FSOC to Consider First Case Under Dodd-Frank’s Hotel California Provision

The Financial Stability Oversight Council (“FSOC”) has announced that on Thursday, April 12, 2018, it will consider a “potential application” from a bank holding company or its successor to be de-designated as a systemically important financial institution under section 117 of the Dodd-Frank Act.

Sometimes known as the “Hotel California” provision,[1] section 117 of Dodd-Frank provides that any institution that was a bank holding company with $50 billion or more in total consolidated assets as of January 1, 2010, participated in the Capital Purchase Program of the Troubled Asset Relief Program, and ceases to be a bank holding company, will presumptively be treated as a nonbank systemically important financial institution (“nonbank SIFI”) and continue to be supervised and regulated by the Federal Reserve.  Such an institution may appeal its designation as a nonbank SIFI to FSOC, which may grant the appeal by a vote of two-thirds or more of its voting members, including an affirmative vote by the Chairperson (the Secretary of the Treasury).

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FTC Files Comments with CFPB on CID Processes

On March 26, 2018, the staff of the Federal Trade Commission’s Bureau of Consumer Protection (“BCP”) filed a comment in response to the Consumer Financial Protection Bureau’s Request for Information on the procedures for issuing Civil Investigative Demands.

In large part, the comment summarizes the BCP’s experience with its own CID program and highlights the BCP’s recent reform efforts. However, the FTC staff comment also provides recommendations to the CFPB, several of which are summarized here:

  • The comment notes that the CFPB Director, Assistant Director, and Deputy Assistant Directors of the Office of Enforcement all have the authority to issue CIDs, whereas this authority at the FTC is limited by statute to the FTC Commissioners themselves, who review and often modify CIDs or even decline to issue them. FTC staff suggest that review by a “very senior official” is appropriate because of the seriousness of a CID and that the CFPB may wish to consider revising its delegation of authority accordingly. Moreover, the comment emphasizes that agency-head approval “ensures that there will be an independent assessment of the costs and benefits of the CID by someone who is not conducting the investigation.”
  • FTC staff also recommend applying an oversight approach to opening and closing investigations that is more consistent with the FTC’s. The heads of both agencies delegate the authority to initiate investigations. At the FTC this delegation includes delegation to managers in the BCP, led by the BCP Director. The comment notes that the BCP Director meets “regularly” with the Commissioners to maintain a close understanding of their enforcement priorities and objectives. In turn, the BCP Director must ensure that the other BCP managers make decisions about opening, furthering, or closing investigations consistent with those priorities and objectives.
  • The comment suggests that the CFPB use its response to the RFI to publicly “ratify” the agency’s recently adopted policy that CIDs include a more specific description of the relevant investigation and how the requested information is connected to that investigation. The comment notes that the CFPB’s new policy brings it in line with FTC practice.
  • FTC staff also suggest that the CFPB pair its meet-and-confer requirement with delegated authority to enforcement staff allowing the staff to modify the time and manner of complying with a CID, contingent on a CID recipient demonstrating progress toward compliance with the information demands.
  • The BCP staff also recommend that the CFPB shorten and simplify the production requirements for electronically stored information. The comment notes that the BCP’s guidelines are “significantly shorter and less complex.”

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Treasury Releases Recommendations to Reform CRA Framework

On April 3, 2018, the Department of the Treasury (“Treasury”) released its much-anticipated recommendations to reform the Community Reinvestment Act (“CRA”). The report, which is addressed to the federal banking agencies, outlines a number of proposed regulatory and administrative changes to (i) the CRA’s performance evaluation criteria, and (ii) the federal banking agencies’ approach to examining banks’ CRA performance. Treasury’s recommendations focus on four “key areas”:

  • Assessment Areas: Treasury recommends expanding the definitions of geographic assessment areas to extend beyond a financial institution’s physical footprint and account for areas where the financial institution “accepts deposits and does substantial business.” According to Treasury, this expansion would account for “the changing nature of banking arising from changing technology, customer behavior, and other factors.”
  • Examination Clarity and Flexibility: Treasury also recommends enhancing flexibility in the CRA performance evaluation process, including by establishing clearer CRA examination guidance and streamlining recordkeeping procedures. According to Treasury, if implemented, these recommendations would “increase the transparency and effectiveness of CRA rating determinations,” and would result in more consistent application of the CRA framework across regulators. In addition, these recommendations, if implemented, would expand the types of products eligible for CRA credit.
  • Examination Process: Relatedly, Treasury recommends improving the federal banking agencies’ examination processes. For example, Treasury found that the CRA examination process, including the process for drafting and publishing a performance evaluation, has become “excessively long.” To shorten the time between examination periods, Treasury recommends that the federal banking agencies standardize CRA examination schedules. Treasury also calls for statutory changes, if necessary, that would enable more timely performance evaluations and ratings.
  • Performance: Finally, Treasury recommends several improvements to CRA performance evaluation ratings. Most notably, Treasury recommends that the federal banking agencies implement uniform guidance to determine if there is a “logical nexus” between a CRA rating and evidence of discriminatory or other illegal credit practices. In the report, Treasury states that “a UDAP violation for a credit product that was not considered as part of a bank’s CRA performance” would not meet the logical nexus test, and therefore should not negatively impact a financial institution’s CRA rating. In contrast, Treasury states that the federal banking agencies should consider a violation of consumer law involving substantial evidence of redlining. As discussed in a prior post, the Office of the Comptroller of the Currency (“OCC”) has already implemented guidance on CRA rating downgrades for consumer compliance violations.

In the coming months, we expect the OCC to release an advanced notice of proposed rulemaking (“ANPR”) that will propose potential reforms to the CRA. This ANPR may be issued jointly along with the Board of Governors of the Federal Reserve (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). Because Treasury’s recommendations are largely in line with the Comptroller of the Currency Joseph Otting’s public statements on CRA reform, we expect significant overlap between the forthcoming ANPR and Treasury’s recommendations. When the OCC releases the ANPR, financial institutions and other industry leaders will have the opportunity to comment on these recommendations and provide suggestions for additional improvements to the CRA framework.

CFPB Issues Request for Information on Its Consumer Financial Education Programs

On April 4, 2018, the Consumer Financial Protection Bureau (“CFPB”) released its latest Request for Information (“RFI”), which seeks comments on the “overall efficiency and effectiveness” of the CFPB’s consumer financial education programs. Generally, the CFPB is requesting comment on its focus on various topics, programs, and delivery channels and methods (presumably to identify if those are the right topics and tools); its use of technology in delivering financial education; and the procurement process it uses to support this work. More specifically, the CFPB is requesting suggestions on ways to:

  • Improve existing consumer financial education programs, including delivery mechanisms for such programs;
  • More effectively evaluate and measure the effectiveness of the CFPB’s financial education work; and
  • Eliminate or minimize the overlap between the CFPB’s consumer financial education programs and the work that other agencies perform.

Notably, financial education was the first topic discussed in the CFPB’s recent semi-annual report and appears to be an area on which the CFPB is quite focused. The CFPB will accept comments for 90 days after the RFI is published in the Federal Register.

The RFI on consumer financial education programs is the eleventh in a series of RFIs issued under the direction of Acting Director Mick Mulvaney. Covington has published a number of blog posts that discuss these RFIs, all of which can be found on the Cov Financial Services Blog. In the press release announcing this RFI, the CFPB stated that it will issue another RFI regarding consumer inquiries next week.

CFPB Issues RFI On Its Guidance and Implementation Support

On March 28, 2018, the Consumer Financial Protection Bureau (“CFPB”) issued a Request for Information (“RFI”) regarding the effectiveness and accessibility of its guidance materials and activities, including implementation support.  Specifically, the RFI asks for information about the following aspects of the CFPB’s methods of providing guidance to the public:

  • Regulatory Inquiries Function: This function allows individuals to submit specific questions about the CFPB’s statutes and regulations by phone, email, or forms on the Bureau’s website.  Responses are informal and usually provided by phone, although the RFI notes that “an increasing number of responses” are conducted by email, particularly for questions about the Home Mortgage Disclosure Act (“HMDA”).  The RFI invites comments specifically on the preferred methods for submitting inquiries and receiving responses; the relative value of different types of responses (such as the tradeoff between faster oral guidance provided individually vs. slower, but more accessible, written guidance); and whether and how the CFPB should publish written responses.
  • Regulatory Implementation and Compliance Aids: This category includes both traditional written material such as compliance guides, rule summaries, and other quick reference materials, and webinars.  The RFI asks for input on the format and availability of these materials; the scope of topics addressed; the effectiveness of the “plain language writing style” that the CFPB uses; and the value of providing Small Entity Compliance Guides and similar materials that the Bureau is not required by law to produce.  On this last topic, the RFI appears to reflect a concern that the small entity resources are written for more than just entities that strictly meet the SBA’s definition of “small business.”
  • Official Interpretations and Standalone Interpretive Rules: These forms of guidance include published Official Interpretations to final rules and standalone interpretive rules issued without notice-and-comment processes.  The RFI states that areas of interest to the CFPB include the efficiency and effectiveness of these interpretations; how often the CFPB should amend Official Interpretations to incorporate standalone interpretive guidance; what process the agency should use for making such amendments; and whether the CFPB should voluntarily employ notice-and-comment procedures for issuing standalone interpretive rules.
  • Guidance Materials of the CFPB Division of Supervision, Enforcement, and Fair Lending (“SEFL”): These materials include compliance bulletins, policy statements, and statements on supervisory practices.  Suggested topics for comment include the timing, frequency, scope, and delivery method of SEFL guidance materials, and the relative value of each type of SEFL guidance.
  • Recommendations for New Forms of Written Guidance: The RFI requests feedback on the utility of providing guidance through FAQs; the comparative utility of an advisory opinion program alongside or instead of FAQs; the costs and benefits of memorializing advisory opinions or other guidance in Official Interpretations through notice and comment; the tradeoffs between quicker guidance such as FAQs or advisory opinions and written guidance after notice and comment; and other forms of written guidance.
  • Disclaimers: The RFI requests feedback on whether the disclaimers on the CFPB’s guidance are transparent, understandable, and appropriate; how the CFPB should change its disclaimer language; how the CFPB should change its “approach” to disclaimers generally; and whether the Bureau should more frequently use a single, more generic disclaimer rather than the variety of disclaimers now used.

The RFI does not ask for comments on certain other matters, which the CFPB is addressing through other RFIs, including:

  • Educational materials on regulations developed for consumers or in response to consumer inquiries;
  • The substance of any proposed rules, final rules, or Official Interpretations; and
  • The guidance provided in the CFPB’s Supervision and Examination Manuals and Supervisory Highlights.

The RFI is the tenth to be issued on various topics in short succession since the arrival of Acting Director Mick Mulvaney.  The CFPB has announced that it will shortly issue RFIs on consumer education and on consumer inquiries.

CFPB Issues Semi-Annual Report, Calls for Legislative Changes

On April 2, 2018, the Consumer Financial Protection Bureau issued its semi-annual report to Congress.  Along with the traditional review of Bureau activities for the 6-month period covered by the report, the report is most notable for the 4 legislative proposals offered by Acting Director Mulvaney in his introductory letter, each of which would serve as a substantial check on the Bureau’s authority and independence.

The four proposals, which reflect concerns voiced by Republicans in Congress about the Bureau’s authority since its founding, are as follows:

  1. Alter the current funding mechanism to fund the Bureau through Congressional appropriations.
  2. Require affirmative legislative approval of “major” rules by Congress.
  3. Ensure that the Bureau’s Director, who presently can only be terminated for cause, is answerable to the President.
  4. Create an independent Inspector General to provide additional oversight.

In proposing these changes – which are described only in broad outlines – Acting Director Mulvaney asserts that the Bureau’s “lack of accountability” should be a “warning sign that a lapse in democratic structure and republican principles has occurred.”  To address those concerns, he proposes these structural reforms that will long outlive the Acting Director’s tenure, and invites a discussion of these proposals during his upcoming Congressional testimony.

