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On this week’s podcast, Ballard Spahr attorneys Bo Ranney, Chris Willis, and Reid Herlihy discuss the significant takeaways from the CFPB’s new report—the first edition of Supervisory Highlights issued under Acting Director Mick Mulvaney. Mr. Ranney, former Examiner-in-Charge at the CFPB, and Mr. Willis, who chairs Ballard Spahr’s Consumer Financial Services Litigation Group, discuss the CFPB’s findings regarding debt collection, payday loans, automobile servicing, and small business lending. They also identify potential areas where the CFPB might focus in future examinations and offer recommendations for addressing the operational concerns raised by the report. Mr. Herlihy, a partner in Ballard Spahr’s Mortgage Banking Group, discusses the high-priority, mortgage-related topics identified in the Bureau’s report, lessons the mortgage industry can learn from the Bureau’s findings, and how the CFPB’s approach in this new report differs from its approach under prior leadership.

To listen and subscribe to the podcast, click here.

Last Wednesday the Federal Reserve published approved final amendments to Regulation CC (Availability of Funds and Collections of Checks) which update the liability provisions of Reg. CC to address the nearly-complete conversion of the nation’s check collection system from a paper to an electronic environment.

Historically, when banks disputed which party should be responsible for the liability arising from an unauthorized check, the risks were split in two.  The paying bank (the bank that would pay on a check associated with an account it held) was responsible for forged checks; it would have a signature specimen from its customers, and be able to examine the signature of a presented check against the specimen signature; it would also know if the entire check was forged, since it was the bank’s check.  If the signatures didn’t match, or the check wasn’t an original check from the paying bank, yet the paying bank paid and there was a subsequent loss by the customer, the paying bank would be responsible for that loss, because it was in the best place to detect the forgery.

The depositary bank (the bank holding the account where check funds would be deposited) was responsible for altered checks; it was deemed to be in the best place to determine whether, for example, the amount of the check had been changed from $100 to $10,000.  This division of risk is old, originally established in 18th Century English law (in the case of Price v. Neal, 97 Eng. Rep. 871 (1762)), and enshrined in the U.S. under UCC Articles 3-407 and 3-417.  It also assumes the presentment and receipt of paper checks.

Virtually all checks presented in 2018 within the US are not presented in paper form.  Instead, an image of the check is taken, the original check is destroyed, and the depositary bank presents this check image (a truncated check) to the paying bank.  Notwithstanding the dramatic increase in settlement speed and dramatic reduction in processing costs, electronic images of checks create a potential problem in the event of a bank dispute over whether a check has been forged or altered.  The original check is destroyed, making it impossible to examine the original check to determine whether the check was altered, or whether it was a forgery.  Regulation CC currently does not provide any presumptions as to whether a check is altered or forged.

The new amendment provides this guidance, adding a new presumption of liability for substitute and electronic checks.  If there is a dispute between the paying bank and the depositary bank as to whether a substitute or electronic check is an altered or a forgery (now described as “derived from an original check that was issued with an unauthorized signature of the drawer”), the presumption is that the substitute/electronic check contains an alteration.  This generally shifts liability on fraudulent checks to depositary banks; this presumption may be overcome if a preponderance of the evidence proves the substitute or electronic check does not contain an alternation, or that it was a forgery.  The presumption does not apply if there is an original check to examine.

It’s a reasonable allocation of risk; the depositary bank is receiving, imaging and destroying the check, and then presenting the image to the paying bank.  If there is a later dispute over the fraudulent nature of the check, then the party that destroyed the original check, and was in the best place to preserve the check as evidence, should bear the risk associated with evidentiary questions.

The amendment goes into effect January 1, 2019.

In what seems to be a response to the Government Accountability Office’s (“GAO”) determination that the Consumer Financial Protection Bureau’s indirect auto finance bulletin (the “Bulletin”) was a rule subject to the Congressional Review Act (“CRA”) and a rebuke to the Bureau’s prior approach of “rulemaking by enforcement,” the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency and the Bureau (collectively, the “agencies”) this week issued an Interagency Statement Clarifying the Role of Supervisory Guidance (the “Interagency Statement”). The Interagency Statement’s stated purpose is to “explain the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.”

