Treasury Secretary Mnuchin Highlights Concerns Regarding Cybersecurity

On March 24, 2017, Treasury Secretary Steven Mnuchin gave a speech in which he identified cybersecurity as his primary concern regarding the financial sector.  Secretary Mnuchin said in his remarks that ensuring a “safe and sound financial sector” requires cooperation and investment among the various financial regulators.  The Secretary emphasized that he wants regulatory agencies to focus on incorporating cybersecurity in all oversight responsibilities.

In October, the federal banking agencies issued an ANPR (covered here) on enhanced cyber risk standards for certain large financial institutions.  The ANPR represented a step toward a coordinated approach to cybersecurity regulation among financial regulators, though it is unclear whether the ANPR will progress to a formal proposal under the new administration.

CFPB Complaint Against Intercept Corporation is Dismissed for Failure to State a Claim

On March 17, 2017, the U.S. District Court for the Eastern District of North Dakota dismissed without prejudice the CFPB’s complaint against third-party payment processor Intercept Corporation and two of its executives for failure to state a claim.

The CFPB’s June 2016 complaint alleged that defendants had violated the Consumer Financial Protection Act (the “CFPA”) by engaging in “unfair acts and practices,” including the processing of transactions for clients, including consumer lenders, when defendants knew or should have known that those transactions were fraudulent and illegal.  Specifically, the CFPB alleged that defendants:  (i) failed to heed warnings from banks and consumers that their clients’ activities were likely illegal or that debits were not authorized by consumers; (ii) failed adequately to monitor and respond to high rates at which consumers and consumers’ banks refused Intercept clients’ attempts to withdraw payments; (iii) ignored law enforcement activity relating to Intercept clients and continued processing for the clients despite knowledge of these red flags; and (iv) failed to investigate red flags in the client application process, basing Intercept’s acceptance of a client solely on a “risk assessment” aimed at determining a client’s ability to pay in the event of loss.

The court concluded that the complaint did not “contain sufficient factual allegations to back up its conclusory statements regarding Intercept’s allegedly unlawful acts or omissions.” To survive defendants’ motion to dismiss, the court noted that the CFPB’s complaint must allege facts demonstrating that defendants’ actions amounted to an “unfair” act or practice.  The court found that the CFPB’s complaint neither alleged facts demonstrating that consumers were injured or likely to be injured, nor contained facts to enable the defendants or the court to ascertain whether any potential injury was outweighed by countervailing benefits to consumers, both elements of an unfairness claim.  The court further noted that the complaint failed to identify how Intercept’s response to alleged “red flags” caused harm or was likely to cause harm to consumers.

Based on the foregoing analysis, the court held that the CFPB’s complaint failed to state a claim for “unfair” acts or practices and granted defendants’ motion to dismiss, without reaching any decision relating to the Bureau’s  constitutionality.  However, because the case was dismissed without prejudice, the defendants’ victory may be short-lived, as the CFPB has the opportunity to renew the action and allege additional facts supporting its claims; there is no substantive holding in the court’s opinion that a payment processor cannot be held liable for unfair acts and practices under the CFPA.

United States Files Amicus Brief in PHH Case

On March 17, 2017, the U.S. Department of Justice filed a Brief for the United States as Amicus Curiae in PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. 2016), a case challenging the constitutionality of the CFPB’s single-director structure pending before the U.S. Court of Appeals for the District of Columbia Circuit. As discussed in a previous post, on February 17, 2017, the D.C. Circuit granted rehearing en banc and vacated the order of the three-judge panel striking down the CFPB’s structure as unconstitutional. The filing of the brief is timely, as en banc oral argument is scheduled for next Friday, March 24, 2017.

The United States limits its brief to the issue of whether the limitations on the President’s removal authority recognized by the U.S. Supreme Court in Humphrey’s Executor v. U.S., 295 U.S. 602 (1935), apply beyond multi-member regulatory commissions to an agency headed by a single Director. The Department of Justice explains “we do not agree with all of the reasoning” in the opinion of the three-judge panel, and its brief does not embrace the panel’s argument that the Bureau’s structure unconstitutionally impinges upon individual liberty. However, the United States supports the panel’s conclusion that single-headed agencies “are meaningfully different from the type of multi-member regulatory commission” addressed in Humphrey’s Executor. The United States thus urges the Court to strike down the Dodd-Frank Act’s for-cause removal provision, see 12 U.S.C. § 5491(c)(3), by finding that the single-Director CFPB violates the separation of powers under Article II of the Constitution. An earlier Department of Justice brief in this case, filed by the Obama Administration, had criticized the panel’s constitutional analysis.

