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Check back regularly to stay informed of landmark decisions and relevant proceedings, as well as news from our legal offices.

PHH v. CFPB: Who won?

You gotta love a case where each party can claim victory!

The US Court of Appeals for the DC Circuit found that the CFPB’s structure was constitutionally valid even though the President could only fire the director for cause rather than “at will.”  So, consumer advocates can be pleased that the agency is continuing in existence, and the director is theoretically independent.  However, they are now stuck with a Trump appointee (when he gets around to it) that will carry over into the next presidential term.  Meanwhile, Mulvaney (interim director) is busy dismantling rules and procedures.  Even the tagline for the CFPB press releases has been changed to add the fact that the CFPB helps “markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations….”

PHH has to be pleased that the appellate court upheld part of the prior decision, which concluded that CFPB director Cordray’s decision-making violated due process.  The case involved a potential violation of the anti-kickback provisions of RESPA.  Cordray retroactively repealed HUD rulings—without going through the Administrative Procedures Act.  Plus, he basically nixed the idea of a statute of limitations for the alleged violation.  The original opinion on this point is a great primer on US Supreme Court decisions on overreach and violation of due process by agencies.  So, industry wins big on this issue.

Now, it will be intriguing to see whether this latter issue (violation of due process) can translate into an effective defense in other cases where regulators “write” rules through the examination and enforcement process!


Karen Neeley
Kennedy Sutherland LLP


Hurricane Harvey - Disaster FAQs


The banking regulators urge bankers to be flexible and provide reasonable accommodations to their borrowers who are adversely affected by natural disasters.  The following are some questions that arise from this.

  1. Many consumers have their income temporarily disrupted by storms. We would like to defer payments.  Any legal or regulatory issues?
  2. From a Reg Z perspective, a payment deferral should be a modification at most. It would not trigger new disclosures.  It is explicitly not a refinancing.  See sec. 1026.20(a)(4).  From a Texas Credit Code perspective, you would not be able to charge a deferral fee on a loan under chapter 342 (installment loan with rate over10%).  Of course, you probably wouldn’t want to do so anyway!

Send the customer a letter or use the bank’s website with the customer logged in to advise them of the deferral and when the payments should re-start.

  1. So, can we explicitly defer payments on home equity loans?
  2. Risky. The Texas Constitution requires home equity loans to be scheduled to be repaid in “substantially equal successive periodic installments.”  I can argue that so long as the original schedule met that criteria, it is valid.  Certainly, the bank can modify a home equity loan.  The safest way to do that is to make accommodations (e.g. lower rate and decrease payments) and extend the term.  So long as the payment covers accrued interest and “some amount of principal,” the loan should be valid.
  3. We expect customers to need home improvement loans quickly in order to start repairs. Can we waive any of the regulatory requirements?
  4. Yes, if you and the customer jump through the right hoops! The Texas Constitution requires both a waiting period of 5 days between application and closing and then a 3 day right of rescission.  Those can be waived, however, if the owner acknowledges in writing that the work and material are necessary to complete immediate repairs to conditions on the homestead that materially affect the health or safety of the owner or person residing in the homestead.

The Reg Z three day right of rescission can be waived for a bona fide personal financial emergency.  The consumer must give the creditor a dated written statement that describes the emergency, specifically waives the ROR, and is signed by all of the consumer entitled to rescind.


  1. Some consumers may wish to apply for a home equity loan so that they can not only fix the damages but also pull out a little cash. Any issues with that?
  2. Sadly, yes. First, remember that the 80% loan to value ratio is measured at closing.  If the homestead has been damaged, its current fair market value may not support a home equity loan.

Second, the Texas Constitution requires a twelve day cooling off period from application/receipt of notice concerning extensions of credit and a three day rescission period.  These CANNOT BE WAIVED!

