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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Senate votes 'yea' to arbitration rule repeal

By Katalina M. Bianco, J.D.

A narrow Senate vote on Oct. 24, 2017, leaves the Consumer Financial Protection Bureau rule on mandatory forced arbitration agreements only a presidential signature away from near-permanent repeal. The measure narrowly passed along largely partisan lines in the Senate with a vote of 50-50 plus Vice President Mike Pence's tiebreaking "yea" vote.

The House and Senate passed the vote under the Congressional Review Act. Under CRA rules, President Trump's signature not only will halt the rule from going into effect but will also bar any federal agencies from enacting similar rules without congressional action.

Final rule. The forced arbitration rule became effective in September but would have applied to arbitration clauses beginning March 19, 2018. It was intended to limit terms in consumer banking and other financial agreements that force consumers to settle disagreements through arbitration. Proponents of the rule, such as Center for Responsible Lending’s Senior Policy Counsel, Melissa Stegman, argued that the arbitration process is often a "rigged system," with no opportunity for appeal and with the arbitrator beholden to the banks for repeat business.

"These rip-off clauses deny Americans the freedom to seek justice through our court system—a right embodied by the Constitution's Seventh Amendment," Stegman said in a statement following the vote.

CFPB study. Critics of the rule, however, cited a CFPB study in arguing that arbitration awards were, on average, higher than court awards for consumers, and that arbitration settlements occurred faster than court settlements.

According to the CFPB’s 2015 study, arbitration awards generally were received within five months compared to the median of roughly 18 months for court cases; however, only a third of arbitration claims during the study period resulted in a decision, and of those that the CFPB could determine an outcome, only about 10 percent—roughly 32 cases—resulted in "affirmative relief." Meanwhile, the courts approved an average of 85 class settlements per year, amounting to an average annual relief amount of $540 million per year.

OCC comments. The Office of the Comptroller of the Currency also weighed in, heralding the vote as a move to avoid what it said "would have likely increased the cost of credit for hardworking Americans." The OCC had used the CFPB’s data to determine impact to credit costs. "The action by Congress is a victory for consumers and small banks across the country," said Acting Comptroller of the Currency Keith A. Noreika.

 For more information about the Bureau's arbitration rule, subscribe to the Banking and Finance Law Daily.

Treasury report: CFPB’s arbitration rule limits consumer choice, expands costly litigation

By Thomas G. Wolfe, J.D.

In conducting an analysis of the Consumer Financial Protection Bureau’s arbitration rule, particularly the prohibition against pre-dispute mandatory arbitration clauses in consumer financial contracts, the U.S. Treasury Department has issued a report concluding that the rule limits consumer choice and expands costly litigation. According to the Oct. 23, 2017, report, the CFPB’s underlying data for its arbitration study “were limited in ways that raise serious questions about its conclusions and undermine the foundation of the Rule itself.” The Treasury report further asserts that the CFPB’s study and rule “do not show that the Bureau’s prohibition on arbitration will efficiently improve compliance with the federal consumer financial laws or serve public and consumer interests as the Dodd-Frank Act commands.”

As observed by the Treasury in a release accompanying the report, the CFPB also “failed to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors.”

Report highlights. Among other things, the Treasury’s report, titled “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule,” maintains that:

• the Arbitration Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates;
• the vast majority of consumer class actions provide “zero relief to the putative members of the class;”
• for the small percentage of class actions that generate class-wide relief, “few affected consumers demonstrate interest in recovery;”
• the Arbitration Rule will “effect a large wealth transfer to plaintiffs’ attorneys;”
• the CFPB did not reasonably consider whether improved disclosures regarding arbitration would “serve consumer interests better than its regulatory ban;”
• the Bureau did not adequately evaluate “the share of class actions that are without merit;”
• the CFPB “offered no foundation” for its assumption that the Arbitration Rule will improve compliance with federal consumer financial laws;
• the Arbitration Rule fails to account for the “major costs” and “inefficiencies” of class action litigation, and did not attempt a “meaningful cost-benefit analysis;” and
• the Arbitration Rule does not address the “important benefits” of arbitration.

