Banking agencies issue examiner guidance for major disasters

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

The federal financial institution regulatory agencies, in consultation with the Conference of State Bank Supervisors, have jointly issued guidance outlining the supervisory practices to be followed in assessing the financial condition of supervised institutions affected by a disaster that results in the President’s declaring an area a major disaster with individual assistance. Such disaster areas generally experience extensive damage that will continue to affect the business activities of the institutions serving that area for an extended period of time.

The Interagency Supervisory Examiner Guidance for Institutions Affected by a Major Disaster describes factors that examiners should consider when assessing the financial condition of a supervised institution affected by a major disaster. In addition to providing information on assessing the various ratings components, the guidance directs examiners to review management’s effectiveness in addressing the immediate aftermath of the disaster as well as longer-term changes to an institution’s business markets and strategy. In assessing a financial institution’s management of problems related to a major disaster, examiners should consider the institution’s asset size, complexity, and risk profile.

The guidance indicates that examiners will consider how management at affected institutions conduct initial risk assessments and refine such assessments as more complete information becomes available and recovery efforts proceed. The guidance also states that examiners must consider the extent to which weaknesses in an institution’s financial condition are caused by external problems related to the major disaster and its aftermath.

The supervisory agencies will work with institutions affected by a major disaster to determine their needs, reschedule any examinations, consider extensions for filing quarterly Reports of Condition and Income or other reports, and address capital declines due to temporary deposit growth, as needed.

The Financial Deposit Insurance Corporation notified its supervised institutions of the guidance in FIL-62-2017. The Federal Reserve Board issued notice of the guidance in Supervisory Letter SR 17-14. The Office of the Comptroller of the Currency published a news release and OCC Bulletin 2016-61 to inform institutions of the guidance.

For more information about financial institutions' operations after major disasters, subscribe to the Banking and Finance Law Daily.

CFPB to reexamine mortgage reporting requirements, prepaid rule

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau plans to reconsider aspects of its mortgage data and prepaid rules. The CFPB also said that it does not intend to assess penalties for errors in mortgage data collected in 2018 and to delay the effective date of the prepaid rule. The prior actions had been issued under former Director Richard Corday, while the change in direction is taken under the leadership of new acting Director Mick Mulvaney.

HMDA reporting requirements. The Bureau will not require data resubmission under the Home Mortgage Disclosure Act unless data errors are material or assess penalties with respect to errors for data collected in 2018 and reported in 2019. The CFPB’s public statement recognizes significant systems and operational challenges that are needed to adjust to the revised regulation and the extended submission deadline is intended to help institutions identify compliance weaknesses. The Bureau will credit good-faith compliance efforts.

The Bureau also announced it intends to open a rulemaking to reconsider various aspects of its 2015 HMDA rule, such as the institutional and transactional coverage tests and the rule’s discretionary data points. Beginning on Jan. 1, 2018, financial institutions will submit HMDA data collected in 2017 and beyond using the Bureau’s new online platform.

Similar statements regarding HMDA implementation have been issued by the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration.

Legislative support. While Sen. Mike Rounds (R-SD) is supportive of the CFPB’s action to delay enforcement of the HMDA data reporting requirements, he hopes that the temporary reprieve will give the Senate enough time to consider the Banking Committee’s economic growth legislation. This includes Rounds’ provision of an exemption for small financial institutions that originate 500 closed-end mortgage loans or 500 open-end lines of credit from HMDA reporting requirements. “This will allow banks to focus on servicing consumers rather than on complying with unneeded federal reporting regulations.”

Expressing his gratitude to acting Director Mick Mulvaney, Rep. Randy Hultgren (R-Ill) said that the delayed enforcement will protect community banks and credit unions from “burdensome” reporting requirements. Hultgren recently introduced the Home Mortgage Reporting Relief Act with Rep. Tom Emmer (R-Minn), who also applauded Mulvaney’s action, which would give community banks and credit unions additional time to comply with the new HMDA reporting rules.

Industry support. Independent Community Bankers of America President and CEO Camden R. Fine strongly supports the CFPB’s actions, believing that if left unaddressed, these mandatory reporting requirements would divert critical community bank resources that would otherwise be used to serve American consumers.

Prepaid rule. The CFPB said that it expects to amend its prepaid rule “soon after the new year” and delay the effective date to allow additional time for implementation. The prepaid rule would affect error resolution procedures for unregistered accounts and digital wallet credit cards that are linked to prepaid accounts.  The CFPB’s anticipated action will be based on its review of comments received on changes that had been proposed to meet industry concerns.

The rule had been scheduled to take effect on April 1, 2018, but in June the CFPB proposed amendments to Reg. E—Electronic Fund Transfers (12 CFR Part 1005) to address what prepaid companies described as “unanticipated complexities” with the rule.

For more information about CFPB initiatives under new leadership, subscribe to the Banking and Finance Law Daily.

UCC's Article 9 inapplicable to foreclosure of HOA lien

By Lisa M. Goolik, J.D.

The “commercial reasonableness” standard of Uniform Commercial Code Article 9 does not apply to the foreclosure of a homeowners’ association lien involving the sale of real property, the Supreme Court of Nevada has concluded. The “elaborate” requirements that an HOA must follow in order to foreclose on the real property securing a lien under Nevada’s Uniform Common Interest Ownership Act (UCIOA) override Article 9's “deliberately flexible” requirements regarding the method, manner, time, place, and terms of a sale of personal property collateral. As a result, the court’s standard for reviewing the foreclosure sale was limited to whether the sale was affected by some element of fraud, unfairness, or oppression.

Low sales price. The purchaser of the property at the HOA’s foreclosure auction had filed an action to quiet title against a lender, Nationstar Mortgage, LLC, that held a deed of trust in the property. Nationstar challenged the action, arguing the sales price of the property—$35,000—was commercially unreasonable as a matter of law.” In support, Nationstar provided an appraisal valuing the property at $335,000 as of the date of the HOA's foreclosure sale. Nationstar contended that the HOA foreclosure sale should be set aside as commercially unreasonable, as demonstrated by the low sales price.

The court agreed that, in the context of Article 9 sales, the secured creditor has an affirmative obligation to obtain the highest sales price possible, and if the sale is challenged, the secured creditor has the burden of establishing commercial reasonableness. However, after examining the statutory requirements of the UCIOA and Article 9, the court concluded that the “commercial reasonableness” standard does not apply to a foreclosure of an HOA lien involving the sale of real property. Accordingly, “inadequacy of price” was not a sufficient ground for setting aside the HOA’s foreclosure sale “absent additional proof of some element of fraud, unfairness, or oppression as accounts for and brings about the inadequacy of price.”


For more information about Nationstar Mortgage, LLC v. Saticoy Bay LLC Series 2227 (Nev. Sup. Ct.), subscribe to the Banking and Finance Law Daily.

GAO says CFPB’s bulletin on indirect auto lending compliance is a reviewable ‘rule’

By Thomas G. Wolfe, J.D.

 

In response to an inquiry by Senator Patrick Toomey (R-Pa), the U.S. Government Accountability Office (GAO) has issued an opinion letter concluding that the Consumer Financial Protection Bureau’s 2013 bulletin on “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” is a general statement of policy and a “rule” subject to the requirements of the Congressional Review Act (CRA). While the CFPB has acknowledged that its bulletin provides guidance and clarity, the Bureau maintains that it is nonbinding and has no legal effect on regulated entities. In contrast, the Dec. 5, 2017, GAO opinion letter, authored by GAO General Counsel Thomas H. Armstrong, asserts that the CFPB bulletin goes beyond the attributes of guidance and clarity and satisfies the CRA’s definition of a “rule” because, among other things, it is a “general statement of policy designed to assist indirect auto lenders to ensure that they are operating in compliance with ECOA and Regulation B, as applied to dealer markup and compensation policies.”

