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On October 8, the CFPB issued its Dodd-Frank mandated semi-annual report to Congress covering the Bureau’s work from October 1, 2018 to March 31, 2019. In presenting the report, Director Kathy Kraninger stressed that the Bureau will continue to use the tools provided by Congress to protect consumers, including “vigorous and even-handed enforcement” with a focus on prevention of harm. Kraninger also reiterated her commitment “to strengthening the consumer financial marketplace by providing financial institutions clear ‘rules of the road’ that allow them to offer consumers a range of high-quality, innovative financial services and products.” Among other things, the report analyzed significant problems consumers face when obtaining consumer financial products and services, assessed actions taken by state attorneys general or state regulators relating to federal consumer financial law, and provided a recap of supervisory and enforcement activities.
While the Bureau did not adopt any significant final rules or orders during the preceding year, it did issue two significant notices of proposed rulemaking relating to certain payday lending requirements under the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” (See previous InfoBytes coverage here.) The Bureau also adopted several “less significant rules,” and engaged in significant initiatives concerning, among other things, (i) the disclosure of loan-level HMDA data; (ii) Residential Property Assessed Clean Energy proposed rulemaking; (iii) an assessment of significant rules, including the Remittance Rule, the Ability to Repay/Qualified Mortgage Rule, and the RESPA Mortgage Servicing Rule; (iv) trial disclosure programs; (v) innovation policies related to no-action letters and product sandbox and trial disclosure programs; and (vi) suspicious activity reports on elder financial exploitation.
On September 30, 16 Republican members of Congress wrote to CFPB Director Kathy Kraninger to express concern over the upcoming expiration of a safe harbor to the Remittance Rule (the Rule), which allows certain insured depository institutions to estimate exchange rates and certain fees they are required to disclose to customers about remittance transactions. As previously covered by InfoBytes, the CFPB issued a Request for Information (RFI) last April on two aspects of the Rule that require financial institutions handling international money transfers, or remittance transfers, to disclose to individuals transferring money information about the exact exchange rate, fees, and the amount expected to be delivered. The RFI also sought feedback on a possible extension of the current statutory exception, which is set to expire July 21, 2020. While lawmakers recognize the CFPB’s interest in mitigating negative effects that may result from the exception’s expiration, they urged the CFPB to “take every available step” to ensure that consumers may continue to access remittance services. The lawmakers stressed that it is often difficult, if not “virtually impossible,” for depository institutions to calculate the exact cost of certain remittance transactions. The letter further noted that “depository institutions cannot readily covert all foreign currencies at the time a transfer is conducted, and if the currency exchange takes place after the transfer is initiated, a consumer’s financial institution may only be able to estimate the applicable exchange rate.” Accordingly, if the exception expired, it could cause many depository institutions to discontinue providing remittance services due to increased compliance risk, or cease transfers to certain countries or beneficial banks due to non-compliance risks.
The lawmakers urged the CFPB to use its statutory authority under the Electronic Fund Transfer Act or Dodd-Frank to make the exception permanent “so financial institutions are able to make long-term decisions regarding the provision of these services.”
En banc 5th Circuit declares FHFA structure unconstitutional, allows net worth sweep claims to proceed
On September 6, the U.S. Court of Appeals for the 5th Circuit reaffirmed, in an en banc rehearing, that the Federal Housing Finance Agency (FHFA) structure violates constitutional separation of powers requirements and allowed “net worth sweep” claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders to proceed. As previously covered by InfoBytes, GSE shareholders brought an action against the U.S. Department of Treasury and FHFA arguing that (i) the FHFA acted outside its statutory authority when it adopted a dividend agreement that requires the GSEs to pay quarterly dividends equal to their entire net worth to the Treasury Department (known as “net worth sweep”); and (ii) the structure of the FHFA is unconstitutional because it violates separation of powers principles. The district court dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the separation of powers claim. On appeal, the 5th Circuit agreed with the lower court on the first claim, concluding that the net worth sweep payments were acceptable under the FHFA’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008 (HERA), which places restraints on judicial review. However, the appellate court reversed the lower court’s decision on the separation of powers claim, concluding that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution.
After an en banc rehearing, the appellate court issued two separate majority opinions. Both opinions concluded that (i) the GSE shareholders plausibly alleged that the net worth sweep exceed the powers of the FHFA when acting as a conservator under HERA; and (ii) the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”
Various dissenting opinions were issued, including one signed by seven judges concluding that the FHFA acted within its statutory powers under HERA when it adopted the net worth sweep, stating “the FHFA’s ‘powers are many and mostly discretionary.’” In another dissenting opinion, four judges argued that the majority opinions wrongly concluded that the FHFA’s structure is unconstitutional, arguing that there are “only reasons for caution and skepticism, and none for action” in the constitutional claim. “Neither the Constitution’s text, nor the Supreme Court’s constructions thereof, nor the adversary process in this litigation has given us much ground on which to declare the FHFA’s design unconstitutional,” the judges argued.
