FDIC closes year with series of regulatory reform adoptions and proposals

By Andrew A. Turner, J.D.

The Federal Deposit Insurance Corporation closed the year by issuing a variety of rulemaking adoptions and proposals, some in concert with other regulators. Highlights are listed below.

Brokered deposits. The FDIC took two actions related to brokered deposits. It amended its regulations on brokered deposits and interest rate caps to except a capped amount of reciprocal deposits from being treated as brokered deposits for certain banks. The agency also, through an Advance Notice of Proposed Rulemaking, asked for information to be used in a broader review of brokered deposit and interest rate cap rules.

Current expected credit losses implementation. The Office of the Comptroller of the Currency, Federal Reserve Board, and FDIC have revised regulatory capital rules to address changes to credit loss accounting under a new accounting standard, including banking organizations’ implementation of the current expected credit losses methodology (CECL). Banking organizations have been given the option to phase in over a three-year period the day-one adverse effects of CECL on the banking organization’s regulatory capital ratios.

The final rule also revises the agencies' stress testing rules and regulatory disclosure requirements to reflect CECL. Conforming changes were made to other regulations that reference credit loss allowances. The final rule is effective on April 1, 2019, but a banking organization may choose to adopt the final rule starting as early as first quarter 2019.

Volcker Rule restriction easing. The federal banking, securities, and commodities regulatory agencies are proposing changes to their Volcker Rule regulations that will exclude small banks with limited trading activities and permit some investment advisors to share a name with a hedge or private equity fund they advise.

Stress test requirements. The FDIC and OCC are proposing to amend their stress test regulations to: increase the asset threshold to $250 billion, up from the current $10 billion; reduce the requirement for annual tests; and reduce the necessary scenarios to two, down from the current three.

Deposit insurance assessment system. The FDIC issued a proposal that would amend its deposit insurance assessment regulations to apply the community bank leverage ratio (CBLR) framework to the deposit insurance assessment system. The primary objective is to incorporate the alternative measure of capital adequacy established under the CBLR framework into the current risk-based deposit insurance assessment system in a manner that: (1) maximizes regulatory relief for small institutions that use the CBLR framework; and (2) minimizes increases in deposit insurance assessments that may arise without a change in risk.

To assist banks in understanding the impact, the FDIC plans to provide on its website a spreadsheet calculator that estimates deposit insurance assessment amounts under the proposal.

Management interlocks. The federal banking regulatory agencies are proposing to change their management interlock rules to ease the burden on community banks. Currently, an individual who has a management position or is a director at an institution with more than $2.5 billion in assets cannot hold a comparable position at an unaffiliated institution with more than $1.5 billion in assets. The proposal would increase both thresholds to $10 billion.

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Debt collector’s ‘validation notice’ placement in letter did not violate FDCPA

By Thomas G. Wolfe, J.D.

In a December 2018 opinion, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit ruled that a debt collector’s placement of its “validation notice” in a collection letter to a consumer did not overshadow the consumer’s rights under the federal Fair Debt Collection Practices Act (FDCPA), nor did the letter misrepresent the importance of the validation notice required by the FDCPA. The consumer had claimed that the collection letter to her violated the FDCPA because the letter stated that “additional important information” was on the back of the first sheet of the letter, but the consumer-rights validation notice appeared on the top of the second sheet of the letter. In affirming the dismissal of the consumer’s proposed class-action lawsuit (O’Boyle v. Real Time Resolutions, Inc.), the Seventh Circuit panel determined that, from the standpoint of an “unsophisticated consumer,” the collector did not provide the validation notice in a manner that could be construed as false, deceptive, misleading, or confusing in violation of the FDCPA.

Further, the federal appellate court upheld the lower court’s denial of the consumer’s request to amend her complaint, determining that the consumer’s proposed amendments would not transform her original claim “into the realm of plausibility” and would cause “undue delay and unfair prejudice” to the debt collector.

Collection letter. In April 2017, Real Time Resolutions, Inc. (RTR), a debt collector, sent its first letter to the consumer to collect an alleged credit-card debt from her. In the middle of the front sheet of the first page, the letter communicated that this “is an attempt to collect a debt, and any information obtained will be used for that purpose.” Farther down on the front sheet, a box directed the consumer to view the reverse side of the first sheet, stating “Please see the back of this page for additional important information regarding this account.”

The back side of the first sheet of the letter provided information about particular consumer-rights notices in 10 states, including the consumer’s home state of Wisconsin, and prominently indicated that the applicable listing “is not a complete list of rights consumers may have under state and federal law.” Then, on the top front of the second sheet (page 2) of the collection letter, the FDCPA-required validation notice appeared: “Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days of receiving this notice, this office will obtain verification of the debt or obtain a copy of a judgment if applicable and mail you a copy of such verification or judgment. If you make a written request to this office within 30 days after receiving this notice, this office will provide you with the name and address of the original creditor, if different from the current creditor.”

According to the Seventh Circuit’s opinion, the text of RTR’s validation notice “is clear, prominent, and readily readable. The font is normal in shape and size—essentially the same font as most of the letter.” Still, as pointed out by the court, while the front of the first page directs the reader to the back of that page for “additional important information,” that additional important information does not include the validation notice, which appears instead on the front top of the second page.

Complaint. In her proposed class action against RTR, the consumer alleged that the debt collector’s letter would mislead “the unsophisticated consumer” by telling the reader that important information was on the back of the first page, but instead providing the FDCPA-required validation notice on the front of the second page. According to the complaint, the letter from RTR violated the FDCPA (15 U.S.C. §§ 1692e and 1692g) by: “overshadowing” the consumer’s FDCPA rights; (ii) failing to communicate her FDCPA rights effectively; (iii) misdirecting a consumer’s attention away from the validation notice; and (iv) causing the misdirection to falsely and misleadingly represent that the validation notice was unimportant.

After the federal trial court declined to certify the proposed class, dismissed the FDCPA claims, and refused the consumer’s request to amend her complaint, the consumer appealed to the Seventh Circuit.

FDCPA provisions. Under section 1692e of the FDCPA, a debt collector is prohibited from using any “false, deceptive, or misleading representation or means in connection with the collection of any debt.” Meanwhile, section 1692g of the FDCPA requires debt collectors to notify consumers of their validation rights and sets forth the rules pertaining to that notification.

Court’s ruling. After noting these applicable FDCPA provisions, the Seventh Circuit asserted, “The FDCPA does not say a debt collector must put the validation notice on the first page of a letter. Nor does the FDCPA say the first page of a debt-collection letter must point to the validation notice if it is not on the first page. Nor does the FDCPA say a debt collector must tell a consumer the validation notice is important. Nor does the FDCPA say a debt collector may not tell a consumer that other information is important.”

In applying the pertinent “unsophisticated consumer” standard in the case, the court noted that an “unsophisticated consumer can be expected to read page two of a two-page collection letter.” In the court’s view, the scanning of the material on the reverse side of page one of the letter was a temporary “speed bump, not a road barrier,” to the validation notice at the top of page two; moreover, the validation notice itself was a “continuation of the letter.” The Seventh Circuit agreed with the lower court that “a consumer who reads the front and back of the first page of a short letter and then completely disregards the second page has not read the letter with care.”

Underscoring that RTR’s validation notice still occupied “a prominent place” in the letter even though it did not appear on the reverse side of page one, the court determined that the collector did not imply that the validation notice was unimportant by referencing other important information on the reverse side. Indeed, the reverse side of the first page discussed the consumer’s rights under Wisconsin law, which was pertinent to the consumer, and communicated that it was not a complete list of all rights consumers might have under federal law. Contrary to the consumer's FDCPA claims, “not even a significant fraction of the population would be misled” by RTR’s collection letter, the court concluded.

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FDIC initiatives seek to improve deposit insurance application process

By Andrew A. Turner, J.D.

The Federal Deposit Insurance Corporation is looking for information on how it can improve the deposit insurance application process and on factors that discourage potential applicants from beginning or finishing applications. Specific aspects under review include improvements that might benefit community banks and improvements in technology. The agency also has created a process that will allow potential applicants to request a review of a draft deposit insurance proposal.

 

As part of its efforts to increase transparency, efficiency, and accountability, the Federal Deposit Insurance Corporation has announced multiple initiatives and resources related to the deposit insurance application process for organizers of de novo banks. The changes are intended to promote a more transparent, streamlined, and accountable process for all applications submitted to the agency. FDIC Chairman Jelena McWilliams stated that a pipeline of new banks “is critical to the long-term health of the industry and communities across the country. The application process should not be overly burdensome and should not deter prospective banks from applying.”

 

The FDIC requested comments on all aspects of the deposit insurance application process, including ways in which the FDIC could or should support the continuing evolution of emerging technology and Fintech companies; aspects of the application process that may discourage potential applications; possible changes to the application process for traditional community bank proposals; and other suggestions for improving the effectiveness, efficiency, or transparency of the application process. Comments on the Notice and Request for Information are due by Feb. 11, 2019.

 

The FDIC has also created a new, designated mailbox as an additional means by which bankers, applicants, and other interested parties may pose questions regarding specific applications or the application process in general.

 

Updated publications. The FDIC has also updated two publications related to the deposit insurance application process. The publications, Applying for Deposit Insurance—A Handbook for Organizers of De Novo Institutions, which was developed to facilitate the process of establishing new banks and originally issued on Dec. 22, 2016, and Deposit Insurance Applications Procedures Manual, which was issued for public comment on July 10, 2017, provide comprehensive instruction to staff regarding the deposit insurance application process. Together, the documents address the informational needs of organizers and provide comprehensive instruction to FDIC staff.

 

Draft insurance review proposal. The FDIC announced that it is establishing a process to allow prospective organizers the option to request FDIC review of a draft deposit insurance proposal prior to filing an official application. The FDIC will review draft proposals to identify potential issues, provide preliminary feedback, and work with organizers on their submissions before submitting a formal application. The draft review process is intended to provide the FDIC and organizing groups the opportunity to better understand and work through possible challenges with a proposal through a collaborative process before a formal application is filed. The agency noted that feedback is limited to matters raised in the review of the submitted materials.

 

Review requests should be made in writing to the appropriate FDIC regional office and should be accompanied by a draft application filing. The FDIC expects to provide interim feedback to the organizers as soon as practicable, but no later than 30 days after receiving a draft proposal, and to communicate overall feedback within 60 days of receipt.

 

Timeframe guidelines. The FDIC has also updated and is republishing its timeframe guidelines for applications. The FDIC is republishing its timeframe guidelines for processing applications, notices, requests, and other filings submitted on behalf of existing and proposed institutions and other parties.

 

According to the FDIC, the timeframe guidelines apply to filings processed by Regional Offices under delegated authority. The timeframe guidelines do not apply to filings that:

• raise legal or policy issues;
• establish or change FDIC policy;
• could attract unusual attention or publicity; or
• involve an issue of first impression.

 

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Justice Department tells Supreme Court CFPB organization is unconstitutional

By Richard A. Roth, J.D.

A Justice Department brief filed in response to the petition for certiorari in a case addressing the constitutionality of the Consumer Financial Protection Bureau concedes that the Justice Department and the Bureau still have different points of view on the issue. The CFPB, to date, maintains that its organization under the Dodd-Frank Act is constitutionally valid, the Justice Department says. However, according to the Justice Department brief, the Bureau’s organization is unconstitutional because an independent agency led by a single director who can be removed by the president only for cause infringes on the president’s power to ensure that federal laws are faithfully executed. The petition for certiorari is State National Bank of Big Spring v. Mnuchin (No. 18-307).

State National Bank of Big Spring was an early challenger to the CFPB’s organization, filing suit in 2012. By early 2018, the issues in the bank’s suit had been narrowed to the constitutionality question. When the U.S. Court of Appeals for the District of Columbia Circuit, in an en banc opinion in PHH Corp. v. CFPB, resolved that question in favor of the CFPB, the parties to the bank’s suit agreed the U.S. district judge hearing the suit could not reach a contrary opinion and agreed to an order of dismissal.

The bank’s subsequent appeal to the D.C. circuit appellate court was rejected, setting the stage for the bank’s Supreme Court petition.

Effect of PHH Corp. The D.C. Circuit three-judge panel that initially decided PHH Corp. v. CFPB determined that the single-director organization was unconstitutional. However, rather than completely striking down the Bureau as the company asked, the panel decided to sever the Dodd-Frank Act section that provided the director could be discharged only for cause. The constitutionality problem would be solved by treating the Bureau as an executive branch agency whose director could be discharged at the president’s discretion.

However, the full circuit overturned that result. According to the en banc majority opinion, the Dodd-Frank Act did not violate constitutional separation of powers principles.

The PHH Corp. decision was not appealed to the Supreme Court.

Justice Department argument. The Justice Department prefers the result reached in PHH Corp. v. Corp. by the three-judge panel and the opinion written by Judge, and now Associate Justice, Kavanaugh. This approach, essentially a middle ground between eliminating the Bureau and continuing it as it currently is constituted, would allow the CFPB to function under the president’s control.

According to the brief, the separation of powers issue is important and deserves Supreme Court review, but in a different case. One problem is that Justice Kavanaugh probably would not participate in the decision due to his earlier involvement as an appellate court judge. Having the full court participate would be preferable, the Justice Department says.

Additionally, the nature of the challengers raises a jurisdictional problem. Two petitioners are associations that are not regulated by the CFPB. The bank, due to its size, is supervised by the Office of the Comptroller of the Currency, not the Bureau, and the Bureau apparently has never tried to assert any supervisory authority over the bank. The petitioners’ standing to sue "is sufficiently questionable to present a significant vehicle problem," the brief says.

 The Justice Department maintains that the Dodd-Frank Act, as written, violates the Constitution, and the brief relies heavily on the points made by Justice Kavanaugh in his appellate court opinion—the for-cause removal clause restricts the president’s powers; the single-director organization lacks the advantages of a multi-member commission that would justify the removal restriction; the single-director organization is "a relatively novel innovation"; and there would be no limit on other, future single-director agencies that could infringe further on presidential removal authority.

Severing the for-cause restriction would resolve the problem while doing the least violence to the Dodd-Frank Act, the Justice Department continues. The Act includes a severability clause, and there is no indication that Congress would have wanted the Bureau to disappear without the removal restriction.

Representation complication. The brief also directs the Court’s attention to the question of who would present the argument in favor of the CFPB’s constitutionality. The Justice Department disagrees with the result of the PHH Corp. suit and thus will not argue in favor of constitutionality. In such a case, the Supreme Court could appoint an amicus curiae; however, there is another available route. Under the Dodd-Frank Act, the CFPB can—with Justice Department consent—represent itself before the Court.

As a result, the Justice Department is recommending that if the Court grants certiorari, it should delay appointing an amicus curiae until newly approved CFPB Director Kathy Kraninger has an opportunity to decide whether the Bureaus intends to defend the D.C. Circuit judgment and the Acting Solicitor General can decide whether to permit the Bureau to do so.

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

Senate confirms Kraninger nomination by one-vote margin; reactions follow political lines

By Richard A. Roth, J.D. and Jacob Bielanski

The nomination of Kathy Kraninger to be Director of the Consumer Financial Protection Bureau was confirmed by the Senate by a vote of 50-to-49 on Dec. 6, 2018. Kraninger will be the second Senate-confirmed CFPB Director, following Richard Cordray. Mick Mulvaney has been serving as Acting Director since Cordray’s resignation.

As the narrow margin for confirmation implies, Kraninger’s nomination was very controversial, with public interest and industry advocacy groups lining up to oppose each other. For example, the Center for Responsible Lending charged that she would “continue [Acting Director] Mulvaney’s destructive course. Kraninger has no track record at all of consumer protection, or of standing up for vulnerable people.” During debate, Sen. Sherrod Brown (D-Ohio) complained that “Her one and only qualification is that she will be a rubber stamp for special interests. That is unconscionable.”

Kraninger’s tenure as Program Associate Director at the Office of Management and Budget came in for severe criticism, with Democrats attempting to link her to the separation of families at the U.S. southern border and with what they asserted were inadequate hurricane responses. (Acting CFPB Director Mulvaney also is Director of the OMB.)

Post-vote comments. Following the contentious confirmation of the new Bureau Director, reactions were divided, mostly among political lines. American Bankers Association President and CEO Rob Nichols said that Kraninger “believes in promoting competition and appropriately tailoring regulations by taking into account both costs and benefits.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said that “As Congress continues its efforts to reform the Bureau into a law enforcement agency that truly protects consumers and is accountable to the people, I am confident that with her experience and knowledge of budget management, Kathy will excel as Director of the Bureau.”

Other comments were less positive. Bartlett Naylor of Public Citizen said “Watch your wallets, protect your purses and batten down your bank accounts. With the confirmation of Kathleen Kraninger, Trump and Senate Republicans are putting Americans at the mercy of predatory lenders and abusive financial firms. Kraninger has absolutely no training or experience relevant to consumer protection.”

“Mick Mulvaney’s disastrous tenure as Acting-Director of the Consumer Bureau had a devastating impact on the financial security and economic stability of millions of Americans,” Rep. Nancy Pelosi (D-Calif) said in a statement following the confirmation. “Director Kraninger must abandon the Administration’s shameful campaign to destroy this vital consumer watchdog.”

“In the year that Mulvaney headed the [CFPB], he made it responsive to consumers rather than to the bureaucrats and busybodies who thought they knew best and wanted to dictate consumers’ financial choices,” Competitive Enterprise Institute Senior Fellow John Berlau said. “This was in sharp contrast to Mulvaney’s predecessor, Richard Cordray, under whose tenure the bureau arbitrarily and retroactively applied regulatory punishments against certain financial firms without due process.”

Center for Responsible Lending Senior Legislative Counsel Yana Miles countered this assessment, saying “Mulvaney’s tenure at the CFPB wasn’t public service—it was service to predatory lenders.”

Despite this, consumer advocacy groups seized the opportunity to criticize the new director for a past that appeared to lack consumer advocacy positions. Senator Cortez Masto (D-Nev) said Kraninger “fails to understand [CFPB]’s core functions,” while the National Association for Consumer Advocates (NACA) said Kraninger “does not fit the profile for the role.” Better Markets President and CEO Dennis Kelleher added that Kraninger has demonstrated a “disqualifying lack of experience or qualifications for leading the consumer protection bureau and an inexcusable lack of genuine commitment to protecting consumers.”

“Ms. Kraninger’s career has zero ties to consumer protection or financial services,” NACA executive director Ira Rheingold said. “Instead, her government background is plagued with links to controversial decisions that are an affront to human rights and justice.”

Both NACA and Americans for Financial Reform made references to the White House family separation program. Some critics claimed Kraninger had a “hidden” role in the program, which detained children of those arrested for illegally crossing the U.S. border separately from their parents or guardians, as part of her duties while serving as associate director for general government programs at the Office of Management and Budget.

Republicans, including Reps. Patrick McHenry (R-NC) and Blaine Luetkemeyer (R-Mo), largely focused on what Kraninger’s confirmation means for the future of the organization. Luetkemeyer, who is currently the chair of the House Subcommittee on Financial Institutions and Consumer Credit, noted that he looked forward to the new director prioritizing “transparency.” McHenry, a member of the House Financial Services Committee, sees expansion of family and small business access to the financial system. “With a full-time Director in place, the BCFP can focus on their important work protecting American consumers,” McHenry added.

Many comments took a muted approach. Some, like the Consumer Bankers Association (CBA), congratulated Kraninger, but used largely non-committal wording with regards to the CFPB future. “We look forward to working with Ms. Kraninger on common-sense regulations that protect consumers while also allowing our well-regulated banking system to serve families and small businesses,” CBA President and CEO Richard Hunt said. The Independent Community Bankers of America added their support and commitment to work with Kraninger.

House Democrats, meanwhile, avoided overt partisan attacks against Kraninger, specifically, but laid out expectations for Kraninger’s term. Similar to Pelosi, Ranking Member on the House Financial Services Committee, Rep. Maxine Water (D-Calif) called on the new director to “roll back” what she said were “anti-consumer” policies instituted by Mulvaney.

Meanwhile, the Consumer Federation of America (CFA) referenced the “turmoil” of the confirmation, but expressed hope for the new director. “Director Kraninger has an opportunity to prove her [skeptics] wrong by setting a bold consumer protection agenda,” CFA director of financial services Christopher Peterson said. “We hope she seizes this vital opportunity.”

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

Minneapolis Fed opposes Board’s proposal to relax liquidity-related regulations for large banks

By Thomas G. Wolfe, J.D.

In response to the Federal Reserve Board’s request for comments on its proposal to modify the “Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding Companies,” the Federal Reserve Bank of Minneapolis is opposing the Board’s plan to relax liquidity-related regulations for large banks. The Minneapolis Fed’s November 2018 comment letter asserts, “In short, the proposed rule-making would weaken the resiliency of large banks at a time when it should be strengthened.”

In October 2018, in keeping with the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” the Federal Reserve Board generated two proposals to establish a revised framework for applying prudential standards to large U.S. banking organizations based on risk. Generally, the proposals seek to more closely align the regulatory requirements that apply to large banking organizations with their risk profiles. The proposed framework would not apply to the U.S. operations of foreign banking organizations.

While the first proposal seeks to tailor the application of prudential standards to U.S. bank holding companies and to apply enhanced standards to certain large savings and loan holding companies, the Board’s second proposal (posed jointly with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) seeks to tailor the application of the agencies’ capital and liquidity rules.

Comment letter. In its Nov. 19, 2018, comment letter, the Minneapolis Fed maintains that the Federal Reserve Board is forgetting lessons learned from the financial crisis and the Great Recession. “In this specific case, we are concerned about the unnecessary relaxation of liquidity-related regulations for large banks,” the letter states. Moreover, the Minneapolis Fed agrees with Federal Reserve Board Governor Lael Brainard’s analysis of the Board’s proposal and agrees with Brainard that the Board’s “proposed changes should not move forward.”

Viewing the Board’s proposal as a potential threat to the financial stability of the U.S. financial system by “rolling back” existing regulations, the comment letter also indicates that the Minneapolis Fed is “deeply troubled by ongoing efforts of the Board of Governors to change rules in a way that reduces the equity funding of the largest banks.” Large banks “should have enough skin in the game, through equity funding, to ensure that their shareholders bear the risk of their investments, rather than taxpayers,” the Minneapolis Fed asserts.

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FDIC considers simpler community bank capital measurement, ‘back to basics’ approach

By Andrew A. Turner, J.D.

The Federal Deposit Insurance Corporation’s Board of Directors has voted to propose a simpler method that qualifying community banks can use to measure their capital adequacy. The community bank leverage ratio (CBLR) framework will allow qualifying banks to satisfy generally applicable capital requirements, prompt corrective action well-capitalized ratio requirements, and all other applicable capital and leverage requirements with a single measurement.

 

At the same time, FDIC Chair Jelena McWilliams advocated for a “back to basics” approach to capital regulations for community banks in remarks at the Thirteenth Annual Community Bankers Symposium in Chicago. McWilliams suggested simplifying regulations and discussed the proposed Community Bank Leverage Ratio. Such measures would simplify compliance for community banks who already maintain sufficient capital levels, but are faced with significant costs when it comes to compliance. McWilliams also discussed FDIC actions to address issues facing community banks.

 

The proposed regulation amendments are required by the Economic Growth, Regulatory Relief, and Consumer Protection Act, and the Federal Reserve Board and Office of the Comptroller of the Currency are expected to propose comparable amendments to their rules. The EGRRCPA requires the agencies to adopt rules creating a CBLR of between 8 percent and 10 percent for community banks with total consolidated assets of less than $10 billion. The measurement is intended to simplify compliance for community banks without reducing the capital they hold and require that banks with higher risk profiles remain subject to generally applicable capital requirements.

 

The agencies have settled on a CBLR of 9 percent. However, understanding the CBLR requires understanding several definitions.

 

Qualifying community bank. The first specifies which banks qualify for the CBLR framework. To qualify, a bank must have:

 

• total consolidated assets of less than $10 billion;
• total covered off-balance sheet exposures of no more than 25 percent of its total consolidated assets;
• total trading assets and liabilities of no more than 5 percent of its total consolidated assets;
• mortgage servicing assets of no more than 25 percent of its CBLR tangible equity capital; and
• covered deferred tax assets of no more than 25 percent of its CBLR tangible equity capital.

 

An advanced approaches banking organization cannot qualify; neither can a bank that is subject to a written agreement, order, capital directive, or prompt corrective action directive.

  

CBLR calculation. A bank would calculate its CBLR by dividing its tangible equity capital by its average total consolidated assets.

 

Tangible equity capital would be the bank’s total equity capital exclusive of minority interest, accumulated other comprehensive income, deferred tax assets that arise from net operating loss or tax credit carryforwards, goodwill, and other intangible assets. Average total consolidated assets would be calculated similarly to the tier 1 leverage denominator the bank currently must calculate.

 

If the bank qualified, and the calculation yielded a result of more than 9 percent, the bank would meet all of its capital requirements.

 

Ceasing to meet standards. The proposal provides a two-calendar quarter grace period for a bank that falls out of compliance with the CBLR criteria. However, this does not apply to a bank that will no longer meet the standards after a merger or acquisition. Such a bank must meet the generally applicable capital standards “as of the completion of the transaction.”

 

If a bank’s CBLR falls to 9 percent or lower, it will be treated as less than well capitalized. It will be considered to be adequately capitalized, undercapitalized, or significantly undercapitalized, depending on the calculated ratio.

 

McWilliams: important role of community banks. McWilliams began her remarks by highlighting the crucial role played by community banks in meeting credit needs for small businesses. In fact, by mid-2018, 50 percent of small loans to businesses were held by banks with assets less than $10 billion, and loans to small businesses by small banks may be even greater. In 627 counties, community banks are the only banking offices. Given the significant impact of community banks, McWilliams cited the need for ensuring that regulations are tailored and not too complex to impede community bank survival.

 

Back to basics. McWilliams’ overarching theme during her remarks was a return to basics for community banks, including the need to simplify capital regulations. For example, Basel III focused too much on large banks; while most community banks maintained sufficient capital to exceed the new minimum thresholds set by the 2013 rules, they were faced with substantial compliance costs. McWilliams acknowledged the need for strengthening capital requirements but argued that requirements, as they relate to community banks, do not need to be complex.

 

The first step to simplifying capital requirements is the CBLR. An estimated 80 percent of community banks would be eligible. For banks that do not adopt the CBLR, the Economic Growth and Paperwork Reduction Act capital simplification proposal would “provide certainty and clarity to community banks,” McWilliams said. 

 

McWilliams also suggested tailoring risk-based capital rules for community banks, including a review of capital ratios and buffers, and other complicated calculations. The goal of revisiting this approach would not be to reduce loss-absorbing capacity but to simplify ratio calculation and reduce compliance burdens on small banks.

 

McWilliams pointed out that the FDIC has also been working on the following areas:

 

• implementing provisions from the Economic Growth, Regulatory Relief, and Consumer Protection Act signed into law this year;
• rulemaking to change the regulatory capital treatment of high-volatility commercial real estate;
• interim rules to increase small institutions eligible for 18-month, on-site examination cycle;
• rulemaking that reciprocal deposits not be considered brokered deposits in some instances;
• comprehensive review of the approach to brokered deposits and national rate caps;
• interagency statement that supervisory guidance does not have the force and effect of law and not be used as a basis for enforcement actions; and
• improving de novo application process for bank formation.

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Luetkemeyer thanks FDIC, OCC for response to calls for ‘Operation Choke Point’ investigation

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

After claiming it was hiring an outside law firm to investigate allegations of employee misconduct, the Federal Deposit Insurance Corporation received thanks from Rep. Blaine Luetkemeyer (R-Mo), Chairman of the Financial Institutions and Consumer Credit Subcommittee, who credited both it and the Office of the Comptroller of Currency for "swift responses."

"I’m happy see the regulators’ willingness to ensure regulation is never again borne of personal biases or political motivations," Luetkemeyer said in a press release.

Allegations against FDIC employees stem from a suit brought by payday lenders (Advance America, et al. v. Federal Deposit Insurance Corporation) and includes accusations that the banking regulator attempted to coerce banks into cutting off relationships with payday lenders through threats that included lower ratings and more intrusive examinations. Payday lenders argue these actions came as part of a larger, partisan effort against the industry, called "Operation Choke Point," by the U.S. Department of Justice under President Obama.

Though FDIC Chairman Jelena McWilliams said in letter to Luetkemeyer that it had retained an outside law firm to "better ascertain the effectiveness" of the FDIC response to claims of misconduct, she also noted that examiner training was being updated to use case studies based on the allegations. "I am troubled that certain FDIC employees acted in a manner inconsistent with FDIC policies in what has been generically described as ‘Operation Choke Point,’" McWilliams said.

Luetkemeyer originally called on McWilliams and Comptroller Joseph Otting to investigate past misconduct, following the court’s unsealing of various emails submitted as evidence in Advance America. By his own account, Luetkemeyer, a representative from Missouri’s 3rd district, formerly served as a bank regulator for the state of Missouri, and has "lead the charge" against Choke Point over the last five years.

The gratitude from Luetkemeyer’s office comes even as Otting told him the OCC had no part of Operation Choke Point and that "pleadings recently submitted by the plaintiffs [in Advance America] do not establish otherwise."

"I know we are both committed to our nation having a safe and sound banking system that treats all customers fairly," Otting wrote in his letter Luetkemeyer. "To be clear, the OCC has no policy or program that targets any business operating within state and federal law, and I am committed to ensuring that it does not have such policy or program in the future."

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FDIC Chair emphasizes ‘partnership with industry’ at financial technology conference

By Thomas G. Wolfe, J.D.

 

As a keynote speaker at the Federal Reserve Bank of Philadelphia’s “Fintech and the New Financial Landscape” conference, Federal Deposit Insurance Corporation Chair Jelena McWilliams noted that too often regulatory agencies “play ‘catch up’ with technological advances and their impact on regulated entities and consumers.” With this dynamic in mind, Williams underscored the FDIC’s goal to “reverse that trend through increased collaboration and partnership with the industry” to “increase the velocity of transformation, while ensuring that banks are safe and sound” and that consumers are “sufficiently protected.” In her speech at the mid-November 2018 conference, the FDIC Chair also relayed a set of questions she has posed for her own staff’s consideration as the agency plans for a future FDIC Office of Innovation that will specifically address financial technology (fintech) developments and issues.

 

In her prepared remarks, McWilliams briefly traced how innovation in the banking and finance field “has been around since at least the 15th century.” “What is different today is the speed and tremendous impact of technological innovation in and on banking,” McWilliams stated. “This is why it is crucial that policymakers and regulators understand the impact, scope, and consequences that are innate to what we have come to refer to as ‘fintechs’,” she said.

 

Expanding access to banking. McWilliams took the opportunity to stress the role of innovation in expanding consumers’ access to banking. Referencing a recent “FDIC National Survey of Unbanked and Underbanked Households,” McWilliams pointed out that although the survey indicates that unbanked and underbanked rates generally are higher among “lower-income households, less-educated households, younger households, black and Hispanic households, working-age disabled households, and households with volatile income,” new technologies offer a “tremendous opportunity to expand access to the banking system.” In particular, mobile banking and Internet banking “offer important inroads to the banking system,” McWilliams said, because a significant percentage of these unbanked or underbanked households have access to a smartphone or the Internet.

 

In addition, the FDIC Chair noted that the agency has “dedicated significant resources” to identify and understand emerging technologies—including digital lending, peer-to-peer lending, machine-learning, artificial intelligence, big data, and blockchain. While the new technology “can certainly introduce risk, it can also help regulators and institutions identify and mitigate risk sooner,” and “will undoubtedly present opportunities to ease the burden of regulatory compliance,” McWilliams said.

 

Future innovation office. While aiming, with humor, to correct any existing misconceptions about the FDIC immediately “rolling out” an Office of Innovation, McWilliams indicated that she is preparing and planning for that eventuality down the road by, among other things, having FDIC staff focus on “four fundamental questions”:

 

1. How can the FDIC provide a safe regulatory environment to promote the technological innovation that is already occurring?
2. How can the FDIC promote technological development at community banks with limited research and development funding to support independent efforts?
3. What changes in policy—particularly in the areas of identity management, data quality and integrity, and data usage or analysis—must occur to support innovation while promoting safe and secure financial services and institutions?
4. How can the FDIC transform—in terms of technology, examination processes, and culture—to enhance the stability of the financial system, protect consumers, and reduce the compliance burden on regulated institutions?

For more information about speeches by federal or state regulatory leaders that illuminate an agency's approach to matters impacting the financial services industry, subscribe to the Banking and Finance Law Daily.

Fed views banking system conditions favorably with regulatory progress

By Andrew A. Turner, J.D.

In conjunction with the first edition of the Federal Reserve Board’s Supervision and Regulation Report, Randal Quarles, the Federal Reserve Board’s Vice Chairman for Supervision, testified at a hearing of the House of Representatives Financial Services Committee. Quarles concentrated on the Fed’s efforts to improve regulatory transparency, and its progress towards making the post-crisis regulatory framework simpler and more efficient.

 

The U.S. banking system is generally in strong condition, with both earnings and profitability increasing in recent years, according to the report. Loan volume is up, and nonperforming loan ratios are improving. Financial institutions also are maintaining high levels of quality capital and improving their liquidity due to new regulatory requirements.

 

On the other hand, the industry remains concentrated because of post-financial crisis consolidation.

 

Fed activities. The report says that, after the crisis, the Fed’s supervisory and regulatory framework has been based on three principles: efficiency, transparency, and simplicity. The goal is to minimize institutions’ compliance burden without compromising recent improvements in safety and soundness.

 

To accomplish this goal, the Fed has shifted some of its supervisory resources to its large bank supervision program, the report notes. The central bank also has enhanced its supervision of smaller banks based on the lessons taught by the financial crisis while reducing the banks’ regulatory burden.

This has been done by:

• reducing the amount of data these banks must submit each quarter;
• increasing the threshold for real estate loans that require formal appraisals;
• moving to simplify regulatory capital requirements; and
• reducing the burden of examinations, especially of on-site examinations.

The report found large financial institutions to be in sound financial condition. Capital levels are strong and much higher than before the financial crisis. Recent stress test results show that the capital levels of large firms after a hypothetical severe global recession would remain above regulatory minimums. While most firms have improved in key areas of supervisory focus, such as capital planning and liquidity management, it was noted that some firms continue to work to meet supervisory expectations in certain risk-management areas.

 

Future reports will focus on the Fed’s activities since each previous report, rather than looking back on the entire period since the financial crisis.

 

Quarles testimony. Under the Dodd-Frank Act, the Vice-Chairman is required to testify before the committee on a semiannual basis, regarding the Fed’s supervision and regulation of firms subject to the Fed’s jurisdiction.

 

Committee Chairman Jeb Hensarling (R-Texas) opened the hearing, entitled “Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System” by asserting that the Dodd-Frank Act "dramatically increased the Fed’s powers way beyond its traditional monetary policy responsibilities." According to Hensarling, with its heightened prudential standards, the Fed can "functionally now control the largest financial institutions in our economy."

 

Hensarling noted that while total overall regulatory restrictions have increased by nearly 20 percent since 1997, regulatory restrictions on "finance and insurance" have increased by 72 percent. He emphasized the work that the committee has devoted to properly tailoring financial regulation. "While I am pleased to see this Fed’s willingness to better tailor, perform cost-benefit analyses, implement prudential regulatory risk adjustments, and propose amendments to the Volcker Rule, each of these as they stand should again be viewed simply as first steps and insufficient to truly propel our economy to sustained 4 percent economic growth," concluded Hensarling.

 

Ranking Member Maxine Waters (D-Calif) also spoke at the hearing. Referencing the election results and the upcoming change in House leadership positions, Waters stated that she believes it is "appropriate to discuss Dodd-Frank and the harmful efforts of the current Committee Majority to weaken and roll back important parts of this law." She asserted that capital standards are an effective method to prevent bank failures and stated, "make no mistake, come January in this Committee, the days of this Committee weakening regulations and putting our economy once again at risk of another financial crisis will come to an end."

 

Transparency and efficiency. Quarles focused his testimony on steps the Fed has taken to increase transparency and keep the public and financial institutions informed. "Transparency is part of the foundation of public accountability and a cornerstone of due process" and "key to a well-functioning regulatory system and an essential aspect of safety and soundness, as well as financial stability," stated Quarles.

1. The Fed has improved its supervisory ratings system for large financial institutions. The new rating system will better align ratings for these firms with the supervisory feedback they receive, and will focus firms on the capital, liquidity, and governance issues most likely to affect safety and soundness.
2. The Fed has clarified that supervisory guidance is a tool to enhance the transparency of supervisory expectations, and should not be the basis of an enforcement action—guidance is not legally enforceable, and Fed examiners will not treat it that way.
3. The Fed expects to finalize a set of measures intended to increase visibility into the Fed’s supervisory stress testing program. These enhanced disclosures will include more granular descriptions of our models; more information about the design of our scenarios; and more detail about projected outcomes.

Quarles discussed recent proposals issued by the Fed, including one that would reduce the reporting burden on community banking organizations, altering reporting frequencies, items, and thresholds, while preserving the data necessary for effective oversight. Another Fed proposal would reduce reporting requirements for small depository institutions in the first and third quarters of the year. Under the proposal, around 37 percent of data items would not be required in those quarters.

 

Quarles stated that the Fed has also issued two proposals to better align prudential standards with the risk profile of regulated institutions, implementing changes that Congress enacted this spring in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Additionally, according to Quarles, the Fed has recently proposed a new approach to calculating credit risk, and has issued a proposal simplifying and tailoring requirements under the Volcker rule. Quarles also stated that the Fed has issued a rule limiting the exposure of large firms to a single counterparty.

 

Quarles highlighted the agency’s efforts to tailor regulation and supervision to risk, including by:

• expanding eligibility of community banking firms for the Small Bank Holding Company Policy Statement, and for longer, 18-month examination cycles;
• giving bank holding companies below $100 billion in assets immediate relief from supervisory assessments, stress testing requirements, and some additional Dodd-Frank Act prudential measures; and
• implementing changes to liquidity regulation of municipal securities and capital regulation of high-volatility commercial real estate exposures.

For more information about regulators supervision of federal banking, subscribe to the Banking and Finance Law Daily.