 

In March 2013, the Bureau issued its bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (CFPB Bulletin 2013-02) as guidance to both depository and nonbank institutions. The CFPB sought to assist indirect auto lenders with ECOA compliance in general and to provide guidance to auto lenders who permit dealers to increase consumer interest rates and compensate dealers with a share of the increased interest revenues. Noting the incentives that these markup and compensation policies create, as well as the discretion they permit, in the indirect auto lending industry, the Bureau discerned “a significant risk” that these existing policies would “result in pricing disparities on the basis of race, national origin, and other prohibited bases.”

 

Letter highlights. In his opinion letter on behalf of the GAO, Armstrong observes that Toomey had asked whether the CFPB’s March 2013 bulletin “is a rule for purposes of the Congressional Review Act.” In concluding that the CFPB bulletin “is a general statement of policy and a rule under the CRA,” the GAO letter underscores that CRA requirements may sometimes apply to general statements of policy.

 

In particular, the letter notes that the CFPB bulletin:

• provides information on the manner in which the CFPB plans to exercise its “discretionary enforcement power;”
• expresses the Bureau’s views that certain indirect auto lending activities “may trigger liability” under ECOA;
• advises the public “prospectively” of the manner in which the CFPB proposes to exercise its discretionary enforcement power;
• sets forth the Bureau’s expectations that indirect auto lenders “take steps” to ensure that their practices do not result in “pricing disparities on prohibited bases;”
• is designed to prescribe the Bureau’s policy in enforcing fair lending laws regarding indirect auto lender markup and dealer compensation policies; and
• asserts that the Bureau “did not raise any claims” that its bulletin would not be a rule—for instance, that the bulletin fell within the CRA’s specified “rule” exceptions. 

For more information about rules impacting the financial services industry that are subject to the Congressional Review Act, subscribe to the Banking and Finance Law Daily.

New York effort to block OCC fintech charter is premature

By Andrew A. Turner, J.D.

 

Since the Office of the Comptroller of the Currency has not reached a final decision on whether to grant special-purpose national bank charters to financial technology companies, a New York regulator’s challenge to the OCC’s authority to grant fintech charters failed on standing and ripeness grounds.

 

A federal district judge said that the New York Department of Financial Services’s purported injuries are too future-oriented and speculative to confer standing. Similarly, the claims are unripe because they are “contingent on future events that may never occur” (Vullo v. Office of the Comptroller of the Currency). 

 

The issue first arose when the OCC began considering the possibility of issuing special-purpose national bank charters to fintech companies under its regulations. To support its position that a fintech charter decision had been reached, DFS relied on several OCC documents:

 

• a White Paper—Exploring Special Purpose National Bank Charters for Fintech Companies;
• a speech by Comptroller Thomas J. Curry touting innovation in the fintech industry as a vehicle to expand financial inclusion for low-income individuals;
• a summary of public comments about the possibility of issuing charters to fintech companies; and
• the “Comptroller’s Licensing Manual Draft Supplement: Evaluating Charter Applications From Financial Technology Companies”

 

Since the OCC has not yet determined whether it will issue charters to fintech companies, nor received any applications, DFS claims that the OCC had determined that it has the power to issue these charters were an insufficient basis for a claim. Without a decision that such licenses will be considered and potentially granted, in the court’s view, the application process remains purely hypothetical.

In fact, the proposed issuance of fintech charters companies, a policy first discussed by an appointee of President Obama, has become increasingly uncertain under President Trump’s two Comptrollers of the Currency, Keith Noreika and Joseph Otting, the court noted. By waiting for a decision, the court would be saved from issuing a decision that may turn out to be unnecessary if the OCC never issues a fintech charter or does so under an altered framework.

 

CSBS litigation. Similar litigation brought by the Conference of State Bank Supervisors in the U.S. District Court for the District of Columbia remains pending. In April 2017, the CSBS filed suit against the OCC for deciding to create a new special-purpose national bank charter for financial technology and other nonbank companies. The CSBS alleged that the fintech charters would exceed the OCC’s authority under the National Bank Act.

 

Most recently, the CSBS filed a response in opposition to the OCC’s motion to dismiss claims against the agency for lack of jurisdiction and failure to state a claim. In its latest filing, the CSBS addresses a number of procedural issues related to standing, ripeness, finality, and timeliness in addition to the larger issue of whether the OCC even has the authority to issue nonbank charters to institutions that do not accept deposits.

The CSBS asserts that the OCC has the power to charter a national bank only if it is organized to carry on the "business of banking" (which, under current law, requires taking deposits, at a minimum) or where Congress has provided specific authorization to charter an entity to carry on a special purpose. The CSBS contends neither of those apply here.

 

In fact, the CSBS argues that the NBA expressly bars the OCC from issuing national bank charters to entities that do not lawfully engage in the business of banking. To lawfully engage in the business of banking, the CSBS asserts, an entity must comply with the Federal Reserve Act by becoming an insured bank under the Federal Deposit Insurance Act. To do this, a bank must actually take deposits, absent special Congressional exemption. Under this interpretation, the OCC could not rightfully issue charters to nondepository fintech companies.

 

The CSBS further relies on the legislative history and historical context of the NBA as well as the Bank Holding Company Act’s definition of "bank" to support the conclusion that a national bank must exercise the power of receiving deposits.

 

The term "business of banking" cannot be considered in a vacuum, the CSBS cautions. The OCC’s reliance on the argument that "business of banking" is not expressly defined in the NBA ignores the conflicts its interpretation creates with the FRA, FDIA, and BHCA.

 

Courts have repeatedly struck down the OCC’s attempts to charter entities that would not carry on the business of banking, and the OCC has been required to obtain specific congressional authority before doing so. For example, specific legislative authorization was required for both trust banks and banker’s banks to receive special purpose charters.

 

The CSBS alleges that the OCC improperly relies on case law that pertains to the inner limits of the business of banking and not the outer limits at issue here where the OCC is trying to expand its authority and that the OCC unreasonably equates the business of banking with the definition of a bank branch in an impermissible construction of statutory authority.

 

Commenting on the New York decision, CSBS said that it stands by its arguments in the District of Columbia case, “confident that the courts will determine that Congress has not given the OCC this authority.”

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

New York Fed’s Stiroh highlights ‘misconduct risk’ at financial firms

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

Federal Reserve Bank of New York Executive Vice President Kevin J. Stiroh addressed the issue of ‘misconduct risk’—the risk of illegal or unethical conduct by employees at a financial firm—in recent remarks at the Culture Roundtable Session with Business Schools and Financial Services Industry. Stiroh expressed concern that such a risk remained inconsistently addressed across the financial sector, posing a threat to prudential and financial stability.

In a speech titled Misconduct Risk, Culture and Supervision, Stiroh noted that financial firms had lost $320 billion in fines since 2008, a number that could arguably be attributed, in part, to individual misconduct. In addition to fines, he told the roundtable that such misconduct undermined confidence in the financial sector, citing Gallup research in 2016 that showed such confidence had fallen in the prior decade.

He encouraged firms to quantify what he called their "cultural capital." Unlike physical or human capital, cultural capital represents how a firm does businesses. Though he conceded cultural capital was intangible, he argued it was possible to measure and assess cultural capital’s impact. A firm with high cultural capital would see processes that produce results "consistent with the firm’s stated values," rewarding employees who act in accordance with those values. By contrast, he said, a firm with low cultural capital would establish values that "do not reflect ‘the way things are really done.’"

"Employees do not speak freely when they have concerns, and senior managers or the board of directors do not find out about improper conduct until it is uncovered by the authorities," Stiroh said of such organizations. "All of this increases misconduct risk and potentially damages the firm and the industry over time."

Stiroh said the Federal Reserve Banks should use supervision, rather than rule-making, to control misconduct risk. A regulatory change, he said, would be difficult to develop, given the "hard-to-define and evolving nature of behavior" of misconduct.

"Part of the role of supervisors is to close gaps in the rules," he said. "Issues like misconduct risk and culture likely fall in these gaps because they involve the attitudes, norms, and behaviors and suggest a critical role for supervisors in addressing these risks."

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Accountants’ assistance no excuse for not filing FBARs

By Richard Roth

Two individuals who admittedly failed to file required Reports of Foreign Bank and Financial Accounts were unable to convince a U.S. Court of Federal Claims judge that there was a reasonable cause for their omission. The judge said explicitly that having tax returns prepared by tax professionals would not, by itself, be an excuse for not filing FBARs. In the absence of such a reasonable cause, the Internal Revenue Service was permitted to penalize both of the individuals for their failure (Jarnagin v. U.S.).

The married couple admitted that they maintained an account at a Canadian bank. The husband is a dual U.S. and Canadian citizen, while the wife is a U.S. citizen with Canadian residency rights, and they own businesses in several U.S. states and in Canada. Under the Bank Secrecy Act, they were required to file FBARs as part of their yearly tax returns, but they conceded that they failed to do so for 2006 through 2009. As a result, the IRS assessed penalties of $10,000 for each year against each individual, for a total of $80,000.

Reasonable cause. The BSA requires that reports of accounts maintained at foreign financial institutions must be filed by U.S. citizens and residents and by anyone in and doing business in the United States (31 U.S.C. §5314(a)). However, a person whose failure to file was due to a reasonable cause cannot be penalized (31 U.S.C. §5321(a)). The individuals wanted to take advantage of the reasonable cause protection.

The judge first noted that neither the BSA nor its implementing regulations provide any guidance on what constitutes reasonable cause for failing to file. Neither was there much judicial precedent, she added. However, sections of the Internal Revenue Code and its regulations did offer a definition that applied in the context of tax compliance.

Based on the IRC and its regulations, the judge decided that the individuals needed to show that they had acted with “ordinary business care and prudence” in order to show a reasonable cause for the failure.

Care and prudence claimed. According to the judge, the individuals relied on three claims to show they acted with ordinary business care and prudence:

1. They hired a competent certified public accountant to prepare their tax returns.
2. The financial information they gave the CPA revealed the existence of the Canadian bank account.
3. They actually, and in good faith, relied on the CPA.

That was not enough, the judge decided.

No reasonable cause. The individuals never discussed their tax returns with their U.S. accountants, the judge pointed out. They did not review their tax returns before signing and filing them, did not explicitly draw their accountants’ attention to the Canadian bank accounts, and never sought any professional advice about their resulting filing obligations.

The judge relied heavily on the tax return language in which the individuals said they had read the returns and supporting documents and asserted that everything was complete and correct. Had they actually read the returns, they would have seen that the tax returns said, explicitly and incorrectly, that they had no interest in any foreign bank accounts. Moreover, after seeing that language, they would have asked their accountants about the accounts, the judge said.

Reliance on the advice of a tax professional can show reasonable cause for failing to follow tax laws in some situations, the judge conceded. However, these individuals had never asked the accountants about their FBAR filing duties, and the accountants had never offered them any professional advice on the subject. The individuals “cannot use as a shield reliance upon advice that they neither solicited nor received,” the judge concluded.

For more information about the Bank Secrecy Act, subscribe to the Banking and Finance Law Daily.

CFPB’s Deputy Director continues fight to lead agency, seeks preliminary injunction

By Charles A. Menke, J.D.

Following the denial of her request for a temporary restraining order that would have prevented President Donald Trump’s designee, Mick Mulvaney, from becoming acting director of the Consumer Financial Protection Bureau, Leandra English has filed an amended complaint and motion for preliminary injunction. Former CFPB Director Richard Cordray appointed English as Deputy Director, intending that she would become acting director upon his resignation. Trump, however, appointed Mulvaney to the position pursuant to the Federal Vacancies Reform Act. U.S. District Judge Timothy J. Kelley ruled that English failed to demonstrate a substantial likelihood that she would prevail on her claim that, as deputy director, she automatically succeeded Cordray pursuant to the Dodd-Frank Act.

Relief sought. In her amended complaint and motion, which are supported by a memorandum and affidavit, English generally seeks the same relief as previously demanded in her request for temporary restraining order. According to English, Mulvaney’s appointment by Trump violates the Dodd-Frank Act’s mandatory succession plan and independence requirement, as well as the Separation of Powers and the Appointments clause of the U.S. Constitution. English asserts that any actions undertaken by Mulvaney as Acting Director are therefore unlawful, and seeks to set aside these actions and compel action unlawfully withheld or unreasonably delayed pursuant to the Administrative Procedure Act. English also asserts she is entitled to declaratory and equitable relief.

Appointments Clause. While renewing the arguments proffered when seeking the temporary restraining order, English argues that under the Appointments Clause, the President has only two means of appointing officers—with the advice and consent of the Senate, or pursuant to a statute. English contends that “there is no clear statement in the FVRA that supplants the Dodd-Frank Act’s rule of succession.” Further, “the FVRA’s appointment provision does not apply by its own terms” but, even if it did apply, “it is overridden by mandatory language in Dodd-Frank.” As a result, there is no statutory basis for Mulvaney’s appointment and the appointment therefore violates the Appointments Clause.

Independence requirements. English additionally argues that even if the FVRA would apply to the CFPB Acting Director appointment, Mulvaney’s appointment is invalid because as CFPB Acting Director, Mulvaney would also be a member of the Federal Deposit Insurance Corporation Board pursuant to the Dodd-Frank Act. As a result, Mulvaney’s appointment not only undermines the CFPB’s independence from the Office of Management and Budget, but also defeats the intent of Congress to make the Federal Deposit Insurance Corporation independent from the OMB.

Briefing schedule, hearing. Defendants have until Dec. 18, 2017, to file their opposition to English’s motion. English must file a reply in support of her motion by Dec. 20, 2017. A hearing on the motion is scheduled for Dec. 22, 2017.
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Credit Union sues to block Mulvaney from acting as CFPB director

By Katalina M. Bianco, J.D.

In response to President Trump’s designation of Mick Mulvaney as acting director of the Consumer Financial Protection Bureau, the Lower East Side People’s Federal Credit Union has filed a complaint seeking declaratory and injunctive relief barring this appointment and any other CFPB acting director appointment by the president absent Senate approval. The credit union filed its suit in the federal district court for the Southern District of New York, alleging violations of the Dodd-Frank Act and the U.S. Constitution, naming the President and Mulvaney as defendants.

The complaint alleges that "President Trump has attempted an illegal hostile takeover of the CFPB, throwing the Credit Union and other credit unions and banks into a state of regulatory chaos. Even worse, defendant Trump has purported to appoint an Acting Director whose mission is to destroy a Bureau that protects thousands of the Credit Union’s members."

The credit union contends that the Dodd-Frank Act calls for the deputy director of the CFPB to serve as acting director until the president appoints and the Senate confirms a new director, and this law, rather than the Federal Vacancies Reform Act (FVRA), under which Mulvaney was appointed, applies. According to the complaint, Leandra English, who was named deputy director by former CFPB director Richard Cordray, became the Bureau’s acting director when Cordray’s resignation took effect.

Violation of Dodd-Frank. The complaint cites Dodd-Frank as providing that the Bureau’s deputy director, who is "appointed by the Director," "shall serve as acting Director in the absence or unavailability of the Director" (12 U.S.C. § 5491(b)(5)). According to the credit union, this designation of the deputy director as the "acting Director" reflects Congress’s deliberate choice to depart from the default procedure for naming an acting official under the FVRA. The credit union points out that an early version of Dodd-Frank that passed the House of Representatives in December 2009 did not provide for a deputy drector, and instead explicitly stated that a temporary replacement for a director would be chosen "in the manner provided by" the FVRA. But the Senate bill, introduced and passed months later, contained the present statutory language.

In addition, the complaint continues, the president’s Vacancies Reform Act appointment powers "shall not apply" to any members of an independent multi-member board or commission (U.S.C. § 3349c(1)). The acting director of the CFPB is an automatic member of an independent multi-member board or commission—the Federal Deposit Insurance Corporation board (12 U.S.C. §§ 1812(a)(1)(B), 1812(d)(2)). Therefore, the credit union argues, the FVRA does not apply to the appointment of the Acting Director of the CFPB

The credit union further argues that, even if President Trump could appoint someone as CFPB acting director, he cannot appoint a White House employee "who serves at his whim and pleasure to run this independent agency. A major purpose of the Dodd-Frank Act was to create a CFPB independent of the President and insulated from political pressure. The purported Mulvaney appointment destroys CFPB independence altogether."

Violation of Constitution. The complaint also alleges a violation of Article II, Section 2, of the Constitution, which provides that the president must appoint all "officers of the United States" with "the advice and consent of the Senate." By appointing Mulvaney in the absence of any Congressional statute so authorizing, the credit union contends, President Trump violated constitutional principles of Separation of Powers and the Appointments Clause.

For more information about the battle over the CFPB acting director, subscribe to the Banking and Finance Law Daily.

Joseph Otting comments on becoming 31st Comptroller of the Currency

By Thomas G. Wolfe, J.D.

Joseph Otting became the 31st Comptroller of the Currency, after being sworn into office by Treasury Secretary Steven T. Mnuchin on Nov. 27, 2017. Otting takes the helm at the Office of the Comptroller of the Currency in place of Keith Noreika, who had been serving as Acting Comptroller since May 2017 when Thomas J. Curry stepped down after completing his term as Comptroller. Commenting that it was an honor to have been nominated by President Donald Trump and confirmed by the Senate, Otting stated that he looks forward “to enhancing the value of national bank and federal savings association charters, reducing unnecessary burden, and promoting economic opportunity while maintaining the safety and soundness of the federal banking system.”

In his remarks after being sworn into office, Otting noted that “[j]ob creation and economic growth are part of the President’s agenda, and banks can support those goals by providing capital and financial services to the consumers, business, and communities they serve.” Otting commented that, based on his personal experience in the banking industry, he knows of “the challenges bankers face as they work to meet customer needs while coping with unnecessary regulatory burden that makes it more difficult and complicated than necessary.” Further, Otting said that “bankers support regulation, but effective regulation evolves with the changing needs of the nation and should be reviewed and modified as those needs change.”

Otting’s background. Otting, who worked for a number of regional banks during his career, most recently was managing partner of Ocean Blvd LLC and Lake Blvd LLC. While the White House observed that Otting previously served as President and CEO of OneWest Bank N.A. and as Vice Chairman of U.S. Bancorp., Otting’s nomination had been opposed by some Democrats, and some consumer groups, because One West Bank was the subject of a 2011 Office of Thrift Supervision enforcement order arising from its mortgage foreclosure practices. Further, according to Congresswoman Maxine Waters (D-Calif), when Otting was nominated as Comptroller of the Currency, One West Bank still was under investigation—stemming from the bank’s dealings with the Federal Housing Administration.

Otting holds a B.A. from the University of Northern Iowa and is a graduate of the School of Credit and Financial Management at Dartmouth College.

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Noreika questions value of bank holding companies

By Andrew A. Turner, J.D.

“Bank holding companies may have outlived their practical business value in our financial system and may, in fact, be obsolete,” according to First Deputy Comptroller of the Currency Keith Noreika. While bank holding companies may continue to serve a purpose for large companies that conduct complex activities, he sees less value for more traditional banking firms. 

Speaking before the American Enterprise Institute on the day of his resignation from government service after serving as Acting Comptroller until a permanent agency head was in place, Noreika said that the holding company structure is not necessary as a tool to manage systemic risk. Evolving regulatory changes have diminished the value of bank holding companies, while costs have increased with duplicative regulation, in his opinion.

Noreika gave the case of the Bank of the Ozarks as an example of why smaller banking companies are eliminating their holding companies. Bank of the Ozarks, a state non-member bank, merged its holding company into the bank citing benefits through consolidated governance and organizational structure.

Noting that for most bank holding companies, the bank usually makes up the vast majority of the company’s assets and activities, Noreika observed that “many community and regional banking organizations are realizing that the extra and duplicative costs of maintaining a holding company make little business and economic sense.” In addition to the trend limiting bank holding companies to activities that are financial in nature, he also pointed to costly prudential requirements under the Dodd-Frank Act as impediments to bank holding company flexibility.

Noreika contended that Congress could reduce regulatory redundancy by giving the regulator of the depository institution sole examination and enforcement authority when a depository institution constitutes a substantial portion of its holding company’s assets. Another suggested approach to the problem of multiple regulators would be to eliminate statutory impediments for firms that want to operate without a holding company, such as modernizing corporate governance requirements for national banks.

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Debt collectors can’t take over consumer’s fair debt collection suit

By Richard Roth, J.D.

The Fair Debt Collection Practices Act preempted debt collectors’ use of state execution procedures to eliminate their potential liability for FDCPA violations by levying on and selling the consumer’s cause of action, the U.S. Court of Appeals for the Ninth Circuit has determined. Using state execution laws in that way would frustrate the purposes of the FDCPA, the court said (Arellano v. Clark County Collection Service, LLC).

Clark County Collection Service and its law firm, Borg Law Group, secured a $793.39 state court default judgment against a consumer for an unpaid medical treatment bill. The consumer counterattacked by filing a federal court FDCPA suit, claiming that they had misled her by deadlines included in the complaint and summons. The complaint included the required FDCPA notice that the debt would be assumed to be valid if it was not disputed within 30 days, but the summons allowed only 20 days to file an answer to the suit, she said.

Clark County Collection and the Borg Law Group responded with what the court termed “a bold gambit.” They obtained a writ of execution from the state court that gave them the authority to levy on the consumer’s personal property to satisfy the default judgment. Using that authority, they levied on the FDCPA claim and, at a sheriff’s sale, bought the suit for $250. Then, claiming they now owned the suit, they convinced the federal judge to dismiss it.

Preemption. Federal law preempts state law if the state law erects an obstacle to the federal law’s ability to accomplish its purpose, the court pointed out. This is referred to as “conflict preemption.”

The purpose of the FDCPA is to protect consumers from abuse, harassment, and deceptive debt collection practices. The Act includes an express preemption section that says state debt collection practices that are inconsistent with the FDCPA are preempted to the extent of the inconsistency (15 U.S.C. §1692n).

It was irrelevant that the FDCPA includes no explicit provisions that address state execution laws, the court then said. Conflict preemption relies on the existence of an actual conflict, not an express claim of preemption. Using the state law execution procedure in this manner not only would eliminate the liability of the law firm and the debt collector, it actually would allow them to use the FDCPA to collect the debt. That clearly would thwart the purposes of the Act.

“[F]ederal law preempts a private party’s use of state execution procedures to acquire and destroy a debtor’s FDCPA claims against it,” the court explicitly said. As a result, Clark County Collection Service and Borg Law Group cannot assimilate the consumer’s FDCPA claim.

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CFPB orders Citibank to pay $6.5M for alleged student loan servicing failures

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

Charging Citibank, N.A., with deceiving student borrowers about tax benefits, incorrectly charging late fees and interest, and sending misleading monthly bills and incomplete notices, the Consumer Financial Protection Bureau has ordered the bank to end its allegedly illegal servicing practices and pay $3.75 million in redress to consumers and a $2.75 million civil money penalty. Citibank consented to the order without admitting or denying the Bureau’s findings.

“Citibank’s servicing failures made it more costly and confusing for borrowers trying to pay back their student loans,” said CFPB Director Richard Cordray. “We are ordering Citibank to fix its servicing problems and provide redress to borrowers who were harmed.”

Loan servicing. For years, Citibank, based in Sioux Falls, S.D., has made private student loans to consumers and also serviced the loans. As a loan servicer, Citibank manages and collects payments and provides customer service for borrowers. The bank also provides borrowers with periodic account statements and supplies year-end tax information. It also keeps track of the borrower’s in-school enrollment status and is responsible for granting and maintaining deferments when appropriate.