Importantly, the United States concedes that the proper remedy for the Dodd-Frank Act’s for-cause removal provision is to sever the provision limiting the President’s authority to remove the CFPB Director, and does not seek a declaration that the entire agency or its operations is unconstitutional. The United States suggests, however, that it is appropriate for the Court to reach the constitutional issue. The earlier Department of Justice brief had suggested the Court may seek to avoid the constitutional issue by deciding the case on statutory grounds. Finally, the United States argues that the Court’s grant of rehearing en banc in Lucia v. SEC, 832 F.3d 277 (D.C. Cir. 2016), regarding the status of administrative law judges of the Securities and exchange Commission under the Appointments Clause of the Constitution should not affect the outcome of the PHH appeal.

OCC Issues Draft Licensing Manual for Evaluating Charter Applications from Fintech Companies

On Wednesday, the Office of the Comptroller of the Currency (“OCC”) issued a highly-anticipated draft supplement to its Licensing Manual (the “Supplement”) for evaluating applications from fintech companies for a special purpose national bank (“SPNB”) charter. The Supplement explains how the OCC will apply its existing licensing standards and requirements to these companies. The OCC is accepting comments on the Supplement until April 14, 2017.

This publication follows comments by Comptroller Thomas J. Curry at the LendIt conference indicating that supplemental licensing guidance for fintech companies would be released soon.  Shortly after these comments, Republicans on the House Financial Services Committee sent a letter to Comptroller Curry noting that his term expires in April and directing the OCC to subject any such guidance to public comment and to refrain from finalizing the guidance before the appointment of a new Comptroller.  The OCC does not typically offer the public an opportunity to comment on procedural manuals and supplements, a fact noted in the OCC press release, so the OCC may have been influenced by the House Republicans’ letter.

The Supplement reflects principles broadly consistent with a white paper released by the OCC in December 2016, which we discussed in detail in a previous client alert. The OCC received a number of comments on its white paper. These comments are cataloged and analyzed in a separate document, the Summary of Comments and Explanatory Statement, also released by the OCC yesterday.

Some highlights from the Supplement are discussed below.

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Trump Administration to nominate J. Christopher Giancarlo to serve as CFTC Chairman

On March 14, 2017, the White House announced that President Donald Trump intends to nominate J. Christopher Giancarlo, currently Acting Chairman of the Commodity Futures Trading Commission (“CFTC”), to serve as the CFTC’s permanent Chairman, subject to confirmation by the Senate. Acting Chairman Giancarlo joined the CFTC as a commissioner in 2014, and was named Acting Chairman on January 20, 2017, when Timothy G. Massad stepped down from that post.

Although the nomination of Acting Chairman Giancarlo as permanent Chairman has been expected, the move to make it official signals more clearly that, as we discussed in a previous client alert, the CFTC under the Trump administration will be moving in a significantly different direction. While we expect Acting Chairman Giancarlo to begin announcing his regulatory agenda in the near future, throughout his tenure at the CFTC he has articulated a clear vision of how the CFTC should operate as a regulator. Under Chairman Giancarlo, market participants can expect a shift in how the CFTC approaches a variety of issues, including swaps trading, cross-border harmonization, and technological innovation, in all cases adopting a flexible, forward-thinking approach in which the CFTC will encourage innovative solutions. Indeed, in remarks made since the election and since being named acting Chairman, he has made clear that he intends, as Chairman, to move the CFTC in the direction he foresaw as a commissioner. Moreover, in a recent speech, Giancarlo also announced an agency-wide review of CFTC rules, regulations and practices to make them “simpler, less burdensome and less costly.” This review, called “Project KISS,” is consistent with President Trump’s executive order to reduce regulatory burdens. Giancarlo further announced a reorganization within the agency, whereby the market surveillance function will be moved from the Division of Market Oversight (“DMO”) into the Enforcement Division. This will enhance the Enforcement Division’s ability to focus on market disrupting behavior, such as spoofing, manipulation and fraud. DMO will gain a new market intelligence branch, dedicated to identifying and analyzing current and emerging market trends. Finally, Giancarlo instructed the agency to undertake a financial technology review to make it a more effective and innovative regulator. Thus far, Giancarlo has shared his viewpoint that the CFTC should regulate in a manner that permits the markets to innovate and evolve.

