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OCC issues guidance regarding purchased loans
On August 8, the OCC issued new guidance regarding the applicability of the legal lending limit (LLL) to purchased loans. The guidance clarifies that “all loans and extensions of credit made by banks are subject to the LLL” and explains that “[w]hether a loan that a bank purchases is attributable to the seller under the LLL regulation depends on specific facts and circumstances.” The OCC then further explains, that in evaluating purchased loans, loans will be attributed to a seller if the bank has direct or indirect recourse to the seller, which can be explicit or implied. Explicit recourse is established through a written agreement and implied recourse can be established though the bank’s course of dealing with the seller. For example, the OCC noted that if a seller routinely “substituted or repurchased loans or refilled or replenished a reserve account even when the contract did not require those actions” that would be sufficient to establish implied recourse.
Senators call for stronger Fed oversight over bank mergers
On August 9, Senators Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Jack Reed (D-RI), and John Fetterman (D-PA) wrote a letter to the Chair and Vice Chair of Supervision for the Board of Governors of the Federal Reserve System urging the Fed to “review and reconsider” its procedures for approving bank mergers. The letter cites the Dodd-Frank Act’s amendment to the Bank Merger Act, which mandates that federal banking regulators consider whether a proposed merger “would result in greater or more concentrated risks” to the stability of the banking or financial system. The senators also voiced concern that the Fed has “not issued any rules or guidance indicating the types of bank mergers that would implicate financial stability concerns” and criticized the process around the Fed’s approval of recent acquisitions.
Futures commission merchant fined $6M for communication failures
On August 8, the CFTC issued an order simultaneously filing and settling charges against a California-based futures commission merchant, requiring it to pay $6 million. The CFTC claims that the respondent violated the Commodity Exchange Act and Commission Regulations by “failing to maintain, preserve, or produce records required to be kept under CFTC recordkeeping requirements, and failing to diligently supervise matters related to its business as a CFTC registrant.” According to the order, respondent’s employees allegedly communicated through personal text messages regarding information required to be maintained under the CFTC-mandated recordkeeping requirements. The CFTC stated that if the information were to be requested, respondent would not be able to furnish the communications promptly. The CFTC further alleged that the use of unauthorized communication was also in violation of the respondent’s own policies and procedures. In addition to the $6 million civil money penalty, the order requires the respondent to cease and desist any further violations of the commission’s regulations that were previously violated. The CFTC noted that the SEC also announced an order filing and settling charges against the merchant for “related recordkeeping and supervision violations.”
CFPB reports on New Mexican consumers’ complaints
On August 10, the CFPB posted a blog entry sharing insights into medical debt and junk fees in New Mexico in advance of CFPB Director Rohit Chopra’s scheduled meeting with New Mexico elected officials this week. The blog entry noted that the CFPB’s public consumer complaint database contains more than 11,600 complaints from New Mexicans, primarily focused on issues with credit products, consumer reporting, and debt collection. The CFPB indicated that almost 18 percent of New Mexico’s population had medical debt (totaling ~$881 million) and the average amount owed per individual is $2,692. Building on the CFPB’s recent hearing on medical billing and collections (covered by InfoBytes here), the CFPB stated that “along with several other states, New Mexico has alerted the CFPB to its concern about fees that consumers are routinely compelled to pay to access consumer financial services or forced to pay for services they do not want.”
Biden E.O. labels China as a country of concern; Treasury issues ANPR
On August 9, the White House announced that President Biden signed an Executive Order on Addressing United States Investments In Certain National Security Technologies and Products In Countries of Concern (E.O.). The President explained his view that some countries create national security risks by using particular technologies to advance their “military and defense industrial sectors” rather than civilian and commercial sectors. Biden stated that although open global capital flows substantially benefit the U.S., the E.O. stated that certain investments may “accelerate and increase the success of the development of sensitive technologies and products in countries that develop them to counter United States and allied capabilities.” The E.O. directs the Secretary of the Treasury to issue regulations that (i) prohibit U.S. persons from participating in specific transactions associated with particular technologies and products that present a significant and urgent risk to national security; and (ii) mandate U.S. persons to notify the Treasury about different transactions related to specific technologies and products that may contribute to the national security threat. The annex to the E.O. identifies China, including Hong Kong and Macau, as the sole nation warranting concern. The E.O. also requires the Secretary to communicate with Congress and the public regarding the E.O., consult with other agency leaders, assess whether to amend the regulations within one year, and provide reports to the President and Congress.