The Interagency Statement begins by clarifying the agencies’ position as to the difference between supervisory guidance and laws or regulations and provides: “Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.” As set forth in its 2017 letter to Senator Patrick Toomey, a significant factor in the GAO’s determination that the Bulletin was a “rule” subject to the CRA was the Bureau’s use of the Bulletin to advise the public prospectively of the manner in which the Bureau proposed to exercise its discretionary enforcement power. The Interagency Statement clarifies that supervisory guidance is meant to outline supervisory expectations or priorities and articulate a general view regarding appropriate practices but should not serve as the basis for enforcement actions. And, while the agencies indicate that they may continue to seek public comment on supervisory guidance in order to improve their understanding of a given issue, any such guidance is not intended to be a regulation or have the force and effect of law.

The agencies state that they will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will seek to limit the use of numerical thresholds or other “bright-line” tests (numerical thresholds will generally be used as exemplars only). Finally, the Interagency Statement also provides that the agencies will limit examination and supervisory citations to violations of law, regulation or compliance with enforcement orders or other enforceable conditions and that their examiners will not criticize supervised financial institutions for a “violation” of supervisory guidance. Supervisory guidance may, however, be referenced as an example of safe and sound conduct in an examination finding.

What does this mean going forward? The Interagency Statement suggests that instead of issuing supervisory guidance to set forth expectations to be used as a “sword” if not followed by supervised entities, the agencies intend to use supervisory guidance to identify compliant practices. As a result, supervised entities may be better able to rely on supervisory guidance as a potential “safe-harbor” or “shield” from agency criticism when structuring their compliance programs. Additionally, existing supervisory guidance issued by the agencies such as supervision manuals and supervisory highlights and including the Bureau’s newly-released Summer 2018 edition of Supervisory Highlights should be viewed as helpful guidance, without precedential effect, in light of the Interagency Statement. Finally, Congress’ override of the Bulletin following the GAO’s determination that the Bulletin was a “rule” subject to the CRA may serve as a deterrent to any attempt by an agency to use its supervisory guidance in a way that is inconsistent with the Interagency Statement.

Webinar. On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights” where the Interagency Statement will also be addressed. The webinar registration form is available here.

On September 12th, the Conference of State Bank Supervisors (CSBS) announced that it would again pursue litigation in opposition to the OCC’s recent decision to accept applications from non-depository financial technology firms for a special purpose national bank (SPNB) charter.

While it announced that its Board of Directors had approved renewing litigation against the OCC at an August 28 meeting, the CSBS did not indicate when it plans to file the lawsuit.  The lawsuit would represent the second time that the CSBS has pursued litigation challenging the OCC’s authority to issue a SPNB charter to fintech companies.  On April 30, 2018, a D.C. federal district court dismissed the first lawsuit filed by the CSBS challenging the OCC’s authority to grant SPNB charters on the grounds that the CSBS had failed to establish any injury in fact necessary for Article III standing and that the case was not ripe for judicial review.  In its initial filing, the CSBS argued that the OCC’s 2017 proposal to issue SBNB charters to fintech companies exceeded the authority granted to the OCC by Congress under the National Bank Act (NBA) and other federal banking laws to charter institutions that engage in the “business of banking.”  The CSBS argued that to engage in the “business of banking,” the NBA requires an institution, at a minimum, to receive deposits.

The New York Department of Financial Services (DFS) also previously filed a lawsuit challenging the OCC’s authority to issue SPNB charters.  That lawsuit, which was filed in a New York federal district court, was dismissed in December, 2017 on similar grounds.  While the DFS has not announced whether it will renew its litigation against the OCC, DFS Superintendent Maria Vullo stated in a July 31 press release that “DFS believes that this [OCC] endeavor, which is also wrongly supported by the Treasury Department, is clearly not authorized under the National Bank Act.  As DFS has noted since the OCC’s proposal, a national fintech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape.”

We recently blogged about the announcement by Varo Bank, N.A., a fintech bank, that it had received preliminary approval from the OCC of its application for a full-service national bank charter.  We do not expect the CSBS or the DFS to challenge the preliminary approval since there would not appear to be any basis to challenge the OCC’s authority to issue a full-service national bank charter to Varo assuming it satisfies the standard conditions for obtaining such a charter.

In July 2018, in Collins v. Mnuchin, a Fifth Circuit panel found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  It determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.”

Both the plaintiffs and the FHFA have filed petitions for rehearing en banc.  The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), sought to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.  Their petition for rehearing en banc seeks reconsideration of the panel’s rulings that the FHFA acted within its statutory authority in entering into the agreement and that the FHFA’s unconstitutional structure did not impact the agreement’s validity.

The FHFA’s petition for rehearing en banc seeks reconsideration of the Fifth Circuit’s ruling that the FHFA’s structure is unconstitutional.  It argues that the plaintiffs did not have Article III standing to bring a separation of powers challenge and that the Fifth Circuit’s constitutionality ruling conflicts with U.S. Supreme Court precedent and the D.C. Circuit’s en banc PHH decision.

The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.  As we have observed, the Fifth Circuit’s decision in Collins could influence how another Fifth Circuit panel might approach the CFPB’s constitutionality.  Indeed, in its Unopposed Petition for Initial Hearing En Banc asking the Fifth Circuit to hear its interlocutory appeal en banc as an initial matter, All American Check Cashing argues that hearing its appeal through the normal panel process “could be a waste [of] judicial resources, especially if this Court votes to rehear Collins en banc.”  It also argues that initial consideration of its appeal en banc “would eliminate any possibility of intra-circuit inconsistency and guarantee that the Fifth Circuit speaks with one voice regarding the constitutionality of [the FHFA’s and the CFPB’s] structures.”

 

Having lost the battle to prohibit class action waivers in consumer arbitration agreements, consumer advocates have embarked on a new crusade.  Their new crusade is a misguided attempt to persuade the Securities and Exchange Commission (SEC) not to approve initial public offerings by companies whose corporate charters or bylaws require individual arbitration of shareholder disputes. They also argue that the amendment of existing charters or bylaws to add an individual arbitration requirement should not be permitted.

In a letter dated August 21, 2018, to SEC Chairman Jay Clayton, a coalition of 133 public advocacy groups called “Secure Our Savings” (SOS)—spearheaded by Paul Bland, Executive Director of Public Justice, a national nonprofit legal advocacy organization—argued that forcing allegedly defrauded shareholders to arbitrate their claims individually would eliminate the deterrent effect of class action shareholder lawsuits and the opportunity for investors to recover their losses.  According to the letter, “the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.”

Moreover, the letter states, private securities class actions “serve as an essential supplement to Commission action.”  At the same time, the Consumer Federation of America, one of the signatories to the SEC letter, issued a report arguing that mandatory shareholder arbitration is against the law and the public interest.

If these arguments sound familiar, it is because they are recycled from the efforts of Public Justice and many of the other SOS participants to persuade the CFPB to prohibit class action waivers in consumer arbitration agreements.  Although the CFPB issued a final rule in July 2017 containing such a prohibition, Congress repealed the rule under the Congressional Review Act in October 2017—before the rule’s effective date.

As explained more fully in our legal alert, consumer advocates are likely to fail in this initiative because the securities laws are preempted by the Federal Arbitration Act and the underlying policy arguments made by consumer advocates are flawed.  Based on the legal authority we discuss, the SEC would have a solid legal and policy basis for permitting arbitration provisions with class action waivers to be used in corporate charters or bylaws.

NPR reported last week that the Trump Administration is planning to end the current prohibition under the Military Lending Act (“MLA”) against creditors offering service members GAP insurance in connection with credit intended to finance the purchase of motor vehicles. Current interpretive guidance concerning the Department of Defense’s regulations implementing the MLA prohibits creditors from financing GAP insurance – insurance that covers the difference in the actual cash value of a motor vehicle and the balance still owed on the financing – in purchase money transactions with protected service members and their dependents.

Neither the MLA nor its implementing regulations expressly prohibit creditors from financing additional items, such as GAP insurance, when financing the purchase of a motor vehicle. Therefore, the current interpretive guidance, which took effect immediately and was issued without notice or an opportunity to comment, caused considerable chaos in the auto finance industry as creditors scrambled to figure out whether they could continue to offer MLA-compliant financing to service members.

Because certain financial products require a borrower to have GAP insurance, industry groups have argued that the GAP prohibition has effectively caused the unavailability of certain financing options for service members. This raises potential fair lending concerns in states that prohibit discrimination against service members in credit or other commercial transactions. Further, service members may be less likely to obtain GAP insurance when there is no option to finance the insurance as part of the transaction, raising concerns that military families may face greater hardship when a vehicle is lost or destroyed – through theft, accident, or natural disaster.

These planned changes to MLA guidance come on the heels of the CFPB’s announcement last week that it has suspended routine supervisory examinations for MLA compliance.

