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PLI’s 24th Annual Consumer Financial Services Institute will take place on March 25-26, 2019, in New York City (and by live webcast and groupcast in Philadelphia, Pittsburgh, and Mechanicsburg, Pennsylvania, and New Brunswick, New Jersey); on May 20-21, 2019, in Chicago; and on December 9-10, 2019, in San Francisco (and by live webcast).

The Institute is considered the country’s premier consumer financial services CLE program and this year’s Institute will once again explore in detail important developments in consumer financial services regulation and litigation.  I am again co-chairing the event, as I have for the past 23 years.

The leadership of the CFPB, OCC, FDIC and FTC is now firmly under Republican control.  While this has altered these agencies’ priorities, all continue to be very active in enforcing consumer financial laws and the CFPB’s supervisory activities remain substantially unchanged.  At the same time, state attorneys general and regulators are increasing their regulatory and enforcement activity to fill any void created at the federal level.  In addition, the improved economy, the deregulated federal environment, and the rapid increase in technological innovation has resulted in new entrants into the consumer financial services industry and the offering of new products and services by existing players.

The morning session on the first day will feature a panel discussion titled “Federal Regulators Speak,” that will be divided into two segments and focus on federal regulatory, enforcement, and supervisory developments.  I will moderate a discussion among CFPB, OCC, FTC and FDIC representatives.

My partner Chris Willis will participate as a panel member in two panel discussions featured in the afternoon session of the first day.  One of those panels is titled “Fair Credit Reporting Act/Debt Collection Issues” and will include a discussion of the CFPB’s debt collection rulemaking, FCRA litigation trends, and state activity. The other panel, which I will moderate, is titled “The Rapidly Evolving Landscape for FinTech” and will examine the intersection between new technologies and products and existing regulatory frameworks, such as the use of Artificial Intelligence (AI) and Blockchain (including virtual currency).

The Institute will also focus on a variety of other cutting-edge issues and developments, including:

  • Privacy and data security issues
  • TCPA developments
  • Class action and litigation developments
  • State regulatory and enforcement developments
  • Consumer advocates’/plaintiff lawyers’ perspectives on current regulatory and litigation issues

We hope you can join us for this informative and valuable program.  PLI has made a special 25 percent discounted registration fee available to those who register using the link that follows.  To register and view a complete description of PLI’s 24th Annual Consumer Financial Services Institute, click here.

For assistance with registration, contact PLI Customer Service at 800-260-4PLI

The FDIC and the Federal Reserve Board of Governors issued a joint advisory to make financial institutions aware of a 2018 amendment to the Fair Credit Reporting Act that provides that a financial institution may, but is not required, to offer a loan rehabilitation program (Section 602 Program) to private education loan borrowers whose credit reports contain a reported default on a private education loan.

The amendment was contained in Section 602 of the Economic, Growth, Regulatory Relief and Consumer Protection Act which was enacted on May 24, 2018.  Section 602 amended FCRA Section 623 to allow financial institutions to offer a 602 Program.  The advisory addresses the requirements for a Section 602 Program, including the need for a financial institution that intends to offer a Section 602 Program to submit a written request for approval to its appropriate federal banking agency.

The advisory states that if a borrower meets the requirements of a financial institution’s Section 602 Program that satisfies the statutory requirements for such a program, the institution can remove a reported default from the borrower’s credit report and the institution will be shielded (i.e. have a safe harbor) from potential FCRA claims related to the removal.

 

A group of 13 state attorneys general and the District of Columbia AG have sent a letter to the FDIC commenting on the agency’s request for information on small-dollar lending.  The RFI, published in November 2018, seeks input on “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.”

In their letter, the AGs assert that “payday lenders are once again returning to ‘rent-a-bank’ schemes in order to evade state law.”  They recommend that “the FDIC discourage banks from entering into these relationships in any guidance it issues on small-dollar lending.”

The AGs also recommend “that the FDIC discourage banks from extending small-dollar loans without considering the consumer’s ability to repay” and “include in any guidance on small-dollar lending factors banks should consider in evaluating a consumer’s ability to repay.”  The specific factors they urge the FDIC to identify are “a consumer’s monthly expenses such as recurring debt obligations and necessary living expenses,” “a consumer’s ability to repay the entire balance of the proposed loan at the end of the term without re-borrowing,” and the “consumer’s ability to absorb an unanticipated financial event…and, nonetheless, still be able to meet the payments as they become due.”