The Treasury simultaneously issued an Advance Notice of Proposed Rulemaking, requesting public comment on the implementation of the E.O., along with proposed definitions of key terms, before the program goes into effect. Written comments may be submitted within 45 days here.
Fed suggests enhancing supervision of “novel activities” by banks
On August 8, the Federal Reserve Board announced the issuance of two supervision letters that elaborate on the its program to supervise “novel activities” such as fintech partnerships, crypto-related activities, and activities using distributed ledger or “blockchain” technology. The first letter, SR 23-7, announces the establishment of the “Novel Activities Supervision Program,” a program designed to “ensure that the risks associated with innovation” supported by new technologies are managed appropriately by the bank. The program will focus on (i) technology-driven partnerships with non-banks; (ii) crypto-asset related activities such as asset custody, crypto-collateralized lending, asset trading, and crypto issuance and distribution; (iii) exploration or use of distributed ledger technology; and (iv) concentration of banking services to crypto-asset related entities and fintech companies. Supervisory teams will be tasked with monitoring and examining these novel activities within the existing supervisory portfolios and will take a risk-based approach on the level and intensity of supervision. The letter concludes that “the Program will also operate in keeping with the principle that banking organizations are neither prohibited nor discouraged from providing banking services to customers or any specific class or type” as permitted by law.
In the second supervisory letter, SR 23-8, the Fed announced a “nonobjection process” for banks seeking to engage in certain dollar token activities. Previously, the OCC issued an interpretive letter permitting national banks to use distributed ledger technology (or similar) to conduct payments using dollar tokens, as long as the bank could demonstrate adequate controls. (Covered by InfoBytes here). The letter clarifies that any bank supervised by the Fed that wishes to engage in those same activities must first obtain a written notice of supervisory nonobjection from the Fed. In order to do so, the bank must be able to demonstrate it has implemented adequate risk management practices, taking into account operational, cybersecurity, liquidity, illicit finance, and consumer compliance risks, among others. The bank must also demonstrate that it is aware of and can comply with laws applicable to the activities.
CFPB's small biz loan data rule stifled for many banks
On July 31, the U.S. District Court for the Southern District of Texas entered an order granting in part and denying in part a motion for a preliminary injunction against the CFPB. The injunction, filed by a bank and two trade associations (collectively “plaintiffs”), aims to prevent the CFPB from enforcing its new final rule, implementing section 1071 of the CPA, which would require financial institutions to collect and provide to the Bureau data on lending to small businesses (covered by InfoBytes here). A 2022 5th Circuit ruling (covered by an Orrick Special Alert here) in a different suit, however, deemed the CFPB’s funding structure unconstitutional.
Plaintiffs urged the 5th Circuit to enjoin enforcement of the small business lending rule pending Supreme Court resolution of the constitutionality of the CFPB’s funding structure, estimating that the burden of complying with the final rule would be $100,000 per community bank, and “the nonrecoverable costs of complying with an invalid regulation constitute irreparable harm,” among other things. The court held that the plaintiff bank had standing because its injury is imminent and not speculative based on the effective date of the final rule, and the costs of preparation for compliance. The court also held that there is a “substantial likelihood” that the plaintiffs would prevail in asserting the final rule is invalid based on the claim that the Bureau’s funding is unconstitutional. The court agreed with plaintiffs’ claim that the costs of compliance with the final rule are “more than de minimis and thus constitute irreparable harm,” despite the CFPB’s argument that the costs of compliance would not be incurred now. Finally, the court held that the CFPB failed to show any evidence that a stay of the final rule will cause harm. While the court entered an injunction, it limited it to the plaintiffs and their members, declining to enter a nationwide injunction as requested by plaintiffs, because “generic reasons such as ‘nationwide scope’ or ‘need for uniformity’ without more are insufficient.”
