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Regulators address concerns at Senate Banking Committee hearing, receive written concerns regarding Basel III
On November 14, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing where regulators, Fed Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, and acting Comptroller of Currency Michael Hsu, testified regarding the Basel III Endgame proposal. Gruenberg’s prepared remarks noted that Basel III reforms are a “continuation of the federal banking agencies’ efforts to revise the regulatory capital framework for our nation’s largest financial institutions, which were found to be undercapitalized and over-leveraged during the Global Financial Crisis of 2008.” The proposal would raise capital requirements for large banks (covered by InfoBytes here).
Concerning Basel III, Senator Tester (D-MO) mentioned he has “some concerns about the proposed changes and how its impact will be on workers’ and households’ and small businesses’ access to credit and overall vibrancy of our capital markets.” “These rules don’t affect any banks in Montana, but they do affect the big guys that affect Montana,” he noted.
Among other testimonies, Senator Warner (D-VA) expressed concerns regarding the timeline of the comment period and potential changes to the proposal. Specifically, Sen. Warner mentioned that comments may not be received until after the rule is close to finalization. Fed Vice Chair Barr noted that the regulators have yet to evaluate comments on the proposal, as most are expected to come through mid-January, and that depending on the substance of some comments, they are open to making appropriate changes to the proposal. Acting Comptroller of the Currency Hsu’s written testimony echoed Barr’s remarks, stating “[w]e will consider all comments, including alternative approaches.”
Moreover, on November 12, a group of Republican lawmakers of the committee also sent a letter to the OCC, FDIC, and the Fed. In the letter, the senators argued that the proposal would restrict billions of dollars in capital, resulting in costlier and more limited access to credit for millions of consumers, impacting affordable housing, mortgage lending, small business lending, and consumer access to credit cards and home equity lines. The proposal was also criticized for its potential to disadvantage U.S. companies globally and harm middle-market private entities and small businesses. Moreover, the letter suggested that the proposal could negatively impact pension funds, increase fees for risk hedging, and decrease returns for retirees.
Also on November 12, several banking industry groups sent a letter to the Fed, FDIC, and the OCC requesting them to issue a revised proposal. The letter alleges violations of the Administrative Procedures Act because the data used to inform the interagency proposal is not publicly available. The groups also argued that the proposed rule repeatedly utilizes non-public analyses based on the agencies’ “supervisory experience” to support different aspects of the rule. Regarding sensitive data, the groups say, “Nothing prevents the agencies from releasing such data and analyses in a manner that is anonymized or aggregated to the extent necessary to protect bank or other party confidentiality.” The senators also believe the proposal would impose “significant harm” throughout the economy “particularly in the face of current economic headwinds and tightening credit conditions.”
On June 28, industry groups and the U.S Chamber of Commerce (collectively, “groups”) released a White Paper, Unfairness and Discrimination: Examining the CFPB’s Conflation of Distinct Statutory Concepts, urging the CFPB to rescind the recently released unfair, deceptive and abusive acts or practices (UDAAP) examination manual. As previously covered by a Buckley Special Alert, in March, the CFPB announced significant revisions to its UDAAP exam manual, in particular highlighting the CFPB’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service. The White Paper, among other things, explained the groups’ position that the Bureau’s UDAAP authority cannot be used to extend the fair lending laws beyond the limits of existing statutory law. The White Paper stated that the Bureau “conflated” concepts of “unfairness” and “discrimination” “by announcing, via a UDAAP exam manual ‘update,’ that it would examine financial institutions for alleged discriminatory conduct that it deemed to be ‘unfair’ under its UDAAP authority.” The groups stated that the agency has “taken the law into its own hand” arguing that “the Bureau did not follow Administrative Procedure Act requirements for notice-and-comment rulemaking.” The groups said the change in the examination manual is “contrary to law and subject to legal challenge” as well as legislative repeal under the Congressional Review Act. Additionally, the groups argued that the Bureau’s interpretation exceeds the agency’s statutory authority, and that the Bureau’s “action should be held unlawful and set aside.” The groups further stated that “[c]hanges that alter the legal duties of so many are the proper province of Congress, not of independent regulatory agencies, and the CFPB cannot ignore the requirements of the Administrative Procedures Act and Congressional Review Act. The CFPB may well wish to fill gaps it perceives in federal antidiscrimination law. But Congress has simply not authorized the CFPB to fill those gaps.”
