Congress Attempts to Counsel Trump Concerning Removal of CFPB Director Cordray, While PHH Petition for Rehearing Remains Undecided

Today Senators Chuck Schumer (D-NY), Sherrod Brown (D-OH), Elizabeth Warren (D-MA) and others voiced their opposition to any attempt by President-elect Donald Trump to oust Richard Cordray, the current Director of the Consumer Financial Protection Bureau (“CFPB”), before Cordray’s term ends in July 2018. They also sent a letter to Cordray outlining and praising his accomplishments as CFPB Director.

The Senators’ opposition to the prospect of Cordray’s removal is just the latest volley between members of Congress and the incoming Administration concerning the CFPB’s directorship.

On January 12, Sean Spicer, a senior spokesperson for President-elect Trump, told reporters that the President-elect had interviewed former Representative Randy Neugebauer (R-TX) for the position of Director of the CFPB. With Richard Cordray’s term as CFPB Director not scheduled to conclude until July 2018, this strongly suggested that the President-elect is considering an attempt to oust Cordray sooner. While in Congress, Rep. Neugebauer introduced legislation aiming to replace the CFPB’s single director with a five-member commission.

Spicer’s statement came on the heels of a January 10 statement from Senator Brown, the ranking member of the Senate Banking, Housing, and Urban Affairs Committee, urging the President-elect not to attempt to remove Cordray or abolish the CFPB. Senator Brown cautioned President-elect Trump that, “Under Richard Cordray’s leadership, the CFPB has returned $12 billion to servicemembers, seniors, and working Americans . . . . Firing Cordray and abolishing the consumer bureau so the special interests can get their $12 billion back would shatter President-elect Trump’s promise to hold Wall Street accountable and protect working people.”

Also on January 10, minority members of the House Committee on Financial Services released a letter to President-elect Trump in the same vein, commending Director Cordray and counseling the President-elect against attempting to remove him.

On January 9, Senators Ben Sasse (R-NE) and Mike Lee (R-UT) released a letter to Vice President-elect Mike Pence urging the opposite: “Given the CFPB’s unconstitutional structure, removing Director Cordray would be consistent with President Trump’s oath to ‘preserve, protect, and defend the Constitution of the United States’ and his duty to serve as an independent guardian of the U.S. Constitution. Removing Director Cordray would also uphold the American idea of limited government, because Director Cordray has vigorously supported the unconstitutional independence of the CFPB and pursued a regulatory agenda that is harmful to the American people.”

The prospect of Director Cordray’s removal is top of mind following the D.C. Circuit Court’s decision in PHH Corp., et al. v. Consumer Financial Protection Bureau (discussed in our prior client alert), which ruled unconstitutional the provision of the Dodd-Frank Act establishing that the CFPB Director could be fired only “for cause,” i.e., for inefficiency, neglect of duty, or malfeasance in office.

As discussed in a prior post, Senators Brown and Warren are among 21 current and former members of Congress who filed an amicus brief in support of the CFPB’s petition for rehearing en banc of the PHH decision. On December 22, PHH filed a response to the petition, arguing that there is no need for the D.C. Circuit to revisit its original decision. The United States also filed a response on December 22, arguing that the D.C. Circuit’s decision “departs from” Supreme Court jurisprudence regarding the separation-of-powers and the removal of executive agency heads. The court granted PHH until January 27 to respond to the United States’ brief. Any decision on the petition for rehearing will thus not be made until after President-elect Trump’s inauguration on January 20, raising the prospect that the United States’ brief could be withdrawn if the Department of Justice’s position changes under the incoming Administration.

Senate Democrats Question OCC’s Proposed FinTech Charters

As discussed in our recent client alert, in a December 2, 2016 whitepaper, the Office of the Comptroller of the Currency (“OCC”) outlined its authority under the National Bank Act to grant special-purpose charters on a case-by-case basis to financial technology (“fintech”) companies that provide services equivalent to certain traditional banking activities. In the paper, the OCC expressed openness to granting such charters, remarking that “it may be in the public interest to do so.”

