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FTC Submits Financial Acts Enforcement Letter to CFPB
On May 14, the FTC released a letter it sent to the CFPB’s assistant directors for fair lending and supervision examinations describing activities related to the FTC’s administration and enforcement of the regulations implementing ECOA, EFTA, TILA, and the Consumer Leasing Act. The annual letter reviews the FTC’s post-Dodd-Frank Act responsibilities with regard to these regulations and reports on enforcement actions taken with regard to each. For example, with regard to TILA, the letter reviews FTC enforcement actions involving non-mortgage credit advertisements, mortgage lending advertisements, and forensic audit scams, and describes the FTC’s rulemaking and policy work related to the CFPB’s mortgage rules and in the area of mobile payments.
DOJ Files First Criminal Action on CFPB Referral, CFPB Files Parallel Civil Suit
On May 7, the U.S. Attorney for the Southern District of New York announced mail and wire fraud charges against a debt settlement firm, its owner, and three of its employees. The government alleges the defendants lied to prospective customers about (i) fees associated with the company’s debt relief products, (ii) the company’s purported affiliation with the federal government and leading credit bureaus, and (iii) the results achieved for its customers. On the same day, the CFPB filed a civil complaint against the same debt relief provider and one other company in which the CFPB alleges the firms violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by charging consumers illegal advance fees for debt-settlement services. The CFPB is seeking to halt the operations, collect civil penalties, and obtain customer redress.
Special Alert: CFPB Issues Final Civil Penalty Fund Rule with Request for Comment
On April 26, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a final rule, effective immediately, that sets forth procedures for the administration of the Consumer Financial Civil Penalty Fund (Civil Penalty Fund or Fund). Under Dodd-Frank, all civil penalties obtained by the CFPB are deposited into the Civil Penalty Fund, which may be used to compensate victims and, to the extent any funds remain, to fund consumer education and financial literacy programs. The final rule identifies categories of victims who may receive payments from the Civil Penalty Fund and articulates the Bureau’s interpretation of the types of payments that may be appropriate for these victims. It also establishes procedures for allocating funds for such payments to victims and for consumer education and financial literacy programs. The CFPB simultaneously issued a proposed rule, seeking comment on possible revisions to the final rule. The CFPB is accepting comments on the proposed rule through July 8, 2013.
Pursuant to the final rule, victims are eligible for compensation from the Fund if a final order in a Bureau enforcement action imposed a civil penalty for the particular violation that harmed the victim. A final order is defined as a consent order or settlement issued by a court or by the Bureau, or an appealable order issued by a court or by the Bureau as to which the time for filing an appeal has expired and no appeals are pending. The Bureau’s proposed rule, however, states that it is considering whether it should revise the final rule to allow payments to victims of any “type” of activity for which civil penalties have been imposed, even if no enforcement action has imposed penalties for the “particular” activity that harmed the victims.
Under the final rule, victims will be compensated from the Fund to the extent of their uncompensated harm. Uncompensated harm is defined as the victim’s compensable harm minus any compensation for that harm that the victim has received or is reasonably expected to receive. The final rule describes three categories of compensation that a victim has received or may be reasonably expected to receive: (i) a previous allocation from the Civil Penalty Fund to the victim’s class; (ii) any redress that a final order in a Bureau enforcement action orders paid to the victim that has not been suspended, waived, or determined by the Chief Financial Officer to be uncollectible; and (iii) other redress that the Bureau knows has been paid to the victim. In determining whether a victim’s harm is compensable, the final rules states that the CFPB will look to the objective terms of the order imposing the civil penalty, or if the order does not set forth such objective terms, the victim’s out-of-pocket loss that resulted from the violation. The Bureau’s proposed rule, however, seeks comment on (i) what should qualify as compensable harm. (ii) whether, when the amount of harm cannot be determined based on the terms of a final order, the Fund Administrator should determine what amount of harm is “practicable,” as opposed to using the victim’s out-of-pocket loss, and (iii) whether, instead of paying victims for their uncompensated harm, the Bureau instead should pay victims a share of the civil penalties collected for the particular violations that harmed them.
