Thursday, July 30, 2015

Effects of QM/QRM regs limited but further study needed says GAO

By Katalina M. Bianco, J.D.

The Government Accountability Office has completed its first study on the impact of the ever-controversial qualified mortgage (QM) and qualified residential mortgage (QRM) regulations on the marketplace. Thus far, the initial effects are limited, but the regulatory agencies need to do further review to truly assess the effects of the regulations, the GAO reported.

QMs/QRMs. The GAO noted that federal agencies, market participants, and observers estimated that the regulations would have limited initial effects because most loans originated in recent years largely conformed to QM criteria. The QM regulations, adopted by the Consumer Financial Protection Bureau and effective since January 2014, address lenders’ responsibilities to determine a borrower’s ability to repay a loan. The regulations also set out standards that include prohibitions on risky loan features (such as interest-only or balloon payments) and limits on points and fees. Lenders that originate QM loans receive certain liability protections.

Securities collateralized exclusively by residential mortgages that are “qualified residential mortgages” are exempt from risk-retention requirements The QRM regulations align the QRM definition with QM, making securities collateralized solely by QM loans not subject to risk-retention requirements. Six agencies jointly issued the final QRM rule—the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Department of Housing and Urban Development, Federal Housing Finance Agency, and Securities and Exchange Commission—that will become effective in December 2015.

Initial effects. The GAO reports that the analyses it reviewed estimated limited effects on the availability of mortgages for most borrowers and that any cost increases for borrowers, lenders, and investors would stem mainly from litigation and compliance issues. According to agency officials and observers, the QRM regulations were unlikely to have a significant initial effect on the availability or securitization of mortgages in the current market because the majority of loans originated were expected to be QM loans, the GAO said. However, there are questions about the size and viability of the secondary market for non-QRM-backed securities.

Agency reviews. The agencies have begun conducting their reviews. The GAO reports, however, that the agencies’ efforts have not included elements important for conducting effective retrospective reviews. “To varying degrees, the relevant agencies have identified outcomes to examine, potential data sources, and analytical methods.” The GAO stresses that the current data lack important information relevant to the regulations and planned data enhancements may not be available before agencies start the reviews. For example, the CFPB proposed expanding Home Mortgage Disclosure Act data reporting requirements, but the earliest that the enhanced data will be available is 2017. The agencies also have not specified how they will conduct their reviews, including determining which data and analytical methods to use.

Recommendations and responses. The GAO recommends that the CFPB and the agencies responsible for the QRM regulations should complete plans to review the QM and QRM regulations. Plans should include identifying specific metrics, baselines, and analytical methods.

According to the report, the CFPB, HUD, and FDIC concurred or agreed with the GAO’s recommendations. The other QRM agencies did not explicitly agree with the recommendations but outlined for the GAO ongoing steps being taken to plan their reviews.

For more information about QMs and QRMs, subscribe to the Banking and Finance Law Daily.

Wednesday, July 29, 2015

Senate Dems and industry groups report on Dodd-Frank at five

By: J. Preston Carter, J.D., LL.M.

Five years after passage of the Dodd-Frank Act, a report released by Democratic staff on the Financial Services Committee has concluded that while Dodd-Frank has been successful in the face of partisan attack, more must be done to ensure all Americans can benefit from the economic recovery. “Five years and nearly 13 million jobs later, the Dodd-Frank Wall Street Reform Act has put our nation on a path to economic recovery,” said Ranking Member Maxine Waters (D-Calif), who requested the report. “The financial crisis represented the worst financial disaster in a generation. And in the face of relentless Republican attempts to roll back these critical reforms, Democrats remain committed to fighting to protect American consumers from the worst actors in our financial system,” Waters continued.

Meanwhile, a new Public Citizen report—Dodd Frank is Five: And Still Not Allowed Out of the House—says it documents “poor implementation of the law. Of the 390 rules required by the law, fewer than two-thirds have been completed; 60 rules have yet to be finalized, while another 83 have not even been proposed, according to the report.

“Dodd-Frank promised that America would never again be held hostage by banks that are too big to fail, but that promise remains unfulfilled,” the report finds. “Instead, industry-captured regulators and members of Congress hungry for campaign contributions from Wall Street continue to delay and dilute the law.”

Nor is the Competitive Enterprise Institute celebrating the birthday: “It is not a happy anniversary,” according to a CEI release. According to its report—How Dodd-Frank Harms Main Street—the reforms were intended to protect Main Street and consumers from financial predation by Wall Street. “Instead, it has meant reduced access to credit for small businesses and fewer choices for consumers, while doing little to punish the main culprits in the financial crisis.”

For more information about the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.

Tuesday, July 28, 2015

Company can sue under consumer debt collection protection act

By Richard A. Roth, J.D.

In a narrowly drawn opinion addressing an unusual set of facts, the U.S. Court of Appeals for the Sixth Circuit has decided that a limited liability company is a “person” under the Fair Debt Collection Practice Act. That means the company can sue over misrepresentations allegedly made during a home mortgage foreclosure. The court was quick to add, however, that its decision did not imply the company could win such a suit (Anarion Investments LLC v. Carrington Mortgage Services, LLC, July 23, 2015, Kethledge, R.)

The unusual circumstances of the suit began with a common transaction—a house was purchased with borrowed money, and a mortgage was given to secure the loan. The house soon was transferred to the owner’s trust, which leased it to an attorney, giving him a five-year term with a purchase option.

The attorney exercised the option but, according to the court’s opinion, took no further steps to obtain title to the property. The original owner, however, stopped making mortgage payments. The home went into foreclosure, and the attorney assigned his lease and purchase rights to an LLC he owned.

The mortgage servicer printed foreclosure notices in a local newspaper. Included in the notices was the assertion that a law firm—Brock & Scott, PLLC—had been designated substitute trustee “by an instrument duly recorded.” Asserting that no such instrument had been recorded, the LLC sued both the servicer and the law firm for misrepresentations under the FDCPA.

The federal district court judge dismissed the suit after concluding that the LLC was not a person under the act and thus could not sue.

What is a person? Referring to the FDCPA civil liability section, the appellate court observed that a debt collector who violates the act “with respect to any person is liable to such person” (15 U.S.C. §1692k(a)). However, the act does not define “person.”

The court then turned to the federal Dictionary Act, which says that under federal laws “person” includes entities like LLCs unless the context indicates it does not. In the 24 places where the FDCPA uses the word “person,” it sometimes refers only to artificial entities and sometimes to both artificial entities and individuals. In the only section that clearly was intended to exclude artificial entities, the act uses the term “natural person.”

The court’s conclusion was that “person” includes LLCs, allowing the attorney’s LLC to sue.

Little reason for worry. The court turned away the argument that its interpretation of “person” would extend the FDCPA too far. First, the act only applies to the collection of consumer debts; the collection of business debts is not covered. In this unusual case, the LLC was suing over an alleged misrepresentation in the effort to collect the original purchaser’s loan.

Second, the opinion answered only one question—who is a person? It did not consider whether any misrepresentation was made “with respect to” the LLC, and there could be no liability in the absence of a misrepresentation to the person who filed the suit.

Dissenting opinion. A dissenting opinion by Judge Donald took issue with the majority’s conclusion that the FDCPA did not indicate that “person” did not apply to artificial entities. The legislative history of the act made clear that it was intended to protect consumers, i.e. not artificial entities, she said. While the act included artificial entities as persons when referring to debt collectors and creditors, only individuals were persons when the act referred to debtors, she maintained.

The fact that this company might not be able to describe a valid claim under the FDCPA does not mean that all other companies will be equally impotent, the dissenter said. In particular, she warned that the decision “effectively provides a new cause of action in foreclosure appeals.”

For more information about the Fair Debt Collection Practices Act, subscribe to the Banking and Finance Law Daily.

Monday, July 27, 2015

Split decision opens door to challenging CFPB constitutionality

By Stephanie K. Mann, J.D.

A Texas state bank has standing under the Constitution to challenge the Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau and the recess appointment of Richard Cordray as CFPB Director, the U.S. Court of Appeals for the District of Columbia has determined in State National Bank of Big Spring v. Lew.

The opinion partially overturned a 2013 decision by the U.S. District Court for the District of Columbia that dismissed the suit in full. According to the district court judge, the bank and the attorneys general did not have standing because they were unable to establish that the Dodd-Frank provisions caused or imminently threatened an injury.

