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GOP Senators Introduce Bill to Create Five-member Board of Directors at CFPB
Last week, Sens. Deb Fischer (R-Neb.), Ron Johnson (R-Wis.) and John Barrasso (R-Wyo.) introduced a bill (S. 105) that would amend the Consumer Financial Protection Act of 2010 to replace the CFPB’s current single director with a bipartisan, five-member board. The proposed leadership structure would be similar to that of other financial regulators, including the FDIC, SEC and CFTC.
House GOP Report Claims CFPB Violated APA
On January 18, GOP members of the House Financial Services Committee released “The CFPB’s Vitiated Legal Case Against Auto-Lenders”, an investigative report prepared by GOP members who are of the belief that the CFPB likely has and continues to violate the Administrative Procedure Act. Relying mostly on internal CFPB documents obtained by the committee, the report focuses on the Bureau’s 2015 rule authorizing it to supervise larger participants in the auto lending market. In an accompanying press release, Committee Chairman Rep. Jeb Hensarling noted that the CFPB likely violated federal law when CFPB Director Richard Cordray failed to “heed CFPB attorneys who advised him to publish a list of institutions the Bureau believed would be subject to the proposed [auto-lending] rule” and/or “re-open the public comment period after it had closed.”
The report was released amid uncertainty over the fate of Director Cordray as the new administration assumes office. As previously covered in InfoBytes, a group of Democratic senators sent a letter Jan. 10 to President-elect Trump urging him not to dismiss Cordray, and noting that an attempt by Trump to fire him would be hard-pressed to withstand a legal challenge. This latest investigative report was the third released by GOP members on the panel over the last 14 months concerning CFPB efforts to regulate auto lenders—which Rep. Hensarling describes as “dangerously out-of-control,” and “unconstitutional.”
DOL Releases Second Set of FAQs Addressing Comments Concerning Fiduciary Rule
On January 13, the Department of Labor (DOL) released a second set of frequently asked questions (FAQs) in response to comments from financial services firms and other stakeholders on its recently-released Fiduciary Rule, which redefines a fiduciary investment advisor under the Employee Retirement Income Security Act of 1974. The DOL issued an initial set of 34 answers to FAQs about the Fiduciary Rule back in October, focusing on the rule’s exemptions, such as the “best-interest contract” exemption and the “prohibited-transaction” exemption. The second set of FAQs provides further clarification on the scope of various exemptions regarding investment recommendations, but also includes guidance on topics such as: (i) investment education; (ii) general communications versus fiduciary investment advice; (iii) fees and other compensation; and (iv) platform providers.
The FAQs further reflect, among other things, that an adviser charging clients a level asset-based fee for providing advice on 401(k) fund offerings may use revenue-sharing payments to offset part or all of that level fee, without running afoul of the fiduciary regulation. The guidance also clarifies that providing educational information to IRA and retirement customers about investment alternatives—such as product features, returns and fees—will not be considered “investment advice” so long as a bank does not make any specific investment recommendations. And, in question 34, the DOL explains that fiduciary status is not triggered by offering to customers an automatic sweep of any uninvested cash from the customer’s account into a short-term investment vehicle on a daily basis.
Senate Banking Committee Announces Subcommittee Assignments for 115th Congress
On January 17, the Senate Committee on Banking, Housing and Urban Affairs Chairman Mike Crapo (R-Idaho) and Ranking Member Sherrod Brown (D-Ohio), announced subcommittee assignments for the 115th Congress. The Senators named to head each subcommittee are listed below:
- Dean Heller of Nevada will be the new chairman of the Securities, Insurance and Investment subcommittee. Sen. Mark Warner of Virginia will continue to serve as ranking member.
- Pat Toomey of Pennsylvania will remain chairman of the Financial Institutions and Consumer Protection subcommittee. Sen. Elizabeth Warren of Massachusetts will be the new ranking member.
- Tom Cotton of Arkansas will become chairman of the Economic Policy subcommittee. Sen. Heidi Heitkamp of North Dakota will be the new ranking member.
- Ben Sasse of Nebraska will chair the National Security and International Trade and Finance subcommittee. Sen. Joe Donnelly of Indiana will serve as ranking member.
Sen. Tim Scott of South Carolina will continue to chair the Housing, Transportation and Community Development subcommittee. Sen. Robert Menendez of New Jersey will remain ranking member.
CFPB Releases Updated Student Loan Payback Playbook Prototype
According to a January 17 blog post by CFPB Student Loan Ombudsman Seth Frotman, the CFPB has released an updated student loan Payback Playbook prototype, incorporating changes that the Bureau implemented after reviewing thousands of public comments submitted by student loan borrowers, consumer advocates, and other industry members. According to Mr. Frotman, the Bureau worked together with the Departments of Education and Treasury to develop “prototype disclosures” that “outline[] a path to affordable payments for struggling borrowers who are trying to avoid student debt distress.” The CFPB reports that it has shared the Payback Playbook prototype and the underlying consumer feedback data with the Department of Education. The joint efforts are part of a broader Department of Education initiative branded “A New Vision for Serving Student Loan Borrowers.”
