Federal Court Dismisses Part of CFPB’s Case Against TCF National Bank

On September 8, 2017, the U.S. District Court for the District of Minnesota entered an order granting in part and denying in part a motion to dismiss claims brought by the CFPB against TCF National Bank (“TCF”) for alleged wrongdoing in connection with offering overdraft services.

Brought in January, the case centered on allegations that TCF, in the course of obtaining customer consent for enrollment in overdraft protection services, violated opt-in and disclosure requirements under Regulation E and engaged in abusive and deceptive practices in violation of Dodd-Frank’s UDAAP provisions.

The court dismissed the CFPB’s Regulation E claims relating to the overdraft notice and opt-in requirements, finding that TCF had complied with the regulation’s specific, “surgical” requirements. The court also dismissed the CFPB’s UDAAP claims insofar as they related to conduct predating the agency’s effective date of July 21, 2011. The Bureau made only a cursory attempt to justify including conduct prior to July 21, 2011. The court understood the pre–July 21, 2011, allegations as based on a continuing-violation theory that, if upheld, would sweep in all prior practices simply because there was some violation after the effective date.

Notably, despite the bank’s technical compliance with the Regulation E overdraft notice and opt-in requirements, the court found that the Bureau had stated a claim against TCF for abusive and deceptive conduct after July 21, 2011, in relation to its opt-in practices. The ruling demonstrates that strict compliance with detailed regulations governing particular activities, such as the Regulation E overdraft notice and opt-in requirements, may still run afoul of Dodd-Frank’s amorphous, blanket UDAAP prohibition.

CFPB Issues its First No-Action Letter

On September 14, 2017, the Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) issued a no-action letter for the first time, after having finalized its no-action letter policy in February 2016.  The Bureau’s letter grants a request by Upstart Network, Inc. (“Upstart”), an online lender that uses both traditional and non-traditional credit scoring data, regarding the application of the Equal Credit Opportunity Act and Regulation B to Upstart’s automated model for underwriting applicants for unsecured non-revolving credit.  In its press release accompanying the letter, the Bureau explicitly referenced its ongoing interest in learning more about the benefits and risks of using alternative data in credit scoring, an issue the Bureau raised in February 2017.

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Federal Reserve Updates Strategies and Tactics for Promoting Payment System Improvements

On September 6, 2017, the Federal Reserve System (“FRS”) published a paper that identifies updated strategies and tactics for improving the U.S. payments system. The paper, entitled Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the Payments Improvement Journey, refines the strategies set forth in a previous FRS paper, Strategies for Improving the U.S. Payment System, published in January 2015, and outlines nine tactics the FRS intends to pursue to advance progress on payment system improvements. The tactics fall into three broad categories: FRS service enhancements, FRS research, and industry collaboration efforts.

The new FRS paper retains without substantive change three of the five strategies outlined in the 2015 paper: speed, security, and collaboration. The fourth strategy outlined in the 2015 paper focused on achieving greater end-to-end efficiency for domestic and cross-border payments. The new paper divides this prior strategy into separate domestic and international components as follows: (1) efficiency—achieving greater end-to-end efficiency for domestic payments; and (2) international—working to enhance the timeliness, cost effectiveness, and convenience of cross-border payments. The tempered expectations for improving cross-border payments reflects concerns about compliance with anti-money laundering, terrorist financing, and economic sanctions requirements. The FRS also decided against enhancing the Fedwire Funds Service to make it easier for participating institutions to send cross-border payments.

The fifth strategy outlined in the 2015 paper—enhancing FRS payments, settlement and risk management services—has been eliminated. Instead, the FRS recharacterizes as tactics two types of potential enhancements to FRS services. First, the FRS will pursue enhancements to FRS settlement services to support real-time retail payments, such as assessing the demand for weekend hours. Second, the FRS will explore and assess the need, if any, for the FRS to engage as a service provider in areas beyond providing settlement services in a faster payments ecosystem. The American Banker reported that, while industry stakeholders generally support enhancements to the FRS’s settlement services, an expanded FRS role as a service provider is more controversial with support from small banks and credit unions and resistance from larger institutions.

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SEC Clarifies Guidance Related to Omission of Interim Financial Information in Registration Statements

On Thursday, August 17, 2017, the U.S. Securities and Exchange Commission (the “SEC”) issued an interpretation that clarifies what financial information an emerging growth company (an “EGC”) may omit from its confidentially submitted draft registration statement.

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District Court Sanctions CFPB for Discovery Misconduct; Dismisses Five Defendants from Lawsuit

On August 25, 2017, a federal judge for the U.S. District Court for the District of Georgia dismissed five payment processor defendants from a CFPB lawsuit, following what the Court described as the repeated failure by the Bureau to follow court discovery orders. In particular, the Bureau refused to provide factual evidence supporting the elements of its claims during Rule 30(b)(6) depositions, and made what the Court considered to be repeated unreasonable claims of privilege in response to defendant questions.  The Court noted that “[t]he CFPB was particularly concerned about being asked to marshal its evidence and to link its allegations to the specific facts that support those allegations.” The dismissal adds to a growing number of setbacks the Bureau has experienced in enforcement-related litigation.

