Sunday, April 30, 2017

CFPB keeps supervisory eye on servicing

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its latest Supervisory Highlights detailing consumer issues the bureau has found through its supervisory work. The current report (Issue 15) addresses consumer issues with student loan and mortgage servicing. CFPB examiners have discovered that some student loan and mortgage servicers are violating consumer compliance laws by failing to provide struggling borrowers with legal protections, according to the bureau. The CFPB also reported that non-supervisory bureau actions have led to the recovery of approximately $6.1 million for 16,000 consumers harmed by auto loan originators. Finally, the bureau released its monthly complaint snapshot for the April 2017, with the focus again on student loan servicing.
Referring to the Supervisory Highlights report, CFPB Director Richard Cordray said that the "slipshod practices" of some student loan and mortgage servicers "are putting borrowers at risk of financial failure and we will hold them accountable."
Student loan servicers. The CFPB noted that it is "a Bureau priority to end illegal practices in student loan servicing." The bureau reported that examiners found that student loan servicers:
  •  routinely acted on incorrect information about whether the borrower was enrolled in school; and
  • failed to reverse certain charges, including improper late fees, even after they knew they had wrongly ended a deferment.
Mortgage servicers. CFPB supervision continues to see serious issues for consumers seeking alternatives to foreclosure, or loss mitigation, at certain servicers, according to the report. CFPB examiners found problems with foreclosure protections, premature foreclosure filings, mishandling of escrow accounts, and incomplete periodic statements. Further, examiners found that one or more mortgage servicers:
  • failed to identify the additional documents and information borrowers needed to submit to complete a loss mitigation application to avoid foreclosure, then denied the applications for not including those documents.
  • launched the foreclosure process prematurely after receiving loss mitigation applications from borrowers;
  • used funds from escrow accounts to pay insurance premiums on unrelated loans, creating shortages in the escrow accounts and higher monthly payments for consumers; and
  • issued incomplete periodic statements that used vague language such as "miscellaneous expenses" or just "service charge."

 Additional highlights. Key highlights of the report also include:
  • how CFPB examiners assess compliance with the Ability-to-Repay rule, including requirements on how a lender verifies a consumer’s ability to repay a mortgage loan;
  • alerts sent by examiners to one or more companies that consumer complaints have spiked, prompting remedies;
  • the bureau’s development and implementation of a program to examine key service providers to help reduce risks to consumers when a company outsources activities to those providers;
  • recent enforcement actions resulting from supervisory actions; and
  • information the industry can use to comply with federal consumer compliance laws.
The CFPB noted in the report that when examiners find problems, they alert the company and outline necessary remedial measures, such as paying refunds or restitution or taking actions to stop illegal practices, such as new policies or improved training or monitoring. If appropriate, the CFPB will open investigations for potential enforcement actions.
Complaint snapshot. Both private and federal student loan borrowers continue to report servicing breakdowns hindering repayment, according to the monthly complaint snapshot. The April 2017 snapshot also highlights trends seen in complaints coming from Nevada and the Las Vegas metro area.
"Student loan servicers play an important role in helping millions of people manage the loans they take out to pursue an education," said CFPB Director Richard Cordray. "Unfortunately, borrowers continue to report difficulties and setbacks as they try to work with their servicers to manage their loan debt."
Currently at $1.4 trillion, student loan debt represents the second largest U.S. debt market after mortgages, the bureau reported. As of April 1, 2017, the CFPB had handled approximately 1,163,200 consumer complaints across all products. Approximately 44,400 of those complaints were about student loans. Specifically, consumers complain about:
  • poor information from and "sloppy" practices by loan servicers;
  • difficulty enrolling and staying in income-driven repayment plans; and
  • confusion over the Public Service Loan Forgiveness and other loan forgiveness programs.
The three companies that the CFPB has received the most average monthly student loan complaints about are Navient Solutions, LLC, Fedloan Servicing/AES, and Nelnet.
National overview. The snapshot includes statistics about complaints submitted to the CFPB from across the United States. These statistics include the following:
  • Student loan complaints showed the greatest increase of any product or service in a year-to-year comparison examining the three-month time period of January to March.
  • Debt collection was the most-complained-about financial product or service.
  • The second and third most-complained-about products or services were credit reporting and mortgages.
  • Montana, Georgia, and Wyoming experienced the greatest year-to-year complaint volume increases from January to March 2017, versus the same time period 12 months before.
  • The top three companies that received the most complaints from November 2016 through January 2017 were Navient Solutions, LLC, Equifax, and Experian.

Nevada spotlight. As of April 1, 2017, consumers in Nevada have submitted 14,600 of the 1,163,200 complaints the CFPB has handled. Of those complaints, 10,800 came from consumers in the Las Vegas metro area. Findings from the Nevada complaints submitted to the CFPB include:
  • Complaints related to debt collection accounted for 29 percent of all complaints submitted by consumers from Nevada, slightly higher than the national rate.
  • Complaints related to mortgages accounted for 23 percent of all complaints from Nevada, a rate that is identical to the national rate of mortgage complaints.
  • Wells Fargo, Experian, and Equifax were the most-complained-about companies from consumers in Nevada.
For more information about CFPB supervision and loan servicing, subscribe to the Banking and Finance Law Daily.

Thursday, April 27, 2017

D.C. Cir.: State regulators’ group sues to block OCC’s planned fintech charter

By Richard A. Roth, J.D.
The Conference of State Bank Supervisors has sued the Office of the Comptroller of the Currency in an effort to block the agency from creating a new special purpose fintech charter. Calling the OCC’s plan "an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks," CSBS says that the OCC only can charter financial institutions that engage in the business of banking. At a minimum, such an institution must accept deposits, but the OCC intends that companies holding the special purpose charters might not accept deposits, meaning they will not be engaged in the business of banking, CSBS charges (Conference of State Bank Supervisors v. OCC ).
According to CSBS President and CEO John W. Ryan, state authorities already supervise tens of thousands of bank and nonbank financial services companies, including more than 75 percent of U.S. banks. This has created "a robust platform for innovation." The OCC’s plan will preempt state consumer protection laws, he added.
CSBS objections. The complaint alleges that the OCC claims the authority to create charters for a broad variety of nonbank financial services providers, regardless of whether they might be thought of as fintech companies. This exceeds the agency’s authority under the National Bank Act.
CSBS complains that the OCC has decided to act simply by publishing a white paper and then asking for public comments on a supplement to its Licensing Manual. The agency should have proposed regulations. In fact, while the white paper sought comments on how the OCC should issue nonbank charters, it did not seek comments on whether the agency had the authority to issue nonbank charters.
The complaint alleges that the OCC intends, as part of the chartering process, to negotiate a secret agreement with each company about which federal banking laws will be applied to it. Also, by virtue of their federal special purpose charters, the companies will be exempt from state banking laws and regulations. This will create significant preemption issues.
OCC chartering authority. According to the CSBS complaint, the OCC has the authority to issue charters to companies to engage in the business of banking and to issue limited special purpose charters. While the NBA does not explicitly define what constitutes the business of banking, law and practice make clear that it must include taking deposits, CSBS asserts.
Previous OCC efforts to issue charters to companies that do not take deposits have been rejected by the courts, according to the complaint. There are three exceptions—Congress has explicitly authorized the agency to charter trust banks, banker’s banks, and credit card banks. The special purpose nonbanks contemplated by the OCC would not fit into any of those categories. Congress has rejected efforts to create other special purpose charters, CSBS notes.
Comptroller of the Currency Thomas J. Curry has said the OCC will issue special purpose charters to companies that engage in at least one of three activities—taking deposits, handling funds transfers such as paying checks, or making loans. While an OCC regulation might permit that broader definition of the business of banking (12 CFR 5.20(e)), the law does not, CSBS argues. In fact, the OCC has pointed only to that regulation, and not to any statute, as its authority.
Moreover, the OCC appears to contemplate allowing special purpose nonbanks to engage in activities that have never been determined to be part of or incidental to banking.
Specific claims for relief. CSBS wants a declaratory judgment preventing the issuance of nonbank special purpose charters for several reasons:
  1.  The OCC does not have the statutory authority to issue special purpose charters to nonbanks.
  2. To the extent that 12 CFR 5.20(e) defines the business of banking in a manner that does not require deposit-taking, its adoption exceeded the OCC’s authority.
  3. To the extent that 12 CFR 5.20(e) defines the business of banking in a manner that does not require deposit-taking, its adoption exceeded the OCC’s authority.
  4. The OCC has not considered the effects of its actions on state regulatory powers, has not carried out a cost-benefit analysis, and has not provided a reasoned explanation, making its actions arbitrary and capricious.
  5. Since Congress has not authorized the OCC to preempt state law in this area, issuing special purpose charters to nonbanks would violate the states’ Tenth Amendment right to regulate the companies.  
The case is No. 1:17-cv-00763.

