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House Democrats Seek Full Review of Financial CHOICE Act by Appropriate Committees; Investor Group Claims Act Will Undercut Shareholder Rights
As previously covered in InfoBytes, on May 4 the House Financial Services Committee approved the revised Financial CHOICE Act of 2017, H.R. 10, in a party-line vote, 34-26. Earlier this month the Ranking Members of two House committees sent letters to their respective Chairmen, urging their committees to not waive their jurisdiction over H.R. 10 and allow their respective committees to debate and vote on the legislation given its wide ranging effects on the U.S. economy. Ranking Member Bobby Scott (D-Va.) of the House Committee on Education and the Workforce stated in his letter that Democrats on the Education and the Workforce Committee “have expressed great concern over the attempts to weaken oversight and enforcement power of the [CFPB] and the important role it plays regarding the integrity of student loan finance services.” Ranking Member John Conyers Jr. (D-Mich.) of the House Committee on the Judiciary urged the Chairman in his letter that “[i]t is particularly critical that our Committee examine and vote on this legislation given numerous provisions squarely within our Rule X jurisdiction that will prevent government agencies from protecting the rights of consumers and hold the financial marketplace more accountable.” As reported previously in InfoBytes, Rep. Elijah Cummings (D-Md.) also called for the House Oversight and Government Reform Committee to assert jurisdiction over H.R. 10.
Additionally, on May 17, an advocacy group of institutional investors called upon the House of Representatives to oppose H.R. 10, saying the bill will undercut shareholder rights. The Council of Institutional Investors (CII) submitted a letter to all members of the House, urging them to oppose the bill. It was signed by CII and 53 institutional investors that collectively hold more than $4 trillion in assets, including representatives from the California Public Employees’ Retirement System, Colorado Public Employees’ Retirement Association, and New York State Teachers’ Retirement System. The letter said the bill would rollback curbs on “abusive” executive pay practices, restrict shareholder rights in board elections, and raise the cost of proxy advisers. The letter also cautioned that the bill would impede the SEC’s oversight of financial markets by requiring “excessive cost-benefit analysis” and including “unwise limits on enforcement.”
Legislation Reintroduced to Make CFPB Spending Accountable to Congress
On May 19, Rep. Andy Barr, (R-Ky.) reintroduced legislation that would amend the Consumer Financial Protection Act of 2010 to make the CFPB’s budget subject to congressional appropriations. As set forth in a press release issued by Rep. Barr’s office, the Taking Account of Bureaucrats’ Spending Act (H.R. 1486), first introduced in March 2015 to the House and referred to the House Financial Services Committee, would give Congress power over what Rep. Burr terms an “unaccountable agency.” “I am reintroducing the TABS Act because the Bureau deserves the same scrutiny and the same checks and balances as any other federal agency,” said Rep. Barr. “Congressional oversight and accountability will ensure that the Bureau stays true to its mission of consumer protection, and avoids politically motivated overreaches, wasteful spending, and unnecessary regulations.” Currently, the CFPB is funded directly by the Federal Reserve. As previously covered in InfoBytes, House Republicans are also trying to overhaul existing financial regulations with the approval of the Financial CHOICE Act (H.R. 10) by the House Financial Services Committee, which would subject the Bureau to greater congressional oversight and tighter budgetary control.
CFPB Issues Report Finding That 90 Percent of Student Borrowers Are Not Enrolled in Income Driven Repayment Plans
On May 16, the CFPB published analysis of a student loan industry data sample, which indicates that nine out of ten of the highest-risk borrowers are not enrolled in federal affordable repayment plans. The report, entitled Update from the CFPB Student Loan Ombudsman, is based on data the Bureau received in response to a voluntary request (Appendix C) for information it sent to several student loan servicers seeking information regarding practices used on borrowers transitioning from default to income-driven repayment plans (IDR). As previously reported in InfoBytes, the 2016 report highlighted the fact that “the majority of borrowers who cure a default and seek to enroll in IDR do so by first rehabilitating their defaulted debt. However, these borrowers describe a range of communication, paperwork processing, and customer service breakdowns at every stage of the default-to-IDR transition.” The Bureau found that data provided in response to its request support the following preliminary observations:
- More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making IDR payments within the first nine months after “curing” a default.
- Borrowers were five times more likely to default for a second time if they did not enroll in an IDR.
- As previously projected in 2016, nearly 30 percent of borrowers who exited default through rehabilitation defaulted for a second time within 24 months and more than 40 percent of borrowers re-defaulted within three years.