For more information about the CFPB's Arbitration Rule and various critiques of it, subscribe to the Banking and Finance Law Daily.

OCC and CFPB disagree over arbitration rule

By Andrew A. Turner, J.D.

The Office of the Comptroller of the Currency has reviewed a working paper that the Consumer Financial Protection Bureau relied on in formulating its final rule prohibiting mandatory arbitration agreements and concluded that the arbitration rule will increase costs of credit cards. Meanwhile, CFPB Director Richard Cordray has responded to criticism questioning the impact of the rule on consumers and financial institutions.

The working paper by Alexei Alexandrov, “Making firms liable for consumers' mistaken beliefs: theoretical model and empirical applications to the U.S. mortgage and credit card markets,” finds a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.

Final rule. The Bureau issued a final rule prohibiting mandatory arbitration agreements for credit cards and certain other financial products with the stated rational being that eliminating mandatory arbitration clauses in contracts for certain financial products introduces a financial liability for financial service providers in the form of a potential increase in class action lawsuits. According to the CFPB, this additional financial liability may lead to greater compliance by financial institutions and make consumers more likely to obtain relief in the event of a dispute.

As part of its arbitration study, the CFPB reported that it did not find any statistically significant evidence of increases in the cost of credit to consumers associated with banning mandatory arbitration in credit card markets.

Working paper. Alexandrov constructed a model to show circumstances in which introducing a financial liability on firms can improve social welfare and consumer surplus. He then conducted statistical analysis of credit card data to estimate price increases. While he found the results of his analysis were statistically insignificant and he could not reject the hypothesis that there were no costs to consumers, Alexandrov was careful to point out that he could not rule out economically significant costs.

OCC findings. The OCC has analyzed and verified the Alexandrov results that were summarized by the CFPB in their arbitration study and discuss potential increased costs to consumers from eliminating mandatory arbitrage clauses. Given the substantial costs to financial firms estimated by the CFPB, one would expect some of these costs to be passed on to consumers or the availability of certain financial services products to decline where costs could not be recouped. The OCC has confirmed Alexandrov’s results using his assumptions and specification and elaborated on his comments about the economic significance of introducing additional financial liability in credit card markets. Consumers face significant risk of a substantial rise in the cost of credit.

According to Alexandrov, the CFPB, and OCC, the magnitude of the effect on pricing is uncertain, but there is a high likelihood that the total cost of credit will increase. However, this analysis does not explore the potential effect on consumer payments, their ability to pay the higher cost, and the potential for an increase in delinquencies, or changes in the availability of certain financial products intended to meet the financial needs of consumers.

 

CFPB defense of arbitration rule. The CFPB argues that it issued a rule that prevents financial companies from using arbitration clauses to deny groups of consumers the ability to pursue their legal rights in court after conducting a comprehensive study that found that arbitration clauses were effectively blocking billions of dollars of relief for millions of harmed consumers. Cordray authored a column, The truth about the arbitration rule is it protects American consumers, in The Hill on October 16, responding to Noreika's October 13 column, Senate should vacate the harmful consumer banking arbitration rule.

Cordray also defended the rule in a letter to U.S. Senator Sherrod Brown (D-Ohio), which included a review by the CFPB's Office of Research.

For more information about the CFPB's rule on mandatory arbitration clauses, subscribe to the Banking and Finance Law Daily.

Bureau charges debt assistance companies ‘lied to line their pockets’

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has filed suit against two companies, Federal Debt Assistance Association, LLC, and Financial Document Assistance Administration, Inc., both companies operating as FDAA; their stated parent company and service provider Clear Solutions, Inc.; and their owners for deceiving consumers and violating the Consumer Financial Protection Act (12 U.S.C. §§ 5531(a), 5536(a)), and the Telemarketing Sales Rule (16 CFR Part 310). According to the Bureau’s complaint, FDAA falsely represented the company as being affiliated with the federal government and falsely promised to eliminate consumers’ debts and improve their credit scores for thousands of dollars in advance fees.