For more information about the OCC and fintech charters, subscribe to the Banking and Finance Law Daily.

Thursday, April 20, 2017

CFPB moves to ease HMDA reporting

By Andrew A. Turner, J.D.
The Consumer Financial Protection Bureau is proposing changes to Reg. C—Home Mortgage Disclosure (12 CFR Part 1003) that are intended to ease lenders’ compliance with its 2015 HMDA rule amendments. According to the bureau, it intends to establish transition rules that will excuse reporting of two data points for loans that were purchased before the 2015 rules took effect. The proposal would:
  • clarify key terms, such as “temporary financing” and “automated underwriting system;
  • create an exemption for some New York-based transactions; and
  • provide a geocoding tool lenders could rely on to determine the census tract of property that secures a loan.
“The Home Mortgage Disclosure Act shines a much-needed spotlight on the mortgage market, which is the largest consumer financial market in the world,” said CFPB Director Richard Cordray. “Today’s proposal reflects the Bureau’s ongoing and substantive engagement with stakeholders in the marketplace, and will help industry meet its new reporting obligations.”
Monitoring mortgages. The HMDA requires many lenders to report information about the home loans in which they receive applications or that they originate or purchase. The regulators use the information to monitor whether financial institutions are serving the housing needs of their communities, assist in distributing public-sector investment, and to identify possible discriminatory lending patterns.
Following the passage of the Dodd-Frank Act, the CFPB updated the HMDA regulation to improve the quality and type of data reported by financial institutions. These amended requirements take effect in January 2018, although public outreach by the CFPB demonstrated that the financial industry would benefit from further clarification. 

For more information about mortgage loan reporting, subscribe to the Banking and Finance Law Daily.

Wednesday, April 19, 2017

OCC fintech charter proposal gets industry pushback

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

The Office of the Comptroller of the Currency received several negative comment letters on the proposed supplement to its Licensing Manual addressing the granting of special purpose national bank charters to financial technology companies. The proposed supplement, which follows the OCC’s publication of guiding principles and a discussion paper, details how a fintech company’s compliance with safety and soundness and fairness standards will be determined.
Chartering authority doubted. In its letter representing a number of consumer, civil rights, small business, and community groups, the Center for Responsible Lending argued that "the OCC does not have the legal authority to charter nondepositories." The letter also stated that a national bank charter for non-depository fintech institutions would harm consumers through the preemption of strong state laws. The signors expressed concern that, in its approval process, the OCC "has completely failed to address critical consumer and small business protection requirements." The letter adds that the chartering process, as it now exists, "seems more designed to pick winners and losers and grant special privileges to established players in the industry than to facilitate innovation."
Consumer protections needed. Although the Mercatus Center at George Mason University believes that the OCC’s current proposal "shows some improvement over its previous statements, it remains overly focused on the survival of the entity instead of the protection of customers." According to Brian R. Knight, Senior Research Fellow at the Mercatus Center, the proposal imposes requirements and conditions on special purpose national banks (SPNBs) "that many will find impossible to meet—without a sufficient countervailing benefit."
Knight recommends that the OCC: reorient charter requirements away from insisting that SPNBs demonstrate survivability and toward ensuring that they can fail in an orderly manner that protects their customers; and clarify the requirements for SPNBs to obtain and maintain a charter consistent with the rights and responsibilities of national banks under relevant law.
More study required. Finally, the Consumer Bankers Association contends that the OCC "has not provided a clear rationale or justification for offering a national bank charter to fintech companies, and the standards and conditions for granting these charters have yet to be fully developed." It urges the OCC to conduct an in-depth study of the fintech sector. After such study, if the OCC still concludes that the public would benefit from a fintech charter, the CBA says it will ask the agency to issue a formal charter proposal for public notice and comment.
For more information about the regulation of financial technology companies, subscribe to the Banking and Finance Law Daily.

Tuesday, April 18, 2017

Safe harbor protected debt collectors that demanded prejudgment interest

By Richard Roth, J.D.

Debt collectors that followed a procedure offered by Wisconsin state law to obtain a review of their practices could demand that consumers pay interest on debts without a court judgment, according to the U.S. Court of Appeals for the Seventh Circuit. The debt collectors adequately stated the amount of the debt, as required by the Fair Debt Collection Practices Act, by stating a principal amount and interest rate (Aker v. Americollect, Inc., April 13, 2017).

The court’s opinion stated the facts simply, saying that the consumers had failed to pay for medical services, and the debt collectors hired by the service providers demanded interest at a 5-percent rate. The consumers claimed that Wisconsin law allows interest only if a contract permitted interest or a judgment has been entered by a court. Since neither was the case, the interest demand was illegal.

The debt collectors offered a different interpretation of the state law. They asserted that the 5-percent interest rate is automatic under state law and that a judgment “just memorializes what law requires.” The appellate court, however, preferred to base its decision on the companies’ second argument.

Safe harbor. Wisconsin law allows financial service providers to request approval of their practices from the state’s Department of Financial Institutions. If the department gives its express approval, or simply fails to disapprove within 60 days, the company can implement its desired practices and be deemed to be in compliance with relevant state laws.

The debt collectors had followed this procedure, submitting all of the required information to the department and receiving no objection to their intent to demand interest. That meant that they could demand the 5 percent interest and be deemed to have complied with state law.

No preemption. The FDCPA did not preempt Wisconsin’s law, the court explained, because state law determines when interest can be charged on a debt owed under state law. The obligation to pay for medical services arose under Wisconsin contract law, so Wisconsin law specified whether interest was due. Under the safe harbor, the debt collectors were deemed to have complied with the state’s law.

Another theory? The opinion explicitly analyzed only whether the debt collectors’ dunning letters properly stated the amount of the debt as required by 15 U.S.C. §1692g(a). The court’s analysis seems to have been more appropriate to whether the interest demand violated the 15 U.S.C. §1692f(1) ban on attempting to collect interest that was not permitted by law or contract. That section was not mentioned, although the court observed in passing that the safe harbor meant the debt collectors had not misrepresented the amount of the debt in violation of 15 U.S.C. §1692e.

For more information about fair debt collections, subscribe to the Banking and Finance Law Daily.

Monday, April 17, 2017

Hensarling: Financial CHOICE Act protects Americans against CFPB ‘defective design’

By Katalina M. Bianco, J.D.

House Financial Services Chair Jeb Hensarling (R-Texas), joined by Rep. Roger Williams (R-Texas), stated in an op-ed that the House Financial CHOICE Act is the way to protect Americans from “the most powerful and least accountable Washington bureaucracy in history”—the Consumer Financial Protection Bureau. The post comes on the heels of reports that an updated version of the Financial CHOICE Act soon will be unveiled.

Hensarling and Williams note that the CFPB’s “bizarre, unique and defective design” is the reason behind the ruling by a panel of judges that the bureau is unconstitutionally structured. The Financial CHOICE Act would change the bureau “from an unconstitutional agency of unelected bureaucrats into a constitutional and accountable civil enforcement agency that enforces consumer protection laws written by Congress” and “truly make the CFPB the ‘cop on the beat’ its supporters claim they want.”

Cordray. The legislators also targeted CFPB Director Richard Cordray, charging that the director “recklessly ignores the due process protections that have been deeply rooted in our American legal system for centuries.” Hensarling and Williams noted that although the Dodd-Frank Act grants Cordray “incredibly broad powers to regulate consumer credit products,” the CFPB chief still chooses to “ignore the law and the intent of Congress.”

Hensarling and Williams cited the CFPB’s UDAAP authority as another example of the agency’s “violation of due process,” because the “largely undefined” UDAAP leaves “plenty of wiggle room for the director to decide what the law says and means.”

