While CFPB obtains $10.28 million civil penalty against tribal lenders, restitution and injunction denied

By Thomas G. Wolfe, J.D.

 

Based on his findings of fact and conclusions of law, a federal district court judge for the Central District of California recently determined that although the Consumer Financial Protection Bureau was entitled to a judgment in its enforcement action against defendants CashCall, Inc., WS Funding, LLC, Delbert Services Corporation, and J. Paul Reddam for their joint and several liability in connection with a tribal-lending enterprise, the CFPB was entitled only to a “First Tier” civil money penalty of $10.28 million, not the $51.61 million statutory penalty the Bureau requested. Moreover, despite the CFPB’s requests for nearly $235.6 million in restitution and for injunctive relief, the judge concluded that the Bureau “failed to meet its burden of proving that either restitution or a permanent injunction is an appropriate remedy.”

 

In keeping with the judge’s factual findings and legal conclusions in Consumer Financial Protection Bureau v. CashCall, Inc., a “joint judgment” submitted by the litigants was subsequently signed by the judge and filed with the court on Jan. 26, 2018.

 

Backdrop. The CFPB initiated its enforcement action in December 2013, and amended its complaint in March 2014, alleging that the defendants engaged in unfair, deceptive, and abusive acts or practices (UDAAP) in violation of the Consumer Financial Protection Act (CFPA)—included in the Dodd-Frank Act. Generally, the Bureau contended that the defendants violated the CFPA by collecting high-cost, high-interest loans. In August 2016, the California federal district court judge ruled that these consumer loans ostensibly made by a Cheyenne River Sioux Tribe-licensed lender actually were made by CashCall. As a result, the credit agreements and the servicing and collection efforts by CashCall’s corporate affiliates all violated the CFPA’s ban on UDAAP.

 

Granting the Bureau’s request for partial summary judgment on the defendants’ liability for the CFPA violations, the court held that, because CashCall was the “true lender,” CashCall, WS Funding, and Delbert engaged in deceptive practices when servicing and collecting on Western Sky loans “by creating the false impression that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements.” In addition, defendant Reddam was found to be individually liable for his participation.

 

Court’s determination. Against this backdrop, in October 2017, the court then held a non-jury trial on the remaining issues pertaining to the appropriate remedy for the defendants’ UDAAP violations of the CFPA. In keeping with that trial and the post-trial briefing by the litigants, the court rendered its Jan. 19, 2018, “Findings of Fact and Conclusions of Law.” In ascertaining and crafting the appropriate remedies to accompany the established CFPA violations, the court determined that the CFPB:

 

• did not sufficiently show that the defendants intended to defraud consumers, or that the consumers did not receive the benefit of their bargains;
• did not present sufficient evidence to support its request for $235.59 million in restitution because any restitution amount must “approximate defendants’ unjust gains;”
• failed to prove “by a preponderance of the credible evidence” that restitution would be an appropriate remedy;
• did not present sufficient evidence to support its request for injunctive relief by showing that the defendants are currently purchasing loans from Western Sky or continuing to service those loans;
• in connection with a statutory civil money penalty, failed to prove by a preponderance of the evidence that the defendants knowingly violated the CFPA, or that the defendants knew at the time they decided to implement the “Western Sky Loan Program” that the structure of the program would subject them to CFPA liability; and
• was entitled to a “First Tier” civil money penalty of $10.28 million, not the $51.61 million statutory penalty the Bureau requested. 

For more information about enforcement actions by the Consumer Financial Protection Bureau and other regulators, subscribe to the Banking and Finance Law Daily.

Operational risk elevated with cyber threats and use of third-party service providers

By Andrew A. Turner, J.D.

 

The Office of the Comptroller of the Currency highlighted key risk concerns in its Semiannual Risk Perspective for Fall of 2017. The report is intended to address issues facing banks in four main areas: the operating environment, bank performance, trends in key risks, and supervisory actions.

 

The top matters requiring attention were operational, credit, and compliance (for community and midsize banks); and compliance, operational, and credit (for large banks). Key issues discussed in the report focus on those risks and include:

• incremental easing in commercial credit underwriting practices;
• increasing complexity of cybersecurity threats;
• increasing concentrations in third-party service providers for some critical operations;
• ongoing challenges in complying with Bank Secrecy Act requirements; and
• challenges in consumer compliance risk management for banks due to the increasing complexity in consumer compliance regulations.

Operational risk remains elevated because of increasing cyber threats and use of third-party service providers as banks adapt business models, transform technology and operating processes. As use of third-party service providers is increasing, and critical operations are increasingly concentrated in a few large service providers, third-party risk management remains a supervisory focus.

 

Compliance risk remains elevated as banks continue to manage money laundering risks in an increasingly complex risk environment. Implementing changes to policies and procedures to comply with amended consumer protection requirements tests bank compliance risk and change management processes.

 

Asset quality remains strong, and overall underwriting is acceptable. Nonetheless, the credit environment continues to be influenced by strong competition, tighter spreads, and slowing loan growth. These factors are driving incremental easing in underwriting practices and increasing concentrations in select loan portfolios—leading to heightened risk if the economy weakens or markets tighten quickly.

 

Potential system-wide issues. The report notes risks that could develop into system-wide issues, including:

• weaknesses in the governance of product sales, delivery, and service, resulting in elevated levels of operational risk for some banks;
• increasing concentrations of commercial real estate loans demonstrate the need for sound risk management processes;
• the potential for renewed declines in prices for grain crops, livestock, and dairy, which, combined with declining prices and increasing debt, may impact the ability of agriculture borrowers to service debt; 
• new requirements under the Military Lending Act and pending changes to the data collection and processing rules for the Home Mortgage Disclosure Act may result in further challenges to compliance change management processes; and
• the current expected credit losses standard (for which implementation begins in 2020) may pose operational and strategic risk when measuring and assessing the collectability of financial assets.

For more information about risk management for banks, subscribe to the Banking and Finance Law Daily.

Nonjudicial mortgage foreclosure not debt collection in Colorado

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

The Fair Debt Collection Practices Act does not apply to nonjudicial mortgage foreclosures under Colorado law, according to the U.S. Court of Appeals for the Tenth Circuit. Nonjudicial foreclosures are not debt collection, the court said. The mortgage servicing company was not a debt collector because the mortgage was not in default when it was transferred for servicing, the opinion added (Obduskey v. Wells Fargo, Jan. 19, 2018, Kelly, P.).

As outlined by the opinion, Wells Fargo began servicing the homeowner’s mortgage while it was still current. After the mortgage fell into default, the company started, but halted, foreclosures several times over a six-year span. In 2014, the company hired a law firm, McCarthy & Holthus, to initiate a nonjudicial foreclosure. That process was started by a letter to the homeowner in which the firm said that it had been instructed to begin foreclosure and that it "may be considered to be a debt collector attempting to collect a debt." The homeowner responded with a suit claiming FDCPA violations.

