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CFPB Orders Law Firm to Comply with CID
On April 10, the CFPB issued a Decision and Order denying a law firm’s petition to set aside a civil investigative demand (CID) asking for information about the firm’s business practices to determine whether debt relief providers or lead generators engaged in “unlawful acts or practices in the advertising, marketing, or sale of debt relief services or products, including but not limited to debt negotiation, debit elimination, debt settlement, and credit counseling.” Specifically, the Bureau determined that none of the objections raised by the law firm warrant setting aside or modifying the CID.
On March 19, the firm filed a petition to set aside the CID (issued on February 27, 2017), offering four key reasons why the CID should not be enforced:
- the CFPB’s structure is unconstitutional and the CID should be stayed pending the PHH Corp. v. CFPB case;
- the CFPB lacks supervisory and enforcement authority with respect to the law firm;
- the CID’s requests are “excessively vague and overly broad”; and
- the CID was issued after the Bureau failed to prevail on a contempt order before the district court.
In responding to these arguments, the CFPB took the following positions. First, the Bureau contended that the law firm had waived its objection to the Bureau’s authority by failing to raise it during the meet-and-confer process with Bureau enforcement counsel. Second, the CFPB noted that under the Consumer Financial Protection Act, the Bureau has the authority to issue CIDs to “any person” who may have relevant information. Third, the Bureau disagreed that the requests in the CID were “excessively vague and overly broad,” and stated that the time to have raised this challenge was during the meet-and-confer process. However, the Bureau stated it is willing to engage in further discussions to determine if modifications may be appropriate. Fourth, the Bureau determined that the mere fact that the law firm in question was never held in contempt by a court of law does not preclude the CFPB “from issuing a CID or investigating whether it violated federal consumer financial law.” Pursuant to the Decision and Order, the law firm is required to produce documents and provide answers to interrogatories within 10 calendar days.
President Trump Issues Two Memoranda to Treasury; Instructs Secretary to Review FSOC Processes for Designating Nonbank Financial Companies as SIFIs and Treasury’s Orderly Liquidation Authority under Dodd-Frank
On April 21, President Trump issued a Presidential Memorandum directing the Secretary of the Treasury to conduct a review of the Financial Stability Oversight Council (FSOC) processes for determining whether nonbank financial companies are financially distressed and designating nonbank financial companies as “systemically important.” The memorandum explains that a review of these processes is needed because the designations “have serious implications for affected entities, the industries in which they operate, and the economy at large.” The memorandum requires the Secretary to report within 180 days on whether:
- the FSOC’s processes are sufficiently transparent and provide adequate due process protections;
- a FSOC designation “give[s] market participants the expectation that the Federal Government will shield supervised or designated entities from bankruptcy”;
- a determination regarding a nonbank’s systemic importance should include “specific, quantifiable projections of the damage that could be caused to the United States economy”;
- the processes appropriately account for the costs of designation; and
- potential designees receive adequate guidance on how to reduce their perceived risk and a “meaningful opportunity to have their determinations or designations reevaluated in a timely and appropriately transparent manner.”
The memorandum further directs the Secretary to include SIFI designation recommendations, including any proposed legislative measures, for improving the processes and opine on whether such processes are consistent with the Administration’s “Core Principles.” The secretary is also directed to make any recommendations for legislation or regulation that would further align FSOC’s activities with the Core Principles.
The President issued a second Memorandum, directing the Secretary to review and report on the Orderly Liquidation Authority (OLA) under Dodd-Frank, with the goal of understanding the “OLA’s full contours and acknowledge the potentially adverse consequences of its availability and use.” Specifically, the memorandum requires that the Secretary assess the following:
- “the potential adverse effects of failing financial companies on the financial stability of the United States”;
- whether the framework for employing OLA is consistent with the Core Principles;
- whether “invoking OLA could result in a cost to the general fund of the Treasury”;
- whether the use or availability of OLA could lead to excessive risk taking or . . . otherwise lead[] market participants to believe that a financial company is too big to fail; and
- whether a new chapter in the U.S. Bankruptcy Code would be a “superior method of resolution for financial companies.”
