CFPB Releases New Prototype Overdraft Disclosures

On August 4, 2017, the Consumer Financial Protection Bureau released four prototype disclosures for the overdraft opt-in required under Regulation E that it is currently testing. The Bureau is considering the prototypes as replacements for the Model Form A-9 opt-in disclosure, which was adopted when the Regulation E overdraft rule was promulgated by the Federal Reserve Board in 2010. The overdraft rule requires financial institutions to obtain consumer consent to assess fees or charges for overdraft services in connection with one-time debit card and ATM transactions. The opt-in requirement does not apply to overdraft fees imposed on check, ACH, or recurring debit card transactions.

The prototypes are more tabular in presentation than the current model form and emphasize that consumers are being presented with two choices: (a) “keep” the bank’s default overdraft protection for check, ACH, and recurring debit card transactions; or (b) “switch to” overdraft protection for all transactions, including one-time debit card and ATM transactions. The prototypes also go further than the model form in highlighting the cost of overdraft fees, but neither the current model form nor the prototypes discuss the benefits from having overdraft protection or any potential costs of not having such protection available. For instance, one of the prototypes includes an “example” of an overdraft scenario emphasizing the cost of overdraft fees, but there is no discussion of the potentially significant consequences of a declined transaction. In addition, three of the prototypes include a check box in the tear-off form for electing to keep the default option, which could raise questions about whether a consumer’s failure to check the “keep” or default option might be construed as a consumer opting-out of overdrafts for check, ACH, and recurring debit transactions.

In a related blog post, the Bureau requested feedback on the prototypes, which would presumably be required to go through notice-and-comment rulemaking before being finalized. To comment on the prototypes, non-confidential comments can be submitted to

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ISDA Releases Whitepaper Regarding Legal Perspectives on Smart Contracts and Distributed Ledger Technology

On August 3, 2017, the International Swaps and Derivatives Association (“ISDA”) and Linklaters LLP released a whitepaper titled “Smart Contracts and Distributed Ledger – A Legal Perspective.” The whitepaper sets out to define the terms “smart contract” and “distributed ledger,” to analyze their applications to the derivatives industry, and to highlight potential legal issues raised by these new technologies.  Of particular interest is the inherent nature of contractual elements – whether they define conditional logical statements (“operational clauses”), or whether they define a broader legal relationship between the parties (“non-operational clauses”).  An example of an operational clause would include a provision that defines the amount of funds to be paid to one party based on a calculated amount, applicable rate, and duration.  A non-operational clause would include a provision specifying the law that governs in the event of a dispute.

The whitepaper proposes a series of distinctions in order to clarify discussions around smart contracts – most notably between “smart contract code” (programs that automatically execute certain tasks but are not contracts) and “smart legal contracts” (representation and execution of the elements of a contract via software).  Also relevant are distinctions between “external” smart contracts (in which smart contract code provides a means of automatic performance; a traditional legal agreement is used to bind the parties) and “internal” smart contracts (in which performance and the operational clauses of the agreement are built into the code, with a traditional agreement covering the non-operational aspects).  The whitepaper further discusses various areas in which smart legal contracts could be beneficial to the derivatives industry (e-signing and the use of so-called oracles to ease execution, among other things), and where they have difficulty replicating the functionality of a traditional agreement (representing concepts like jurisdiction and single agreement provisions).

The paper concludes that smart contract and distributed ledger technology have great potential for use in derivatives products and ISDA documentation, but that there must be industry-wide coordination if this potential is to be realized.  ISDA’s Market Infrastructure and Technology Oversight Committee intends to facilitate such development, and other working groups have been set up to coordinate workstreams and standards.

CFPB Special Monthly Complaint Report Highlights Companies’ Reponses to Consumer Complaints

On August 1, 2017, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released a “special edition” of its monthly complaint report. Rather than focus on particular financial products or markets like the Bureau’s standard monthly complaint reports, the special edition highlights how companies have responded to consumer complaints and consumers’ views of those responses and the process as a whole.

According to the report, the CFPB has fielded over 1.2 million consumer complaints. Between 2014 and 2016, the vast majority of complaints were submitted via the CFPB’s web portal, with debt collection, credit reporting, and mortgage complaints being the most common complaint categories.

The CFPB typically sends complaints to companies in less than one day. The report notes that since the Bureau’s launch, companies have responded in a timely manner (generally defined to mean within 15 days) to roughly 97% of these complaints across the board, with each product and service category reaching at least a 90% timely response rate. Of the categories of responses, “Closed with monetary relief,” “Closed with non-monetary relief,” “Closed with explanation,” and “Closed” are most typically used, with “Closed with explanation” accounting for 72% of responses. This may reflect that many consumer complaints derive not from a violation of law but from a consumer’s misunderstanding or frustration with a legal practice.