The appellate court was careful to limit its decision only to whether the bank and the state officials have standing to sue. It expressed no opinion on the merits of any of the claims.

Challenged Dodd-Frank provisions. State National Bank of Big Springs and the attorneys general of 10 states claim that several Dodd-Frank Act consumer protection and financial stability provisions violate the U.S. Constitution in a number of respects. The bank also asserts that President Obama could not use his recess appointment authority to appoint Cordray as bureau director.

Specifically, the suit claims that:
  • The organization of the CFPB is unconstitutional because independent agencies must be led by multiple-member commissions, not by a single director. Also Congress gave the CFPB so much power that the non-delegation doctrine was violated.
  • President Obama exceeded his authority when he appointed Cordray during a three-day intra-session Senate recess. Under NLRB v. Noel Canning, three days was not long enough to allow the exercise of the recess appointment authority.
Standing and ripeness. The appellate court summarized the issue of standing as an inquiry into whether the bank or states had suffered an injury in fact that was caused by the law and that the court could redress. If standing existed, a second issue arose—was this the right time to allow the challenge, i.e. was the complaint ripe for adjudication?

Challenge to CFPB. As a general rule, there is little doubt that a regulated company has standing to challenge the validity of a law or rule under which it is regulated, the court began. The Texas bank is regulated by the CFPB, and the bureau already has taken at least one action, the adoption of a rule on international remittance transfers, that has imposed obligations and costs on the bank. There was no reason not to follow the general rule and decide the bank has standing, the court decided.

When the bank should be permitted to bring the challenge was the second question. A regulated company should not be required to violate a law and risk enforcement penalties in order to challenge that law, the court said. That the bank was challenging the legality of the CFPB rather than the validity of a CFPB regulation was not relevant. The challenge was ripe.

Challenge to recess appointment. Little additional analysis or space was devoted to whether the bank could challenge Cordray’s recess appointment. The bank had standing to challenge the appointment, and the issue was ripe, for the same reasons, the court said.

However, the court explicitly noted that Cordray had subsequently been confirmed in the post by the Senate and thereafter had ratified everything he had done during the recess appointment. The significance of those facts had to be considered by the trial court.

For more information about challenges to the CFPB, subscribe to the Banking and Finance Law Daily.

Friday, July 24, 2015

Legislative proposals would change Fed policy, FOMC structure

By Colleen M. Svelnis, J.D.
The Financial Services Subcommittee on Monetary Policy and Trade has held a hearing to examine legislative proposals intended to increase the accountability and transparency with respect to monetary policy and the operation of the Federal Reserve System. “Examining Federal Reserve Reform Proposals,” held on July 22, 2015, looked to consider if the economy performs better when the Fed follows a rules-based approach to monetary policy versus improvisational policy.
“This hearing provides us with another opportunity to examine how the Federal Reserve conducts monetary policy and why the development of these policies is in desperate need of transparency. The Fed’s recent high degree of discretion and its lack of transparency in how it conducts monetary policy demonstrate that not only are reforms needed, but more important that reforms are necessary,” said Subcommittee Chairman Bill Huizenga (R-Mich). Huizenga stated that since the Dodd-Frank Act was passed, the Fed has continued to expand its authority and power beyond its original legislative authority.
Bill would amend Federal Reserve Act. One of the proposals presented was a discussion draft of a bill by Rep. Huizenga that would amend the Federal Reserve Act to establish requirements for policy rules and blackout periods of the Federal Open Market Committee (FOMC), to establish requirements for certain activities of the Federal Reserve Board, and to amend Title 31, United States Code, to reform the manner in which the Federal Reserve Board is audited.
The proposal would do the following:
  • explain differences between the course of monetary policy and a reference policy rule;
  • require the Fed to conduct cost-benefit analyses when it adopts new rules;
  • require the Fed to disclose the salaries of highly paid employees;
  • provide for at least two staff positions to advise each member of the Federal Reserve Board, and require Fed employees to abide by the same ethical requirements as other federal financial regulators;
  • reform the “blackout period” governing when Federal Reserve Governors and employees may publicly speak on certain matters;
  • alter the membership of the FOMC and reform the Fed’s emergency lending powers under Section 13(3) of the Federal Reserve Act; and
  • require that the FOMC set interest rates on balances maintained at a Federal Reserve Bank by a depository institution and enhance the Government Accountability Office’s authority to audit Federal Reserve operations.
Commission to study monetary policy. The second proposal, H.R. 2912, the “Centennial Monetary Commission Act of 2015,” introduced by Rep. Kevin Brady (R-Texas), would establish the Centennial Monetary Commission to study monetary policy, including: 
  • the historical monetary policy of the Fed; 
  • the various operational regimes under which the Federal Reserve may conduct monetary policy;
  • the use of macro-prudential supervision and regulation as a tool of monetary policy; and 
  • the Lender-of-Last-Resort function.
The Commission would also be charged with recommending a course of United States monetary policy going forward and must report to Congress its findings, conclusions, and recommendations by Dec. 1, 2016. 
Congressional authority. The witnesses seemed to mostly agree that Congress has the authority to change the structure of the Fed. Dr. John Cochrane, Senior Fellow at the Hoover Institution, said in his testimony that “[i]t is wise for Congress and the Federal Reserve to rethink the fundamental structures under which the Fed operates.” 
Cochrane pointed out that “the massive expansion of Fed responsibilities, the many new tools it is now using, and in particular the temptation to use direct regulatory control to achieve nearly unlimited economic objectives, strike me as the most important topics for a discussion about rules, independence, mandates, and accountability.”
Don’t erode Fed authority. Dr. Donald Kohn, Senior Fellow, Economic Studies, at the Brookings Institution, also testified on the proposed legislative changes applying to the Fed. Kohn stated that he does not agree that “something has been seriously amiss with the way the Federal Reserve has carried out the responsibilities Congress has given it.” Kohn said that, while not perfect, “The Federal Reserve, working in part under the guidance of the Congress in Dodd Frank, has greatly toughened and improved its regulation and supervision of the institutions for which it is responsible, and the financial system is safer than it has been for many years.”
According to Kohn, the Fed has already been adapting its monetary policy strategy and communications, and he stated, “I do not believe that major changes have been identified that would make the Federal Reserve a significantly more effective public policy institution.” Kohn also indicated that the FOMC has taken a number of steps to increase the predictability and transparency of its actions, especially over the past 10 years.
Kohn did allow that there could be “further improvements to goals, structure, and decision-making processes” within the Fed. However, he said that the existing monetary policy committee has a “panel rooted in partisan politics, not expertise, and its make-up is strongly tilted to one side.”
“I believe that public support for the Federal Reserve in our democratic society requires that the authority of the Board not be eroded,” he concluded.
Fed would still have independence. According to Dr. John Taylor, Professor of Economics at Stanford University, “the finding that predictable rules-based monetary policy is essential for good economic performance comes from research by many people and from practical experience over many years in the United States and other countries.” Taylor said his research over four decades also supports this view.
Taylor also believes that “clear public strategy” would help the Fed from sacrificing its independence by preventing policy makers from “bending under pressure.” Taylor expressed his belief that under the proposal, the Fed “would choose and describe its own strategy … The Fed could change the strategy if the world changed. It could deviate from the strategy in a crisis if it explained why. It would still serve as lender of last resort or take appropriate actions in the event of a crisis. Moreover, a policy strategy or rule does not require that any instrument of policy be fixed, but rather that it flexibly adjusts up or down to economic developments in a systematic and predictable way that can be explained.” 
Analysis of proposals. Dr. Paul Kupiec, Resident Scholar at the American Enterprise Institute gave testimony analyzing the legislative proposals. Kupiec said from his review of the Fed’s history, “it is clear that, from time to time, the US Congress finds it necessary to re-examine the Fed’s mandate, powers, and responsibilities, and to revise legislation appropriately when appropriate.”
Kupiec identified potential problems with the proposed legislation as written and gave suggestions of how to amend language and tighten requirements, and he also mentioned issues he believes merit further consideration or clarification, as well as practical considerations.

This article previously appeared in the Banking and Finance Law Daily.