The CFPB has stated that it will only make payments to victims to the extent practicable. In the final rule’s interpretative commentary, the CFPB explained that it believes that for payments to be “practicable,” it must be feasible to carry out all of the steps involved in making the payments, and to do so efficiently and without excessive administrative cost. The final rule identifies scenarios where distribution may be impracticable, including when the amount of the payment is so small the victim is unlikely to redeem it, the cost of distribution is not justified, the victim cannot be located with reasonable effort, the victim does not timely submit information required by the distribution plan, or the victim does not redeem the payment within a reasonable time.
With respect to fund allocation procedures, the final rule establishes a Civil Penalty Fund Administrator who will manage the Fund and report to the CFPB’s Chief Financial Officer. The Fund Administrator also must follow written direction provided by the Civil Penalty Fund Governance Board, which will be established by the Director of the CFPB. The Administrator will designate a payment administrator—who may be a CFPB employee or a contractor—who will propose a plan for distributing the allocated funds to individual victims. The plan must be approved by the Administrator.
Under the final rule, funds will be allocated based on six-month periods, which will be published on the CFPB’s website by July 8, 2013. The start date for the first period has been established as July 21, 2011. The first two periods, however, need not be exactly six months in order to allow the Bureau to establish a schedule that will be administratively efficient. When there are sufficient funds available to fully compensate all the victims in the six-month period class, the Fund Administrator will allocate to each victim the amount necessary to fully compensate those victims for their uncompensated harm. If there are insufficient funds to fully compensate victims in any six-month period, victims from the most recently concluded six-month period will receive an equal percentage of their uncompensated harm. In the event of a surplusage within a given six-month period, the Fund Administrator next will allocate any remaining funds to classes of victims from preceding six-month periods until no funds remain or the victims are fully compensated. The proposed rule seeks comments regarding (i) how funds should be allocated to classes of victims, particularly when there are insufficient funds in a particular period to fully compensate all victims and (ii) whether funds should be allocated more or less frequently, or whether a different method of timing allocations should be used.
Under the final rule, any funds that remain after distribution can be allocated to consumer education or financial literacy programs, based on criteria separately adopted by the CFPB. The Fund Administrator, however, does not have the authority to select or allocate funds to particular programs. The proposed rule also seeks comment regarding whether there should be a limit to the amount of funds that may be allocated to such programs.
The CFPB will issue annual reports that describe how the funds will be allocated, the basis for those allocations, and how the funds have been distributed. The reports will be available on the CFPB’s web site.
Federal Reserve Board Proposes Large Bank Assessment Rule
On April 15, the Federal Reserve Board proposed a rule that would establish an annual assessment for bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets and for nonbanks designated by the Financial Stability Oversight Council. The Dodd-Frank Act directed the Board to establish such an assessment to cover expenses the Board estimates are necessary to carry out its supervision and regulation of those companies. This proposed rule outlines how the Board would (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. Beginning this year, the Board proposes to notify covered companies of the amount of their assessment no later than July 15 of the year following each assessment period (the calendar year). After an opportunity for appeal, assessed companies would be required to pay their assessments by September 30 of the year following the assessment period. For the 2012 assessment period, the Board estimates that the assessment basis would be approximately $440 million. Comments on the proposal are due by June 15, 2013.
Banking Regulators Issue Additional Resolution Plan Guidance
On April 15, the Federal Reserve Board and the FDIC issued additional guidance for the first group of institutions required to submit resolution plans pursuant to the Dodd-Frank Act. That group includes 11 institutions that submitted initial resolution plans last year. Based on their review of those initial plans, the regulators offer additional instruction as to what information should be included in the 2013 submissions, including more detailed information about certain potential obstacles to resolvability under the Bankruptcy Code. Given the additional request, the regulators also extended the due date for the plans from July 1, 2013 to October 1, 2013.
