Now What? I FOUND A UDAP Now What? Pat Farrell Lori 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 3 rd 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.) s 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 Penalties Defined Tier 1 Any 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

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