Thursday, July 23, 2015

CFPB turns 4 amidst flurry of activity

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau reached its fourth anniversary on July 21, and while the bureau seemingly celebrated with a host of enforcement activity, CFPB naysayers took the opportunity to take action against the agency. As has been the case since the bureau opened its doors for business in 2011, the CFPB draws controversy like flies to honey. It's been a busy week for the bureau and for legislators.

Antonakis resignation. Big news at the bureau was the resignation of Deputy Director Steven Antonakes, who has been with the CFPB since its start. Antonakes sent an email to bureau staff on July 16 stating that he would be stepping down to spend more time with family as he has been commuting from Massachusetts for years, and a CFPB spokesperson confirmed his departure. No firm date was disclosed at the time, but word from the bureau now is that Antonakes will step down at the end of this month. The bureau announced today that Meredith Fuchs will serve as acting deputy director. Fuchs announced her intention to step down as General Counsel earlier this month, but she will continue to serve as General Counsel and Acting Deputy Director until a permanent replacement is chosen for each position. Antonakes served not only as Deputy Director but as Associate Director for supervision, enforcement, and fair lending. Big shoes to fill.

Consumer complaints. The CFPB announced a new monthly complaint snapshot, the first report out on the eve of the bureau's birthday. One of the key accomplishments the CFPB has noted in papers documenting the last four years is the large amount of complaints the bureau has handled since opening its doors - more than 650,000 to date This new series adds to the CFPB’s consumer complaint tools, including its Consumer Complaint Database. Responding to consumer complaints is a "key element" of the bureau's work, CFPB Director Richard Cordray said.

Enforcement activity. Cordray said that the bureau's enforcement activity has secured more than $10 billion in relief for more than 17 million consumers. CFPB enforcement activity this past week has boosted those numbers. The CFPB and the Office of the Comptroller of the Currency brought a coordinated enforcement action against Citibank, N.A. and its subsidiaries seeking redress for their deceptive marketing, billing, and administration of debt protection and credit monitoring add-on products. The CFPB alleged that Citibank or its subsidiaries deceptively marketed these various debt protection and credit monitoring add-on products during telemarketing calls, online enrollment, and “point-of-sale” application and enrollment at retailers, or when enrolled consumers later called to cancel certain products.

In another action this week, Discover Bank and two of its affiliates—The Student Loan Corporation and Discover Products, Inc.—entered into a consent order with the CFPB to settle claims that the companies violated provisions of the Consumer Financial Protection Act of 2010 (CFPA) in connection with their student loan servicing activities that included more than 800,000 accounts acquired from Citibank. Two days later, the bureau filed a complaint against Student Financial Aid Services, Inc. for alleged illegal sales and billing practices. The bureau alleges unfair and deceptive acts or practices on the part of the company for luring in consumers with misleading information about the total cost of its subscription financial services and then charging them with undisclosed and unauthorized automatic recurring charges.

These actions come on the heels of an action last week by the CFPB and Department of Justice against American Honda Finance Corporation, the car manufacturer's consumer auto loan subsidiary, for failing to monitor the activities of dealers from which it bought loans to prevent discriminatory interest rate mark-ups. As a result, according to the bureau and DOJ, African-American, Hispanic, and Asian and Pacific Islander borrowers were charged higher interest rates on their car loans to the tune of an average of between $150 and $250 over the life of a loan.

Supporters v. distractors. Also center stage during the bureau's anniversary was the ongoing push-and-pull between bureau supporters and naysayers. On the same day as the bureau birthday, Sen. Ted Cruz (R-Texas) and Rep. John Ratcliffe (R-Texas) introduced a bill intended to make this anniversary the bureau’s final one. The bill would abolish what the lawmakers call “just another example of the cronyism that infects our nation’s capital.”

The legislators also contend that the CFPB is unaccountable to the American people because Congress does not oversee the bureau through the annual appropriations process. This “unique setup” makes for a “situation that invites regulatory excess and abuse.”

Representatives Randy Neugebauer (R-Texas), Chairman of the House Financial Institutions and Consumer Credit Subcommittee, and Roger Williams (R-Texas), member of the House Financial Services Committee, said that the CFPB is responsible for some of the most consequential regulations that are hurting economic growth and stifling opportunity for individuals and families across America. According to the legislators, the CFPB continuously issues one-size-fits-all, Washington-knows-best regulations that harm consumer choice, decreases credit availability, and increases costs across the board for consumers and hardworking businesses.

In contrast to these opinions, the Treasury Department said the bureau has had a “transformative impact, establishing and enforcing clear rules of the road for banks and nonbanks involved in a wide range of financial markets.” To prevent the kinds of predatory behavior that contributed to the 2008 financial crisis, the CFPB has issued a number of “common sense rules” strengthening the country’s mortgage market, wrote Treasury’s Rob Friedlander.

At an event sponsored by the watchdog group Better Markets, former lawmakers and Dodd-Frank architects Christopher Dodd and Barney Frank gave an inside perspective about the causes of the 2008 financial crisis, their reaction to critics of the legislation, and their concerns about efforts to roll back the reform. Dodd said that "the CFPB is an important bulwark for consumers. Before, consumer protection measures had to be passed separately. Now with the CFPB in place, it’s one-stop shopping for consumer protection,"

Other legislators chimed in to defend the bureau. For example, House Minority Leader Nancy Pelosi (D-Calif) noted the CFPB's monetary return rate to "consumers who had fallen victim to unfair and deceptive financial practices."

The U.S. PIRG Education Fund released a new webpage, “Meet the CFPB: Just Ten of the Ways It Works for You,” to celebrate and increase public awareness of the agency. The group cited the bureau's work with consumer complaints, special offices to fight discrimination, protect servicemembers, help students pay for college, and protect elders against financial abuse as well as its resources for consumers with questions about mortgages among other things.

The CFPB: active, controversial, but always relevant to the world of banking and financial services.

For more information about the CFPB and it's fourth anniversary, subscribe to the Banking and Finance Law Daily.