In a letter sent to CFPB Director Rohit Chopra, the groups conveyed that Congress did not intend for the Bureau to “fill gaps” between the clearly articulated boundaries of antidiscrimination statutes with its UDAAP authority. The groups urged Director Chopra to rescind the exam manual update and stated that “[s]hould [he] believe additional authority is necessary to address alleged discriminatory conduct, we stand ready to work with Congress and the CFPB to explore that possibility and to ensure the just administration of the law.
On November 29, the parties reached a stipulated settlement in an action filed by several consumer advocacy groups against the CFPB, which claimed that the Bureau’s Taskforce on Federal Consumer Financial Law established under former Director Kathy Kraninger was “illegally chartered” and violated the Federal Advisory Committee Act (FACA). The consumer advocacy groups’ complaint alleged that the taskforce—which was established by the Bureau in 2019 to examine the existing legal and regulatory environment facing consumers and financial services providers—lacks balance, and that the appointed members who “uniformly represent industry views” have worked on behalf of several large financial institutions or work as industry consultants or lawyers. (Covered by InfoBytes here.) This composition, the consumer advocacy groups argued, undermines the purpose of the taskforce and is a violation of FACA and the Administrative Procedure Act. The complaint also stated that while FACA requires advisory committee meetings to be open to the public and that records be disclosed, the taskforce has held closed-session meetings without providing public notice and has failed to make available any of the records related to these meetings or its other work.
Under the terms of the stipulated settlement filed in the U.S. District Court for the District of Massachusetts, the parties agreed that the taskforce “was subject to FACA because it was ‘established’ and ‘utilized’ by the Bureau ‘in the interest of obtaining advice or recommendations.’” The parties also stipulated that the Bureau failed to comply with FACA in its establishment and operation of the taskforce, including by releasing a two volume report in January containing recommendations for modernizing the consumer financial services marketplace (covered by InfoBytes here) without being produced by a FACA-compliant advisory committee. The stipulated settlement agreement requires the Bureau to, among other things, (i) release all taskforce records; (ii) amend the final report to include a disclaimer that the report was produced in violation of FACA; (iii) relocate the taskforce webpage and remove the current version of the report from its website; (iv) issue a press release by January 17, 2022, notifying the public of the settlement agreement; and (v) provide status reports until the Bureau has come into full compliance.
On August 31, the U.S. District Court for the Western District of Texas granted summary judgment in favor of the CFPB in an action filed by two trade groups challenging the payment provisions of the Bureau’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (2017 Rule), but stayed the August 19, 2019 compliance date for 286 days after final judgment as requested by the plaintiffs. As previously covered by InfoBytes, the plaintiffs challenged the 2017 Rule’s payment provisions’ compliance date and asked the court to set aside the 2017 Rule and the Bureau’s ratification of the payment provisions of the 2017 Rule as unconstitutional and in violation of the Administrative Procedures Act.
In granting summary judgment to the Bureau, the court ruled that the ratification “was valid and cured the constitutional injury caused by the 2017 Rule’s approval by an improperly appointed official.” Among other things, the court also concluded that the payment provisions, as a matter of law, “are consistent with the Bureau’s statutory authority and are not arbitrary and capricious,” and that the Bureau properly considered the costs and benefits of such payment provisions. However, in granting the plaintiffs’ request for a longer stay, the court stated it was persuaded by the plaintiffs’ arguments “that they should receive the full benefit of the temporary stay and that a more substantial compliance date allows time for appeal,” consistent with the fact that the “stay was requested with 445 days left until the implementation deadline, and it was entered with 286 days remaining.”
On August 6, the U.S. District Court for the Western District of Texas received briefs from the CFPB and the two trade groups (plaintiffs) challenging the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule) regarding a compliance date for the 2017 Rule’s payment provisions. The briefs were filed in response to the court’s July 29 order requesting briefing “concerning what would be the appropriate compliance date if the court were to deny Plaintiffs’ motion for summary judgment and grant Defendants’ motion for summary judgment.” As previously covered by InfoBytes, in August 2020, the plaintiffs asked the court to set aside the 2017 Rule and the Bureau’s ratification of the payment provisions of the 2017 Rule as unconstitutional and in violation of the Administrative Procedures Act (APA). Earlier in July 2020, the Bureau issued a final rule revoking the 2017 Rule’s underwriting provisions and ratified the 2017 Rule’s payment provisions (covered by InfoBytes here) in light of the U.S. Supreme Court’s decision in Seila Law LLC v CPFB (covered by a Buckley Special Alert, holding that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau).
