Category Archives:Legal News

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

PHH Corporation v. CFPB

If you are like me, you have probably read several very brief articles about the eagerly anticipated appellate decision from the DC Court of Appeals in PHH Corporation v. Consumer Financial Protection Bureau (CFPB), considering whether or not the CFPB is an unconstitutionally created behemoth. As important as the future of the CFPB is, there were really critical issues addressed by this decision. So, I have put on my reading glasses and now read the entire 110 pages of the opinion.

Constitutional Issue. The first 69 pages of the opinion dealt with the constitutionality issue as to the structure of the CFPB. The court concluded that, in order to appropriately maintain the effect of the Executive Branch, an independent agency must either have a multi-member board or the president must have the authority to remove the director at will rather than only “for cause.” The remedy put into place by this court is to conclude that the CFPB director must be dismissible at will by the president.

FYI, there are three agencies that don’t fit the analysis including the Social Security Administration, FHFA, and the Office of Special Counsel. Another single executive agency, the Office of Comptroller of the Currency, is safe as the comptroller is removable at will.  Therefore, that agency’s constitutional validity should not be at question. And the court found appropriate protections or limitations as to the other three.

RESPA. The court then totally struck the CFPB’s interpretation of the anti-kickback provisions in RESPA. The law and the rule have an explicit exception for “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” HUD had long standing letters and interpretations explicitly permitting the reinsurance scenario. The only issue in this case, then, is whether the reinsurance premiums were at “reasonable market value.” According to the court, “the basic statutory question in this case is not a close call.

This part of the opinion is very important to community bankers as I believe it strikes at the heart of the guidance published last year by the CFPB on marketing services agreements. If the contracts provide for services that are actually performed and the payment is at reasonable market value, then these agreements should be valid.

Statute of Limitations. Cordray held in his administrative opinion that the statute of limitations in RESPA did not apply to him. He concluded that the Dodd Frank Act’s enforcement authority granted to the CFPB authorized administrative actions that were not bound by other statutes and their specific limitations provisions. The court disagreed and concluded that the CFPB’s enforcement authority is in fact limited by the “statutes of limitations of the various federal consumer protection laws it is charged with enforcing.” RESPA has a one year limitation period for court actions and a three year period for administrative ones. Thus, the three years applies here. This is just not ambiguous in RESPA, and the Dodd Frank Act doesn’t override this. This part of the opinion also means that the CFPB can’t ignore the clear statutes of limitation in the other 18 laws assigned by DFA to it.

There is a very good discussion of the core American jurisprudence concept of due process in this part of the opinion. I particularly like this quote from Satellite Broadcasting Co. v. FCC: “Traditional concepts of due process…preclude an agency from penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule…Otherwise the practice of administrative law would come to resemble ‘Russian Roulette.'” I would argue that the current ADA application to private websites-without any rulemaking on the part of the Department of Justice-would also fall within this prohibition!

For more information contact: Karen M. Neeley.

RESPA Compliance and Marketing Services Agreements

As appeared in Banker’s Digest on October 26, 2015

By: Karen Neeley

The CFPB has been very active in pursuing perceived kickbacks in the real estate settlement process.  In June, Director Cordray issued a decision in the PHH Corp administrative enforcement appeal.  The administrative law judge had imposed a penalty of $6 million.  The case involved an alleged kickback relating to mortgage insurance referred to affiliates of the mortgage company.  Cordray concluded that the action was not limited in time and pursued all loans closed on or after July 21, 2008 (years before the bureau was created).  In addition, he disallowed reliance on a 1997 HUD letter on point.  The result was an increase in the penalty to $109 million.  This case follows on the heels of a number of other kickback cases decided on an ad hoc basis by the CFPB.

On October 8, 2015 the CFPB issued Compliance Bulletin 2015-05 on RESPA Compliance and Marketing Services Agreements (MSAs).  This is not a rule, and so no comments are permitted.  As with UDAAP, the CFPB is making law through enforcement proceedings and guidance rather than through formal rulemaking.

Although many of the cases brought by the CFPB have related to insurance services, the bulletin is not limited in its scope.  For example, the Bureau notes that it has found many examples of settlement service providers keeping payments without actually performing any contractually-obligated services such as underwriting, processing, and closing services.  In one case, a title company entered into unwritten agreements with individual loan officers to defray their marketing expenses and to provide leads.  Then the loan officers sent referrals to the title company. Other cases involved other marketing services that were alleged not performed in exchange for the fees paid.

The bulletin notes that the “Bureau has found that many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement…”  A more careful consideration of legal and compliance risk arising from MSAs is recommended by the CFPB.  Whistle blower activity continues to grow and is encouraged by the CFPB.

