1 2007 Consumer Conference Advanced Enforcement Actions: What Examiners and Lawyers Need to Know FDIC September 25-27, 2007

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2007 Consumer ConferenceAdvanced Enforcement Actions: What Examiners

and Lawyers Need to Know FDIC

September 25-27, 2007

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Advanced Enforcement Actions: Panel Members

Marguerite Sagatelian – Moderator – FDIC Legal (Boston)

Thomas Feeney – FDIC Legal (Washington)Denise Beiswanger –FDIC DSC (Sioux Falls)Patricia Farrell – FDIC DSC (Philadelphia)JoAnna Gekas – FDIC Legal (San Francisco)Kara Ritchie – FDIC DSC (Boston)

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Session Overview Focus on best practices, not

substantive law. We may touch upon law at times, such as when we are discussing case examples or remedies.

Use hypothetical fact patterns drawn from actual cases.

Review examination process and what happens when potential violations are discovered during examination.

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Session Overview (continued)

Highlight collaboration between DSC and Legal, and benefits of early involvement by Legal.

Review consultation process. Discuss investigation practices (formal

and informal). Focus on issues relating to selection of

remedies, especially when remedy is restitution to consumers.

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Session Overview (continued)

Review issues relating to involvement of other state and federal agencies.

Address issuing Notice of Charges. Highlight pursuit of settlement

strategy. Focus on collaboration between

Regional Office and Headquarters.

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Advanced Enforcement Actions

Examination Process

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Examination Process Scope

Risk-focused, process-oriented Examiner assessment:

Compliance Management System (CMS)

Operational risk Third-party risk / Reputational risk

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Examination Process Document Review

Product listings Bank policies and procedures Training materials Board and Committee minutes Advertising and marketing

materials Complaints Audit findings

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Examination Process Red Flags Sources

Complaints (STARS, Better Business Bureau, Blogs, States)

State investigations (Attorney Generals)

Media

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Examination Process Red Flags Sources

Third-party arrangements Marketing: Too good to be true? Incentive programs – bank

employees and third-party arrangements

Collection practices

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Example: Credit Card Offer

Pre-approved – Respond Now! Up to $2,500 No Deposit Required

ISSUE?

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Example: Consumer Loan Offer

Automated approval and scoring. FACTA procedures question –

How are fraud alerts handled? Bank response – Denied.

ISSUE?

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Examination Process Is there a Violation?

Careful analysis Contact FO and RO personnel Additional information/document

requests Interview bank personnel

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Examination Process Involve RO Legal

Early involvement necessary – Provide guidance for support of

violation Advise what documents to obtain Assist with consultation

Consultation with WO staff

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DSC/Legal Collaboration

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Getting Legal Involved Early

Some areas, like unfair/deceptive practices and fair lending, do not lend themselves to quick or simple analyses.

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Getting Legal Involved Early (continued)

How can Legal help? Help analyze potential violations. Provide guidance in developing

evidence to support violations. Provide support during

consultation process.

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Getting Legal Involved Early(continued)

Advise which relevant documents to obtain while examination is ongoing.

Assist in review of complaint files and identify red flags.

Assist when other divisions/offices are involved, e.g. DIR.

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Getting Legal Involved Early(continued) In unfair/deceptive cases, Legal can

help determine whether facts support the legal standard of a violation of Section 5 of the FTC Act.

In fair lending cases, Legal can help determine what types of loans should be reviewed, and whether the facts support the violations cited.

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Other Areas of Collaboration

10(c) recommendation memo. Identifying what types of evidence should

be gathered. Drafting information requests (informal)

and subpoenas (formal). Developing questions for interviews

(informal) or sworn testimony (formal). Recommendation memo for Notice of

Charges or for settlement. Appeals of examination findings/ratings.

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Trends Increasing volume of compliance enforcement

cases. Increasing complexity of cases. More disputes of examination findings and

ratings resulting in more SARC appeals. Some increase in DSC and Legal staff, but

there will be a learning curve period. Early Legal involvement and close

collaboration between Legal and DSC will lead to better handling of enforcement cases.

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DSC Consultation Process

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DSC Consultation ProcessFair Lending

RD Memorandum Transmittal Number 97-003: Guidelines for Referring Violations of the Anti-Discrimination Provisions of the Equal Credit Opportunity and Fair Housing Acts to the Department of Justice or Notifying the Department of Housing and Urban Development of Violations of the Fair Housing Act

RD Memorandum Transmittal Number 2004-17: Consultation Policy and Procedures for Compliance Examination and Community Reinvestment Act Issues

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DSC Consultation ProcessUDAP

RD Memorandum Transmittal Number 2005-021: Procedures for Determining Compliance with Prohibition on Unfair or Deceptive Acts or Practices found in Section 5 of the Federal Trade Commission Act.

RD Memorandum Transmittal Number 2004-17: Consultation Policy and Procedures for Compliance Examination and Community Reinvestment Act Issues

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DSC Consultation Process Best Practices:

Contact earlier in process. Involvement of all interested parties. Gathering supporting documentation. Documenting discussions with bank. Organizing and tracking information.

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Investigations – Formal and Informal

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Informal Investigations Includes information and documents

gathered during examination. Includes contacting third parties

without a subpoena and seeking information or documents.

