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Alabama judge finds the Corporate Transparency Act unconstitutional, DOJ quickly appeals
On March 1, the federal district court in the Northern District of Alabama entered a final declaratory judgment concluding that the Corporate Transparency Act (CTA) is unconstitutional. The plaintiffs, including a non-profit small business association consisting of more than 60,000 small business members as well as an individual small business owner, sued the Treasury Department, Secretary Janet Yellen, and FinCEN Acting Director Himamauli Das in their official capacities, alleging that the CTA’s mandatory disclosure requirements violate the First, Fourth, Fifth, Ninth, and Tenth Amendments and exceed Congress’s authority under Article I of the Constitution.
Corporations, LLCs, or other similar entities that are either “(i) created by the filing of a document with a secretary of state… or (ii) formed under the law of a foreign country and registered to do business in the United States” are required to provide certain beneficial ownership information, as well as disclose any related changes to FinCEN under the CTA, excluding exempt entities. The CTA was passed in 2021 as part of the National Defense Authorization Act and required most entities incorporated under state law to disclose beneficial ownership information to FinCEN to prevent financial crimes often committed through shell corporations. In September 2022, FinCEN issued a final rule implementing the CTA, which went into effect on January 1 of this year, and required currently existing entities and five million new entities formed each year from 2025 to 2034 to disclose the identity and information of any “beneficial owner” to FinCEN (see Orrick Insight here).
According to the court, the CTA exceeds the Constitution’s limits on Congress’s power and does not have a strong enough connection to any of Congress’s listed powers to be considered a necessary or appropriate way to reach Congress’s policy objectives. The court rejected the government’s claims that the CTA is covered by various constitutional provisions, including the Commerce Clause, Taxing Clause, Necessary and Proper Clause, and Congress’s powers related to foreign affairs and national security.
The judgment permanently enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs and as a result they are not required to report beneficial ownership information to FinCEN at this time. The order does not ban enforcement of the CTA and its beneficial ownership disclosure requirements to FinCEN generally.
On March 11, the U.S. Department of Justice filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit after U.S. District Judge Liles C. Burke’s March 1 ruling.
State Supreme Court vacates and remands TILA dispute
Recently, the Maine Supreme Judicial Court vacated a judgment in favor of a bank and remanded the decision to re-examine the nature of a loan and consider all relevant evidence to determine if the loan was for commercial purposes. The plaintiffs defaulted on a loan from the defendant, a bank, by securing the loan with a hunting cabin they owned, and a lease for the land on which they had built the cabin. The defendant successfully sued for recovery of the cabin. On appeal, the plaintiffs argued the bank failed to make the requisite disclosures under TILA and thus it was in error to decide in favor of the bank. The bank conceded that it did not make the required disclosures but countered that the credit transaction was not subject to TILA because the loan was for commercial purposes, and if the loan was secured by real property, it was not expected to be used as the principal dwelling of the consumer(s).
First, the court found that it was an error not to consider extrinsic evidence when determining the purpose of the loan because the Official Staff Interpretations of Regulation Z outline factors to be considered in such a determination, which should be given great deference. Moreover, it found that most federal courts applied a holistic approach in determining the purpose of the loan. Because the Business and Consumer Docket court in Maine did not consider any extrinsic evidence, it decided to remand. Second, the court held that the TILA exemption for “credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer . . . in which the total amount financed exceeds $50,000” was inapplicable. Although the loan was for $378,698, the loan was secured by a leasehold. According to the court, the leasehold was an interest in real property, and the language in the exemption referencing “principal dwelling” only modified “personal property” and not “real property.”
Business groups sue the CFPB over credit card late fee rule
On March 7, several business groups (plaintiffs) sued the CFPB rule in the U.S. District Court for the Northern District of Texas over its announced credit card late fee rule. As previously covered by InfoBytes, the Bureau’s new final rule limited most credit card late fees to $8, among other actions, and was met immediately with criticism from banks and legislators.