For the student loan accounts that Citibank was servicing, the Bureau found that Citibank misrepresented important information on borrowers’ eligibility for a valuable tax deduction, failed to refund interest and late fees it erroneously charged, overstated monthly minimum payment amounts in monthly bills, and sent faulty notices after denying borrowers’ requests to release a loan cosigner.

The Dodd-Frank Act grants authority to the CFPB to take action against institutions violating consumer financial laws, including engaging in unfair, deceptive, or abusive acts or practices.

Restitution. The CFPB’s order requires Citibank to:

• pay $3.75 million in restitution to harmed consumers who were charged erroneous interest or late fees, paid an overstated minimum monthly payment, or received inadequate notices as a result of Citibank’s faulty servicing;
• provide accurate information regarding student loan interest paid, implement a policy to reverse erroneously assessed interest or late fees, and provide borrowers who were denied a cosigner release with their credit scores, the phone number of the credit reporting agency that generated the credit report, and disclosure language confirming that the credit reporting agency did not make the decline decision; and
• pay a $2.75 million penalty to the CFPB’s Civil Penalty Fund.

Charging Citibank, N.A., with deceiving student borrowers about tax benefits, incorrectly charging late fees and interest, and sending misleading monthly bills and incomplete notices, the Consumer Financial Protection Bureau has ordered the bank to end its allegedly illegal servicing practices and pay $3.75 million in redress to consumers and a $2.75 million civil money penalty. Citibank consented to the order without admitting or denying the Bureau’s findings.

“Citibank’s servicing failures made it more costly and confusing for borrowers trying to pay back their student loans,” said CFPB Director Richard Cordray. “We are ordering Citibank to fix its servicing problems and provide redress to borrowers who were harmed.”

Loan servicing. For years, Citibank, based in Sioux Falls, S.D., has made private student loans to consumers and also serviced the loans. As a loan servicer, Citibank manages and collects payments and provides customer service for borrowers. The bank also provides borrowers with periodic account statements and supplies year-end tax information. It also keeps track of the borrower’s in-school enrollment status and is responsible for granting and maintaining deferments when appropriate.

For the student loan accounts that Citibank was servicing, the Bureau found that Citibank misrepresented important information on borrowers’ eligibility for a valuable tax deduction, failed to refund interest and late fees it erroneously charged, overstated monthly minimum payment amounts in monthly bills, and sent faulty notices after denying borrowers’ requests to release a loan cosigner.

The Dodd-Frank Act grants authority to the CFPB to take action against institutions violating consumer financial laws, including engaging in unfair, deceptive, or abusive acts or practices.

Restitution. The CFPB’s order requires Citibank to:

• pay $3.75 million in restitution to harmed consumers who were charged erroneous interest or late fees, paid an overstated minimum monthly payment, or received inadequate notices as a result of Citibank’s faulty servicing; 
• provide accurate information regarding student loan interest paid, implement a policy to reverse erroneously assessed interest or late fees, and provide borrowers who were denied a cosigner release with their credit scores, the phone number of the credit reporting agency that generated the credit report, and disclosure language confirming that the credit reporting agency did not make the decline decision; and 
• pay a $2.75 million penalty to the CFPB’s Civil Penalty Fund. 

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Court rejects bank's, bankers association's 'FAST Act' lawsuit challenging reduced dividends

By Thomas G. Wolfe, J.D.

The U.S. Court of Federal Claims recently dismissed the proposed class-action lawsuit brought by a national bank, Washington Federal, N.A., and the American Bankers Association (ABA) against the United States government challenging the funding of the 2015 Fixing America’s Surface Transportation (FAST) Act. As part of legislation to fund the FAST Act, the Federal Reserve Act was amended, bringing about a reduction of the historic, statutory 6-percent dividend paid to certain member banks on their Federal Reserve stock.


In American Bankers Association v. United States, the federal court first determined that, as a threshold matter, the ABA lacked jurisdictional standing in the case. Next, the court determined that Washington Federal and other similarly situated national banks had no contractual or statutory entitlement to a dividend at any specific rate nor a property interest in which to assert a “Taking Clause” claim under the Fifth Amendment to the U.S. Constitution. According to the court, “the remedy for the understandable grievances alleged in this case lies within the exclusive jurisdiction of the Congress.”

In 2015, Congress enacted the FAST Act to provide $2.7 billion over five years for “national transportation infrastructure,” and the funding efforts included the Federal Reserve Act amendment. The ABA and Washington Federal contended that the 6-percent annual dividend had been guaranteed to member bank stockholders “since the Federal Reserve Act was enacted in 1913, and it is memorialized in contracts between the Federal Reserve Banks and their member bank stockholders.” Among other things, the ABA’s and Washington Federal’s amended complaint alleged that a valid contract existed between the federal government and member banks for the banks to receive the expected 6-percent dividends.

In response, in May 2017, the government asked the U.S. Court of Federal Claims to dismiss the amended complaint, maintaining that there was no express or implied contract between the parties and that there was no “compensable taking” of any cognizable property right in a specified dividend rate.


ABA lacks standing. Noting its jurisdiction in the case under the Tucker Act, the Court of Federal Claims outlined the necessary showing by the plaintiffs to demonstrate that the source of substantive law on which they relied could be fairly interpreted as “mandating compensation by the Federal Government.” While Washington Federal met the standard for establishing standing in the case, the ABA did not, the court decided.

Although the ABA had alleged that 66 member banks had a contract with the Federal Reserve Bank, the court noted that each “owns a different amount of Federal Reserve Bank stock and experienced different amounts of monetary loss, as a result of the implementation of the FAST Act.” The ABA argued that individualized proof was not needed because each member bank “had an equal reduction in dividend receipts.” While the court recognized that the net decrease in dividend receipts differed because each ABA member purchased a different amount of stock when it joined the Federal Reserve System, the court emphasized that the amended complaint did not allege the ABA suffered individual monetary injury nor did it allege that any member bank assigned to the ABA a right to recover damages on its behalf.

Court’s decision. The court observed that the parties to the litigation spent much of their time arguing about whether Washington Federal had a contractual relationship with the Federal Reserve Bank and, if so, whether Congress could change the terms of that contract by legislation. However, from the court’s perspective, the parties “overlooked the dispositive fact” that a particular section of the Federal Reserve Act provides that “the right to amend, alter, or repeal this act is hereby expressly reserved.” According to the court, the Federal Reserve Act “conferred no right to Washington Federal or any other holder of Federal Reserve Bank stock to receive a dividend at any rate certain that Congress could not amend, change, or even eliminate.”

Moreover, the Federal Reserve Act did not convey a contractual or statutory right to a 6-percent dividend, the court stressed. If Washington Federal did not have a right to a 6-percent dividend, then the bank could not be viewed as having a “property interest” in a 6-percent dividend rate as well. At most, Washington Federal had “only a mere unilateral expectation” of a 6-percent dividend, the court determined. Further, the court pointed out that Federal Reserve Bank stock could not be sold or transferred and that the U.S. Court of Appeals for the Federal Circuit has considered that facet as an important factor in determining whether a property right is present.

Further, based on its analysis of Washington Federal’s lack of a contractual right, statutory right, or property interest in an annual 6-percent dividend, the court had little trouble also determining that the bank did not have any recognizable interest in the dividend that could form a viable claim under the “Taking Clause” of the Fifth Amendment to the Constitution.

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Senators approve proposal to ease financial regulatory requirements

By Andrew A. Turner, J.D.

Senate Banking Committee members have reached bipartisan agreement on proposed legislation that would change the financial regulatory framework by raising the threshold for applying enhanced prudential standards to bank holding companies from $50 billion to $250 billion. “The package is targeted toward helping community banks, credit unions, mid-sized banks, regional banks and custody banks,” according to the press release announcing the agreement. The regulatory relief package also includes consumer protections for veterans, senior citizens, and victims of fraud. 