The memorandum also requires that Secretary’s review include a quantitative evaluation of OLA’s “anticipated direct and indirect effects” as well as recommendations for improving OLA. The memo also directs the Treasury Department to refrain from making any systemic risk determination unless it determines, in consultation with the President, that the Doff-Frank criteria require otherwise.”
At the signing of the memo, Treasury Secretary Steven Mnuchin delivered prepared remarks, in which he assured the President and the Public that the Treasury will “work tirelessly” in its efforts to “provide a clear analysis of the extent to which the OLA encourages inappropriate risk-taking and the extent of potential taxpayer liability.”
Credit Unions, Small Banks Encourage Fed Payments System Operational Role
On April 18, three industry organizations representing community banks and credit unions—the Credit Union National Association (CUNA), the Independent Community Bankers of America (ICBA), and the National Association of Federally-Insured Credit Unions (NAFCU)—sent a letter urging the Federal Reserve System (Fed) to provide central bank settlement services in support of private sector development of future payment systems, rules, and standards. The letter also urges the Fed to take on three operational roles in addition to settlement capabilities: (i) to serve as an “on-ramp” to real-time payments; (ii) to serve as a real-time payments operator, much as it currently is an operator for checks, automated clearinghouse payments, and wire transfers; and (iii) to maintain a “payments directory” that would link together financial institutions and private-sector payments directories. The organizations argue, among other things, that the Fed’s commitment to these operational roles is critically important to achieving the “much-needed goals of safety, equitable access, and ubiquity” in developing an improved payments system. The letter emphasizes that the organizations are not requesting that the Fed develop rules or standards for real-time payments, but rather take the position that such efforts “should be left for private sector rules and standards organizations.”
As previously covered by InfoBytes, the Fed created the Faster Payments Task Force and the Secure Payments Task Force in June 2015 to lead industry efforts toward a speedier and better payments system. The CFPB also issued a set of guiding principles aimed to help private industry better protect consumers as new, faster electronic payment systems continue to emerge. (See InfoBytes coverage) The April 18 letter “applaud[s] the formation of both [Task Forces]” and “strongly encourage[s] the ongoing commitment of the [Fed] to lead and catalyze payments industry activities until the desired outcomes stated in the 2015 Strategies for Improving the U.S. Payments System paper are achieved.”
Banking Regulator Admits to Flaws in Supervision of Community Banking Sales Practices
On April 19, the OCC released a report detailing the results of an internal review that concedes the regulator’s oversight of a national bank’s consumer complaints and whistleblower cases was “untimely and ineffective” and that OCC supervisors missed or failed to address warning signs throughout the course of the bank regulator’s recent investigation. The objective of the internal review was to, among other things, “identify gaps in supervision,” and “[d]etermine if there are lessons learned that can result in improved supervision process.” The report—which was prepared by the OCC’s Office of Enterprise Governance (OEG) and the Ombudsman—concluded, among other things, that OCC supervisors had “focused too heavily on bank processes versus what those processes were actually reporting,” and notes that the OCC’s internal review “found no evidence that supervisory activities included in-depth review and testing of monitoring systems and controls” over incentives-based sales compensation or sales integrity. In addition to identifying “lessons learned” and “missed opportunities,” the report also sets forth general recommendations that it believes the OCC’s large bank supervision division should consider in order to improve their practices going forward, including that the regulator “[d]evelop an enterprise-wide whistleblower process and update external-facing interfaces . . . to inform the public or other governmental agencies how to communicate whistleblower information to the OCC,” and that it also “[e]nsure issues or concerns are followed through to effective corrective action.”
House Financial Services Committee to Discuss the “Financial CHOICE Act” at April 26 Hearing
On April 19, House Financial Services Committee Chairman Jeb Hensarling (R-TX) announced that the Committee will hold a hearing to discuss the Financial CHOICE Act next Wednesday, April 26. Touted as a potential replacement for the Dodd-Frank Act, the proposed new law—which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs—was unveiled last June by Chairman Hensarling in a speech to the Economic Club of New York and was subsequently approved by the Committee last September. The hearing will focus on an updated discussion draft of the bill at next Wednesday’s hearing.