The appellate court had little difficulty deciding that Wells Fargo was not a debt collector because it had begun servicing the mortgage when it was not in default. The principal question was whether the law firm was attempting to collect a debt. If not, it was not a debt collector, and the provisions of the FDCPA were irrelevant to it.

Nonjudicial foreclosures. There is considerable disagreement among the courts about whether nonjudicial mortgage foreclosure is debt collection, the court first noted. Three U.S. appellate courts and the Colorado Supreme Court have decided that nonjudicial foreclosures constitute debt collection, while one appellate court—the Ninth Circuit—and "numerous" U.S. district courts have determined that the FDCPA is not implicated.

The Tenth Circuit decided that nonjudicial foreclosures are not debt collection as contemplated by the FDCPA, at least under Colorado law. The salient fact was that the law firm had not demanded any payment from the homeowner.

"[E]nforcing a security interest is not an attempt to collect money from the debtor," the court said. It disregarded the homeowner’s argument that the end goal of any foreclosure is obtaining payment on the debt.

A judicial foreclosure suit allows the creditor to obtain a deficiency judgment against the debtor if the sale proceeds do not pay the debt in full, the court pointed out. A nonjudicial foreclosure gives the creditor only the sale proceeds and requires a creditor that wants a deficiency judgment to file a separate suit after the sale. Since the law firm’s communications with the homeowner had never included any demand for payment, there was no effort to collect a debt, the appellate court concluded.

Other considerations. Two points bear noting. First, the FDCPA does not define explicitly what constitutes debt collection. However, it does define "debt collector" as anyone who collects or attempts to collect "debts owed or due or asserted to be owed or due another." It does not explicitly say that a debt collector must be collecting or attempting to collect money directly from the debtor (15 U.S.C. §1692a).

Second, the Tenth Circuit’s decision conflicts with a Colorado Supreme Court decision on whether Colorado nonjudicial foreclosures constitute debt collection (Shapiro & Meinhold v. Zartman, 823 P.2d 120 (1992)). Generally, it might be thought that the state court would be the authority when the interpretation of state law is in question. The apparent conflict could be resolved by remembering that the Tenth Circuit viewed the issue as the interpretation of the FDCPA, not Colorado state law.

The case is No. 16-1330.

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

Misused safe harbor language gives debt collector no safety

By Richard A. Roth, J.D.

Language created by a court specifically to be used by debt collectors to tell consumers how much they owe does not protect debt collectors from Fair Debt Collection Practices Act liability if that language is inaccurate under the circumstances, the U.S. Court of Appeals for the Seventh Circuit has decided. The safe harbor language cannot simply be copied and pasted, the court said; rather, it provides safety only if it gives consumers accurate information (Boucher v. Finance System of Green Bay, Inc.).

Debt collector Finance System of Green Bay was hired to collect overdue bills for medical services. The amount owed would increase over time due to continuing interest charges. This situation creates a problem for debt collectors because they are required by the FDCPA to tell consumers the amount of the claimed debt, and disclosing in a collection letter a precise amount owed is difficult when the amount is not fixed.

In an effort to help debt collectors meet their FDCPA duties, the Seventh Circuit devised the safe harbor 17 years ago in Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C. Debt collectors that need to state accurately an increasing amount owed can do so by saying:

As of the date of this letter, you owe $ [the exact amount due]. Because of interest, late charges, and other charges that may vary from day to day, the amount due on the day you pay may be greater. Hence, if you pay the amount shown above, an adjustment may be necessary after we receive your check, in which event we will inform you before depositing the check for collection. For further information, write the undersigned or call 1-800-[phone number].

FSGB used that language, nearly word-for-word.

Claimed inaccuracy. The problem, according to the consumer, is that state law prohibits the imposition of late charges or other charges on unpaid medical bills. Interest can be added, but nothing else. An unsophisticated consumer who was told that late fees and other charges could be imposed might be induced to make an immediate payment in order to avoid an increase in the debt.

That meant FSGB’s letter violated the FDCPA because it failed to state the amount owed and misrepresented the amount of the debt, even though the debt collector used the language specified by the court, the consumer said.

Misrepresentation. The appellate court chose to address the claimed FDCPA violation before considering the applicability of the safe harbor. The first conclusion was that the collection letter was a material misrepresentation of the amount of the debt.

The core question for the court was whether the letter would “materially mislead or confuse an unsophisticated consumer.” The letter met that standard because: (a) it implied that late fees or other charges could be imposed even though doing so was illegal; and (b) an unsophisticated consumer’s considerations about whether and when to pay the medical bill could be influenced by a misunderstanding that immediate payment would eliminate or reduce the additional, illegal charges.

Safe harbor applicability. Initially, the appellate court noted that Miller had created the safe harbor to protect debt collectors from claims that they had not accurately stated the amount owed, which would violate 15 U.S.C. §1692g. That was a different claim from one that a debt collector had made a material misrepresentation in violation of 15 U.S.C. §1692e. However, the requirements of the two sections overlapped to such a degree that it would make no sense for the safe harbor to apply to one claim but not the other, the court said.

No safe harbor here. FSGB did use the safe harbor language established by Miller, the court conceded. However, that was not enough. The safe harbor would protect a debt collector only if the information it included actually was accurate; otherwise, the safe harbor language itself would be misleading.

Since the safe harbor included a warning that late fees and other charges could be imposed when doing so was forbidden, it was inaccurate, the court concluded. The debt collector could have, and should have, deleted the inaccurate part of the language. Having failed to do so, FSGB had no protection.

For more information about consumer debt collection protections, subscribe to the Banking and Finance Law Daily.

CFPB sudden dismissal of online lending suit draws outrage from industry

By Stephanie K. Mann, J.D.

Without explanation, the Consumer Financial Protection Bureau has voluntarily dismissed, without prejudice, a lawsuit against four online payday lenders. In reaction to this sudden dismissal, two industry groups have expressed their outrage.

The National Consumer Law Center deplores the action to dismiss the lawsuit against the payday lenders “who preyed on working families by making loans up to 950% that were illegal in at least 17 states.” According to the trade association, all of the payday lenders are owned and incorporated by the Habematolel Pomo of Upper Lake Indian tribe located in Upper Lake, Calif. While the lenders claim that only tribal law applies to the loans, the NCLC notes that in 2014, the Supreme Court made clear that tribes “going beyond reservation boundaries are subject to any generally applicable state law.”

“It’s outrageous that Acting Consumer Financial Protection Bureau Director Mick Mulvaney, who took more than $62,000 from payday lenders while a member of Congress, is now giving a free pass to lenders that are collecting on illegal loans that charge an obscene 950% interest,” said Lauren Saunders, associate director of the National Consumer Law Center. Allied Progress also questioned Mulvaney’s objectivity.

