Last Thursday, by a party-line vote of 34-26, the House Financial Services Committee approved the Financial CHOICE Act (H.R. 10) proposed by Committee Chairman Jeb Hensarling.
In addition to overhauling the CFPB’s structure and authority, the bill would make significant changes to the rulemaking process followed by the CFPB and other financial services regulators, including the Fed, FDIC, OCC and NCUA. It would also override the Second Circuit’s controversial opinion in Madden v. Midland Funding by codifying the “valid when made” rule and repeal the women- or minority-owned businesses and small business data collection requirements added to the ECOA by Section 1071 of Dodd-Frank.
Key CFPB changes include the following:
- The CFPB would be renamed the “Consumer Law Enforcement Agency” (CLEA). It would be led by a single Director appointed by the President and confirmed by the Senate. There would be no “for cause” limit on the President’s authority to remove the CLEA Director and the Deputy Director would also be appointed by the President.
- The CLEA would have no supervisory authority, no UDAAP enforcement or rulemaking authority, no enforcement or rulemaking authority “with respect to payday loans, vehicle title loans, or other similar loans,” and no authority to prohibit or limit the use of arbitration agreements in connection with consumer financial products or services.
- The CFPB’s 2013 indirect auto finance guidance would be nullified and any such future guidance would be subject to various requirements that include advance public notice and a comment period.
- The Office of Information and Regulatory Affairs (OIRA) would “have the same duties and authorities with respect to the [CLEA] as the [OIRA] has with respect to any other agency that is not an independent regulatory agency.” Presumably, this means proposed and final CLEA regulations would be subject to OIRA review.
- The CLEA would be subject to the regular Congressional appropriations process. (The OCC, FDIC and NCUA would also be brought in to the appropriations process.)
- The CLEA would have its own Inspector General.
- A party to a CLEA administrative proceeding that could result in a cease and desist order or penalty could require the CLEA to terminate the proceeding, thereby requiring the CLEA to bring a civil action should it wish to pursue the same remedies.
- The recipient of a CID could file a petition to modify or set aside the CID with a federal district court.
- An Office of Economic Analysis would be created within the CLEA to conduct an impact analysis of all proposed rules, conduct follow up reviews of final rules at designated intervals to measure the rule’s success in meeting its objectives, and conduct a cost-benefit analysis of a proposed administrative action, civil lawsuit, or consent order.
- The Director of the CLEA would be required to establish a procedure for the issuance of advisory opinions.
- The CLEA would be required to maintain a segregated account in the Civil Penalty Fund for all civil penalties it receives. Any funds not distributed to victims of the violations for which the penalties were collected that remain in the segregated account after 2 years would have to be deposited in the general U.S. Treasury.
Key changes to rulemaking process include the following:
- The CLEA, Fed, FDIC, OCC, NCUA, SEC, FHFA, and Commodity Futures Trading Commission (federal financial agencies) would be required to include specified information in notices of proposed and final rulemaking. Such information is similar to the information that currently must be provided to OIRA by federal agencies, other than those defined as an “independent regulatory agency, under Executive Order 12866 for proposed and final regulations constituting a “significant regulatory action.” That information includes an assessment of a regulation’s anticipated costs and benefits and an identification and assessment of available alternatives.
- Before a rule can take effect, a federal financial agency must publish in the Federal Register “a list of information on which the rule is based, including data, scientific and economic studies, and cost-benefit analysis” and submit a report to Congress containing specified information that includes a classification of the rule as “major” or “nonmajor.” A major rule is a rule that it is likely to result in (a) an annual effect on the economy of $100 million or more, (b) a significant increase in costs or prices for consumers, individual industries, federal, state or local government agencies or geographic regions, or (c) significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based businesses to compete with foreign-based businesses in domestic and export markets.
- A major rule cannot take effect until Congress enacts a joint resolution of approval. A nonmajor rule is subject to disapproval by a joint resolution. The bill specifies the procedures for joint resolutions of approval and disapproval.
- Chevron deference would not apply to judicial review of a federal financial agency’s action. A court would be required to “decide de novo all relevant questions of law, including the interpretations of constitutional and statutory provisions, and rules made by an agency.”
- An agency could not use the proceeds of a settlement for payments to persons who were not victims of the alleged wrongdoing.
The CHOICE Act bill would override the Second Circuit’s opinion in Madden v. Midland Funding, in which the court held that a non-bank transferee of a loan from a national bank loses the ability to charge the same interest rate that the national bank charged on the loan under Section 85 of the National Bank Act. The bill would add the following language to Section 85: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.” The same language (with the word “section” changed to “subsection” when appropriate) would also be added to the provisions in the Home Owners Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks. (While these statutory amendments would be welcome, Alan Kaplinsky recently pointed out in a recent article for American Banker’s BankThink that the OCC could more simply and quickly accomplish the same objective for national banks by issuing a regulation.)
Finally, the CHOICE Act bill would repeal Section 704B of the ECOA, the amendment made to the ECOA by Section 1071 of Dodd-Frank to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.
The bill must now be considered by the full House. A vote on the bill could happen before the end of this month.