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  With the comment period on the FDIC’s RFI having ended on January 22, the FDIC could soon follow suit.

In October 2018, the CFPB issued a statement in which it stated that it expects to issue a proposed rule this month to revisit the ability-to-repay provisions of its final payday/vehicle title/ high-rate installment loan rule but not the rule’s payments provisions.  The Bureau also stated that its proposal would address the rule’s August 19, 2019 compliance date.  On January 14, American Banker published an article indicating that the Bureau was expected to issue its proposal “within days or weeks.”  According to the article, the Bureau has concluded that the best approach is to entirely remove the rule’s ability-to-repay provisions.

 

 

 

The FDIC has issued an Advance Notice of Proposed Rulemaking (ANPR) seeking comment on its regulatory approach to brokered deposits and interest rate restrictions.

The FDIC’s current regulations on brokered deposits and interest rate restrictions are set forth at 12 C.F.R. Section 337.6.  Such regulations implement Section 29 of the Federal Deposit Insurance Act which restricts an insured depository institution that is less than well capitalized from soliciting or accepting deposits by or through a “deposit broker.”  It also imposes restrictions on the interest rate that such institutions can pay on deposits.  

The FDIC states in the ANPR that it is undertaking a “comprehensive review[] [of] its brokered deposit and interest rate regulations in light of significant changes in technology, business models, the economic environment, and products since the regulations were adopted.”  Through the ANPR, the FDIC seeks input on how it “can improve its implementation of Section 29 of the FDI Act, while continuing to protect the safety and soundness of the banking system.”  The FDIC also seeks input on a series of specific questions, with one set of questions directed at  brokered deposits and a second set directed at interest rate restrictions.

In addition to two sections that discuss various issues concerning brokered deposits and interest rate restrictions, the ANPR’s Supplementary Information contains a section that reviews the current law and regulations and their history and another section that reviews the history of brokered deposit use by insured institutions, including the impact of the bank failures that occurred during the 1980s, and related research findings.  The ANPR also includes two appendices: Appendix 1 providing “descriptive statistics detailing the historical holdings of brokered deposits by bank size and [Prompt Corrective Action] capital classification status” and Appendix 2 providing an updated analysis of core and brokered deposits using data through the end of 2017.

Given the infrequency with which the FDIC has granted waivers to the interest rate restrictions for banks that are deemed less than well capitalized (including banks that have entered into an enforcement action with a capital provision), a reexamination of the brokered deposit rules will be viewed positively by the industry.  Further, although a financial institution could use brokered deposits to fund rapid growth, brokered deposits can be a more stable long-term funding source on a financial institution’s balance sheet.  The industry will benefit if financial institutions can use brokered deposits responsibly without significant limitations to manage liquidity needs and limit interest rate risk.

Responses to the ANPR will be due no later than 90 days after the date of its publication in the Federal Register.  

 

On November 15, 2018, in response to a November 7, 2018 letter from Republican Senators, FDIC Chairman Jelena McWilliams announced that the FDIC has engaged outside counsel to investigate the Obama-era Operation Choke Point, under which the FDIC and other government agencies pressured banks not to do business with payday lenders. In her letter, McWilliams said that “[r]egulatory threats, undue pressure, coercion, and intimidation designed to restrict access to financial services for lawful businesses have no place at this agency.”

She appears to mean it. She went on to say that, “[w]e have placed clear limitations on the ability of any FDIC personnel to recommend the termination of account relationships, including requirements that any such recommendations be made in writing, that Regional Directors review such recommendations, and that all such recommendations are reported to the FDIC Board of Directors and Division Directors.” That internal policy is in furtherance of her deep investment in “transparency and accountability at the FDIC.”

She also backed-up the internal policy with an external check. “To ensure that the FDIC’s commitment to integrity remains unequivocally clear, I am asking an outside law firm to review the prior actions taken by the FDIC in [Operation Choke Point] so that I can better ascertain the effectiveness of our response.” “Under my leadership, the FDIC’s oversight responsibilities will be exercised based on our laws and our regulations, not personal or political beliefs,” she concluded.