Includes Internet and other research.

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Informal Investigations(continued)

Advantages May be able to gather evidence quickly. Absence of subpoena may make third

party more cooperative, particularly if third party’s interest is aligned with that of FDIC (e.g. consumers).

Information gathered informally can help attorneys and examiners prepare for formal investigation.

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Informal Investigations(continued)

Disadvantages Testimony – third party may not be

completely honest without formality of oath and court reporter.

Documents – third party may refuse to provide documents without subpoena.

Documents provided by third party without subpoena may present evidentiary issues at hearing (e.g. is the document authenticated?)

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Formal Investigations Obtaining Section 10(c) Order of Investigation. See Legal Division Policy No. 215 – 10(c)

Investigation Procedures – Orders of Investigation, and FIAP Manual (Chapter 12).

Consultation policy must be followed. Order should be obtained when examiner and

attorney have reason to believe that there is a violation of law and evidence is needed outside of bank records.

Joint DSC/Legal recommendation memo.

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Formal Investigations(continued) Legal and DSC work together to

determine what information should be obtained by subpoena, and what witnesses should provide sworn testimony.

Examiners are an invaluable resource for attorneys to help draft document subpoenas and develop questions for witnesses.

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Issues Relating to Remedies

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Remedies Under Section 8

Section 8 (b) (1) – cease and desist order

Section 8(i) – civil money penalty

Section 8(b)(6) – restitution

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Cease and Desist Order Long history of use in risk management

cases. Now being used for compliance

enforcement cases as well. Bank’s objections usually revolve around

language of paragraphs and perceived lack of recognition that bank has taken corrective action.

In settlement scenario, bank is neither admitting nor denying liability. As a result, bank wishes to avoid language that looks like implied admission of wrongdoing.

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Civil Money Penalty The decision to seek a CMP and the amount

of penalty sought depends on the statutory factors and the availability of other remedies such as restitution.

In cases involving a large number of affected consumers, the usual CMP matrix may not be appropriate. DSC may apply another benchmark such as net income.

In recent orders, we have stated that the bank must pay the order itself and may not seek indemnification or reimbursement.

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Restitution

FDIC may order a depository institution or an institution-affiliated party (IAP) to “make restitution or provide reimbursement, indemnification, or guarantee against loss” if the FDIC can show that the depository institution or IAP was either:

(1) unjustly enriched by the violation; or

(2) the violation involved a reckless disregard for the law or any applicable regulations or prior order of the FDIC.

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Restitution (continued)

Prior litigated cases involve ordering institution-affiliated parties to make restitution to a bank.

Plain language of Section 8(b)(6) authorizes the federal banking agencies to issue an order of restitution against a bank.

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Where an agency is seeking restitution for public harm caused by violations of law, as a matter of equity restitution is measured by harm to the public, absent any clear limitation of restitution in the statute.

Porter v. Warner Holding Co., 328 U.S. 395 (1946)

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Section 8(b)(6)contains no restriction on the application of equitable principles.

As a remedial statute, Section 8(b)(6) should be construed broadly to effectuate its purposes. Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).

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For unfair/deceptive cases, FTC standards for restitution or consumer redress differ somewhat from the FDIC’s statutory authority under Section 8.

However, both agencies rely on equitable principles.

In a deceptive marketing case, it may be difficult to show which consumers were harmed and the extent of their injury.

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When seeking restitution or reimbursement to consumers from a bank, issues arise regarding:

Defining those consumers eligible for restitution; How restitution will be effected.

Example: Deceptive marketing of credit card – restitution could be based on:

Time period (e.g. first 12 months). Early over-limit customers. When customers stopped using card. Types of fees to be reimbursed.

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Because restitution often involves a large sum of money, depending on the number of consumers eligible for restitution, banks are more likely to litigate rather than settle the proposed enforcement action.

As a result examiners and attorneys are spending more time on enforcement actions.

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Other issues when a non-bank third party is involved: Whether the third party is an institution affiliated

party under section 3 (u) of the FDI Act. Whether the bank is able to effect restitution

when the third party services the accounts and controls all the records.

If there is a contract between the bank and the third party, whether there are provisions in the contract regarding liability.

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Issues Relating to Involvement

By Other Agencies

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Other Federal Agencies Department of Justice – e.g. fair lending

cases. HUD – e.g. RESPA violations. FTC – e.g. Section 5 FTC Act violations by

non-bank third party (servicer or mortgage company).

Other federal banking agencies – e.g. involvement of national banks and thrifts.

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State Agencies State Attorney General’s Office –

e.g. state chartered bank engaging in violations of state law (that may parallel federal law).

State banking departments – e.g. state charted banks engaging in violations of law.

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Coordination Issues When two or more agencies are

investigating the same misconduct, coordination may be a challenge.

In some instances, the agencies may be cooperating with one another and sharing information obtained by each agency.

Any information sharing is subject to procedures established under Part 309.

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Coordination Issues (continued) In some cases, one agency may be

further along in its investigation than the other.

In some cases, the different agencies are seeking different remedies.

In some cases, agencies may be investigating the same misconduct but pursuing different parties, although overlap is common.

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Coordination Issues (continued) Sometimes considerations outside

of the merits of the case come into play. Timing Supervisory issues Future working relationship between

the agencies Optics (or politics)

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