Top Story Compliance Related

The CFPB has reported it has sued student loan servicer Pennsylvania Higher Education Assistance Agency (PHEAA), which does business as American Education Services (AES), for illegally collecting on student loans that have been discharged in bankruptcy and sending false information about consumers to credit reporting companies. The CFPB’s lawsuit asks the court to order PHEAA to stop its illegal conduct, provide redress to borrowers it has harmed, and pay a civil penalty.

PHEAA is a student loan servicer with its principal office in Harrisburg, Pennsylvania. It is a public corporation organized under the laws of the Commonwealth of Pennsylvania. As of December 2023, PHEAA serviced a portfolio of student loans worth roughly $17.8 billion.

The United States Bankruptcy Code provides consumers a financial fresh start by discharging debts and prohibiting creditors from collecting on discharged debts. Many student loans, both federal and private, can be discharged in bankruptcy only if a borrower initiates a separate proceeding and meets a more stringent legal standard than is applied to other debts. However, certain private student loans are discharged in normal bankruptcy proceedings like other unsecured consumer debt. These “non-qualified” private student loans include money borrowed to pay for tuition at schools that do not qualify for federal Title IV funding, such as unaccredited trade or K-12 schools, loans for medical and dental residency, loans to students attending school less than half-time, or loans where the loan amount was higher than the cost of attendance (which can occur when a loan is disbursed directly to a consumer).

AES services a range of private student loans, including those that have strict discharge requirements in bankruptcy and non-qualified loans that are routinely discharged. Nevertheless, when a consumer with private student loans serviced by AES receives a bankruptcy discharge, the company’s practice is to treat all of that consumer’s education-related loans as not discharged, unless it receives an explicit court order or other express direction from the loan owner.

In March 2023, the CFPB issued a bulletin warning the industry about this issue, detailing how supervisory examinations had found some student loan servicers illegally returning loans to collections after bankruptcy courts had discharged the loans.

The CFPB's complaint alleges that, between 2017 and 2021, AES collected or attempted to collect on approximately 7,934 private student loans after a bankruptcy proceeding. Although discovery in litigation will reveal the total scope of PHEAA’s unlawful collection activity, the Bureau says at least 177 were loans eligible for discharge in bankruptcy. Borrowers were thus subjected to illegal collections on loans they did not owe. AES also furnishes inaccurate information to credit reporting companies regarding borrowers’ outstanding debt, which causes financial harm to consumers and may make it harder to qualify for other credit in the future.

This is the CFPB’s second public enforcement action against PHEAA this year. On May 6 the CFPB filed a complaint and proposed stipulated judgment, which, if approved by the court, would require PHEAA and the National Collegiate Student Loan Trusts to pay more than $5 million for student loan servicing failures, including failing to provide accurate information to borrowers and incorrectly denying forbearance requests.

The Federal Reserve Board, FDIC, and OCC on Friday jointly issued state loan-to-deposit ratios that are used to evaluate compliance with the Riegle-Neal Interstate Banking and Branching Efficiency Act. Each respective host state loan-to-deposit ratio shows the ratio of total loans in a state to total deposits in the state for all banks that have that state as their home state. These ratios replace those issued in May 2023.

By law, a bank is generally prohibited from establishing or acquiring branches outside of its home state primarily for the purpose of acquiring additional deposits. This prohibition seeks to ensure that interstate bank branches will not take deposits from a community without the bank also reasonably helping to meet the credit needs of that community.

• Section 109 Host State Loan-to-Deposit Ratios

The FDIC has issued a list of nine enforcement decisions and orders issued in April 2024.

• An order to pay a $13,000 civil money penalty for flood insurance rules violations was issued to CNB Bank, Carlsbad, New Mexico
• Consent orders were issued to —
  • Spring Valley Bank, Wyoming, Ohio
  • Tioga-Franklin Savings Bank, Philadelphia, Pennsylvania
  • Commodore Bank, Somerset, Ohio
  • The First Bank and Trust Company of Murphysboro, Murphysboro, Illinois (Corrected order)
• A notice of intention to prohibit and notice of charges for an order of restitution and assessment of a civil money penalty was issued to Derrick Alan Smith, formerly a community banking branch banker at Branch Banking and Trust Company (now known as Truist Bank), Charlotte, North Carolina
• An order of prohibition assessing a $7,000 civil money penalty was issued to Cody Kietzman formerly employed by The Frederick Community Bank, Paxton, Illinois
• An order of prohibition was issued to David P. Ritter formerly employed by Summit Community Bank, Inc., Moorefield, West Virginia
• An order approving the termination of FDIC insurance was issued to Interstate Federal Savings and Loan Association of McGregor, McGregor, Iowa

The OCC has released its schedule of Community Reinvestment Act (CRA) evaluations to be conducted in the third (July–September) and fourth (October–December) quarters of 2024.

The Treasury Department has announced that OFAC has sanctioned two companies that are linked to the Private Military Company “Wagner” (Wagner Group). Mining Industries SARLU and Logistique Economique Etrangere SARLU were designated pursuant to Executive Order (E.O.) 14024 for enabling Wagner Group security operations and Wagner Group-linked illicit mining endeavors in the Central African Republic (CAR).

