As we turn the page on the summer, the Consumer Financial Protection Bureau is poised to be active – and actively overseen – in the months ahead. Here’s an overview of some of the issues and events ahead.
On August 14, 2019, the U.S. District Court for the Northern District of Illinois entered a consent order (the “Consent Order”)—agreed to by the U.S. Commodity Futures Trading Commission (the “CFTC”), Kraft Foods Group Inc. (“Kraft”) and Mondelēz Global LLC (“Mondelēz”)—to resolve long-running market manipulation litigation between the parties.
In the past few weeks, both Federal Deposit Insurance Corporation (“FDIC”) Chairman Jelena McWilliams and Comptroller of the Currency Joseph Otting have spoken publicly about ongoing efforts by their agencies, and by the Federal Reserve Board, to reform regulations implementing the Community Reinvestment Act (“CRA”).
The federal bank regulatory agencies have been working on reforms to the CRA regulations for over a year. In April of last year, the Treasury Department released a report outlining potential changes to the CRA. In August, the OCC published an advanced notice of proposed rulemaking (“ANPR”) describing, among other things, a proposed “metrics-based framework” for assessing compliance with the CRA. The OCC’s proposed framework would: (i) rely more heavily on quantitative benchmarks to assign CRA ratings; (ii) change the geographical assessment area for certain banks, including to consider their online presence in addition to their physical branches; and (iii) expand the types of activities considered in CRA evaluations. Finally, in June, the Federal Reserve Board published a summary of feedback received during a series of 29 roundtable discussions with bankers and community members on the CRA.
Speaking at the end of July, Chairman McWilliams indicated that it would still be some months before the agencies were ready to publish a proposed rule, and signaled that the agencies were attempting to think “outside of the box.” As an example, Chairman McWilliams noted that the agencies were considering whether to provide CRA credit for investments in rural broadband. Such investments may already qualify for CRA credit under existing OCC guidance, but the Chairman’s statement suggested that the relevant rules might be relaxed or extended to other investments in digital infrastructure.
Last week, Comptroller of the Currency Joseph Otting provided another preview of aspects of the proposed rule. Most of the reforms that the agencies have previously discussed in public would expand banks’ ability to obtain CRA credit. Consistent with that approach, Comptroller Otting stated last week that the agencies were considering whether to make CRA credit available for investments in Opportunity Zones — i.e., zones designated by states, with the concurrence of the Internal Revenue Service, as “economically distressed,” and where new investments may be eligible for preferential tax treatment. On the other hand, Comptroller Otting also suggested that the agencies are considering whether to restrict the ability of banks to receive CRA credit when they originate mortgages to high-income families and individuals who move into lower-income areas. That may happen, for example, in gentrifying neighborhoods where the average incomes of new buyers may significantly exceed the average incomes of existing residents.
Neither Chairman McWilliams nor Comptroller Otting offered a firm estimate of when the agencies would publish a proposed rule. And neither commented on whether, or to what extent, the new rule would adopt the proposals in the ANPR. Nevertheless, their comments clarify that the agencies are working actively on CRA reform, and that they may be considering proposals that go beyond the OCC’s ANPR, in addition to the proposals set out in the ANPR itself.
Last July, the IRS announced its Virtual Currency Compliance Campaign, designed to intensify the IRS’s efforts to counter the underreporting of income related to cryptocurrency use. Through the campaign, the IRS will address noncompliance through taxpayer education, increased audits and initiations of criminal investigations.
This past week the IRS began sending “educational” letters to more than 10,000 taxpayers who either potentially failed to report income and pay the tax from cryptocurrency transactions, or did not report their transactions properly. The IRS sent out three variations of the letters — Letter 6173, Letter 6174, or Letter 6174-A — depending on the severity of the perceived violation. Letters 6174 and 6174-A ask taxpayers to review their returns and file an amended return if necessary; Letter 6173 is a more serious warning that also requires a signature under perjury from the taxpayer affirming U.S. tax law compliance.
On July 23, the New York State Department of Financial Services (“DFS”) announced a new Research and Innovation Division. The Division will assume responsibility for licensing and supervising virtual currencies. It will also “assess efforts to use technology to address financial exclusion; identify and protect consumer data rights; and encourage innovations in the financial services marketplace.”
According to New York Superintendent of Financial Services Linda Lacewell, the Division will “position DFS as the regulator of the future, allowing the Department to better protect consumers, develop best practices, and analyze market data to strengthen New York’s standing as the center of financial innovation.”
