Banks Need to Watch Out for Compliance with the Servicemembers Civil Relief Act

March 1st, 2017

compliance-3-1-17.pngDuring the past year, federal regulators have increased enforcement activities under the Servicemembers Civil Relief Act (SCRA). In the last four months, banks have been ordered to pay more than $25 million in penalties and restitution, and a recent federal district court decision clarified the scope of the U.S. Department of Justice’s authority to enforce pattern or practice violations of the SCRA.

Recent Consent Orders
The Office of the Comptroller of the Currency (OCC) recently issued a consent order imposing a $20 million civil penalty against Wells Fargo, ordering restitution to consumers harmed by SCRA violations and mandating implementation of an enterprise-wide SCRA compliance program to prevent future violations. The consent order sets forth minimum SCRA compliance program requirements, including:

  1. Written policies and procedures to ensure: identification of consumers eligible for SCRA benefits and protections; the accuracy of assertions made in affidavits of military service; adequate use of searches of the Department of Defense Manpower Data Center database to determine SCRA eligibility; consistent application of state laws that provide more protection to service members than the SCRA; and documentation and record retention.
  2. An SCRA Training Program to provide instruction to all senior management and covered employees.
  3. A system for ongoing monitoring, testing and reporting on SCRA compliance.

The requirements outlined in the OCC’s consent order will provide a useful guide for other financial institutions to review their SCRA compliance procedures.

Recently, Wells Fargo also settled a Department of Justice lawsuit alleging that the bank repossessed more than 400 motor vehicles without first obtaining the necessary court orders. The Justice Department consent order required Wells Fargo to pay more than $4 million to the victims of improper repossessions, remove the repossessions from their credit reports, pay a $60,000 civil penalty and institute new procedures to prevent future unlawful repossessions. The Justice Department filed a similar complaint against HSBC Financial Corp., and the consent order resolving that matter requires HSBC to pay $434,500 to the victims of the illegal repossessions.

Pattern or Practice Violations of SCRA
In July of 2016, the Justice Department filed suit against Michigan-based COPOCO Community Credit Union, alleging it had violated the SCRA by repossessing protected service members’ motor vehicles without obtaining the necessary court orders. The SCRA provision that grants enforcement authority to the Justice Department requires that a defendant either engage in a pattern or practice of violation or violate the statute in a way that raises an issue of significant public importance.

The credit union moved to dismiss, arguing that because the Justice Department’s complaint had alleged only a single SCRA violation, therefore it had failed to demonstrate a “pattern or practice” or “issue of significant public importance.” The Justice Department responded that a “pattern or practice” can be established by the lack of a written compliance program and the inference that other consumers are likely harmed if one is harmed.

The Justice Department argument is troubling because it suggests a nebulous enforcement standard of whether something will “inevitably lead to a pattern of illegal conduct.” Perhaps even more concerning is the contention that what it deems to be of “significant public importance” cannot be subject to judicial review, which suggests a lack of any meaningful check on the Justice Department’s prosecution authority under the SCRA. On January 5th, the U.S. District in Eastern Michigan denied the credit union’s motion to dismiss, holding that the absence of policies or procedures to check the Manpower Data Center database to determine military status was enough to allege a “pattern or practice” in violation of the SCRA.

Takeaway
The scope of these penalties highlights that the SCRA remains a focus of federal regulators, and the compliance requirements outlined in the OCC’s consent order with Wells Fargo can serve as a template for other financial institutions to follow in creating their own compliance programs. Furthermore, the COPOCO decision makes clear that the lack of a compliance policy can itself be a “pattern or practice” in violation of the SCRA. Compliance is key to avoiding costly litigation and resulting adverse publicity.

For more information, Dinsmore publishes a resource to provide general guidance on the SCRA: Servicemembers Civil Relief Act (SCRA) Handy Desk Reference.

jcostello

John F. Costello, Jr. is a partner in the Financial Services Regulatory & Enforcement Group of Dinsmore & Shohl LLP, which offers extensive experience representing banks and financial institutions. Their practice includes advising and counseling banks and financial institutions to navigate the complexities of regulatory oversight, including compliance, impacting legislative action, resolving litigation, and handling government investigations and enforcement actions.