Wednesday, July 22, 2015

#DoddFrankAt5: Costs and benefits

By John M. Pachkowski, J.D.
The fifth anniversary of the Dodd-Frank Act’s enactment has brought an avalanche of reports, commentary, analyses, speeches, and opinion pieces highlighting the costs and benefits of the law. The authorship of these reports determined whether: “Dodd-Frank—GOOD” or “Dodd-Frank—BAD”.
The American Action Forum (AAF) released an analysis detailing the law’s impact on employment, the housing market, and regulatory burden. Overall, the analysis found that the Dodd-Frank Act has fundamentally altered capital markets and added layers of complexity for consumers and financial institutions.
The analysis was conducted by Ben Gitis, Director of Labor Market Policy, Andy Winkler, Director of Housing Finance Policy, and Sam Batkins, Director of Regulatory Policy, at the AAF. The American Action Forum “is a 21st Century center-right policy institute providing actionable research and analysis to solve America’s most pressing policy challenges.”
Costs and burdens. Specifically, Gitis, Winkler, and Batkins found that five years after Dodd-Frank’s enactment its regulatory mandates have cost $24 billion and accounted for 61 million in paperwork burden hours. The analysis also noted that “[o]nly 60.3 percent of Dodd-Frank’s 398 regulations have been finalized, with another 21.5 yet to be proposed, and 18.2 percent in proposed form.” Moreover, the top five costliest pending regulations would add $7.8 billion in regulatory costs and 1.7 million in paperwork hours. These top five pending regulations deal with capital requirements for swap entities, home mortgage disclosure, standards for clearing agencies, pay ratio disclosure, and conduct standards for swap dealers.
Job growth. The analysis also discussed the impact on job growth. Gitis, Winkler, and Batkins pointed out that, while many of the rules enacted under Dodd-Frank are intended to limit risk among the largest financial companies, small firms seem to be paying the price with stagnant job growth. On the other hand, they noted there has been a “substantial increase in financial regulatory jobs in the federal government.”
Regulatory surge. Research by Patrick A. McLaughlin, a Senior Research Fellow at the Mercatus Center at George Mason University and Oliver Sherouse, program associate for the regulatory studies program at the Mercatus Center, quantified the regulatory surge of Dodd-Frank. They noted that Dodd-Frank “is associated with more than five times as many new restrictions as any other law passed since January 2009, for a total of nearly 28,000 new restrictions.”
They added, “The extraordinary output of regulation set in motion by Dodd-Frank should, five years after its enactment, give us pause. Such a large and sudden addition of regulation of the financial sector has doubtless increased the complexity of financial regulation, and it is remarkable that such vast changes were accomplished in a relatively short timeframe, for better or worse.” McLaughlin and Sherouse concluded, “Whether this increased government involvement in the financial sector will prevent future crises or exacerbate them remains to be seen.”
People being tamed. In remarks before the American Enterprise Institute, House Financial Services Committee Chairman Jeb Hensarlng (R-Texas), said, “The ‘animal spirits’ of free enterprise, entrepreneurial risk-taking and dream-chasing that have identified us as a people are being tamed.” He added the promised benefits that Dodd-Frank would “lift our economy, end “Too Big to Fail” and “promote financial stability” have made our society “now less stable, less prosperous, and less free.” In his closing, Hensarling said, “let’s commit ourselves to nothing less than the replacement of Dodd-Frank. Before the next economic downturn, Congress should replace Dodd-Frank. With this modest first step, together we can begin to win back America’s promise.”
More remains. Aaron Klein, Director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, said, “Five years in, Dodd-Frank has revamped financial regulation. The new system, while still largely untested, has made important improvements to guard against the causes of the last crisis.” He added, However, Dodd-Frank also left major areas unaddressed and, like any new law, requires improvements. It will be up to our political and regulatory systems to ensure that we are in the best position to prevent future crises in different forms and to protect consumers, while nurturing a robust financial system that encourages economic growth.”
 A report released by the Democratic staff on the House Financial Services Committee concluded that while Dodd-Frank has been successful in the face of partisan attack, more must be done to ensure all Americans can benefit from the economic recovery. “Five years and nearly 13 million jobs later, the Dodd-Frank Wall Street Reform Act has put our nation on a path to economic recovery,” said Rep. Maxine Waters (D-Calif.), the Committee’s Ranking Member. She added, “The financial crisis represented the worst financial disaster in a generation. And in the face of relentless Republican attempts to roll back these critical reforms, Democrats remain committed to fighting to protect American consumers from the worst actors in our financial system.”
“5 numbers to know”. Think Progress, a progressive, non-partisan, editorially independent advocacy group listed “five numbers to celebrate the overhaul’s birthday”:
  • $10.3 billion recovered by the Consumer Financial Protection Bureau for illegal or illegitimate practices by financial companies;
  • 83 separate financial rules mandated by Dodd-Frank that haven’t been written yet;
  • 139 separate times Congress has tries to amend or repeal Wall Street reform in its first five years;
  • $3.25 billion spent to influence the government since Dodd-Frank was passed; and
  • The five biggest banks control 44 percent of all U.S. banking assets—more than before Dodd-Frank was enacted.
Grave mistake. Speaking at an event sponsored by the Better Markets group to mark the fifth anniversary of the signing of the Dodd-Frank Act, Treasury Secretary Jacob Lew asserted that “it would be a grave mistake to think that banks can self-regulate, that forces that produce excessive risk-taking are a thing of the past, and that risks taken on Wall Street will not harm Main Street.” 
Following up on his remarks at the Better Markets event, Lew issued a separate July 21, 2015, statement from his office to underscore this same theme of “maintaining vigilance” to continue the work of Dodd-Frank Act reforms. “As memories of the crisis fade, our vigilance must not,” Lew commented.

For more information about the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.

Tuesday, July 21, 2015

Despite state regulation, common law sustains arbitration of auto financing dispute

By Thomas G. Wolfe, J.D.

A recent court opinion by the Maryland Court of Appeals—Maryland’s highest court—illustrates that common-law contract principles can still play a pivotal role in a court’s decision to either grant or deny arbitration of an auto financing dispute, even when a state law or regulation is present in the mix.

Underscoring this point, in Ford v. Antwerpen Motorcars, Ltd., Maryland’s high court ruled that the “single document rule” of a Maryland state regulation governing vehicle sales contracts did not displace Maryland’s common-law contract principles permitting multiple documents to be “construed together as evincing the entire agreement of the parties.” Consequently, even though a car dealer’s retail installment sales contract with two consumers for the financing of their car purchase did not itself contain an arbitration provision, Maryland’s high court determined that the contract, when construed together with a “Buyer’s Order,” served to require arbitration of the consumers’ dispute with the car dealer.

By way of background, the consumers executed and signed a Buyer’s Order, setting forth the purchase price, and a Retail Installment Sales Contract (RISC), containing the financing terms of their car purchase. While the Buyer’s Order contained an arbitration clause, the RISC did not include any arbitration agreement. Still, the RISC did provide that “this contract along with all other documents signed by you in connection with the purchase of this vehicle, comprise the entire agreement between you and us affecting this purchase.”

Later, when a dispute arose with the dealership concerning their car, the consumers sought to litigate their claims under Maryland law rather than arbitrate them. In response, the car dealership asked the state trial court to compel arbitration of the dispute, based on the arbitration clause contained in the Buyer’s Order. In opposition, the consumers contended that the Maryland regulation governing vehicle sales contracts required a single “instrument in writing containing all of the agreements of the parties.” Since the RISC reflected the core agreement of the parties and contained no arbitration clause, it trumped the Buyer’s Order, the consumers maintained.

Maryland’s high court framed the issue on appeal: “Under Maryland contract law, is an arbitration provision not contained in a vehicle sales contract, but found in a Buyer’s Order executed on the same day, enforceable where the applicable Maryland regulations require vehicle sales contracts to contain all agreements of the parties?”

In ruling that the Buyer’s Order could be construed together with the RISC, the court determined that “under our long standing common law contract principles … multiple documents may be construed together as evincing the entire agreement of the parties to a vehicle sales contract.” In reaching its decision, the court emphasized that contract principles govern arbitration issues and that the language of both the RISC and the Buyer’s Order indicated an intention by the parties that they were to be “read together as constituting one transaction.”

For more analysis and cases like Ford v. Antwerpen Motorcars, Ltd., subscribe to the Banking and Finance Law Daily.

Monday, July 20, 2015

Fed flexes its muscle under Dodd-Frank

By Lisa M. Goolik, J.D.

At its July 20, 2015, open meeting, the Federal Reserve Board approved two actions under the authority of a law that turns five the same week - the Dodd-Frank Act. For starters, the Fed approved a final rule that imposes a capital surcharge on the largest, most systemically important U.S. bank holding companies pursuant to Section 165 of the Act. The Fed also voted to approve a final order establishing enhanced prudential standards for General Electric Capital Corporation (GECC) in accordance with Section 165.

Capital surcharge. Under the final rule, a firm that is identified as a global systemically important bank holding company, or GSIB, will have to hold additional capital to increase its resiliency in light of the greater threat it poses to the financial stability of the United States. The Fed’s rule uses five broad categories correlated with systemic importance—size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity—to calculate a numerical score that would be used to determine whether a U.S. bank holding company would be identified as a GSIB. The final rule is based upon the international standard adopted by the Basel Committee on Banking Supervision and is augmented to address risks to U.S. financial stability.

According to the Fed, eight bank holding companies would be identified as GSIBs under the final rule: JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp., and State Street Corp.

The capital surcharge will be phased in beginning on Jan. 1, 2016, and would become fully effective on Jan. 1, 2019. Using the most recent available data, surcharges for the eight GSIBs are estimated to range from 1.0 to 4.5 percent of each firm's total risk-weighted assets.

Commenting on the final rule, Fed Chair Janet Yellen stated, "A key purpose of the capital surcharge is to require the firms themselves to bear the costs that their failure would impose on others. In practice, this final rule will confront these firms with a choice: they must either hold substantially more capital, reducing the likelihood that they will fail, or else they must shrink their systemic footprint, reducing the harm that their failure would do to our financial system. Either outcome would enhance financial stability."

Enhanced standards. The Fed also approved enhanced prudential standards for GECC, which was designated by the Financial Stability Oversight Council in July 2013 for enhanced supervision. The Fed’s order takes into account General Electric’s plans to substantially reduce GECC's holdings by as much as 70 percent and retain only those business lines that support GE's core industrial businesses. As a result, the final order provides for application of enhanced prudential standards in two phases that begin Jan. 1, 2016, and Jan. 1, 2018.

Because of the “substantial similarity” of GECC's activities to that of a large bank holding company, the enhanced prudential standards are similar to those that apply to large bank holding companies, but are “tailored to reflect the unique characteristics of GECC.”

Effective Jan. 1, 2016, GECC must comply with risk-based and leverage capital requirements, the liquidity coverage ratio rule, and related reporting requirements. If GECC is still designated by the FSOC prior to Jan. 1, 2018, GECC would be required to comply with liquidity risk-management, general risk-management, capital-planning, and stress-testing requirements, as well as restrictions on intercompany transactions. Additionally, GECC would also be subject to certain governance requirements unique to its structure

Yellen noted, “Whether a firm we regulate is a bank or a nonbank, our goal is to tailor our regulation and supervision to the systemic footprint of the individual firm in a way that safeguards the stability of our financial system and our economy.”

For more information about the Fed's authority under the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.

Friday, July 17, 2015

Debt collecting law firm comes under CFPB authority, federal district judge says

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau has the authority to enforce the Fair Debt Collection Practices Act and Consumer Financial Protection Act against a law firm that specializes in consumer debt collections, according to U.S. District Judge Amy Totenberg. The law firm’s claims that the bureau was attempting to illegally regulate the practice of law and was violating its constitutional rights both were rejected (CFPB v. Frederick J. Hanna & Assoc., P.C., N.D. Ga., No. 1:14-CV-2211-AT, July 15, 2015).

According to the CFPB, Frederick J. Hanna & Associates files thousands of consumer debt collection suits each year—more than 350,000 between 2009 and 2013—while employing a small staff of attorneys. According to the bureau’s calculations, the firm’s procedures mean that each complaint receives no more than one minute of attention from an attorney before it is filed. Also, suits often are simply dismissed if the consumer appears in court, especially if the consumer has an attorney.

The CFPB’s main charges are that the firm violates the FDCPA by misrepresenting that attorneys are involved in reviewing the suits and by relying on affidavits signed by individuals who the firm knows, or should know, had no personal knowledge of the asserted facts. These practices violated the FDCPA and also were unfair, deceptive, or abusive under the CFPA.

Practice of law. The law firm’s practice of law objection to the bureau enforcement action applied only to the CFPA claim, not the FDCPA claim, Judge Totenberg first made clear. The Dodd-Frank Act says that the bureau can enforce any of the “enumerated consumer laws” against attorneys, and the FDCPA is such a law. There is no question the FDCPA applies to attorneys engaged in debt collection litigation.

However, the bureau’s authority to act against unfair, deceptive, or abusive acts and practices under the CFPA is constrained by an exclusion that protects the practice of law. According to the act, “the Bureau may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed . . .” (12 U.S.C. §5517(e)(1)). That exclusion covers the law firm’s debt collection suits, the judge said.

The CFPB noted in reply that there are two exceptions from that exclusion, one of which applies to services performed “by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney . . .” (12 U.S.C. §5517(e)(2)). The judge decided that this exclusion clearly applied to the law firm’s debt collection suits, giving the bureau the authority to act. The suits were services provided to the law firm’s clients with respect to consumers who were not receiving services from the firm.

The judge rejected the firm’s counter-arguments, including one based on the legislative history of the Dodd-Frank Act, as unpersuasive and contrary to the clear meaning of the statute. It was irrelevant that the practice of law historically was regulated by the states, the judge added, as that tradition did not mean the federal government had no authority.

First Amendment objection. The law firm claimed that applying the FDCPA and CFPA to its litigation practice infringed on its right to petition the government for redress of grievances, a right guaranteed by the First Amendment to the Constitution. The theory, which is referred to as the Noerr-Pennington doctrine, has its roots in antitrust law. According to the judge, the doctrine originally was that the First Amendment immunized persons from liability under the antitrust laws when they were petitioning the government, and has been extended to judicial proceedings and to contexts other than antitrust.

However, the doctrine does not extend to debt collection suits, the judge said. The Supreme Court determined that the FDCPA applies to debt collecting attorneys in Heintz v. Jenkins, 514 U.S. 291 (1995)), and the act’s applicability was not in doubt. There was, in fact, no support for the claim that debt collection suits were constitutionally protected.

Equal protection objection. Because the CFPB’s enforcement action did not limit the access of the firm’s clients to the courts in any “constitutionally significant way,” there was no violation of the Constitution’s equal protection clause, the judge continued. In fact, the judge said, the firm’s equal protection argument “fails right out of the gate” because it relied on an assertion that any action that would in any way infringe on access to the courts required strict scrutiny. In fact, the clients’ right to sue to recover debts was not a fundamental right that was entitled to special constitutional protection.

This meant the bureau’s enforcement activities were permissible as long as they had a rational basis. The firm did not even try to argue that the enforcement of the CFPA and FDCPA did not have a rational basis. In fact, the firm offered no reason to believe the CFPB suit would meaningfully interfere with the clients’ ability to file nonfrivolous collection suits, the judge observed.

Statute of limitations. The judge did leave the law firm a glimmer of hope when she refused to rule completely on the firm’s statute of limitations argument. The FDCPA sets a one-year statute of limitations, and the firm argued that could eliminate from consideration many of the suits on which the CFPB was building its case, which could perhaps reduce its liability. The CFPB, on the other hand, argued that there should be no statute of limitations on the claims. The judge pointed out a third possibility that neither side cared to argue—the CFPA’s three-year time limit.

According to the law firm, the issue was settled by the language of the FDCPA, which says that “An action to enforce any liability” under the act had to be brought within one year. “Any liability” includes liability to the government, the firm argued.

The CFPB tried unsuccessfully to convince the judge that there should be no time limit. According to the bureau, the FDCPA statute of limitations section applies only to private civil suits. A different section, which sets no time limit, applies to the authority of the CFPB and the Federal Trade Commission to enforce the act. The judge, though, pointed out that this section refers to enforcing “compliance” and says nothing about imposing liability.

If Congress had said nothing about time limits, the CFPB might have had a good point, the judge conceded. However, the CFPA says explicitly that the bureau has three years to sue after it discovers a violation. Thus, the bureau’s argument was that Congress gave consumers one year to sue under the FDCPA, and gave the bureau three years to sue under the CFPA, but put no limit on when the bureau could use under the FDCPA. The judge rejected that result.

While the judge was certain there had to be some statute of limitations, she was not prepared to decide what the time limit was. She was, however, able to decide that whether the time limit was one year or three did not matter at the early stage of the suit. None of the bureau’s claims would be completely eliminated by the shorter time limit, she said, and the bureau and the firm would have to engage in the same discovery process no matter which time limit was correct.

That being the case, the judge invited the law firm to again raise the statute of limitations on summary judgment or after an appellate court considered the issue.

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

Thursday, July 16, 2015

Student loan servicers maneuver roadblocks to legal protections for servicemembers

By Andrew A. Turner, J.D.

Almost three years after the Consumer Financial Protection Bureau released its first report documenting student loan complaints from military borrowers, the problem persists as student loan servicers are still failing to provide legal protections to servicemembers, according to the Consumer Financial Protection Bureau. The CFPB report, “Overseas & Underserved: Student Loan Servicing and the Cost to Our Men and Women in Uniform,” finds that commonly reported issues involve the denial of military deferments without adequate explanation and problems with the application of the Servicemembers Civil Relief Act.

The SCRA provides for interest rate reductions on most pre-service loans, which includes student loans. However, servicemember complaints suggest that there is an ongoing problem with how student loan servicers communicate with servicemembers about the programs available to them.

In addition to communication issues, the report suggests that there remain roadblocks in the way of servicemembers seeking military deferments. A military deferment is an option afforded to some active duty servicemembers that allows for postponement of monthly student loan payments under certain circumstances.

For federal student loans, a servicer is required to provide a military deferment in certain, defined circumstances. The CFPB suggests that servicing representatives may lack sufficient training in deferment programs. Poor communication and improper loan processing by student loan servicers may lead to “surprise” delinquencies, defaults, and debt collection attempts upon the completion of military service or the return from deployment.

The CFPB has gone down this path before, with a 2012 report, “The Next Front? Student Loan Servicing and the Cost to Our Men and Women in Uniform,” which outlined obstacles faced by servicemembers, including those in combat zones. Since that time, the CFPB has handled more than 1,300 complaints from military borrowers related to the servicing or collection of student loans.