According to the CFPB’s brief, the stay of the compliance date should remain in place for no longer than 30 days after the Court’s decision on summary judgment. The CFPB argued, among other things, that a 30-day delay is consistent with the APA and should provide sufficient time to make any final preparations. In addition, the CFPB argued that complying with the payment provisions is not considered “onerous” because the provisions generally prohibit lenders from withdrawing payments for a covered loan from a borrower’s account after two consecutive attempts have failed due to lack of sufficient funds and because the provisions require lenders to give consumers certain notices, specifically before attempting to withdraw a payment for the first time and before making an “unusual” withdrawal attempt. In addition, the CFPB argued that “[f]urther extension of the stay is particularly unwarranted because the only basis for the stay disappeared over a year ago.”
According to the plaintiffs’ brief, an “order lifting the stay…should set the compliance date no earlier than 445 days (or, at a minimum, 286 days) from the date the court lifts the stay, reflecting the time left for compliance when the stay was sought (or entered).” In addition to arguing that requiring immediate compliance would violate the APA, the plaintiffs argued, among other things, that “the 2017 Rule gave lenders twenty-one months before compliance would be required, which the Bureau viewed as necessary to give lenders ‘enough time for an orderly implementation period’ and to ‘reasonably adjust their practices to come into compliance.’” Moreover, the plaintiffs argued that the Bureau will need to set a new compliance date via notice-and-comment rulemaking if the stay did not toll the compliance period.
Responses from both parties are due by August 16.
On July 23, the U.S. Court of Appeals for the Sixth Circuit held that statutory language did not authorize the CDC to implement a moratorium on evictions in response to the Covid-19 pandemic. The plaintiffs, a group of rental property owners and managers, filed a lawsuit seeking declaratory judgment and a preliminary injunction, claiming the CDC’s order exceeded the government’s statutory grant of power and violated the Constitution and the Administrative Procedures Act. The district court found that the moratorium exceeded the government’s statutory authority under 42 U.S.C. § 264(a) and ruled in favor of the plaintiffs on the declaratory judgment claim. The 6th Circuit denied the government’s motion for an emergency stay pending appeal, citing that the government was unlikely to succeed on the merits.
In affirming the district court’s ruling and addressing the merits in the current order, the 6th Circuit reviewed whether Section 264(a) of the Public Health Act of 1944 allowed the CDC to issue its moratorium. The appellate court held that while the statute allows the Surgeon General, with the approval of the Secretary, to make and enforce such regulations as are “necessary to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the States or possessions, or from one State or possession into any other State or possession,” it “does not grant the CDC the power it claims.” Additionally, the appellate court concluded that an eviction moratorium did not fit the mold of actions permitted under the statute’s language. The 6th Circuit emphasized that even if the language of the statute could be construed more expansively, it could not “grant the CDC the power to insert itself into landlord-tenant relationships without clear textual evidence of Congress’s intent to do so.” Writing that “[a]gencies cannot discover in a broadly worded statute authority to supersede state landlord-tenant law,” the appellate court explained that the government’s interpretation of the statute presented a nondelegation problem, which “would grant the CDC director near-dictatorial power for the duration of the pandemic, with authority to shut down entire industries as freely as she could ban evictions.” Furthermore, the appellate court concluded that any potential ratification taken by Congress last December when former President Trump signed the Consolidated Appropriations Act, which, among other things, extended the expiration date of the eviction moratorium, “did not purport to alter the meaning of § 264(a), so it did not grant the CDC the power to extend the order further than Congress had authorized.”
On June 17, eight state attorneys general (from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia) filed an opposition to the FDIC’s motion for summary judgment and reply in support of their motion for summary judgment in a lawsuit challenging the FDIC’s “valid-when-made rule.” As previously covered by InfoBytes, last August the AGs filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act]” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered in May (covered by InfoBytes here) that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, does not interpret state law, and does not preempt state law.” Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority.