Given the similarities of the FHFA’s single director structure with that of the CFPB, this case warrants close attention as it has the potential to create a vehicle for consideration by the Supreme Court of the constitutionality of single director agencies.
On August 22, two members of the U.S. House of Representatives, Katie Porter (D-Calif.) and Nydia Velázquez (D-N.Y.), sent a letter to the U.S. Department of Treasury requesting that the Financial Stability Oversight Council (FSOC) consider designating the three leading providers of cloud-based storage systems for the financial industry as systemically important financial market utilities. The letter is in response to the recent data breach announcement by a national bank (covered by InfoBytes here), where an alleged former employee of the bank’s cloud-based storage system gained unauthorized access to the personal information of credit card customers and people who had applied for credit card products. According to the Congresswomen, 57 percent of the cloud services market is “cornered by” three main providers, and “a lack of substitutability for the services provided by these very few firms creates systemic risk.” The letter argues that cloud services are not currently subject to an enforced regulatory regime and, “[w]ithout a dedicated regulatory regime proportional and tailored to their very unique structure and risks, cloud comparing companies will continue to evade supervision.”
On March 6, the U.S. Court of Appeals for the 4th Circuit held that Congress did not waive sovereign immunity for lawsuits under the FCRA, affirming the lower court’s dismissal of a consumer action. According to the opinion, a consumer filed a lawsuit against the U.S. Department of Education (the Department), a student loan company, and the three major credit reporting agencies, alleging numerous claims, including violations of the FCRA for failing to properly investigate disputes that federal student loans were fraudulently opened in his name. The Department filed a motion to dismiss to the FCRA claims against it arguing the court lacked subject matter jurisdiction based upon a claim of sovereign immunity. The lower court agreed, holding Congress had not affirmatively waived sovereign immunity for suits under the FCRA.
On appeal, the 4th Circuit agreed with the lower court. The appellate court noted that, although the FCRA includes a “government or governmental subdivision or agency” as part of the definition of “person” in the statute, there is a “longstanding interpretive presumption that ‘person’ does not include the sovereign,” and that waivers of sovereign immunity need to be “unambiguous and unequivocal.” The appellate court noted that Congress waived immunity in other sections of the FCRA, which were not at issue in this case and, had Congress waived immunity for enforcement purposes under the FCRA, it would raise a new host of “befuddling” and “bizarre” issues, such as the prospect of the government bringing criminal charges against itself. Therefore, the appellate court concluded that the federal government may be a “person” under the substantive provisions, but that without a clear waiver from Congress, the federal government is still immune from lawsuits under the FCRA’s enforcement provisions.
On July 31, President Trump signed the “National Flood Insurance Program (NFIP) Extension Act of 2018” into law (see Public Law 115-225/S. 1182). The NFIP was set to expire that day. The short-term extension, which the Senate passed earlier that day, reauthorizes the NFIP through November 30, and provides Congress additional time to establish a long-term financial solution.
Visit here for continuing InfoBytes coverage on the NFIP.
On July 16, in a divided opinion, the U.S. Court of Appeals for the 5th Circuit affirmed in part and reversed in part a lower court’s decision that addressed two claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders: (i) whether the Federal Housing Finance Agency (FHFA) acted within its statutory authority when it adopted a dividend agreement, which requires the GSEs to turn over every quarter “dividends equal to their entire net worth” to the Treasury Department; and (ii) whether the structure of the FHFA is unconstitutional and in violation of the separation of powers. The lower court previously dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the constitutional claim. In addressing the first claim, the appellate court agreed with the lower court and found the government-sponsored entities’ payments acceptable under the agency’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008, which places restrains on judicial review. However, the appellate court reversed the lower court’s decision as to the second claim and agreed with shareholders that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution. “We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the opinion stated. The divided appellate panel remanded to the lower court for further proceedings.
Earlier this year, in response to a challenge to the CFPB's single-director structure, the U.S. Court of Appeals for the D.C. Circuit en banc upheld the CFPB’s constitutionality in a 7-3 decision (see Buckley Sandler Special Alert). The 5th Circuit is also scheduled to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure, in which 14 state Attorney General filed an amici curiae brief encouraging the appellate court to disagree with the en banc decision of the D.C. Circuit. (See previous InfoBytes coverage here and here.)
