In response to the U.S. Supreme Court’s decision in Lucia v. SEC, President Trump has issued an executive order that changes the process used by federal agencies for administrative law judges (ALJs).

In Lucia, the Supreme Court ruled that administrative law judges (ALJs) used by the SEC are “Officers of the United States” under the Appointments Clause in Article II of the U.S. Constitution because they exercise “significant authority pursuant to the laws of the United States.”  Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a “Department.”

Currently, federal agencies hire ALJs through a competitive merit-selection process administered by the Office of Personnel Management (OPM).  The Executive Order removes ALJs from the “competitive service,” a federal worker classification that follows the OPM’s hiring rules, and places them into the “excepted service,” a category of federal workers who are subject to a different hiring process, by creating a new excepted service category specifically for ALJs.

Federal regulations provide that appointments of workers who are in the excepted service are to be made “in accordance with such regulations and practices as the head of the agency concerned finds necessary.”  The executive order amends such regulations to provide that for ALJs, such regulations and practices must include the requirement that an ALJ who is other than an incumbent ALJ must be licensed to practice law by a state, the District of Columbia, the Commonwealth of Puerto Rico, or any territorial court established under the U.S. Constitution.

Presumably, to address Lucia’s conclusion that ALJs must be appointed by an agency official who qualifies as the “head of a Department” for purposes of the Appointments Clause, the agency regulations for hiring ALJs issued pursuant to the executive order will provide that a final hiring decision must be made by the agency head rather than a subordinate official.  However, even if ALJs are only hired by agency heads, it is not certain that the heads of all agencies would qualify as the “head of a Department.”

As we have previously observed with regard to the CFPB, the Dodd-Frank Act provided that “[t]here is established in the Federal Reserve System, an independent bureau to be known as the “[BCFP].”  Under U.S. Supreme Court decisions that have addressed the meaning of the term “Department,” it is unclear whether an establishment’s status as an independent agency with a principal officer who is not subordinate to any other executive officer is sufficient to render it a “Department” or whether it must also be self-contained.  While compelling arguments can be made that that the CFPB’s status as an independent agency should be sufficient to render it a “Department,” Congress’ decision to house the CFPB in the Federal Reserve means that the CFPB’s status as a “Department” is not free from doubt.  Similarly, because the OCC is housed in the Treasury Department, there is a question whether the Comptroller would qualify as the “head of a Department.”

 

Republican Congressman Blaine Luetkemeyer, a member of the House Financial Services Committee, has sent letters to six agencies asking them to issue and publish statements concerning the effect and use of “agency statements-for example, guidance documents, supervisory letters or examination manuals—that have not gone through notice and comment rulemaking.”  One such letter was sent to the Federal Reserve Board and the other letter was sent to the FDIC, NCUA, SEC, OCC and CFPB.

In the letters, Rep. Luetkemeyer requests that, in such statements, the agencies affirm that agency statements that have not gone through notice and comment rulemaking “do not establish binding legal standards, and thus shall not be the basis of enforcement actions or supervisory directives, including but not limited to the issuance of ‘Matters Requiring Attention’ or ‘Matters Requiring Immediate Attention.'”

Rep. Luetkemeyer also requests that the agencies:

  • Clarify in their statements “that any failure to adhere to guidance shall not, directly or indirectly, form the basis of any other adverse supervisory determinations, such as ratings downgrades
  • Establish a standard practice by which any subsequently issued guidance includes a statement regarding the effect of the guidance consistent with the above limitations
  • Ensure that examiners are “appropriately educated about the use and role of guidance; and held accountable when guidance is applied inappropriately”

Rep. Luetkemeyer observes in the letters that greater clarity about the appropriate use and interpretation of guidance is needed because “[o]ver the years, a significant number of agency guidance, handbooks and circulars have been issued.  Almost none has been withdrawn or rescinded; similarly, almost none went through notice and comment rulemaking or was submitted to the Congress pursuant to the Congressional Review Act.”

In his letter to the five agencies, Rep. Luetkemeyer references the determination by the Government Accountability Office (GAO) that the Fed’s leveraged lending guidance was a rule for CRA purposes but was not submitted to Congress before it took effect.  Following that determination, the GAO determined that the CFPB’s bulletin on discretionary pricing by auto dealers was also a rule for CRA purposes.  The bulletin subsequently became the first guidance document to be disapproved by Congress pursuant to a joint CRA resolution.

In a statement issued about the signing of the CRA resolution by President Trump, the CFPB stated that the resolution’s enactment “clarifies that a number of Bureau guidance documents may be considered rules for purposes of the CRA, and therefore the Bureau must submit them for review by Congress.”  The CFPB also indicated that it plans to “confer with Congressional staff and federal agency partners to identify appropriate documents for submission.”

 

 

 

Comptroller of the Currency Joseph Otting is scheduled to make two appearances before Congress next week.

On Wednesday, June 13, 2018, he is scheduled to appear before the House Financial Services Committee at a hearing entitled “Financial Industry Regulation: the Office of the Comptroller of the Currency.”

On Thursday, June 14, 2018, he is scheduled to appear before the Senate Banking Committee at a hearing entitled “Update from the Comptroller.”