"FDAA and its owners lied to financially vulnerable consumers to line their pockets with cash," said CFPB Director Richard Cordray. "Today’s lawsuit seeks to stop these deceptive practices, impose civil money penalties, and return to cheated consumers the fees they paid to these companies."

FDCPA. According to the complaint, FDAA promised to eliminate consumers’ unsecured debts and improve their credit scores, primarily by using the debt-verification process set out in the Fair Debt Collection Practices Act. However, the companies’ debt validation programs "were merely debt-management programs that misled consumers about the results that could be achieved under the FDCPA’s debt-verification process."

Failure to disclose. The complaint alleges that FDAA failed to make proper disclosures about not paying debts. FDAA instructed consumers to stop making payments on the debts enrolled in their program. However, they failed to disclose that not making payments may result in the consumer being sued by creditors or debt collectors and may increase the amount of money the consumer owes due to the accrual of fees and interest, according to the complaint.

Advance fees. The CFPB charged that FDAA took illegal advances for debt-relief and credit-repair services without achieving certain results, a violation under the TSR. It is a violation of the TSR for any seller or telemarketer to request or receive payment of any fee or consideration for goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating until and unless:

• the time frame in which the seller has represented all of the goods or services will be provided to that person has expired; and
• the seller has provided the person with documentation in the form of a consumer report from a consumer-reporting agency demonstrating that the promised results have been achieved.

Relief. The CFPB’s complaint seeks monetary relief, injunctive relief, and civil money penalties.

 

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CFPB kicks rulemaking into high gear

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has released a flurry of rulemaking in the past few weeks. The Bureau adopted the much-anticipated short-term, small-dollar loan regulation this month. The focus of the rule is loans that require full or nearly full repayment at one time, such as payday loans, vehicle title loans, and deposit advance products, although some longer-term loans that have balloon payment features also are covered under the rule. Most of the rule, which is based on last year’s proposal, will take effect 21 months after it is published in the Federal Register.

According to the Bureau, the rule:

• establishes a full-payment test for installment loans to ensure that consumers can afford their payments and still meet their basic living expenses and major financial obligations;
• limits to three the number of loans that can be made in close succession (while a prior loan is outstanding or within 30 days after a prior loan is repaid);
• creates an exception to the full-payment test for very small loans if the lender offers a way the consumer can get out of debt more gradually;
• creates a separate exemption for loans that pose less risk for consumers; and
• prevents lenders that make short-term loans, balloon-payment loans, and longer-term loans with an annual percentage rate of more than 36 percent from continuing to attempt to debit consumer accounts for payments after two consecutive failures.

The Bureau provided a factsheet that summarizes the rule.

 

Mortgage servicers. The CFPB has issued an interim final rule intended to provide mortgage servicers with clearer and more flexible standards for providing modified written early intervention notices to borrowers who have invoked their cease communication rights under the Fair Debt Collection Practices Act, with rule amendments that become effective on Oct. 19, 2017.

 

The Bureau also has proposed amendments to clarify timing requirements for servicers to transition to providing modified or unmodified periodic statements and coupon books to consumers in connection with their bankruptcy case.

 

ECOA rulemaking. Late last month, the CFPB modified Equal Credit Opportunity Act regulations in order to provide greater clarity for mortgage lenders regarding their obligations in collecting consumer ethnicity and race information, while promoting compliance with rules intended to ensure consumers are treated fairly.

 

The Bureau’s amendments would allow mortgage lenders to adopt application forms that include expanded requests for information regarding a consumer’s ethnicity and race as they will no longer be required to maintain different practices depending on their loan volume or other characteristics.

The Bureau also finalized additional amendments to facilitate compliance with Reg. B’s requirements for the collection and retention of information about the ethnicity, race, and sex of applicants seeking certain types of mortgage loans.

 

The rule amendments are effective on Jan. 1, 2018, except that the amendment to Appendix B removing the existing “Uniform Residential Loan Application” form in amendatory instruction 6 is effective Jan. 1, 2022.

