On June 12, 2017, the U.S. Department of the Treasury released the first of a series of reports recommending regulatory reforms to the financial system consistent with President Trump’s Core Principles for Regulating the United States Financial System. Treasury’s first report focuses on the regulatory framework governing the depository system. Notably, a substantial portion of the report’s recommendations can be addressed through regulatory action, without legislation. This client alert summarizes the report’s most significant recommendations.
On June 15, 2017, the CFPB announced that it is proposing for public comment certain modifications to its prepaid rule. The rule, which was issued in final form in October 2016, limits consumers’ losses for lost and stolen prepaid cards, requires financial institutions to investigate errors, and includes enhanced disclosure provisions.
The final rule unexpectedly granted Regulation E error resolution rights to consumers holding unregistered prepaid accounts, a provision that was not part of the CFPB’s original proposal. Financial institutions criticized this aspect of the final rule, arguing that providing error resolution rights to holders of unregistered accounts would invite and open new avenues for fraud. Financial institutions also argued that it would be difficult, if not impossible, to investigate alleged errors if they have little to no information about the purchasing customer. As a result, financial institutions have claimed that, if the CFPB retains error resolution rights for unregistered prepaid accounts, they would no longer provide immediate access to funds on such accounts.
To address these concerns, the current proposal would require consumers to register their prepaid accounts to qualify for Regulation E error resolution rights, including the right to recoup funds for lost or stolen cards. Under the CFPB’s proposal, however, Regulation E error resolution rights would apply to registered accounts even if the card was lost or stolen before the consumer completed the registration process.
On January 5, 2017, the Consumer Financial Protection Bureau (the “CFPB”) issued a civil investigative demand (“CID”) to The Source for Public Data, L.P. (“Public Data”), a company that collects personal information about consumers. The CID requested information to determine whether consumer reporting agencies, persons using consumer reports, or other persons have engaged or are engaging in unlawful acts and practices in connection with the provision or use of public records information in violation of the Fair Credit Reporting Act. The CID implied that Public Data is a consumer reporting agency, a characterization Public Data has rejected.
See our article in BAI Banking Strategies, On the Road to Recovery: Phasing in Your Bank’s Recovery Plan, regarding compliance with the OCC’s recovery planning guidance.
On June 7, 2017, the Consumer Financial Protection Bureau announced entry of a consent order against mortgage servicer Fay Servicing, LLC for alleged violations of the Bureau’s 2014 mortgage servicing rules.
The CFPB alleged that Fay Servicing failed to provide timely notices to delinquent borrowers acknowledging that their loss mitigation applications were complete or incomplete, and failed to provide timely notices to delinquent borrowers of the foreclosure mitigation options available to them. The CFPB further alleged that Fay Servicing proceeded with foreclosure actions against borrowers who had applied for loss mitigation options while their applications were under consideration. According to the Bureau, these issues constituted violations of multiple rules under the 2014 mortgage servicing rules.
The order requires Fay Servicing to set aside $1.15 million for the purpose of providing redress to affected borrowers. The company must provide affected customers with notice of the funds and with certain protections from foreclosure actions during the company’s redress efforts. The CFPB will collect any unclaimed redress payments and may at its discretion use the remainder to provide additional redress or may deposit the remaining funds in the U.S. Treasury as disgorgement. The order also requires Fay Servicing to implement compliance policies and procedures and to comply with federal law.
In a press release, Fay Servicing stated that “any instance in which it did not comply with a regulatory requirement” relates to a “small fraction” of the company’s borrowers and that affected borrowers were assisted by the company’s loss mitigation process.
On June 8, 2017, Acting Chair J. Christopher Giancarlo of the Commodity Futures Trading Commission (“CFTC”) made his request for the CFTC’s budget for fiscal year 2018 (“FY 2018”) to the House Appropriations Committee Subcommittee on Agriculture, Rural Development and Related Agencies (“Subcommittee”). Acting Chair Giancarlo is seeking an increase in the CFTC’s budget from $250 million in FY 2017 to $281.5 million in FY 2018.
According to Acting Chair Giancarlo, the budget request is based on his experience “as a former senior executive as a publicly traded company.” To that end, Acting Chair Giancarlo assured the Subcommittee that, in crafting the budget, he did not simply “take last year’s budget and add a percentage increase.” Rather, he emphasized that the budget baseline was zero, and it was built from the ground up to ensure that “each requested dollar…serve a purpose.”
On June 5, 2017, the White House announced that Donald Trump will nominate Joseph Otting to succeed Thomas J. Curry as Comptroller of the Currency. Otting is the former CEO of OneWest Bank, where he worked for current Treasury Secretary Steve Mnuchin.
Otting is a longtime financial services executive who worked at U.S. Bancorp before moving to OneWest. As CEO of OneWest, he led a bank that was regulated by the Office of the Comptroller of the Currency (“OCC”).
The OCC is currently being led by former Covington and Simpson Thacher & Bartlett LLP lawyer Keith Noreika, who is serving as Acting Comptroller.
The New York Times and Wall Street Journal also reported on Friday, June 2, that President Trump has made his selections for nominees to two of the three open positions on the Federal Reserve Board of Governors.
President Trump has reportedly chosen Randal K. Quarles, a Treasury Department official from the George W. Bush Administration and former financial industry lawyer, to serve as Vice Chair for Supervision. In practice, he would be succeeding Daniel Tarullo, who was never formally appointed to the position but in practice served as the Fed’s point person for bank supervision. Quarles is generally regarded as favoring less restrictive regulation of financial institutions as compared to Tarullo.
Marvin Goodfriend, a former economist at the Federal Reserve Bank of Richmond who now teaches economics at Carnegie Mellon University, will also reportedly be nominated to the Board. Goodfriend is a monetary policy scholar who has advocated that the Fed adopt simpler, more mechanical rules for determining monetary policy.
In its decision in Kokesh v. SEC, issued on Monday, June 5, 2017, the Supreme Court unanimously ruled that “disgorgement” of ill-gotten gains by the Securities and Exchange Commission (“SEC”) is a “penalty” within the meaning of 28 U.S.C. § 2462. As a result, disgorgement is unavailable to the SEC in judicial proceedings involving conduct that took place more than five years before the filing of the government’s complaint. As explained below, because Section 2462 is a statute of general application (i.e., not specific to the SEC), the Court’s ruling could have implications for judicial civil penalty proceedings brought by the Consumer Financial Protection Bureau (“CFPB”), the Federal Trade Commission (“FTC”), the Commodity Futures Trading Commission (“CFTC”), and other financial and consumer regulators.
The House of Representatives voted this afternoon to pass the Financial CHOICE Act (“CHOICE 2.0”), its comprehensive financial regulatory reform bill. The key provisions of CHOICE 2.0 are summarized in our client alert of April 24, 2017, available here, although the bill has evolved somewhat since April. As we wrote late last month, Representative Jeb Hensarling agreed on May 24 to remove the repeal of the Durbin Amendment from the second discussion draft of the Act.
CHOICE 2.0 is likely to face strong opposition from Senate democrats, and its passage through the Senate is by no means assured. We will continue to track the progress of CHOICE 2.0, and of any further amendments that may be proposed in the Senate to facilitate its passage through that chamber.
On May 24, 2017, Rep. Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, agreed to remove the repeal of the Durbin Amendment from the second discussion draft of the Financial CHOICE Act (“CHOICE 2.0”). The Durbin Amendment, an amendment to the Electronic Fund Transfer Act added by section 1075 of the Dodd-Frank Act, requires the Federal Reserve Board to adopt regulations to cap interchange fees that banks with $10 billion or more in assets may receive from payment card networks in debit card transactions. The Durbin Amendment, and the Federal Reserve Board’s regulations, also prohibit the issuance of debit cards that restrict the processing of electronic debit transactions to less than two unaffiliated networks, and contractual or other restrictions on merchants’ routing of electronic debt transactions over any payment card network that can process the transactions.
The proposed repeal of the Durbin Amendment has divided Republican lawmakers and has been fiercely debated in the House of Representatives (the “House”). In a written statement, Congressman Hensarling stated that he would not “let this one provision hinder passage of an important priority bill that will end bank bailouts and help renew healthy economic growth for all Americans.” The removal of this provision from CHOICE 2.0 is a victory for retailers, who vigorously pushed for adoption of the Durbin Amendment and benefit from the Durbin Amendment’s cap on the debit card interchange fees merchants can be charged. Banks, which receive the interchange fees charged by payment card networks, have fought against the Durbin Amendment, arguing that it is an example of unnecessary government interference in the free market. The Consumer Bankers Association reported in a letter to Congressman Hensarling that “the Durbin Amendment has resulted in a $42 billion windfall for merchants and little if any savings for consumers.”
Although dropping the repeal of the Durbin Amendment may make CHOICE 2.0 more likely to pass the House, prospects for the bill’s passage in the Senate are dim. It has been reported that Republicans in the Senate are currently drafting their own comprehensive regulatory reform bill.