- More than 75 percent of borrowers who default for a second time did not successfully pay a single bill to their student loan servicers. The CFPB estimates that “as many as four out of every five borrowers who rehabilitate a student loan could be eligible for a zero dollar ‘payment’ under an IDR plan, suggesting many of these defaults were preventable, even for the most economically vulnerable consumers.”
- Borrowers who used the consolidation option, which requires borrowers to enroll in an IDR plan (except in rare circumstances) to resolve their student loan defaults, are more likely to immediately begin to repay their debts successfully.
According to the CFPB, the data reinforce the Bureau’s concern that “hundreds of thousands of borrowers who recently cured their default through rehabilitation are unable to successfully access a stable and affordable repayment plan and soon end up back in default.” Further, the Bureau found support for its position that “borrowers who cure default through consolidation appear to fare much better, particularly in the first months after exiting default.”
OFAC Updates: New Sanction Designations and Additions to Specially Designated Nationals List
In May, OFAC announced implementation of sanctions against several entities and individuals designated for, among others, materially assisting, sponsoring, or providing financial support to certain foreign entities. In addition, OFAC updated its list of Specially Designated Nationals.
Pakistan-Based ISIS Financial Facilitators. On May 11, OFAC imposed sanctions against three Pakistani individuals and one entity for their roles in assisting ISIS’s financial networks and their “connections with terrorist groups that are a direct threat to the security of both the [U.S.] and Pakistan.” The designations block the individuals and entity—each of whom has been designated as providing the identified networks with material and financial support—from participating in the global financial system, and further state that “all property and interests in property . . . subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from engaging in transactions with” those listed.
Syrian Government Supporters. On May 16, OFAC announced it was taking action against five individuals and five entities in response to the Syrian Government’s continued acts of violence committed against its own citizens. The sanctions came as a reaction to three Executive Orders: (i) E.O. 13572—targeting persons responsible for human rights abuses in Syria, their supporters, and supporters of senior officials or certain activities related to public corruption; (ii) E.O. 13582—targeting the Government of Syria and its supporters; and (iii) E.O. 13382—targeting proliferators of weapons of mass destruction and their supporters. The new sanctions prohibit transactions by U.S. persons with those listed and “any property or interest in property of the identified persons in the possession or control of U.S. persons or within the United States must be blocked.”
Yemen-Based Financial Facilitators and Arms Trafficker. On May 19, OFAC imposed sanctions against two Yemen-based financial facilitators for their roles in assisting al-Qa’ida leaders in the Arabian Peninsula. The designations block the individuals, both of whom were designated as engaging in actions through weapon trafficking, from the global financial system, and further state that “all property and interests in property . . . subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from engaging in transactions with” the identified individuals.
Foreign Narcotics Kingpin Sanctions. On May 19, OFAC made additions to the Specially Designated Nationals (SDN) list, which designates individuals and companies who are prohibited from dealing with the U.S. and whose assets are blocked. Transactions are prohibited if they involve transferring, paying, exporting, or otherwise dealing in the property or interest in property of an entity or individual on the SDN list. Additions to the list were made under the Foreign Narcotics Kingpin Sanctions Regulations against two two Peruvian individuals and three Peruvian entities.
PHH v. CFPB Update: D.C. Circuit Hears Oral Arguments Before En Banc Court
On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.
Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”
In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.
At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)
A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.
NYDFS Files Independent Lawsuit Against OCC Fintech Charter
Following the April 26 lawsuit filed by the Conference of State Bank Supervisors (CSBS) opposing the OCC’s fintech charter (see previous InfoBytes post), the New York Department of Financial Services (NYDFS) filed its own lawsuit on May 12, asking the court to block the OCC from creating a new special purpose fintech charter. “The OCC’s charter decision is lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York and other state regulators,” NYDFS Superintendent Maria T. Vullo said in a statement announcing the lawsuit. “This charter puts New York financial consumers . . . at great risk of exploitation by newly federally chartered entities seeking to be insulated from New York’s strong consumer protections.” NYDFS’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that the OCC’s charter would include “vast preemptive powers over state law.” Specific concerns include the risk of (i) weakened regulatory controls on usury, payday loans, and other predatory lending practices; (ii) consolidation of multiple non-depository business lines under a single federal charter, thus creating more “too big to fail” institutions; and (iii) creating competitive advantages for large, well-capitalized fintech firms that could overwhelm smaller market players and thus restrict innovation in financial products and services. The complaint also asserts that the “OCC’s action is legally indefensible because it grossly exceeds the agency’s statutory authority.” Finally, the complaint claims that the proposed fintech charter would injure NYDFS monetarily because the regulator’s operating expenses are funded by assessments levied by the OCC on New York licensed financial institutions. According to NYDFS, every non-depository financial firm that receives a special purpose fintech charter from the OCC in place of a New York license deprives NYDFS of crucial resources that are necessary to fund its regulatory function.