The timing on this bulletin could not be worse.  Many community banks have already exited residential mortgage lending due to the rigidity of the QM rules and ability to repay standard.  Those who are toughing it out have seriously reevaluated their programs due to the compliance nightmare posed by TRID (Truth in Lending/RESPA Integrated Disclosures).  One obvious solution to the bank that wanted to continue providing residential mortgage loans was to enter into an MSA with a mortgage company or larger institution.  The Compliance Bulletin pours cold water on that option.

Nonetheless, a properly drafted and carefully monitored MSA with a quality mortgage lender can still be a viable option.  But there must be a rigorous due diligence review of the third party with whom the bank contracts.  The board should carefully evaluate all risks before entering into such an arrangement.  Most significantly, the bank must carefully and fully perform the services it agrees to provide in exchange for its fee.  Finally, the program should be monitored and evaluated from time to time to make sure that compliance is still on course.

The bulletin notes, and Cordray states in his decision, that these MSA arrangements result in higher cost and less ability to shop for the consumer.  My concern as an unabashed supporter of community banking is that the true cost of these moves by the CFPB will be in reduced credit availability in rural communities and to marginal borrowers.  Meanwhile, clearly regulatory compliance costs for community banks are now higher.  And while I don’t have a degree in economics, I strongly suspect that higher costs will ultimately mean higher prices on loans.

OCC Host Workshop in Dallas

The Office of the Comptroller of the Currency will host two workshops in Dallas at the Wyndham Dallas Suites – Park Central on October 20-21,  2015 for directors of national community banks and federal savings associations. The workshop is limited to the first 35 registrants and cost $99 to attend.

The Compliance Risk workshop on October 20 combines lectures, discussion, and exercises on the critical elements of an effective compliance risk management program. The workshop also focuses on major compliance risks and critical regulations. Topics of discussion include the Bank Secrecy Act, Anti-Money Laundering and Qualified Mortgage Regulations. The instructors will also touch on the new Truth-in-Lending (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA) Integrated Disclosures Rule, also known as TRID.

Revised and updated for 2015, the Credit Risk workshop on October 21 focuses on credit risk within the loan portfolio, such as identifying trends and recognizing problems. The workshop also covers the roles of the board and management, how to stay informed of changes in credit risk, and how to effect change.

 The workshops are taught by experienced OCC staff and are two of the 35 offered nationwide to enhance and expand the skills of national community bank and federal savings association directors. For information, including a complete list of available workshops, or to register for a workshop, visit http://www.seiservices.com/occ or call (240) 485-1700.

TBA Files Freedom of Information Act Request with CFPB

The Texas Bankers Association (TBA) announced on its website that it has filed a Freedom of Information Act (FOIA) Request with the CFPB to obtain all documentation the CFPB requested from bank software processors on the overdraft activity of their bank customers.

In a memo, dated June 2nd, to state banking associations, the American Bankers Association raised concerns about the costs to industry of the CFPB’s use of its expansive authority to gather information under Section 1022 of the Dodd-Frank Act. The ABA stated in the memo that one of the processors had informed its clients that it may pass on to them the processor’s costs in responding to the CFPB’s order. The memo encouraged the Bureau to seek all relevant information before engaging in rulemaking, insist that the Bureau fund its data collection efforts, and support the introduction of legislation to address Section 1022 of the Dodd-Frank Act.

In its announcement, the TBA states that it was informed by its members that one of the processors would be billing its client banks for the cost of producing the information sought by the CFPB regarding overdraft checking programs. The TBA commented that it “objects to this third-party data search on both legal and customer privacy grounds” and is “concerned about the breadth of this data sweep and why the CFPB’s information requirements could not be satisfied with a representative cross-sampling rather than a demand request apparently sent to every major processor in the banking industry.”

According to the TBA, in addition to seeking “copies of all factual and analytical surveys and investigations conducted by the CFPB, or on its behalf by third parties,” its FOIA request also seeks “access to any legal analysis relied upon by way of supporting the CFPB’s legal authority for the issuance of the information orders.”

CFPB Challenged

The Consumer Financial Protection Bureau (CFPB), established on July 21, 2011, was challenged by Senator Ted Cruz and Representative John Ratcliffe with the introduction of (S. 1804, H.R. 3118). Both bills move to abolish the Bureau, saying that while the Bureau was intended to “help consumers by regulating and reigning in larger financial institutions,” in actuality, “big banks have only gotten bigger and the number of smaller banks and options for consumers have only decreased.” Separately, Chairman Richard Shelby of the Senate Banking Committee progressed legislation that would place the Bureau within the appropriations process and replace its director-driven governance model with a five-member commission. 

In survey results released by SNL Financial last week, 33% of respondents identified the creation of the CFPB as the byproduct of Dodd-Frank that has most impacted their bank. SNL Financial conducted the online survey of 616 banking industry professionals. The survey ran from July 2, 2015-July 17, 2015.

