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I FOUND A UDAP
Now What?Now What?
Pat FarrellLori Honjiyo
Best Practices on How to Handle these Types of Cases
Collaboration with Legal – (or) Make Legal Work For You
Help analyze potential violations Provide guidance in developing
evidence to support violations Provide support during
consultation process
Other Things Legal Can Do for You
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
Even More things Legal Can Do
Help determine whether facts support the legal standard of a violation of Section 5 of the FTC Act
Draft information requests (informal) and subpoenas (formal)
Assist in drafting responses to Bank management objections
Develop questions for interviews (informal) or sworn testimony (formal)
Wait! There’s Still More!
Assist in drafting 10(c) recommendation memo
Assist in drafting recommendation memo for enforcement actions such as 8(b), Restitution and CMPs
Assist in drafting recommendation memo for settlement when appropriate
10(c) Investigations 10(c) gives FDIC representatives the power
to take testimony under oath and subpoena documents and records.
Can be used to develop enforcement actions.
Can be used to obtain records where other regulators refuse to cooperate.
Can be used to obtain records from 3rd parties.
Can be used when Bank is non-cooperative or non-responsive.
Preparing to Become an Enforcement Action:Developing Your Case
Support every allegation with evidence Have copies of all documents you will rely
on and make sure they are organized Err on the side of providing too much
information Call Legal to discuss issues and questions
at the earliest opportunity
Developing your Case (cont.)
Emails are discoverable and they last forever. Examiner notes are also discoverable. Keep clean sets of originals. Organize your work product, so that others
don’t have to. Get it all, no matter how voluminous Reports derived from Bank’s systems: Make
sure to identify and name employees who know how it works and can be called later.
Violations That Grow Up To Be
Enforcement Actions
Remedies Under Section 8
Section 8(b)(1) – cease and desist order
Section 8(i) – civil money penalty Section 8(b)(6) – restitution
Whom Can We Pursue?
Insured State Nonmember Banks Insured State Member Banks,
National Banks & Savings Associations in Certain Cases
Officers and Directors
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 or denying liability. As a result, bank wishes to avoid language that looks like implied admission of wrongdoing.
Basis that must be shown for 8(b) Cease and Desist
If the Bank has engaged, or is about to engage in: Unsafe or unsound practices Violation of law, rules or regulations or
conditions imposed in writing
Issue an ORDER, whether through consent or hearing, requiring the Bank to:
cease and desist from violations and unsafe or unsound practices
8(b)(6) Allows Requiring Affirmative Actions
Agency may affirmatively order: Restitution, if
Party was unjustly enriched Violation or practice involved reckless
disregard for the law, regulation, or prior order
Restriction of growth Disposal of loan or asset Rescission of contracts Employment of qualified officers
Agency can limit activities of Bank or IAP
Restitution
Prior litigated cases involve ordering IAPs 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.
Restitution (continued)
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.
Restitution (continued)
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, what provisions the contract contains regarding liability.
8(i) Civil Money PenaltiesDefined
Tier 1Any insured depository institution or any
IAP who: violates any law or regulation violates any final order violates a written condition in an
application approval violates a written agreement
$5,000 per day
Determining Amount of CMP Statute sets forth 5 factors: Financial
Resources; Good Faith; Gravity of Violations; History; Other Matters
From this FDIC developed its CMP Matrix Courts have scrutinized amount of CMPs
and Mitigating Factors Standard is “abuse of discretion” in
increasing the amount of the CMP after ALJ’s recommendation
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 cannot be used. DSC may apply another benchmark such as a factor based on net income.
In recent orders, we have stated that the bank must pay the order itself and may not seek indemnification or reimbursement.
CMPs Against Directors Besides seeking CMPs against the Bank
and IAP, FDIC may also look at directors Yessick case: Failure to fulfill director’s
fiduciary duty may result in imposition of CMPs.
Not widely sought. Should be analyzed on a case-by-case
basis.
Enforcement Action Process
NoticeIssued
Answer
20 days
Pre-HearingConference
Discovery
Hearing
RecordCertified
1 - 3 weeks
Briefs
30 days
Reply Briefs
15 days
RecommendedDecision
45 days
Exceptions
30 days
Certification of Record
to the Board
2 - 3 weeks
Board Decision
90 days
Appeal to
Circuit Court
30 days
Wrap Up
Complexity Length of time cases take to develop New area for FDIC and Examiners Requiring interdivisional coordination Important area for Compliance in
enforcing consumer protection laws