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