In response, the AGs argued that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” Additionally, the AGs challenged the FDIC’s claim that its Provision “does not implicate rent-a-bank schemes or the true lender doctrine because the Provision only applies ‘if a bank actually made the loan,’” emphasizing that the FDIC’s “mere statement that it does not condone rent-a-bank schemes” is insufficient and that “choosing to not address true-lender issues is an insufficient response to comments that the Provision creates significant uncertainty about those issues.” Moreover, the AGs claimed that the Provision is “arbitrary and capricious” and fails to meaningfully address valid concerns and criticisms raised by commenters, and that the rule constitutes “in substance if not form, a reversal of the FDIC’s previous stance” that the FDIC is “obligated to acknowledge and explain.”
On January 29, the U.S. District Court for the Northern District of California denied dismissal of an action brought against the OCC by two community coalitions, requesting the court block the agency’s final rule to revise the regulatory framework implementing the Community Reinvestment Act (CRA). As previously covered by InfoBytes, in June 2020, the groups filed a complaint alleging that, among other things, the OCC failed to provide for meaningful public input on key revisions to the agency’s final rule, and that the May 20 rule (covered by a Buckley Special Alert) failed to consider the impact of the Covid-19 pandemic and is in violation of the Administrative Procedures Act. The OCC moved to dismiss the action, arguing that the community groups lack standing, or in the alternative, that they do not fall within the CRA’s “zone of interests.” The district court disagreed. Specifically, the court concluded that the community groups adequately alleged standing because the members of their organizations “compete for OCC-regulated banks’ CRA dollars,” and their members “will now have to compete with investment opportunities that could not previously receive CRA credit.” Moreover, among other things, the court concluded that the community groups satisfy the “the zone-of-interests test, because they receive grants and loans for which banks obtain CRA credit, making them direct beneficiaries of the statute.”
On October 29, a national community advocate group filed a complaint against the CFPB challenging the Bureau’s repeal of the underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Rule). As previously covered by InfoBytes, in July, the CFPB issued a final rule revoking, among other things, the Rule’s (i) provision that makes it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay the loans according to their terms; (ii) prescribed mandatory underwriting requirements for making the ability-to-repay determination; and (iii) the “principal step-down exemption” provision for certain covered short-term loans.
The complaint alleges that the Bureau’s repeal of the underwriting provisions of the Rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” Specifically, the complaint asserts that the Bureau invented a “new evidentiary standard” when it required that evidence supporting the need for the underwriting provisions be “robust and reliable,” which, according to the complaint, is a standard “custom-designed” to repeal the provisions. The complaint further argues that the CFPB “failed to consider the harms that consumers suffer from no-underwriting lending” and relied on analysis and data that was not “previously made available for comment.” The complaint seeks a declaration that the repeal was unlawful and an order requiring the Bureau to “take necessary steps to ensure prompt implementation of the 2017 Payday Lending Rule’s Ability-to-Repay Protections.”
On October 25, the U.S. District Court for the District of Massachusetts issued an order granting a preliminary injunction and stay of effective date of HUD’s disparate impact regulation under the Fair Housing Act (Final Rule). As previously covered by a Buckley Special Alert, in September, HUD issued the Final Rule, which is intended to align its disparate impact regulation, adopted in 2013 (2013 Rule), with the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. Among other things, the Final Rule includes a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims.
According to the order, two fair housing organizations (collectively, “plaintiffs”) filed the action against HUD seeking to vacate the Final Rule under the Administrative Procedures Act (APA) and subsequently filed for a preliminary injunction and stay, arguing, among other things, that the changes to the 2013 Rule are “arbitrary and capricious.” The court noted that the Final Rule “constitutes a significant overhaul to HUD’s interpretation of disparate impact standards,” and that the alterations to the 2013 Rule “appear inadequately justified.” The court further explained that the Final Rule’s “massive changes pose a real and substantial threat of imminent harm” to the plaintiffs by increasing “the burdens, costs, and effectiveness of disparate impact liability.” Lastly, the court noted that HUD did not identify any “particularized” harm to the government or public should the injunction be granted. Thus, the court granted the preliminary injunction and stayed the implementation date until further order.