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

CFPB to investigate itself on function fulfillment

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is planning a series of requests for information that are intended to provide evidence on how well the Bureau is doing its job. The RFIs will ask for comments on the CFPB’s "enforcement, supervision, rulemaking, market monitoring, and education activities," Acting Director Mick Mulvaney said.

The first RFI will focus on civil investigative demands—demands for information from companies that the Bureau uses as part of investigations into specific industries, companies, and practices, as well as into how those practices affect consumers. Several U.S. district court judges have refused to enforce Bureau CIDs in the past year because the demands did not adequately describe what conduct was under investigation or what consumer financial protection laws might have been implicated.

According to Mulvaney, "In this New Year, and under new leadership, it is natural for the Bureau to critically examine its policies and practices to ensure they align with the Bureau’s statutory mandate. Moving forward, the Bureau will consistently seek out constructive feedback and welcome ideas for improvement."

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

Financial Services Committee’s staff director to become CFPB’s chief of staff

By Thomas G. Wolfe, J.D.

The House Financial Services Committee’s staff director, Kirsten Sutton Mork, is leaving the committee to serve as chief of staff for the Consumer Financial Protection Bureau, according to a January 2018, announcement by Committee Chairman Jeb Hensarling (R-Texas). Hensarling also took the opportunity to announce that Shannon McGahn would replace Mork as the Financial Services Committee’s staff director after Mork departs for the CFPB in the near future.

Commending Mork for her leadership, character, and “commitment to conservative principles” in her committee role, Hensarling expressed his confidence that Mork “will do an outstanding job as Chief of Staff for the CFPB and be a tireless advocate for American consumers.” Likewise, noting that McGahn had been a staff director for the committee in the past, Hensarling welcomed McGahn back, stating that McGahn will be “invaluable this year as we work to put forth bold solutions to reform our broken housing finance system and continue our efforts to pass legislation that promotes a healthy economy that is working for all working Americans.”

Concerns of Allied Progress. Meanwhile, in a Jan. 5, 2018, release, Karl Frisch, Executive Director of Allied Progress, which refers to itself as a “consumer watchdog organization,” expressed his concern about Mork becoming the Bureau’s chief of staff. “Kirsten Sutton Mork has spent much of her career looking out for the interests of big banks and Wall Street heavy hitters—she’ll be no different at the CFPB. She simply can’t be trusted to protect consumers from these extremely powerful special interests,” Frisch remarked.

For more information about key personnel in supervisory, regulatory, or enforcement positions affecting the financial services industry, subscribe to the Banking and Finance Law Daily.

Fed considering new large institution risk management guidance

By Andrew A. Turner, J.D.

 

The Federal Reserve Board is asking for comments on proposed supervisory guidance that would outline its risk management expectations for larger banks and holding companies—generally, those with $50 billion or more in U.S. assets, the subsidiaries of such companies, and designated systemically important financial institutions. The guidance, which would be part of a new large institution rating system, would outline expectations for:

• senior management;
• business line management; and
• independent risk management and controls.

The core principles include ensuring that the firm manages its risk in a way that is prudent and consistent with its business strategy and risk management capabilities. The guidance is intended to consolidate and clarify the Fed’s existing supervisory expectations regarding risk management, and is part of a broader initiative to develop a new rating system for large financial institutions that will align with the post-crisis supervisory program. Comments are due by March 15, 2018.

 

The Fed’s previously issued corporate governance proposal looks to enhance the effectiveness of boards of directors by refocusing supervisory expectations for the largest firms’ boards on their core responsibilities to promote the safety and soundness of the firms. The Fed’s earlier ratings proposal, also issued in August 2017, is aimed at better alignment of the Fed's rating system for large financial institutions with the post-crisis supervisory program for these firms.

 

Questions for comments. The Fed invited comment on the following questions on the proposal.

1. What considerations beyond those outlined in this proposal should be considered in the Federal Reserve’s assessment of whether a large financial institution has sound governance and controls such that the firm has sufficient financial and operational strength and resilience to maintain safe and sound operations?
2. How could the roles and responsibilities between the board of directors set forth in the proposed board effectiveness guidance, and between the senior management, business line management, and independent risk management be clarified?
3. What, if any, aspects of the structure and coverage of independent risk management and controls should be addressed more specifically by the guidance?
4. The proposal tailors expectations for foreign business organizations, recognizing that the U.S. operations are part of a larger organization. How could this tailoring be improved?
5. In what ways, if any, does the guidance diverge from industry practice? How could the guidance better reflect industry practice while facilitating effective risk management and controls? Are there any existing standards for internal control frameworks to which the guidance should follow more closely?
6. Other supervisory communications have used the term “risk appetite” instead of risk tolerance. Are the terms “risk appetite” and “risk tolerance” used interchangeably within the industry, and what confusion, if any, is created by the terminology used in this guidance?
7. The proposal would adopt different terminology than is used in the proposed large financial institution rating system, and the Board expects to align the terminology so the element in the governance and controls component would change from “management of core business lines” to “management of business lines.” Does this proposal clearly explain this expected change? Do commenters anticipate any impact from this change?

The guidance would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate holding companies of foreign banking organizations operating in the United States, and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Board.

 

For more information about risk management for financial institutions, subscribe to the Banking and Finance Law Daily.

Data breach protection bill demands more from credit reporting agencies

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

Legislation introduced by Sens. Elizabeth Warren (D-Mass) and Mark Warner (D-Va) is intended to hold large credit reporting agencies accountable for data breaches involving consumer data. Warren stated that the bill “imposes massive and mandatory penalties for data breaches at companies like Equifax—and provides robust compensation for affected consumers—which will put money back into peoples' pockets and help stop these kinds of breaches from happening again.”

The DataBreach Prevention and Compensation Act would give the Federal Trade Commission more direct supervisory authority over data security at credit reporting agencies (CRAs), impose mandatory penalties on CRAs to incentivize adequate protection of consumer data, and provide robust compensation to consumers for stolen data. Warner said, “if companies like Equifax can’t properly safeguard the enormous amounts of highly sensitive data they are collecting and centralizing, then they shouldn't be collecting it in the first place.”

In September 2017, Equifax made public a data breach which compromised the personal information of as many as 143 million Americans. The attack highlighted that CRAs hold vast amounts of data on millions of Americans but lack adequate safeguards against hackers, according to Warren. She stated that, under this legislation, Equifax would have had to pay at least a $1.5 billion penalty “for their failure to protect Americans’ personal information.”