The U.S. Department of the Treasury’s recent report evaluating economic opportunities presented by nonbank financial institution and fintech company innovations includes a detailed account of current data aggregation activities in the financial services marketplace and provides policy recommendations that shed light on the federal government’s current views on data aggregation. (See our legal alert and blog posts (here and here) for a discussion of other portions of the Treasury’s report.)  In seeking to harness the potential benefits that can come from data aggregation, the Treasury report firmly supports the inclusion of these market participants.

Following are key takeaways from the Treasury’s report with respect to data aggregation practices and regulatory issues.

  • BCFP and private sector should develop consumer disclosure best practices. The Treasury suggests that the Bureau of Consumer Financial Protection (BCFP) should develop, either with the private sector or pursuant to its rulemaking authority, consumer-facing disclosures that are “plain language, readily accessible, readable through the preferred device used by consumers to access services… so that consumers can give informed and affirmative consent regarding to whom they are granting access, what data is being accessed and shared, and for what purpose,” and to opt-out of such sharing.
  • APIs provide advantages and should be supported. The report raises a number of issues with screen scraping while promoting the benefits of application programming interfaces (APIs) “that allow for the inclusion of robust security features, greater transparency and access controls for consumers, improved data accuracy, and more predictable and manageable information technology costs.”  Following is a graphic from the report identifying the similarities and differences between bilateral/partnered API and open API arrangements.  It highlights how APIs can remove the need for fintech apps (users of aggregated data) and data aggregators to access consumers’ bank account login credentials and, therefore, supports Treasury’s suggestion that the private sector and financial regulators should work to implement API solutions that “address data sharing, [data normalization,] security, and liability [and should support] efforts to mitigate implementation costs for community banks and smaller financial services companies with more limited resources to invest in technology.”

  • Clarifying applicability of third-party oversight guidance to data aggregators. The report states that there is some ambiguity regarding when third-party oversight guidance issued by federal banking regulators applies to data aggregator relationships, noting that data aggregators entering into “an API agreement with a bank [] may become subject to third-party guidance because of the contractual relationship, which can increase compliance costs.”  The Treasury suggests that federal banking regulators take action to resolve this ambiguity.
  • Third-party data aggregators should be treated as “consumers.”  Section 1033 of the Dodd-Frank Act provides “consumers” a right to access certain account information electronically upon request.  Treasury recommends that this section be interpreted so that “third parties properly authorized by consumers, including data aggregators and consumer fintech application providers, fall within the definition of ‘consumer’… for the purpose of obtaining access to financial account and transaction data.”
  • Data security addressed by GLBA Safeguards Rule. The report assumes that “data aggregators and consumer fintech application providers are subject to the Gramm-Leach-Bliley Act (GLBA)” and that “the Safeguards Rule appropriately addresses” data security concerns with data aggregation activities.  To the extent additional regulatory or legislative measures are considered to address data aggregation data security issues, the Treasury suggests that such activities occur at the federal level rather than the state level to ensure uniformity.
  • Other financial regulators should support data aggregation. The report suggests that regulators in addition to the BCFP should take steps to enhance data aggregation activities, including the Securities and Exchange Commission, the Financial Industry Regulatory Authority, Department of Labor, and state insurance regulators.

On September 20, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr will conduct a webinar, “More Than Just Fintech: What Are the Important Takeaways for All Consumer Financial Services Providers from Treasury’s Sweeping Report?”  A link to register is available here.

 

 

 

A portion of the Treasury’s report entitled “A Financial System That Creates Economic Opportunities, Nonbank Financials, Fintech, and Innovation” focuses on the mortgage industry.  A detailed discussion of the Treasury’s mortgage-related findings and recommendations is available here.

We have previously blogged about the portion of the Treasury report that focuses on payments and have published a legal alert that discusses other portions of the report.

On September 20, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr will conduct a webinar, “More Than Just Fintech: What Are the Important Takeaways for All Consumer Financial Services Providers from Treasury’s Sweeping Report?”  A link to register is available here.

 

The Senate Committee on Commerce, Science, and Transportation has scheduled a hearing for tomorrow, August 16, titled “Oversight of the Federal Communications Commission.”  The Committee’s website indicates that the hearing will examine policy issues before the FCC and review the FCC’s ongoing duties and activities.

The witnesses scheduled to appear are the four sitting FCC Commissioners (Chairman Pai and Commissioners O’Reilly, Carr, and Rosenworcel).  The FCC’s response to the D.C. Circuit’s ACA International decision, particularly with regard to the TCPA robocall prohibition, is expected to be a significant focus of the hearing.