 

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

OCC’s Noreika touts online lending opportunities, responsibilities at policy summit

By Thomas G. Wolfe, J.D.

 

Speaking at the 2017 Online Lending Policy Summit in Washington, D.C., Acting Comptroller of the Currency Keith Noreika contrasted his viewpoint with that of some pundits who see the growth of the online lending industry in recent years as a response to the lack of agility of the nation’s conventional banking system. “I do not share that view,” Noreika stated. “I see the growth of online lending and marketplace lenders as the natural evolution of banking itself.” In his prepared remarks for the September Summit, Noreika outlined the ways in which the Office of the Comptroller of the Currency promotes economic opportunity and responsible innovation. “Too often regulatory burden gets in the way of economic opportunity,” he asserted.

 

Noreika noted that the Summit and similar events “play an important role in informing national policymakers of what the industry needs to provide safe and sound products and services to customers across the country and to unleash their potential to promote economic opportunity.”

 

Online lending. According to facts and figures relayed by the Acting Comptroller, marketplace lenders have originated about $40 billion in consumer and small business loans in the United States during the past decade. Moreover, online lending “has doubled every year since 2010.” While industry analysts vary somewhat on how high the ceiling is, “some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025.”

 

At the same time, Noreika observed the challenges facing the online lending industry despite its rapid growth. “It remains to be seen how online lending companies … will perform under stress,” he said. “That’s part of a maturing business, and risk is part of economic opportunity. Success requires adapting to new market conditions and effectively managing evolving risks.”

 

OCC’s efforts. Noreika observed that innovation not only comes from within the banking industry, it also comes from private companies outside the system as well. Pivoting to the OCC’s work to “to promote economic opportunity and responsible innovation,” Noreika underscored that:

 

• since 2015, the OCC has “published practical guiding principles, held a public forum, and established a framework for supporting responsible innovation;”
• the OCC’s Office of Innovation “serves as a clearinghouse for innovation-related matters and a central point of contact for OCC staff, banks, nonbank companies, and other industry stakeholders;”
• through “regulatory sandboxes” and “bank pilot” programs, the OCC not only fosters responsible innovation, the OCC also increases its own knowledge and understanding of innovative products, services, and technologies;
• the OCC supports the chartering of “fintech companies that want to become national banks;”
• there is increasing interest in the OCC possibly offering special-purpose national bank charters to “nondepository fintech companies engaged in the business of banking;”
• Noreika and the OCC have sought ways in which to lessen the regulatory burden on the online lending industry; and
• Noreika personally “added his voice to the chorus in letters to Congress denouncing Operation Chokepoint.”

Banks’ responsibility. According to Noreika, “Banks make the decisions to retain or terminate customer relationships, not the regulators, and not the OCC.” Accordingly, banks have a responsibility to provide “fair access and fair treatment,” he emphasized. “If the system fails to provide fairness to all, it cannot be a source of strength to any,” he stated.

 

For more information about how federal and state regulators view technological developments and innovations taking place in the financial services marketplace, subscribe to the Banking and Finance Law Daily.

FSOC rescinds AIG’s SIFI designation

By Andrew A. Turner, J.D.

The Financial Stability Oversight Council has decided that American International Group, Inc., LLC, is no longer in financial distress and therefore not a threat to U.S. financial stability. As a result, the Council rescinded AIG’s designation as a systemically important financial institution, and the company will not be subject to supervision by the Federal Reserve Board and enhanced prudential standards.

The Council approved the rescission of AIG's designation by a six-to-three vote with one member being recused. Richard Cordray, Director of the Consumer Financial Protection Bureau, Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, and Melvin L. Watt, Director of the Federal Housing Finance Agency, voted against the rescission. A Treasury Department document provides the views of seven of the members of the Financial Stability Oversight Members.

"The Council has worked diligently to thoroughly reevaluate whether AIG poses a risk to financial stability," Treasury Secretary Steven T. Mnuchin said. "This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability."