The underlying lawsuit is CFPB v. Universal Debt Solutions, LLC, et al., No. 15-CV-859. The Bureau filed the suit in 2015 against a number of entities it described as, collectively, “the ringleaders of a robo-call phantom debt collection operation, their companies, and their service providers.” The defendants included several payment processors whom the CFPB argued should be held liable because, among other things, they should have recognized that chargebacks connected with the scheme were suspicious and likely connected to fraud. The payment processor defendants allegedly provided substantial assistance to the debt-collection operation and engaged in UDAAP violations. In September 2015, the Court ruled in that the CFPB’s allegations were sufficient to state a claim against the payment processor and service providers defendants for providing substantial assistance to the scheme.

During the course of litigation, four payment processor defendants, as well as another “service provider” defendant, served the CFPB with Rule 30(b)(6) deposition notices, requiring the Bureau to produce a representative of the organization to answer defendants’ factual questions. Over the Bureau’s strenuous and repeated objections, the Court held that the depositions would go forward and a CFPB representative was required to answer questions about the facts underlying the elements of the CFPB’s allegations.

The representatives produced by the Bureau, however, read their answers off scripts “to deliver rote, sometimes, unresponsive answers,” and were unable or unwilling to respond to follow up questions outside the scripts. Further, the representatives claimed not to have discovered a single exculpatory fact in the course of the investigation, and repeatedly asserted work product privilege even following clarification from the Court that questions regarding the factual bases for allegations were not privileged.

The Court held that these actions violated its repeated discovery orders. It further held that these violations warranted the substantial sanction of dismissing the counts related to the defendants who conducted the depositions, stating that it did not believe a lesser sanction would be effective in remedying the Bureau’s action.  Though the Bureau may appeal this matter, the sanctions constitute a striking rebuke to the Bureau and represents another in a series of recent litigation losses for the Bureau.

CFTC Enforcement and Regulatory Report: 2017 Activity and Outlook

The U.S. Commodity Futures Trading Commission (the “CFTC” or the “Commission”) has been very active since the beginning of this year, despite the change in Presidential Administration, the lack (until recently) of appointed Commissioners, and the turnover of leadership at both the Commission and Division level.  Notably, the Commission has announced over 20 enforcement actions, proposed four rules, and launched two new initiatives.

Our CFTC Enforcement and Regulatory Report for 2017 describes enforcement activity by the Division of Enforcement and the recent final rule concentrating surveillance and other investigative authority in the division.  The report also provides an update on Commissioner nominations, and discusses the Commission’s regulatory agenda going forward, recent CFTC initiatives, and pending proposed rules.

OCC Permits Programs for Higher LTV Mortgage Lending in Distressed Communities

On August 21, 2017, the OCC issued guidance permitting national banks and federal savings associations to establish programs to offer mortgages with loan-to-value (“LTV”) ratios exceeding 100 percent in communities that have been officially targeted for revitalization by a federal, state, or municipal governmental entity or agency, or by a government-designated entity.

Under existing supervisory guidance, banks are expected generally to limit the LTV ratios of their owner-occupied residential loans to no more than 90 percent, unless borrowers have credit enhancement in the form of mortgage insurance or readily marketable collateral.  The existing guidance recognizes that banks can exceed this limit without obtaining credit enhancement in individual cases, subject to certain conditions.  The OCC’s new guidance allows banks’ mortgage loans to have LTV ratios exceeding 100 percent without credit enhancement as part of an overall program of lending in distressed communities.  (The new guidance does not explain whether mortgages with LTV ratios between 90 and 100 percent are eligible as program loans.)

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CFPB Issues Temporary Amendment to HMDA Rule Reporting Threshold

On August 24, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule amending Regulation C, the implementing regulation for the Home Mortgage Disclosure Act (“HMDA”). In October 2015, the CFPB promulgated substantial revisions to Regulation C (the “HMDA Rule”) to implement statutory amendments to HMDA in section 1094 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The 2015 amendments modified the types of institutions and transactions subject to Regulation C, the types of data institutions are required to collect and report, and the processes for reporting and disclosing the required data. Most of the new or revised regulatory provisions are scheduled to take effect in January 2018.

One such provision would have required certain lenders, including community banks and credit unions, to report home equity lines of credit (“HELOCs”) if the lender originated at least 100 HELOCs in each of the two preceding calendar years. The CFPB’s recent change to the HMDA Rule temporarily increases the threshold for this reporting requirement to 500 HELOCs in each of the two preceding calendar years (through 2018 and 2019).

When it proposed this temporary increase in the HELOC reporting threshold, the CFPB explained that it was responding to “increasing concerns from community banks and credit unions” regarding “the challenges and costs of reporting open-end lending.” The CFPB also noted that its “analysis of more recent data suggests changes in open-end origination trends that may result in more institutions reporting open-end lines of credit than was initially estimated.” The CFPB has indicated that the temporary amendment to the reporting threshold will give the CFPB time to consider whether a permanent change is warranted. Continue Reading

The OCC Rejects Operation Chokepoint in Letter to Chairman Hensarling

On August 21, 2017, Keith Noreika, the Acting Comptroller of the Currency, sent a letter to Jeb Hensarling, the Chairman of the House Financial Services Committee, stating that the Office of the Comptroller of the Currency (“OCC”) is not, and never was, a part of Operation Chokepoint, and that Operation Chokepoint is not the policy of the OCC. Acting Comptroller Noreika sent the letter in response to a request from Chairman Hensarling that the OCC issue a formal repudiation of Operation Chokepoint.

In rejecting Operation Chokepoint, Acting Comptroller Noreika wrote that “the agency rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.” Acting Comptroller Noreika also stated that the OCC “expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”  Continue Reading

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