5th Cir: Bank, directors could not sue FDIC over enforcement proceeding irregularities

By Richard A. Roth, J.D.

A state bank and its directors could not challenge FDIC enforcement orders by filing a suit claiming constitutional violations. The only avenue available to attack the proceedings was to appeal the orders in the U.S. Court of Appeals.

 

A federal district court did not have jurisdiction over a suit filed by a New Orleans community bank and its directors who were unhappy with two Federal Deposit Insurance Corporation enforcement actions and the resulting cease-and-desist orders and civil money penalties, the U.S. Court of Appeals for the Fifth Circuit has decided. Under the Federal Deposit Insurance Act, only the U.S. appellate courts have jurisdiction over challenges to enforcement actions (Bank of Louisiana v. FDIC, March 28, 2019, Duncan, S.).

 

Enforcement actions. The FDIC brought two administrative enforcement actions against Bank of Louisiana and three directors beginning in 2013:

• The first claimed that the directors had caused the bank to violate the regulation on loans to insiders. The FDIC adopted the administrative law judge’s recommendation that each director pay a $10,000 civil penalty.
• The second, which was brought less than one month after the first, was broader. It charged that the bank had violated the Bank Secrecy Act, Electronic Funds Transfer Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Home Mortgage Disclosure Act, and National Flood Insurance Program. The FDIC adopted the ALJ’s recommendation of a $500,000 penalty and a cease-and-desist order. 

The order entered in the first enforcement proceeding was appealed to the Fifth Circuit, which affirmed the FDIC’s decision. The second also was appealed, but eventually was returned to the FDIC due to problems with the constitutionality of the ALJ’s appointment.

 

However, while the first action was on appeal and the second was being considered by the FDIC board, the bank and directors sued the FDIC in the federal district court. The suit alleged that the FDIC had violated equal protection rights by targeting the bank due to the bank president’s age and had violated due process rights by preventing the bank from offering some evidence and restricting the president’s ability to talk with his attorney. The appellate court noted that these claims had been considered and rejected by both the ALJ and the FDIC board.

 

Restricting court jurisdiction. The appellate court began its analysis by observing that, in most situations, Congress has the authority to decide what cases the federal courts can hear and under what conditions those cases can be considered. While civil suits usually are heard first by the U.S. district courts, Congress can "leapfrog" the district courts by sending claims through an administrative process and providing for direct appeal to the U.S. appellate courts.

 

Congress can establish such a process either implicitly or explicitly. The issue here, the court said, was whether the Federal Insurance Act (at 12 U.S.C. §1818) had done so by implication. That would be decided by answering two questions: First, did the statutory scheme of the FDI Act show that Congress intended to preclude district court jurisdiction? Second, were the claims presented by the suit of the type that Congress intended to fall within that statutory scheme?

 

Congressional intent. There was no real question about whether Congress intended to preclude federal district court jurisdiction over claims against the FDIC that arose from enforcement proceedings. In fact, the bank and directors conceded the issue. The statutory language that "no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement or any notice or order [under the section], or to review, modify, suspend, terminate, or set aside any such notice or order" (12 U.S.C. §1818(i)(1)) "virtually compels that concession," the court said.

 

The question then was whether the claims raised by the bank and directors were of the type that Congress intended would be covered by the statutory scheme.

 

Nature of the claims. The Supreme Court set the factors for answering that question in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), the court said. It would be assumed that Congress did not intend to preclude district court jurisdiction if:

 

1. all meaningful judicial review would be precluded;
2. the claims were "wholly collateral" to the statutory review process; and
3. the claims were not within the FDIC’s expertise.

The three Thunder Basin factors made clear that the district court did not have jurisdiction over the suit.

 

The FDI Act scheme allowed meaningful judicial review of FDIC board orders, the court pointed out. In fact, the board considered the constitutional claims and the Fifth Circuit considered them on review. The complaint that limits on the bank’s discovery prevented meaningful review were unavailing because the bank and directors had been able to develop an adequate record, according to the court.

 

The equal protection and due process claims were not collateral to the enforcement proceedings, the appellate court continued. Rather, they arose directly from claims of irregularities in those proceedings. Even if the constitutional claims were substantively collateral to the FDIC’s allegations about how the bank was operated, they were not wholly collateral, the court pointed out.

 

Finally, the FDIC’s expertise included the constitutional claims. Why the FDIC chose to bring its enforcement proceedings and how those proceedings were conducted would be affected by the agency’s banking expertise, the court said.

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

U.S.: Law firm engaged in nonjudicial foreclosure not a debt collector

By Richard A. Roth, J.D.