For the identification information of the designated parties, see the May 30, 2024, BankersOnline OFAC Update.

The FDIC has issued Financial Institution Letters with guidance to provide regulatory relief to financial institutions and facilitate recovery in areas of—

• Boyd, Carter, Fayette, Greenup, Henry, Jefferson, Jessamine, Mason, Oldham, Union, and Whitley Counties in Kentucky (FIL-28-2024) affected by severe storms, straight-line winds, tornadoes, landslides, and mudslides on April 2, 2024.
• Adair, Montgomery, Polk, and Story Counties in Iowa (FIL-29-2024) affected by severe storms causing significant property damage May 20–21, 2024.
• Boone, Cabell, Fayette, Kanawha, Lincoln, Marshall, Nicholas, Ohio, Putnam, Wayne, and Wetzel Counties in West Virginia (FIL-30-2024) affected by severe storms, straight-line winds, tornadoes, flooding, landslides, and mudslides caused significant property damage April 2–6, 2024.

The Treasury Department yesterday announced it has published a 2024 Non-fungible Token (NFT) Illicit Finance Risk Assessment. The risk assessment explores how vulnerabilities associated with NFTs and NFT platforms may be exploited by illicit actors for money laundering, terrorist financing, and proliferation financing.

The assessment finds that NFTs are highly susceptible to use in fraud and scams and are subject to theft. The report determines that illicit actors can use NFTs to launder proceeds from predicate crimes, often in combination with other methods to obfuscate the illicit source of proceeds of crime. It also found little evidence of the misuse of NFTs by terrorists or proliferators, in contrast to fraudsters, to date. The assessment finds that inadequate cybersecurity protections, challenges related to copyright and trademark protections, and the hype and fluctuating pricing of NFTs can enable criminals to perpetrate fraud and theft related to NFTs and NFT platforms. Moreover, some NFT firms and platforms lack appropriate controls to mitigate risks to market integrity and to combat money laundering and terrorist financing, and sanctions evasion. The assessment recognizes that mitigation measures, such as industry tools, law enforcement authorities, and analysis of public blockchain data, can partially mitigate such risks.

To address outstanding risks, the risk assessment recommends several U.S. government actions, including:

• Raising awareness within industry of existing obligations
• Continuing to enforce existing laws and regulations related to NFTs and NFT platforms; and
• Considering further application of regulations to NFTs and NFT platforms

In a CFPB Blog article ("Banks' responsibility for scams")posted yesterday, CFPB General Counsel Seth Frotman described an ongoing case in which Citibank has been sued by the state of New York for failing to respond adequately when people promptly told the bank that scammers had stolen money by initiating wire transfers from the consumers’ accounts online. The losses New York alleges people have suffered are serious: for example, New York alleges that one person discovered that a scammer had changed her online banking password, transferred money from her savings to her checking account, and then stole $40,000 via wire transfer—all through Citibank’s online banking platform. And New York alleges that instead of complying with the Electronic Fund Transfer Act’s protections in circumstances like these, Citibank looked to a law that was intended to govern transactions between commercial entities which does not provide the same level of consumer protection to victims of scams.

Mr. Frotman reports that, in response to New York’s allegations, Citibank has argued that the Electronic Fund Transfer Act doesn’t apply because the scammers ultimately used a wire transfer to take the money, and the Act contains an exemption for transfers made by banks “by means of” a wire service. But the CFPB disagrees with Citibank's stance, as it explained in a Statement of Interest (amicus brief) submitted to the court. The Bureau's position is that when a bank connects wire transfer capabilities to its online consumer banking platform and a person authorizes (or a scammer purports to authorize) a transfer online, the Electronic Fund Transfer Act applies to the transaction except for the bank-to-bank portion of it.

Editor's Note: CFPB Blog articles are not official interpretations of law or regulations. The ABA and other industry associations have issued a statement opposing the CFPB's blog article, arguing that the “CFPB cannot reinterpret a statute and reverse decades of settled law in an amicus brief and then use a blog post to suggest that its position is the law.”

The staff of the Federal Trade Commission has provided its annual report to the Consumer Financial Protection Bureau on its enforcement and related activities in 2023 on the Truth in Lending Act (TILA), Consumer Leasing Act (CLA), and Electronic Fund Transfer Act (EFTA).

The report highlights the FTC’s enforcement actions and initiatives under these laws and their implementing regulations, including in the areas of automobile financing and leasing, payday lending, other credit and leasing, and electronic fund transfers.

• Press release

The Department of the Treasury announced yesterday that OFAC has designated three individuals, Yunhe Wang, Jingping Liu, and Yanni Zheng, for their activities associated with the malicious botnet tied to the residential proxy service known as 911 S5. OFAC also sanctioned three entities—Spicy Code Company Limited, Tulip Biz Pattaya Group Company Limited, and Lily Suites Company Limited—for being owned or controlled by Yunhe Wang.

For identity information on the designated individuals and entities, see the BankersOnline May 28, 2024, OFAC Update.