Waters rebuts claims.
Representative Maxine Waters (D-Calif), Ranking Member of the Financial Services Committee, fired back, stating, “The so-called Financial Choice Act is a piece of legislation that will essentially kill the most important aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to prevent another financial crisis.” The lawmaker said that the Republicans and President Donald Trump are prioritizing Wall Street over hard-working Americans and putting the nation’s economic security at risk.

Waters took aim at the new version of the legislation, calling it the “Wrong Choice Act” and claiming the measure:
  • “bows down shamefully to Wall Street’s worse impulses”; 
  • would “completely gut and functionally terminate the “highly successful” CFPB; and 
  • encourages “a race to the bottom of Wall Street by removing financial stability safeguards.” 
The measure also would provide a two-year “escape hatch for Trump-appointed regulators to administratively roll back regulations before making it easier for industry to litigate and block any future effort by regulators to restore or strengthen consumer and investor protections,” Waters added. 

AFR on revised bill. The Americans for Financial Reform expressed its opposition to the revision of the Financial CHOICE Act, stating that the new version would:
  • make a “disastrous bill” even worse; 
  • eliminate the CFPB’s ability to stop abuse and deception; and 
  • render regulators weaker than before the financial crisis. 
NCRC statement. The National Community Reinvestment Coalition released a statement in response to news of the revised legislation. “If made law, the Financial CHOICE Act would pull the rug out from under our system of protecting consumers from abuse by financial institutions.” The NCRC added, “Backers of this bill have failed to learn their lessons from the Great Recession.”

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

Thursday, April 13, 2017

CFPB back in court on PHH, Sprint

By Katalina M. Bianco

The case of PHH v. CFPB continued this week when PHH Corporation asked the U.S. Court of Appeals for the District of Columbia Circuit to reverse a $109 million Consumer Financial Protection Bureau administrative disgorgement order without remanding the appeal for further action by the bureau. According to the company and its affiliates, the appellate court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and the only remedy is the complete invalidation of the bureau. The companies’ reply brief also argues that the CFPB has offered no real support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.

Constitutionality arguments. PHH Corp. focuses much of its reply brief on arguments that the CFPB’s single-director, removal-for-cause structure is an unconstitutional intrusion on the president’s powers by Congress. If the CFPB is constitutional, there is no logical curb on Congress’s ability to create independent agencies, the brief asserts. The bureau’s broad powers and ability to fund itself by drawing on the Federal Reserve Board’s assessments exacerbate the problem.

The brief paints a picture of the bureau as having an essentially unrestrained ability to act as the director chooses.

Severing the removal-for-cause provision from the remainder of the Dodd-Frank Act will not solve the problem, the brief claims. Congress intended to create what amounts to a wholly unconstitutional agency, and that agency must be wholly restructured.

PHH Corp. also argues that the enforcement action cannot be remanded to an unconstitutional agency. The appellate court must decide the constitutional issue. The brief notes as well that all of the parties agree the question should be decided.

RESPA arguments. The three-judge panel unanimously rejected the bureau’s new interpretation of RESPA and its claim not to be restricted by a statute of limitations, and it was right to do so, the reply brief contends. The use of captive reinsurance companies did not amount to a prohibited kickback because the companies actually rendered a service in exchange for reasonable payments.

Applying a reinterpretation of the law to completed conduct that was deemed legal when it occurred offends fundamental fair notice principles, the PHH Corp. brief continues. The entire industry relied on the Department of Housing and Urban Development’s prior regulatory interpretation. The bureau can change an interpretation, or even decline to offer an interpretation, the brief concedes, but it cannot punish a company for relying on guidance it actually has issued.

Sprint. Noting that "the siren song of $15.14 million in unexpended funds lured some new sailors into the shoals of this litigation," a federal trial judge has ordered the CFPB and Justice Department to supply their respective positions regarding a proposed modification of a 2015 consent order between the CFPB and Sprint Corporation.

The 2015 consent order was intended to settle a lawsuit brought by the bureau against Sprint, in U.S. District Court for the Southern District of New York, alleging that Sprint knowingly allowed unauthorized third-party charges to be billed to its wireless telephone customers between 2004 and 2013.

The court’s latest Memorandum and Order was the result of a Jan. 3, 2017, "Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order" filed by the Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont. The state AGs sought to intervene in the case to ensure that the approximately $14 million of Sprint’s remaining, unused "consumer redress funds" are used for "consumer protection purposes." 

It should be noted that during 2015, Sprint entered into separate multi-million dollar settlements, totaling $18 million, with the Federal Communications Commission and with all 50 states and the District of Columbia to resolve charges stemming from its third-party billing practices.

The court ordered the CFPB and DOJ to provide their positions on the proposed modification of the consent order since that modification would "alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury." The court added that the proposed modification "may raise an issue implicating the Miscellaneous Receipts Act, which provides that Government officials ‘receiving money for the Government from any source shall deposit that money with the Treasury.’"

To comply with the court’s order, the CFPB and DOJ must file their respective memoranda by May 10, 2017. The state AGs and Sprint may file responsive memoranda by May 24, 2017. As part of its memorandum, the CFPB also is requested to "advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application."

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

Tuesday, April 11, 2017

State attorneys general urge Congress to preserve CFPB’s ‘prepaid accounts rule’

By Thomas G. Wolfe, J.D.

Attorneys general from 17 states and the District of Columbia have submitted a letter to congressional leaders, urging them to oppose House and Senate resolutions that would nullify the Consumer Financial Protection Bureau’s “prepaid accounts rule.” In their April 5, 2017, letter, the state attorneys general maintain that the legislative resolutions (S.J. Res. 19, H.J. Res. 62, and H.J. Res. 73) would “eradicate important protections that have been proposed for consumers who use prepaid cards … to receive wages, make purchases, or pay their bills.”

In October 2016, the CFPB adopted its final prepaid accounts rule, which amends Regulation E (Electronic Fund Transfers) and Regulation Z (Truth in Lending), to provide users of prepaid accounts with stronger consumer protections similar to those associated with checking accounts and credit card accounts (see Banking and Finance Law Daily, Oct. 5, 2016). Recently, the CFPB proposed an extension of the rule’s effective date to April, 1, 2018, to allow more time for industry members to implement technological system changes to comply with the final rule (see Banking and Finance Law Daily, March 10, 2017).

Meanwhile, those introducing the congressional resolutions (S.J. Res. 19, H.J. Res. 62, and H.J. Res. 73), disapproving of the CFPB’s prepaid accounts rule, have invoked the Congressional Review Act as the primary source of empowerment for undoing the rule (see Banking and Finance Law Daily, Feb. 16, 2017). Although the state attorneys general (AGs) characterize these congressional resolutions as a “misplaced effort,” the AGs acknowledge that the Congressional Review Act “gives Congress, with the President’s signature, a window to veto a rule from going into effect.”

AGs’ letter. In their letter, the AGs for the District of Columbia, California, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Mississippi, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington, along with the Executive Director of the Hawaii Office of Consumer Protection, express their support for the CFPB's prepaid accounts rule. They also note that prepaid cards are often used by “vulnerable consumers” who have limited or no access to a traditional bank account.

Moreover, the AGs’ letter underscores that the consumer protections provided by the CFPB’s rule are important because, among other things, “consumers frequently report concerns about hidden and abusive fees as well as fraudulent transactions that unfairly deplete the funds loaded onto prepaid cards.” Urging the congressional leaders to “oppose S.J. Res. 19, H.J. Res. 62, and H.J. Res. 73,” the AGs assert that the rule’s “common-sense protections” not only will combat abuses, the protections also are “increasingly important as the use of these cards expands in the marketplace.”

AGs’ remarks. Accentuating the point that the CFPB’s prepaid accounts rule will provide needed consumer protections, California Attorney General Xavier Becerra stated that prepaid cards typically “come with high and poorly disclosed fees and other predatory terms.” Likewise, Illinois Attorney General Lisa Madigan commented, “Federal protections on prepaid cards are critical to help consumers avoid fraud, hidden fees, and unauthorized charges.”

