Financial Services Weekly News - September 2016 #2



Editor's Note

In this edition. The NYDFS proposed a cybersecurity regulation governing New York-chartered banks and insurance companies, the OCC released its bank supervision priorities in its annual supervision operating plan, the House Financial Services Committee approved the Financial CHOICE Act, and the Department of Justice announced a settlement agreement with a bank for alleged False Claims Act violations. These and other developments are covered below.

Regulatory Developments

NYDFS Proposes Cybersecurity Regulation for Banks and Insurance Companies

On September 13, the New York State Department of Financial Services (NYDFS) issued a proposed regulation that would require banks and insurance companies to institute comprehensive cybersecurity programs. The regulation would require banks and insurance companies licensed by New York State (but not federally chartered institutions) to establish a cybersecurity program; adopt a written cybersecurity policy; designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing its new program and policy; and have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third parties, along with a variety of other requirements to protect the confidentiality, integrity and availability of information systems. The NYDFS’s summary of the regulation can be found here. The proposed regulation is subject to a 45-day public comment period following the September 28, 2016 publication in the New York State Register before its final issuance. The regulation is scheduled to become effective January 1, 2017.

Update: California Governor Signs Bill into Law Requiring Fee Transparency

The August 31 edition of the Roundup reported on a bill that would require California public pension funds to obtain and publicly disclose substantial amounts of information regarding their investments in private investment funds. On September 14, California Governor Jerry Brown signed the fee-transparency bill into law, requiring public pension funds to comply with the new requirements beginning January 1, 2017.

OCC Releases Annual Supervision Operating Plan, Bank Supervision Priorities

On September 14, the Committee on Bank Supervision (CBS) of the Office of the Comptroller of the Currency (OCC) released its annual supervision operating plan outlining the OCC’s bank supervision priorities. The plan will guide CBS managers and staff in the development of their supervisory priorities, planning, and resource allocations for the fiscal year spanning October 1, 2016 to September 30, 2017 (FY 2017). In FY 2017, the OCC will focus on the following priorities: (1) commercial and retail loan underwriting; (2) business model sustainability and viability; (3) operational resiliency; (4) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance management; and (5) management processes addressing new regulatory requirements. In FY 2017, the CBS will differentiate among regulated institutions according to size, complexity, and risk profile when developing supervisory strategies and will devote resources to risk-focused examinations of technology service providers supporting critical processing and services to banks.

House Financial Services Committee Passes Bank Regulatory Reform Bill

On September 13, the House Financial Services Committee approved the Financial CHOICE Act, the regulatory reform bill touted as the Republican alternative to Dodd-Frank. As discussed in the June 8 edition of the Roundup, the Financial CHOICE Act would, among other things, (1) provide relief from Dodd-Frank and Basel III-related regulations for banking organizations that choose to make a “qualifying capital election”; (2) retroactively repeal the authority of the Financial Stability Oversight Council to designate firms as systemically important financial institutions (SIFIs) and replace the orderly liquidation regime established by Title II of Dodd-Frank with a new chapter of the Bankruptcy Code; (3) reform the CFPB by replacing the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations and establishing an independent, Senate-confirmed Inspector General; (4) make all financial regulatory agencies more accountable to Congress; (5) repeal the Durbin Amendment on interchange fees; (6) repeal sections and titles of Dodd-Frank, including the Volcker Rule, that limit capital formation; and (7) incorporate more than two dozen regulatory relief bills for community financial institutions. The Financial CHOICE Act passed on a party line vote and the Democrats did not offer any amendments.

Fintech Flash: Bank Partnership Agreements

Prior FinTech Flash installments have addressed the pros and cons of marketplace lending companies entering into bank partnerships as well as considerations relevant for determining whether a marketplace lending platform or its bank partner is the “true lender.” If a marketplace lending platform decides that it makes sense to enter into an arrangement with a bank partner, then it will need to negotiate and enter into a contractual agreement with its bank partner that satisfies applicable legal and regulatory requirements, establishes a structure for the arrangement intended to result in the bank partner being viewed as the “true lender,” and addresses other legal and business considerations. For more information, click here to read the latest from Goodwin’s FinTech practice.

Enforcement & Litigation

HUD/DOJ Settle with FHA Mortgage Lender for $52.4 Millions Over Alleged False Claims Act Violations

On September 13, the Department of Justice (DOJ) announced a settlement agreement with a bank for allegedly violating the False Claims Act by improperly underwriting and originating FHA-insured mortgage loans. According to the DOJ, from January 1, 2006 to December 31, 2011, the lender was improperly underwriting and certifying that mortgage loans qualified for FHA insurance when the loans in fact did not meet the Department of Housing and Urban Development (HUD) underwriting and FHA program requirements. The DOJ alleged that the lender was violating one or more HUD requirements, including overstating borrower income, understating borrower liabilities, and conducting inadequate verification of income and employment. It further alleged that the lender was not in compliance with HUD-required quality control procedures and failed to self-report instances of material deficiencies in FHA loans identified in the lender’s quality control reviews. As a result of the lender’s conduct, the DOJ claimed that HUD had insured hundreds of loans approved by the lender that were not FHA-eligible and incurred substantial losses when it paid insurance claims on the loans at issue. The settlement requires the lender to pay $52.4 million to the federal government and to identify and repay any unallowable costs the lender sought in connection with its prior submission of the FHA loans at issue. It also released the lender from liability under provisions of the False Claims Act, Program Fraud Civil Remedies Act, and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and under several common law claims.

FINRA Fines Broker-Dealer for Failing to Supervise the Transmittal of Funds from Customer Brokerage Accounts

On September 14, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Ameriprise Financial Services, Inc. $850,000 for failing to detect the conversion of more than $370,000 from five customer brokerage accounts by one of its registered representatives. FINRA alleged that Ameriprise failed to adequately investigate red flags associated with nine third-party wire requests, including that the funds were being transmitted to a business bank account associated with an Ameriprise representative. In settling the matter, Ameriprise neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Mortgage Banking: Servicing Remains an Enforcement Target

Goodwin’s Michael Flynn, a partner in the Financial Industry, Banking, Consumer Financial Services, and FinTech practices; Mike Whalen, a partner in the Technology Group and co-leader of the FinTech practice; and Levi Swank, an associate in the Financial Industry and Consumer Financial Services Litigation practices, published an article, Servicing Remains an Enforcement Target, in the September 2016 issue of Mortgage Banking. The article provides a survey of recent government enforcement and litigation actions focused on mortgage servicing, and takes the position that although the number of actions has declined since the financial and foreclosure crisis, enforcement agencies are still paying close attention to mortgage servicing-related activities such as servicing transfers, vendor management, data security, debt collection, and regulatory examination compliance.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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