The new Division follows previous efforts by DFS to regulate innovation and technology in financial services. For example, DFS has been licensing and supervising virtual currency companies since 2015 under its BitLicense regime. Companies with BitLicenses are subject to consumer protection and capital requirements, and must maintain anti-money laundering compliance programs. DFS also signed a memorandum of understanding with Israeli regulators regarding fintech regulation. DFS has also sued the Office of the Comptroller of the Currency over the OCC’s proposal to grant special purpose national bank charters to fintech companies.
The Research and Innovation Division is the second new division at DFS since Superintendent Lacewell assumed the role in February 2019; in May, DFS created the Consumer Protection and Financial Enforcement Division.
DFS also announced leadership appointments for the new Research and Innovation Division. Matthew Homer, who was recently head of policy and research at a New York fintech company, will serve as Executive Deputy Superintendent; Matthew Siegel and Olivia Bumgardner will serve as Deputy Superintendents; and Andrew Lucas will be Counsel.
On July 22, 2019, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency (collectively, the “federal banking agencies”), and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a joint statement emphasizing their risk-focused approach to examinations of banks’ Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance programs (the “Statement”). The Statement does not purport to create additional supervisory expectations for banks, but is meant to provide transparency into the risk-focused approach the agencies use for planning and performing BSA/AML examinations. While the Statement largely restates existing rules and guidance and notes “it does not establish new requirements,” the fact that the agencies issued the statement may itself be an important, albeit implicit, acknowledgement of concerns expressed by some that BSA/AML examinations have become increasingly less risk-based in practice.
On July 9, 2019, the federal banking agencies released a final rule to simplify aspects of the regulatory capital rules for banking organizations that are not “advanced approaches” banking organizations, i.e., those with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. Initially proposed in September 2017 as part of the agencies’ ongoing efforts to meaningfully reduce regulatory burden on small and mid-sized banking organizations, the final rule is intended to simplify and clarify certain aspects of the capital rules, and in particular the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests. Importantly, the Board of Governors of the Federal Reserve System (“Board”) also used the rulemaking as an opportunity to streamline an important aspect of its regulatory framework by permitting bank holding companies, savings and loan holding companies, and state member banks of all sizes to redeem or repurchase their common stock without obtaining formal, prior regulatory approval under most circumstances.
On July 11, the House Financial Services Committee held a markup for a series of bills designed to reform the credit reporting system and the Fair Credit Reporting Act (“FCRA”). Each bill passed on a party-line vote. The associated hearing was titled “Who’s Keeping Score? Holding Credit Bureaus Accountable and Repairing a Broken System.”
In her opening statement, Committee Chairwoman Maxine Waters (D-CA) stated her belief that “our credit reporting system is deeply broken.” She added that “[c]onsumers make more complaints about the credit reporting process to the Consumer Financial Protection Bureau than any other issue,” and that it “is exceedingly common that credit reports are filled with errors.”
The Committee considered the following credit reporting reform bills, each introduced by a Democratic member:
- The Restricting Use of Credit Checks for Employment Decisions Act, which would ban the use of consumer report information for most employment decisions.
- The Free Credit Scores for Consumers Act of 2019, which would expand consumer disclosure rights. In particular, nationwide consumer reporting agencies (“CRAs”) would be required to disclose consumer credit scores annually upon request. Further, any CRA would be required to disclose to consumers their full file and credit score when that consumer obtains a fraud alert or security freeze, or has disputed information on the credit report.
- The Restoring Unfairly Impaired Credit and Protecting Consumers Act, which would require CRAs to remove adverse information from consumer reports after four (rather than the current seven) years.
- The Improving Credit Reporting for All Consumers Act, which would reform the dispute process in several ways, including by providing consumers the right to appeal disputes.
The bills can now be considered by the full House of Representatives. Were they to pass the full House, the lack of Republican supports suggests they would face significant challenges in the Senate.
On Tuesday, June 25, the Consumer Financial Protection Bureau (the “CFPB”) convened the first in a new series of symposia on consumer protection topics. The symposium series was announced in Director Kathleen Kraninger’s first major speech as the Bureau’s Director on April 17, 2019. The intent of the series is to initiate dialogue with stakeholders that will inform the Bureau’s future rulemakings. The topic of the first symposium, in which our colleague Eric Mogilnicki participated, was the meaning of “abusive acts or practices” under section 1031 of the Dodd–Frank Act. The “abusive” standard has been on the Bureau’s rulemaking agenda since the fall of 2018. Continue Reading
On June 14, 2019, the Federal Reserve Board (“Federal Reserve”) released a Notice of Proposed Rulemaking (“NPR”) requesting public comment on updates to its regulations governing the disclosure of confidential supervisory information (“CSI”) and its Freedom of Information Act (“FOIA”) procedures. Although the Federal Reserve classified many of the proposed revisions as “clarifications” or “technical updates,” the NPR includes several important changes to this rule. Comments must be received by August 16, 2019. Continue Reading