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Top Story Compliance Related


Bureau circular reminder on adverse action notices

The CFPB yesterday announced its issuance of Consumer Financial Protection Circular 2022-03, "Adverse action notification requirements in connection with credit decisions based on complex algorithms." The circular confirms that federal anti-discrimination law —the Equal Credit Opportunity Act (ECOA) — requires companies to explain to applicants the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms.

ECOA protects individuals and businesses against discrimination when seeking, applying for, and using credit. To help ensure a creditor does not discriminate, ECOA requires that a creditor provide a notice when it takes an adverse action against an applicant, which must contain the specific and accurate reasons for that adverse action (or a disclosure of the applicant's right to a statement of those specific reasons). Creditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations. Creditors cannot justify noncompliance with ECOA based on the mere fact that the technology they use to evaluate credit applications is too complicated, too opaque in its decision-making, or too new.


OCC to host Dallas workshop for directors and management

The OCC has announced it will host a one-and-a-half-day Building Blocks for Success workshop in Dallas for directors, senior management team members, and other key executives of national community banks and federal savings associations on June 28-29.

The workshop fee is $99 and limited to the first 35 registrants. Participants receive course materials, supervisory materials, and lunch.

Online registration is required. Information on other OCC workshops is available on the OCC's website.


FHFA requires new public disclosures by Enterprises

The Federal Housing Finance Agency on Thursday published a final rule that amends the Enterprise Regulatory Capital Framework (ERCF) by introducing new public disclosure requirements for Fannie Mae and Freddie Mac (the Enterprises). The requirements include quarterly quantitative and annual qualitative disclosures related to risk management, corporate governance, capital structure, and capital requirements and buffers under the standardized approach.

The rule becomes effective 60 days after publication in the Federal Register. The Enterprises will publish their first public disclosure reports under the final rule in the first quarter of 2023.


SEC stops hedge fund fraud scheme

The Securities and Exchange Commission has announced fraud charges have been filed against Detroit-based EIA All Weather Alpha Fund I Partners LLC (EIA) and its sole owner, Andrew M. Middlebrooks, for allegedly engaging in a multi-year scheme that included the misappropriation and misuse of investors’ funds. To halt this alleged ongoing fraud, the SEC has obtained emergency relief from the U.S. District Court in the Eastern District of Michigan, including a temporary restraining order against EIA and Middlebrooks and an asset freeze against the defendants and named relief defendants.

According to the SEC’s complaint, unsealed yesterday, from at least mid-2017 to April 2022, EIA and Middlebrooks deceived investors in their hedge fund, EIA All Weather Alpha Fund I, LP, including by making repeated false statements about the fund’s performance and total assets; providing falsified investor account statements; misrepresenting that the fund had an auditor; and creating and disseminating a fake audit opinion to investors. The SEC’s complaint also alleges that EIA and Middlebrooks misused new investor money to make Ponzi-like payments to other investors in the fund in order to continue to deceive investors into believing that the fund was profitable. According to the complaint, Middlebrooks also misappropriated investor funds for personal use, including for jewelry and credit card payments.

The SEC seeks injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against EIA and Middlebrooks. The SEC also named EIA All Weather Alpha Fund I, LP, EIA All Weather Fund Partners II, LLC, and Shop Style Shark, LLC as relief defendants.


OCC posts CRA evaluation schedule for July–December

The OCC has released its schedule of Community Reinvestment Act evaluations to be conducted in the third and fourth quarters of 2022. The list is in alphabetic order by state.


OFAC targets terrorist groups' oil smuggling network

On Wednesday, Treasury announced that OFAC had designated an international oil smuggling and money laundering network led by Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) officials that has facilitated the sale of hundreds of millions of dollars’ worth of Iranian oil for both the IRGC-QF and Hizballah. This oil smuggling network has acted as a critical element of Iran’s oil revenue generation, as well as its support for proxy militant groups that continue to perpetuate conflict and suffering throughout the region.

For identification of the ten individuals and nine entities designated yesterday, see the May 25, 2022, BankersOnline OFAC update.


FATF updates evaluation of Israel's AML/CFT network

The Financial Action Task Force (FATF) has posted a follow-up-report on its 2018 assessment of Israel’s measures to tackle money laundering and terrorist financing. The FATF has now re-rated the country on the wire transfer recommendation, from "partially compliant" to "largely compliant."

The report also looks at whether Israel's measures meet the requirements of FATF Recommendations 2 and 15, which changed since their mutual evaluation. The FATF agreed to upgrade the rating of Recommendation 15 (New technologies), to largely compliant.

