Thursday, April 19, 2018

CFPB seeks feedback on changing consumer complaint and inquiry handling processes

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has asked for comments on its consumer complaint and inquiry handling processes. The public is being asked to suggest best practices for responding to complaints and providing information to help consumers make decisions.
The request for information (RFI) also asks if criteria is needed to differentiate consumer complaints from consumer inquiries. The comment period closes on July 16. The request for information is the final in a series of RFIs described as seeking evidence to ensure the Bureau is properly carrying out its duties.
To date, the CFPB has received more than 1.5 million consumer complaints about financial products or services. The Bureau accepts complaints through its website; by referral from the White House, congressional offices, federal agencies, and state agencies; and by telephone, mail, email, and fax. The Bureau routes complaints directly to financial companies and works with them to get consumers a timely response from the company, generally within 15 days.
Consumer requests for information about financial products or services, the status of a complaint, or an action taken by the CFPB, are typically proffered by telephone. When consumers call with an inquiry, a Bureau representative collects basic information about the consumer, listens to the consumer describe their situation and question, and provides educational information about financial products and services.
The CFPB is asking whether it should:
  • require consumers to classify their submission as a complaint or inquiry;
  • develop a process for companies to reclassify consumers’ submissions;
  • add or discontinue any channels for accepting comments or inquiries;
  • expand, limit, or maintain the ability of authorized third parties to submit complaints;
  • develop a process for companies to provide timely responses to consumer inquires sent to them by the Bureau; and
  • publish data about consumer inquiries.
Consumer complaint reporting. The Bureau previously asked for information on the Bureau’s consumer complaint analysis and reporting practices. The comment period for consideration of changes to those practices expires on June 4, 2018.
According to the earlier RFI, the Dodd-Frank Act assigns the Bureau several specific consumer complaint-related tasks. In fact, “collecting, investigating, and responding to consumer complaints” is one of the Bureau’s primary functions. The Bureau is directed to make an annual report to Congress, and it publishes monthly and special reports on consumer complaint trends. It also maintains a public consumer complaint database.
The Bureau specifically wants comments on four broad areas:
  1. consumer complaint reporting frequency;
  2. consumer complaint reporting content;
  3. consumer complaint reporting methodology; and
  4. consumer complaint information publication.
For more information about possible changes in the way that the CFPB operates, subscribe to the Banking and Finance Law Daily.

Wednesday, April 18, 2018

Brown rebukes Mulvaney for undermining Bureau mission

By J. Preston Carter, J.D., LL.M.

Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, criticized Consumer Financial Protection Bureau Acting Director Mick Mulvaney for "his efforts to roll back the agency’s mission to protect consumers." Mulvaney appeared before the committee at a recent hearing to testify about the Bureau’s semi-annual report to Congress for the period of April 1 to Sept. 30, 2017. At the hearing, Brown stressed that since Mulvaney took the helm, the Bureau "has not initiated a single enforcement action to put money back in the pockets of service members, veterans, seniors, or students."

"Mr. Mulvaney is trying to convince us that protecting families and prosecuting shady lenders is, ‘pushing the envelope.’ That is a lie. That is the CFPB’s entire mission," Brown said.

Undermining the Bureau. The lawmaker noted that Mulvaney supported eliminating the CFPB when he was a member of Congress. His actions since being named acting director show “he is determined to undermine the CFPB so Congress will take away its ability to protect consumers.” To support his statement, Brown listed several examples of Mulvaney’s actions to weaken the CFPB. Mulvaney has:
  • halted payments to victims of financial crimes;
  • directed Bureau staff to reconsider current investigations and litigation;
  • prevented the CFPB from hiring investigators to "hunt down shady lenders";
  • changed the CFPB’s mission statement, claiming the Bureau should also work for payday lenders and credit card issuers; and
  • put a moratorium on new rulemaking.
Brown added that on the 50-year anniversary of the Fair Housing Act, the CFPB under Mulvaney observed the anniversary by weakening the Office of Fair Lending and Equal Opportunity.

For more information about the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Monday, April 16, 2018

English gets grilled during oral argument in CFPB leadership dispute

By Katalina M. Bianco, J.D.

Oral arguments were heard by the U.S. Court of Appeals for the District of Columbia Circuit on April 12, 2018, in the battle over the legitimate acting director of the Consumer Financial Protection Bureau. The court grilled counsel for English for close to twice his allotted 20 minutes of argument (English v. Trump, D.C. Cir. Docket No. 18-5007).

English v. Trump. Before resigning on Nov. 24. 2017, CFPB Director Richard Cordray appointed Leandra English deputy director of the CFPB and announced that she would be acting director until a permanent director would be appointed by President Trump and confirmed by the Senate. Trump subsequently named Mick Mulvaney, head of the Office of Management and Budget, as acting director, and English sued Trump and Mulvaney in response.