AIG President and Chief Executive Officer Brian Duperreault stated that the Council’s decision “reflects the substantial and successful de-risking that AIG’s employees have achieved since 2008” and that the company “is committed to continued vigilant risk management and to working closely with our numerous regulators to enable a strong AIG to continue to serve our clients.”

 

Additional review needed, says Watt. Dissenting from the decision, Watt believed the FSOC should have conducted an independent review of AIG to determine whether “the nature, scope, size, scale, concentration, interconnectedness, or mix of activities” of AIG could pose a threat to the financial stability of the United States.

 

Under Section 113 of the Dodd-Frank Act, the FSOC may determine that a nonbank financial company will be supervised by the Federal Reserve Board and be subject to prudential standards if it determines that:

1. material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States; or
2. the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the nonbank financial company could pose a threat to the financial stability of the United States. 

According to Watt, the FSOC has never reviewed AIG under the second standard. Rather, the Council incorporated an evaluation of the factors required to be considered under the second standard into its evaluation under the first standard. Thus, Watt concluded that, if the Council determined that AIG no longer meets the criteria for designation under the first standard, an independent review and determination under the second standard is required before a decision can be appropriately made to rescind the designation. Watt called the Council’s decision without evaluating the second standard “premature and unwise.”

 

Gruenberg and Cordray: no material change. Gruenberg also disagreed with the decision because, in his view, nothing had materially changed since 2013 to diminish the concerns raised by the FSOC at that time. Gruenberg stated a “core basis” for the designation in 2013 was that AIG had a large volume of liabilities subject to discretionary withdrawal, and if the firm were in material financial distress, a large number of those liabilities could run within a short period of time, posing a threat to U.S. financial stability. The asset liquidation could have disruptive effects on the broader financial markets and impair financial market functioning, said Gruenberg.

“These issues remain the same today as they were in 2013. While there have been some reductions in certain exposures, there have been increases in others, most notably in the life insurance and annuity business. Nothing about the liquidity characteristics of AIG’s liabilities and assets has changed to diminish the concerns originally raised by the FSOC.”

Cordray added that he was on the Council at the time that it designated AIG in 2013, and nothing in the analysis on the issue of rescinding that designation changed his views. In Cordray’s opinion, AIG continues to pose a threat to the stability of the financial system and satisfies both standards under the test—material financial distress at AIG not only could pose, but actually does continue to pose, a threat to the financial stability of the United States, and the nature, scope, scale, concentration, interconnectedness, or mix of activities at AIG could pose a threat to the financial stability of the United States.

AIG today is not the AIG of yesterday. In contrast, J. Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission, concluded that the AIG of today no longer meets the standard for SIFI designation. Giancarlo concluded that AIG’s debt-holders, derivatives counterparties, and market participants view the firm as a far less significant credit risk than it was in 2013. Giancarlo also argued AIG does not meet the standard for SIFI designation because “AIG does not have systemically important ties to other large financial institutions.”

Similarly, while J. Mark McWatters, Chairman of the National Credit Union Administration, called the AIG of 2008 “a basketcase” and “the proverbial poster child for ill-conceived business plans, internal control systems, and risk-management protocols,” he concluded that “AIG is a different company today.”

Calling on his experience as “a commercial finance, M&A, and tax attorney with a CPA license,” McWatters said he had “thoughtfully analyzed” the financial statements, recommendations, data, and other reports, and concluded that AIG no longer poses a systemic risk to the financial system. “I remain confident that AIG, if presented to this Council as, say, Company X, would not receive a SIFI designation today,” said McWatters.

Likewise, concurring with the decision to rescind AIG’s SIFI determination, independent member S. Roy Woodall, Jr. wrote that the AIG of 2016 is “a different organization, approximately half the size it was at the time of the financial crisis and, therefore, no longer satisfies the first determination standard under which it was designated.”

Continued monitoring recommended. Notably, Woodall also said he remained concerned with some of AIG’s activities, especially those relating to annuities with guaranteed features. Although Woodall did not believe the activities would justify continuing to regulate AIG as a SIFI, he felt the activities should continue to be monitored from a macro-prudential perspective.