New York Federal Court Holds Dodd-Frank Rule Does Not Bar Late SEC Suits
On March 24, the U.S. District Court for the Eastern District of New York held that a Dodd-Frank Act rule requiring the SEC, within 180 days of notifying a target of the pendency of an investigation, to file an action or obtain an extension of time from an SEC director, does not provide for the dismissal of an enforcement action that does not comply with the rule. SEC v. NIR Group, LLC, No. 11-4723, slip op. (E.D.N.Y. Mar. 24, 2013). In deciding a motion in which the SEC sought to halt discovery into its compliance with the rule, the court explained that the statute does not explicitly provide for dismissal of an enforcement action that does not comply with the 180-day requirement, but that the absence of such a remedy does not render the provision superfluous. The court determined that evidence concerning compliance with the internal deadline is not relevant to the action. For that and other reasons, the court held that the evidence sought was not discoverable.
Additional State AGs Join Challenge to Dodd-Frank Act Provisions
On February 13, the plaintiffs in a case challenging portions of the Dodd-Frank Act sought leave to file a second amended complaint to add as plaintiffs the state attorneys general (AGs) of Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, Texas, and West Virginia. Motion for Leave to File Second Amended Complaint, State Nat'l Bank of Big Spring v. Wolin, No 12-1032 (D.D.C., filed Feb. 13, 2013). The new state AGs join the AGs of Michigan, Oklahoma, and South Carolina, who previously joined the suit and claim that the "orderly liquidation authority" (OLA) for financial institutions provided to the Treasury Secretary by the Dodd-Frank Act violates the separation of powers doctrine, as well as the Fifth Amendment's bar against the taking of property without due process. The case also involves private party plaintiffs who, in addition to challenging the OLA, challenge as unconstitutional (i) the formation and operation of the CFPB, (ii) the appointment of CFPB Director Richard Cordray, and (iii) the operation of the Financial Stability Oversight Council. The plaintiffs were due to respond to a pending government motion to dismiss, but asked the court to stay briefing on that motion pending resolution of the motion to file a second amended complaint.
Republican Senators Reiterate Opposition to CFPB Nomination, Demand Structural Reforms
On February 1, Republican Senators sent a letter to President Obama to reaffirm their position that the CFPB lacks transparency and accountability, and that until structural reforms are implemented, the 43 signatories will continue to block consideration of any nominee for CFPB director. Specifically, the letter states that (i) the CFPB director-led structure should be replaced by a bipartisan board of directors, (ii) the CFPB should be subject to the annual congressional appropriations process, and (iii) prudential regulators should be empowered to serve as a safety and soundness check to CFPB actions. Also on February 1, Senator Rob Portman (R-OH), who opted not to sign the letter to President Obama, sent a separate letter to CFPB Director Cordray to highlight the “commonsense reforms” to the CFPB that the two previously have discussed, including a change in the CFPB’s governance structure. The letter states that Mr. Cordray “noted…leadership by a bipartisan board provides some stability and continuity in regulation over time.” On February 7, Senator Portman reportedly is aiming to serve as a liaison between the White House and congressional Republicans on Mr. Cordray’s pending nomination and potential CFPB reforms. The only other Republican Senator not to sign the letter to President Obama was Senator Bob Corker (R-TN).
Special Alert: Detailed Analysis of CFPB's Mortgage Servicing Rules
On January 17, the CFPB issued final rules amending Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The rule amending Regulation Z includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoff statements. The rule amending Regulation X addresses (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. This Alert includes a detailed analysis of these nine topics and also provides links to each of the model forms amended or added by the rule. For ease of reference, this Alert contains a detailed, hyper-linked table of contents. Click here to download our detailed analysis of CFPB's Mortgage Servicing Rules.
Special Alert: Analysis of Final ECOA and HPML Appraisal Rules
On January 18, the federal banking agencies issued a final rule amending Regulation Z to implement certain requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs), and to notify consumers who apply for these loans of their right to a copy of appraisal. On the same day, the Consumer Financial Protection Bureau issued a final rule under the Equal Credit Opportunity Act (ECOA), as amended by the Dodd-Frank Act, to require creditors to provide residential mortgage loan applicants with a copy of any and all appraisals and other written valuations developed in connection with an application for closed or open-end credit that is to be secured by a first lien on a dwelling. Both rules take effect on January 18, 2014. BuckleySandler has prepared a Special Alert that provides additional details regarding the HPML appraisal rule, as well as a Special Alert regarding the ECOA appraisal rule.