The CFPB shared problems found in the inaugural report with other federal regulators, including the Department of Justice and the Federal Deposit Insurance Corporation. In May 2014, the DOJ joined with the FDIC and entered an order providing $60 million in compensation for more than 77,000 servicemembers in an action against student loan servicers Sallie Mae and Navient (formerly one company) related to their application of benefits under the SCRA to active duty members of the military.

The difficulties faced by military personnel have been described as the “canary in the coal mine,” raising larger questions about the adequacy of servicing in the broader student loan market. The CFPB’s latest report notes that there is currently no comprehensive framework that provides uniform standards for the servicing of all student loans.

With launch of an inquiry by the CFPB into student loan servicing practices for all consumers in May 2015, it is evident that the problems facing servicemembers repaying student debt are just one part of a bigger issue that has been put under the bureau’s microscope.

For more information about CFPB actions on student loan servicing, subscribe to the Banking and Finance Law Daily.

Wednesday, July 15, 2015

Fed to root out cyber threats with cybersecurity assessment tool

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

Beginning in late 2015 or early 2016, the Federal Reserve Board plans to start using a Cybersecurity Assessment Tool developed by the Federal Financial Institutions Examination Council to help banks manage cybersecurity risk. In response to the ever-increasing volume and sophistication of cyber threats, the FFIEC created the tool to help institutions identify their risks and determine their cybersecurity preparedness.

The assessment tool incorporates cybersecurity-related principles from the FFIEC Information Technology (IT) Examination Handbook, regulatory guidance, and concepts from other industry standards, including the National Institute of Standards and Technology Cybersecurity Framework. The Fed announced in recent supervisory guidance (SR 15-9) that it will use the assessment tool as part of the examination process when evaluating financial institutions’ cybersecurity preparedness in information technology and safety and soundness examinations and inspections.

Benefits to the institution. The FFIEC stated that institutions using the assessment tool will be able to enhance their oversight and management of their cybersecurity by:
  • identifying factors contributing to and determining the institution’s overall cyber risk;
  • assessing the institution’s cybersecurity preparedness;
  • evaluating whether the institution’s cybersecurity preparedness is aligned with its risks;
  • determining risk management practices and controls that are needed or need enhancement and actions to be taken to achieve the desired state; and
  • informing risk management strategies.

Risk and maturity. The assessment tool consists of two parts: Inherent Risk Profile and Cybersecurity Maturity. Inherent risk incorporates the type, volume, and complexity of the institution’s operations and threats directed at the institution. Cybersecurity maturity includes statements to determine whether an institution’s behaviors, practices, and processes can support cybersecurity preparedness. Upon completion of both parts, an institution’s management can evaluate whether the institution’s inherent risk and preparedness are aligned.

The FFIEC stated that, going forward, it will update the assessment tool and the IT Examination Handbook based on the changing cybersecurity threat landscape.

For more information on how banks can manage cybersecurity risk, subscribe to the Banking and Finance Law Daily.

Tuesday, July 14, 2015

Meeks bill would fix Collins Amendment treatment of hybrid instruments

By John M. Pachkowski, J.D.

A bill introduced by Rep. Gregory Meeks (D-NY) would amend a provision of the Dodd-Frank Act that deals with the ability of smaller bank holding companies to use various types of hybrid instruments to meet their Tier 1 capital requirements. The bill was co-sponsored by: Reps. Peter King (R-NY), Carolyn Maloney (D-NY), and Blaine Luetkemeyer (R-Mo).

Collins Amendment. Under Section 171 of the Dodd-Frank, commonly referred to as the Collins Amendment, bank holding companies are generally prohibited from counting hybrid capital instruments, such as trust preferred securities (TruPS), towards their Tier 1 capital requirements as May 10, 2010. There are a number of phase-in periods that allow certain depository institution holding companies to either count the instruments towards Tier 1 capital or phase them out over a three-year period.

Depository institution holding companies with less than $15 billion in total assets as of Dec. 31, 2009, can continue to count hybrid capital instruments issued before May 19, 2010, as Tier 1 capital under section 171(b)(4)(C) of the Dodd Frank Act. However, depository institution holding companies with more than $15 billion in total assets as of Dec. 31, 2009, are required to phase out Tier 1 hybrid capital by over the three-year period which ends on Jan. 1, 2016.

Asset threshold. Specifically, the bill, H.R. 2987, the Community Bank Capital Clarification Act, would clarify Dodd Frank section 171(b)(4)(C) by treating a smaller depository institution holding companies, those with less than $15 billion in consolidated assets of Dec. 31, 2009, to continue to hold that status for so long as the holding company has total consolidated assets of less than $15 billion.

Prior fix attempts. Meeks’ legislation is the latest attempt to clarify the asset threshold question. Former-Rep. Michael Grimm (R-NY) introduced H.R. 3128 during the 112th Congress to address the same issue. Both Meeks and Maloney were co-sponsored of that bill.

According to a committee report—H. Rept. 112–566—Grimm’s bill was to “provide regulatory relief from the requirements of Section 171” since that provision “may prove to be costly and onerous for institutions.” The report added, “H.R. 3128 was drafted to ensure that Section 171 does not inadvertently ensnare financial institutions that have traditionally held less than $15 billion in total assets. H.R. 3128 amends Section 171 to provide a second date—March 31, 2010—from which bank holding companies may elect to have their consolidated assets determined for purposes of permitting them to continue counting hybrid capital instruments as Tier 1 capital.”

It should be noted that the regulatory relief bill introduced by Senate Banking Committee Chairman Richard Shelby (R-Ala) on June 2, 2015, would emulate H.R. 3128. Section 123 of Shelby’s bill would add March 31, 2010, as a date for calculation of total consolidated assets for purposes of exempting certain debt or equity instruments of smaller financial institutions from capital deductions requirements.

This story previously appeared in the Banking and Finance Law Daily.

Monday, July 13, 2015

Justice Department didn’t unlawfully target industries for Operation Choke Point, report

By Stephanie K. Mann, J.D. 

In an inquiry into allegations raised by a Congressional staff report that Justice Department attorneys abused their authority and improperly targeted objectionable businesses or industries under Operation Choke Point, the Justice Department’s Office of Professional Responsibility has concluded that none of the individuals committed professional misconduct.

The Justice Department report examined the issue of whether Justice Department lawyers unlawfully targeted Internet payday lenders and to pressure banks not to do business with them. A staff report released by the House Oversight and Government Reform Committee accused the Justice Department of abusing their authority. The report, The Department of Justice’s “Operation Choke Point”: Illegally Choking Off Legitimate Businesses?, claimed that the true goal of Operation Choke Point is to target industries deemed objectionable by the Obama Administration.

Focus of operation. According to the inquiry report, “neither the design nor the initial implementation of Operation Choke Point specifically focused on Internet payday lenders or their lending practices.” The report did note, however, that emails and memoranda indicated that some Civil Division attorneys did view payday lending “in a negative light.”

The inquiry did not find evidence of efforts to improperly pressure lawful businesses. Additionally, there was no evidence to support a conclusion that Department attorneys provided inaccurate information to Congress about the design, focus, or implementation of Operation Choke Point.

FIRREA subpoenas. The OPR found that the Civil Division’s interpretation and use of the Financial Institutions Reform and Recovery Act statute was supported by current case law. Of the 60 subpoenas issued as part of Operation Choke Point, few targeted Internet payday lenders, according to the report, and in those cases, there was reason to suspect fraudulent practices. The report also referenced the three cases that were filed as a result of Operation Choke Point, that have been resolved by negotiated settlements and consent judgments, and been accepted by U.S. District Courts.

Finally, the report stated that the evidence did not establish that Operation Choke Point compelled banks to terminate business relationships with other lawful businesses.

For more information about Operation Choke Point and the full text of the report, subscribe to the Banking and Finance Law Daily.

Friday, July 10, 2015

Fifth Circuit: Not every contract can support a maritime lien

By Lisa M. Goolik, J.D.

On July 6, the U.S. Court of Appeals for the Fifth Circuit held that a company that managed and operated vessels for owners under management contracts could not claim maritime liens in the vessels for unpaid management fees, even though the agreements specifically provided for the creation of maritime liens to secure payment. In Comar Marine Corporation v. Raider Marine Logistics, LLC, the court concluded that maritime liens cannot be created by agreement. In addition, the management agreements were not of the category of contracts that give rise to maritime liens. As a result, the company, Comar Marine Corporation, was not entitled to arrest and sell the vessels to collect its management fees.

