InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Supreme Court holds SEC ALJs are subject to the Appointments Clause of the Constitution
On June 21, the U.S. Supreme Court held, in Lucia v. SEC, that SEC administrative law judges (ALJs) are “inferior officers” subject to the Appointments Clause (Clause) of the Constitution. The case began when the SEC instituted an administrative proceeding against the petitioner resulting in a decision by the ALJ imposing sanctions against the petitioner, including civil penalties of $300,000 and a lifetime bar from the investment industry. On appeal, the D.C. Circuit Court of Appeals upheld the ALJ’s sanctions and rejected the petitioner’s argument that ALJs are officers of the United States and therefore subject to provisions of the Clause, including the requirement that officers be appointed by the president, the head of a department, or a court of law. The D.C. Circuit decision conflicts with subsequent decisions by the U.S. Court of Appeals for the 10th and 5th Circuits (available here and here).
In a 6-3 decision, the Supreme Court reversed the D.C. Circuit decision, holding that ALJs are “Officers of the United States” subject to the Clause under the framework the Court used in Freytag v. Commissioner (concluding that U.S. Tax Court “special trial judges” are officers subject to the Clause). In support of this holding, the majority noted that ALJs receive a career appointment, exercise “significant discretion,” and if the SEC decides against reviewing a decision, their decisions become final and are “deemed the action of the Commission.”
Notably, the ALJ that presided over the petitioner’s case is the same ALJ that presided over the CFPB’s claims against PHH, which ultimately lead to the D.C. Circuit’s en banc decision in PHH v. CFPB and the CFPB’s subsequent dismissal of the action (covered by Buckley Sandler here and here).
NYDFS fines global banking firm $205 million for alleged FX violations
On June 20, the New York Department of Financial Services (NYDFS) announced a $205 million settlement with a global banking firm to resolve allegations that the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to the consent order, the bank did not implement and maintain sufficient controls to identify and prevent unsafe and unsound activities conducted by certain FX traders. Among other things, the order states that FX traders (i) used electronic chatrooms to coordinate trading activity with competitors to improperly affect FX prices; (ii) engaged in a practice known as “jamming the fix,” which entails accumulating a large trading position and subsequently making aggressive trades with the intention of moving the fix price in a desired direction; (iii) disclosed confidential customer information to competitors through electronic chatrooms; and (iv) mislead customers by hiding markups on trades. In addition to the fine, the bank is required to improve its internal controls and programs to comply with applicable New York State and federal laws and regulations, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program.
Court allows certain City of Oakland claims to proceed against national bank
On June 15, the U.S. District Court for the Northern District of California granted in part and denied in part a national bank’s motion to dismiss an action brought by the City of Oakland, alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its September 2015 complaint, Oakland alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue for the city. After the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Sandler Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices, Oakland filed an amended complaint. The amended complaint expanded Oakland’s alleged injuries to include (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) neutralized spending in Oakland’s fair-housing programs. The bank moved to dismiss all of Oakland’s claims on the basis that the city had failed to sufficiently allege proximate cause. The court granted the bank’s motion without prejudice as to claims based on the second alleged injury to the extent it sought monetary relief and claims based on the third alleged injury entirely. The court allowed the matter to proceed with respect to claims based on the first injury and, to the extent it seeks injunctive and declaratory relief, the second injury.
Bitcoin and ether not considered securities by SEC
On June 14, the Director of the SEC Division of Corporation Finance, William Hinman, stated that the SEC does not consider the cryptocurrencies bitcoin and ether to be securities. In his remarks at the Yahoo Finance All Markets Summit, Hinman emphasized a number of factors that are considered when assessing whether a cryptocurrency or ICO should be considered a security. These factors include, primarily, whether a third party drives the expectation of a return—the central test used by the Supreme Court in SEC v. W.J. Howey Co.. According to Hinman, bitcoin’s and ether’s networks are decentralized without a central third party controlling the enterprise and, thus, applying the disclosure rules of federal securities laws to these cryptocurrencies would add little value to the market. Hinman did note that whether something is considered a security is not static and emphasized that if a cryptocurrency were to be placed into a fund and interests were sold, the fund would be considered a security.
New York Fed report finds CFPB oversight does not significantly reduce volume of mortgage lending
The Federal Reserve Bank of New York (New York Fed) released a June 2018 Staff Report titled “Does CFPB Oversight Crimp Credit?” which concludes that there is little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending. The report compared the lending outcomes of companies subject to CFPB oversight with smaller institutions below $10 billion in total assets that are exempt from CFPB supervision and enforcement activities, as well as lending outcomes before and after the CFPB’s creation in July 2011. Using HMDA data, bank balance sheets, and bank noninterest expenses, the report concluded, among other things, that (i) CFPB oversight may have changed the composition of lending—supervised banks originated fewer loans to lower-income, lower-credit score borrowers; (ii) there has been a drop in lending to borrowers with no co-applicant by CFPB supervised banks; and (iii) there has been an increase in origination of “jumbo” mortgage loans by CFPB supervised banks. The report noted that its results do not speak to the effect of the CFPB’s rulemaking, such as the TILA-RESPA integrated disclosure rule.