On January 9, 2017, Senators Sherrod Brown (D-OH) and Jeff Merkley (D-OR)—both minority members of the Senate Committee on Banking, Housing, and Urban Affairs—released a letter to the OCC identifying the following specific concerns with the OCC’s proposal:

Charter Shopping. Senators Brown and Merkley question whether the OCC would have authority to grant charters to non-depository companies, given that the OCC’s special-purpose chartering authority is narrowly defined. Because the OCC suggested that fintech companies could choose to provide only certain types of financial services, the Senators criticize the OCC for permitting companies to “negotiate which provisions of a national banking charter they want . . . while avoiding the rules and regulations that would apply to a full-service bank.” The Senators suggest that such “charter shopping” could contribute to another financial crisis, as “lightly-regulated” entities crowd those “subject to more stringent” regulations out of the market.

Financial Inclusion. The Senators also argue that chartering fintech or other alternative financial services companies could harm underbanked consumers by offering only “a la carte services” that do not promote saving. If these companies do not provide the “social benefits” of traditional banks, the Senators argue, they should not receive reciprocal benefits granted to national banks (such as preemption of certain state laws).

Consumer Protection. Senators Brown and Merkley further suggest that alternative charters could permit predatory payday lenders to avoid state consumer protection regulations.

Separation of Banking and Commerce. The Senators argue that granting alternative charters could blur the line between banking and commerce if commercial firms seek such charters. Senators Brown and Merkley point to several potential negative results of chartering commercial firms. In their view, granting these charters could: incentivize commercial firms to offer preferential treatment to their own financial services or products (which might not be competitive); create a conflict of interest between credit decisions of a chartered subsidiary and the interests of its commercial parent; and bring commercial firms under the “scope of the federal safety net.”

The OCC requested comments on its whitepaper by January 15, 2017.

Circuit Split May Affect PHH Appeal

As we discussed in a recent client alert, the U.S. Court of Appeals for the Tenth Circuit held on December 27, 2016, in Bandimere v. SEC, that the Securities and Exchange Commission’s use of administrative law judges (“ALJs”) to adjudicate enforcement actions is unconstitutional.  The decision has created a circuit split that breathes new life into an independent constitutional ground on which the D.C. Circuit or the U.S. Supreme Court could decide PHH Corp., et al. v. Consumer Financial Protection Bureau without reaching the controversial issues of the bureau’s structure and CFPB Director Richard Cordray’s status.

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Massad to Step Down as CFTC Chairman

On January 3, 2017, Timothy G. Massad announced that he will step down as chairman of the Commodity Futures Trading Commission (“CFTC” or “Commission”) on Inauguration Day, January 20, 2017.  Chairman Massad’s announcement also notes that he will also step down as a Commissioner after a few weeks.

President Barack Obama nominated Chairman Massad to head the Commission on November 12, 2013, and the U.S. Senate confirmed him on June 3, 2014.  His tenure has focused largely on the implementation and enforcement of the Dodd-Frank Wall Street Reform and Consumer Protection Act through reforms to the over-the-counter swap market.

As we discussed in a previous client alert, the transition to the Trump Administration is likely to have a significant impact on the regulatory agenda of the CFTC, particularly with the proposed, but not finalized, rules on position limits, automated trading, and swap dealer capital requirements for non-banks.  Commissioner J. Christopher Giancarlo is reportedly the frontrunner for nomination to the chairmanship.  We expect that once Chairman Massad steps down this month, Commissioner Giancarlo will be named the acting chair. Commissioner Giancarlo has been a vocal critic of a number of the proposed and final rules issued during Chairman Massad’s tenure.  With two of the Commission’s five posts already vacant, Chairman Massad’s departure will enable the Trump Administration to significantly reshape the agency, and potentially its policy direction, with commissioners of its choice.  However, the CFTC’s governing statute prohibits more than three commissioners from being members of the same political party.  Commissioner Giancarlo, a Republican, currently serves alongside Commissioner Sharon Bowen, a Democrat.