Stating that Congress should let the “CFPB’s common-sense final rule stand,” New York Attorney General Eric Schneiderman remarked, “No consumer should be charged fees just to receive their paycheck.” Similarly, Rhode Island Attorney General Peter Kilmartin cautioned Congress against unraveling the consumer protections afforded by the CFPB’s rule. Kilmartin stated that “pre-paid debit cards are the preferred method of currency for scam artists and thieves.”

For more information about the actions of state attorneys general affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

Thursday, April 6, 2017

Fed’s Tarullo gives his final thoughts on post-crisis regulation

By Colleen M. Svelnis, J.D.

In his final official speech, departing Federal Reserve Board member Daniel K. Tarullo offered a broad perspective on regulatory reform enacted by the Dodd-Frank Act in 2010, while identifying areas where “the case for change has become fairly strong.” 
Describing how financial regulation changed after the financial crisis with capital requirements put in place by the Fed, including the stress testing program, Tarullo concentrated on capital regulation because it is the single most important element of prudential financial regulation. “Eight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system,” Tarullo said, especially for the most systemically important banks.
Tarullo discussed the Fed’s response to the worst recession since the Great Depression, which he stated was felt by the following three parts:
  • the sheer magnitude of the impact on the economy;
  • the dramatic freezing up of many parts of the financial market; and
  • the rapid deterioration of financial firms.
Too-big-to-fail. Tarullo also discussed the too-big-to-fail “problem” saying that Congress and financial regulators developed responses to the “woefully inadequate capital levels of prudentially regulated firms.” The most important element of regulatory strengthening, according to Tarullo, was to increase the amount of capital held by banks. “The quick action in assessing the firms, recapitalizing them where needed, and sharing the results of the stress tests with the public stands as one of the turning points in the crisis,” stated Tarullo.
Dodd-Frank Act. A pivotal choice of the Dodd-Frank Act was to make prudential regulation of the practices and activities of large banking organizations the presumptive approach to taming too-big-to-fail problems, stated Tarullo. According to Tarullo, a law like the Dodd-Frank Act would normally “have been followed some months later by another law denominated as containing technical corrections, but also usually containing some substantive changes deemed warranted by analysis and experience. But partisan divisions prevented this from happening.” He acknowledged that there are “clearly some changes that can be made without endangering financial stability.” Among these, Tarullo pointed to bank size thresholds, and the burdensome effect on the compliance capabilities of community banks subject to the Dodd-Frank Act rules.
Volcker Rule. Tarullo expressed concern that the Volcker Rule is too complicated, with problems in the statute and the regulatory approach. He saw a statutory problem involved in having five different agencies participating in joint or parallel rulemaking. He also stated that “the approach taken in the regulation in pursuit of consistency was one that essentially contemplated an inquiry into the intent of the bankers making trades.” Tarullo said the intention was that, “as the application of the rule and understanding of the metrics resulting from it evolved, it would become easier to use objective data to infer subjective intent. This hasn’t happened, though.”
An additional problem in his view, also in the statute, is that the Volcker rule applies to a much broader group of banks than is necessary to achieve its purpose. One regulatory approach to lessen the burden, he said, would be to exempt all banks with less than $10 billion in assets and other banks that report less than some nominal amount of trading assets.
Don’t publish the model. Tarullo stated that it would be “unwise” to give the stress testing supervisory model to the banks. He discussed how, in 1992, the details of a stress test model for revised capital standards for Fannie Mae and Freddie Mac were made public and any changes went through the standard notice and comment process. According to Tarullo, this is an example of what appeared to be a reasonable transparency measure in publishing the models that resulted in less protection for the financial system. 

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Wednesday, April 5, 2017

Digital currency unlikely to ‘drive out’ dollars, says Philadelphia Fed’s Harker

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

Unless the government issues digital currency, it will not likely "drive out" currency issued by the central bank of a credible and stable government "any time soon," according to Federal Reserve Bank of Philadelphia President Patrick Harker in prepared remarks on April 3, 2017. At the University of Pennsylvania School of Engineering and Applied Science, Harker also touched on interest rate increases by the Fed, and said, "I view three rate hikes as appropriate in 2017, assuming things stay on track." He added, "I continue to believe they should be gradual, both in pace and increments."
In his address—Fintech: Revolution or Evolution?—Harker said the question regarding digital currency is whether there will ever be one that is stable enough to become as widely used as a government one. Privately issued currencies can lead to unstable money supply and depreciation of the currency, he said, because there’s no fundamental guarantee of its value in the same way that there is with currency issued by a central bank. Harker noted that some governments are exploring the possibility of producing their own digital currencies. However, he mentioned that several hurdles remain, including technical challenges, the risk of cyber attacks, the potential for criminal activity such as money laundering, and threats to privacy.
Even if fintech is "wildly successful," Harker said, "Banks aren’t going anywhere." Comparing bankers to real estate agents, who survived the advent of e-commerce better than travel agents, Harker stressed that, "no matter what happens in the world of fintech, you still need a trusted broker of money. The roles may change and adapt, but someone needs to be the source of funds and credit."
Harker told the audience that "a large portion of government’s role in fintech will be regulation." Regulators must create oversight that allows for innovation while protecting markets and consumers, he said. "[I]t’s in fintech firms’ best interest to know what’s expected from them from the beginning."
Harker said fintech is not so much a revolution as a continuing evolution that the banking system has seen for the past 40 years, with, for example, securitization, credit scoring, and prepaid cards. "[I]t’s just a different delivery system."
For more information about financial technology in the financial industry, subscribe to the Banking and Finance Law Daily.

Monday, April 3, 2017

New white paper: Financial industry cybersecurity concerns grow, New York acts

With growing concerns over cyber risks, federal and state regulators have increased efforts to develop new cybersecurity standards. New York became the first state to require banks, insurance companies, and other regulated financial institutions to establish and maintain a cybersecurity program to protect consumers and the industry, with regulations taking effect March 1, 2017. Meanwhile federal banking regulators are considering cyber risk management standards and resilience standards for large financial institutions and their service providers. In addition, the Securities and Exchange Commission has adopted regulations to strengthen the technology infrastructure of the securities markets and the Commodity Futures Trading Commission has adopted related rules on system safeguards.

A new White Paper by J. Preston Carter, J.D., LL.M., Mark S. Nelson, J.D., and John M. Pachkowski, J.D., legal editors at Wolters Kluwer Legal & Regulatory U.S., discusses New York’s new requirements, explores issues under consideration by federal banking agencies, and explains requirements imposed by federal securities and commodities regulators.

For more information about cybersecurity requirements, subscribe to the Banking and Finance Law Daily.

Democratic leaders call for investigation into Trump’s business dealings

By Stephanie K. Mann, J.D.

Leading Democrats on the Senate Banking Committee, Foreign Relations Committee, and Judiciary Committee have called for a federal investigation into whether President Donald Trump’s business dealings in Azerbaijan may have violated anti-corruption and sanctions laws, and served as a channel for money-laundering and other illicit activities tied to Iran’s Islamic Revolutionary Guard Corps (IRGC), an elite military force that wields significant economic and political power in Iran.

Senators Sherrod Brown (D-Ohio), Ben Cardin (D-Md), and Dianne Feinstein (D-Calif) outlined their concerns in a letter to Treasury Secretary Steven Mnuchin, Attorney General Jeff Sessions, and FBI Director James Comey. According to the letter, the senators’ concerns stem from a recent New Yorker investigative article that details the Trump Organization’s relationship with Azerbaijan’s Mammadov family in their joint development of the Trump Tower in Baku. According to the article, the Mammadovs have ties to IRGC actors.

In their letter, the legislators raise questions about whether the Trump Organization may have violated the Foreign Corrupt Practices Act, and the possibility that one of the construction entities involved with the Azerbaijani developers of the project may have been a front organization for the IRGC. The New Yorker article claims that the IRGC may have been the source of payments made to the Trump Organization, which would be a direct violation of U.S. sanctions law, claims the letter.

“It appears that the lack of due diligence by the Trump Organization described in the article exposed President Trump and his organization to notoriously corrupt Azerbaijani oligarchs, and may also have exposed the Trump Organization to the IRGC,” the senators wrote. “Even though the Trump Organization appears to have withdrawn from the Baku Tower deal, serious questions remain unanswered about the Trump Organization’s potential criminal liability.”