Citing violations of the National Bank Act and conflicts with state law in violation of the Tenth Amendment of the U.S. Constitution, NYDFS seeks declaratory and injunctive relief that would declare the fintech charter proposal to be unlawful and prohibit the OCC from taking further steps toward creating or issuing the charter without express Congressional authority.
In a press release issued the same day, the CSBS said it “strongly supports the [NYDFS] lawsuit” and reiterated that the OCC “does not have the authority to issue federal charters to non-banks, and its unlawful attempt to do so will harm markets, innovation and consumers.”
Ransomware Attack Has Global Impact, Bipartisan Legislation Introduced to Counter Hacking
On May 12, a cyberattack spread around the world, affecting more than 230,000 computers in roughly 150 countries, according to a statement issued by the American Bankers Association. The ransomware, known as “WannaCry,” was used to exploit a vulnerability that affects computers running Microsoft Windows (see Department of Homeland Security Alert). Users of infected computers received a message that their files had been encrypted and that they must pay a ransom in bitcoin in order to decrypt their files. However, as conveyed in a press release issued by the Financial Services - Information Sharing and Analysis Center (FS-ISAC), it appears that the majority of the attacks seem to be targeting and impacting non-financial sector entities globally. FS-ISAC “believes the current attacks utilize known vulnerabilities for which there are available software patches,” but that firms and service providers need to implement the patches. Agencies continue to monitor what may be the first in a series of attacks.
SEC Office of Compliance and Examinations (OCIE) and FBI Issue Responses. The OCIE released a statement cautioning registrants to be vigilant in mitigating risk, and noted a recent OCIE study that determined a substantial number of registrants did not conduct periodic risk assessments, penetration tests, or vulnerability scans, while a smaller number had not updated critical security patches. The OCIE also provided links to guidance on cybersecurity risk management. Likewise, the FBI issued a bulletin providing guidance on additional protection measures following the attack.
Bipartisan Legislation Introduced. On May 17, bipartisan legislation was introduced in the House and Senate to add transparency and accountability to the federal government process for retaining or disclosing vulnerabilities in technology products, services, applications, and systems. The bill, Protecting our Ability To Counter Hacking (PATCH) Act, follows the apparently leaked NSA hacking tool which opened the door to the global “WannaCry” ransomware attack. It is sponsored by Senators Brian Schatz (D-Haw.), Ron Johnson (R-Wis.), and Cory Gardner (R-Colo.), and Representatives Ted Lieu (D-Cal.) and Blake Farenthold (R-Tex.). As described in a release issued by Sen. Schatz’s office, the proposed legislation would make the Vulnerabilities Equities Process (VEP) more permanent, while altering its structure. It would also make the Department of Homeland Security the chair of the interagency board overseeing the VEP. Under the bill, the NSA and other security agencies would still be a permanent part of the board, while other agencies and the White House's National Security Council could attend meetings if the board deems it necessary. The established board would also produce a report for Congress on the policies it establishes regarding the disclosure of vulnerabilities no later than 180 days after the enactment of the Act. An unclassified version of the report will be publicly available as well. “Striking the balance between U.S. national security and general cybersecurity is critical, but it's not easy,” Sen. Schatz noted. “This bill strikes that balance. Codifying a framework for the relevant agencies to review and disclose vulnerabilities will improve cybersecurity and transparency to the benefit of the public while also ensuring that the federal government has the tools it needs to protect national security.”
Coalition for Cybersecurity Policy and Law. The legislation has already received support. The Coalition issued the following statement in support of the proposed bill: “We support the goals of the PATCH Act and we look forward to working with Chairman Johnson, Senators Schatz and Gardner, and Reps. Lieu and Farenthold as it moves forward in both chambers. The events of the past week clearly demonstrate the real-world consequences of exploited vulnerabilities. Governments have a critical role in getting vulnerability information to organizations capable of acting to protect security in a timely manner upon discovery.”
DOJ Enters $89 Million Settlement with Texas-Based Bank in False Claims Act Matter
On May 16, the U.S. Department of Justice (DOJ) announced that a Texas-based bank (Bank) agreed to settle the DOJ’s allegations that it violated the False Claims Act and FIRREA by wrongfully seeking payments from a federally insured reverse mortgage program. To protect lenders, HUD provides mortgage insurance through a program administered by the Federal Housing Administration (FHA) on reverse mortgage loans, in which seniors borrow money against the equity they have in their homes. The DOJ alleged that the Bank sought to obtain insurance payments for interest from the FHA despite failing to properly disclose on the filed insurance claim forms that the mortgagee was not eligible for such interest payments because it had failed to meet various deadlines relating to appraisal of the property, submission of claims to HUD, and pursuit of foreclosure proceedings. As a result, from approximately 2011 to 2016, the mortgagees on the relevant reverse mortgage loans serviced by Bank “allegedly obtained additional interest that they were not entitled to receive.” The Bank agreed to pay more than $89 million to resolve the allegations, of which $1.6 million will be paid to the individual who filed the lawsuit under the whistleblower provisions of FIRREA.
Company Accused of Bilking 9/11 First Responders Out of Millions of Dollars Says CFPB Action Unlawful
On May 15, a New Jersey-based finance company and its affiliated parties filed a motion to dismiss allegations that it scammed first responders to the World Trade Center attack and NFL retirees with high-cost loans. As previously covered in InfoBytes, the CFPB and the New York Attorney General’s office (NYAG) claimed the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants’ motion to dismiss 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 defendants argue, the complaint issued against them is a “prime example of how the unchecked authority granted to the CFPB leads to administrative overreach that has a profound effect on the businesses and individuals the agency targets.”
In response to the claims that they mischaracterized credit, the defendants assert that the complaint is “based on the erroneous theory that—despite clear contractual terms and the weight of legal authority to the contrary—these transactions are not true sales, but instead are ‘extensions of credit’ under the Consumer Financial Protection Act [(CFPA)], and therefore the [defendants] deceived consumers by labeling the agreements as sales.” The CFPA defines an extension of “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” In this instance, the defendants contend, there is no debt, no repayment obligation, and no “right granted to defer payment of a debt” because the consumers are the sellers of the asset.
The defendants argue that (i)“the CFPB’s unprecedented structure violates fundamental constitutional principles of separation of powers, and the CFPB should be struck down as an unconstitutional administrative agency”; (ii) because these transactions do not fall into the CFPA’s definition of credit, the case lacks a federal cause of action; and (iii) “each cause of action in the [c]omplaint individually fails to state a claim for relief, including because the Government is flat out wrong in its contention that the underlying settlement proceeds are not assignable.”
Ninth Circuit Grants Petition to Hear FTC v. AT&T Appeal En Banc
On May 9, the Court of Appeals for the Ninth Circuit granted a petition for rehearing en banc filed by the FTC in a case involving whether the Commission may regulate an internet service provider’s slowing down of data after a customer has used a specified amount of data under an “unlimited” plan.
The FTC’s 2014 complaint alleged that AT&T’s practice of “data throttling,” and its subsequent failure to adequately inform its customers of this practice, violated Section 45(a) of the FTC Act. A federal district court dismissed the complaint, rejecting AT&T’s argument that it was exempt from FTC Section 45(a) enforcement because it is a common carrier. Section 45(a) allows the Commission to “prevent persons, partnerships or corporations, except . . . common carriers . . . from using . . . unfair or deceptive acts or practices” (emphasis added). The court held, however, that the common carrier exception applies only when the entity has the status of a common carrier and is engaging in common carrier activity. The district court order also held that “[w]hen this suit was filed, AT&T’s mobile data service was not regulated as common carrier activity by the [FCC],” and that “[o]nce the Reclassification Order of the [FCC] (which now treats mobile data [service] as common carrier activity) goes into effect, that will not deprive the FTC of any jurisdiction over past alleged misconduct as asserted in this pending action.”
In 2016, a three-judge Ninth Circuit panel reversed, holding that AT&T is exempt from Section 45(a) as a common carrier. See Fed. Trade Comm'n v. AT&T Mobility LLC, 835 F.3d 993 (9th Cir. 2016). The en banc court’s order vacates that ruling pending review by the full Ninth Circuit. Per the Ninth Circuit’s May 10 order, en banc oral argument will occur the week of September 18, 2017. The exact date and time will be announced in a separate order. Notably, given the recent uncertainty over which regulatory agency will oversee common carriers—the FTC or the FCC—the timing of this ruling is important.