As we’ve noted in earlier posts on this, litigation is currently pending in the D.C. federal court on prior FDIC administrations’ participation in Operation Choke Point.

The FDIC, Federal Reserve Board and Comptroller of the Currency are proposing a rule to implement a rural property appraisal exemption under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) and also increase the appraisal exemption based on transaction value from $250,000 to $400,000.

As we reported previously, the Act amends the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) to exclude a loan made by a bank or credit union from the FIRREA requirement to obtain an appraisal if certain conditions are met. The conditions are that the property is located in a rural area; the transaction value is less than $400,000; the institution retains the loan in portfolio, subject to exceptions, and; not later than three days after the Closing Disclosure is given to the consumer, the mortgage originator or its agent has contacted not fewer than three state-licensed or state-certified appraisers, as applicable, and documented that no such appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator or its agent.

The federal banking agencies propose to implement the exemption under the Act by simply adding to the list of exempted transactions in their respective appraisal regulations a transaction that “is exempted from the appraisal requirement pursuant to the rural residential exemption under 12 U.S.C. 3356.”  In short, the agencies will implement the exemption by simply referencing the statutory provision.

Significantly, the agencies also propose to increase the exemption based on the value of a transaction from $250,000 to $400,000.  The agencies advise that the decision to propose an increase in the transaction value exemption is based on consideration of available information on real estate transactions secured by single 1-to-4 family residential property, supervisory experience, comments received from the public in connection with the Act, and rulemaking to increase the appraisal threshold for commercial real estate appraisals.  If this proposed exemption is adopted, it will significantly reduce the importance of the rural property exemption added by the Act.

With both proposed exemptions, banks still would need to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices.

The comment period will run 60 days from the publication of the proposal in the Federal Register.

Thirteen Republican Senators have sent a letter to FDIC Chairman Jelena McWilliams urging the FDIC to take action to ensure that lawful businesses are no longer at risk of adverse financial consequences as a result of “Operation Choke Point, and its associated culture and Choke Point-like regulatory actions.”

“Operation Choke Point” was a federal enforcement initiative involving various agencies, including the DOJ, OCC, FDIC, and Fed.  Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In June 2014, the national trade association for the payday lending industry and several payday lenders initiated a lawsuit in D.C. federal district court against the FDIC, Fed, and OCC in which they alleged that certain actions taken by the regulators as part of Operation Choke Point violated the Administrative Procedure Act and their due process rights.  In September 2018, pursuant to a joint stipulation of dismissal, the Fed was dismissed from the lawsuit.  Cross-motions for summary judgment are currently pending before the court.

In their letter, the Senators ask the FDIC if it is the agency’s official position “that lawful businesses should not be targeted by the FDIC simply for operating in an industry that a particular administration might disfavor” and “[i]f so, what [the FDIC is] doing to make sure that bank examiners and other FDIC officials are aware of this policy and have communicated it to regulated institutions?”  They also ask whether there were any communications explaining supervisory expectations of “elevated risk” or “high risk” merchants with regulated institutions that would likely qualify as a rule under the Congressional Review Act that were not properly submitted to Congress and what the FDIC is doing to ensure that its staff does not communicate policy in a matter that is inconsistent with the position of the FDIC’s Board of Directors.

The letter does not reference the FDIC’s January 2015 Financial Institution Letter (FIL) entitled “Statement on Providing Banking Services” that attempted to rectify the damage created by Operation Choke Point.  In the Statement, the FDIC “encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk.”  The Statement followed the FDIC’s July 2014 FIL in which the FDIC withdrew the list of “risky” merchant categories (such as payday lenders and money transfer networks) that was included in prior guidance on account relationships with third-party payment processors (TPPPs).  Consistent with the July 2014 FIL and an October 2013 FIL on TPPP relationships, the 2015 FIL advised banks that they were neither prohibited nor discouraged from providing services to customers operating lawfully, provided they could properly manage customer relationships and effectively mitigate risks.  However, unlike the prior FILs, the new FIL expressly acknowledged that “customers within broader customer categories present varying degrees of risk” and should be assessed for risk on a customer-by-customer basis.

 

 

The FDIC has published a request for information (RFI) on small-dollar lending, including “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.”  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  Comments must be received by January 22, 2019.

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  The FDIC’s issuance of the RFI signals that the FDIC intends to follow suit.