Today, Israel is compliant on 16 Recommendations and largely compliant on 19. It remains partially compliant on 4 Recommendations (one Recommendation is non-applicable to Israel).


FTC Safeguards Rule guidance

The Federal Trade Commission has announced the publication of FTC Safeguards Rule: What Your Business Needs to Know. The Rule requires financial institutions within the FTC’s jurisdiction to have measures in place to keep customer information secure. The new guidance publication explains which entities are subject to the rule, and reminds those entities of their responsibility to ensure their information security programs are in step with their current business practices and emerging security risks.


FTC order against EPS

The Federal Trade Commission on Tuesday announced it has finalized an order against Electronic Payment Systems, LLC for allegedly opening credit card processing merchant accounts for fictitious companies on behalf of Money Now Funding, a business opportunity scam that the FTC previously sued. By ignoring warning signs that the merchants were fake, Electronic Payment Systems assisted Money Now Funding in laundering millions of dollars of consumers’ credit card payments to the scammers from 2012 to 2013.

In an administrative complaint filed in March 2022, the FTC alleged that Electronic Payment Systems facilitated the Money Now Funding scam by creating 43 different merchant accounts for fictitious companies on behalf of Money Now Funding, allowing the scammers to run more than $4.6 million in consumer credit card charges through those accounts. The practice of processing credit card transactions through another company’s merchant accounts is known as credit card laundering. The complaint also outlined ways in which Electronic Payment Systems employees turned a blind eye to the credit card laundering, and even gave advice to Money Now Funding on how to spread charges among different accounts to evade detection.

The FTC is ordering Electronic Payment Systems, and its owners John Dorsey and Thomas McCann, to make a number of substantial changes to their processes that will ensure they do not further harm consumers moving forward. The FTC is not able to obtain a monetary judgment in this case because of the Supreme Court’s decision in AMG Capital Management v. FTC.

Under the terms of the settlement order, Electronic Payment Systems, Dorsey, and McCann would be:

  • Prohibited from credit card laundering: The defendants would be prohibited from credit card laundering and any other actions to evade fraud and risk monitoring programs.
  • Prohibited from working with certain merchants: The defendants would be prohibited from providing payment processing services to any merchant that is, or is likely to be, engaged in deceptive or misleading conduct, and any merchant that credit card industry monitoring programs have flagged as high-risk for certain reasons.
  • Required to screen potential merchants: The defendants would be required to conduct detailed screening of potential merchants who conduct outgoing telemarketing or are engaged in certain activities that could harm consumers.


CFPB launches Office of Competition and Innovation

On Tuesday, the CFPB announced it is opening a new office, the Office of Competition and Innovation, as part of a new approach to help spur innovation in financial services by promoting competition and identifying stumbling blocks for new market entrants. The office will replace the Office of Innovation that focused on an application-based process to confer special regulatory treatment on individual companies. The new office will support a broader initiative by the CFPB to analyze obstacles to open markets, better understand how big players are squeezing out smaller players, host incubation events, and, in general, make it easier for people to switch financial providers.

The new office will support the CFPB’s general effort at increasing competition for the benefit of all consumers. Specifically, the CFPB wants to:

  • Give consumers their walking rights to switch providers: The CFPB will be exploring ways to reduce the barriers to switching accounts and providers.
  • Research structural problems blocking successes: The new office will be housed in the CFPB’s Research, Markets, and Regulation division, giving it greater access to resources to look at market-structure problems that create obstacles to innovation. For example, this could include greater explorations of the payment networks market or the credit reporting system, both of which are essential to our financial system but have only a few dominant players.
  • Understand how bigger players can gain advantage over smaller players: Sometimes start-ups simply get run over by bigger players. For example, big companies can easily pitch new products to their large customer bases and stymie outside players who may have more favorable products. Big tech companies, with their huge reaches, are also seeking new ways to join consumer finance markets and may threaten fair competition.
  • Identify ways to address commonplace obstacles: Innovators may not be getting their products or services to market because of more practical problems like access to capital or talent. Or they may not launch because they don’t have access to the large volumes of digital data stored by the big banks. A future rulemaking by the CFPB under Section 1033 of the Consumer Financial Protection Act will give consumers access to their own data.
  • Host events to explore barriers to entry and other obstacles: The new office will convene events such as open houses, sprints, hackathons, tabletop exercises, and war games. Entrepreneurs, small business owners, and technology professionals will be able to collaborate, explore obstacles, and share frustrations with government regulators. Results will be shared publicly.

The CFPB is also encouraging companies, start-ups, as well as members of the public to file rulemaking petitions to ask for greater clarity on particular rules.


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