While Woodall noted also that that state insurance regulators are recognized as the primary financial regulators of insurance activities and that they have enhanced their regulatory capabilities since the financial crisis, he recommended that the Council closely monitor state regulatory developments.

Noreika questions FSOC’s authority. Keith A. Noreika, Acting Comptroller of the Currency, questioned the authority of the FSOC to designate individual nonbank companies for bank-like regulation. “I am concerned that by picking institutions from among similarly situated competitors within the same industry and labelling one systemically important and not the other, we may adversely affect the competitive environment in unfair and arbitrary ways,” said Noreika.

Noreika criticized the process as “politicized” and said it “invariably forces the Council to pick ‘winners and losers’ from among firms in a competitive industry.”

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Senators urge Fed to act on opioid crisis

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

Senators Sherrod Brown (D-Ohio), ranking member of the Senate Banking Committee, and Joe Donnelly (D-Ind), member of the Senate Banking Committee, sent a letter to Federal Reserve Board Chair Janet Yellen, urging the Fed to explore and devote resources to supplement federal government efforts to combat the nation’s opioid epidemic.

The letter referred approvingly to the Administration’s Commission on Combating Drug Addiction and the Opioid Crisis, but stated that the opioid epidemic is not just a public health and law enforcement matter: "This is an economic matter." The letter cited Yellen’s comments at a committee hearing on July 13, 2017, in which she said, "I do think it [opioid addiction epidemic] is related to the decline in labor force participation among prime-age workers."

The Senators believe the Fed, including the research departments at the Board and regional Reserve Banks, can help policymakers better understand the impact of the opioid epidemic on labor force participation rates, full employment, and on overall economic activity in communities. They added that the community development and business outreach functions of the Federal Reserve System can also engage businesses to look for solutions in their communities. Therefore, Brown and Donnelly are asking the Fed to further research this area in order to formulate policy responses to reduce and prevent further opioid use.

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OCC, New York spar over agency authority to charter fintechs

By Richard A. Roth, J.D.

A motion to dismiss by the Office of the Comptroller of the Currency and an opposing memorandum by New York’s Department of Financial Services lay out the two sides’ positions in a suit challenging the OCC’s ability to grant national bank charters to companies that do not accept deposits. In its motion to dismiss Vullo v. OCC, the agency asserts that New York has no current right to try to block the charters and that it has the right to grant them. The state responds that it has standing to sue, its legal challenge is ripe for decision, and the agency is exceeding its authority under the National Bank Act.

The state and the OCC are arguing over whether the OCC can grant national bank charters to fintech companies—broadly, companies that use innovative technology to provide financial products and services to customers. The agency has made clear, through papers, proposals, and speeches by officials, that it believes it has the legal right to issue charters and is considering doing so. As part of its public statements, the OCC also has said that it wants chartered fintech companies to engage in banking activities other than accepting deposits.

New York asserts that the OCC has reached a final decision that it will grant charters. The state also argues that, under the NBA, the OCC can charter institutions only if they engage in the business of banking, and accepting deposits is an essential part of that business. One of the state’s concerns is that the OCC will use fintech national bank charters to preempt state laws governing nondepository financial services companies that traditionally have been under state, not federal, authority.

Final agency action. A threshold question is whether the OCC has taken a final action that is subject to judicial review. What New York characterizes as a decision to grant charters is merely “a collection of non-final policy statements and solicitations for input from the public,” the OCC asserts. The agency says it has not completed its decision-making process, and no legal consequences have resulted from anything it has done. That means there has been no final agency action, so there is nothing to review.

New York makes much of the OCC’s statement in a March 2017 notice that the agency had “reached this decision for a number of reasons.” It had “reached this decision” after publishing a white paper and then reviewing and responding to more than 100 public comments. The fact that the OCC still is soliciting comments on how it will implement its decision to grant charters does not affect that the decision to do so has been reached, the state asserts.

The OCC’s assertion that its interpretation of the NBA is entitled to judicial deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984) shows that there are legal consequences that render the agency’s action final, the state adds.

