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Financial Services Law Insights and Observations


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  • Financial Stability Oversight Council will hold its first post-election meetings on November 16

    Federal Issues

    On November 16, Treasury Secretary Jack Lew will preside over a meeting of the Financial Stability Oversight Council (FSOC). The agenda will include both an open and an executive session. The preliminary agenda for the open session includes an update on the work of the Alternative Reference Rates Committee, an update on the council's review of the asset management industry and revisions to the council's regulations under the Freedom of Information Act. The preliminary agenda for the executive session includes a presentation on stress tests of central counterparties conducted by the CFTC, a discussion of confidential data related to the Council’s review of asset management products and activities, and an update on the annual re-evaluation of the designation of a non-bank financial company.

    Open session Council meetings are made available to the public via live webcast and also can be viewed after they occur here. Meeting minutes for the most recent Council meeting are generally approved at the next Council meeting and posted online soon afterwards. Meeting minutes for past Council meetings are available here. Readouts for past Council meetings are available here.

    Federal Issues Consumer Finance Nonbank Supervision CFTC FSOC Department of Treasury

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  • Bill to Change SIFI Determination Postponed

    Consumer Finance

    The House of Representatives delayed discussion of HR 1309, the Systemic Risk Designation Improvement Act, in an effort to give the bill’s sponsor Blaine Luetkemeyer (R-MO) additional time to propose a method to fund the estimated $115 million cost of implementing the changes in regulatory oversight. The increased oversight costs stem, in part, from provisions in the bill that would require closer involvement by the Financial Stability Oversight Council (FSOC) in determining whether a bank holding company is a Systemically Important Financial Institution (SIFI), and thus subject to enhanced supervision and macro-prudential standards by the Federal Reserve. Under the current law, originating from Title I of the Dodd-Frank Act, the FSOC looks only to whether the bank holding company has $50 billion in assets. Whereas under HR 1309, the FSOC would also factor whether a bank was subject to material financial distress, as well as the nature, scope, size, scale, concentration, interconnectedness or mix of the bank’s activities in making the SIFI designation.

    Dodd-Frank FSOC U.S. House

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  • FSOC Rescinds Nonbank Financial Company's "Too-Big-to-Fail" Designation

    Consumer Finance

    On June 29, the Financial Stability Oversight Counsel (FSOC) announced that it rescinded its July 2013 “systemically important” designation of a Connecticut-based financial company. FSOC’s July 2013 designation subjected the company to supervision by the Federal Reserve and enhanced prudential standards. According to FSOC, the company posed a threat to U.S. financial stability due to its standing as one of the largest – ranked by assets – financial services companies in the U.S. At the time of its designation, the company also acted as a significant source of credit to the U.S. economy by providing financing to more than 243,000 commercial customers, 201,000 small businesses through retail programs, and 57 million consumers in the U.S. On June 28, FSOC unanimously voted to rescind its designation, stating that the company had “fundamentally changed its business” by, among other things: (i) decreasing its total assets by more than 50 percent; (ii) moving away from short-term funding; (iii) reducing connections with large financial institutions; (iv) no longer owning any U.S. depository institutions; and (v) no longer providing financing to U.S. consumers or small businesses in the U.S. FSOC also noted that, “[t]hrough a series of divestitures, a transformation of its funding model, and a corporate reorganization, the company has become a much less significant participant in financial markets and the economy.” Treasury Secretary Lew commented that the FSOC’s decision demonstrates a two-way designation process: “The Council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the Council also acts.”

