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Regulators Coordinate Review of Volcker Rule Application to Foreign Funds
On July 21, five U.S. financial regulators announced that they would not take action against foreign banks for qualifying foreign excluded funds, subject to certain conditions, under the Volcker Rule for a period of one year as they review the treatment of these types of funds under current implementing regulations. The regulators, which include the Federal Reserve Board, FDIC, OCC, SEC, and Commodity Futures Trading Commission, issued a joint statement to address concerns raised as to whether certain foreign excluded funds may fall within the definition of “banking entity” under the Bank Holding Company Act and therefore be subject to the Volcker Rule.
“A number of foreign banking entities, foreign government officials, and other market participants have expressed concern about the possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for certain foreign funds,” according to the joint statement. The regulators noted that the review will allow time to consider the appropriate course of action to address these concerns, including whether congressional action may be necessary.In addition, the regulators stressed that the joint statement “does not otherwise modify the rules implementing section 619 [of the Dodd-Frank Act] and is limited to certain foreign excluded funds that may be subject to the Volcker Rule and implementing regulations due to their relationships with or investments by foreign banking entities.”
Small Lenders Call for Restraint on Housing Finance Reform During Senate Banking Committee Hearing
On July 20, the Senate Committee on Banking, Housing, and Urban Affairs (Committee) held a hearing entitled, “Housing Finance Reform: Maintaining Access for Small Lenders.” Frequent topics of discussion in the hearing included, among other things, housing finance reform, secondary market access, affordable housing, access to credit in rural areas, mortgage insurance, and mortgage backed securities issued by government-sponsored enterprises (GSEs), operating under conservatorship since 2008.
Sen. Mike Crapo (R-Idaho), Chairman of the Committee, remarked in his opening statement that “small lenders play a critical role in the mortgage market,” and that a need exists to preserve access to the secondary market. However, Sen. Crapo asserted that although GSEs are currently earning profits, a risk exists for taxpayers if there is a market downturn. “A mortgage market dominated by two huge government-sponsored companies in conservatorship is not a long-term solution, and is not in the best interest of consumers, taxpayers, lenders, investors, or the broader economy,” Sen. Crapo stated.
Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, released an opening statement in which he stated, “[S]mall lenders are often the only lenders willing to go the extra mile to underwrite mortgages . . . in cities’ urban core and in rural communities. . . . As we continue to debate the role of the GSEs, private capital, and large financial institutions in providing access to affordable mortgages, we cannot create a system that allows the GSEs or new players to use a business model that serves only the largest lenders, the highest income borrowers, or the well-off pockets of our country.”
The coalition of consumer groups and small lenders present at the hearing supported GSE reform, sought additional support for small lenders, and called for prompt government action relative to housing finance reform.
The July 20 hearing—a video of which can be accessed here—included testimony from the following witnesses:
- Ms. Brenda Hughes, Senior Vice President and Director of Mortgage and Retail Lending, First Federal Savings Bank of Twin Falls, on behalf of the American Bankers Association (testimony)
- Mr. Tim Mislansky, Senior Vice President and Chief Lending Officer, Wright-Patt Credit Union and President and CEO, myCUmortgage, LLC on behalf of the Credit Union National Association (testimony)
- Mr. Jack E. Hopkins, President and CEO, CorTrust Bank, N.A., on behalf of the Independent Community Bankers of America (testimony)
- Mr. Charles M. Pruvis, President and CEO, Coastal Federal Credit Union, on behalf of the National Association of Federally-Insured Credit Unions (testimony)
- Mr. Wes Hunt, President, Homestar Financial Corporation, on behalf of the Community Mortgage Lenders of America (testimony)
- Mr. Bill Giambrone, President and CEO, Platinum Home Mortgage and President, Community Home Lenders Association (testimony)
Legislation Introduced to Codify “Valid When Made” Doctrine
On July 19, Representative Patrick McHenry (R-N.C.), the Vice Chairman of the House Financial Services Committee, and Representative Gregory Meeks (D-N.Y.) introduced legislation designed to make it unlawful to change the rate of interest on certain loans after they have been sold or transferred to another party. As set forth in a July 19 press release issued by Rep. McHenry’s office, the Protecting Consumers’ Access to Credit Act of 2017 (H.R. 3299) would reaffirm the “legal precedent under federal banking laws that preempts a loan’s interest as valid when made.”