Investigations warranted.
As a result of these allegations, the senators have asked the Justice Department to investigate whether:
  • the Trump Organization violated anti-corruption laws by failing to conduct due diligence into its relationship with the Mammadovs;
  • the company acted with “willful blindness” regarding its business partners' illicit activity in the Baku dealings; and 
  • the Trump Organization could face criminal prosecution. 
The legislators have also asked Treasury to examine the Trump Organization’s foreign partners in the Baku deal, its internal compliance controls, and whether the company may have violated sanctions laws by doing business with those linked to the IRGC.

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

Friday, March 31, 2017

CFPB: Credit card charge disputes still source of consumer complaints

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau’s latest monthly complaint snapshot features consumer credit card complaints. According to the snapshot, consumers continue to complain most about difficulties disputing charges on their credit cards. The March 2017 report (Vol. 21) also highlights trends seen in complaints coming from Massachusetts and the Boston metro area.
"Credit cards are a vital financial tool used daily by more than half of all adults in this country," said CFPB Director Richard Cordray. "Consumers deserve clear guidance and need to be able to resolve problems that arise with their cards."
Spotlight on credit cards. The CFPB began accepting credit card complaints from consumers when the bureau opened its doors in July 2011. As of March 1, 2017, the CFPB had handled approximately 116,200 credit card complaints. According to the snapshot, consumers specifically complain about:
  • being billed for charges that were not initiated by them or other authorized users on their accounts;
  • issues with taking advantage of offered benefits after meeting requirements of bonus points programs, miles programs, cash back programs, and travel benefits programs; and
  • credit card accounts being opened fraudulently in their names even after an alert was placed on their credit files.
The companies with the most credit card-related complaints are Citibank, Capital One, and JPMorgan Chase, the bureau reported.
National overview. Some of the findings from national statistics published in this month’s snapshot report include the following:
For February 2017, debt collection was the most-complained-about financial product or service, followed by credit reporting, and mortgages.
  • Student loan complaints showed the greatest increase of any product or service in a year-to-year comparison examining the three-month time period of December to February;
  • Montana, Georgia, and Missouri experienced the greatest year-to-year complaint volume increases from December 2016 to February 2017 versus the same time period 12 months before.
Spotlight on Massachusetts. As of March 1, 2017, consumers in Massachusetts have submitted 20,600 of the 1,136,000 complaints the CFPB has handled. Of those complaints, 15,400 came from consumers in the Boston metro area. According to the snapshot:
  • Complaints related to debt collection accounted for 20 percent of all complaints submitted by consumers from Massachusetts, lower than the national rate of 27 percent.
  • Consumers in Massachusetts submitted complaints about mortgages at about the national average.
  • The most complained-about companies by Massachusetts consumers are Bank of America, Citibank, and Experian.
For more information about CFPB complaint snapshots, subscribe to the Banking and Finance Law Daily.

Thursday, March 30, 2017

Experian agrees to $3M penalty for deceptive credit score marketing practices

By Katalina M. Bianco, J.D.

Experian Holdings, Inc., one of the nation’s largest credit reporting agencies, has agreed to pay a $3 million civil penalty to settle allegations brought by the Consumer Financial Protection Bureau that Experian deceived consumers about the use of the credit scores they purchased. Experian represented that the "educational" credit scores it sold to consumers were used by lenders to make credit decisions when, in fact, lenders did not use the educational scores, according to the bureau's consent order. The CFPB also charged Experian with violating the Fair Credit Reporting Act by placing advertisements on web pages that consumers accessed when obtaining their free annual credit reports. Experian did not admit any wrongdoing.

Educational credit scores. According to the CFPB, several companies have developed "educational credit scores," which lenders rarely, if ever, use. Experian developed its own proprietary credit scoring model, referred to as the "PLUS Score," which it applied to information in consumer credit files to generate a credit score it sold directly to consumers.

The CFPB alleged that Experian marketed the PLUS Scores to consumers by representing that they were the same scores lenders use to make credit decisions. However, lenders did not use the PLUS scores, and in some instances, there were significant differences between the PLUS Scores and the various credit scores lenders actually use, presenting an inaccurate picture of how lenders view a consumer’s creditworthiness.

The consent order requires that Experian truthfully inform consumers about the nature of the scores it sells to consumers and implement a marketing compliance program.

"Experian deceived consumers over how the credit scores it marketed and sold were used by lenders," CFPB Director Richard Cordray said. "Consumers deserve and should expect honest and accurate information about their credit scores, which are central to their financial lives."

"Free" credit reports. The CFPB also claimed Experian violated the FCRA, which requires a credit reporting company to provide a free credit report once every 12 months. Until March 2014, consumers requesting their free annual report through Experian had to view Experian advertisements before they received their report. The FCRA prohibits these advertising tactics.

Cordray remarks. In prepared remarks before the National Community Reinvestment Coalition on March 29, Cordray noted that the CFPB is "pressing" banks, credit unions, and credit reporting agencies to make their reporting systems more accurate. Fair credit reporting appears to be on the bureau's 2017 agenda.

For more information about fair credit reporting and the CFPB, subscribe to the Banking and Finance Law Daily.

Tuesday, March 28, 2017

Indiana Supreme Court: No law firm exemption available under four consumer-protection laws

By Thomas G. Wolfe, J.D.

The Indiana Supreme Court recently addressed whether law firms are entitled to an exemption under four state consumer-protection laws, regardless of whether an attorney exemption is available. In rejecting arguments raised by two defendant law firms and their principal on appeal in Consumer Attorney Services, P.A. v. State of Indiana, the court determined that Indiana’s Credit Services Organizations Act, Mortgage Rescue Protection Fraud Act, Home Loan Practices Act, and Deceptive Consumer Sales Act, do not provide law firms with any express or implied exemption from liability. The Indiana high court's March 21, 2017, decision stemmed from a lawsuit by the State of Indiana against Consumer Attorney Services, P.A., The McCann Law Group, LLP, and Brenda McCann—individually and in her capacity as owner or officer of the two law firms. After Indiana homeowners registered complaints with the Indiana Attorney General's Office about the defendants’ treatment of the homeowners’ loan-modification matters or foreclosures, the Indiana Attorney General claimed that the law firms and McCann violated the four state consumer-protection laws.

According to the court’s opinion, Consumer Attorney Services, P.A. (CAS) is a Florida corporation “that purports to specialize in foreclosure- and mortgage-related legal defense work, requiring non-refundable retainers and monthly fees up front to be automatically deducted from bank accounts.” McCann was an attorney licensed in Florida “who acted as CAS’s manager.” CAS entered into various “Partnership,” “Associate,” and “Of Counsel” agreements with several Indiana attorneys to handle Indiana cases, and all of these agreements “were entered into before CAS registered as a foreign entity authorized to do business in Indiana.”

Investigation, complaint. After Indiana homeowners complained, the Indiana Attorney General investigated CAS’s practices. Among other things, the Indiana AG’s investigation revealed that the majority of pertinent Indiana homeowners did not have any personal contact with an Indiana-licensed attorney after the attorney’s retention, and the homeowners received “perfunctory” legal services. Moreover, the Indiana AG found no resident homeowners having obtained a successful loan modification.

Based on the investigation, the State of Indiana filed a lawsuit against CAS, McCann, and the McCann Law Group under the four state consumer-protection laws. Eventually, the defendants requested summary judgment in their favor, contending that they were all “statutorily exempted from liability” under the state laws. The Indiana Supreme Court disagreed.

CSOA, MRPFA. The defendants argued that they were exempt from the Indiana Credit Services Organizations Act (CSOA) because; (i) the statute excludes liability for any “person admitted to the practice of law in Indiana if the person is acting within the course and scope of the person’s practice as an attorney;” (ii) the statute defines a “person” as “an individual, a corporation, a partnership, a joint venture, or any other entity;” and (iii) Kansas precedent, addressing similar statutory language in the defendants’ favor, should be found persuasive.

In rejecting the defendants’ contentions, the court pointed out that, unlike the Kansas situation, the Indiana CSOA did not furnish the court with the same clear and convincing legislative history to resolve an ambiguity in the statutory language. Instead, the court emphasized that the CSOA should be interpreted “liberally,” given its broad consumer-protection purposes. Next, the court noted similar “exemption” language in the Indiana Mortgage Rescue Protection Fraud Act (MRPFA) but acknowledged its more limited scope: “an attorney licensed to practice law in Indiana who is representing a mortgagor.”

