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Winds of Change: Weathering Financial Regulatory
Reform
May 27, 2009
Association of Corporate Counselwww.acc.com
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Overview Purpose
New Laws Credit Cardholders Bill of Rights (a.k.a Credit CARD
Act of 2009) Fraud Enforcement and Recovery Act of 2009
Helping Families Save Their Homes Act of 2009
New Regulations and Regulatory Initiatives
What Is Ahead?
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Issues to Be Covered Mortgages, mortgages, mortgages Consumer Protection
Identity Theft Unfair and Deceptive Practices Credit Card and Other Lending Practices
Prepaid/Stored Value/Gift Cards Anti-Money Laundering Compliance OFAC Compliance TARP/Stimulus developments
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Mortgages Overview of Helping Homeowners Save
Their Homes Act of 2009
Key provisions and action items Unanswered questions Next steps Mortgage fraud efforts
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Will the new Obama Modification and revised Hope for Homeowners plan improve the results?
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“Capitalism works better from every perspective when the economic decision makers are forced to share power with those who will be affected by those decisions”
-Representative Barney Frank, Chairman, House Financial Services Committee
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Mitigation of Systemic Risk
Regulation of Hedge Funds Regulation of Insurance Industry (Optional Federal Charter) Regulation of Credit Rating Agencies (CRAs) Regulation of Derivatives (CDS, Interest rate swaps) Regulation of Mortgage Products Regulation of Other Unregulated Entities Accounting and Audit Standards (including global convergence of
standards)
Multiple Regulators or Single Regulator? Role of Federal Reserve Transparency Consumer Protections Credit Cards 401K “reform”
Current Landscape of the Federal Policy Overhaul of the Financial Services Industry
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Consumer Protection Credit Cards Identity Theft and Data Breach Unfair and Deceptive Practices
A new agency?
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Credit Card Accountability, Responsibility, and Disclosure (CARD) Act Of 2009
President Obama signed HR 627 into law on May 22, 2009
Originally named the Credit Cardholders’ Bill of Rights Act of 2009
Historic legislation intended to reform current credit card industry practices by increasing transparency and amending the Truth in Lending Act
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Credit CARD Act of 2009 Prohibits Raising APRs without at least 45 day’s notice Applying principal payments in excess of minimum to lowest
balance two or more APRs apply to different portions of an outstanding balance
Double billing Charging more than one over-the-limit fee for same balance
unless cardholder has received additional extension of credit, Issuing credit cards to college-aged persons without verifying
independent ability to make payments or have a parent co-sign
Prepaid card fees, with exceptions, and expiration dates
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Effective 9 months after enactment (May 22) unless otherwise provided in Act
Increase in rate or change in terms and conditions effective 90 days after enactment
Other provisions range from 90 days to 15 months
Federal Reserve Board “may” promulgate regulations and forms
Regulation required in some cases
IMPLEMENTATION
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Credit CARD Act – Other Provisions Interchange Fee Study Mandated BSA stored value regulations Report to Congress on reduced credit limits or higher rates based
on geography or identity of merchant, credit transactions, mortgage creditor
Use of credit cards by small businesses Establishment of small business information security task force A study on the link between fluency in English, financial literacy
and conduct of financial affairs Comprehensive summary of federal financial literacy programs Study of products marketed with credit cards (as to suitability,
predatory nature of offer and loss rates on insurance products) Report on cost-effectiveness of emergency PINs
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Sen. Tom Coburn (R-OK) offered amendment: “Protecting Americans from Violent Crime
Permits individuals to carry firearms in National Parks
Two requirements Not otherwise prohibited by law from possessing a
firearm
In accordance with state law in which park is located
Effective in 9 months?
COBURN AMENDMENT
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Identity Theft: Legislative Congress: Federal Data Breach Laws?
H.R. 2221 – introduced 4/30/09 To require data security programs, notices of
breaches Bipartisan Would pre-empt state laws
S. 139 – introduced 1/6/09 Breach notification bill Sen. Diane Feinstein – reintroduced from last
Congress
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Identity Theft: FTC Priority New Team at FTC: Chairman Jon Liebowitz
FTC Division of Privacy and Identity Protection (within BCP)
Identity Theft Data Clearinghouse
Identity Theft was #1 consumer complaint
Reported to FTC in 2008
Credit card fraud led the pack
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Recent FTC Actions re Identity Theft Red Flag Rule delayed until 8/1/09
FTC published a “Red Flag” Guide http://ftc.gov/redflagsrule
Debate about reach of Fair and Accurate Credit Transactions Act of 2003 (FACTA), definition of “creditor” AMA has objected to FTC interpretation
April 29, 2009: FTC Workshop (transcripts available) – Best Red Flag Practices
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Other Recent FTC Actions GLB Act: FTC will release model privacy notice
by August (announced on May 11)
FTC review of credit score use by insurance companies April 17, 2009 letter: to protect PII in responses to
compulsory process sent to insurance companies Rental Research Services, Inc. (D. MN. 2009)
Sale of credit reports to identity thieves Dinamica Financiera LLC (C.D. Cal. 2009)
Mortgage “Rescue” operations directed to Spanish consumers
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Other ID Theft/UDPA Developments State Laws:
45 states now have security breach notification laws
Alaska’s law: effective 6/1/09
Increase in law suits – by consumers, banks, credit unions and businesses alleging failure to protect PII, negligence, and
violation of unfair and deceptive practices acts
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Recent Data Breach/ID Theft Cases Hannaford Brothers Co. data breach class
action pending in ME Hacking of 4.2 million credit and debit card
accounts
May 12, 2009: D. Ct. dismissed most claims (implied warranty, failure to give notice of breach, strict liability and breach of confidential relationship)
But allowed: negligence/UDPA claims for identity theft: un-reimbursed fraudulent charges (actual damages)
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Recent Data Breach/ID Theft Cases Heartland – sued January 2009
Class action in MN Negligence, failure to safeguard consumer data
Failure to notify consumers timely
Credit Union Suits – in Texas and New Jersey Largest data breach in US history?