The final rule is scheduled to go into effect on August 29.
CFPB sues auto-loan servicer for double-billing practices
On August 2 CFPB filed a complaint in the U.S. District Court for the Northern District of Georgia against an auto-loan servicer alleging a host of illegal practices that harmed individuals with auto loans. The Bureau alleged that the auto-loan servicer engaged in unfair acts and practices in violation of the CFPA, including (i) wrongfully activating nearly 80,000 times starter-interruption devices, which are devices that warn consumers with beeps or disable their car altogether when they are late with a loan payment; (ii) failing to ensure refunds of over millions of dollars of GAP insurance premiums after consumers paid off their loan early or their car was repossessed by the auto-loan servicer; (iii) erroneously billing 34,000 consumers for collateral-protection insurance (CPI) by charging consumers twice each billing cycle, totaling around $1.9 million; (iv) wrongfully applying extra consumer payments first to late fees or CPI instead of accrued interest; and (v) wrongfully repossessing consumers’ cars dozens of times due to errors by the auto-loan servicer or its vendor.
The Bureau seeks, among other things, redress to consumers, civil money penalties, and injunctions to prevent future violations.
HUD and NAREB to educate consumers on appraisal bias
On August 2, HUD announced a partnership with the National Association of Real Estate Brokers to address appraisal bias and discrimination in the housing market. The collaboration, launching in October 2023, will include online training, roundtable discussions, and distribution of educational material designed to promote fairness in the housing market. HUD also referenced its involvement in the PAVE task force (covered by InfoBytes here), which is dedicated to ending bias in home valuation and has made critical progress since its launch in 2022.
Senate Banking Committee holds hearing on account fees
On July 26, the Senate Banking Committee held a hearing regarding “fees and tactics impacting Americans’ wallets” in relation to financial services and the role of the CFPB in addressing harmful fees. Leading the hearing, Senator Raphael Warnock (D-GA), chairman of the committee, explained that some “excessively high” and unclear fees do not serve an economic value, referring to these as “junk fees.” Senator Warnock shared that 1/3 of households that do not use banks cite high fees as their reason for continuing without a bank account. Senator Thom Tillis (R-N.C.) criticized the CFPB’s attempts at avoiding the oversight of the Administrative Procedures Act in the rule-making process by mislabeling its actions. Tillis added that after the 2008 financial crisis, regulators emphasized the importance of overdraft revenue as, “an appropriate tool for ensuring the stability of the bank’s balance sheets.” He then criticized the shift in guidance, as the CFPB looks to reprimand banks who follow “the established prudential standards for the crime of listening to their previous federal regulators.” He also claimed that the Bureau does not have proper jurisdiction, resources, or staff to make such decisions.
Pennsylvania Attorney General Michelle Henry testified about recent enforcement actions she has taken, including a recently filed suit against a Wall Street private equity-owned installment lender, who allegedly charged consumers “junk fees” for low-value or valueless add-on products. Henry also mentioned entering into a settlement relating to a bank charging “junk fees” in connection with auto finance products. Brian Johnson, a financial regulatory compliance specialist and former deputy director of the CFPB, claimed that the agencies and the White House have failed to provide a consistent definition for the “junk fees” that could subject institutions to scrutiny, and criticized the CFPB, saying that it does not follow its own regulations and laws governing how agencies make rules by publishing interpretive rules as policy statements in bulletins. A final topic raised by Senator Tina Smith (D-MN) regarded land contracts and lease-to-purchase or rent-to-own agreements that she claimed can be exploitative towards underserved communities. Smith noted that such contacts are “designed to fail,” noting that more than 80 percent of the time, people lose all their equity because they do not make it to the last payment of the contract.