Federal Reserve Eliminates SOSA Rating and Proposes New Standards for FBO Daylight Overdraft Capacity

On December 7, 2017, the Federal Reserve announced that it will eliminate the use of the Strength of Support Assessment (or “SOSA” rating) as a supervisory tool.  The SOSA rating measures the extent to which a foreign banking organization (“FBO”) is in a position to provide support to its U.S. branches, agencies, and subsidiary banks, by assessing internal and external factors such as home country risk.  The Federal Reserve currently uses the SOSA rating solely to calculate an FBO’s net debit cap for purposes of daylight overdraft capacity at a Federal Reserve Bank and to determine an FBO’s eligibility for discount window loans.  Accordingly, on December 11, 2017, the Federal Reserve issued a proposal to amend its Payments System Risk Policy to eliminate reliance on an FBO’s SOSA rating to calculating its net debit cap.  The proposal would also eliminate reliance on an FBO’s status as a financial holding company (“FHC”) to determine its net debit cap.

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FINRA Requests Comment on Proposed Amendments Related to the Expungement of Customer Dispute Information

On December 6, 2017, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 17-42 requesting comment on proposed amendments to the FINRA Codes of Arbitration Procedure relating to requests for expungement of customer dispute information.  FINRA Rule 2080 currently governs a member or associated person’s request to expunge information from the Central Registration Depository (“CRD”) system arising from disputes with customers.  An “associated person” is defined by FINRA Rules 12100 and 13100 as a person associated with any broker or dealer admitted to membership in FINRA. 

Regulatory Notice 17-42 proposes the establishment of a “roster of arbitrators with additional training and specific backgrounds or experience from which a panel would be selected to decide an associated person’s request for expungement of customer dispute information” pursuant to Rule 2080.  The roster was one of the recommendations made by the FINRA Dispute Resolution Task Force in its Final Report and Recommendations regarding possible enhancements to the FINRA arbitration and mediation forum.  Pursuant to the proposed amendments, panels composed of three arbitrators from the roster would decide expungement requests where (i) the underlying customer-initiated arbitration is not resolved on the merits, or (ii) where an associated person files a separate claim requesting expungement of customer dispute information.

Regulatory Notice 17-42 also proposes changes to the expungement process that would apply to all requests for expungement of customer dispute information.

The comment period expires February 5, 2018.

Federal Reserve Proposes to Increase Stress Test Transparency

On December 7, 2017, the Federal Reserve released three proposals that would increase the transparency of its stress test exercises, including the Dodd-Frank Act Stress Tests (“DFAST”) and Comprehensive Capital Analysis and Review (“CCAR”).  The proposals are comprised of: (1) enhancements to the Federal Reserve’s disclosures regarding its stress test models, (2) amendments to the Federal Reserve’s Policy Statement on the Scenario Design Framework, and (3) adoption of a new policy statement on the Federal Reserve’s approach to developing, implementing, and validating models.  Comments on the three proposals are due by January 22, 2018.

The Federal Reserve’s proposals represent a substantial step toward more transparency in stress testing, but would not provide for full disclosure of the agency’s models.  The preambles to the proposals suggest that the Federal Reserve is seeking to balance the benefits of additional disclosure, including increased public and market confidence in the stress test process, with concerns over the possibility that full disclosure would allow DFAST and CCAR participant firms to “game the system” by shifting their businesses to activities that appear to be advantaged under the models, which in turn could create systemic risk by leading to increased correlations among large firms’ asset holdings.  Each of the three proposals is discussed below.

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GAO Finds that the CFPB’s 2013 Bulletin on Indirect Auto Lending is a Rule for Purposes of the Congressional Review Act.

On December 5, 2017, the U.S. Government Accountability Office (“GAO”) issued a letter finding that the Consumer Financial Protection Bureau’s March 21, 2013 Bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act is a “rule” for the purposes of the Congressional Review Act (“CRA”), and therefore should have been submitted to Congress for approval.  The GAO letter responds to a request from Senator Patrick Toomey for guidance on whether the 2013 Bulletin is subject to the CRA. In response to GAO’s finding, Senator Toomey stated:

“GAO’s decision makes clear that the CFPB’s back-door effort to regulate auto loans, which was based on a dubious legal justification, did not comply with the Congressional Review Act. GAO’s decision is an important reminder that agencies have a responsibility to live up to their obligations under the law. When they don’t, Congress should hold them accountable. I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

The 2013 Bulletin was controversial because it interpreted the fair lending laws to hold indirect auto lenders responsible for the potential fair lending violations of auto dealers in connection with the origination of auto loans.  The 2013 Bulletin stated that the CFPB would use its supervisory and enforcement power against indirect auto lenders to address these alleged consumer harms.  Because the CFPB has no jurisdiction over auto dealers, which were explicitly carved out from the Dodd Frank Act, some critics charged that the agency was trying to do indirectly what it could not do directly.