OCC Announces Launch of New Central Application Tracking System (CATS)
On January 17, the OCC launched the first phase of its Central Application Tracking System (CATS), a new web-based system for banks to file licensing and public welfare investment applications and notices. CATS provides a secure, electronic system through which authorized national banks, federal savings associations, federal branches, and banking agencies may draft, submit, and track their licensing and public welfare investment applications and notices. CATS will replace the existing e-Corp and CD-1 Invest application tools. As explained in OCC Bulletin 2016-37, the new program is being launched in three phases to help banks transition from the existing tools. The second and third phases of the CATS rollout are scheduled to begin in the spring of 2017. When ready, CATS will be accessible through BankNet, the secure portal for OCC-regulated banks.
OCC Finalizes Rule Addressing Receiverships of Uninsured National Banks
On December 20, the OCC announced the publication of its final rule implementing a framework for receiverships of national banks that are not insured, and thus not subject to receivership, by the FDIC under the Federal Deposit Insurance Act (“FDIA”). As discussed in a previous InfoBytes post, the OCC has not historically appointed a receiver for uninsured banks, opting instead to rehabilitate or resolve such institutions without a receiver. This OCC final rule—which goes into effect on January 19, 2017—reflects the OCC’s current belief that establishing and clarifying a receivership framework for uninsured banks “will be beneficial to financial market participants and the broader community of regulators.”
Among other things, the rule seeks to provide clarity to market participants with respect to the following key issues: (i) when and how a receiver for uninsured bank may be appointed; (ii) the powers held by the receiver of an uninsured bank; (iii) the two methods through which parties holding claims against an uninsured depository institution can seek approval of those claims; (iii) the order of payment for administrative expenses and claims against an uninsured bank; and (iv) the treatment of fiduciary or custodial assets. Notably, the OCC did not explicitly address whether the new rule will also apply to FinTech companies should they obtain a special purpose national bank charter as proposed recently by the OCC.
NYDFS Submits Comment Letter Opposing OCC FinTech Charter
On January 17, the New York Department of Financial Services (NYDFS) Superintendent Maria T. Vullo submitted a comment letter in stern opposition to the OCC proposal to create a new FinTech charter, stating that the proposed regulatory scheme is not authorized by federal law and would create a number of problems, including a serious risk of regulatory confusion and uncertainty. New York’s top financial regulator is of the opinion that “the OCC should not use technological advances as an excuse to attempt to usurp state laws.” More specifically, NYDFS’ contends, among other things, that: (i) state regulators are better equipped to regulate cash-intensive nonbank financial service companies; (ii) a national charter is likely to stifle rather than encourage innovation; (iii) the proposal could permit companies to engage in regulatory arbitrage and avoid state consumer protection laws; and (iv) a national charter would encourage large “too big to fail” institutions, permitting a small number of technology-savvy firms to dominate different types of financial services.
An interview of Superintendent Vullo discussing this topic may be accessed here.
PA Secretary of Banking and Securities Voices Concerns About OCC FinTech Charter
On January 17, Secretary of the Pennsylvania Department of Banking and Securities, Robin L. Wiessmann, submitted a comment letter calling upon the OCC to give “more thoughtful deliberation about the intended and unintended consequences that will result from such an apparent departure from the OCC’s current policy and scope of supervision.” Specifically, Wiessman requested that the federal bank regulator address three concerns regarding: (i) the broad application and ambiguity of the term “fintech”; (ii) the need by the OCC to have an adequate regulatory scheme in place before approving charters; and (iii) the possible federal preemption of existing state consumer protection laws. The Secretary’s letter echoes many of the concerns raised in a recent comment letter submitted by the Conference of State Bank Supervisors (CSBS) “reiterating its opposition to the [OCC] proposal to issue a special charter for fintech companies.”
John Doe Lawsuit Says CFPB Action Unlawful After PHH
On January 10, a California-chartered finance company with its principal place of business in Manila, Philippines filed an action to enjoin the CFPB from, among other things, disclosing the existence of an investigation of the plaintiff and taking any action against the plaintiff unless and until the CFPB is constitutionally structured. John Doe Co. v. CFPB, D.D.C., No. 17-cv-00049 (D.D.C. Jan. 10, 2017). The action was prompted, in part, by the recent PHH v. CFPB decision in which the court held that the CFPB’s single director leadership structure is unconstitutional and, thus, that the agency must operate as an executive agency supervised by the President. Here, the John Doe plaintiff argues that because the CFPB has requested review of the PHH decision, the court’s remedy in regarding the CFPB’s structure has not taken effect and thus agency is operating in violation of the Constitution. Therefore, plaintiff asserts, the CFPB can take no further action against it—including publication of the CFPB’s investigation of plaintiff or initiation of enforcement action against plaintiff.
We note, that on the same day the plaintiff filed its complaint, the court issued an order reflecting its decision that the plaintiff be able to proceed in its action against the CFPB under a pseudonym. In so doing, the court noted that where a company has filed an action to protect against the government’s disclosure of its identity, it would be “counterintuitive that a court should require that same company to disclose its identity in the parallel court proceedings.” Judge Rudolph Contreras of the U.S. District Court for the District of Columbia has given the CFPB until Jan. 25 to respond to the company’s complaint and motion to proceed under a pseudonym.