    Federal Reserve Systemic Risk FSOC

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  • FSOC Publishes 2016 Annual Report, Highlights Marketplace Lending as Emerging Risk

    Privacy, Cyber Risk & Data Security

    On June 21, the Financial Stability Oversight Council (FSOC) released its 2016 annual report. The report reviews financial market and regulatory developments, identifies emerging risks, and offers recommendations to enhance the U.S. financial markets, promote market discipline, and maintain investor confidence. Among other things, the report focuses on threats and vulnerabilities related to cybersecuritry, marketplace lending, and distributed ledger systems/blockchain technology. Addressing the need for heightened cybersecurity, the report advises financial institutions to work together with government agencies to better understand risks associated with destructive malware attacks and to “improve cybersecurity, engage in information sharing efforts, and prepare to respond to, and recover from, a major incident.” Regarding marketplace lending, the report stresses that, as the industry continues to grow, “financial regulators will need to be attentive to signs of erosion in lending standards.” Finally, according to the report, distributed ledger systems pose operational vulnerabilities that “may not become apparent until they are deployed at scale,” and cautions that a “considerable degree of coordination among regulators may be required to effectively identify and address risks associated with distributed ledger systems.”

    FSOC Blockchain Marketplace Lending Privacy/Cyber Risk & Data Security Distributed Ledger

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  • GAO Report Examines Effectiveness of the Financial Regulatory System

    Consumer Finance

    Recently, the Government Accountability Office (GAO) released a report on the effectiveness of the U.S. financial system’s existing regulatory structure. In examining the financial regulatory system, the GAO conducted a performance audit from April 2014 to February 2016, dividing the regulatory system into the following sectors based on the various agencies’ missions: (i) safety and soundness oversight of depository institutions; (ii) consumer protection oversight; (iii) securities and derivatives markets oversight; (iv) insurance oversight; and (v) systemic risk oversight. The GAO found that “[f]ragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.” Based on its audit, the GAO concluded that the regulatory structure as it stands does not always guarantee (i) efficient and effective oversight; (ii) consistent financial oversight; and (iii) consistent consumer protections. The report further identified problems with the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR), which are regulatory groups created out of the Dodd-Frank Act to address gaps in systemic risk oversight. Specific problems highlighted in the GAO’s findings include: (i) potential missed opportunities and duplicative analyses as a result of the Federal Reserve’s and the OFR’s similar systemic risk monitoring goals but lack of key collaboration; (ii) a lack of reliance by FSOC on the Federal Reserve’s and the OFR’s systemic risk monitoring efforts; and (iii) limitations on FSOC’s authority to address broader systemic risks that are not specific to a particular entity. The GAO emphasized that, “[w]ithout congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.”

    Dodd-Frank Systemic Risk FSOC GAO

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  • Fed Issues Final Rule Limiting Bank Mergers of Large Financial Firms

    Consumer Finance

    On November 5, the Board finalized Reg. XX thereby implementing Section 622 of the Dodd-Frank. The final rule, which was proposed in May, prohibits a financial company from combining with another company if the resulting company’s liabilities exceed 10 percent of the aggregate consolidated liabilities of all financial companies. The final rule also adds an exemption to clarify that a financial company may continue to engage in securitization activities if it has reached the limit and establishes reporting requirements for financial companies that do not otherwise report consolidated information to the Board or other Federal banking agency. Financial companies subject to the limit include insured depository institutions, bank holding companies, savings and loan holding companies, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision. The final rule will be effective on January 1, 2015.

    Dodd-Frank Federal Reserve FSOC

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  • FSOC Annual Report Calls For Heightened Scrutiny Of Nonbank Mortgage Servicers


    On May 7, following a short open meeting, the Financial Stability Oversight Council (FSOC)—the body established by the Dodd-Frank Act to identify and respond to risks to the stability of the U.S. financial system—released its 2014 annual report. As with past reports, this report reviews market and regulatory developments, and identifies emerging risks to the financial system. Among several new risks identified by the FSOC are those related to the increase in the transfer of mortgage servicing rights (MSRs) from banks to nonbank servicers. The report asserts that many nonbank servicers “are not currently subject to prudential standards such as capital, liquidity, or risk management oversight,” and that where mortgage investors’ ability to collect on mortgages is dependent on a single mortgage servicing company, “failure could have significant negative consequences for market participants.” The FSOC recommends that, in addition to continuing to monitor risks associated with transfers to nonbanks, state regulators should work together and with the CFPB and the FHFA on prudential and corporate governance standards for nonbank servicers. The report elevates and reinforces recent regulatory scrutiny of MSRs and nonbank servicers. Earlier this year, the CFPB's deputy director detailed the CFPB's expectations with regard to the transfer of MSRs and compliance with the CFPB's mortgage servicing rules, and New York financial services regulator Benjamin Lawsky expressed his view that nonbank mortgage services are insufficiently regulated and that state regulators need to intervene on the front end of MSR transactions to prevent undue harm to homeowners before it occurs.