Court issues stay of CFPB Payday Rule compliance date

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

In the ongoing lawsuit against the Consumer Financial Protection Bureau filed by Community Financial Services Association, seeking to invalidate the Bureau’s Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans, the federal court for the Western District of Texas has reconsidered a portion of an earlier order refusing to stay the Aug. 19, 2019, compliance date of the Bureau’s Payday Rule. The court’s order stated that, given that the Bureau plans to issue Notices of Proposed Rulemaking revisiting the rule’s ability-to-repay provisions, a stay of the Rule's current compliance date of Aug. 19, 2019, is "appropriate" in order "to prevent irreparable injury."

CFPB reconsidering payday lending rule. The CFPB payday lending rule established restrictions on short-term loans, including a test to ensure that consumers can afford payments, a limit on the number of loans that may be made in close succession, and a limit on the ability of lenders to continue debiting consumer accounts for payments after two consecutive failures (see Banking and Finance Law Daily, Oct. 5, 2017). The Bureau issued a public statement on Oct. 26, 2018, stating that it planned to propose revisiting only the ability-to-repay provisions and not the payments provisions, in significant part because the ability-to-repay provisions have much greater consequences for both consumers and industry than the payment provisions.

Compliance date at issue. The CFPB had requested that a federal judge suspend the lawsuit while the Bureau conducts a rulemaking process reconsidering the rule. On June 12, 2018, the court granted in part and denied in part the joint motion to stay the litigation and agency action. The order stayed the litigation pending further order of the court; denied the parties’ request to stay the compliance date for the payday rule until 455 days after judgment is rendered in this action; and directed the parties to file joint status reports every 60 days informing the court about proceedings related to the payday rule and the litigation. The court denied the parties’ motions for consideration of this order on Aug. 7, 2018.

Both parties filed the required joint status report on Aug. 17, 2018. The status report informed the court that the Bureau was planning to prepare a notice of proposed rulemaking to reconsider the Payday Rule and that it expected to issue a notice of proposed rulemaking by early 2019. On Aug. 28, 2018, the court issued an order maintaining the stay of litigation and ordered the parties to file another joint status report on or before Oct. 31, 2018. In their Oct. 26, 2018, status report, the Bureau notified the court that it intended to issue notices of proposed rulemaking in January 2019 to reconsider the Rule and address the Rule’s compliance date. Due to the Bureau’s publicly announced plans to reconsider portions of the Rule, the court has reconsidered the portion of its earlier order and granted the Bureau’s request to stay the Rule’s compliance date.

The court, however, declined the request to stay the compliance date until 455 days from the date of final judgment in this action. The court stated that the other portions of the June 12, 2018, order regarding the stay of litigation in this action should be continued in full force and effect. The court also adjusted the conditions and timing for the parties to file periodic joint status reports.

For more information about the CFPB's payday lending rule, subscribe to the Banking and Finance Law Daily.

Terminated employees’ FCRA judgment, damages, attorney fees vacated for lack of standing

By Thomas G. Wolfe, J.D.

Although four plaintiff pension-portfolio managers who worked at the equity desk of Allstate Insurance Company were awarded statutory damages, punitive damages, and attorney fees at trial for the company’s alleged violations of the Fair Credit Reporting Act (FCRA), the U.S. Court of Appeals for the Seventh Circuit, in Rivera v. Allstate Insurance Company, vacated those awards and dismissed the FCRA claims because the claims rested on a “bare procedural violation” of the FCRA “unaccompanied by any concrete and particularized harm or risk of harm to an interest protected by the statute.” Allstate retained a law firm to investigate “suspicious trading” at its equity desk, and, after the firm provided its oral findings to the company, Allstate fired the four managers. Rejecting the managers’ claims that Allstate violated the FCRA by failing to provide them with a summary of the law firm’s investigative findings after they were fired, the Seventh Circuit asserted that the managers: failed to show how any minor FCRA noncompliance hampered their case against Allstate; failed to identify any prospective employer that refused to hire them as a result; and failed to demonstrate how they suffered any resulting concrete injury. In other words, the plaintiff managers lacked Article III standing to sue Allstate.

Notably, the Seventh Circuit also vacated the jury’s verdict awarding over $27 million in compensatory and punitive damages in favor of the managers, based on the managers’ defamation claims against Allstate.

Backdrop. After conducting its own internal investigation into suspicious trading at its equity desk, the company retained attorneys from a third-party law firm, Steptoe & Johnson, to investigate further. In turn, Steptoe & Johnson hired an economic consulting firm to calculate any potential losses. The Steptoe lawyers delivered oral findings to Allstate. Afterward, Allstate determined that four portfolio managers “had violated the company’s conflict-of-interest policy by timing trades to improve their bonuses,” and the company terminated their employment “for cause.”

In addition, Allstate provided information about its investigations on its annual Form 10-K for 2009, and sent a memo to its own Investment Department about the Form 10-K disclosures but did not name the four portfolio managers who were fired.

Complaint, trial. The portfolio managers who were fired by Allstate then filed a lawsuit in Illinois federal district court against the company. The managers not only asserted defamation claims, based on the Form 10-K filing and the internal memo, they also alleged that Allstate violated the FCRA provision (§1681a(y)(2)) by “failing to give them a summary of Steptoe’s findings after they were fired.”

According to the court’s opinion, the federal jury returned a verdict in the managers’ favor, awarding them more than $27 million in compensatory and punitive damages on the defamation claims. In connection with the FCRA claims, in addition to the $1,000 in statutory damages awarded each manager by the jury, the trial court judge tacked on additional punitive damages and attorney fees. The judge awarded $3,000 in punitive damages under the FCRA to each manager, and approved the managers’ request for $357,716 in attorney fees associated with their statutory claims.

Allstate’s arguments. On appeal, Allstate argued that the plaintiff managers lacked standing under the U.S. Supreme Court’s 2016 decision in Spokeo, Inc. v. Robins, and that the factual record in the case did not support the jury’s finding of a willful violation of the FCRA, which is required for awarding statutory and punitive damages. Further, Allstate challenged the lower court’s award of FCRA attorney fees as “excessive and disproportionate considering the relative insignificance of the statutory claims” in the litigation.

Court skeptical about FCRA claims. In interpreting the applicable FCRA provisions, the Seventh Circuit emphasized that it was not conclusively determining that the Steptoe & Johnson law firm was a “consumer reporting agency” under the FCRA, nor was it definitively deciding that the firm’s oral report to Allstate about its investigation was a “consumer report” under the FCRA. As stated by the court, “the question we confront here is whether subsection [§1681a(y)(2)] is sufficiently similar to §1681b(b)(3)(A) to require the same outcome. The answer is no.” According to the Seventh Circuit, a summary-only disclosure obligation after an adverse employment decision under the FCRA (§1681a(y)(2))—like the one in the case before it—“is a far cry” from the disclosure required under the separate FCRA provision (§1681b(b)(3)(A)) requiring an employer to provide “a complete copy of the consumer report” and a written explanation of an employee’s FCRA rights before an adverse employment decision.

No standing. Ultimately, the federal appellate court focused on vacating the lower court’s FCRA awards on jurisdictional grounds, based on the lack of any concrete injury to support the managers’ Article III standing to sue. The court stressed that under the standard enunciated by the Supreme Court in Spokeo, there must be an “injury in fact” element that is “both concrete and particularized.” Further, to be “concrete,” the injury must be “real” and “not abstract—that is, it must actually exist.”

Determining that the managers’ FCRA claims against Allstate did not satisfy the Spokeo standard to establish their standing in the case, the Seventh Circuit vacated the judgment and awards for damages and attorney fees, and directed the lower court to dismiss the managers’ FCRA claims against the company.

For more information about federal and state court decisions impacting the financial services industry, subscribe to the Banking and Finance Law Daily.