Against this backdrop, the court determined that the MRPFA “unambiguously exempts attorneys as individuals, not the law firms with which they are affiliated, because only an individual can be ‘licensed to practice law in Indiana’.” The court further determined that, “given the overlap in coverage between the MRPFA and the CSOA, we believe it would be odd indeed to read an expansive exemption into the CSOA which is unavailable under the MRPFA.”

In the court’s view, this interpretation of the CSOA and the MRPFA was also compatible with the judiciary's “disciplinary authority.” The court asserted, “We thus find it reasonable that our General Assembly would choose to exempt attorneys specifically (who are subject to far more extensive disciplinary action by this Court) while not exempting their firms.” Accentuating this point, the court clarified that “although a law firm may qualify as a ‘person’ with respect to other provisions of the CSOA, it does not qualify for an exemption under Indiana Code section 24-5-15-2(b)(6).”

HLPA, DCSA. Next, addressing Indiana’s Home Loan Practices Act (HLPA), and Deceptive Consumer Sales Act (DCSA), the court stressed that neither law “contains an express attorney exemption of any kind, but CAS still sought exemption, on the grounds that the underlying alleged violation of the HLPA and the DCSA falls within the scope of the MRPFA and the CSOA.” The court explained that since it did not find any available law firm exemption under the CSOA or the MRPFA, no law firm exemption could be extended to the ancillary claims under the HLPA and the DCSA.

McCann not exempt. Lastly, the court determined that because Brenda McCann “was never licensed as an attorney in the State of Indiana, she too cannot claim the exemptions contained in the CSOA or the MRPFA, nor can she extend them to the HLPA and the DCSA.”

For more information about judicial interpretations of attorney or law firm exemptions under state consumer-protection laws, subscribe to the Banking and Finance Law Daily.

Thursday, March 23, 2017

Civil penalty of $1.75 for HMDA violations is largest yet by CFPB

By Stephanie K. Mann, J.D.
The Consumer Financial Protection Bureau has ordered Nationstar Mortgage LLC to pay a $1.75 million civil penalty for violating the Home Mortgage Disclosure Act by consistently failing to report accurate data about mortgage transactions for 2012 through 2014. The enforcement action is the largest HMDA civil penalty imposed by the bureau to date, which stems from Nationstar’s market size, the substantial magnitude of its errors, and its history of previous violations, said the bureau’s press release
“Financial institutions that violate the law repeatedly and substantially are not making serious enough efforts to report accurate information,” said CFPB Director Richard Cordray. “Today we are sending a strong reminder that HMDA serves important purposes for many stakeholders in the mortgage market, and those required to report this information must make more careful efforts to follow the law.”
Compliance requirements. Nationstar, a nationwide nonbank mortgage lender headquartered in Coppell, Texas, is a wholly owned subsidiary of Nationstar Mortgage Holdings Inc. The Home Mortgage Disclosure Act of 1975 requires many mortgage lenders to collect and report data about their mortgage lending to appropriate federal agencies and make it available to the public. Federal regulators, enforcement agencies, community organizations, and state and local agencies can use the information to monitor whether financial institutions are serving housing needs in their communities. 
In its supervision process, the CFPB found that Nationstar’s HMDA compliance systems were flawed, and generated mortgage lending data with significant, preventable errors. Nationstar also failed to maintain detailed HMDA data collection and validation procedures, failed to implement adequate compliance procedures, and produced discrepancies by failing to consistently define data among its various lines of business. In the samples reviewed, the CFPB found error rates of 13 percent in 2012, 33 percent in 2013, and 21 percent in 2014.
Order. The CFPB’s order requires Nationstar to:
  • pay a $1.75 million penalty;
  • develop and implement an effective compliance management system; and
  • fix HMDA reporting inaccuracies.
Since the CFPB’s examination, Nationstar has been taking further steps to improve its HMDA compliance management system and increase the accuracy of its HMDA reporting, as detailed in its Form 10-K to the Securities and Exchange Commission. 
For more information about mortgage loan reporting, subscribe to the Banking and Finance Law Daily.

Tuesday, March 21, 2017

Repeal Durbin Amendment, says ABA

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

Calling the Durbin Amendment a "windfall for the nation’s largest merchants," the American Bankers Association, along with hundreds of banks and 49 state bankers associations, sent a letter to Congress urging its repeal. Section 1075 of the Dodd–Frank Act, known as the Durbin Amendment, requires the Federal Reserve Board to cap the debit card interchange fees that large banks charge.
The ABA’s letter states that, rather than resulting in lower prices for consumers at the register, as retail lobbyists promised, the Durbin Amendment has "shifted higher profits to big-box stores," and banks have restricted the availability of free checking accounts and free debit rewards. The letter adds that "retailers have pocketed this windfall at the precise time that their underinvestment in cybersecurity has permitted massive payment data breaches on their systems—costing consumers, banks of all sizes, and credit unions many hundreds of millions of dollars to remedy."
As the House Financial Services Committee considers how best to protect the interests of American consumers, the letter concludes, "we urge you to support efforts to repeal the Durbin Amendment."
For more information about effects of the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.

Has administration change created separation of powers trap for CFPB?

By Richard Roth

The Dodd-Frank Act provision allowing the Consumer Financial Protection Bureau’s director to be removed only for cause is unconstitutional, but the CFPB should not be eliminated, according to the Department of Justice. In an amicus curiae brief filed in PHH Corp. v. CFPB, Justice argues that the for-cause termination restriction violates the Constitution’s separation of powers principles but that severing the restriction from the rest of the Dodd-Frank Act, not the elimination of the bureau, is the proper remedy.

At the request of the CFPB, a three-judge panel decision in the case was vacated and an en banc hearing scheduled. In PHH Corp. v. CFPB, the panel majority decided that:
  1. The CFPB’s single-director structure is impermissible for an independent agency.
  2. The proper remedy for the violation is to sever the section permitting the CFPB director to be removed only for cause from the remainder of the Dodd-Frank Act, which would permit the President to remove the director at will.
  3. The CFPB misinterpreted RESPA when it tried to enforce against PHH Corp. a new interpretation of how the act applied to the use of captive reinsurers, resulting in a $109 million disgorgement order.
The Justice Department’s brief addresses only the first two issues.

Separation of powers. The brief frames the separation-of-powers dispute as whether the Supreme Court’s 1935 decision in Humprey’s Executor v. U.S., 295 U.S. 602, which upheld the Federal Trade Commission’s removal-for-cause structure, should be extended to the CFPB. It should not be extended, according to the Justice Department.

The core of the position is that the Constitution requires the President to “take Care that the Laws be faithfully executed.” As part of doing so, the President has the authority to appoint administrative officers to act under his direction. The President cannot ensure that the nation’s laws are faithfully executed if he does not have the ability to remove from office those persons who are failing to act according to his directions, the brief argues.

Humphrey’s Executor created an exception to the President’s removal power that applied to the five-member FTC. It is important to understand that the FTC is a multiple-member commission whose members are appointed on a staggered basis, the brief says. This arrangement creates an agency that has “long-term continuity and expertise” and that has some ability to avoid the appearance of partisanship. It also facilitates group decision-making.

The Constitution vests in the President the power to enforce the laws. However, “The principles animating the exception in Humphrey’s Executor do not apply when Congress carves off a portion of that quintessentially executive power and vests it in a single executive officer below the President who is not subject to the President’s control,” the Justice Department asserts.

Practical concerns. Extending the Humphrey’s Executor exception to a single-director bureau could create an exception that “swallows the rule” that the President can remove officers who are not executing the laws to his satisfaction, the brief warns. Moreover, the CFPB’s single-director structure actually makes such a conflict more likely.

First, when an agency’s power is vested in a single individual, that individual becomes more able to act independently rather than under the direction of the President. Second, when an agency’s head has a term longer than that of the President, such as the CFPB director’s five-year term, a President who has only a for-cause removal authority could not select a replacement.

As a result, the President would have neither the “front-end” appointment power nor the “back-end” removal power, the Justice Department says.

Severability. The brief supports the panel’s decision not to invalidate the entire CFPB, asking the full court instead to agree with severing the removal-for-cause provision from the remainder of the Dodd-Frank Act. This remedy would allow the bureau to remain fully functional. As noted in the panel decision, a severability clause was included in the act, and that clearly expressed Congress’s intent.

Related case. In a footnote, the Justice Department noted that its brief takes a position contrary to what Justice has previously asserted in another suit. In State National Bank of Big Spring v. Mnuchin, the Justice Department, representing the Treasury Department and the CFPB, defended the constitutionality of the CFPB’s structure. Based on its new position on the issue, Justice said it is working with the CFPB to allow the bureau’s own attorneys to take over the Big Spring litigation.

Possible future effect. Under the Dodd-Frank Act, the CFPB can rely on its own attorneys “in any action, suit, or proceeding to which the Bureau is a party” (12 U.S.C. §5563(b)). However, there is a potentially significant exception to that authority.

The CFPB’s ability to represent itself before the Supreme Court is restricted. Within 10 days of the entry of a judgment that could be appealed, the bureau must ask the Attorney General for permission to represent itself. The bureau can represent itself only if the AG either consents or fails to object within the following 60 days (12 U.S.C. §5563(e)).

It seems unlikely that the Justice Department would consent to allowing the CFPB to argue before the Supreme Court a legal position with which Justice disagrees. This could leave the bureau unable to attempt to vindicate its organization in the Supreme Court regardless of how the D.C. Circuit rules on the issue:
  • If the appellate court rules that the single-director structure is constitutional, PHH Corp. could request a Supreme Court review. The Justice Department then could deny the CFPB’s request to represent itself and concede the separation-of-powers issue before the Supreme Court. That would leave only the remedy at issue.
  • If the appellate court rules that the single-director structure violates separation-of-powers principles and that severance is the proper remedy, the Justice Department likely would not consent to allowing the bureau to appeal the issue to the Supreme Court. Instead, it would defend the decision, should PHH Corp. appeal. (However, such an appeal by PHH Corp. is unlikely, as the appellate court decision would free the company from the bureau’s $109 million disgorgement order, which would be a clear victory for the company.)
  • If the appellate court rules that the single-director structure violates separation-of-powers principles and that the Dodd-Frank Act’s creation of the bureau must be disregarded, the Justice Department again likely would not consent to allowing the bureau to appeal the issue to the Supreme Court. Instead, it would file the appeal and argue for severance as the proper remedy.
As a result, the best result for the CFPB might be for the appellate court to decide the case based only on PHH Corp.’s claim that the bureau’s RESPA interpretation was wrong. This would allow the appellate court to defer consideration of the separation of powers issue, at least until the likely appeal in Big Spring.

Preserving the ability to raise the issue before the Supreme Court was cited by a group of attorneys general from 17 states and the District of Columbia when they asked for permission to intervene in the en banc appeal. That request was denied.

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

Friday, March 17, 2017

The Community Financial Institution Exemption Act: An Analysis of Its Potential Impact

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

On February 28, 2017, Congressman Roger Williams (R-TX) introduced H.R. 1264, the Community Financial Institution Exemption Act. It was referred to the House Committee on Financial Services, one of the committees on which Congressman Williams serves. The bill would (i) define the term "community financial institution" as "an insured depository institution or credit union with less than $50,000,000,000 [i.e., $50 billion] in consolidated assets," and (ii) exempt those institutions "from all rules and regulations issued by the [Consumer Financial Protection] Bureau."

Under current law, the term "community financial institution" is defined as an insured institution that has less than $1 billion in total assets, based on average total assets for the preceding three years. [12 USC 1422(10)] That $1 billion figure is adjusted annually based on the movement of the Consumer Price Index for all urban consumers, and it currently stands at between $1.1 billion and $1.2 billion. The Community Financial Institution Exemption Act does not amend that definition.

The Federal Reserve Board uses the related term "community bank" to refer generally to banks owned by organizations with less than $10 billion in assets. The enactment into law of a new definition in the context of community banking -- one that directly conflicts with existing law and common usage -- has the potential to dilute the meaning of the affected term and thereby de-focus attention that is devoted to community banking issues.

As of December 2016, there were 5,083 banks in the United States. According to a January 10, 2017, post on the Forbes web site titled "Full List: Ranking America's 100 Largest Banks," only 20 U.S. banks have assets in excess of $50 billion. As of the end of the 3rd quarter of 2016 (the most recent data available from the NCUA), there are 5,844 credit unions in the United States. Only one of those credit unions (Navy FCU) has assets in excess of $50 billion. Based on that data, one could deduce that if the Community Financial Institution Exemption Act were to be enacted, only 21 financial institutions in the United States, out of more than 10,900 currently doing business, might be subject to rules and regulations issued by the CFPB.

Owing to the Fed's repeal of regulations regarding (i) truth in savings, (ii) consumer privacy, and (iii) unfair or deceptive acts or practices (12 CFR parts 230, 216, and 227), more than 10,900 insured institutions might be, at least temporarily, without authoritative regulatory guidance on those issues. Regulatory enforcement regarding those issues might undergo a corresponding lapse. And because the CFPB's and Fed's versions of several consumer compliance regulations have diverged from one another during the past six years, authoritative guidance and agency enforcement regarding (iv) truth in lending, (v) real estate settlement procedures, (vi) equal credit opportunity, and (vii) electronic fund transfers could be similarly affected.

The bill would allow the CFPB to revoke the exemption of a specific rule or regulation, as applied to a specific class of community financial institutions. But any revocation would be effective only if "the Bureau makes a detailed, written finding that such class of community financial institutions has engaged in a pattern or practice of activities that have been detrimental to the interests of consumers and are of a type that the specific rule or regulation is intended to address." It is difficult to imagine that specific classes of institutions would begin to engage in repeated violations of the laws and regulations alluded to in the previous paragraph -- i.e., violations that would satisfy the "pattern or practice" standard. It is, therefore, possible that those pillars of consumer compliance might not be re-established quickly or easily.

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

Thursday, March 16, 2017

CFPB proposes delay in prepaid rule effective date

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is proposing a six-month delay in the effective date of the final prepaid accounts rule. The current effective date is Oct. 1, 2017. The CFPB proposal would extend the date to April 1, 2018. Comments on the proposed rule are due by April 5, 2017.

The CFPB adopted the final prepaid accounts rule in October 2016. The new rule amends Reg. E (12 CFR Part 1005) and Reg. Z (12 CFR Part 1026) and the regulations’ official interpretations to give prepaid account consumers protections similar to those for checking account and credit card consumers. The bureau set an effective date of one year because the agency said the final rule provides "strong consumer protections." However, the CFPB issued the proposed rule to extend the date after learning that some industry participants are concerned about implementing certain provisions of the rule. The bureau stated that delaying the effective date for six months "will be sufficient" for industry members to comply with the rule.

Substantive changes? "At this time," the proposal does not make changes to any other part of the final prepaid accounts rule, according to the bureau. The CFPB said it will take into consideration public comments on difficulties implementing the rule. Should the bureau determine that substantive changes are "necessary and appropriate," it will issue a separate proposal and comment request.

Legislative reaction. Representative Scott Tipton (R-Colo) voiced his approval of the proposed extension, stating, "I am pleased to see that the CFPB has considered the concerns raised by consumers, industry, and members of Congress about its prepaid account rule and took action to delay the rule for six months." He remarked that the 12-month effective date "was unrealistic given the new disclosure and packaging requirements and operational changes necessary to comply with the rule." Delaying implementation of the rule balances the protection of consumers with the growth of prepaid card products, Tipton noted.

Senator David Perdue (R-Ga) stated that the CFPB should "scrap" the prepaid accounts rule. "From its initial stages, this rule was shortsighted and so sweeping that it would have stifled innovation in a growing marketplace millions of consumers rely on," he said. The legislator opposed the implementation of the prepaid accounts rule by introducing a resolution (S.J.Res. 19) in February that would nullify the rule.

For more information about the CFPB prepaid accounts rule, subscribe to the Banking and Finance Law Daily.