Risks & Opportunities Facing Financial Services

Comptroller of the Currency Thomas J. Curry recently discussed risks and opportunities facing financial services during remarks before the New England Council in Boston, MA. During his speech, the Comptroller commented on interest rate risk, compliance risk, cybersecurity, and the role collaboration can play in mitigating these risks. He also discussed opportunities to improve business operations as well as service to customers.

More specifically, Curry emphasized that the inevitable rise in interest rates could greatly affect loan quality, particularly loans that were not carefully underwritten to begin with, and that ”loans that are typically refinanced, such as leveraged loans,” would be particularly severely affected. The final and “perhaps the foremost risk facing banks today,” according to Curry, is cyber threats. Curry outlined the agency’s efforts to curtail cyber intrusion in the banking industry, highlighting the June 30 release of its Semiannual Risk Assessment . Curry noted lastly that information-sharing is just as important as self-assessment and supervisory oversight and he strongly recommend that financial institutions of all sizes participate in the Financial Services Information Sharing and Analysis Center, a non-profit information-sharing forum established by financial services industry participants to facilitate the sharing of physical and cyber threat and vulnerability information. Collaboration among banks of all sizes and non-bank providers, Curry stated, can be a “game-changer” in more ways than one.”

Read Curry’s remarks

Senators Ask CFPB for Small Business Loan Data

On July 10th U.S. Sen. Cory Booker (D-NJ) with fellow senators issued a letter urging the Consumer Financial Protection Bureau (CFPB) to expedite the agency’s rulemaking (Regulation B) around publicly available small business loan data, pursuant to Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The request was made due to the lack of public data which makes it difficult for lenders to identify, control and increase lending across all communities.

The letter states, ““There are nearly 28 million small businesses in the United States. While entrepreneurship can open the door to achieve the American Dream, it can be difficult for entrepreneurs to get their businesses started. Access to capital is often limited in underserved and underrepresented communities—the same communities that disproportionately endure financial hardship and lack broader access to opportunities….Current data collection efforts are fragmentary and provide an incomplete picture of lending in the small business marketplace. Regulation B will facilitate the enforcement of fair lending laws and help identify the credit needs of women-owned, minority-owned, and all small businesses.”

Read the Letter

FDIC's Advisory Committee on Community Banking Scheduled to Meet

The Federal Deposit Insurance Corporation (FDIC) has announced that its Advisory Committee on Community Banking will meet on Friday, July 10. Staff will provide an update on a number of issues, including examination frequency and offsite monitoring; call report streamlining; the cybersecurity assessment tool; and recent rulemakings. There also will be discussions about high volatility commercial real estate loans and review of banking regulations under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA).

The meeting is open to the public and will be held from 9:00 a.m. to 3:00 p.m. EDT in the FDIC Board Room on the sixth floor of FDIC headquarters located at 550 17th Street, NW, Washington, D.C. The meeting also will be webcast live. The agenda for the meeting and a link to the webcast are available at https://www.fdic.gov/communitybanking/2015/2015-07-10_agenda.html.

Cybersecurity Assessment Tool Released

The FDIC & FFIEC have released a Cybersecurity Assessment Tool to help financial institutions with less than $1 Billion in total assets identify their cybersecurity risks and determine their preparedness. The Assessment provides a repeatable and measurable process for financial institutions to measure their cybersecurity preparedness over time.

The Assessment consists of two parts: Inherent Risk Profile and Cybersecurity Maturity. The Inherent Risk Profile identifies the institution’s inherent risk before implementing controls. The Cybersecurity Maturity includes domains, assessment factors, components, and individual declarative statements across five maturity levels to identify specific controls and practices that are in place. While management can determine the institution’s maturity level in each domain, the Assessment is not designed to identify an overall cybersecurity maturity level. To complete the Assessment, management first assesses the institution’s inherent risk profile based on five categories: 1.)Technologies and Connection Types 2.) Delivery Channels 3.) Online/Mobile Products and Technology Services 4.) Organizational Characteristics 5.) External Threats. Management then evaluates the institution’s Cybersecurity Maturity level for each of five domains: 1.) Cyber Risk Management and Oversight 2.) Threat Intelligence and Collaboration 3.) Cybersecurity Controls 4.) External Dependency Management 5.) Cyber Incident Management and Resilience.

Learn More About the Cybersecurity Assessment Tool

FFIEC Cybersecurity Assessment Tool Presentation View Slides (PDF) | View Video

The FDIC encourages institutions to comment on the usability of the Cybersecurity Assessment Tool, including the estimated number of hours required to complete the Assessment, through a forthcoming Federal Register Notice. FDIC-supervised institutions may direct questions on the FFIEC Cybersecurity Assessment Tool through https://fdicsurveys.co1.qualtrics.com/jfe/form/SV_4JgpIWXWB9Gjps1.