According to a FactSheet distributed by Warren and Warner, the Data Breach Prevention and Compensation Act would:

•  establish an Office of Cybersecurity at the FTC tasked with annual inspections and supervision of cybersecurity at CRAs;
• impose mandatory, strict liability penalties for breaches of consumer data beginning with a base penalty of $100 for each consumer who had one piece of personal identifying information compromised and another $50 for each additional compromise per consumer;
• require the FTC to use 50 percent of its penalty to compensate consumers and increase penalties in cases of inadequate cybersecurity or if a CRA fails to timely notify the FTC of a breach; and
•  double the automatic per-consumer penalties and increase the maximum penalty to 75 percent of the CRA’s gross revenue in cases where the offending CRA fails to comply with the FTC’s data security standards or fails to timely notify the agency of a breach.

For more information about data security in the financial industry, subscribe to the Banking and Finance Law Daily.

Government, credit union memos outline positions in Mulvaney appointment challenge

By Richard A. Roth, J.D.

Memoranda by the Justice Department and a federal credit union are the opening moves in the credit union’s effort to block President Donald Trump’s appointment of Mick Mulvaney as the Consumer Financial Protection Bureau’s acting director. Responding to a complaint and request for a preliminary injunction filed by Lower East Side People’s Federal Credit Union, the DOJ is asserting the financial institution does not have standing to sue and has failed to satisfy any of the requirements for the injunction. The credit union’s reply brief in Lower East Side People's Federal Credit Union v. Trump offers counter-arguments.

Lower East Side’s complaint alleges that, due to conflicting claims of authority raised by Mulvaney and CFPB Deputy Director Leandra English, the institution does not know who is in charge and cannot decide whose directions to follow. The Trump administration relies on the Federal Vacancies Reform Act to authorize Mulvaney’s appointment, but the Dodd-Frank Act automatically made English the acting director when Richard Cordray resigned the directorship, Lower East Side asserts.

DOJ’s motion to dismiss the complaint and supporting brief raise three attacks:

1. Lower East Side does not have standing to sue because it does not have “a cognizable personal stake” in the appointment controversy.
2. The credit union is not likely to succeed on the merits of its suit because the Mulvaney appointment is legal.
3. A preliminary injunction is inappropriate because Lower East Side will not suffer any irreparable harm from the appointment and the public interest and equities are not in its favor.

Standing to sue. For Lower East side to establish federal court jurisdiction, it must demonstrate that it has standing to sue Trump and Mulvaney—essentially, that it has suffered an injury in fact, that the injury is fairly traceable to the appointment, and that the court can provide a remedy by ruling in the credit union’s favor. According to DOJ, the credit union attempts to establish all of that merely by saying that it is regulated by the CFPB, and that claim alone is insufficient.

More specifically, the credit union does not claim the CFPB has taken any action against it that could cause it any harm, DOJ argues. Simply being a regulated financial institution is not enough. “Accordingly, injury, causation, and redressability are all lacking.”

Since Lower East Side is regulated by the CFPB, it has standing to sue, the institution replies—its regulated-entity status is enough. If more is needed, a recent CFPB action that will “neuter” mortgage disclosure rules has enough effect on the credit union to create standing.

Appointment legality. As far as the conflict between the Federal Vacancies Reform Act, which allows the president to fill vacancies temporarily by appointment, and the Dodd-Frank Act, which says the CFPB deputy director automatically becomes acting director when the director is unavailable, the FVRA is what matters, DOJ asserts. The FVRA on its face applies to the CFPB, and none of the FVRA exceptions are relevant.

The Dodd-Frank Act provision might authorize the Bureau’s deputy director to step in, DOJ continues, but that provision is not the exclusive way to fill the job. It does not supersede the FVRA provision.

“Shall still means shall,” the credit union replies. The Dodd-Frank Act says the deputy director “shall . . . serve as acting Director in the absence or unavailability of the Director,” and that clear direction resolves the dispute. To the extent that a conflict between the two laws might exist, the later-passed Dodd-Frank Act would supersede the FVRA.

Injunctive relief hurdles. Lower East Side also fails to clear the hurdles that apply to all requests for injunctive relief, according to DOJ. The credit union is not threatened by any irreparable harm, and neither the public interest nor the balance of the equities between the government and the credit union support blocking the Mulvaney appointment.

A violation of the U.S. Constitution’s Appointments Clause, which the financial institution claims has occurred, is not alone sufficient to constitute an irreparable harm, DOJ asserts. In fact, Lower East Side cannot point to any harm, let alone an irreparable harm.

The government typically has broad discretion in managing its own operations, the DOJ continues. The potential for disruption that would be caused by an injunction must be given significant weight. Interfering with the CFPB’s operations would be disruptive, and an order compelling the President to withdraw his appointment “would be an extraordinary intrusion into core Executive Branch operations.”

Injunctions have been issued against other Presidents, the credit union says, and there is no reason not to issue a preliminary injunction in this case. A violation of the Appointments Clause is a violation of the institution’s constitutional rights, and that always constitutes an irreparable harm. The same is true for regulation by a director who has no authority.

More specifically, Lower East Side says that part of its mission is “promoting economic justice and serving financially underserved communities.” Recent CFPB actions under Mulvaney that reduce the effectiveness of the Home Mortgage Disclosure Act and the rules on prepaid debit cards interfere with the credit union’s ability to accomplish its mission, and that also is an irreparable harm.

As for the effect that a preliminary injunction might have on the CFPB’s ability to conduct its own business, Lower East Side asserts that “This claim is hard to take seriously, from a defendant who by his own admission wants to eviscerate the Bureau. The only people interfering with the Bureau’s execution of the nation’s consumer protection laws are Donald Trump and Michael Mulvaney . . .”

In a subsequent reply, DOJ argues that the credit union cannot rely on the HMDA statement to show an injury. That statement was issued after the suit was filed and so cannot create standing at the time of filing, the reply points out. Even if the timing of the statement were disregarded, Lower East Side “misunderstands the agency’s statement, offers an impermissibly speculative and attenuated theory of injury, and cannot establish standing based on how the CFPB exercises its enforcement discretion against third parties,” the government explains.

Quo warranto statute. The DOJ's later reply also claims that the federal quo warranto statute is the only avenue open to someone who wishes to challenge another’s authority to carry out the duties of a federal office. Quo warranto—meaning “by what authority”—applies only when the challenger claims a personal interest in the office, and the credit union raises no such claim, the government says.

Lower East Side should be required to wait until the CFPB has taken some action that actually causes it an injury and then raise a collateral attack on Mulvaney’s authority, according to the DOJ.

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

California’s credit card surcharge law unconstitutionally restricts commercial speech

By Charles A. Menke, J.D.