The CRA applies to any “agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy.” The GAO concluded that because the 2013 Bulletin is a statement of general applicability as it applies to all indirect auto lenders, has future effect, and provides guidance on how the CFPB will enforce fair lending laws, the 2013 Bulletin falls within the CRA’s definition of a rule.  As a result the 2013 Bulletin should have been submitted to Congress as required by the CRA.

Since the 2013 Bulletin was never submitted to Congress, the guidance it provides may not be in effect until that step is completed, which, given the current leadership of the CFPB, may never occur.

CFPB Acting Director Institutes Suspension of Data Collection, Reveals Plans to Bring in More Political Appointees, and Announces Review of Pending Enforcement Matters

Acting CFPB Director Mick Mulvaney made three important announcements this week.  First, on December 4, he announced a suspension of the agency’s collection of consumers’ personal information due to concerns about cybersecurity. Mulvaney, who said he is taking data security “very, very seriously” according to The Wall Street Journal report (paywall), explained that the Bureau should first hold itself accountable and ensure it has a rigorous data-security program before expecting the same from the financial services industry it oversees. In addition, Mulvaney revealed two of his immediate priorities for the Bureau under his leadership: hiring senior political appointees to work with the heads of the independent agency’s main divisions and reviewing more than 100 pending CFPB enforcement cases.

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UK Regulator Extracts Compensation from Fund Operator and Parent

On November 10, the FCA issued a Final Notice relating that Capita Financial Managers Limited (“CFM”) had agreed to pay investors £66m over the collapse of a circa £110m unregulated collective investment scheme called the Connaught Income fund.

The decision has garnered interest because the FCA faced political pressure to speed up its investigation into this matter.  The decision demonstrates a willingness to provide meaningful compensation to end-investors.  Further comment has centred on the fact that CFM was not charged any penalty over a public censure and that CFM’s ultimate parent, Capita plc, agreed to fund any shortfall.  The decision has not been received without criticism, however. Continue Reading

Director Cordray Leaves: Dispute Erupts Over CFPB Leadership

On Friday, November 24, Richard Cordray left the CFPB — but not before appointing his Chief of Staff, Leandra English, as Deputy Director of the Bureau.  Under the Dodd-Frank Act, the Deputy Director “shall . . . serve as acting Director in the absence or unavailability of the Director.”

Hours later, President Trump named Mick Mulvaney, current director of the Office of Management and Budget and a staunch CFPB critic, as Acting Director of the CFPB.  The administration later released an Opinion of the Department of Justice’s Office of Legal Counsel (“OLC”) that seeks to harmonize the Dodd-Frank Act with the Vacancies Reform Act, which generally governs the President’s authority to make appointments to fill vacancies in federal agencies.

In brief, the OLC has advised that the President has the option of allowing the Deputy Director to serve as Acting Director — but also may choose (as President Trump has already done) to appoint a different Senate-confirmed appointee to serve as Acting Director.  In its Opinion, the OLC takes pains to demonstrate that it has consistently viewed the Vacancies Reform Act as providing such an option even in the face of statutory language on succession.

Shortly thereafter, CFPB General Counsel Mary McLeod circulated a memorandum to the CFPB’s senior leadership taking the same position and advising “all Bureau personnel to act consistently with the understanding that Director Mulvaney is the Acting Director of the CFPB.”

Nevertheless, Deputy Director English sued President Trump and OMB Director Mulvaney late on Sunday, arguing that she is the rightful Acting Director of the CFPB and seeking declaratory judgment and a Temporary Restraining Order to prevent them from taking further action toward placing Mulvaney in charge of the agency.

Where does this leave us?  Although the lawsuit is a wild card, it still appears the administration holds the upper hand.