If enacted, the Financial CHOICE Act would, among other things, tailor a bank’s supervision to its risk profile/business model and provide for an independent exam appeals process, while also providing for and imposing more stringent penalties in cases of fraud or deception. Other provisions of the bill would repeal the Volcker Rule, strip the CFPB of its examination powers, and “UDAAP” enforcement authority and also discontinue small business loan data collection. And, finally, the Act would bring the CFPB, FDIC, OCC, FHFA, NCUA, and the Fed’s supervisory functions under the congressional appropriations process, thereby mandating a cost-benefit analysis and, in some cases, congressional approval prior to the release of any new regulations.
According to a press release from GOP Committee members, the proposed new law is based upon two central principles: (i) “all banks need to be well-capitalized” but (ii) “Dodd-Frank’s one-size-fits-all regulations . . . make[] no sense and hurt[] smaller, hometown banks and credit unions that did nothing to cause the last financial crisis.” To this end, the Financial CHOICE Act seeks to ease capital standards for community banks and credit unions that “elect to maintain enough capital to ensure that if they get in trouble, taxpayers won’t be forced to bail them out.” Meanwhile, offering a very different response to the release of an updated draft of the bill, Maxine Waters (D-CA), the Ranking Member of the Financial Services Committee, released a statement reiterating numerous objections to what she terms “the Wrong Choice Act.” Among other things, Rep. Waters argues that the proposed law “prioritize[s] the needs of Wall Street over the needs of hard-working Americans,” and “would take away much needed protections and put our economic security at risk.”
CFPB Issues Final Rule Delaying Effective Date for Prepaid Accounts Rule to April 1, 2018
On April 20, the CFPB released a final rule delaying the general effective date of its rule governing prepaid accounts by six months, to April 1, 2018. As previously covered in InfoBytes, the Bureau, after reviewing comments, decided last month to delay the effective date of the rule—which, among other things, provides consumers with additional federal protections under the Electronic Fund Transfer Act on prepaid financial products, mobile wallets, person-to-person payment products, and other electronic accounts with the ability to store funds. The CFPB explained that the six-month extension “provides for an appropriate balance between the interests of the consumers who will receive the benefits of the rule and the needs of industry for an adequate implementation period.” For additional background information, please see our earlier InfoBytes coverage of the Prepaid Rule.
CFPB Releases Updates to Rulemaking Ex Parte Policy
On April 18, the CFPB issued a release revising its Policy on Ex Parte Presentations in Rulemaking Proceedings. The Policy, originally posted on the Bureau’s website on August 16, 2011, generally requires public disclosure of ex parte communications made to the CFPB’s decision-making staff about pending rules. Per the release, the Bureau asserts that the updates are based on feedback from the public as well as the Bureau’s experiences in implementation and are intended to ensure “fairness and transparency in [the Bureau’s] rulemaking proceedings while also encouraging candid input from state entities.” The majority of the revisions are non-substantive and serve to “clarify the Policy’s provisions and requirements, ensure consistency in terminology . . ., make technical amendments, and facilitate compliance with the procedures in the Policy.” However, the revision includes two key updates. First, it adds an exemption for state entities, similar to the exemption that exists for Federal agencies. These state entities include state attorneys general or their equivalents, state bank regulators, and “state agencies that license, supervise, or examine consumer financial products or services.” The Bureau states that due to the sometimes sensitive nature of the communications from the entities, it “believes that these entities are likely to provide more frank and robust feedback if communications are not subject to the disclosure requirements of the Policy.” A second key update to the Policy specifies that outside parties no longer bear responsibility for both sending ex parte communications to the Bureau and posting them to regulations.gov. Rather, stakeholders are instructed to send communications directly to the Bureau, and Bureau staff will post the communications to the public docket. The updated Policy also extends the time period for outside parties to summarize meetings and presentations from three to ten business days.