The CFPB report also examines consumers’ reactions to the complaint responses by looking at consumer disputes of those responses. The rates that consumers file disputes range from a low of 14% of company responses for prepaid cards, to a high of 23% of company responses for mortgages. In looking at these disputes, the Bureau concedes the limitations of dispute data, noting that this data “does not provide insight into the reasons why a consumer was dissatisfied with the company’s response to their complaint and . . . does not reflect the positive feedback consumers have about how companies have addressed their concerns.”

For more qualitative information about the complaint responses and the process more generally, the Bureau reviews narrative feedback from consumers; as the report notes, this consumer feedback also helps identify situations where the Bureau may want to investigate further. The report highlights specific consumer narratives expressing frustration at what the consumers saw as insufficient responses from the company, or thanking the Bureau for help in reaching a satisfactory resolution, though in all the quoted narratives, the consumers were generally pleased with the Bureau’s role in the process.

Finally, the report notes that the Bureau is seeking to share more useful consumer feedback with companies, though it does not detail specific steps or a timeline for doing so.

OCC Issues Request for Information on the Volcker Rule

This morning, the Office of the Comptroller of the Currency (“OCC”) released a Request for Information (“RFI”) to determine how regulations implementing the Volcker Rule should be revised to better accomplish the purposes of the statute.

The OCC’s release notes that the information the agency is soliciting could support revisions to the regulation that are consistent with the recommendations identified in the U.S. Department of the Treasury’s June 2017 regulatory reform report, which we summarized in a client alert.  However, broad-based reform of the Volcker Rule, including some of the changes recommended in the Treasury Report, would require legislative changes to the underlying statute, and the OCC’s RFI does not seek comments on changes to the statute.

Notably, the other federal financial agencies with concurrent rulewriting authority over the Volcker Rule – the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Commodity Futures Trading Commission – did not release the RFI jointly with the OCC.  The preamble to the RFI acknowledges that any revisions to the current regulation will need to involve those agencies.  As we discussed in a previous blog post, some of the other agencies are still led by appointees of President Obama and may be less likely to support reform of the regulation in the near-term.

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SEC Report of Investigation Concludes that DAO Tokens Were Securities

On July 25, 2017, the Securities and Exchange Commission (“SEC”) issued a Report of Investigation (“Report”) finding that the digital tokens offered and sold by the virtual, unincorporated organization known as “The DAO” were securities subject to the federal securities laws. The DAO sold DAO tokens in exchange for the digital currency Ether used on the Ethereum blockchain. The DAO expected to use the estimated $150,000,000 in Ether it raised to fund digital projects, while purchasers of the DAO tokens expected a return on their investment by sharing in the earnings from the funded projects. Holders of DAO tokens could also re-sell their tokens on a number of web-based platforms that supported secondary market trading in DAO tokens.

The DAO is an early example of an Initial Coin Offering (“ICO”), a type of crowdfunding in which investors purchase digital “coins” or “tokens” distributed via blockchain/distributed ledger technology (“DLT”) with fiat or digital currencies, and the blockchain/DLT company issuing the digital coins or tokens uses the proceeds to fund its business activities. For more information on ICOs, see the SEC’s investor bulletin on the subject.

In the Report, the SEC for the first time deemed a digital asset a security, and illuminated several factors the SEC will consider in determining whether a given digital asset constitutes a security. Although the SEC declined to bring an enforcement action in this instance, it noted that parties transacting in DAO tokens may be liable for violations of federal securities laws, and further that exchanges which provide for trading in DAO tokens must register with the SEC unless they are otherwise exempt. The SEC cautioned market participants that other offers and sales of digital assets may be subject to federal securities laws, depending on the characteristics of each asset, along with the facts and circumstances surrounding their offer and sale.

The SEC found that DAO tokens were securities – more specifically that they were investment contracts. As the SEC noted in the Report, federal securities law treats an investment contract as “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial expertise of others.” See SEC v. Edwards, 540 U.S. 389, 393 (2004); SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946). In reaching its determination, the SEC made the following findings:

  • The purchase of DAO tokens with Ether was “an investment of money,” as it constituted the contribution of value that can create an investment contract.
  • Promotional materials told investors that the DAO was for-profit, and would offer a return on money invested.
  • DAO tokenholders’ profits derived from the managerial efforts of others. The founders held themselves out as experts in investing on the Ethereum blockchain, leading investors to believe they could be relied upon for success. The DAO’s “Curators” held significant power over the operations of the DAO. Consequently, the founders and “Curators” played roles essential to the success or failure of the enterprise.
  • DAO tokenholders’ rights were limited. They were substantially reliant on the managerial efforts of the founders and Curators. Furthermore, DAO tokenholders were widely dispersed and had limited means of communication, which weakened their ability to exercise meaningful control.