The agreement was announced by Senate Banking Committee Chairman Mike Crapo (R-Idaho) and Banking Committee members Joe Donnelly (D-Ind), Heidi Heitkamp (D-ND), Jon Tester (D-Mont), and Mark Warner (D-Va). Crapo said that the proposals would “foster economic growth by right-sizing regulation.” The legislative proposal includes provisions intended to:

• improve consumer access to mortgage credit;

• provide regulatory relief for small financial institutions and protect consumer access to credit;

• provide protections for veterans, consumers, and homeowners; and

• tailor regulation for banks to better reflect their business models.

Tailoring regulations. Bank holding companies with total consolidated assets between $50 billion and $100 billion would be exempt from enhanced prudential standards immediately, and bank holding companies with total consolidated assets between $100 billion and $250 billion would be exempt 18 months after the effective date. The proposed legislation would also require changes to the supplementary leverage ratio for custodial banks and the treatment of municipal obligations.

Mortgage credit. Mortgage loans that are originated and retained in portfolio by an insured depository institution or an insured credit union with less than $10 billion in total consolidated assets would be deemed qualified mortgages. A tailored exemption from appraisal requirements would be applied to mortgage loans with a balance of less than $400,000 if the originator is unable to find a state-certified or state-licensed appraiser.

The bill would also provide regulatory relief to small depository institutions from disclosure requirements under the Home Mortgage Disclosure Act. Other provisions target barriers to jobs for loan originators; access to manufactured homes; real property retrofit loans; escrow requirements for consumer credit transactions; and the wait period for lower mortgage rates.

Credit access. Capital simplification for qualifying community banks would establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8 percent and not more than 10 percent. Banks with less than $10 billion in total consolidated assets that maintain tangible equity in an amount exceeding the community bank leverage ratio would be deemed to be in compliance with capital and leverage requirements.

Community bank relief would exempt banking entities from the Bank Holding Company Act if they have (1) less than $10 billion in total consolidated assets, and (2) total trading assets and trading liabilities that are not more than 5 percent of total consolidated assets.

Reporting requirements would be reduced for depository institutions with less than $5 billion in total consolidated assets that satisfy other appropriate criteria. Federal savings associations with less than $15 billion in total consolidated assets would be permitted to operate with the same powers and duties as national banks without being required to convert their charters. The consolidated asset threshold would be raised from $1 billion to $3 billion for well managed and well capitalized banks to qualify for an 18-month examination cycle.

Protections. Credit bureaus would be required to include in a consumer’s file fraud alerts for at least a year under certain circumstances, provide consumers one free freeze alert and one free unfreeze alert per year, and provide further protections for minors. Other sections are aimed at protecting veterans’ credit and aiding senior protection.

Senator reaction. Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, questioned the wisdom of legislation “rolling back so many of Dodd-Frank’s protections” while banks made “record profits last year.” Senator Bob Corker (R-Tenn), a member of the Senate Banking Committee, countered that the reforms will ease the regulatory burden that Dodd-Frank created for community banks. Similarly, Sen. Thom Tillis (R-NC) commented that “Dodd-Frank’s harmful one-size-fits-all model” has restricted access to capital with burdensome regulations.

Senator Tom Cotton (R-Ark) applauded the agreement, which includes the PACE Act, legislation Cotton introduced earlier this year that requires Truth in Lending Act disclosure for Property Assessed Clean Energy (PACE) loans that target low-income and elderly Americans with predatory home loans.

Industry comments. Marcus Stanley, policy director at Americans for Financial Reform, worried that the proposal strips away mandates to maintain regulatory oversight and “opens the door for Trump-appointed regulators to severely weaken the rules applying to large regional banks.” On the other hand, Rob Nichols, American Bankers Association president and CEO, welcomed the regulatory reform legislation for including mortgage rule changes, longer examination cycles for community banks, charter flexibility for federal savings associations, and stress test relief.

While urging Congress to continue working toward policies which consider risk rather than arbitrary asset thresholds, the Consumer Bankers Association and Financial Services Roundtable saw the agreement as an important step forward by giving the Federal Reserve Board flexibility to make a more complete assessment when designating certain institutions systematically important.

The Independent Community Bankers of America expressed its support for a legislative agreement that included ICBA-advocated provisions to increase exemption thresholds for Home Mortgage Disclosure Act reporting, provide “qualified mortgage” status for portfolio mortgage loans at most community banks, expand eligibility for the 18-month regulatory examination cycle, and ease appraisal requirements to facilitate mortgage credit in local communities.

Meanwhile, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, offered a series of recommendations to revitalize small business lending. The “Financing Main Street Agenda” includes five core recommendations: replace asset thresholds with multifactor risk assessments; reduce the burden of stress testing and capital planning while preserving benefits; harmonize U.S. capital and liquidity rules with international standards; reassess the Volcker Rule; and improve the regulatory process.

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Supreme Court rejects chance to consider concrete injury, but another opportunity arises

By Richard A. Roth

The Supreme Court has rejected a request by a prospective employer that it review whether combining a disclosure required by the Fair Credit Reporting Act and a job applicant’s waiver in the same document gave the applicant standing to sue under Article III of the Constitution. According to the U.S. Court of Appeals for the Ninth Circuit, the applicant would have suffered an injury in fact due to the employer’s failure to put the waiver in a separate document (Syed v. M-I, LLC).

The FCRA requires an employer that wants to look at a job applicant’s consumer report to disclose that intent in advance in a document that contains nothing but the disclosure. The sole statutory exception to the separate document requirement is that the employer may include a place for the applicant to give his consent on the same document. However, the employer added to the document a waiver of the applicant’s right to sue for any FCRA violations.

Concrete injury. According to the Ninth Circuit, the applicant had described more than a “bare procedural violation” of the FCRA. The requirement that a job applicant affirmatively consent to allowing an employer to review his consumer report created a right to privacy, the court said, and depriving an applicant of a meaningful ability to permit, or refuse to permit, the use of his consumer report violated that right.

The appeal was filed as M-I, LLC v. Syed (No. 16-1524).

Job applicant’s appeal. However, a petition for certiorari filed by a job applicant on Oct. 30, 2017, raises precisely the same issue. In Groshek v. Time Warner, the applicant asks the Court to review whether two employers’ inclusion of liability releases in the FCRA disclosure documents created an injury in fact. Contrary to the Ninth Circuit, the U.S. Court of Appeals for the Seventh Circuit decided there was no concrete injury.

According to the Seventh Circuit, the goal of the FCRA disclosure provision is to ensure that job applicants do not unknowingly consent to an employer’s use of a consumer report. An employer’s addition of extraneous material, such as a waiver of liability, would not create a concrete injury as long as it did not confuse the applicant about his rights (see Groshek v. Time Warner).

Syed distinguished. The Seventh Circuit considered but rejected the Ninth Circuit’s opinion in Syed. According to the Seventh Circuit, the two cases were different because, unlike Syed, Groshek conceded that he had not been confused about his right to prevent the employers from reviewing his consumer report.

The appeal was filed as Groshek v. Time Warner (No. 17-688).

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Noreika advocates intermingling of banking and commerce

By Stephanie K. Mann, J.D.

Mixing banking and commerce can generate efficiencies that deliver more value to customers and can improve bank and commercial company performance with little additional risk, argued Acting Comptroller of the Currency Keith Noreika at the Clearing House Annual Conference in New York City. Addressing what has been a “taboo” subject for banking regulators, the separation of banking and commerce in the United States, Noreika offered his alternative to the narrative.

Traditionally, banking and commerce have been separated to protect banks from the corruptive power of commercial ownership and protect the market from banks consolidating and wielding too much commercial power.