California businesses may charge customers a fee for using a credit card, the U.S. Court of Appeals for the Ninth Circuit has ruled. The Court held that a California law (Cal. Civ. Code §1748.1) restricting surcharges on credit cards was unconstitutional as applied to the plaintiffs because it restricted the plaintiffs’ non-misleading commercial speech. In addition, the restriction did not directly advance the state’s asserted interest in preventing consumer deception, nor was it narrowly drawn to achieve that interest. The court affirmed the entry of a summary judgment in favor of five California businesses and their respective owners in an action brought against the California Attorney General in her official capacity (Italian Colors Restaurant v. Becerra, Jan. 3, 2018, Vance, S.).

Lower court. The five California businesses—a restaurant, gas station, dry cleaners, transmission repair business, and web design company—and their respective owners filed an action in federal court against the California Attorney General. The merchants alleged that California Civil Code provision violated the First Amendment to the U.S. Constitution as an unlawful restriction on commercial speech because the statute regulates how retailers can describe the price difference between cash and credit purchases. The businesses also contended that since a statute must clearly delineate the conduct it proscribes, in keeping with principles of due process, the California provision was unconstitutionally vague.

The district court agreed determining, among other things, that: (i) the California provision singled out “a specific class of speakers,” and involved a “content-based restriction”; (ii) as a restriction on commercial speech, the statute was subject to the “intermediate scrutiny” test and did not pass that test; and (iii) if the statute’s purported purpose was to prevent deception and “unfair surprise” to consumers at the cash register, then “a law mandating disclosure of surcharges would be the most direct way to prevent consumer deception” and would also “prevent any encroachment on the freedom of speech.” 

Standing. On appeal, the Ninth Circuit first determined that the businesses had standing to sue. The court found that the businesses modified their speech and behavior based on a credible threat that the California Civil Code provision would be enforced against them.

Regulation of commercial speech. The court next found that the California Civil Code provision regulates commercial speech. In making that determination, the court relied on the U.S. Supreme Court’s decision in Expressions Hair Design v. Schneiderman in which the Court decided that New York’s no-surcharge law "regulates speech" under the First Amendment to the U.S. Constitution. Section 1748.1 of the California Civil Code regulates commercial speech since it prohibits the businesses from expressing their prices by posting a single sticker price and charging an extra fee for credit card use, the court said.

Intermediate scrutiny. Restrictions on commercial speech must survive intermediate scrutiny, the court stated. “If the speech ‘is neither misleading nor related to unlawful activity,’ then ‘[t]he State must assert a substantial interest to be achieved by’ the regulation.” Moreover, “[t]he regulation must directly advance the asserted interest, and must not be ‘more extensive than is necessary to serve that interest.’”

Lawful activity. The businesses’ activity—charging credit card users more than cash users—is not unlawful, the court determined, as the California Civil Code provision permits cash discounts. In addition, since they can already charge credit card customers more than cash customers, their desire to communicate the difference in the form of a surcharge rather than a discount is not misleading.

State interest. Enforcing section 1748.1 of the California Civil Code against the businesses does not directly advance California’s asserted interest in preventing consumer deception, the court further found. “[T]he Attorney General must do more than merely identify a state interest served by the statute … [and] has pointed to no evidence that surcharges posed economic dangers that were in fact real before the enactment of Section 1748.1, or that Section 1748.1 actually alleviates these harms to a material degree.”

The California Civil Code provision also prevents businesses from effectively communicating and informing consumers about the cost of using a credit card and why credit card customers are charged more than customers paying with cash, according to the court. “We fail to see how a law that keeps truthful price information from customers increases the accuracy of information in the marketplace,” the court said

Overly restrictive. “There is no reasonable fit between the broad scope of Section 1748.1—covering even plaintiffs’ non-misleading speech—and the asserted state interest.” According to the court, California could employ other, more narrowly tailored, means to prevent consumer deception, such as simply banning deceptive or misleading surcharges, or requiring businesses to disclose their surcharges both before and at the point of sale.

The court also noted that the many exemptions carved into the California Civil Code provision, including broad exemptions for the state and municipalities, undermine the state’s asserted interest in preventing consumer deception as justification for the provision. “That California exempted itself and its subdivisions from the asserted free market protections of Section 1748.1 suggests that this justification is thin,” the court said.

For more information about state banking laws, subscribe to the Banking and Finance Law Daily.

PHH Corp. settles state charges over mortgage servicing, foreclosures

By Katalina M. Bianco, J.D.

New Jersey-based PHH Mortgage Corporation has agreed to pay up to $45 million to settle charges arising from the company’s mortgage servicing and mortgage foreclosure practices between 2009 and 2012. The settlement calls for the payment of more than $30 million to homeowners, some of whom lost their homes in foreclosure, $5 million to 12 state attorneys general whose offices led the investigation and the settlement, and nearly $9 million to state mortgage regulators. The consent judgment addresses charges by 49 states and the District of Columbia, and by 45 state mortgage regulatory agencies. New Hampshire is the only state that did not participate.

The complaint the attorneys general will file to complete the settlement alleges a litany of servicing violations by the company. These include that PHH Corp:

• failed to apply homeowners’ payments properly;
• charged unauthorized default-related fees;
• threatened foreclosures and gave conflicting information to homeowners who were in loss mitigation programs;
• failed to respond to homeowners’ information or aid requests;
• did not properly handle loss mitigation applications, including not keeping track of documents submitted by homeowners;
• did not keep complete loan servicing files;
• commenced foreclosures without having documentation that proved the company had the right to do so;
• did not adequately supervise third parties it used in the foreclosure process;
• filed documents with inaccurate or incomplete information; and
• used "robosigned" documents.

While the company is settling the charges, it has not admitted any wrong doing.

The consent judgment establishes mortgage servicing standards and requires third-party audits. Homeowners who lost their homes to foreclosure will be paid at least $840, while those who faced foreclosures but did not lose their homes will receive at least $285. The consent judgment has a three-year term, and it is not binding on anyone who acquires PHH Corp. or the company’s assets.

 

For more information about PHH Mortgage Corporation and other mortgage-related actions, subscribe to the Banking and Finance Law Daily.

In 2017, Trump and Republican Congress leave imprint on banking

By John M. Pachkowski, J.D.

The year 2017 for banking will be remembered for President Donald J. Trump and the Republican-controlled Congress taking steps to either repeal or dismantle various aspect of the Dodd-Frank Act; the continuing story of the ability of the Financial Stability Oversight Council to designate non-bank companies as significantly important financial institutions (SIFIs); steps taken by the Office of the Comptroller of the Currency to bring financial technology under federal supervision; and changes to leadership at the Consumer Financial Protection Bureau and the other banking agencies.

This Strategic Perspectives will examine these developments and provide a glimpse into the issues that may arise in 2018.

1. Regulatory reform.

At both ends of Pennsylvania Avenue, there were a number of initiatives that sought to roll back or repeal various provisions of the Dodd-Frank Act.