The RFI requests input on 21 questions dealing with the following topics:

  • Consumer demand
  • Challenges
  • Product features
  • Innovation
  • Alternatives
  • Other considerations

The questions dealing with “Challenges” include one that asks whether there are “any legal, regulatory, or supervisory factors that prevent, restrict, discourage, or disincentivize banks from offering small-dollar credit products.”  A glaring regulatory impediment to small-dollar lending by FDIC-supervised institutions is the FDIC’ s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised institutions from offering deposit advance products.  (In October 2017, just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment loans, the OCC rescinded substantially identical guidance on deposit advance products, applicable to national banks and federal savings associations.)

While the OCC’s encouragement of small-dollar lending was in one sense a welcome development, the OCC bulletin raised several concerns.  As discussed more fully in our blog post about the bulletin, those concerns were the bulletin’s failure to confirm that the National Bank Act authorizes national banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, as well as the bulletin’s unfavorable view of bank-nonbank partnerships.

Unlike the FDIC, the OCC did not issue an RFI in advance of issuing its bulletin.  The FDIC’s RFI thus serves as an opportunity for commenters to provide input that could result in the FDIC’s issuance of guidance that addresses the shortcomings in the OCC bulletin.  For example, the RFI asks: “What are the potential benefits and risks related to banks partnering with third parties to offer small-dollar credit?”  In addition, it invites comment on the structure of small-dollar credit products offered by FDIC-supervised institutions.  Thus, commenters can ask the FDIC to consider structures other than the structure suggested by the OCC bulletin–even-payment amortizing loans with terms of at least two months.

Additionally, and perhaps most significantly, this RFI could serve as a vehicle for the FDIC to confirm that, in a properly structured loan program between a bank and a nonbank marketing and servicing agent, the Federal Deposit Insurance Act authorizes state-chartered banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, despite “true lender” and Madden arguments to the contrary.

The FDIC’s Center for Financial Research has issued a research paper that discusses the use of the information contained in a “digital footprint,” meaning the information that people leave online by accessing or registering on a website, for predicting consumer default.

The researchers considered ten digital footprint variables that included:

  • The device type (e.g. tablet or mobile)
  • The operating system (e.g. iOS or Android)
  • The channel through which a customer comes to a website (e.g. search engine or price comparison site)
  • Two pieces of information about the user’s email address (e.g. includes first and/or last name and includes a number)

According to the researchers, the results of their research suggest that “even the simple, easily accessible variables from the digital footprint proxy for income, character and reputation are highly valuable for default prediction.”  For example, ownership of an iOS device was found to be one of the best predictors for being in the top quartile of income distribution, customers coming from a price comparison website were found to be almost half as likely to default as customers directed to the website by search engine ads, and customers having their names in the email address were found to be 30% less likely to default.  The researchers also found that digital footprint information complements rather than substitutes for credit bureau information, suggesting that a lender that uses information from both sources can make superior lending decisions.

The researchers observe that “digital footprints can facilitate access to credit when credit bureau scores do not exist, thereby fostering financial inclusion and lowering inequality.”  They indicate that their results “suggest that digital footprints have the potential to boost financial inclusion to parts of the currently two billion working-age adults worldwide that lack access to services in the formal financial sector.”

The researchers also comment that regulators are likely to closely watch the use of digital footprints, noting that U.S. lenders using digital footprint information “are likely to face scrutiny whether the digital footprint proxies for [borrower characteristics such as race and gender that may not be considered under the Equal Credit Opportunity Act] and therefore violate fair lending laws.”

 

The FDIC has issued a request for information that seeks comment on how the FDIC can make its communications with insured depository institutions (IDIs) “more effective, streamlined, and clear.”  Concerned that the amount of information the FDIC provides to IDIs can create challenges for banks, particularly community banks, the FDIC is soliciting input “on how to maximize efficiency and minimize burden associated with obtaining information on FDIC laws, regulations, policies, and other materials relevant to RDIs.”  In addition to IDIs and other financial institutions and companies, the FDIC encourages comments from individual depositors and consumers, consumer groups, and other members of the financial services industry.

The RFI contains specific questions on which the FDIC seeks input that address three topics: efficiency, ease of access, and content.  Comments must be received by the FDIC by December 4, 2018.