Auto finance company agrees to $19.7 million preliminary class action settlement over extra lease fees
On June 15, the lead plaintiff filed a motion in the U.S. District for the Southern District of Florida for preliminary approval of an approximately $19.7 million class action settlement between a group of consumers and an auto finance company over allegations that extra fees were charged beyond the set purchase option price disclosed in certain vehicle lease contracts. According to the motion, the lead plaintiff alleged that after he chose to purchase his vehicle at the end of his lease term and he was charged extra third-party fees not included in his original lease contract. The class action complaint alleges violations of the Consumer Leasing Act and breach of contract. The settlement class consists of consumers nationwide who entered into certain lease contracts with the company, purchased their leased vehicle after June 4, 2009, and that were required to pay a documentary or dealer fee not disclosed in the lease contract, which allegedly averages about $238 per consumer. The settlement would allow prospective opt-in members to submit a claim for repayment of 100% of the extra fees charged. The $19.7 million settlement figure was determined using a statistically significant sample of the transactional records available and includes up to $2.95 million in attorneys costs and fees. The settlement is awaiting the court’s approval.
Comptroller Otting discusses regulatory priorities during congressional testimonies
On June 13 and 14, Comptroller of Currency Joseph Otting appeared before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs to discuss his priorities as Comptroller. As highlighted in the identical press releases for both House and Senate hearings, Otting testified about the OCC’s achievements and efforts since being sworn in as Comptroller in November 2017. Among other things, Otting discussed the agency’s efforts to (i) modernize the Community Reinvestment Act (CRA); (ii) promote compliance with the Bank Secrecy Act and anti-money laundering regulations (BSA/AML); and (iii) simplify the Volcker Rule, particularly for small and mid-size banks. Otting emphasized in his written testimony that his priority is to reduce the regulatory burden on financial institutions, specifying that the CRA requirements have become "too complex, outdated, cumbersome, and subjective." To that end, Otting stated that the OCC, in coordination with other federal agencies, is preparing an advance notice of proposed rulemaking to gather information on potential CRA updates, which, in Otting’s view, should include (i) expanding the types of activities that are eligible for CRA credit; (ii) changing assessment areas so they are not based solely on where the bank has a physical presence; and (iii) providing clearer metrics. As for BSA/AML, Otting noted this was his “number two issue” behind reforming the CRA and the working group—the OCC, FinCEN, the FDIC, the Federal Reserve, and NCUA— will likely address key issues like de-risking and improvement of transparency over the next three to six months. Otting noted his pleasure with the Volcker Rule changes in the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155/ P.L. 115-174) but cautioned that fine-tuning may be necessary as the OCC proceeds with implementation.
Trump intends to nominate Kathleen Kraninger to be director of the CFPB
On June 18, the White House announced President Trump’s selection of Kathleen Kraninger to be the director of the CFPB for a five-year term. Kraninger currently serves as the associate director for general government at the Office of Management and Budget (OMB). Prior to OMB, Kraninger worked at the Department of Homeland Security and in Congress on the House and Senate Committees on Appropriations. Mick Mulvaney, the acting director of the Bureau and director of OMB, supervises Kraninger in her current role. In a statement commending the selection, Mulvaney emphasized that Kraninger is likely to follow his example, “I have never worked with a more qualified individual than Kathy… I know that my efforts to rein in the bureaucracy at the [Bureau] to make it more accountable, effective, and efficient will be continued under her able stewardship.” While the Federal Vacancies Reform Act (FVRA) required the president to nominate a new director prior to June 22nd, Mulvaney is likely to remain the acting Bureau director for the foreseeable future, as FVRA allows Mulvaney to continue in the acting capacity until the Senate confirms or denies Kraninger’s nomination. If Kranginger’s nomination fails, FVRA would allow Mulvaney to restart a new 210-day period as acting director of the Bureau and to continue serving if the president makes another nomination before that period ends.
CA Attorney General secures $67 million in debt relief for former students of defunct for-profit school
On June 13, the Superior Court of the State of California ordered a California-based student loan provider to halt all debt collection efforts and forgive the balances on over 30,000 private student loans, which were used for programs at a now defunct for-profit college. According to the announcement by the California Attorney General, Xavier Becerra, the debt relief totals $67 million for the former students. The complaint, filed on the same day as the order, alleges the company engaged in unlawful debt collection practices, including sending borrowers notices threatening legal action, to collect on the student loans at issue. In addition to the debt forgiveness, the order requires the company to (i) refund all payments made on the student loans by California-residents after August 1, 2017; (ii) refund payments made prior to August 1, 2017 by borrowers who received allegedly unlawful debt collection notices; and (iii) delete negative credit reporting associated with the student loans for all of the for-profit students around the country.
As previously covered by InfoBytes, in a class action filed by former students, the Department of Education was recently barred by a preliminary injunction from continuing collection efforts on student loans used for the same defunct for-profit college.
National bank and coalition of 42 Attorneys General settle LIBOR action for $100 million
On June 15, the New York Attorney General, along with 41 other state Attorneys General, announced a $100 million settlement with a national bank for allegedly fraudulent conduct involving U.S. Dollar LIBOR. According to the settlement agreement, the bank “misrepresented the integrity of the LIBOR benchmark” to government and private institutional counterparties. The bank allegedly concealed, misrepresented, or failed to disclose information to “avoid negative publicity and protect the reputation of the bank,” including, among other things, asked employees in other sections of the bank avoid offering higher rates than the bank’s USD LIBOR submissions. Additionally, contributing to inaccurate LIBOR benchmark rates, the bank allegedly was aware that other financial institutions made USD LIBOR submissions that were inconsistent with their borrowing rates. The bank is required to pay $95 million into a settlement fund, which government and non-profit entities with LIBOR-linked investments from the bank may be eligible for distribution, while the remaining $5 million will cover costs and fees associated with the investigation and settlement.