Exceptions. Under current federal law, exceptions are provided for some firms to mix banking and commerce more freely. However, said Noreika, these exceptions provide an unfair advantage. Namely, “well-lawyered and well-connected companies tend to gain and benefit from special exceptions, privileging them over the bulk of firms that must live under the weight of a general prohibition against mixing banking and commerce.” This results in the very consequences that the prohibition was intended to prevent: “advantaging and aggrandizing a few at the expense of the many.”

Inherently safer? Noreika then questioned whether separating banking and commerce makes the economy more secure, particularly following the recent financial crisis. “Even when separated, risk can build in one part of the system with less rigorous supervision and become a contagion spreading to infect the whole,” said the Acting Comptroller. He pointed to the recent examples of Bear Stearns and Lehman Brothers, who, because they were not banks, were not regulated with a system of checks and balances and not required to have a diversified and stable sources of liquidity and capital. Yet these companies played a significant role in the financial crisis.

By allowing banks and commerce to intermingle, Noreika believes that meaningful competition will emerge which could have a number of positive effects, including tempering the risk concentrated in having just a few mega banks. In addition, it could make more U.S. banks globally competitive and promote economic opportunity and growth domestically and the development of better banking services, greater availability, and better pricing. “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so,” stated Noreika.

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CFPB sues largest debt settlement services provider for deceiving consumers

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has filed charges against Freedom Debt Relief, LLC, the nation’s largest debt settlement services provider, and its co-CEO Andrew Housser for deceiving consumers about its "clout with creditors." The CFPB is seeking compensation for harmed consumers, civil penalties, and an injunction against Freedom and Housser to halt their "unlawful conduct."

"Freedom took advantage of vulnerable consumers who turned to the company for help getting out of debt," said CFPB Director Richard Cordray. "Freedom deceived consumers about its clout with creditors that it knows do not negotiate with debt-settlement companies, made some customers negotiate on their own, and misled consumers about its fees and their accounts."

Complaint. The Bureau filed this action against Freedom and Housser under the Telemarketing and Consumer Fraud and Abuse Prevention Act (15 U.S.C. §§ 6102(c), 6105(d)(2012)); the Telemarketing Sales Rule (16 CFR Part 310); and the unfair, deceptive or abusive acts and practices provisions of the Consumer Financial Protection Act (12 U.S.C. §§ 5531, 5536(a), 5564, 5565), in connection with the marketing and sale of debt-settlement or debt-relief services.

Specifically, the Bureau alleges that Freedom:

• misleads consumers about creditors’ willingness to negotiate;
• fails to make clear to consumers that they may need to negotiate with creditors;
• deceives consumers about the extent of their services and their fees; and
• fails to disclose to consumers that they are entitled to a return of funds in their accounts if they leave the program.

The complaint includes Housser because, according to the CFPB, Housser co-founded and continues to exercise managerial responsibility for Freedom. The co-CEO has the authority to approve Freedom’s policies and practices and to approve the content of the debt-resolution agreements that consumers sign with Freedom and on which his name and signature appear. The complaint alleges that Housser knows Freedom charges consumers even if it doesn’t negotiate settlements with creditors but allows the agreements to assure consumers they will be charged only if there’s a settlement and consumers make a payment.

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Consumer bankers say regulators’ proposal undermines Community Reinvestment Act’s purpose

By Thomas G. Wolfe, J.D.

 

Commenting on the Office of the Comptroller of the Currency’s, Federal Reserve Board’s, and Federal Deposit Insurance Corporation’s joint proposal to amend their respective Community Reinvestment Act (CRA) regulations, the Consumer Bankers Association (CBA) asserts that the proposed rulemaking runs counter to the CRA’s purpose and “will negatively impact our members as they work to provide products and services meeting the most pressing needs of lower income families and communities.” In particular, the CBA’s October 2017 comment letter to the OCC maintains that home equity loans should be kept separate from the “home mortgage loans” category; home improvement loans should not be lumped together with “other secured” and “other unsecured” loans; and financial institutions should not be required to produce their CRA Loan Application Register documents under the proposed changes to “public file” requirements.

 

In September 2017, the OCC, Fed, and FDIC proposed amendments to their respective CRA regulations to align them with recent revisions made by the Consumer Financial Protection Bureau to Regulation C—Home Mortgage Disclosure (12 CFR Part 1003). Since the Bureau’s Reg. C modifications are slated to take effect Jan. 1, 2018, the proposed CRA rule amendments by the OCC, Fed, and FDIC target the same effective date as well. In addition, the federal regulators requested public comment on the proposed modifications to their CRA regulations.

 

Comment highlights. In its comment letter, the CBA underscores that:

• as a general rule, home equity loans should not be included with “home mortgage loans” for CRA purposes;
• home equity loans should be included in the CRA analysis “only at the option of the financial institution,” and should be reported as a separate category—apart from home mortgage loans—for easier identification;
• financial institutions could benefit from having the option to combine certain traditional CRA mortgage categories, “i.e. home purchase, home improvement, and home refinance,” for purposes of the financial institution’s CRA examination;
• home improvement loans should not be lumped with “Other Secured” and “Other Unsecured” categories for loans, but should be listed instead as a “fifth category of consumer loans;” and
• because the regulators’ proposal would allow financial institutions to maintain only the pertinent notice required under Regulation C for their CRA public files and would not require including data from their “HMDA Loan Application Register” files, financial institutions should similarly not be required to produce their “CRA Loan Application Register” files.

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Risk management principles for bank products, fintech charters touted

By Andrew A. Turner, J.D.

The Office of the Comptroller of the Currency has issued updated guidance (OCC Bulletin 2017-43) on how banks and thrifts should manage the risks that arise when they offer new, modified, or expanded financial products or services. Meanwhile, Acting Comptroller of the Currency Keith Noreika defended national bank charters for fintech companies in a speech discussing innovation and financial technology.

Risk management principles for banks. The guidance, which replaces a bulletin published in 2004, advises that new activities “should encourage fair access to financial services and fair treatment of consumers” and comply with applicable laws and regulations. It specifically considers strategic, reputation, credit, operational, compliance, and liquidity risk.

According to the OCC, technological advances like the expanded use of artificial intelligence and cloud data storage, along with evolving consumer preferences are “reshaping the financial services industry at an unprecedented rate and are creating new opportunities to provide consumers, businesses, and communities with more access to and options for products and services.” The bulletin outlines ways of conducting effective risk management to avoid strategic risk, reputation risk, credit risk, operational risk, compliance risk, and liquidity risk.

As part of ongoing supervision, OCC examiners review new activities consistent with the OCC’s risk-based supervision. The bulletin stated that examiners will consider new activities’ effect on banks’ risk profiles and the effectiveness of banks’ risk management systems, including due diligence and ongoing monitoring efforts. New activities should be developed and implemented consistently with sound risk management practices and should align with banks’ overall business plans and strategies.

The bulletin outlines ways of conducting effective risk management to avoid strategic risk, reputation risk, credit risk, operational risk, compliance risk, and liquidity risk.

1. Management should design an effective risk management system that identifies, measures, monitors, reports, and controls risks when developing and implementing new activities.
2. Management and the board should clearly understand the rationale for engaging in new activities and how proposed new activities meet the bank’s strategic objectives.
3. Management should conduct due diligence to fully understand the risks and benefits before implementing new activities.
4. Management should establish and implement policies and procedures that provide guidance on risk management of new activities.
5. Management should have effective change management processes to manage and control the implementation of new or modified operational processes, as well as the addition of new technologies into the bank’s existing technology architecture.
6. Management should have appropriate performance and monitoring systems to assess whether the activities meet operational and strategic expectations and legal requirements and are within the bank’s risk appetite.

Risk management of banks’ third-party relationships should include comprehensive oversight of those relationships, according to the bulletin. A third-party service provider’s inferior performance or service may result in loss of bank business, increased legal costs, and heightened risks in many areas, including credit, operational, compliance, strategic, and reputation.