CFTC Proposes Capital Rules for Swap Dealers and Major Swap Participants

On December 2, 2016, the Commodity Futures Trading Commission (“CFTC”) proposed rules establishing capital requirements for swap dealers (“SDs”) and major swap participants (“MSPs”). The CFTC’s proposed capital rules would cover those swap dealers and major swap participants that are not subject to prudential regulation. Chairman Timothy Massad noted in his attached statement that the proposed rule attempts to recognize the different types of firms that act as SDs and allow for those differences in setting the capital requirements for each. Commissioner J. Christopher Giancarlo stated that his support of the proposed rule was predicated on the inclusion of several questions that he hopes market participants will specifically address in their comments on the rule. Commissioner Giancarlo’s questions relate to his ongoing concern that capital requirements imposed on financial institutions have worked to constrain markets instead of supporting market strength and stability. His questions also address the scope of the proposed rule and the appropriateness of the proposed capital model review and approval process. Market participants seeking to comment on the rule should focus on responding to the questions raised by Commissioner Giancarlo, as comments addressing these points likely will have a significant impact in shaping the final rule.

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FDIC Issues Draft Handbook for De Novo Bank Organizers

Last Thursday, the FDIC issued a draft handbook for organizers of de novo insured depository institutions.  The handbook provides an explanation of the process for submitting an application to the FDIC in order to offer FDIC-insured deposit products.  The handbook is relevant for any person or company that is interested in a bank charter and proposing to accept insured deposits as a source of funding.

The FDIC is requesting comment on the handbook, including in response to the following questions:

  1. Does the handbook provide an organizer with sufficient clarity, transparency, and understanding with respect to the requirements, procedures, and processes for establishing an insured depository institution?
  2. Does the handbook adequately address the requirements, procedures, and processes for establishing an insured depository institution during the primary phases: pre-filing activities, the application process, and pre-opening activities?
  3. Does the handbook appropriately address the information needs of organizers who are experienced bankers, as well as the information needs of other organizers, such as certain proposed investors or directors, who may not have experience in banking?
  4. Is the inclusion of comments from successful bank Chief Executive Officers regarding de novo formation helpful and, if so, should the discussion be expanded?

Comments are due by February 20, 2017.

OCC Finalizes Receivership Rule for Uninsured National Banks

On December 20, 2016, the Office of the Comptroller of the Currency (“OCC”) released a final rule addressing the receivership of national banks that are not insured by the Federal Deposit Insurance Corporation (“FDIC”) and therefore are not subject to receivership by the FDIC under the Federal Deposit Insurance Act (“FDIA”).  While all 52 existing uninsured national banks are trust banks, the final rule also will presumably apply to fintech companies that obtain special purpose national bank charters if and when the OCC charters them.

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House Freedom Caucus Takes Aim at Financial Regulations

On December 14, 2016, House Freedom Caucus Chairman Mark Meadows released a special report (the “Report”) detailing over 200 rules, regulations, and executive orders the Caucus recommends that President-Elect Donald Trump should examine, revoke, or issue in his first 100 days in office.

The report targets for repeal a diverse set of regulations finalized or proposed during the Obama Administration, including several that are important to the financial services industry. These include the fiduciary rule for investment advisers, the proposed arbitration rule for consumer financial institutions, and rules setting recovery plan guidelines for OCC-regulated banks. The vast majority of the targeted regulations can be nullified by Congress pursuant to the Congressional Review Act (“CRA”), which could fuel further speculation that House Republicans may push for an omnibus resolution to nullify many regulations at once.

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Financial Stability Board Publishes 2017 Roadmap for Correspondent Banking

On December 19, 2016, the Financial Stability Board (“FSB”) issued its end-of-2016 progress report regarding its action plan to assess and address the decline in correspondent banking. The report sets out a roadmap the FSB intends to follow in 2017 in response to the decline of correspondent banking, a critical part of the global payments system.  In the next year, the FSB’s action plan consists of new data analyses exploring the dimensions and implications of the issue, clarifying regulatory expectations through new guidance from the FSB’s Financial Action Task Force (“FATF”) and other standard-setting bodies, enhancing domestic risk management frameworks in jurisdictions that are home to affected respondent banks, and strengthening tools for due diligence by correspondent banks.

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