English contends that the Dodd-Frank Act (12 U.S.C. §5491(b)(5)(b)) provides that the Deputy Director
"shall … serve as the Acting Director in the absence or unavailability of the Director." The Trump administration and Mulvaney claim the Federal Vacancies Reform Act (FVRA) supports Mulvaney’s leadership of the Bureau until a permanent director is appointed.

English lost on her motion for a preliminary injunction, and the case now is being appealed.

Issue of redress contested. During argument, the court questioned counsel for English about whether a preliminary injunction would provide relief to English. The redress has to be that English gets the job, but if the President can name a permanent director, then English loses that job again, the court noted, stating that English might only remain in place for two hours. The court stated that to prevail in a bid for a preliminary injunction, English would have to show that the President can be enjoined from naming someone else as director.

Further, there is the issue of “at will” vs. “for cause” removal of a Bureau director. While the director can be removed only “for cause,” does that apply to an acting director? The court asked English to consider a hypothetical question: If Cordray had remained in his position as director until the end of his term, then stayed on until a permanent director was appointed, could he still only be removed for cause or could he be removed by the President “at will”? English and Trump were in agreement that he could be removed “at will.” Therefore, English as acting director could be removed “at will” as well.
Vacancy vs. unavailability. English contended that the Dodd-Frank Act provision (§5491(b)(5)(b)) is controlling when there is no permanent director in place. The court noted that the provision uses the term “absence or unavailability” rather than vacancy. This seems to imply a more temporary situation. If Congress had intended the terms to mean vacancy, then why doesn’t the provision state so?

Mandatory. English argued that the use of the word “shall” in the provision makes the provision mandatory. The deputy director “shall” serve as acting director until a director is appointed. The court replied that the word “shall” is a “semantic mess” and does not always mean mandatory. Further, the court said, the Dodd-Frank Act is “ambiguous.”

Trump’s counsel argued that the word “shall” simply is not enough to displace the FVRA. Even with the word “shall” in the statute, the Dodd-Frank Act can co-exist with the FVRA. Further, he contended that if the Act is ambiguous as to successors, there is no way it can displace the FVRA. Trump stated that if Congress intended to displace the FVRA, it could have said so in many ways, such as “exclusive acting director.” The court retorted that Congress “doesn’t talk like that.” Asked by the court why “shall” is not enough to mean mandatory, Trump answered that the FVRA expressly addresses vacancies while the Dodd-Frank Act does not.

Independence. English asserted that Congress sought to insulate the Bureau from the Office of Management and Budget by providing that the CFPB is independent (12 U.S.C. §5491(a)). The President selected the director of the OMB to serve as acting director of the Bureau. He selected the wrong person for the position. The court questioned whether it would be acceptable to name “any person in the world but Mulvaney,” and, if so, how would that help English?

The issue of Bureau independence also came into play during Trump’s arguments. Trump contended that the Social Security Administration is independent but subject to the FVRA. He also stated that English was “drastically over-reading the statute” as to the issue of the Bureau being independent of the OMB.

The court stated it was “troubled” by Mulvaney “wearing two hats,” as OMB director and acting director of the CFPB. Further, if the acting director can be removed “at will” it could cripple the agency. If the President just keeps removing acting directors who do not adhere to his wishes, how can anything be accomplished by the Bureau, the court inquired of Trump. “I hear you saying you’re not concerned with this,” the court stated.

For more information about English v. Trump, subscribe to the Banking and Finance Law Daily.

Thursday, April 12, 2018

Fed proposes large bank capital rule simplification

By Katalina M. Bianco, J.D.

The Federal Reserve Board is proposing amendments to its capital, capital plan, and stress test rules that it believes will simplify large banks’ capital planning processes without reducing the industry’s current strong capital levels. The proposal would create two new concepts, the stress capital buffer and the stress leverage buffer. It also would integrate each bank’s Comprehensive Capital Analysis and Review results with the capital rule requirements in a way that would reduce the number of capital-related requirements a bank must meet from the current 24 down to 14.

According to the Fed, smaller banks that are subject to the CCAR and stress test rules might see reductions in their required capital levels due to the changes. Required capital levels for global systemically important banks generally would remain the same, but a few GSIBs might see slight increases.

Stress capital buffer. A staff memo released by the Fed says that each bank would calculate a stress capital buffer (SCB) based on its CCAR results. The decrease in the firm’s common equity tier 1 capital ratio under the severely adverse scenario would be added to four quarters of planned common stock dividends, and that total would be the bank’s required SCB. However, the SCB would never be less than 2.5 percent of the bank’s risk-weighted assets.