Charters for financial technology companies. Providing assurance that a chartered fintech company would be engaged in at least one of the core activities of banking, Noreika called concerns over an inappropriate mixing of banking and commerce “exaggerated.” Speaking at Georgetown University’s Institute of International Economic Law’s Fintech Week, Noreika said that commercial companies should not be prohibited from applying for national bank charters if they meet the criteria.

Many fintech and online lending business models fit within the various categories of charters, including special purpose national banks, according to Noreika, as he observed interest in fintechs becoming full-service banks, trust banks, and credit cards banks. “Chartering innovative de novo institutions through these existing authorities enhances the federal banking system,” in his view.

The initiative to charter nondepository fintech companies remains a work in progress as Noreika noted that authority has been challenged in litigation brought by Conference of State Bank Supervisors and the New York Department of Financial Services.

 

Refuting assertions that the OCC is considering granting charters to nonfinancial companies as unwarranted fears, Noreika concluded with a call for “a constructive discussion of where commerce and banking coexist successfully today and where else it may make sense in the future.”

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Fannie Mae misses two affordable housing goals in 2016, FHFA reports

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

The Federal Housing Finance Agency, in its Annual Housing Report, has preliminarily determined that Fannie Mae failed to meet the very low-income home purchase goal and the low-income refinance goal for 2016. However, Fannie Mae did achieve the single-family low-income home purchase goal and the low-income areas home purchase goal. The FHFA has preliminarily determined that Freddie Mac achieved all of the multifamily goals for 2016.

The report describes the affordable housing activities of the Enterprises during 2016 and meets the reporting requirements of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended. Fannie Mae’s total business volume in 2016 was $637.4 billion and, as a result, the total affordable housing allocation transferred was $268 million. Freddie Mac’s total business volume in 2016 was $445.7 billion and the total affordable housing allocation transferred was $187.1 million.

Besides announcing the FHFA’s preliminary review of the Enterprises’ 2016 housing goals performance, the report also includes information about the distribution of single-family loans by race/ethnicity, gender, and census tract median income. In addition, the report includes a breakdown of the single-family mortgage product-types purchased by each Enterprise, as well as information on mortgage payment type (e.g., fixed-rate or adjustable-rate mortgage), loan-to-value ratios, and credit scores for 2016.

The report describes the status of several other activities related to affordable housing, including the FHFA’s Duty to Serve rule. The report also describes the affordable housing allocations made by each Enterprise, as well as the FHFA’s efforts to survey the mortgage markets and release loan-level data submitted by the Enterprises to the public. Finally, the report discusses subprime, nontraditional, and higher-priced mortgage loans.

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District of Columbia adopts student loan borrower bill of rights

By Richard Roth, J.D.

The District of Columbia has established a student loan borrower bill of rights that is intended to set basic principles and ensure protections for borrowers. The five articles of the bill of rights address loan pricing and terms, abusive loan products, underwriting, collection practices, and customer service, according to the D.C. Department of Insurance, Securities and Banking.

Terms and price. The bill of rights generally calls on lenders to comply with the Truth in Lending Act and Reg. Z—Truth in Lending (12 CFR Part 1026). Specific requirements include the use of plain English and the disclosure of loan pricing and terms in ways that will facilitate comparison shopping.

No abusive products. Lenders should offer only loans that match the borrower’s intended use. New credit should not be offered to borrowers who cannot repay previous loans—in other words, there should be no “debt traps.” The bill of rights also says that when a fixed-fee loan is refinanced or modified, additional fees should not be charged based on the outstanding principal unless the borrower receives a “tangible cost benefit.”

Underwriting. Four underwriting principles are spelled out:

1. Credit should be offered only if there is “high confidence” that the borrower will be able to repay the loan without defaulting or re-borrowing.
2. Loans a borrower cannot truly afford should not be made, even if the lender in fact can find a way to secure payment. Also, servicers should not derive unreasonable fees from late fees or comparable charges.
3. Loans should be made to meet the borrower’s need, not to generate more revenue for the lender, even if the borrower could qualify for a larger loan.
4. Lenders should check credit reports before they extend loans, and they should report the borrower’s performance to credit bureaus.

Collections. Lenders and servicers should treat borrowers in accordance with the Fair Debt Collection Practices Act. They should carefully watch over third-party debt collectors, and all companies involved in collections should keep complete and accurate account information.

Customer service. Lenders and servicers should acknowledge customer complaints promptly, preferably within five days, and all complaints should be resolved in a timely manner. Borrowers should be informed of any changes in information such as the servicer’s address or the sale of the loan. The bill of rights also includes a broad anti-discrimination policy that extends to sexual orientation and sexual identity.

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Legislators react to Senate vote to overrule CFPB arbitration rule

By Stephanie K. Mann, J.D.

Following the Senate’s passage of a Congressional Review Act Resolution (H.J. Res. 111) to overrule the Consumer Financial Protection Bureau’s arbitration rule, multiple legislators have voiced their support and opposition for the action. Once signed by President Trump, the rule will be prevented from taking effect, and will also bar any federal agencies from enacting similar rules without congressional action.

The arbitration rule, which was released on July 10, 2017, bans pre-dispute arbitration clauses in consumer financial product contracts if those clauses prevent class actions. Under the rule, arbitration clauses would only be allowed if their application is restricted to individual claims.

Victory for consumers. Commending the Senate for joining the House in “fighting for consumers and for draining the bureaucratic swamp of yet another political regulation,” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) called the vote a victory for consumers and a “rejection of the unchecked, unconstitutional and unaccountable CFPB.” The legislator stressed that laws and regulations should be written by elected representatives, rather than “unelected and unaccountable bureaucrats.”

Believing that a ban on arbitration clauses would result in lower reward payments for wronged customers and higher credit costs, Sen. Tom Cotton (R-Ark) argued that there is little evidence to demonstrate that class action suits stop the behavior that they intend to punish. The arbitration rule “was wrong on the merits and, worse, an abuse of authority by the CFPB,” said Cotton.

Customers end up paying. According to Sen. Sherrod Brown (D-Ohio), legislators have a duty to “look out for the people we serve—not Wall Street banks and corporations trying to scam consumers.” However, forced arbitration takes this power away from ordinary people, and gives it to big banks and Wall Street companies that already have an unfair advantage.

Brown highlighted an Economic Policy Institute study that people who went into arbitration with Wells Fargo, and found that, on average, they ended having to pay the bank almost $11,000. Additional studies show that Wall Street and other big companies win 93 percent of the time in arbitration. Regular people don’t stand a chance against those numbers.

Siding with banks. Arguing in favor of the arbitration rule on the floor of the Senate, Sen. Elizabeth Warren (D-Mass) reminded the legislators about recent history in which Wells Fargo creates 3.5 million fake accounts, charging customers fees and ruining credit scores and Equifax lets hackers steal personal information on 145 million Americans, putting nearly 60 percent of American adults at risk of identity theft. However, because millions of consumer financial contracts include a forced arbitration clause, all consumers are forced to go to arbitration by themselves, rather than joining with other customers in court.

According to Warren, anyone who votes to reverse the arbitration rule, “is saying loud and clear that they side with banks over their constituents—because bank lobbyists are the only people asking Congress to reverse the rule.” The Military Coalition, which represents more than 5.5 million veterans and servicemembers, supports the arbitration rule because "forced arbitration is an un-American system wherein service members' claims against a corporation are funneled into a rigged, secretive system in which all the rules, including the choice of the arbitrator, are picked by the corporation," and warns that "the catastrophic consequences" these forced arbitration clauses “pose for our all-voluntary military fighting force's morale and our national security are vital reasons” to preserve the rule.

In addition, Warren points to the AARP, which represents nearly 40 million American seniors, who believes that the CFPB rule should be preserved because it “is a critical step in restoring consumers' access to legal remedies that have been undermined by the widespread use of forced arbitration for many years.” Older consumers are at increased risk of financial scams so the “AARP supports the availability of a full range of enforcement tools, including the right to class action litigation to prevent harm to the financial security of older people posed by unfair and illegal practices.”
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