A law firm engaged in a nonjudicial foreclosure on a consumer’s residence is not a debt collector under the Fair Debt Collection Practices Act, the Supreme Court has unanimously decided. The text of the FDCPA, an apparent congressional intent to avoid interfering with state foreclosure proceedings, and the Act’s legislative history all show that, for most purposes, a business that has the enforcement of security interests as its principal purpose is not included in the general definition of "debt collector," the Court decided (Obduskey v. McCarthy & Holthus LLP, March 20, 2019, Breyer, S.).

The decision affirms a judgment by the U.S. Court of Appeals for the Tenth Circuit that rejected the consumer’s suit.

Foreclosure process. When a homeowner fell behind on his mortgage payments, the loan servicer hired the law firm of McCarthy & Holthus to carry out a nonjudicial foreclosure under Colorado law. The first step in that process was a state-law mandated 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 Tenth Circuit agreed with the law firm that it was not a debt collector, and thus not subject to the FDCPA, because it had not demanded any payment from the homeowner. The nonjudicial foreclosure could not result in a deficiency judgment against the consumer, the court pointed out. That could only happen in a separate suit. "[E]nforcing a security interest is not an attempt to collect money from the debtor," the court said.

What is a debt collector? The FDCPA’s definitions of "debt collector" are a bit confusing. In 15 U.S.C. §1692a, the Act says generally that a debt collector is anyone who either is in a business that has, as its principal purpose, the collection of debts, or who regularly collects or attempts to collect debts. However, the Act then adds that for the purposes of §15 U.S.C. §1692f(6)—which addresses the improper taking or threatening of nonjudicial actions to foreclose on property—a person in a business that has, as its principal purpose, enforcing security interests also is a debt collector.

The homeowner argued that this last, specific provision meant the law firm was a debt collector.

The Supreme Court disagreed. The added provision does not mean that a person in the business of enforcing security interests is a debt collector under the general definition; rather, it means that such a person is a debt collector for the specific purpose of the impermissible threat part of the FDCPA, but for no other part.

Meaning of the FDCPA. According to the Court’s opinion, authored by Justice Breyer, the result was compelled by the text of the FDCPA.

If the Act gave only the general definition of "debt collector," the law firm would have been included, the opinion said. A loan to buy a home is an obligation to pay money; the mortgage secures that obligation; a foreclosure sells the property to repay that debt; and a company that engages in nonjudicial foreclosures would be collecting that debt.

It was irrelevant that the payment was not being collected from the consumer directly, the opinion added, as the FDCPA applies to the collection of debts indirectly.

However, the opinion asked, if a foreclosure agent were to be deemed a debt collector under the general definition, what was the purpose of the specific definition that applies to impermissible threats in foreclosures? And, more explicitly, why does the specific definition say that, for that part of the Act, "debt collector" also includes a foreclosure agent?

The only way to give meaning to the entire definition was to construe the specific definition as adding something to the general definition, Justice Breyer concluded. Therefore, a company that engages in nonjudicial foreclosures is, in general, not a debt collector subject to the FDCPA. However, it is subject to the FDCPA’s ban on impermissible foreclosure threats and actions.

Supporting arguments. The Court noted two additional arguments in favor of its decision. First, Congress might have wanted to treat nonjudicial foreclosures differently from other debt collection activities in order to avoid disrupting established state foreclosure regimes. These state laws often include significant consumer protection aspects that could be seen as violating the FDCPA.

The legislative history of the FDCPA also supports the decision, the opinion said. When the Act was being considered by Congress, two conflicting versions were considered. One would have included nonjudicial foreclosures fully, while the other would have excluded them completely. The version that was passed "has all the earmarks of a compromise" that makes clear what Congress settled on.

Consumer’s assertions rejected. The Court considered, but rejected, a series of arguments made by the consumer.

First, the imperative to find meaning in all of the FDCPA’s text would not be satisfied by interpreting the special definition as applying to repossession agents. The Act spoke of enforcing all security interests, not just personal property interests. If Congress intended to include only "repo men," it would have made that clear by limiting the specific definition to the repossession of personal property.

Second, it is true that the FDCPA includes venue requirements on debt collection suits, the Court agreed. However, a provision of the Act that applies in litigation does not affect the application of the Act to nonjudicial activities. The opinion then noted that the Court was deciding only whether those engaged in nonjudicial foreclosures are debt collectors; those carrying out judicial foreclosures might be debt collectors, particularly since a judicial foreclosure includes the possibility of a deficiency judgment against the consumer.