Federal Reserve submits annual report to Congress on credit card profitability of depository institutions
In July, the Federal Reserve Board submitted its annual report to Congress on the profitability of credit cards as required by Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988. The Report to Congress on the Profitability of Credit Card Operations of Depository Institutions (the Report) focuses on credit card banks with assets exceeding $200 million meeting the following criteria: (i) more than 50 percent of assets are loans made to individual consumers; and (ii) 90 percent or more of consumer lending involves credit cards or related plans. As of December 31, 2017, the 12 banks that met this criteria accounted for almost 50 percent of outstanding credit card balances on the books of depository institutions. According to the Report, credit card loans have replaced other methods of borrowing, such as closed-end installment loans and personal lines of credit. In the aggregate, “consumers carried slightly over $1 trillion in outstanding balances on their revolving accounts as of the end of 2017, about 6.1 percent higher than the level at the end of 2016.” While the Report notes the difficulty with tracking credit card profitability due to revisions in accounting rules and other factors, it indicates that delinquency rates and charge-off rates for credit card loans saw a modest increase in 2017 across all banks but remained below their historical averages.
The Report also discusses recent trends in credit card pricing practices. Data from a survey that studied a sample of credit card issuers found that the average credit card interest rate across all accounts is about 13 percent, while the average interest rate on accounts that assessed interest was closer to 15 percent. The Report notes that, “while average interest rates paid by consumers have moved in a relatively narrow band over the past several years,” there exists is a great deal of variability across credit card plans and borrowers, reflecting various card features and the risk profile of the borrower.
On May 17, in response to a request from the CFPB, the FTC transmitted a letter summarizing its 2017 enforcement activities related to Regulation Z (TILA), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Fund Transfer Act) for the CFPB’s use in preparing its 2017 Annual Report to Congress. The FTC highlighted numerous activities related to the enforcement of the pertinent regulations, including:
- Payday Lending. The FTC acknowledged the continued litigation against two Kansas-based operations and their owner for allegedly selling lists of counterfeit payday loan debt portfolios to debt collectors in violation of the FTC Act, previously covered by InfoBytes here.
- Military Protection. The FTC identified the July 2017 military consumer financial workshop and the launch of the new Military Task Force (previously covered by InfoBytes here and here) among the activities the agency engaged in related to protecting the finances of current and former members of the military. The FTC also noted continued participation in the interagency group working with the Department of Defense on amendments to its rule implementing the Military Lending Act.
- “Negative Option.” For actions under the Regulation E/EFTA, the FTC highlighted numerous “negative option” enforcement actions, in which the consumer agrees to receive goods or services from a company for a free trial option, but if the consumer does not cancel before the trial period ends, the consumer will incur recurring charges for continued goods or services. Among the actions highlighted is a case in which the FTC imposed a $179 million judgment (suspended upon the payment of $6.4 million) settling allegations that the online marketers’ offers of “free” and “risk free” monthly programs for certain weight loss and other products were deceptive.
- Auto Loans. The letter highlighted, among others, the FTC action against a Southern California-based group of auto dealerships that allegedly violated a prior consent order with the FTC by misrepresenting the cost to finance or lease a vehicle, previously covered by InfoBytes here.
On May 10, Federal Reserve Board (Board) Chairman Jerome H. Powell responded to Senator Elizabeth Warren’s request concerning a formal commitment by the Board to vote on whether a national bank’s remediation plans to improve its compliance and operational risk management program meet the terms set forth by the Board’s February 2 order to cease and desist (Order). (See previous InfoBytes coverage here.) According to Powell, the decision to lift the asset growth restriction placed on the bank as part of the Order will be determined by a vote of the Board of Governors. In addressing an additional request made by Sen. Warren that the third-party review of the bank’s remedial actions required by the Order be publically released, Powell stated that when the third-party review is ready, “we will review that report to determine whether and to what extent the report can be publicly disclosed without impairing protected interests.” Powell noted that typically evaluations of that kind are not released to the public because they contain confidential supervisory information that would, if disclosed, “likely impair the effectiveness of the supervisory process,” among other things.
- Daniel P. Stipano to discuss "BSA/AML culture of compliance roundtable" at the FiSCA Annual Conference
- Daniel P. Stipano to discuss "Is there a better way to fight money laundering" at the FiSCA Annual Conference
- Michelle L. Rogers to discuss "What's trending in enforcement" at the Mortgage Bankers Association Annual Convention & Expo
- Kathryn L. Ryan and Moorari K. Shah to discuss "Today's regulatory environment - Are you in the know?" at the Equipment Leasing and Finance Association Annual Convention
- Buckley Webcast: Smoke and mirrors: Navigating the regulatory landscape in banking the marijuana industry
- H Joshua Kotin to discuss "CMS - Components of a successful monitoring program" at the RegList Annual Workshop
- Tim Lange to discuss "Temporary authority to operate - Are you prepared? Hear what the states are doing" at the RegList Annual Workshop
- Sherry-Maria Safchuk to discuss "Cybersecurity" at the RegList Annual Workshop
- Jeffrey P. Naimon to discuss "Hot topics in mortgage origination" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Sherry-Maria Safchuk to discuss "CCPA: Countdown to compliance – A discussion of common questions and what is next on the CA privacy horizon" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "Adapting to the rapidly changing compliance landscape involving marijuana and marijuana-related businesses" at an ACAMS webinar
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference