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OCC highlights key risks affecting the federal banking system in spring 2018 semiannual risk report
On May 24, the OCC released its Semiannual Risk Perspective for Spring 2018, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations. Priorities focus on credit, operational, compliance, and interest risk, and while the OCC commented on the improved financial performance of banks from 2016 to early 2018, in addition to the “incremental improvement in banks’ overall risk management practices,” the agency also noted that risks previously highlighted in its Fall 2017 report have “changed only modestly.” (See previous InfoBytes coverage here.)
Specific areas of concern noted by the OCC include: (i) easing of commercial credit underwriting practices; (ii) increasing complexity and severity of cybersecurity threats; (iii) use of third-party service providers for critical operations; (iv) compliance challenges under the Bank Secrecy Act; (v) challenges in risk management involving consumer compliance regulations; and (vi) rising market interest rates, including certain risks associated with the “potential effects of rising interest rates, increasing competition for retail and commercial deposits, and post-crisis liquidity regulations for banks with total assets of $250 billion or more, on the mix and cost of deposits.” Additionally, concerns related to integrated mortgage disclosure requirements under TILA and RESPA previously considered a key risk have been downgraded to an issue to be monitored.
Colorado Court of Appeals holds attorney fees award is a non-dischargeable civil penalty
On May 17, the Colorado Court of Appeals held that an attorney fees award imposed under the Colorado Consumer Protection Act (CCPA) is a civil penalty and is not dischargeable under the Bankruptcy Code. According to the opinion, the State of Colorado sued a law firm, its owners, and affiliated companies for allegedly violating the CCPA and the Colorado Federal Debt Collection Practices Act (CFDCPA) by fraudulently billing mortgage servicers for full costs associated with title insurance premium charges even though not all the costs were incurred. The district court agreed with the State and awarded attorney fees and costs for the violations. In the appeal, one of the defendants argued, among other things, that the district court was precluded from awarding attorney fees because his debts had previously been discharged in bankruptcy. In affirming the district court’s decision, the appeals court concluded that attorney fees awards made under the CCPA and the CFDCPA are not dischargeable because the award “made under the CCPA’s mandatory provision was sufficiently penal to constitute a ‘fine, penalty or forfeiture’ under § 523(a)(7) [of the Bankruptcy Code] and was not dischargeable.”
OCC encourages banks to offer short-term, small-dollar installment lending
On May 23, the OCC released Bulletin 2018-14, which encourages banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC’s core lending principles. The Bulletin acknowledges the CFPB’s final rule on Payday, Vehicle Title, and Certain High-cost Installment Loans (Payday Rule) – which generally covers loans with maturities shorter than 45 days or longer-term loans with balloon payments – and states the OCC intends on working with the Bureau to ensure banks can “can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”
Specifically, the Bulletin encourages banks to offer loans without balloon payments and with maturities greater than 45 days subject to three core lending principles: (i) the product should be consistent with safe and sound banking, treat customers fairly, and comply with all applicable laws and regulations; (ii) banks should effectively manage risks associated with the product; and (iii) the product should be underwritten based on reasonable policies and practices, such as amount and repayment terms aligning with eligibility, use internal and external data sources to assess a consumer’s creditworthiness, and loan servicing processes that assist distressed borrowers. Additionally, with regard to pricing, the Bulletin stated that the “OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).”
Immediately after the OCC’s release, the CFPB issued a statement applauding the Bulletin because “[m]illions of Americans desperately need access to short-term, small-dollar credit.” In January, the CFPB stated it plans to reconsider the Payday Rule and the Spring 2018 rulemaking agenda indicates the Bureau expects a notice of proposed rulemaking to be issued by February 2019 (previously covered by InfoBytes here and here).
District court sanctions banker for violating consent order issued by CFPB and Maryland Attorney General
On May 21, the U.S. District Court for the District of Maryland granted in part and denied in part a motion for sanctions brought by the CFPB and the Consumer Protection Division of the Maryland Attorney General’s Office (plaintiffs) against a banker (defendant) previously held in civil contempt for violating a final judgment order prohibiting him from participating in the mortgage industry. As previously covered in InfoBytes, in April 2015, a joint enforcement action alleging participation in a mortgage-kickback scheme in violation of RESPA and state law was bought against the defendant, five other individuals, and a Maryland title company. According to the 2018 sanctions order, a stipulated final judgment and order between the parties was approved in November 2015, which, among other things, limited the defendant—who neither admitted nor denied the allegations—from participating in the mortgage industry for two years but did not prohibit him “from acting solely as a personnel or human-resources manager for a mortgage business operated by a FDIC insured banking institution. . . .”