  1. We would like to offer special, low-rate unsecured loans to affected consumers. Any minefields with that?
  2. Maybe. If your bank should be examined for fair lending pricing issues, this group of loans could skew the results.  But since employee loans are typically excluded from the analysis (due to special rates), this portfolio should similarly be excluded.

Be sure that all of your customers know about the program…not just protected class members.  If you market it, be sure to reach out to your Hispanic customers through Spanish-language radio, for example.

  1. Our customers will be filing claims on their insurance policies as to property damage. Any special problems there?
  2. Yes. The Texas Insurance Code (chapter 557) includes some rules that apply to lenders.  If a claim under a policy for damages to residential real property is paid to the insured and the bank and the bank holds all or part of the proceeds, the bank must notify the insured of its requirements for release of the proceeds.  This notice must be provided not later than the 10th day after the bank receives the insurance payment.

Similarly, if an insurance proceeds check for damages to personal property is made payable to the bank or otherwise requires the bank’s approval, then no later than the 14th business day after the bank receives a request for endorsement or approval it must either endorse/approve or provide a written statement of the reason for the denial.

  1. Many customers with debit/ATM cards did not opt-in to overdraft coverage when we sent the Reg E notice. Can we pay these if they overdraw?
  2. Certainly you MUST pay if the items are force-pays under the card rules. But you could pay these so long as you do not charge a fee of any sort for doing so.  Reg E, sec. 1005.17, prohibits a bank from assessing a fee or charge for an overdraft unless its requirements (notice and opt-in) have been satisfied.
  3. Are there any accounting consequences for waiving these (and other) fees?
  4. No. You just have foregone revenue.

Hurricane Harvey's Impact on the Banking Industry

Dear Clients:

Natural disasters—like Hurricane Harvey—bring a number of challenges to the banking community, many of which will unfold fully only as the full toll is known.  Meanwhile, here is a collection of resource information and action steps.

Closures.  Banks in affected areas can close facilities and open temporary ones with a phone call.  Written notices can be submitted later.  For state charters, the DOB number is 877.893.6246.  DOB page on closings:

FDIC is 202.898.7192 (Barbara Hagenbaugh)

Fed is 202.452.2955 (Darren Gersh).  OCC is 202.649.6870 (William Grassano)

Federal regulatory web site with more info and links: and

DOB Proclamation:

Lending. Regulatory bulletins clearly expect lenders to be flexible on payments during this period. Late fees should be waived! Collateral will be affected as well as income.  Hopefully flood insurance is in place.  Right now, Congress is still arguing over extension of NFIP.  But current policies should cover this event.

Operations. Bankers are encouraged to waive fees during this difficult period.  Also, as waters recede, there will be branches, ATMs, and safe deposit vaults to clean up.  Be aware of the environmental hazards resulting from contaminated flood waters.  Employees need to be careful and wear appropriate gear!

Help for bank employees. IBAT and TBA have already initiated a relief fund campaign.  Contributions are being handled through the Texas Bankers Foundation.  In addition, ICBA is partnering with MainStreet Bank in Fairfax, Va to launch the Hurricane Harvey Community Bank Relief Fund.

Watch for more information as events develop…..

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.

Kennedy Sutherland Named a 2017 'Best Law Firm' by U.S. News-Best Lawyers

Kennedy Sutherland LLP is pleased to announce that it has been named a “Best Law Firm” by U.S. News – Best Lawyers for 2017, achieving national Tier 1 rankings in the practice area of Financial Services Regulation Law.

“Kennedy Sutherland LLP has taken great pride in advising financial institutions on regulatory compliance and enforcement, complex transactions and other expansion activities and banking laws for over 30 years. It’s an honor to have our clients and peers include us in this distinguished group for the work we’ve done” said Patrick J. Kennedy, Jr.

Firms included on the “Best Law Firms” list are recognized for professional excellence with persistently impressive ratings from clients and peers. Inclusion in the rankings signals a quality law practice and breadth of legal experience and knowledge.