Fed invites public comment on framework matching regulations with risk profiles

By Andrew A. Turner, J.D.

The Federal Reserve Board has issued two proposed rulemakings that would more closely match the regulations for large banking organizations with their risk profiles. The proposed framework would not apply to the U.S. operations of foreign banking organizations. The proposals stem from changes in the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted in May, that were intended to ease compliance burdens for banks.

 

The first proposed rulemaking would tailor the application of prudential standards to U.S. bank holding companies and apply enhanced standards to certain large savings and loan holding companies. The second proposed rulemaking, issued jointly with the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, would tailor the application of the agencies’ capital and liquidity requirements.

 

A proposed requirements chart for each category also shows a list of firms projected to be included in each category. Comments will be accepted through Jan. 22, 2019.

 

Four categories of standards. The proposals present four categories of prudential standards that reflect the different risks of firms in each group of large U.S. banking organizations:

 

• Category IV: Most firms with $100 billion to $250 billion in total assets would be subject to significantly reduced requirements. These firms would no longer be subject to standardized liquidity requirements or a requirement to conduct and publicly disclose the results of company-run capital stress tests.
• Category III: Firms with $250 billion or more in assets, or firms with at least $100 billion in assets that exceed certain risk thresholds, would be subject to enhanced standards that are tailored to the risk profile of these firms.
• Category II: Firms of global scale—those with very significant size ($700 billion or more in total assets) or cross-jurisdictional activity ($75 billion or more)—would be subject to more stringent prudential standards (based on global standards developed by the Basel Committee on Banking Supervision) and other prudential standards appropriate to very large or internationally active banking organizations.
• Category I: U.S. global systemically important bank holding companies (GSIBs) would remain subject to the most stringent standards.

 

The adjustments would significantly reduce regulatory compliance requirements for firms subject to Category IV standards, modestly reduce requirements for firms subject to Category III standards, and largely keep existing requirements in place for firms subject to Category I and II standards.

 

Powell statement. In his opening statement at the Fed’s Oct. 31, 2018, open meeting, Fed Chairman Jerome Powell said the Fed will “continue to incorporate size into its evaluations of risk, but size is only one factor. The proposals we are considering would enhance our framework by introducing additional measures of risk.” Powell said proposals would prescribe materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and the economy.

 

Quarles in agreement. In his statement on the proposals, Randal K. Quarles, the Fed’s Vice Chairman for Supervision, said the proposals embody an important principle: “the character of regulation should match the character of a firm.” He said the purpose of the package of proposed changes is not to reduce the capital adequacy or liquidity resiliency of the U.S. regional bank holding companies. Instead, Powell hopes that “firms will see reduced regulatory complexity and easier compliance with no decline in the resiliency of the U.S. banking system.”

 

Brainard sees risk. In her dissenting statement, Fed Governor Lael Brainard, said the proposals under consideration go beyond the provisions of EGRRCPA by relaxing regulatory requirements for domestic banking institutions that have assets in the $250 to $700 billion range, and they “weaken the buffers that are core to the resilience of our system. This raises the risk that American taxpayers again will be on the hook.”

 

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CFPB to revisit payday lending rule’s ability-to-pay provisions

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

The Consumer Financial Protection Bureau said it expects to issue proposed rules in January 2019 that will reconsider its rule regarding Payday, Vehicle Title, and Certain High-Cost Installment Loans and address the rule's compliance date. In its public statement, the Bureau said it will make final decisions regarding the scope of the proposal closer to the issuance of the proposed rules. However, it said it is currently planning to propose revisiting only the ability-to-repay provisions and not the payments provisions, in significant part because the ability-to-repay provisions have much greater consequences for both consumers and industry than the payment provisions.

Banking groups seek compliance date extension. Prior to the release of the Bureau’s statement, the Consumer Bankers Association and the American Bankers Association sent a letter to CFPB Acting Director Mick Mulvaney requesting that the Bureau immediately extend the compliance date of its payday lending rule. The rule was adopted in October 2017. The current compliance date of the rule is Aug. 19, 2019. However, the letter notes, under its most recent unified agenda, the Bureau announced an intention to reopen the rule in January 2019, only seven months prior to the compliance date. "Given the significant unintended consequences of the rule," the letter states, "it is important that institutions do not expend resources unnecessarily implementing extensive operational and policy changes to comply with a rule that the Bureau may modify."

For more information about the CFPB's payday lending rule, subscribe to the Banking and Finance Law Daily.

Payday lender settles debt collection, abusive practices charges

By Katalina M. Bianco, J.D.

A payday lender has agreed to pay a $200,000 penalty and $32,000 in restitution to settle Consumer Financial Protection Bureau charges arising from the company’s methods of collecting unpaid loans. According to the Bureau, Cash Express, LLC, sent consumers dunning letters that misrepresented its collection methods and improperly withheld amounts needed to repay prior loans when it cashed subsequent checks for consumers. The company did not admit any violations of the law in agreeing to the settlement.

 

According to the consent order, Cash Express and an affiliate, First Cash Express, LLC, provide short-term, small-dollar loans and check cashing services in Alabama, Kentucky, Mississippi, and Tennessee, through more than 325 storefronts. Cash Express has been in operation since 1998.

 

Charged violations. The Bureau charged specifically that the two companies violated the Consumer Financial Protection Act in four ways:

 

1. They mailed more than 19,000 letters demanding that debts be paid after the statutes of limitations on the debts had passed and, in most cases, they also threatened to sue. 
2. They threatened to file collection suits when, in fact, they almost never did so and had no intention to do so.
3. They threatened in both loan applications and collection letters to provide negative information to credit reporting agencies when they did not intend to do so. 
4. They set off check cashing proceeds against loan payments that were due without disclosing the practice when the checks were presented.

  

Consent order obligations. In addition to making the required payments, the companies are obligated by the consent order to refrain from set-offs unless the consumer consents before the check is cashed. They also may not make misrepresentations about collection suits or credit reports.

 

The companies also must create a compliance plan and secure the Bureau’s approval. However, the order does not impose any ongoing monitoring requirement.

 

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FDIC seeks input on improving its communication, transparency

By Thomas G. Wolfe, J.D.

 

The Federal Deposit Insurance Corporation is requesting information from stakeholders and interested parties on how the FDIC can improve its communication methods in a transparent and efficient manner while also minimizing the regulatory burden for supervised financial institutions. Seeking to make its communications with insured depository institutions “more effective, streamlined, and clear,” the FDIC’s Request for Information (RFI) poses three sets of questions—on the topics of efficiency, content, and ease of access—to elicit comments from the public. According to the FDIC’s Oct. 5, 2018, Federal Register notice, comments on the agency’s RFI must be received by Dec. 4, 2018.

 

FDIC Chairman Jelena McWilliams remarked that providing pertinent information to depositors, consumers, bankers, and other stakeholders “is vital for them to better understand the agency’s policies, procedures and regulations.” At the same time, the amount of information the FDIC disseminates “can create burdensome challenges for insured depository institutions, especially community banks,” McWilliams stated. The FDIC also has issued a Financial Institution Letter outlining the nature and scope of the agency’s RFI on its communication and transparency.

 

RFI queries. The RFI sketches the FDIC’s many and varied forms of communication with the financial services industry, consumers, and the public. To generate and shape responses to its RFI, the FDIC sets forth “Suggested Topics for Commenters” in a question format. For instance, the FDIC asks:

• How effective are the FDIC’s current forms of communication? Which methods are the most effective, and which are the least effective?
• Are there other methods of communication that the FDIC should consider using in the future?
• Is FDIC information readily available and easy to find? If not, how can the FDIC make it easier to receive and find information?
• How appropriate is the current timing and frequency of various FDIC communications?
• Should the FDIC’s Financial Institution Letters (FILs) be organized by date, topic, applicable regulation, or institution size?
• Should the FDIC distinguish between FILs that communicate regulations and policy from FILs that may be purely informational?
• How can the FDIC improve its website?
• Which types of communication are best suited for informing insured depository institutions about new policies, laws, and regulations?
• Which types of communication are best suited for informing insured depository institutions about educational materials, news, and other updates?