However, in August 2017, the court held the defendant in civil contempt for failing to comply with the order when it was discovered that the defendant (i) owned and operated mortgage businesses in violation of the order, while claiming to be employed as a human resources professional at one of the businesses; (ii) operated bank branches in Maryland and California; (iii) failed to upload the final judgment and order into the Nationwide Mortgage Licensing System and Registry (NMLSR); and (iv) failed to comply with stipulated reporting requirements. The plaintiffs’ proposed sanctions sought to disgorge all of the defendant’s income from 2015 until the date of compliance and impose a lifetime ban from the industry. In issuing the sanctions, the court ordered that all contemptuous income since the final judgment should be disgorged and extended the original two-year ban another two years—minus the exemption for employment as an HR professional. The defendant is further required to post the sanctions order on the NMLSR within 60 days.
Federal Reserve meeting to consider proposed overhaul of Volcker Rule set for May 30
On May 23, the Federal Reserve Board issued a notice announcing it will meet on May 30 to consider a proposal to modify the Volcker Rule. Section 13 of the Bank Holding Company Act currently restricts banks from engaging in proprietary trading and restricts their ownership of certain funds. As previously discussed in InfoBytes, last month the House passed the “Volcker Rule Regulatory Harmonization Act,” which, among other things, would provide clear exemptions for banking entities with $10 billion or less in consolidated assets or those comprised of five percent or less of trading assets and liabilities. A similar exemption is also included in the bipartisan Senate financial regulatory reform bill, S.2155, which was signed by President Trump on May 24. (See InfoBytes coverage on S.2155 here.)
Trump signs legislation enacting bipartisan regulatory relief bill
On May 24, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (the bill) — which modifies provisions of the Dodd-Frank Act and eases certain regulations on certain smaller banks and credit unions. Upon signing, the White House released a statement quoting the president, “[c]ommunity banks are the backbone of small business in America. We are going to preserve our community banks.”
The House, on May 22, passed the bipartisan regulatory reform bill by a vote of 258-159. The bill was crafted by Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo, R-Idaho and passed by the Senate in March. The House passed the bill without any changes to the Senate version, even though House Financial Services Chairman, Jeb Hensarling, originally pushed for additional reform provisions to be included. Specifically, the bill does not include certain provisions that were part of Hensarling’s Financial CHOICE Act, such as (i) a complete repeal of the Volker Rule; (ii) subjecting the CFPB to the Congressional appropriations process and restructure the agency with a bipartisan commission; and (iii) reducing the Financial Stability Oversight Council’s (FSOC) authority to designate nonbank financial institutions as Systemically Important Financial Institutions (SIFIs).
In response to the bill’s passage, the OCC’s Comptroller of Currency, Joseph Otting, issued a statement supporting the regulatory changes and congratulating the House, “[t]his bill restores an important balance to the business of banking by providing meaningful reductions of regulatory burden for community and regional institutions while safeguarding the financial system and protecting consumers.” Additionally, acting Director of the CFPB, Mick Mulvaney, applauded Congress, noting that the reforms to mortgage lending were “long overdue” and called the bill “the most significant financial reform legislation in recent history.”
As previously covered by InfoBytes, the highlights of the bill include:
- Improving consumer access to mortgage credit. The bill’s provisions state, among other things, that: (i) banks with less than $10 billion in assets are exempt from ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) appraisals will not be required for certain transactions valued at less than $400,000 in rural areas; (iii) banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages are exempt from HMDA’s expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amendments to the S.A.F.E. Mortgage Licensing Act will provide registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; and (v) the CFPB must clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans, as well as outline certain liabilities related to model disclosure use.
- Regulatory relief for certain institutions. Among other things, the bill simplifies capital calculations and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets. The bill also states that banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, are exempt from Volcker Rule restrictions on trading with their own capital.
- Protections for consumers. Included in the bill are protections for veterans and active-duty military personnel such as: (i) permanently extending from nine months to one year the protection that shields military personnel from foreclosure proceedings after they leave active military service; and (ii) adding a requirement that credit reporting agencies provide free credit monitoring services and credit freezes to active-duty military personnel. The bill also addresses the creation of an identity theft protection database. Additionally, the bill instructs the CFPB to draft federal rules for the underwriting of Property Assessed Clean Energy loans (PACE loans), which would be subject to the TILA ability-to-repay requirement.
- Changes for bank holding companies. Among other things, the bill raises the threshold for automatic designation as a SIFI from $50 billion in assets to $250 billion. The bill also subjects banks with $100 billion to $250 billion in total consolidated assets to periodic stress tests and exempts from stress test requirements entirely banks with under $100 billion in assets. Additionally, certain banks would be allowed to exclude assets they hold in custody for others—provided the assets are held at a central bank—when computing the amount such banks must hold in reserves.