GAO Publishes Study Examining Fintech Industry Regulation
On April 19, the U.S. Government Accountability Office (GAO) published a study examining four “subsectors” within the fintech industry—marketplace lenders, mobile payments, digital wealth management platforms, and distributed ledger technology (also known as blockchain)—and highlighting the types of products and services offered and how they are regulated. The report, Financial Technology – Information on Subsectors and Regulatory Oversight, is the first in a series of planned reports on fintech, following a request by Congress for a review of issues related to the industry. From July 2016 to April 2017, GAO reviewed agency publications, guidance, final rulemakings, initiatives, and enforcement actions, and also conducted interviews with representatives from the federal prudential regulators, state supervision agencies, and trade associations in order to compile the findings in the report. The report provides an overview of the technologies associated with each subsector, identifies primary users of the products and services, notes potential benefits and risks, and highlights industry trends and current regulations and oversight. Notably, GAO stated it made no recommendations in this report.
Dallas Fed Explores Reasons Why Community Banks are “Flipping to State Charters”
Released earlier this month, the latest issue of the Federal Reserve Bank of Dallas’ Quarterly Publication Financial Insights, takes a closer look at the causes behind a recent trend in community banks opting to change from a national to a state charter. As explained in the article—entitled Community Banks Flipping to State Charters—“[v]ery few commercial banks—only about 1 percent—change charters in any given year,” but, “of those that do change charters, twice as many are choosing a state charter.” Indeed, according to the authors, “[o]f the 780 community banks that changed charters between 1995 and 2015, 529 left the control of the [OCC].” Having analyzed data from the National Information Center (NIC), the authors conclude that motivations for changing to a state charter vary broadly “from cost to culture,” but that “[b]roadly speaking, charter choice is generally a question of whether the higher assessment cost often associated with a national charter is offset by the benefits of operating under a single set of laws and regulations.”
Supreme Court Hears Arguments on Whether a Debt Collector Who Purchases the Debt is Liable Under the FDCPA
On April 18, the United States Supreme Court heard oral argument in Henson v. Santander Consumer USA, Inc., Dkt. No. 16-349, on the question of “[w]hether a company that regularly attempts to collect debts it purchased after the debts had fallen into default is a ‘debt collector’ subject to the Fair Debt Collection Practices Act [FDCPA].” The case arose out of a class action filed by four consumers who had defaulted on automobile loans made by an auto lending affiliate of a major bank. The originator hired Respondent to collect the loans on behalf of the lender and Respondent later purchased the delinquent loans as part of a pool. Though Petitioners did not allege that debt collection was the principal purpose of the Respondent’s business, the consumer-plaintiffs had claimed that the Respondent regularly buys and attempts to collect defaulted debts, and that, in this instance, the Respondent engaged in conduct that violated the FDCPA after it bought the loans. The Petitioner needed to establish, among other things, that the Respondent was a debt collector under the FDCPA and that the loans were in default when they were acquired.
In March 2016, the U.S. Court of Appeals for the Fourth Circuit rejected the consumers’ arguments, concluding that the FDCPA “generally does not regulate creditors when they collect debt on their own account and that, on the facts alleged by the plaintiffs, [the defendant] became a creditor when it purchased the loans before engaging in the challenged practices.” Accordingly, the Fourth Circuit noted that the originator of the loans was irrelevant. In September 2016, the consumer-plaintiffs filed a cert petition with the Supreme Court, which was subsequently granted on January 13. Attorneys general from 28 states and the District of Columbia also joined in an amicus brief supporting the consumers’ argument.
At oral argument before the Supreme Court, the Petitioners cited 15 U.S.C. §1692a(6)(F) and argued that the debts are "owed" to the original lender, but are "due" to the debt buyer. As such, argued Petitioner, a debt buyer should be considered to be collecting debts “owed or due another,” and thus fall within the FDCPA definition of a “debt collector”. Respondent countered that “owed or due another” could only mean that the debt is currently owed to another person. However, Respondent argued, as a debt buyer, it was collecting debts owed to itself, and thus would not be a “debt collector” under the FDCPA. Both sides also presented policy-based arguments. Petitioner suggested that because Respondent was considered a “debt collector” before purchasing the loan, it could not remove itself from the scope of the FDCPA by purchasing the debts. Conversely, Respondent noted that, by purchasing essentially all of the original lender’s loans it had “stepped into [the lender]’s shoes.” Counsel emphasized that Respondent therefore fit the FDCPA definition of “creditor,” and, as a creditor, it had an incentive to maintain a positive relationship with consumers.