The SCB then would be added to any applicable GSIB surcharge and countercyclical capital buffer to yield the firm’s standardized approach capital conservation buffer. The memo says this would make the standardized approach capital conservation buffer sensitive to both the bank’s vulnerability to stress—through the SCB—and its potential to harm the financial system—through the GSIB surcharge.

Stress leverage buffer. The stress leverage buffer (SLB) would be the difference between the bank’s starting and minimum projected tier 1 leverage ratio under the severely adverse scenario, added to the same four quarters of planned dividends. According to the memo, this would maintain the current relationship between the risk-based and leverage capital requirements in normal and stress conditions.

The SLB would replace the CCAR requirement that the bank show that it can maintain a capital level that is higher than the minimum leverage requirement post-stress.

Test, CCAR assumption changes. The proposal also would change some of the assumptions made by the supervisory stress test and CCAR.

First, it currently is assumed that a bank will carry out all of its planned dividends, share repurchases, and regulatory capital instrument issuances. However, the introduction of the SCB would make the bank’s ongoing capital distributions dependent on its performance under stress. For that reason, the CCAR no longer would assume that any capital instruments will be repurchased or redeemed.

According to the memo, history shows that, under stress, repurchases will be reduced or stopped before the payment of common share dividends. For this reason, the payment of four planned quarterly dividends would be assumed.

Second, the supervisory stress test rule would change the assumption it uses to approach balance sheet projections. Currently, the test assumes that loan supplies will remain constant under stress, while loan demand will change to reflect the scenario’s economic conditions. This generally brings about growth in a bank’s projected total assets and is intended to look at whether the firm has enough capital to handle stress without reducing the availability of credit.

This assumption has come under question, as firms have given examples of situations in which it is unrealistic, the Fed says. As a result, the proposal would change the stress test to assume that banks will take appropriate actions to maintain a constant asset level, as opposed to projecting asset growth.

Third, the Fed no longer would object to a bank’s capital plan based on a quantitative assessment of the bank’s capital adequacy. Since the SCB will impose appropriate capital distribution limits, a quantitative adequacy objection would be unnecessary.

However, objections based on qualitative assessments would remain possible.
For more information about Fed capital planning and stress tesging, subscribe to the Banking and Finance Law Daily.

Tuesday, April 10, 2018

Bank subject to some, not all, ‘overdraft fee’ claims in proposed class action

By Thomas G. Wolfe, J.D.

Reviewing the respective one-year limitation period contained in an underlying checking account agreement as well as set forth in the federal Electronic Fund Transfers Act (EFTA), the federal district court in Hawaii reached a split decision in connection with Bank of Hawaii’s request for summary judgment concerning a bank customer’s claims that the bank violated the EFTA and Hawaii law by imposing unauthorized overdraft fees on his checking account. Distinguishing between claims based on preauthorized recurring transfers and claims based on unauthorized overdraft fees, which arguably fell outside the scope of the agreement between the bank and its customer, the court determined that the customer could advance his EFTA claim on the bank’s overdraft fees occurring within one year of filing his complaint. Overdraft fees charged outside the one-year limit were barred. Similarly, in connection with the state-law claims, the court denied summary judgment on overdraft fees charged after a September 2015 cutoff date, but granted summary judgment in favor of the bank on overdraft fees charged before that cutoff date.

According to the court’s April 5, 2018, opinion in Smith v. Bank of Hawaii, the Bank of Hawaii (BOH) described its checking account offerings as providing three different types of balances: a ledger balance, a current balance, and an available balance. Referencing a Consumer Financial Protection Bureau Supervisory Highlights issue, the court noted that a transaction that would not have resulted in an overdraft fee under a ledger-balance method still could result in an overdraft fee under an available-balance method.

The bank customer opened multiple BOH checking accounts between July 2010 and December 2014. Previously, in rejecting BOH’s motion to dismiss the customer’s lawsuit, the court determined that the bank’s underlying checking account agreement and opt-in form, construed together, were “ambiguous as to BOH’s choice of balance method.” Accordingly, the court refused to recognize that BOH adequately disclosed that it was using an “available-balance method” to determine overdrafts on the customer’s applicable checking account.

EFTA limitation period. BOH argued that, as a matter of law, the customer’s EFTA claim was barred in its entirety under EFTA’s one-year statute of limitations because a claim accrues “when the first unauthorized transfer occurs.” In contrast, the customer argued that “each wrongly imposed overdraft charge constitutes a separate violation, involving its own statutory period.” Noting that no federal appellate court has squarely resolved the issue in the context of preauthorized recurring transfers, the trial court determined that the case before it presented a different set of factual circumstances—one involving “allegedly unauthorized overdraft fees.”