Relevant facts. The underlying issue began as a contract dispute between Comar and four vessel-owning limited liability companies (LLCs). The LLCs contracted Comar to market, manage, and operate the vessels as charters in the Gulf of Mexico. The management agreements provided that the LLCs pay Comar a monthly management fee, and all expenses Comar incurred in connection with its provision of services were to be reimbursed by the owners. The contracts also provided that Comar “is relying on the credit of the Vessel[s] to secure payment of [the management fees and advanced sums for expenses] and shall have a maritime lien on the Vessel[s].”

When the charter business in the Gulf of Mexico began to dry up, the LLCs decided to terminate the agreements prematurely, and Comar sued for breach of contract. Comar alleged that it was owed approximately $1.1 million in fees and sought and secured arrests of the four vessels, on the grounds that it was entitled to maritime liens. 

The district court held that although the LLCs materially breached the agreements, Comar did not have valid maritime liens on the vessels because the management agreements were not of the type to give rise to a maritime lien. As a result, the district court concluded that Comar wrongfully arrested the vessels. Comar appealed.

No lien by agreement. Although the contracts specifically provided that Comar held a maritime lien on the vessels to secure payment of its management fees, the Fifth Circuit held that maritime liens cannot be created by agreement. “The Supreme Court has stated, ‘[m]aritime liens are not established by the agreement of the parties, except in hypothecations of vessels, but they result from the nature and object of the contract. They are consequences attached by law to certain contracts, and are independent of any agreement between the parties that such liens shall exist.’”

Specific contracts. Moreover, according to the Fifth Circuit, the breach of only certain types of historically recognized contracts gives rise to maritime liens, and the management agreements in question were not one of the recognized types. Comar contended that the agreements were the functional equivalent to bareboat charters, contracts that have been recognized as giving rise to maritime liens. 

However, a “charter” is an arrangement whereby one person becomes entitled to the use of the whole of a vessel belonging to another, wrote the court. The court had previously held that under such a charter, “the vessel is transferred without crew, provisions, fuel or supplies, i.e. ‘bareboat’; and when, and if, the charterer operates the vessel he must supply also such essential operating expenses.” In addition, the charterer is responsible for periodical payments to the vessel owners, “without regard to whether the charterer uses the vessel gainfully or not.”

Because the management agreements provided that the LLCs were to reimburse Comar for any expenses, the court concluded the agreements were not charters. In addition, Comar did not owe the LLCs a periodic payment independent of whether the vessels were used. Rather, the LLCs owed Comar a periodic payment for its services.

For more information about maritime liens, subscribe to the Banking and Finance Law Daily.

Thursday, July 9, 2015

Zombie debt, robo-calling, servicemember snafus add up to $216M for Chase

By Katalina M. Bianco, J.D.

Selling “zombie” debts, robo-signing court documents, and failing to accord proper protections to servicemembers are among the consumer debt collection violations committed by various JPMorgan Chase companies, according to the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, and 48 attorneys general. Three banks and one credit card servicing company agreed to pay at least $216 million in consumer refunds and civil penalties, in addition to at least $50 million in refunds the OCC says already have been paid.

Aa part of the settlement agreement, Chase agreed to stop all collection efforts on 528,000 consumer accounts. According to the CFPB, these accounts had a face value of several billion dollars when Chase sent them to debt collectors, and “The actual market value is now estimated in the tens or hundreds of millions of dollars.”

Separate consent orders were entered by the two agencies to resolve the related actions. The CFPB’s enforcement action also settled charges by 47 states and the District of Columbia. Chase agreed to the orders but did not admit to any wrongdoing.

Bureau action. The CFPB’s investigation focused on credit card accounts that went into default between 2009 and 2013. According to the bureau, Chase sold some of these accounts to third-party debt collectors, providing account information using electronic files. When necessary, Chase employees also signed affidavits for use in collection suits.

The bureau charged that the electronic files included: accounts with unlawfully obtained judgments, accounts with inaccurate balances, accounts that had been paid off, accounts that had been discharged in bankruptcy, accounts that had been opened fraudulently, accounts that already were subject to payment plans, accounts that Chase had previously sold, and accounts that were owed by deceased consumers. Since Chase knew the debt collectors would rely on the information, it assisted them in deceptive collection activities, the CFPB said.

The 528,000 accounts that Chase may no longer attempt to collect include those over which collection suits were filed. The companies provided the debt collectors with more than 150,000 affidavits for use in these suits, and in the process it “systematically failed to prepare, review, and execute truthful statements as required by law,” according to the CFPB.

CFPB action remedies. Under the CFPB consent order, Chase agrees to halt collection efforts on the 528,000 accounts, notify consumers it will not attempt to enforce court judgments, and take steps to prevent inclusion of the accounts in consumer reports. Chase will pay a minumum of $50 million in consumer redress, including a 25-percent penalty to consumers who paid more than they owed plus a $30 million civil money penalty.

OCC action. The OCC’s consent order resulted from a 2013 settlement of charges related to debt collection litigation practices, including robo-signing documents, and violations of the Servicemembers Civil Relief Act. In that settlement, Chase agreed to take described remedial action, and the OCC deferred the entry of any civil penalty. While Chase has since repaid more than $50 million to consumers, the OCC determined that “the full extent of the deficiencies” called for an additional $30 million penalty.

For more information about the Chase enforcement actions, subscribe to the Banking and Finance Law Daily.

Wednesday, July 8, 2015

GAO greenlights TRID rule

By John M. Pachkowski, J.D.

The Government Accountability Office (GAO) has released its assessment of Consumer Financial Protection Bureau’s compliance with the procedural steps required by Congressional Review Act (CRA) regarding the CFPB’s 2013 final rule that integrated various mortgage disclosures required by the Real Estate Settlement Procedures Act and the Truth in Lending Act.

Although the final rule, commonly referred to as the TRID rule, was formally published at the end of 2013 and was to become effective on Aug. 1, 2015, many industry stakeholders and members of Congress pressed the bureau to delay the effective date or provide a safe harbor for compliance.

Bowing to pressure, the CFPB initially announced that in a letter to Sens. Joe Donnelly (D-Ind) and Tim Scott (R-SC) stating that the bureau’s oversight of the TRID implementation “will be sensitive to the progress made by those entities that have been squarely focused on making good-faith efforts to come into compliance with the rule on time.”

Following its “sensitive to the progress made” position, the CFPB issued a proposed amendment that would delay the effective date of the TRID rule until Oct. 3, 2015. The bureau noted that it was taking this action due to an administrative error on its part in complying with the CRA.

In its assessment, which was sent to the leadership of the Senate Banking and House Financial Services Committees, the GAO noted that since the CFPB’s CRA review was not received until June 16, 2015, the required 60-day delay in the effective date of a major rule was not met. Despite that failure, the GAO found the other procedural steps required by the CRA were met.

Specifically, the GAO’s assessment found the CFPB adequately discussed costs and benefits of the TRID rule. In addition, the bureau took other actions that satisfied: the requirements of the Regulatory Flexibility Act; the notice and comment requirements of the Administrative Procedures Act; and the cost estimates for information collection requirements under Paperwork Reduction Act.

For more information about TILA and RESPA, subscribe to the Banking and Finance Law Daily.

Tuesday, July 7, 2015

U.S.: Disparate-Impact and the Fair Housing Act—what does it mean?

By James T. Bork, J.D., LL.M.

On June 25, 2015, the Supreme Court upheld the application of disparate-impact under the Fair Housing Act (FHA) in Texas Department of Housing & Community Affairs v. The Inclusive Communities Project, Inc. But the decision also described limitations on its application.

This case marks the third time the disparate-impact/FHA issue has reached the Supreme Court. In early 2012, the parties to Magner v. Gallagher agreed to have their case dismissed two weeks prior to oral argument before the Justices. The key issue there was whether the FHA made it illegal for local governments to enforce housing codes in a way that had a negative impact on minorities, even though enforcement was not motivated by intentional bias. In late 2013, the parties to Township of Mount Holly v. Mount Holly Gardens Citizens settled that case three weeks before it was to be argued. The issue in this second case was whether the FHA prohibits official housing policies that are not the result of intentional bias, but which nonetheless have a negative impact on racial minorities and/or others protected by the law.