For more information about federal and state regulators’ requests for information affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

 

New technologies can foster financial inclusion, says Fed’s Brainard

By Andrew A. Turner, J.D.

Developing technological infrastructure, such as faster payment systems, along with the potential for more transparent and simpler product offerings provide building blocks that may “be combined in ways that move the needle on financial inclusion,” according to Federal Reserve Board Governor Lael Brainard. She spoke at a conference, “FinTech, Financial Inclusion—and the Potential to Transform Financial Services,” hosted by the Federal Reserve Bank of Boston with the Aspen Institute.

While new technologies are lowering transaction costs by automating the customer interface and underwriting processes, it remains unclear “how much of this fintech lending is making a significant dent in financial inclusion, as opposed to serving prime and near-prime consumers in the United States,” Brainard observed. Account access and credit are unlikely to provide a complete solution as continued progress on financial inclusion is likely to require solutions that address the needs of underserved households and small businesses, in her view. In particular, families' financial resilience in the face of unpredictability in income and expenses, is a critical concern that needs to be considered.

“New platforms like faster payment systems have the potential to combine with other technological improvements, like cheap access to cloud computing and an open-source approach to artificial intelligence, to create more full-stack approaches to financial inclusion,” Brainard argued. Financial innovation, noted by the Fed Governor, includes machine-learning tools and data aggregation to offer credit to consumers lacking traditional credit histories, apps using faster payments and cheap accounts, and products using behavioral economics-based “nudges” to help consumers grow their savings.

However, Brainard cautioned that many of these products create consumer data security and privacy issues to resolve, which could have implications for pricing of services. Another challenge is reaching communities that lack infrastructure for digital service delivery. Access to technology, she contended, is “increasingly essential to households and small businesses in underserved low- and

The challenge as regulators, she concluded, “is to ensure trust in financial products and services by maintaining the focus on consumer protection, while supporting responsible innovation that provides social benefits.”

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Prudential escapes 'systemically important' designation

By Richard A. Roth, J.D.

The Financial Stability Oversight Council has determined that Prudential Financial, Inc., will no longer be supervised by the Federal Reserve Board as a systemically important financial institution. The Sept. 19, 2013, decision that financial distress at the company could pose a threat to U.S. financial stability no longer is warranted, the FSOC said.

 

The Dodd-Frank Act authorizes the FSOC to consider whether nonbank financial companies are SIFIs that should be supervised by the Fed and subject to enhanced prudential standards. A company can be designated a SIFI if:

 

1. material financial distress at the company could pose a threat to U.S. financial stability; or
2. the “nature, scope, scale, concentration, interconnectedness, or mix of activities” of the company could pose such a threat.

 

Prudential’s SIFI designation was based on the first criterion. In explaining the rescission of that designation, the FSOC said it had been concerned principally about the exposure of creditors, investors, and other market participant to the company and the domino effects on asset values if the company were to need to liquidate assets quickly.

 

What changed since 2013? The FSOC’s explanation is redacted in ways that conceal some of the council’s reasoning. However, the explanation noted that, compared to 2013:

 

1. The company’s capital market exposures have not significantly changed.
2. The company’s exposure to the institutional insurance market does not contribute to a threat to financial stability.
3. There was no significant risk that a forced liquidation of assets by Prudential would disrupt the asset markets or threaten companies with comparable holdings.
4. The market effect on the company of a downward shock has decreased since 2013 due to the company’s leverage ratio and increased holdings of highly liquid assets.

 

The FSOC added that the New Jersey insurance regulatory agency has more authority to oversee Prudential than it had in 2013.

 

The explanation did note, however, that Prudential still qualifies as a company that is predominantly engaged in financial activities. More than 85 percent of both the assets and revenue of the company and its subsidiaries are related to activities that are financial in nature. As a result, the company will remain eligible for a SIFI designation should it pose a systemic risk in the future.

 

Watt’s concurrence. In agreeing with the FSOC’s decision, Federal Housing Finance Agency Director Melvin L. Watt expressed his concern that the company never was evaluated under the second of the two standards. Congress intended that both criteria should be given equal weight, he said. Prudential qualified for “de-designation” under the second standard as well as the first.

 

Company statement. Prudential’s press release said the company believes that it never qualified for the SIFI designation. The company’s “sustainable business model, capital strength and comprehensive risk management” meant the company never posed a systemic threat, the company said.

For more information about the Financial Stability Oversight Council, subscribe to the Banking and Finance Law Daily.

Payday lenders seek summary judgment in ‘Operation Choke Point’ suit against banking regulators

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

Payday lenders have filed a motion for summary judgment in their lawsuit targeting what it characterizes as efforts by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to pressure banks to end banking relationships with payday lenders due to risk to the banks’ reputations, referred to as "Operation Choke Point" (Advance America, Cash Advance Centers, Inc. v. Federal Deposit Insurance Corporation, Oct. 12, 2018).

The payday lenders allege that the regulators have threatened banks with longer and more intrusive examinations, reduced ratings, and other punitive actions in efforts to coerce them into dropping payday lenders as customers. This has been done without regard to the legality of the lenders’ business practices. The motion includes documents released as part of the motion for summary judgment in the lawsuit.

Summary judgment is appropriate if the movant "shows that there is no genuine dispute as to any material fact." The motion asserted that the undisputed facts show beyond any genuine dispute that the payday lenders have standing to sue; the agencies violated the payday lenders’ Due Process rights; and the payday lenders are entitled to declaratory and injunctive relief.

According to the motion filed in the U.S. District Court for the District of Columbia along with a statement of undisputed facts, the agencies have violated the payday lender’s due process rights under the StigmaPlus Theory and the "reputation plus" theories. According to the motion, "where a person’s good name, reputation, honor, or integrity is at stake because of what the government is doing to him," "notice and an opportunity to be heard are essential." Additionally, the motion stated that the defendants violated the payday lenders’ due process rights under the "reputation plus" theory where defamation in the course of the termination of employment is" actionable under the Due Process Clause.

Injunctive relief requested. The motion asks for injunctive relief by closing off both of the mechanisms "through which Defendants have stigmatized Plaintiffs and harmed their background legal rights." According to the payday lenders, the court should "end Defendants’ campaign of direct coercion by enjoining them, and their employees and agents, from applying informal pressure on banks to terminate their relationships with payday lenders" or otherwise depriving them of access to the banking system.

The motion further states that the court should end the agencies’ attempts to raise the cost of doing business with payday lenders by requiring them to issue a public clarification that payday lending is not a disfavored, "high risk" business, and that having a payday-lender or a third-party that processes payments for payday lenders as a customer "does not, standing alone, necessitate any kind of heightened monitoring or enhanced due diligence obligations."

Documents released. Chairman of the House Financial Institutions and Consumer Credit Subcommittee Blaine Luetkemeyer (R-Mo), in response to the document released with the motion, issued a statement that he is "appalled by the blatant intimidation and bias employed by unelected bureaucrats to play partisan politics with the livelihood of our citizens. No matter your ideological leanings, the American government should not be able to destroy all that you have worked for."

Luetkemeyer, a frequent critic of the Justice Department’s "Operation Choke Point," sponsored legislation that would end the Obama-era program. H.R. 2706, The Financial Institution Customer Protection Act of 2017, would require federal banking agencies to provide banks or credit unions written justification of any request to terminate or restrict a customer’s account, except in instances of national security. The bill would also require the federal banking agencies to issue an annual report to Congress that describes the number of customer accounts the agency requested or caused to be closed and the legal authority on which the agency relied. The bill was passed by the house on Dec. 11, 2017.

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