The court stressed that EFTA’s implementing regulation, Regulation E, accounted for these differing factual circumstances. The bank customer maintained that BOH did not disclose its use of an available-balance method for determining overdrafts and corresponding fees and that he thought he was opting in to an overdraft service that used a ledger-balance instead. In the court’s view, given the nature of the customer’s claim that the fees were outside the scope of the underlying agreement, “it makes sense in the overdraft context to view each fee separately—as an allegedly unauthorized charge—whereas it might not make sense to view preauthorized recurring transfers separately.”

Consequently, using this framework, the court decided that BOH was not entitled to summary judgment concerning overdraft fees the bank charged within one year of the customer’s complaint. However, claims based on overdraft fees imposed by the bank outside that one-year limit were barred.

Contractual limitation period. Next, in connection with the customer’s state-law claims against BOH for breach of the implied covenant of good faith and fair dealing, unjust enrichment, and the violation of other Hawaii laws, the court focused on the one-year limitation period contained in the agreement governing the checking account. The court ultimately determined that the one-year limitation period in the contract was not unreasonable or unconscionable under the circumstances.

Generally, the court agreed with BOH that the customer had the tools, including his own bank statements, to discover the facts supporting his state claims “within approximately a month of each challenged fee.” Moreover, the customer contacted BOH five or six times about the overdraft fees. Against this backdrop, the court determined that at least one overdraft fee was charged within one year of the filing of the original complaint. As a result, the court denied the bank’s request for summary judgment as to any overdraft fees charged on or after Sept. 9, 2015, but granted summary judgment in favor of BOH as to any fees charged before that date.

No waiver of jury trial. Also, in reviewing the applicable checking account agreement and related documentation, despite the inclusion of a “jury trial waiver” provision in the middle of a 36-page agreement, the court concluded that the bank customer had not knowingly and voluntarily waived his right to a jury trial.

For more information about court decisions affecting the banking industry, subscribe to the Banking and Finance Law Daily.

Thursday, April 5, 2018

Appraisal-requirement threshold doubled

By Andrew A. Turner, J.D.

The Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation have increased the threshold for commercial real estate transactions requiring an appraisal from $250,000 to $500,000. The amendments will take effect immediately upon publication in the Federal Register.

After considering more than 200 comments from appraisers, appraiser trade organizations, financial institutions, financial institutions trade organizations, and individuals, the agencies decided to increase the commercial real estate appraisal threshold to $500,000, rather than $400,000 as proposed. The rulemaking initiative responded to financial industry concerns that the current threshold level had not kept pace with price appreciation in the commercial real estate market in the 24 years since the threshold was established. The agencies’ action is intended to reduce the regulatory burden for real estate-related financial transactions.

The change allows a financial institution to use an evaluation rather than an appraisal for commercial real estate transactions exempted by the $500,000 threshold. Evaluations provide a market value estimate of the real estate pledged as collateral, but do not have to comply with the Uniform Standards of Professional Appraiser Practices and do not require completion by a state licensed or certified appraiser.

Definition of commercial real estate transaction. The final rule defines commercial real estate transaction as a real estate-related financial transaction that is not secured by a single 1-to-4 family residential property. It excludes all transactions secured by a single 1-to-4 family residential property, and thus construction loans secured by a single 1-to-4 family residential property are excluded, and remain subject to the $250,000 threshold.

For more information about federal regulatory requirements for real estate transactions, subscribe to the Banking and Finance Law Daily.

Wednesday, April 4, 2018

New York further updates cybersecurity reg FAQs

By J. Preston Carter, J.D., LL.M.

The New York Department of Financial Services has provided another update to its answers to frequently asked questions regarding its cybersecurity regulation—23 NYCRR Part 500. The regulation, establishing cybersecurity requirements for financial services companies, became effective March 1, 2017. The original FAQs were published last December. The first set of revised FAQs was published in February.

The NYDFS’s second set of revised FAQs added the following guidance:
  • In the cyber portal, an Entity ID is an entity’s unique license or charter number issued by the State of New York. Further information is provided in the FAQs for insurance companies and insurance producers. Required filings may be made electronically via the DFS Web Portal.
  • Individuals, with no Board of Directors, filing a Certificate of Compliance for their own individual license are acting as a Senior Officer, as defined in the Regulation, and should complete the filing process in that manner. The Senior Officer is the individual or individuals responsible for the compliance of a Covered Entity.
Here are upcoming key dates to keep in mind under New York’s cybersecurity regulation:
  • Sept. 3, 2018—Eighteen-month transitional period ends. Covered Entities are required to be in compliance with the requirements of sections 500.06, 500.08, 500.13, 500.14(a), and 500.15 of 23 NYCRR Part 500.
  • March 1, 2019—Two-year transitional period ends. Covered Entities are required to be in compliance with the requirements of 23 NYCRR 500.11.
For more information about financial services cybersecurity, subscribe to the Banking and Finance Law Daily.