The SEC emphasized that its findings regarding the DAO were limited to the instant case, and that any determination of whether or not a given digital asset is a security will be based on the facts and circumstances. It further encouraged market participants to constructively engage with the SEC and ensure that they are in compliance with the relevant securities laws.

CFPB Identifies Regulatory Action Plans in Spring 2017 Update to the Unified Agenda of Federal Regulatory and Deregulatory Actions

On July 20, 2017, the Consumer Financial Protection Bureau (“CFPB”) announced the release of its Spring 2017 semiannual update of its rulemaking agenda, which is included in the Unified Agenda of Federal Regulatory and Deregulatory Actions (the “Unified Agenda”), published by the Office of Information and Regulatory Affairs (“OIRA”). Submissions for the Spring 2017 update to the Unified Agenda were due March 31, 2017, so the information is already somewhat out of date. The CFPB’s updated rulemaking agenda is now available on the OIRA web site.

The Unified Agenda provides information on planned regulatory and deregulatory actions by Federal Government executive departments, agencies, and commissions, and, as set forth in a March 6, 2017 OIRA memorandum, is designed to “promote transparency and open government.” The Trump Administration articulated its intent to use the Unified Agenda to begin “fundamental regulatory reform,” reduce “unnecessary regulatory burden,” and amend and eliminate “ineffective, duplicative, and obsolete” regulations. The Unified Agenda defines five stages of rulemaking activity: (1) prerule stage; (2) proposed rule stage; (3) the final rule stage; (4) long-term actions not expected to occur within the 12 months after publication of the Unified Agenda; and (5) completed actions.

The CFPB’s Spring 2017 update lists 19 items on the Bureau’s regulatory agenda. All of the CFPB’s agenda items are in the final rule, proposed rule, or prerule stage. The CFPB has now issued final rules on four of the six agenda items it listed as falling within the final rule stage: (1) Arbitration; (2) Expedited Funds Availability Act (Regulation CC); (3) Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z); and (4) Technical Corrections to the 2016 Amendments to the 2013 Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z). The timetables for issuing final rules for the two remaining agenda items in the final rule stage — Amendments Relating to Disclosure of Records and Information and Gramm-Leach-Bliley Act (GLBA)(Regulation P) — are September 2017 and November 2017, respectively.

Nine CFPB regulatory actions are in the proposed rule stage. Most notably, the CFPB’s agenda indicates that its initial review of comments on the proposed Payday, Vehicle Title, and Certain High-Cost Installment Loans rule (the “Payday Loan Rule”) was scheduled for completion in June 2017, but gives no estimated date for issuance of a final rule. Having received “more than one million comments” in response to the proposed rule, the CFPB may be hard-pressed to justify the issuance of a final Payday Loan Rule within a few months after completing its initial review of the comments if it is, in fact, “carefully considering” the extraordinary number of comments. Other estimated dates include the issuance of both a proposed Debt Collection Rule and a proposed rule for the Supervision of Larger Participants in Markets for Personal Loans by September 2017. Estimated dates included in the Unified Agenda, however, tend to slip.

Public Support for the CFPB and its Arbitration Rule — Is The Evidence Clear?

A recent poll — conducted by Lake Research Partners and Chesapeake Beach Consulting on behalf of Americans for Financial Reform and the Center for Responsible Lending — appears to show substantial public support for the Consumer Financial Protection Bureau (CFPB) and a number of its recent regulatory initiatives.  The published poll results reflect, among other things, that:

  • 91% of Americans believe that it is important to “regulate financial services and products to make sure they are fair for consumers,” and substantial majorities support “tougher rules and enforcement” and increased regulation of financial companies;
  • 74% of Americans support the 2010 Dodd-Frank act, and an almost equal number (73%) support the CFPB; and
  • Most Americans support recent CFPB regulatory initiatives, including the CFPB’s ban on mandatory pre-dispute arbitration clauses in contracts for consumer financial services (66%).

This last result is particularly notable, as it could influence Congressional willingness to overrule the Bureau’s arbitration rule pursuant to the Congressional Review Act (see our client alert, at page 3, for more details).

But the poll’s results are not as unambiguous as they seem at first glance, and policymakers should be cautious in relying on them.  Some of the support for the CFPB and CFPB policies reflected in the results could be ascribed to the way the pollsters asked their questions.

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Acting Comptroller Noreika Addresses Challenges to the OCC’s Fintech Charter

In remarks on Wednesday before the Exchequer Club in Washington, Acting Comptroller of the Currency Keith Noreika responded to State regulators and consumer advocates who have criticized the OCC’s proposed special purpose fintech charter (the proposed charter is discussed in this Covington client alert).