Jurisdictional impediments to suit. The OCC argues that the federal district court does not have the jurisdiction even to consider the merits of the state’s suit. According to the agency, the state has not suffered an injury in fact, the issue is not ripe for judicial consideration, and any challenge to the relevant regulation is time-barred. Unsurprisingly, New York disagrees.

The OCC asserts that any injury the state might suffer is “future-oriented and speculative,” not actual or imminent. There will be no actual harm unless and until a charter actually is granted. This means the state does not have standing to sue, according to the agency.

The state replies that its standing is clear. The New York Department of Financial Services enforces state laws, and the OCC has decided to preempt those laws by granting national bank charters. This diminution of the state’s sovereignty establishes its standing to sue.

Even if New York has an injury in fact, the dispute is not ripe for decision, the OCC also says. The agency claims that it has not yet decided whether to charter fintech companies, and waiting until a decision is made will not cause a hardship for the state. New York counters that the extent of the OCC’s authority is a purely legal question that is “eminently fit for judicial review.”

What is the business of banking? The ultimate issue likely is what activities constitute the business of banking. Generally, the core business of banking is seen as three activities: taking deposits, paying checks (or processing other types of payments), and extending credit. New York views taking deposits as essential, while the OCC does not.

Federal law does not offer a precise definition of “the business of banking.” According to the OCC, that makes the NBA’s use of the phrase ambiguous. Under Chevron, the agency’s reasonable interpretation of the ambiguous phrase is entitled to judicial deference, and the agency’s interpretation is that deposit-taking is not required. Similarly, the agency has a broad authority to grant charters to companies that engage in some, but not all, banking activities. Perhaps performing only one of the core activities would suffice, the OCC’s motion suggests.

In reply, New York argues that the NBA is not ambiguous, at least as far as chartering decisions. The business of banking must include taking deposits. This is demonstrated by the structure of the NBA and by the broader scheme of the federal banking laws. In particular, the state points out, the Bank Holding Company Act defines “bank” in a way that requires the company to accept deposits.

Moreover, even if “business of banking” is ambiguous, the OCC’s interpretation in the contest of chartering is unreasonable, New York asserts.

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

Fed fines HSBC $175M for failing to detect FX traders’ misdeeds

By Lisa M. Goolik, J.D.

The Federal Reserve Board has fined HSBC Holdings plc, London, U.K., and HSBC North America Holdings Inc., New York, N.Y., $175 million for deficiencies in HSBC's supervision of foreign exchange (FX) traders. The Fed said the firm “fail[ed] to detect and address its traders misusing confidential customer information, as well as using electronic chatrooms to communicate with competitors about their trading positions.” The Fed also ordered HSBC to improve its controls and compliance risk management concerning the firm's FX trading.

Coordinated FX trading. In 2014, the Commodity Futures Trading Commission, along with the Office of the Comptroller of the Currency and other federal regulators, ordered five banks—including HSBC—to pay fines ranging from $275 million to $310 million each for trying to manipulate the global FX benchmark rates to benefit the positions of certain traders.

FX traders used private electronic chat rooms to coordinate their attempts to manipulate the FX benchmark rates for certain currency pairs, including the U.S. Dollar, Euro, and British Pound Sterling. They shared confidential customer order information and trading positions, changed trading positions to accommodate the interests of the collective group, and agreed on trading strategies as part of an effort by the group to attempt to manipulate certain FX benchmark rates. In some cases they pushed the rates downward, and in some cases upward.

HSBC traders charged. The Fed subsequently barred two former senior managers, Mark Johnson and Stuart Scott, from employment in the banking industry following their criminal indictment for wire fraud connection with their trading activities at HSBC. The individuals were charged with making multiple misrepresentations to an FX client of HSBC in connection with a large pre-arranged currency transaction. The OCC took similar action to bar Johnson from employment.

The Fed’s fine against HSBC addresses the firm’s deficient policies and procedures that prevented it from detecting and addressing unsafe and unsound conduct by its FX traders, including Johnson and Scott.

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