Notably, a Second Circuit panel in 2015 in Madden v. Midland Funding, LLC overturned a district court’s holding that the National Bank Act (NBA) preempted state law usury claims against purchasers of debt from national banks. (See Special Alert on Second Circuit decision here.)The appellate court held that state usury laws are not preempted after a national bank has transferred the loan to another party. The Supreme Court denied a petition for certiorari last year. According to Rep. McHenry, “[t]his reading of the National Bank Act was unprecedented and has created uncertainty for fintech companies, financial institutions, and the credit markets.” H.R. 3299, however, will attempt to “restore[] consistency” to lending laws following the holding and “increase[] stability in our capital markets which have been upended by the Second Circuit’s unprecedented interpretation of our banking laws.”
Federal Reserve Task Force Shoots for Real-Time Payments Network by 2020
On July 21, the Faster Payments Task Force, created by the Federal Reserve in 2015, announced the publication of its final report detailing strategic efforts to implement faster payment solutions (part one of the report was published in January of this year). The report outlines 16 proposed faster payments solutions and is the culmination of proposals and feedback from providers across the payments industry, including more than 300 representatives from financial institutions, consumer groups, payment service providers, financial technology firms, merchants, government agencies, and numerous other interested parties. The task force’s goal is to have a real-time payments network available to U.S. consumers and businesses by 2020. The report discusses various solutions and technologies for implementing faster payments and recommends a framework for ongoing collaboration, decision-making, and rule setting. The report also addresses security threats, advocates for infrastructure to support faster payments, recommends that the Fed collaborate with relevant regulators to evaluate current laws and make necessary rule changes.
“Our goal is to ensure that anyone, anywhere is able to pay and be paid quickly and securely,” said Sean Rodriguez, the Fed's faster payments strategy leader and chair of the Faster Payments Task Force. “In real terms, that means people will not have to wait hours or days to deliver and access their money. Businesses will have enhanced cash management and better information associated with their payments.”
Treasury Announces FSOC Executive Session on July 28
On July 21, the Treasury Department announced that on Friday, July 28, Secretary Steven T. Mnuchin will preside over an executive session of the Financial Stability Oversight Council (FSOC). According to a Treasury press release, the preliminary agenda includes:
- a discussion about Volcker Rule recommendations presented in the Treasury’s June 2017 report, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions”;
- an update on annual reevaluation requirements for designating nonbank financial companies; and
- a discussion regarding pending litigation brought against FSOC.
Consistent with FSOC’s transparency policy, the meeting may be made available via live webcast and can be viewed after it occurs. Meeting minutes for the most recent FSOC meetings are generally approved at the next meeting and posted online soon afterwards.
Meeting minutes for past meetings are available here.
Readouts for past meetings are available here.
FTC to Host Small Business Roundtables Focusing on Cybersecurity
On July 20, the FTC announced it will host a series of public roundtables to discuss pressing challenges facing small businesses when protecting the security of their computers and networks. The feedback will be used to assist the FTC and its partners in creating additional cybersecurity education resources. The Engage, Connect, and Protect Initiative: Small Business and Data Security Roundtables are part of Acting FTC Chairman Maureen K. Ohlhausen’s initiative to help small businesses protect against cyberattacks. Earlier this year, Ohlhausen launched a website designed to provide guidance for small businesses on scams and cyberattacks, many of which lack the resources larger companies have to spend on cybersecurity. (See previous InfoBytes post here.)
The first roundtable will be on July 25 in Portland, Oregon, in partnership with the National Cyber Security Alliance (NCSA), the SBA, and other organizations. On September 6, a second roundtable discussion will convene in Cleveland in collaboration with the SBA and the Council of Smaller Enterprises. The third roundtable in the series, sponsored by the NCSA, will occur later in September in Des Moines, Iowa.
Legislation Reintroduced to Base SIFI Determination on Risk Rather Than Asset Size
On July 19, Representative Blaine Luetkemeyer (R-Mo.) reintroduced legislation designed to overhaul the process used to manage systemic risk by basing the regulation of financial institutions on risk rather than asset size alone. As set forth in a press release issued by Rep. Luetkemeyer’s office, the Systemic Risk Designation Improvement Act of 2017 would replace the $50 billion threshold for designating a bank holding company as a Systemically Important Financial Institution (SIFI) with a series of standards for evaluating risk. The legislation would require the Federal Reserve to evaluate an “institution’s size, interconnectedness, substitutability, global cross-jurisdictional activity, and complexity” before designating it as a SIFI. The legislation was previously introduced in the House, but discussion was delayed to provide Rep. Luetkemeyer with time to propose a method for funding the proposed changes, which are estimated to cost more than $115 million. (See previous InfoBytes summary here.)
“This legislation supports economic growth throughout the country because it will free commercial banks to make loans while allowing financial regulators the ability to apply enhanced standards on banks based on actual risk posed to the financial system–rather than on arbitrary asset size alone," Luetkemeyer pronounced.
Buckley Sandler Insights: CFPB Updates Rulemaking Agenda
On July 20, the CFPB released its Spring 2017 rulemaking agenda. The agenda was last updated in Fall 2016. The summer release date, and the fact that certain deadlines listed in the updated agenda have already passed, indicates that the agenda’s release may have been delayed after the CFPB drafted it. The following aspects of the updated agenda are particularly noteworthy:
- Regulation Reviews: The Bureau plans to begin “the first in a series of reviews of existing regulations that we inherited from other agencies through the transfer of authorities under the Dodd-Frank Act,” noting that “other federal financial services regulators have engaged in these types of reviews over time, and believe that such an initiative would be a natural complement to our work to facilitate implementation of new regulations.” The Bureau has formed “an internal task force to coordinate and deepen the agency’s focus on concerns about regulatory burdens and projects to identify and reduce unwarranted regulatory burdens….” The agenda lists “pre-rule activities” as continuing through September 2017. Separately, the Bureau notes its ongoing assessments of the effectiveness of the Mortgage Servicing Rules, the Ability-to-Repay/Qualified Mortgage Rule, and the Remittance Transfer Rule pursuant to the Dodd-Frank Act’s five-year lookback provision.
- Small Dollar Lending: The Bureau reports that it received more than one million comments on its June 2016 proposed rule to impose ability-to-repay requirements for payday, vehicle title, and similar installment loans. The Bureau states that it “continue[s] to believe that the concerns articulated in the [proposed rule] are substantial” but does not provide an expected release date for a final rule.
- “Larger Participants” in Installment Lending: The agenda lists September 2017 as the expected release date for “a proposed rule that would define non-bank ‘larger participants’ in the market for personal loans, including consumer installment loans and vehicle title loans.” Designation as a larger participant brings a non-bank entity within the CFPB’s supervisory jurisdiction. The agenda indicates that a companion rule requiring payday, vehicle title lenders, and other non-bank entities to register with the Bureau is also underway, as noted below.
- Debt Collection: In July 2016, the Bureau released an outline of proposals under consideration for debt collection and convened a panel under the Small Business Regulatory Enforcement Fairness Act in conjunction with the Office of Management and Budget and the Small Business Administration’s Chief Counsel for Advocacy to consult with representatives of small businesses that might be affected by the rulemaking. The Bureau notes that, “[b]uilding on feedback received through [that] panel, we have decided to issue a proposed rule later in 2017 concerning debt collectors’ communications practices and consumer disclosures.” The agenda states that a proposed rule is expected in September 2017. The Bureau also states that, in a departure from the July 2016 outline of proposals, the Bureau “intend[s] to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”
- Overdrafts: The Bureau states that the current opt-in regime “produces substantially different opt-in rates across different depository institutions” and that its “supervisory and enforcement work indicates that some institutions are aggressively steering consumers to opt in.” The Bureau reports that it is “engaged in consumer testing of revised opt-in forms and considering whether other regulatory changes may be warranted to enhance consumer decision making.” The agenda lists “pre-rule activities” as continuing through June 2017.
- Small Business Lending: The agenda lists “pre-rule activities” on the implementation of the small business data reporting provisions of the Dodd-Frank Act as continuing through June 2017. Specifically, the agenda states that, at this juncture, the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.”
- HMDA & ECOA Amendments: The agenda lists October 2017 as the expected release date for the April 2017 proposed ECOA amendments to clarify requirements for collecting information on ethnicity, race, and sex, but does not list an expected release date for finalization of the April 2017 proposed technical corrections to the 2015 HMDA rule, or the July 2017 proposed amendments to the 2015 HMDA rule’s requirements for reporting home equity lines of credit.
- TRID/Know Before You Owe Amendments: The agenda lists March 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in our special alert.
- Mortgage Servicing Amendments: The Bureau states that it expects to issue a proposal in September 2017 “to make one or more substantive changes to the rule in response to . . . concerns” raised by the industry.
- Arbitration: Interestingly, the agenda states that the Bureau’s final rule on mandatory arbitration clauses, which was released this month to significant controversy, was not expected until August.
- Non-Bank Registration: The Bureau states that it is “considering whether rules to require registration of [installment lenders] or other non-depository lenders would facilitate supervision, as has been suggested to us by both consumer advocates and industry groups.”
- Prepaid Cards: The agenda does not provide an expected release date for finalization of the June 2017 proposed amendments addressing error resolution and limitations on liability, application of the rule’s credit-related provisions to digital wallets, and other issues.
- Credit Card Agreement Submission: The Bureau is “considering rules to modernize our database of credit card agreements to reduce burden on issuers that submit credit card agreements to us and make the database more useful for consumers and the general public.” The agenda lists “pre-rule activities” as continuing through October 2017.
OFAC Assesses $2 Million Penalty Against International Oil and Gas Company for Violations of Ukraine-Related Sanctions
On July 20, the Treasury’s Office of Foreign Asset Control (OFAC) announced a $2 million civil money penalty assessed against an international oil and gas company, including two of its U.S. subsidiaries, for alleged violations of OFAC’s Ukraine-Related sanctions regulations. OFAC claims that, in May 2014, the company impermissibly dealt in services of a senior official of the Government of the Russian Federation who had been placed on the List of Specially Designated Nationals and Blocked Persons (SDNs) by signing eight legal documents related to oil and gas projects in Russia with the individual. Although the company claimed that it believed such actions were permissible, OFAC noted that the “plain language of the Ukraine-Related Sanctions” clearly indicates otherwise. In particular, OFAC stated that the sanctions blocked “any property and interests in property, and prohibited any dealing in any property and interests in property, of a person so designated.” In addition, the sanctions expressly forbid U.S. persons from “any contribution or provision of funds, goods, or services from any such person,” and, according to OFAC, do not differentiate between an individual’s “personal” and “professional” capacity—a distinction the company tried to make.
Thus, concluded OFAC, information available at the time of the alleged violations “clearly put [the company] on notice that OFAC would consider executing documents with an SDN to violate the prohibitions in the Ukraine-Related Sanctions Regulations.” The $2 million penalty was the largest that OFAC could impose under statute. OFAC imposed the penalty based on the following factors: (i) the company did not voluntarily self-disclose the violations; (ii) the company demonstrated reckless disregard for U.S. sanctions requirements by disregarding clear warning signs; (iii) the company’s senior-most executives knew of the official’s status as an SDN when it executed the legal documents; (iv) the company caused significant harm to the sanctions program by dealing with a senior official of the Russian Federation; and (v) the company is a sophisticated and experienced oil company that has global operations and routinely deals in goods, services and technology subject to U.S. economic sanctions and export controls.
Senate and House Committees File Separate Resolutions Disapproving of CFPB Arbitration Rule
On July 20, the Senate Committee on Banking, Housing and Urban Affairs and the House Financial Services Committee each announced Congressional Review Act Joint Resolutions of Disapproval against the CFPB’s Arbitration Agreements final rule issued July 10. In a press release issued by the Senate Committee, 24 Republican senators—including Chairman Mike Crapo (R-Idaho)—expressed concern that the anti-arbitration measure will discourage cost-effective dispute resolution and push consumers into class action lawsuits causing more harm than good. House Republicans outlined similar concerns in a press release issued the same day. H.J. Res. 111, co-sponsored by all 34 Republican members of the House Financial Services Committee, will seek to nullify the rule, which they believe “punish[es] consumers with decreased access to financial products, increased costs for such products, or both.”
The Congressional Review Act allows Congress to overturn agency rules by a simple majority if moved within 60 days from the rule’s publication.