In the instant case, a Texas-based nonprofit corporation, assisting low-income families in obtaining affordable housing, brought FHA disparate-impact claims against the Texas Department of Housing and Community Affairs. The non-profit group alleged that the department “caused continued segregated housing patterns by its disproportionate allocation” of federal tax credits for housing, “granting too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.” Accordingly, the non-profit maintained that the department was required to “modify its selection criteria in order to encourage the construction of low-income housing in suburban communities.” Writing for the majority, Justice Kennedy stated that a plaintiff who brings a disparate-impact claim essentially "challenges practices that have a disproportionately adverse effect on minorities" and "are otherwise unjustified by a legitimate rationale.”

No impact on issues apart from FHA. It is important to note that the focus of the Court's decision is limited to an interpretation of the FHA, and in no way affects an insured institution's obligations with respect to the Equal Credit Opportunity Act, Regulation B—Equal Credit Opportunity (12 CFR Part 1002), and lending discrimination issues. It does not require the alteration or adjustment of any fair lending policies or standards that financial institution lenders currently observe.

ECOA and Regulation B. Disparate-impact analysis, in the form of the "effects test," has been part of creditors' Equal Credit Opportunity compliance obligations since at least as long ago as the Federal Reserve Board's most recent full revision of Regulation B in 2003. (See 68 FR 13144, March 18, 2003) The current relevant text of the Consumer Financial Protection Bureau's version of the regulation is identical to the Fed's. In particular, §1002.6(a) states that "The legislative history of the [Equal Credit Opportunity] Act indicates that the Congress intended an 'effects test' concept, as outlined in the employment field by the Supreme Court in the cases of Griggs v. Duke Power Co. and Albemarle Paper Co. v. Moody to be applicable to a creditor's determination of creditworthiness." (citations omitted)

Even though it is well understood that the effects test is synonymous with disparate-impact, the Commentary to Regulation B spells it out. "Congressional intent that this doctrine [i.e., the effects test] apply to the credit area is documented in the Senate Report … and in the House Report … . The Act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. … " (Commentary to §1002.6(a)-2)

The regulators' guidance for their respective examiners leaves no doubt that a finding of disparate-impact can be the basis of an ECOA or FHA violation. As stated in the Fed's Consumer Compliance Handbook, the Federal Deposit Insurance Corporation's Compliance Examination Manual, and the CFPB's Supervision and Examination Manual, "… evidence of discriminatory intent is not necessary to establish that a lender's adoption or implementation of a policy or practice that has a disparate-impact is in violation of the [FHA] or ECOA."

Interagency policy statements. Regulatory guidance during the past 20+ years has recognized that disparate-impact theory is a legitimate element of fair lending analysis. The 1994 Interagency Policy Statement on Discrimination in Lending from eight federal agencies recognizes that "Policies and practices that are neutral on their face and that are applied equally may still, on a prohibited basis, disproportionately and adversely affect a person's access to credit."

A basic premise of the federal regulators' 2013 Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule rests on the fact that disparate-impact analysis is a settled issue in the context of fair lending. The 2013 guidance sheds light on the question of whether a lender that originates only Qualified Mortgages might be liable under the disparate-impact doctrine for violations of the ECOA and Regulation B.

As readers will recall, the regulators determined that a financial institution's decision to offer only mortgage loans that meet the criteria for Qualified Mortgages under the CFPB's Ability-to-Repay rule should not, by itself, constitute a fair lending violation under the disparate-impact, or effects test, doctrine. But aside from the specifics of that issue, it is important to note that the 2013 Interagency Guidance affirms the continued validity of the 1994 Interagency Policy Statement, including its remarks on the disparate-impact doctrine. (See also CFPB Bulletin 2012-4: "… the CFPB reaffirms that the legal doctrine of disparate-impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B.")

Summary of analysis. The foregoing analysis shows that banks' compliance obligations regarding disparate-impact theory flow primarily from sources that are separate from the Fair Housing Act and which are not affected by the Court's decision. Those obligations remain firmly in place, and would have remained in place even if the Court's dissenters had prevailed.

HUD regulation. Disparate-impact analysis under the FHA is supported by the Department of Housing and Urban Development's regulation codified at 24 CFR Part 100–Discriminatory Conduct Under the Fair Housing Act. Subpart G of the regulation, added by an amendment published at 78 FR 11459 (Feb. 15, 2013), codifies the disparate-impact theory that is (according to the final rule analysis published in the Federal Register) recognized by all the federal financial regulatory and enforcement agencies, as well as every federal appellate court that had ruled on the issue. That section states that "A practice has a discriminatory effect where it actually or predictably results in a disparate-impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin." (24 CFR §100.500(a))

James T. Bork, J.D., LL.M., is a Senior Banking Compliance Analyst with Wolters Kluwer Financial Services. Prior to joining WKFS, he practiced law for several years with a focus on financial institutions, consumer banking issues, commercial lending, and business law. He was also Assistant General Counsel and Senior Compliance Attorney at a billion dollar institution. Jim has written articles and spoken on regulatory and compliance developments affecting financial institutions. He received his law degree in 1989 and earned a Master of Laws degree (LL.M.) in banking law in 1993 from the Morin Center for Banking and Financial Law at Boston University School of Law.

This article previously appeared in the Banking and Finance Law Daily.

Saturday, July 4, 2015

GSE pay hikes raise legislator ire over ‘crony capitalist empire’

By Katalina M. Bianco

The recent jump in compensation for Fannie Mae and Freddie Mac chief executives has spurred a bipartisan backlash from outraged members of both the Senate and House. The CEOs of the government sponsored enterprises will each get a raise of $3.4 million, bringing their total annual compensation to $4 million, up from $600,000 each of the two previous years.

Washington cronyism. Speaking out on the hike in compensation, Rep. Scott Garrett (R-NJ), Chairman of the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee, blasted the FHFA for the move. “On the same day that the Ex-Im Bank expires, the crony capitalist empire strikes back at the FHFA,” said Garrett. “Fannie and Freddie have been bailed out by American taxpayers to the tune of $188 billion, yet Director Watt is handsomely rewarding the executives of these failed institutions. Today's announcement is yet another reminder that Washington cronyism is alive and well.”

Bailout a source of animosity. The GSEs were bailed out by taxpayers to the tune of $188 billion in 2009, and, as noted by Sen. Bob Corker (R-Tenn), a member of the Senate Banking Committee, an April stress test conducted by the FHFA showed that Fannie Mae and Freddie Mac could require a $157 billion taxpayer bailout to keep them afloat during a future crisis.

“I understand that Fannie Mae and Freddie Mac want to offer competitive salary and bonus packages to attract and retain talent, but because it appears that FHFA is ready to unilaterally drive the GSEs back to the failed model of private gains and public losses, this decision is just one more reason Congress must act to reform our housing finance system,” Corker said.

Legislative reform. “This decision by the Federal Housing Finance Agency to dramatically boost the salaries for the CEOs of Fannie and Freddie would appear to signal a return to business as usual,” said Sen.Mark R. Warner (D-Va), a member of the Senate Banking Committee and Ranking Member of the Banking subcommittee overseeing the secondary mortgage market. Warner also noted the taxpayer bailout of the GSEs and added that “the Senate Banking Committee last year voted in support of bipartisan reforms to fundamentally restructure the federal role in mortgage finance. These extraordinary pay raises fly in the face of the legislative intent.”

The legislation referred to by Warner is the Housing Finance Reform and Taxpayer Protection Act of 2013, S. 1217, which would wind down and eliminate Fannie Mae and Freddie Mac and establish the Federal Mortgage Insurance Corporation as an independent federal agency.

GSE compensation reform. After the announcement that Watt had directed Freddie Mac to propose executive compensation for its CEO that could be as high as the “25th percentile of the market,” Rep. Ed Royce (R-Calif) a member of the House Government Sponsored Enterprises Subcommittee, introduced legislation to block the proposed hike in pay (H.R. 2243, the Equity in Government Compensation Act of 2015).

“We appear to be tip-toeing back to a permanent quasi-state for our secondary housing market with private market compensation levels backed by taxpayers,” Royce said. His intention is to advance the legislation introduced last month. “I look forward to working with Chairman Hensarling to legislatively rein in executive salaries at these government-backed monopolies, a proposal that has won bipartisan support in the past."

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