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Arizona Creates Sandbox Program for Fintech

Arizona recently became the first state in the U.S. to create a “regulatory sandbox” program to facilitate the development of innovative financial products and services, which either incorporate new or emerging technology or reimagine uses of existing technology. Arizona H.B. 2434 requires the State Attorney General to establish a sandbox program to which entrepreneurs may apply to test their innovations. Program participants will gain the ability to test their products on up to 10,000 Arizona state residents (and up to 17,500 residents in some instances), without the need to obtain certain state licenses that would otherwise be required. Program participants are also exempted from certain state financial sector regulations. The full bill can be accessed here.

GAO Publishes Report on Fintech Regulation

On March 22, 2018, the Government Accountability Office (“GAO”) issued a report on the regulation of financial technology (“fintech”) in response to a request from Congress for more information on “fintech activities.” The report concludes that agencies that regulate fintech firms should coordinate with each other more closely, develop offices of innovation (for agencies that have no already done so), and consider adopting approaches to fintech used in foreign jurisdictions, such as the “regulatory sandbox” approach used by the U.K.’s Financial Conduct Authority. GAO also reports on a few innovation initiatives under consideration by agencies such as the OCC and CFTC.

The GAO’s analysis focuses on the following fintech areas: payments, lending, wealth management and financial advice, and blockchain/distributed ledger technology, including virtual currency.  The report is the product of interviews with over 100 fintech stakeholders, including representatives of fintech firms, financial institutions, trade associations, law firms, consumer groups, and federal and state financial regulators.

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House Financial Services Committee Approves Bill to Exclude Attorneys from FDCPA

This week, the House Financial Services Committee (the “Committee”) approved by a vote of 35-25 a bill introduced last month by Rep. Alex Mooney (R-WV) that would exclude from the definition of “debt collector” under the Fair Debt Collection Practices Act (“FDCPA”) law firms or licensed attorneys engaged in litigation activities to collect a debt, provided that those activities are “in connection with a legal action in a court of law to collect a debt” and that the debtor is served or service is attempted in accordance with applicable rules. The bill, H.R. 5082, the “Practice of Law Technical Clarification Act of 2018,” provides that such “litigation activities” that would exempt an attorney from the definition of “debt collector” include:

  • serving legal pleadings or discovery;
  • communicating in a court of law, depositions, settlement conferences, or in the enforcement of a judgment; or
  • “any other activities engaged in as part of the practice of law … that relate to the legal action.”

The Committee passed the bill the same week that the CFPB and Federal Trade Commission submitted their joint report to Congress on their activities under the FDCPA. The report, covered in our recent post, highlighted the agencies’ enforcement actions under the FDCPA. Many of the recent actions have focused on attorneys or law firms engaged in debt collection activities. H.R. 5082 could thus have a measurable impact on enforcement in this arena. The agencies have also been active recently in FDCPA enforcement against non-lawyers: mortgage loan servicers, debt collection agencies, payment processors, and telephone marketing service providers.

In addition, the bill would amend the Consumer Financial Protection Act to prevent the Consumer Financial Protection Bureau (“CFPB”) from exercising its enforcement or supervisory authority over attorneys when engaged in such activities in connection with a legal action to collect a debt. The next step is for the entire House of Representatives to consider the bill.

As the Committee’s press release notes, H.R. 5082 is one of eight bills that the Committee advanced this week, another active week following last week’s passage in the Senate of a bill to roll back certain regulations under the Dodd-Frank Act.

Regulators Issue Report on Activities to Combat Illegal Debt Collection Practices

Yesterday, the Consumer Financial Protection Bureau (“CFPB”) and Federal Trade Commission (“FTC”) issued a joint annual report to Congress on their activities in 2017 to combat illegal debt collection practices under the Fair Debt Collection Practices Act (“FDCPA”), for which the agencies share responsibilities.
The report suggests that, even amidst other changes at the CFPB, debt collection activities remain an area of focus, particularly on the enforcement side. The report also highlights coordination between the FTC and CFPB at least on this issue. It remains to be seen how this coordination plays out practically in future investigations and how the CFPB handles similar overlapping authorities with other regulators.

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