Executive action. Within two weeks of his inauguration, the president made good on his promise to "do a big number" on the Dodd-Frank Act by signing an Executive Order on Feb. 3, 2017, that directed the Secretary of the Treasury to report back in 120 days on what rules promote or inhibit the administration’s priorities.

"Core Principles." The administration’s priorities, enunciated in Executive Order 13772, were based on seven Core Principles:  

1. empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; 
2. prevent taxpayer-funded bailouts; 
3. foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; 
4. enable American companies to be competitive with foreign firms in domestic and foreign markets; 
5. advance American interests in international financial regulatory negotiations and meetings; 
6. make regulation efficient, effective, and appropriately tailored; and 
7. restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.

  

The first report released by the Treasury Department in connection with the mandate set forth in Executive Order 13772 was entitled A Financial System That Creates Economic Opportunities: Banks and Credit Unions." The report’s findings and recommendations addressed changes brought about with the enactment of the Dodd-Frank Act and identified significant areas for reform in order to conform to the Core Principles.

  

The report also noted that given the breadth of the financial system and the unique regulatory regime governing each segment, the Treasury Department found it necessary to divide its review of the financial system into a series of reports. Subsequent reports in connection with the Executive Order 13772 review were to focus on markets, liquidity, central clearing, financial products, asset management, insurance, and innovation.

  

Among other things, the report called for a number of actions to be taken by the regulators or Congress. For example, the report said that a "sensible rebalancing of regulatory principles... can better align the financial system to serve consumers and businesses in order to support their economic objectives and drive economic growth." 

 

Regarding specific recommendations, the report called for: 

• "substantial amendment" to the Volcker Rule to promote liquid and vibrant markets; 
• Congress and the regulatory agencies to undertake a holistic analysis of the cumulative impact of the regulatory environment, targeting the Community Reinvestment Act as one particular statute that needs to be modernized;
• right-sizing financial regulation and removing unnecessary regulatory duplication and overlap by providing: explicit, appropriately risk-sensitive capital standards; supervised stress-testing appropriately tailored based on banking organizations’ complexity; and actionable living wills for the largest systemically-important banks; and 
• a "significant restructuring" of the Consumer Financial Protection Bureau.

SIFI and OLA review. In addition to the regulatory review based on the Core Principles, the president took other executive action that addressed the ability of FSOC to designate non-bank financial institutions as systemically important financial institutions (SIFIs) and the bank regulators to exercise the orderly liquidation authority (OLA) found in Title II of the Dodd-Frank Act. 

 

The orderly liquidation authority found in the Dodd Frank Act authorizes financial regulators to wind down a large, complex financial institution that is failing and dismantle it in a way that is less harmful and disruptive than taxpayer bailouts or bankruptcy. The Presidential Memorandum on the orderly liquidation authority provided that the Treasury Department conduct an analysis to ensure that the OLA does not encourage excess risk-taking, moral hazard, and exposure to taxpayers. The Treasury Secretary noted that the OLA could be used in an emergency. 

 

The designation of non-bank firms, such as insurance companies, allows FSOC to monitor the risks posed by nonbank financial companies and to address these risks through enhanced supervision and stricter rules. The Presidential Memorandum affecting the designation of non-bank SIFIs called for a 180-day review to ensure that the SIFI designation is "a fair and transparent process."

  

In November, the Treasury Department issued its report on FSOC’s SIFI designation process and provided recommendations on ways to improve FSOC’s processes for nonbank financial companies and financial market utility (FMU) designations. The report identified five policy goals that should be achieved by FSOC’s designation processes: leveraging the expertise of primary financial regulatory agencies; promoting market discipline; maintaining a level playing field among firms; appropriately tailoring regulations to minimize burdens; and ensuring FSOC’s designation analyses are rigorous, clear, and transparent.

 

As for nonbank financial company designations, the Treasury Department recommended that FSOC prioritize its efforts to address risks to financial stability through a process that emphasizes an activities-based or industry-wide approach.

 

Regarding the designation of FMUs, the report recommended that FSOC add important enhancements to improve the analytical rigor, engagement, and transparency of the process, and to ensure that the designation process is individualized and appropriately tailored. Additionally, the report has recommended that FSOC continue to study key issues related to FMU operation, designation, and resolution. Finally, Treasury has recommended that FSOC consider incorporating cost-benefit analyses into its FMU evaluation process as well.

 

Legislative measures. At the end of 2017, there were two major legislative initiatives that sought to provide regulatory reform—H.R. 10, the Financial CHOICE Act of 2017 and the S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act.

 

The Financial CHOICE Act of 2017, which was introduced by House Financial Services Committee Chairman Jeb Hensarling (R-Texas), is based on the following key principles:

 

• taxpayer bailouts of financial institutions must end, and no company can remain too big to fail;
• both Wall Street and Washington must be held accountable;
• simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful; 
• economic growth must be revitalized through competitive, transparent, and innovative capital markets; 
• every American, regardless of circumstances, must have the opportunity to achieve financial independence; 
• consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty; and 
• systemic risk must be managed in a market with profit and loss.

 

House Democrats dubbed the bill, the "Wrong Choice Act."

 

Following an early May 2017 Financial Services Committee mark up, the Financial CHOICE Act was passed by the House on June 8, 2017, by a 233 to 186 roll call vote.

 

The Senate’s regulatory relief initiative was introduced in November 2017 by Senate Banking Committee Chairman Mike Crapo (R-Idaho). The bill is a bipartisan measure which would raise the threshold for applying enhanced prudential standards to bank holding companies from $50 billion to $250 billion.

 

Other measures in the Senate bill would:

  

• provide that mortgage loans originated and retained in portfolio by an insured depository institution or an insured credit union with less than $10 billion in total consolidated assets will be deemed qualified mortgages under the Truth in Lending Act while maintaining consumer protections;
• require that the federal banking agencies establish a community bank leverage ratio of equity to average consolidated assets of not less than eight percent and not more than 10 percent. Banks with less than $10 billion in total consolidated assets that maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with capital and leverage requirements; and
• require credit bureaus to include in the file of a consumer 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.

  

S. 2155 was reported out of the Senate Banking Committee on Dec. 5, 2017, and placed on the Senate Legislative Calendar under General Orders as Calendar No. 287.

2. CFPB at a turning point?

As the sixth year of the Consumer Financial Protection Bureau "serving consumers" comes to a close, its mission as envisioned in the Dodd-Frank Act possibly hangs in the balance given Republican control of Congress and the White House.

  

Although the CFPB issued two significant rulemaking initiatives, those actions were tempered by the actions taken by Congress and White House.

  

Arbitration rule. In July, the Bureau issued its final rule banning mandatory predispute arbitration clauses in consumer financial product contracts if those clauses prevent class actions. Arbitration clauses that apply only to individual actions must disclose that class actions are not covered. If a judge rules that a suit is not appropriate for class action treatment, an otherwise valid arbitration clause can be invoked.