  • First, it is difficult to see how Deputy Director English obtains an injunction, as a court could reasonably have doubts about both her likelihood of success on the merits, and her claim of irreparable harm (since she may not have a cognizable legal interest in running the agency).  Injunctive relief is essential here, however, as by the time such a suit is heard on the merits, there may be a Senate-confirmed Director in place.
  • Second, the OLC Opinion notes that the President may always fire an Acting Director.  The OLC reasons that even if the Dodd-Frank Act properly requires “good cause” for the President to remove a Director — an issue being litigated in the pending CFPB v. PHH case — such protection does not extend to an Acting Director.
  • Third, it is difficult to see how the Bureau could take any action under Acting Director English — such as issuing a new proposed regulation or bringing an enforcement action — that would not be drawn into a legal fight over the legitimacy of the Acting Director’s authority.  The same could be said of actions taken by Acting Director Mulvaney — but his actions are far more likely to be ratified by the next Director.

In light of the foregoing, it still appears that the Mulvaney era at the Bureau will begin Monday, to be followed by a full five-year term for a new Director once she or he is confirmed by the Senate.

CFPB Sues Tribal-Affiliated Online Loan Servicer for Collecting on Allegedly Void Loans

On November 16, 2017, the CFPB filed suit in Montana federal court against Think Finance for activities connected to its tribal-affiliated internet lending business.  Think Finance worked with lenders owned by Native American tribes to offer small-dollar loans to consumers that the Bureau alleges are void under state law.  This suit came on the same day that the upcoming departure of Director Richard Cordray became public, an indication perhaps that Bureau leadership may believe that the aggressive theories of the case (discussed below) would not be pursued under new leadership.  Think Finance declared bankruptcy in Texas federal court three weeks ago, so the CFPB filed may have filed suit to ensure that it could be a creditor.  As indicated by the recent bankruptcy action, Think Finance may not have the resources to defend itself in this action.

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Richard Cordray Resigns from the CFPB

Richard Cordray, the first and only Director of the Consumer Financial Protection Bureau, announced today that he will resign from the Bureau by the end of November–presumably in order to explore a run for governor in his home state of Ohio.  Cordray, a Democrat, was appointed to serve as the agency’s first Director in a recess appointment by former President Obama in 2012.  He was subsequently confirmed by the Senate in July of 2013.  Since that time, Cordray has been the face of the young agency as it pursued aggressive policy and enforcement initiatives.   Continue Reading

CFPB Requests Information Related to Consumers’ Access to Free Credit Scores

On November 13, 2017, the Consumer Financial Protection Bureau published two notices in the Federal Register seeking information related to consumers’ access to free credit scores.  These notices highlight the Bureau’s continued focus on credit scoring and consumer understanding of credit scores as a priority area for the CFPB.

In the first notice, the CFPB’s Office of Financial Education requests information from consumers regarding their experiences with free access to credit scores.  The Bureau also requests information from businesses, nonprofit credit and financial counseling providers, and any other interested members of the public.  The stated goal is to identify educational content that is providing the most value to consumers, discover whether additional educational content could be developed to aid consumers’ understanding of credit scores and reports, and gain a broader understanding of industry practices that best support educating and empowering consumers.  The deadline for submitting public comments is February 12, 2018.

The second notice announces the CFPB’s plans to update its list of companies that offer existing customers free access to their credit score.  This updated list will further the CFPB’s goal of consumer awareness of companies that provide this service to consumers.

To compile its initial list, which was published in March 2017, the Bureau requested information on both credit card issuers and non-credit card companies, but only committed to publishing and only published information on credit card issuers.  As with the Bureau’s initial request, both credit card issuers and non-credit card companies are invited to respond to this new request, provided they meet certain specified criteria, including offering (at least some) existing customers the ability to obtain a free credit score, offering the score on a continuous basis (as opposed to a time-limited or promotional basis), and offering periodic updates to the score.  In keeping with past practice, the Bureau only commits to including on the list the credit card issuers that respond and meet the above criteria, while retaining discretion as to whether to publish information on non-credit card companies as part of the existing list or on a separate list.  The CFPB further announced that it intends to supplement publication of the updated list with more content aimed at educating consumers about the availability of credit scores and credit reports.  The deadline for submitting comments on the updated list is January 21, 2018.