Tuesday, March 14, 2017

New York Fed VP: How lawyers can help reform financial services culture

By Thomas G. Wolfe, J.D.
Speaking at Yale Law School’s “Chirelstein Colloquium” in New Haven, Conn., Michael Held, Executive Vice President of the Federal Reserve Bank of New York, emphasized that an in-house lawyer “who is both a partner and a guardian—an insider and an outsider—can greatly benefit a financial services firm” by helping to improve the firm’s culture. In his March 8, 2017, remarks, Held provided examples of how lawyers might accomplish that goal through their “independence and insight” without compromising their legal role and without becoming “captive” to a financial services firm’s culture.
Culture. According to Held, while some individuals commit financial crimes because they are greedy, that does not explain the whole picture. From Held’s experience, “the reasons why bankers break the law are varied and complex. And, in many instances, misconduct is related to an organization’s culture.” For instance, Held said that “junior bankers typically don’t consult ‘the law’ for guidance on a day-to-day basis. They take their cues from their peers and immediate supervisors.”
Although Held observed that, given a financial firm’s culture, individuals may not always refer to written policies, consult with in-house counsel or the firm’s compliance department, he asserted that “there is no ‘culture excuse’ when people break the law.”
Lawyers’ role. Held noted that “a proliferation of technical rules prompts us to ask what we can do, not what we should do.” He pointed out that lawyers in financial firms are too often asked by clients, in effect, “How close to the legal line can I get?” Likewise, Held also expressed concern that, given this type of cultural mindset, “lawyers, intentionally or not, enable this kind of thinking. Lawyers are certainly not immune from cultural influences.”
Against this backdrop, Held offered ways in which lawyers might improve a financial services firm’s culture. Among other things, in Held’s view, lawyers should:
  • be “part of the conscience of the organization;”
  • ask questions about the organization to help resolve difficult ethical questions, particularly since the rules governing the legal profession “expressly permit advice on non-legal matters;”
  • identify and combat “troublesome silos of behavior” within the organization to help the firm’s management evaluate whether there is an isolated “rogue” unit or a “more systemic problem” present;
  • explore whether the way the business is organized and run poses a risk of “unacceptable conflicts of interest;”
  • determine whether principles and tasks are communicated clearly and whether problems are addressed early or belatedly;
  • assess whether the firm’s senior leaders set a proper example; and
  • inquire about how the firm treats employees who “escalate issues.” 
Commenting that culture is “contagious,” Held noted that, as a result of current privacy and risk concerns on the part of employers, a banker’s record of misconduct does not always travel with him or her from one financial firm to the next. Held discussed the possibility of a potential “database of banker misconduct,” which was initially introduced by New York Fed President Bill Dudley. Held touched upon the pros and cons of establishing this type of database.
For more viewpoints by regulators and by the financial services industry on improving the business culture, subscribe to the Banking and Finance Law Daily.

Thursday, March 9, 2017

Fed's Powell sees technology challenges for payments system

By Colleen M. Svelnis

Speaking about innovation, technology, and the payments system, Federal Reserve Board Governor Jerome H. Powell focused on three key areas where technological innovation is driving change: creating a real-time retail payments system; using distributed ledger technology (DLT) to develop new clearing and settlement services; and the issuance of digital currencies by central banks.

In his remarks at the Yale Law School Center for the Study of Corporate Law, Powell discussed the impact of new technology on the financial system and businesses. He warned that disruptive new technologies suggest that traditional financial service providers must innovate and adapt or be left behind.

Payments system. The Fed and other central banks have adopted broad public policy objectives to guide the development and oversight of the payments system. At the Fed, Powell states, they have identified efficiency and safety as the “most fundamental” objectives. The payments system must be innovative, while also addressing risks, supporting financial stability, and maintaining public confidence, according to Powell. He stated that “Safe payment systems are built from proven technology and operate reliably and with integrity.”

With regard to the development of real time retail payments, Powell stated that the Fed has been working with a wide range of stakeholders to improve the speed, efficiency, and safety of the U.S. payments system. Powell also discussed the work of the Faster Payments Task Force, which in 2017 will assess proposals covering innovative ways to deliver real-time payments against the task force criteria.

Distributed ledger technologies. Using blockchain technology—which employs a form of DLT—and an open architecture, Powell noted that Bitcoin allows for the transfer of value between participants connected to its ecosystem without reliance on banks or other trusted intermediaries.

Powell noted that some predict that DLT will eventually render parts of the banking and payments system obsolete, as the intermediation of funds through the banking system will become unnecessary. In contrast to Bitcoin’s open architecture, Powell stated that work by the financial industry has focused on the development of “permissioned” systems.
Issues include whether finality of settlement is to be determined by a central trusted party or by a majority of participants, and whether participants are able to view information on other parties’ transactions. Another issue, according to Powell, is the costs for upgrading and streamlining payment, clearing, settlement, and related functions with DLT. Technical issues including whether a particular version of DLT will work for the intended purpose are still being explored, stated Powell, and issues of reliability, scalability, and security remain. Powell also stated that governance and risk management is critical, as well as the legal issues surrounding and supporting DLT.

Digital currencies. Powell discussed the idea of a digital currency issued by a Central Bank. According to Powell, a digital currency issued by a central bank would be a global target for cyber attacks, cyber counterfeiting, and cyber theft, as well as a potential vehicle for global criminal activities, including money laundering. Central banks would have to balance trade-offs between strengthening security and enabling illegal activity. Privacy issues would also need to be considered, stated Powell. According to Powell, “private-sector products and systems already exist or are being developed that will fulfill demands that central-bank-issued digital currencies might otherwise seek to meet.”

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Wednesday, March 8, 2017

Senate Democrats urge OCC to review Santander Bank discriminatory lending charges

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

Senate Democrats are urging the Office of the Comptroller of the Currency to review charges of discriminatory lending by Santander Bank that surfaced in a Committee for Better Banks report. The OCC recently downgraded Santander’s Community Reinvestment Act rating for failure to meet the law’s requirements in serving low-and-moderate-income neighborhoods based on review of performance records from 2011 to 2013. Senator Bob Menendez (D-NJ) and several other Democratic senators have written to Comptroller Thomas J. Curry urging him to review the report’s findings when the agency examines the bank’s most recent record to determine compliance with the Community Reinvestment Act.
The senators said that while they were "pleased that the OCC’s examination considered recent enforcement actions against the bank for illegal overdraft fees and unlawful repossessions of cars from military servicemembers, it is imperative that the OCC also take into account findings which suggest discriminatory lending practices." The letter said the report, which was "based on an analysis of Santander’s mortgage lending in 15 metropolitan areas in 2014 and 2015," includes "alarming findings of disparities in loan origination, denial, and application rates for minority and low-income borrowers."
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Tuesday, March 7, 2017

Return receipt meets RESPA information request acknowledgment requirement

By Richard Roth

The U.S. Court of Appeals for the Eleventh Circuit has set a very low bar for what mortgage loan servicers must do to satisfy Real Estate Settlement Procedures Act regulations requiring mortgage loan servicers to acknowledge having received a homeower’s request for information. While a servicer must provide a written acknowledgment of receipt within five business days, the requirement can be met simply by signing the homeowner’s certified mail return receipt, the court said in a not-for-publication opinion (Meeks v. Ocwen Loan Servicing LLC).

According to the court, the homeowner had his attorney send Ocwen Loan Servicing a written request for information about his loan, and the attorney chose to send the letter using certified mail. Ocwen received the letter, and an employee signed the receipt, which was returned to the attorney in due course. Seven months later, the homeowner sued Ocwen, claiming in part that it had not provided a timely acknowledgment of having received his letter.

Reg. X requirements. Reg. X—Real Estate Settlement Procedures requires a mortgage loan servicer to acknowledge receiving a qualified written request for information, in writing, within five business days (12 CFR 1024.36(c)). However, neither the regulation nor the staff comments offer any details about the form or contents of that acknowledgment.

The court said there is no precedent as to whether a certified mail receipt can constitute a written acknowledgment. However, the court said—without any analysis—that under the facts presented, the return receipt was sufficient.

Applicability. Reg. X is not the only consumer protection regulation that imposes acknowledgment duties. Reg. Z—Truth in Lending requires a creditor to provide a written acknowledgment of a consumer’s billing error claim within 30 days (12 CFR 1026.13(c)). Like Reg. X, Reg. Z gives no details about what providing a written acknowledgment entails.

The Eleventh Circuit opinion gives no hint about whether a certified mail return receipt alone would be adequate in circumstances other than Reg. X.

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