Acting Comptroller Noreika’s comments on the fintech charter reflect an evolution — but not a fundamental change — in pre-existing OCC policy toward fintechs, as initially established under Comptroller Thomas Curry.  In particular, the Acting Comptroller’s comments reflect the OCC’s effort to adapt to a legal challenge to the proposed special-purpose fintech charter brought by the Conference of State Bank Supervisors (the challenge is discussed in this Covington blog post).

Acting Comptroller Noreika suggested that the OCC would seek to rely on other OCC chartering authorities not affected by the legal challenge.  For example, the OCC may be open to chartering “innovative de novo institutions” with fintech-focused business models under its (uncontested) authority to charter full-service national banks and federal savings associations, or under its special purpose charter authority for trust banks, banker’s banks and CEBA credit card banks.

At the same time, the Acting Comptroller made clear that the OCC would continue to defend its special purpose fintech charter in court, emphasizing that State regulators had sought to challenge it before the OCC had evaluated — or even received — a single application for such a special purpose charter.  While he did not discuss the OCC’s legal strategy, his remarks may well presage a ripeness challenge to the State regulator lawsuit (i.e., an argument that the State regulators jumped the gun by effectively bringing a lawsuit against a white paper that had not yet been put in practice).

The Acting Comptroller’s remarks also reflected continuity in the OCC’s approach to supervising fintech banks.  He emphasized, as had Comptroller Curry, that banks holding a fintech charter would be held to equivalent regulatory standards to other banks, including with respect to capital, liquidity, consumer protection and, “where appropriate,” financial inclusion (emphasis in original — as explained in our client alert, the financial inclusion requirements of the Community Reinvestment Act would not apply to a special purpose fintech bank that did not accept Federally-insured deposits).

Yellen Floats Possible Regulatory Changes in Senate Testimony

On Thursday, July 13, Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee. During this hearing, Chair Yellen stated that the Federal Reserve (the “Fed”) is open to modifying the threshold for designating banks as systematically important financial institutions (“SIFIs”). She reiterated that the Fed would not oppose raising the current asset threshold—which makes all banking organizations with consolidated assets equal to or in excess of $50 billion subject to SIFI status—but also suggested that the Fed might be open to alternative methods of determining SIFI status beyond asset size. In particular, she stated, in response to a question from Senator Mike Rounds (R.-S.D.), that “[a]n approach based on business model or factors is also a workable approach from our point of view” for determining SIFI status.

Chair Yellen’s testimony also touched on other bank regulatory issues. For example, as reported earlier this year, Chair Yellen indicated that the Fed “could find ways to reduce the burden” of the notoriously complex Volcker Rule, which could include establishing exemptions for community banks and tasking a single agency with overseeing the rule’s implementation and compliance. Responsibility for the Volcker rule is currently shared among the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporate, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

Chair Yellen also acknowledged that regulators may need to make changes to the enhanced supplementary leverage ratio (“eSLR”), which mandates a greater leverage ratio for bank holding companies with more than either $700 billion in total consolidated assets or $10 trillion in assets under custody, as well as for any of their subsidiary banks with assets of more than $10 billion.

Last month, the Department of the Treasury issued a report that recommended, among other things, regulatory changes to ease the burdens on financial institutions with respect to the Volcker Rule and the eSLR. We discussed the report at length in a client alert.

CFPB Proposes to Ease HMDA Reporting Requirements for Community Banks and Credit Unions

On July 14, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a proposal to ease, at least temporarily, the reporting requirements for community banks and credit unions under the Home Mortgage Disclosure Act (“HMDA”). The proposed rule would raise the threshold at which financial institutions have to report on home equity lines of credit for the years 2018 and 2019.

In October 2015, the CFPB issued a final rule implementing the HMDA amendments in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which updated many HMDA reporting requirements. Among other things, Dodd-Frank required some lenders to report home-equity lines of credit and other open-end lines of credit secured by a dwelling in their HMDA reporting.

The final rule exempted lenders that originated fewer than 100 dwelling-secured open-end lines of credit in each of the preceding years from the new reporting requirements for open-end lines of credit. Based on concerns raised by community banks and credit unions about the substantial compliance burden this creates, the CFPB is now proposing to raise the exemption threshold.

Under the new proposal, for the years 2018 and 2019, all lenders that originated fewer than 500 home-equity and other dwelling-secured open-end lines of credit in the previous two calendar years would be exempt from the reporting requirement. The CFPB estimates that this would exempt roughly 25% of the home-equity lending market. Although the proposal contemplates a temporary change, the CFPB indicated that it would use the intervening period to determine if it should make the higher threshold permanent.

The CFPB has provided a tight deadline for submitting comments on this proposal.  The comment period closes on July 31, 2017.