About “Best Law Firms”: The U.S. News – Best Lawyers® “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. To be eligible for a ranking, a law firm must have at least one lawyer listed in 23rd Edition of The Best Lawyers in America© list for that particular location and specialty.

About U.S News & Best Lawyers: U.S. News Media Group publishes the monthly U.S. News & World Report magazine and its signature franchises include its “America’s Best” series of consumer guides that include rankings of colleges, graduate schools, hospitals, health plans and more. Best Lawyers is the oldest peer-review publication in the legal profession. For over a quarter century, the company has helped lawyers and clients find legal counsel in distant jurisdictions or unfamiliar specialties.


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.

Advisory to Financial Institutions on E-Mail Compromise Fraud Schemes

The Financial Crimes Enforcement Network (FinCEN) today issued an advisory to help financial institutions guard against a growing number of e-mail fraud schemes in which criminals misappropriate funds by deceiving financial institutions and their customers into conducting wire transfers. This advisory also provides red flags—developed in consultation with the Federal Bureau of Investigation and the U.S. Secret Service—that financial institutions may use to identify and prevent such e-mail fraud schemes. Business E-mail Compromise (BEC) and E-mail Account Compromise (EAC) schemes are among the growing trend of cyber-enabled crime adversely affecting financial institutions. Since 2013, there have been approximately 22,000 reported cases of BEC and EAC fraud involving $3.1 billion.


Advisory Issued on FATF-Identified Jurisdictions with AML/CFT Deficiencies

The Financial Crimes Enforcement Network (FinCEN) today issued an advisory to financial institutions regarding the Financial Action Task Force’s (FATF) updated list of jurisdictions with strategic anti-money laundering/counter-terrorist financing (AML/CFT) deficiencies. These changes may affect U.S. financial institutions’ obligations and risk-based approaches regarding relevant jurisdictions. FinCEN’s advisory can be viewed at

Advisory Notice

Attorneys Recognized by Best Lawyers in America©

Kennedy Sutherland LLP is pleased to announce two attorneys have been named to the 2017 edition of The Best Lawyers in America©. Best Lawyers is an annual ranking designed to capture the opinion of leading lawyers about the professional abilities of their colleagues within the same geographical and legal practice areas.

The following lawyers were recognized by Best Lawyers as leaders in their field in the 2017 edition:

Each year, only a single lawyer in each specialty in each community is honored as the “Lawyer of the Year.” Kennedy Sutherland’s senior attorney, Karen M. Neeley, was selected Best Lawyers® 2017 Banking and Finance Law “Lawyer of the Year” in San Antonio, Texas.

Mr. Kennedy’s practice focuses on the representation of banks, bank holding companies and other financial intermediaries. For over 34 years Kennedy has represented these entities and their shareholders, directors and officers in a broad range of matters, including mergers and acquisitions,  S corp elections, ESOP and bank holding company formations, Community Reinvestment Act strategy, strategic planning, corporate governance and  state and federal banking law compliance. In addition, Mr. Kennedy’s practice includes representation of banks as well as project sponsors utilizing state and federal  tax credit  programs  including Historic Tax Credits, New Market Tax Credits, Renewable Energy Tax Credits and low income housing tax credits.

Ms. Neeley has provided legal services to community banks throughout Texas and beyond for over 30 years. In addition to serving as General Counsel for the Independent Bankers of Texas, she is an advisory director for the Texas Association of Bank Counsel. Routinely, Neeley advises banks on regulatory compliance, examination preparation, policies and procedures and has special expertise in Bank Secrecy Act, fair lending and consumer compliance matters.

First published in 1983, Best Lawyers® lists are compiled based on an exhaustive peer-review evaluation. Lawyers on The Best Lawyers in America list are divided by geographic region and practice areas. They are reviewed by their peers on the basis of professional expertise, and undergo an authentication process to make sure they are in current practice and in good standing. For the 2017 Edition 7.3 million votes were analyzed.