposit discrepancy policies. According to the consent orders, the Banks?violations were twofold: (a) the Banks told customers that deposits were subject to verification, suggesting that the banks would take steps to ensure deposits were accurately credited when a discrepancy arose between the deposit slip and the actual amount of the deposit; and (b) the Banks made no adjustments to the deposit amounts where deposit discrepancies were under a certain threshold ($50 from January 2008-September 2012 and $25 from September 2012 through November 2013). In other words, the deposits were credited for the amount on the deposit slip regardless of the discrepancy. The net effect was that if a customer miscalculated its deposit and the discrepancy was under the threshold, the deposit was never credited to reflect the discrepancy. The Orders require the Banks to: - Provide proper vendor management to ensure their service providers and affiliates properly and accurately resolve deposit discrepancies; - Establish a Compliance Committee to monitor and coordinate Requires Chase to cease all post judgment enforcement actions and request that the consumer reporting agencies delete/ amend/ suppress any reporting of the judgments. the Banks?adherence with the consent orders; continued on next page

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10 REDLINING ENFORCEMENT ACTIONS ARE BECOMING A POINT OF EMPHASIS September 29, 2015 continued from previous page - Procedures for effective monitoring, training, record-keeping, and audit of the banks?third parties; - Access by the banks to all necessary systems of the banks?third parties to insure compliance with all consumer protection laws; - Monitoring of all third party agreements to ensure they contain specific expectations, obligations, and consequences for compliance with all consumer protection laws; - Maintenance of records of all third party agreements and any marketing or solicitation materials developed by the banks?third parties for add on products; - Prompt notification by the banks?third parties regarding any regulatory inquiries, customer complaints and/or legal actions received by the banks?third parties (?other than routine requests such as requests for cease and desist collection contact); - Procedures to address and resolve consumer complaints and inquiries regarding services or products provided by the banks?third parties; and - Procedures to effectively analyze the root cause of complaints and identify any patterns or trends in complaints about specific products or practices. Enforcement actions and the resulting consent orders should be reviewed carefully by other financial services companies to not only identify regulatory points of emphasis and prohibited practices, but also for guidance as to regulator expectations regarding effective compliance management systems. In what may be the tip of the iceberg, the Department of Justice and CFPB have partnered together to enter into a proposed consent order with Hudson City Savings Bank resolving allegations that the bank engaged in a pattern or practice of redlining predominantly black and Hispanic neighborhoods in its residential mortgage lending practice. The consent order, if approved, would be the largest redlining settlement in history to provide direct subsidies, according to the CFPB. The settlement follows a 2014 CFPB investigation into the bank?s mortgage lending practices and a subsequent referral to the Department of Justice. The complaint alleges that between 2009 and 2013, the bank?s policies and procedures discouraged consumers in majority Black-and-Hispanic neighborhoods from applying for credit from the bank and therefore violated the Equal Credit Opportunity Act and the Fair Housing Act. Both Acts prohibit discrimination based upon race, color and national origin. The agencies alleged that the bank placed its branches and loan officers principally outside of majority Black-and-Hispanic neighborhoods, excluding majority-black-and-hispanic neighborhoods from its Community Reinvestment Act assessment areas, selecting mortgage brokers that were mostly outside of and did not effectively serve the majority Black- and-hispanic neighborhoods and focusing its marketing efforts on neighborhoods with relatively few Black and Hispanic residents. More specifically, the CFPB and Department of Justice contended: - The bank engaged in a branch expansion and acquisition strategy that excluded and formed a?semi-circle around the four counties in New York State with the highest proportions of majority-black-and-hispanic neighborhoods?; - A significant disparity existed between the applications the bank derived from majority-black-and-hispanic tracts in their metropolitan statistical areas (?MSAs?) when compared to those derived from the bank?s peers in the same areas; - The bank generated 80% of their mortgage applications from brokers and the bank?s broker network was heavily concentrated outside of majority-black-and-hispanic areas; - The bank discouraged lending in majority-black-and-hispanic neighborhoods by excluding most of the majority-black-and-hispanic neighborhoods in two of its MSAs from its Community Reinvestment Act assessment areas; continued on next page

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12 SMITH DEBNAM NARRON DRAKE SAINTSING & MYERS, LLP 4601 SIX FORKS ROAD, SUITE 400 RALEIGH, NORTH CAROLINA This document is intended to be informational only. This material has been prepared or is distributed solely for informational purposes and is not a solicitation. All publication rights reserved. None of the material in this publication may be reproduced in any form without the express written permission of Smith Debnam Narron Drake Saintsing & Myers, LLP Smith Debnam Narron Drake Saintsing & Myers, LLP