Handles > 100 million transactions/month, for > 250,000 merchants
Company would not disclose number of affected accounts
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Other Recent Cases Ruiz v. Gap, Inc. – ND Cal. – 4/6/09
Job applicant has standing to sue for future ID theft exposure – data was on stolen laptop
Court relied on toxic tort analogy re future harm
But negligence claim rejected.
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Fraud, Money Laundering, OFAC Mortgage Fraud Fraud Enforcement and Recovery Act of
2009 (FERA) FinCEN Enforcement Action OFAC Enforcement Principal federal regulators IRS’s expanding role Tax havens, tax evasion
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Mortgage Fraud National Mortgage Fraud Task Force Increased spending for criminal
investigations and recovery
New definitions in law Coordinated efforts FTC’s 71 letters on deceptive mortgage
modification practices
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Fraud Enforcement and Recovery Act of 2009 (FERA) Adds mortgage lending business to financial
institution in criminal code Defined as both financing and refinancing debt
secured by interest in real estate Includes subsidiaries Affects interstate or foreign commerce
False statements in applications include those of mortgage brokers and agents of MLBs
Broadens criminal provisions to include TARP funds and other stimulus, recovery or rescue funding
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Fraud Enforcement and Recovery Act of 2009 (FERA) Proceeds of criminal activity = property derived from or
obtained or retained through unlawful activity Sense of Congress on limited use of 18 U.S.C 1956 and
1957 Additional funding to pursue financial crime, including
mortgage, securities and commodities and financial institution fraud Also frauds related to federal assistance and relief programs
False Claims Act Financial Crisis Inquiry Commission
Examine causes of current financial and economic crisis Criminal referrals a
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FinCEN Enforcement Action 2009-1 Key elements
NY branch of foreign bank $5 million civil money penalty - concurrent with OCC penalty – no admission Allegedly failed to establish and implement adequate AML program reasonably designed
to identify and report suspicious transactions, particularly with respect to wire transfers, pouch activity, and U.S. dollar demand drafts
Failed to file large number of SARS OCC enforcement action in September 2006 Deficiencies and transactions between 5/01/04 and 1/16/07 Considered total SARs filed through 1/09 Included potential transactions with terrorists
Comptroller John C. Dugan:"Today's action signifies our ongoing commitment to the goals of the BSA, and will help ensure that all institutions remain vigilant in the fight against money laundering and other illicit activity."
FinCEN Director James H. Freis, Jr: "Despite the current economic and resource challenges that many banks may face, Bank Secrecy Act (BSA) compliance efforts must not be diminished.”
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Anti-Money Laundering Compliance - FinCEN 2009 Enforcement Action MSB proposed regulation and stored
value card questions
Mortgage fraud initiatives SAR confidentiality - disclosure/sharing Directive to act on prepaid cards
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Money Services Businesses FinCEN/IRS Money Services Businesses
Examination Manual
Proposed regulation and questions on prepaid
Focus on foreign entities Stepped up training for examiners at IRS
and state banking level
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OFAC Lloyds TSB Bank - $350 million fine
Wire transfer information
More to come?
Cuba Sanctions Increased enforcement IAT and Swift changes
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Tax Havens UBS Deferred Prosecution Agreement Proposed legislation Negotiations around the globe
Lawsuit with IRS on John Doe subpoenas Provision dropped from FERA FBAR deadline
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Prepaid Card/Stored Value Credit CARD Act of 2009
Regulate fees and disclosures Requires FinCEN regulations in 270 days
FinCEN proposal asks questions for future regulation
Merchant networks as reload locations Deposit insurance questions Continuing activity in the states
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Questions?
Carol R. Van Cleef [email protected]
Todd Cranford [email protected] Tal Franklin [email protected] t Vincent Frillici [email protected] Micah Green [email protected]
Deborah Lodge [email protected] Stephen McHale [email protected]
For further information contact the following members of the Patton Boggs Financial Services Team:
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