- Protections for student borrowers. The bill’s provisions include measures to prevent creditors from declaring an automatic default or accelerating the debt against a borrower on the sole basis of bankruptcy or cosigner death, and would require the removal of private student loans on credit reports after a default if the borrower completes a loan rehabilitation program and brings payments current.
Each provision of the bill will take effect at various intervals from the date of enactment up to 18 months after.
Court denies plaintiff’s motion for summary judgment in TCPA action, questions accuracy of report citing number of robocalls
On May 21, the U.S. District Court for the Southern District of California denied a plaintiff’s motion for summary judgment against a solar company that she claimed made multiple unwanted robocalls to her cell phone, holding that questions remained about the accuracy of a report identifying the number of illegal calls the company allegedly placed. The plaintiff filed a putative class action complaint asserting that the company, in order to market products and services, violated the Telephone Consumer Protection Act (TCPA) when it used a “predictive dialer” to contact cell phone numbers the company bought from third parties. The plaintiff further claimed that none of the alleged call recipients had provided prior express consent to receive the calls, and that an expert retained by the plaintiff found that the company had made 897,534 calls to 220,007 unique cell phones. After the class was certified, the plaintiff moved for summary judgment, requesting that class members be awarded damages available under the TCPA of $1,500, or $500 per call.
While the court determined that there is no argument as to the plaintiff’s TCPA claim concerning whether the company made telemarketing calls (and failed to receive prior express consent), a dispute remained over whether the plaintiff had “carried its burden of demonstrating” that the high number of calls cited in the report were actually made. First, the court stated that, because the company “stipulated that the [p]laintiff’s expert in fact reached a certain conclusion, it does not follow that [the company] stipulated to the accuracy of the conclusion.” Second, the court held that, since a reasonable jury could find the report’s “conclusions are flawed for any number of reasons,” a fact issue as to the report’s accuracy remained. A settlement conference has been set for June 6.
OFAC issues new Ukraine-/Russia-related General Licenses authorizing additional wind-down activities
On May 22, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued Ukraine-/Russia-related General License 15 (GL 15) authorizing specified wind-down activities through October 23, which would be otherwise prohibited by Ukraine-Related Sanctions Regulations. Permissible activities with the designated company and its subsidiaries apply to operations, contracts, and agreements that were effective prior to April 6. OFAC further stated that, while funds blocked prior to May 22 remain blocked, GL 15 permits the use of these blocked funds for specified maintenance and wind-down activities.
The same day, OFAC also issued Ukraine-/Russia-related General License 12C (GL 12C) to replace and supersede General License 12B (GL 12B) in its entirety. (See previous InfoBytes coverage on GL 12B here.) GL 12C, which incorporates exemptions permitted under GL 15, authorizes wind-down activities “originating and intermediary U.S. financial institutions to process funds transfers that they would otherwise block to an account held by a blocked U.S. person at a U.S. financial institution,” and allows the release of “such funds for authorized maintenance and wind-down purposes.” GL 12C is effective May 22.
OFAC also released six new FAQs and published updated FAQs related to these general licenses.
Visit here for additional InfoBytes coverage on Ukraine/Russian sanctions.
Vermont legislation regulates data brokers and provides consumer protections
On May 22, a Vermont bill, established to regulate data brokers and provide consumers with protections against companies that collect, analyze, and sell their personal information, was enacted without the governor’s signature. Among other things, H.764: (i) requires data brokers to pay a $100 fee to register annually with the Vermont Secretary of State and publicly disclose information about data collection practices and opt-out policies; (ii) requires companies to implement measures to ensure they have “adequate security standards” to safeguard against data breaches; (iii) prohibits the “acquisition of personal information with the intent to commit wrongful acts”; and (iv) prohibits credit reporting agencies from charging consumers fees for the placement, removal, or temporary lift of a security freeze. The credit freeze provisions became effective upon passage. The data broker provisions take effect January 1, 2019.
Court enters default judgment in favor of CFPB against debt relief companies
On May 22, the U.S. District Court for the District of Maryland entered a default judgment, in favor of the CFPB, against two debt relief companies, their service provider, and their owners (defendants) for allegedly misleading consumers about their debt validation program. As previously covered by InfoBytes, the CFPB filed a complaint in October 2017 against the defendants for allegedly violating the Telemarketing Sales Rule and the Consumer Financial Protection Act by, among other things, purportedly claiming to be affiliated with the federal government and misrepresenting the abilities of their services. In granting the CFPB’s request for default judgment, the court held that the defendants failed to defend the action and ordered they pay almost $5 million in restitution, as well as $16 million in civil money penalties. In addition to the fines, the defendants are prohibited from engaging in telemarketing, debt relief and credit repair activities in the future.