FDIC Vice Chairman Hoenig’s Proposal for Regulation of Financial Holding Companies

As has been widely reported, FDIC Vice Chairman Thomas Hoenig put forward in remarks to the Institute of International Bankers on Monday, March 13, a “Market-Based Proposal for Regulatory Relief and Accountability” (the “Hoenig Proposal” or the “Proposal”).  If adopted, the Hoenig Proposal would substantially change the regulation of large and complex banking organizations doing business in the United States.

The Hoenig Proposal advances ideas that the Vice Chairman has long advocated concerning a new framework for bank regulation.  In 2015 and 2016, Mr. Hoenig proposed various types of regulatory relief for what he described as traditional commercial banks that maintained an equity-to-assets ratio (i.e., a leverage ratio) of at least 10 percent and met certain additional criteria.  The Proposal put forward earlier this week would apply to banking firms engaged in what are described as nontraditional activities—i.e., it would apply to financial holding companies (“FHCs”).  While the Proposal has no asset size threshold, embedded in it is a new systemic risk framework that would replace much of the approach of the Dodd-Frank Act applicable to the largest and most interconnected banking organizations.  The Proposal is of particular salience in light of statements from the White House that favor a reinstatement of Glass-Steagall-like restrictions of a sort set out in the Proposal, as well as speculation that Vice Chairman Hoenig is a contender to become the Federal Reserve’s Vice Chair for Supervision.

The most significant features of the Hoenig Proposal, some of which are intended to set a baseline for further discussion or development, appear after the jump.

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CFPB Issues RFI on Credit Card Market

On March 10, 2017, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a request for information regarding the consumer credit market (the “RFI”). Section 502 of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) requires the CFPB to conduct a biennial review of the credit card market, which the RFI is designed to inform.

The RFI seeks comment on topics related to how the credit card market is functioning. The topics included in the RFI may shed light on the Bureau’s future policy making and enforcement priorities in the credit card market.  Comments are due by June 8, 2017.

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Pence’s Chief Economist Previews CFPB Changes, Predicts Agency’s Continued Existence

On March 7, 2017, Mark Calabria, chief economist to Vice President Mike Pence, commented on the Trump administration’s likely approach to the CFPB during a panel at the National Association for Business Economics’ annual economic policy conference. The comments provide rare insight given that President Trump has not publicly detailed his thinking on reforming the agency.

Calabria, a former U.S. Senate aide and the Cato Institute’s former director of financial regulation studies, stated that the agency is unlikely to be repealed but will instead be altered so that it “actually goes after bad actors rather than mak[ing] policy decisions that have nothing to do with bad actors.” In particular, Calabria took issue with the CFPB’s efforts to limit payday loan rates, characterizing such limits as paternalistic and asserting that officials should not “second-guess” terms freely agreed to by lenders and borrowers.

In terms of specific legislative reforms, Calabria predicted that the administration will focus on subjecting the bureau to the regular congressional appropriations process as a way of increasing the agency’s accountability. In addition, Calabria indicated that he expects that increased oversight will restrain the CFPB from announcing policy through enforcement actions.

House and Senate Panels Advance SEC Proposals

On March 9, 2017, the House Financial Services Committee and Senate Banking Committee conducted their first legislative mark-ups in the new Congress and approved bipartisan bills to amend several SEC-related laws.  Observers have speculated that the simultaneous advancement of this package of bipartisan bills in both chambers may indicate that key legislators are open to pursuing financial reform efforts in narrowly focused stages rather than through comprehensive legislation.

The approved bills are reintroduced versions of bills that received consideration previously — in some cases receiving near-unanimous approval by the full House — without final enactment. They are summarized below.

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CFPB Proposes Extension of Effective Date for Prepaid Accounts Final Rule

On March 9, 2017, the CFPB released a proposal to delay the effective date for certain provisions of the prepaid accounts final rule for six months, from October 1, 2017, to April 1, 2018.  In its proposal, the CFPB indicated that the proposed extension was prompted by industry concerns about constraints on the ability to pull and replace prepaid card products and related packaging materials with non-compliant disclosures from retail locations before the effective date.  Comments on the proposal to delay the effective date are due 21 days after the proposal is published in the Federal Register.

The CFPB noted that a delayed effective date also would give it the opportunity to evaluate certain substantive aspects of the prepaid accounts final rule that were not anticipated or fully explained during the comment period.  Although the CFPB is not proposing any substantive amendments to the prepaid accounts final rule, the CFPB explained that the delay in the effective date would allow it “to assess whether any additional adjustments to the Rule are appropriate” and issue any proposed revisions it finds necessary and appropriate.  If the CFPB determines that further adjustments are necessary, it will issue a separate proposal. Continue Reading

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