 

 As soon as the Arbitration Rule was released, Republicans in Congress vowed to repeal the final rule through use of the Congressional Review Act, which not only halts the regulation from taking effect, but it also bars federal agencies from enacting similar rules without congressional action. 

 

Senator Tom Cotton (R-Ark) was first to voice his intent to rescind the Arbitration Rule stating, "The CFPB has gone rogue again, abusing its power in a particularly harmful way."  

 

H. J. Res. 111 and S. J. Res. 47 were introduced in the House and Senate as the vehicles to repeal the Arbitration Rule. 

 

Subsequently, H. J. Res. 111 was approved by the House and, narrowly, by the Senate with the president signing the bill on Nov. 1, 2017, thereby repealing the Arbitration Rule. 

 

Payday loans. The other major initiative that the CFPB finalized was its regulations regulating short-term, small-dollar loans. The regulations will cover loans that require full or nearly full repayment at one time, such as payday loans, vehicle title loans, and deposit advance products. Some longer-term loans that have balloon payment features also are covered. 

 

As with the Bureau’s Arbitration Rule, Congress has taken the first step to nullify the payday lending rules pursuant to the Congressional Review Act. In early December, a bipartisan group of House members introduced H.J. Res. 122. Rep. Dennis Ross (R-Fla), the chief sponsor of the joint resolution, noted, "short-term, small dollar credit is essential to nearly 12 million American consumers who have difficulty qualifying for many other types of credit." Ross, along with the other co-sponsors—Reps. Alcee Hastings (D-Fla), Tom Graves (R-Ga), Henry Cueller (D-Texas), Steve Stivers (R-Ohio), and Collin Peterson (D-Minn)—also emphasized that all 50 states, the District of Columbia, and all Native American tribes already regulate short-term loans covered.

 

Who’s in charge? Although the CFPB may have both of its two big rulemaking initiatives nullified by Congress, the biggest change to the Bureau’s mission is just beginning to be played out in a federal court following the resignation of Richard Cordray as CFPB Director. 

 

As Cordray was departing, Leandra English was named as Deputy Director, thereby setting into motion the CFPB succession provisions found in the Dodd-Frank Act. At the same time, the president, acting under the provisions of the Federal Vacancies Reform Act (FVRA), named Office of Budget and Management Director Mick Mulvaney as the Bureau’s acting director. Mulvaney had at one time called the CFPB a "sick, sad" joke.

  

With competing leadership, English sued Mulvaney and the president seeking a temporary restraining order and other relief. That effort was rebuffed by the U.S. District Court for the District of Columbia. English then amended her complaint seeking a preliminary injunction claiming, among other things, that 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. In response to English’s amended complaint, Mulvaney argued that English failed to demonstrate a substantial likelihood that she would prevail on her claim that, as deputy director, she automatically succeeded Cordray. He further contended that English had not established that, absent a preliminary injunction, she would be irreparably harmed. In her latest reply brief, English argued that the Dodd-Frank Act supplies "a clear answer" to the question on which the merits of the case turn. She added, even if Dodd-Frank’s succession statute were interpreted as being permissive rather than mandatory,the President’s selection of Mulvaney would still be impermissible because: (1) It flouts Congress’s design in creating the CFPB as an "independent bureau;" and (2) The FVRA, by its terms, does not apply to the appointment of "any member" of a multi-member board that "governs an independent establishment or Government corporation," and the CFPB Director, as an automatic Federal Deposit Insurance Corporation board member, is such a member.

 

A coalition of 17 state attorneys general wrote the president indicating that they would continue enforcing consumer protection laws regardless of the status of CFPB leadership. In a letter to the president, the attorneys general stated, "If incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account"

 

Beside the court dispute over who heads up the CFPB, the question of whether the Bureau’s leadership structure is constitutional is still pending before the U.S. Court of Appeals for the District of Columbia Circuit. In May, the full court heard oral arguments (audio file) in PHH Corporation v. CFPB. Among the issues in the appeal, the full court was asked to determine whether the CFPB’s structure as an independent agency with a single director violated the Constitution’s separation of powers requirements.

 

A different direction. Regardless of the outcomes in the English and PHH cases, it has been observed that the CFPB "is undergoing its first ideological swing in leadership" and the "new leadership should be expected to take the Bureau in a different direction." These observations were provided by Makada Henry-Nickie and Aaron Klein of the Brookings Institution. The authors also noted that "to characterize every change in policy as unprecedented or problematic—this would be a slippery trajectory." Henry-Nickie and Klein added, "It could be reasonably argued that Mulvaney’s changes may offer new policy tools that prove effective at improving consumer choice and enhancing competition, while combating abusive and predatory banking practices."

3. Fintech

The year 2017 saw the Office of the Comptroller of the Currency continue its push to allow financial technology companies, or fintech, the opportunity to apply for special purpose national bank charters. 

 

In 2016, the OCC laid the groundwork to allow fintech companies to apply for the special purpose national bank charters. This process began with the release of a white paper entitled "Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective," discussing the principles that will guide the development of the agency’s framework for evaluating new and innovative financial products and services. The final action taken by the OCC at the end of 2016 was release of a paper, entitled "Exploring Special Purpose National Bank Charters for Fintech Companies," that discusses several important issues associated with the approval of a national bank charter. 

 

OCC’s next step. To continue the process, the OCC proposed adding a supplement to its Licensing Manual. According to the OCC, the supplement would address the unique factors that must be considered in evaluating special purpose applications. Under the proposed supplement, a special purpose national bank would be defined as a national bank that either pays checks (or makes other similar transfers, such as using debit cards) or lends money. Accepting deposits will not be permitted, and the banks will not be covered by the Federal Deposit Insurance Corporation. The proposed supplement also provides that fintech companies that receive charters will be expected to meet the same safety and soundness and fairness standards that apply to all national banks. The proposed supplement offers details on how a fintech company’s compliance with those standards will be determined.

  

Challenges to OCC. With the issuance of the proposed Licensing Manual supplement, the OCC seemed to be on track to eventually issue a special purpose charter. However, the New York State Superintendent of Financial Services, Maria T. Vullo, and the Conference of State Bank Supervisors (CSBS) had other ideas. Both Vullo and the CSBS filed separate lawsuits challenging the OCC’s ability to issue the special purpose charter. 

 

The CSBS was the first to challenge the OCC, calling the OCC’s plan "an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks." The complaint alleged that the OCC claims the authority to create charters for a broad variety of nonbank financial services providers, regardless of whether they might be thought of as fintech companies, exceeding the agency’s authority under the National Bank Act. 