Next, the Court said that the law firm’s mailing of notices to the consumer did not change the result. By sending the notices, the firm was not taking steps that went beyond foreclosing; rather, it was carrying out steps required by state law as part of the foreclosure process.

The Court concluded by adding that if the decision created a loophole that foreclosure agents could exploit to engage in the various abusive collection tactics the FDCPA bans, state laws often already addressed that danger. If more protection was needed, Congress would have to amend the Act. The Court could only enforce the Act as Congress had written it.

Concurring opinion. Justice Sotomayor’s concurring opinion first noted that Justice Breyer’s opinion "makes a coherent whole of a thorny section of statutory text." However, she also said that a nonjudicial foreclosure would be the indirect collection of a debt under the general definition.

The need to give meaning to all of the Act’s text led her to agree with the Court’s decision, she said, but "all the same, this is too close a case for me to feel certain that Congress recognized that this complex statute would be interpreted the way that the Court does today." Congress still could act to extend the FDCPA’s consumer protections to all debt collection activities.

Justice Sotomayor also reinforced that part of the Court’s opinion saying nonjudicial foreclosure agents were not being given "a license to engage in abusive debt collection practices." This decision should be seen as applying only to a foreclosure agent’s good-faith efforts to comply with state laws while actually carrying out a nonjudicial foreclosure, she wrote.

The implication is that, in Justice Sotomayor’s belief, abusive collection tactics carried out under the guise of a nonjudicial foreclosure, with no intent actually to foreclose, would violate the FDCPA.

The case is No. 17-1307.


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

Kraninger seeks clear authority to enforce the Military Lending Act

Consumer Financial Protection Bureau Director Kathleen L. Kraninger has asked Congress to grant the CFPB clear authority to supervise for compliance with the Military Lending Act (MLA). Kraninger delivered a proposal to the House of Representatives that would amend the Consumer Financial Protection Act to explicitly state that the CFPB has nonexclusive authority to require reports and conduct examinations to assess compliance with the MLA.

Since Kraninger's confirmation as Bureau Director in December 2018, the Democratic members of the House Committee on Financial Services have urged her to commit, in writing, to resuming a consistent supervisory role over consumer protection laws, including the MLA. In their letter, the lawmakers charged that during former director Mick Mulvaney’s tenure, the CFPB discontinued enforcement, "neglecting its responsibility under the law to protect servicemembers and their families."

Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) has also criticized the CFPB for failing to monitor financial services institutions for violations of the MLA, stating, "The CFPB is neglecting its duty to protect the women and men who serve and protect our country. The CFPB has broad authorities--Congress does not need to take action, the CFPB Director does."

According to a Banking Committee minority press release, under former director Richard Cordray, the CFPB used its supervisory authority to proactively examine banks and nonbank lenders for violations of protections under the MLA, but under Mick Mulvaney the CFPB ended those examinations and said it would reconsider whether the Bureau has the authority to examine lenders for compliance with the MLA.


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

Is nonjudicial mortgage foreclosure debt collection? Supreme Court hears arguments

By Richard A. Roth, J.D.

 

Is a law firm carrying out a nonjudicial foreclosure on behalf of a client engaging in debt collection that is subject to the Fair Debt Collection Practices Act? Questions posed by the Supreme Court justices during oral arguments in Obduskey v. McCarthy & Holthus, LLC, implied sympathy for the homeowner’s position that he was protected by the FDCPA, offset by skepticism that the language of the Act actually provided that protection.

The arguments raised by the petition for certiorari focused on the interplay between two parts of the FDCPA:

1. the definition of "debt collector" in 15 U.S.C. §1692a(6) (the "general purpose" definition"); and
2. the special provisions included in 15 U.S.C. §1692f(6) that ban unfair practices by persons who are attempting "to effect disposition or disablement of property" (the "limited purpose definition").

The first sentence of the general purpose definition says that a person is a debt collector if he uses interstate commerce or the mail in any business that has debt collection as its principal purpose, or he "regularly collects or attempts to collect, directly or indirectly, debts owed" to someone else. However, the third sentence adds that, for the purposes of 15 U.S.C. §1692f(6), "debt collector" includes someone who uses interstate commerce or the mail in a business that has the enforcement of security interests as its principal purpose.

 

The issue presented was whether a law firm that was engaged in a nonjudicial foreclosure, but that never demanded any payment from the homeowner, was collecting a debt.

 

Effect of no payment demand. According to the Tenth Circuit opinion in Obduskey v. Wells Fargo, the bank began servicing the homeowner’s mortgage while it was still current. After the mortgage fell into default, the bank started, but halted, foreclosures several times over a six-year span. In 2014, the company hired 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.

 

Three U.S. appellate courts and the Colorado Supreme Court have decided that nonjudicial foreclosures constitute debt collection, the Tenth Circuit said in its opinion. However, one appellate court—the U.S. Court of Appeals for the Ninth Circuit—and a number of U.S. district courts have determined that the FDCPA is not implicated. The Tenth Circuit concluded that the nonjudicial foreclosure was not debt collection under the FDCPA because 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 appellate court said. In the process of reaching that conclusion, the court disregarded the homeowner’s argument that the end goal of any foreclosure is obtaining payment on the mortgage loan debt.

 

Homeowner’s arguments. Attacking the Tenth Circuit’s decision, Daniel L. Geyser, the homeowner’s attorney, described a statutory organization in which the FDCPA first defined who was a debt collector and then added to that group, for purposes of 15 U.S.C. §1692f(6), those persons who were not covered by the general purpose definition but were covered by the limited purpose definition because they were enforcing a security interest.

 

When challenged by Justice Alito to explain who might be covered by the limited purpose definition of 15 U.S.C. §1692f(6) but not the general purpose definition of 15 U.S.C. §1692a(6), Geyser described a traditional repossession agent who would repossess a car, deliver the car to the creditor, be paid for his services, and not care whether the creditor sold the car or not. Such a person would not be collecting any payment, but he still would be a debt collector under the limited purpose definition.

 

Justice Gorsuch, however, noted that 15 U.S.C. §1692f(6) not only bans unfair practices, it also bans threats to take banned actions. In other words, it bans talking to the affected consumer. Why was talking to the consumer not covered by the general purpose definition, making the limited purpose definition superfluous, he asked? Geyser argued that the threat might not be an effort to collect payment.

 

In essence, the justices appeared to view the two "debt collector" definitions as separate, with the limited purpose definition adding a group of persons who were not covered by the general purpose definition. On the other hand, Geyser attempted to convince them that a person could be covered by one or both definitions. Justice Sotomayor alone expressed agreement with that proposition.

 

Geyser also attempted to minimize the law firm’s claims that the homeowner’s position would set up conflicts with requirements of state law.

 

In his main argument and his rebuttal, Geyser also cited a different FDCPA section, 15 U.S.C. §1692i, which sets venue rules for collection suits. Under that section, a debt collector who is suing to enforce a security interest must sue in the judicial district where the property is located. That section says nothing about seeking a deficiency judgment, so it must mean that foreclosure constitutes debt collection, he argued.

 

Law firm’s arguments. Kannon K. Shanmugam, the law firm’s attorney, conceded in response to a question by Chief Justice Roberts that creditors don’t want to own houses, they want to be paid, and that foreclosing a mortgage is a way to be paid. However, he also said that foreclosing a mortgage is a way to be paid that is distinct from being paid by the homeowner. The foreclosure does not demand payment by the homeowner. "[N]ot everything that could lead to the elimination of a debt constitutes debt collection," he said.

 

Justice Kagan did not accept that argument, asserting instead that a foreclosure was merely an alternative method of securing payment. Justice Kavanaugh seconded that belief, noting that a foreclosure inherently communicated a "pay up or lose your home" message. "[C]ommon sense tells you this is an effort to have you repay the debt," he said.

 

Shanmugam replied that the purpose of the nonjudicial foreclosure was to foreclose on the property, not to induce a payment. He argued that, in passing the FDCPA, Congress understood that collecting debts and enforcing security interests were distinct concepts. Congress intended that persons enforcing security interests should be subject only to limited restrictions, and the combination of the general purpose and limited purpose definitions accomplished that by treating nonjudicial foreclosures as not being debt collection.

 

He did concede that a law firm seeking a deficiency judgment as part of a judicial foreclosure would be collecting a debt.

 

Federal government’s support. The U.S. government, arguing separately from the law firm, also argued that nonjudicial foreclosures are not debt collection. Assistant to the Solicitor General Jonathan C. Bond characterized this as resulting from a congressional compromise that would subject persons enforcing security interests to a ban only on a limited set of practices deemed to be unfair. The broader applicability asserted by the homeowner would upset that compromise, he argued.

The limited purpose definition made clear that Congress intended to regulate debt collectors and security interest enforcers separately, he said. Bond conceded, as had Shanmugam, that a security interest enforcer who also demanded payment would be a debt collector. However, he disagreed with the proposition that a sale of the property after repossession—or foreclosure—mattered. "If you are taking property to be used to satisfy a debt, it doesn’t matter whether you sell it or, indeed, whether anyone sells it," he said.

 

In Bond’s view, a nonjudicial foreclosure that complies with state law and does not include a payment demand is solely the enforcement of a security interest and not debt collection.

 

The case is No. 17-1307.

 

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

Creditor not liable for loan servicers’ RESPA loss-mitigation violations

By Katalina M. Bianco, J.D.

A mortgage loan creditor is not vicariously liable for its loan servicer’s violations of the Real Estate Settlement Procedures Act because the Act explicitly restricts liability to servicers, the U.S. Court of Appeals for the Fifth Circuit has decided. In what it termed a case of first impression in the federal appellate courts, the Fifth Circuit said that a creditor cannot be liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA and Reg. X—Real Estate Settlement Procedures (12 CFR Part 1024). The RESPA ruling was given as an alternative to the court’s first choice—that the homeowner failed to describe an agency relationship between the bank and either of the servicers (Christiana Trust v. Riddle, Dec. 21, 2018, Elrod, J.).

Bank of America made a home-equity loan to a homeowner and later gave the servicing rights to Ocwen Loan Servicing. A subsequent assignee of the loan shifted the servicing rights to BSI Financial Services. When the assignee filed a foreclosure suit, alleging that the homeowner had not made her payments, the homeowner filed a third-party complaint against Bank of America and the two servicers claiming that she had filed a loss mitigation application that had not been considered as Reg. X required.

The homeowner’s claims were dismissed by the U.S. district court judge, and she appealed.

No agency relationship. Vicarious liability requires an agency relationship, the appellate court said, and the homeowner’s third-party complaint simply failed to describe such a relationship between Bank of America and either of the two servicers. A person who provides services under a contract is not necessarily an agent of the recipient of those services, the court pointed out. An agent acts under a principal’s control, while a contractor might not, and the homeowner had not claimed the bank had any control over the servicers’ actions.

No vicarious liability. Even if the homeowner had described an agency relationship, RESPA and Reg. X still would have protected the bank from any liability for the servicers’ violations, the court then said. While the statute and the regulation both impose loss-mitigation consideration duties, both explicitly restrict to servicers any liability for failing to carry out those duties.

Both the regulation and the statute place loss-mitigation compliance duties only on servicers, the court pointed out. Reg. X defines a servicer as a person who receives payments from the mortgagor and distributes those funds as required by the loan. The bank did not engage in those activities, so it was not a servicer, the court reasoned.

When Congress intended RESPA to apply more broadly, it used broader language, according to the court. For example, the act said that "no person" could accept kickbacks or unearned fees. However, the loss mitigation duties applied explicitly only to servicers. RESPA’s text "plainly and unambiguously" imposed liability only on servicers and rejected any vicarious liability for creditors, the court decided.

One member of the three-judge panel did not join in the RESPA determination because she felt the failure to describe an agency relationship was adequate to decide the case. However, the opinion added that, in the Fifth Circuit, alternative holdings are not obiter dictum; rather, they are binding precedent.

The case is No. 17-11429.

For more information about RESPA and Reg. X court developments, subscribe to the Banking and Finance Law Daily.

FDIC closes year with series of regulatory reform adoptions and proposals

By Andrew A. Turner, J.D.

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

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

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

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

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

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

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

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

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

For more information about FDIC regulatory actions, subscribe to the Banking and Finance Law Daily.

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

By Thomas G. Wolfe, J.D.

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

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

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

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

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

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

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

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

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

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

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

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

FDIC initiatives seek to improve deposit insurance application process

By Andrew A. Turner, J.D.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

For more information about federal deposit insurance issues, subscribe to the Banking and Finance Law Daily.

Justice Department tells Supreme Court CFPB organization is unconstitutional

By Richard A. Roth, J.D.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Thomas G. Wolfe, J.D.

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

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

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

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

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

For more information about federal regulatory proposals impacting the financial services industry, subscribe to the Banking and Finance Law Daily.

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

By Andrew A. Turner, J.D.

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

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

For more information about community bank regulation, subscribe to the Banking and Finance Law Daily.

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

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

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

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

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

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

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

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

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

For more information about the regulation of payday lenders, subscribe to the Banking and Finance Law Daily.

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

By Thomas G. Wolfe, J.D.

 

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

 

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

 

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

 

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

 

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

 

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

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

Fed views banking system conditions favorably with regulatory progress

By Andrew A. Turner, J.D.

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

 

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

 

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

 

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

 

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

This has been done by:

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

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

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

Court issues stay of CFPB Payday Rule compliance date

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

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

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

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

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

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

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