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Winds of Change: Weathering Financial Regulatory

Reform

May 27, 2009

Association of Corporate Counselwww.acc.com

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?

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

Mortgages   Overview of Helping Homeowners Save

Their Homes Act of 2009

  Key provisions and action items   Unanswered questions   Next steps   Mortgage fraud efforts

Performance of Mortgage Modifications to Date:

Will the new Obama Modification and revised Hope for Homeowners plan improve the results?

  “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

  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

Consumer Protection   Credit Cards   Identity Theft and Data Breach   Unfair and Deceptive Practices

  A new agency?

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

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

  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

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

  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

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

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

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

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

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

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)

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

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.

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

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

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

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

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.”

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

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

OFAC   Lloyds TSB Bank - $350 million fine

  Wire transfer information

  More to come?

  Cuba Sanctions   Increased enforcement   IAT and Swift changes

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

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

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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