 

In her lawsuit, Vullo alleged that "[t]he Fintech Charter Decision is lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State." Vullo’s complaint also claimed that the fintech charter poses serious threats to New York consumers and businesses because the charter would include vast preemptive powers over state law. Ultimately, Vullo’s complaint was dismissed on standing and ripeness grounds since the OCC not reached a final decision on whether to grant special purpose charters to fintech companies. 

 

4. Nonbank SIFIs no more?

The validity of FSOC’s ability to designate non-bank financial companies as SIFIs under the Dodd-Frank Act was left unresolved in 2017 despite the fact that the appellate court deciding the issue heard oral argument (audio file) in October 2016. A federal district court had ruled, in early 2016, that FSOC’s SIFI designation for MetLife, Inc., was arbitrary and capricious and that FSOC acted contrary to its published guidance without explaining, or even acknowledging, the deviation.

 

The case of MetLife, Inc. v. Financial Stability Oversight is still unresolved due in part to the change in presidential administrations and MetLife’s own insistence.

  

As previously mentioned, the Trump administration sought a review of FSOC’s SIFI designation process in April. Following that action, MetLife had filed a series of motions with the appellate court to hold the appeal in abeyance until the Treasury Department released its report claiming that the results of the SIFI designation review "may substantially illuminate this Court’s consideration of the issues on appeal." The appeals court ultimately granted MetLife’s various requests.

 

Once the Treasury Department’s SIFI report was released, MetLife filed a supplemental brief with court arguing that "[e]ach of the fatal deficiencies highlighted by the Treasury Report requires rescission of [MetLife’s SIFI designation]." The brief also noted that "there are also sharp policy conflicts between the Report and the government’s position in this appeal."

 

Given the "sharp policy conflicts between the Report and the government’s position in this appeal," it is conceivable that government could change its position and align its position with the findings of the Treasury Department’s report.

 

Although MetLife is still attempting to shed its SIFI designation, FSOC announced, in late September, that American International Group, Inc. (AIG), is no longer in financial distress and therefore not a threat to U.S. financial stability. As a result, FSOC 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. FSOC approved the rescission of AIG’s designation by a six-to-three vote with one member being recused. Once the rescission was announced, the Treasury Department released a document detailing the views of the Council’s seven members regarding the rescission.

 

Following AIG’s rescission as a SIFI, the advocacy group Third Way noted that the rescission showed that the "SIFI designation process is working" and "Dodd-Frank always intended for SIFI designations to be a dynamic process that phases firms in and out as their situations change." Third Way also pointed that the SIFI process was not like the Eagles "Hotel California" in that you can leave.

 

 5. Changes in leadership

 

At the beginning of 2017, before Trump was even inaugurated, there were calls to fire "King Richard" Cordray by Sens. Ben Sasse (R-Neb) and Mike Lee (R-Utah). After Trump’s inauguration, Rep. Jeb Hensarling also called on the president to fire Cordray. As already noted, Cordray left on his own accord.

 

Beside the changes being litigated at the CFPB, the three bank regulatory agencies—the OCC, Fed, and FDIC—are also in the process of having their leadership changed.

 

Fed changes. At the Fed, the president was given the opportunity to name a new Chairman, as well as other Fed Governors.

 

In early February, Daniel K. Tarullo announced that he was resigning as member of the Fed and would be leaving on or around April 5, 2017. In his resignation letter to the president, Tarullo stated, "It has been a great privilege to work with former Chairman Bernanke and Chair Yellen during such a challenging period for the nation’s economy and financial system"

 

The president nominated Randal Quarles of Colorado to be a member of the Fed for a term expiring Jan. 31, 2032, and to be vice chairman for supervision for a four-year term. The position of vice chairman for supervision was created by the Dodd-Frank Act. The vice chairman is responsible for developing policy recommendations regarding supervision and regulation for the Fed. Quarles was also nominated for the remainder of a 14-year term expiring in 2018, and for an additional 14-year term.

 

After much speculation in the media, the president nominated current Fed member Jerome H. Powell to become the next Fed Chairman. In an article appearing in the New York Times, it was noted that the president was "breaking precedent" since "[the] previous three Fed chairmen were reappointed, in each case by a president of the opposite political party."

 

The president also announced, on Nov. 29, 2017, his intention to nominate Marvin Goodfriend of Pennsylvania as a member of the Fed’s Board of Governors. The nomination would place Goodfriend on the Board of Governors for the remainder of a 14-year term expiring on Jan. 1, 2030.

 

Once current-Fed Chair Janet L. Yellen departs in early February 2018, Powell is confirmed as Chairman, and Goodfriend is confirmed as a Fed Governor, the president will still have the opportunity to name three new members to get the Board up to seven members if he so chooses. At least one of these nominees must have community banking experience.

 

New head at OCC. Joseph Otting was confirmed by the Senate to be the 31st Comptroller of the Currency. The 54-43 vote confirming Otting was along mostly party line, with only two Democrats voting in favor of confirmation. Otting was sworn-in as Comptroller of the Currency on Nov. 28, 2017. 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."

 

Changes at FDIC. Finally, the president announced that he will nominate Jelena McWilliams as the next Chairperson of the Federal Deposit Insurance Corporation. She would serve the remainder of a six-year term expiring July 15, 2019, according to the White House statement. McWilliams currently serves as Executive Vice President, Chief Legal Officer, and Corporate Secretary for Fifth Third Bank in Cincinnati, Ohio. Previously, she has worked in the United States Senate and at the Fed.

 

6. A look ahead

It would be somewhat remiss for a "year-in-review" not to say something about what lies ahead in 2018.

The Deloitte Center for Regulatory Strategy, Americas noted that most of the "challenges and uncertainties" from 2017, such as continuing lack of clarity over the final shape of post-crisis reforms, would probably remain in 2018. The report also noted that "[t]he consensus in the US is that there will be some meaningful adjustments to the Dodd-Frank Act, but no large-scale repeal or rewrite." The report added that, on a global scale, supervisors will be turning more attention to long-term structural issues, such as fintech and climate change. Addressing changes in senior leadership of many of the world’s leading regulatory bodies, the report noted that it "remains to be seen how far new leaders will uphold the key tenets of the international supervisory agenda of the last decade, particularly its emphasis on cross-border coordination, or whether supervisory priorities will tilt more toward promoting the competitiveness of individual jurisdictions."

 

Martin Neil Baily and Aaron Klein of the Brookings Institution noted in a report entitled "Biggest financial regulation stories of 2017, and what to watch in 2018" that "2017 mostly served to set up 2018 as the year of action." Baily and Klein added, "Dodd-Frank is here to stay. However, 2018 is likely to feature far more significant changes in implementation of Dodd-Frank as well as potentially its most major legislative changes. But if prior years are any guide, financial regulation can be as difficult to forecast as financial markets."

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