    CFPB Mortgage Servicing FSOC NYDFS

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  • Federal Reserve Board Issues Final Large Bank Assessment Rule

    Consumer Finance

    On August 16, the Federal Reserve Board issued a final rule establishing the process by which it will assess annual fees for its supervision and regulation of large financial companies. The Dodd-Frank Act directed the Board to collect assessment fees equal to the expenses it estimates are necessary or appropriate to supervise and regulate bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets and nonbank financial companies designated by the Financial Stability Oversight Council. The final rule outlines how the Board will (i) determine which companies are assessed, (ii) estimate the total anticipated expenses, (iii) determine the assessment for each of the covered companies, and (iv) bill for and collect the assessment from the companies. For the 2012 assessment period, the first year for which assessment fees will be collected, the Board will notify each company of the amount of its assessment when the rule becomes effective in late October.  Payments for the 2012 assessment period will be due no later than December 15, 2013. The Board estimates it will collect about $440 million for the 2012 assessment period. Beginning with the 2013 assessment period, the Federal Reserve will notify each company of the amount of its assessment fee no later than June 30 of the year following the assessment period.  Payments will be due by September 15.

    Dodd-Frank Federal Reserve FSOC Bank Supervision

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  • Federal District Court Dismisses Challenge to Dodd-Frank Act, CFPB

    Consumer Finance

    On August 1, the U.S. District Court for the District of Columbia dismissed in its entirety a lawsuit that challenged Titles I, II, and X of the Dodd-Frank Act as unconstitutional.  The lawsuit was brought originally by three private parties and later joined by several state attorneys general.  The court determined that that the plaintiffs lacked standing and had not demonstrated injury sufficient to permit a challenge of the law on any of their claims.

    The private plaintiffs' challenge to Title X, which created the CFPB, was based on “financial injuries directly caused by the unconstitutional formation and operation of the [CFPB,]” including substantial compliance costs, increased costs of doing business, and forced discontinuance of profitable and legitimate business practices in order to avoid risk of prosecution.  The court concluded that such “self-inflicted” harm could not confer standing to challenge Title X.  With respect to the private plaintiffs’ challenge to the Financial Stability Oversight Council (FSOC) created by Title I, the court concluded that while an unregulated party is not precluded from establishing standing to challenge the creation and operation of FSOC, standing is “substantially more difficult to establish” under such circumstances and the theories asserted by the plaintiffs were too remote to confer standing.

    Both the private plaintiffs and the state attorneys general challenged Title II, claiming that the “orderly liquidation authority” (OLA) provisions violate the separation of powers, deny due process to creditors of a liquidated firm, and violate the requirement for uniformity in bankruptcy.  The court again concluded that none of the plaintiffs established either present or future injury sufficient to confer standing to challenge the OLA.

    According to media reports, an appeal of the ruling by at least one of the private plaintiffs is anticipated.

    CFPB Dodd-Frank State Attorney General FSOC Single-Director Structure

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  • Financial Stability Oversight Council Releases 2013 Annual Report


    On April 25, the Financial Stability Oversight Council (FSOC) met in an open session to announce the release of its 2013 Annual Report to the Congress. The Annual Report outlines the FSOC’s views with regard to, among other things, (i) the need for housing finance reform to attract private capital to the housing finance system, (ii) increased awareness of operational risks, whether from cyberattack or acts of nature, and (iii) the importance of working with foreign counterparts to reform the governance and integrity of interest reference rates like LIBOR. FSOC Chairman and Treasury Secretary Lew also advised that the FSOC met in executive session to discuss its continuing analysis of non-bank financial companies and that he expects a vote on an initial set of systemically important designations of non-bank financial companies soon.

    FSOC Department of Treasury LIBOR

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