The plaintiffs’ complaint claimed the CFPB completed the rule hastily to implement a pledge made by President Biden around his State of the Union Address to reduce credit card late fees by 75 percent. The complaint further asserted the CFPB skipped necessary steps, made economic miscalculations, and otherwise breached the Administrative Procedure Act. As alleged, the Bureau likely understated “the volatility of card issuers’ cost-to-fee ratios pertaining to late fees” and improperly relied on data which does not allow for the recovery of a “reasonable and proportional” penalty fee. On the Bureau’s use of the Y-14M data, the complaint alleged the new rule ignored peer-reviewed studies and instead opted to base the rule on an internal study using confidential data that was not available for examination during the period allocated for public comment. The plaintiffs argued the final rule would incur “substantial compliance costs” by amending printed disclosures, using the cost-analysis provisions, and notifying consumers of changes in interest rates to recoup costs, among other problems. The complaint also cited TILA’s effective-date provisions and the Bureau’s embattled funding structure to support the argument that the final rule would cause irreparable harm.
GAO report calls for FDIC, Fed to fix bank supervision issues
On March 6, the U.S. Government Accountability Office (GAO) released a report to congressional requesters, including Senator Sherrod Brown (D-OH), Chairman of the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs, regarding the Fed and FDIC’s communication of supervisory concerns related to the 2023 banking issues and the agencies’ procedures for escalating concerns. The report found that while both regulators generally met their requirements for communicating concerns, the Fed’s escalation procedures lacked clarity and specificity, which could have contributed to delayed enforcement last year.
The GAO recommended that the Fed revise its escalation procedures to be more precise and include measurable criteria. The Fed agreed with the recommendation and acknowledged that clearer examination procedures could help in addressing supervisory concerns more promptly. For the FDIC, the GAO recognized that the FDIC already updated its escalation procedures in August 2023 and will intend to implement further revisions to respond promptly. The GAO report also suggested that Congress amend the FDI Act to incorporate noncapital triggers related to unsafe banking practices before they affect capital.
FHFA eliminates household income restriction on PTFCs
On March 12, the FHFA published a final rule in the Federal Register titled “Exception to Restrictions on Private Transfer Fee Covenants (PFTCs) for Loans Meeting Certain Duty to Serve Shared Equity Loan Program Requirements,” which established an additional exception to the FHFA’s regulation proscribing Fannie Mae, Freddie Mac, and FHLBanks from “purchasing, investing in, [and] accepting as collateral” mortgages encumbered by certain types of PTFCs, or related securities, subject to certain exceptions. This new exception will allow the banking entities to engage in transactions if the loans met the equity loan program requirements for the resale restriction programs “without regard to any household income limit.” The final rule will go into effect on May 13.
VA proposes rule changes to VA-Guaranteed, IRRRLoans
On March 7, the VA published a supplemental notice of proposed rulemaking in the Federal Register titled “Loan Guaranty: Revisions to VA-Guaranteed or Insured Interest Rate Reduction Refinancing Loans” which sought comment on whether the “date of loan issuance” should be defined as date of the note (as originally suggested) or as the date “the first payment is due.” The notice explained the VA did not receive any comments on this aspect of the proposed rule and enumerated several concerns with the initial proposed definition. The comment period for this proposed rule will close on May 6.
Fed issues final rule for FMUs to update risk management requirements, noting cyber and climate risks
On March 8, the Federal Reserve Board announced a final rule that will update risk management requirements for financial market utilities (FMUs) supervised by the Fed. FMUs provide the financial infrastructure to clear and settle payments and transactions. The rule will go into effect 30 days after publication in the Federal Register, and FMUs are expected to comply with certain updates by 90 days and all updates by 180 days after publication. The Fed reported the final rule is “substantially similar” to the proposed rule and provided additional details to the exiting requirements for the following: (i) review and testing; (ii) incident management; (iii) business continuity management; and (iv) third-party risk management.
OCC’s Hsu speaks on operational resilience framework as regulators consider non-financial disruptions
On March 12, the Acting Director for the OCC, Michael J. Hsu, delivered a speech at a banking conference in Washington, D.C. on “operational resilience,” which he defined as a bank’s ability to “prepare for, and adapt to, and withstand or recover from disruptions.” Hsu stressed that the most concerning impacts on financial institutions are not financial, but often arise from natural disasters, pandemics, global conflicts, or weak internal governance management. The acting director noted an increase in the probability of disruptions occurring and the impacts of them. In response, the OCC will expect financial institutions to be operationally resilient, and Hsu stated that the federal banking agencies are considering making changes to their operational resilience framework for large banks and possibly third-party service providers.
These principles were first laid out in a white paper following the September 11, 2001, attack on the World Trade Center whereby the paper promoted geographic diversity and the resiliency of data centers. During the Covid-19 Pandemic, the federal banking agencies issued a paper that integrated existing guidance and common industry practices in October 2020.
FTC confirms two members as its board returns to full strength
On March 8, the FTC announced the confirmation of two new commissioners: Andrew N. Ferguson and Melissa Holyoak. Additionally, current Commissioner Rebecca Kelly Slaughter received a confirmation vote for a second term. Newcomers Ferguson and Holyoak were nominated by President Biden and will serve until September 25, 2025; Slaughter will serve until the same date in 2029. Ferguson had previously been working as solicitor general of Virginia, and before that he was chief counsel to U.S. Sen. Mitch McConnell of Kentucky and as Republican counsel on the U.S. Senate Judiciary Committee. Holyoak was most recently solicitor general with the Utah Attorney General’s Office. Before that, she served as president and general counsel of a D.C.-based public interest law firm.
Fed Chairman Powell testifies before House Financial Services Committee on Basel III “Endgame,” commercial real estate, and banking capital
On March 6, the House Financial Services Committee held its semi-annual hearing on the Federal Reserve’s Monetary Policy Report, and heard testimony from the Federal Reserve Chairman Jerome Powell a day after the Republican committee members sent a letter to the banking regulators urging withdrawal from the Basel III “Endgame” proposal. Powell discussed the Basel III Endgame proposal comments, the commercial real estate market, and capital requirements, among others.
On the Basel III “Endgame” proposal, Chairman McHenry (R-NC) asked if the Fed was listening to the comments received and what the status of the rulemaking is moving forward. Powell confirmed that the Fed has received substantive comments in mid-January and had put out the Quantitative Impact Study; the Fed is still analyzing the comments and will soon reach a point where the Fed can begin making decisions. Powell signaled to expect “broad and material changes to the proposal” while expressing confidence that the final proposal will receive support from the Fed and the public.
Congressman Barr (R-KY), who also questioned the Basel III “Endgame” proposal, asked whether a re-proposal that implemented Basel III in a “capital neutral way” could be achieved without jeopardizing financial stability; Powell responded with “hypothetically, yes.” Then, pointing to a report that found 97 percent of comment letters either opposed or expressed concerns about the proposal, Powell stated “it’s unlike anything I’ve seen.” On technical matters, Barr raised the concern that subjecting different size banks to a one-size-fits-all standard would concentrate the industry, increase risks, and decrease competition. Powell indicated he shared that concern.
Congressman Himes (D-CT) inquired about the commercial real estate market, specifically if the rapid decline in vacancy rates was a manageable risk. Powell indicated that the risks are manageable but stressed that “[t]here will be some losses by banks” and that the Fed is actively in touch with these banks, mostly small- and medium-sized banks with higher concentrations in this market. Congressman Lynch (D-MA) inquired about the 2023 banking issues and if they were caused in part by the “instantaneous” withdrawals of money from the banks as a proverbial bank run. Powell confirmed that the Fed is working on liquidity rules to change this.
Congressman Loudermilk (R-GA) inquired about the driving force behind the record-high levels of credit card debt. Powell believed that pure economic growth was the cause, and the number has just scaled up; alternatively, it was because of the stimulus spending from the pandemic. Loudermilk then posed a hypothetical: if there was a rule on restricting lending from banks, if that rule would drive businesses and consumers towards “alternative forms of credit”; Powell said it would, and that would present nonbank lenders with more business. Moreover, Congressman Loudermilk had Powell commit to at most an analysis of how capital proposals affect small business credit access and small-dollar lending before finalizing any proposals.