The issues about which Mr. Otting is likely to be questioned by lawmakers include the OCC’s proposal to issue special purpose national bank charters to nondepository fintech companies and its plans to engage in rulemaking to modernize its regulations implementing the Community Reinvestment Act.

 

 

The National Credit Union Administration has published a notice in the Federal Register proposing to amend the NCUA’s general lending rule to provide federal credit unions (FCU) with a second option for offering “payday alternative loans” (PALs).  Comments on the proposal are due by August 3, 2018.

In 2010, the NCUA amended its general lending rule to allow FCUs to offer PALs as an alternative to other payday loans.  For PALs currently allowed under the NCUA rule (PALs I), an FCU can charge an interest rate that is 1000 basis points above the general interest rate set by the NCUA for non-PALs loans, provided the FCU is making a closed-end loan that meets certain conditions.  Such conditions include that the loan principal is not less than $200 or more than $1,000, the loan has a minimum term of one month and a maximum term of six months, the FCU does not make more than three PALs in any rolling six-month period to one borrower and not more than one PAL at a time to a borrower, and the FCU requires a minimum length of membership of at least one month.

The proposal is a reaction to NCUA data showing a significant increase in the total dollar amount of outstanding PALs but only a modest increase in the number of FCUs offering PALs.  In the proposal’s supplementary information, the NCUA states that it “wants to ensure that all FCUs that are interested in offering PALs loans are able to do so.”  Accordingly, the NCUA seeks to increase interest among FCUs in making PALs by giving them the ability to offer PALs with more flexible terms and that would potentially be more profitable (PALs II).

PALs II would not replace PALs I but would be an additional option for FCUs.  As proposed, PALs II would incorporate many of the features of PALs I while making four changes:

  • The loan could have a maximum principal amount of $2,000 and there would be no minimum amount
  • The maximum loan term would be 12 months
  • No minimum length of credit union membership would be required
  • There would be no restriction on the number of loans an FCU could make to a borrower in a rolling six-month period, but a borrower could only have one outstanding PAL II loan at a time.

In the proposal, the NCUA states that it is considering creating an additional kind of PALs (PALs III) that would have even more flexibility than PALs II.  It seeks comment on whether there is demand for such a product as well as what features and loan structures could be included in PALs III.  The proposal lists a series of questions regarding a potential PALs III rule on which the NCUA seeks input.

The NCUA’s proposal follows closely on the heels of the bulletin issued by the OCC setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.  In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”

 

The third location of PLI’s 23rd Annual Consumer Financial Services Institute will take place in PLI’s San Francisco Conference facility and via concurrent live Webcast on June 25-26, 2018.  This will be the first time in many years that the Institute will take place in San Francisco.  Since the first location of this event in NYC on March 26-27 was well-attended, and the second location in Chicago on May 7-8 was sold-out, anyone interested in attending the program in San Francisco is encouraged to act quickly to register.  I am co-chairing the event, as I have for the past 22 years.

With the resignation of former CFPB Director Cordray and President Trump’s appointment of Mick Mulvaney as CFPB Acting Director, the agenda and activity of the CFPB is already undergoing significant change.  Further significant change can be expected under the new permanent Director who is eventually appointed and confirmed.  At the same time, state attorneys general and regulators are threatening to fill any void created by a less aggressive CFPB.

As was the case last year, the lead-off morning presentation on the first day will feature a panel discussion devoted to CFPB developments.  I am very pleased that in San Francisco, the panel will feature two CFPB attorneys: Christopher J. Young, Deputy Assistant Director for Supervision, and Cara Petersen, Principal Deputy Enforcement Director.  The CFPB attorneys will respond to a wide-ranging list of questions about the CFPB’s supervisory, enforcement, and other activities.  During this same panel,  I will moderate a discussion among two experienced industry lawyers and an experienced consumer lawyer who closely follow the CFPB’s activities.  If your practice involves the CFPB, you will not want to miss the entire panel discussion.

The first day of the program will also include a  panel titled “Federal Regulators Speak: Priorities & Coordination” that will feature representatives of the FTC and DOJ.

New to the Institute this year will be a panel on the second day that will discuss the rapidly changing landscape for marketplace lending and fintech.  My partner Scott Pearson will be a member of the San Francisco panel and I will moderate.

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

  • Privacy and data security issues
  • FCRA/debt collection issues
  • Class action and litigation developments
  • State regulatory and enforcement developments
  • Plaintiff lawyers’ perspective of regulatory and litigation issues under Trump Administration

In addition, attendees will receive up to one full hour of Ethics credit exploring ethical issues unique to the consumer space.

Click here for a complete description of PLI’s 23rd Annual Consumer Financial Services Institute and to reserve your seat today.  A special discounted registration fee will only be available to persons who register using this link.

The OCC has issued a bulletin (2018-14) setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.

In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”  The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”

By way of background, the bulletin notes that in October 2017, the OCC rescinded its guidance on deposit advance products because continued compliance with such guidance “would have subjected banks to potentially inconsistent regulatory direction and undue burden as they prepared to comply with the [CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).”]  The guidance had effectively precluded banks subject to OCC supervision from offering deposit advance products.  The OCC references the CFPB’s plans to reconsider the Payday Rule and states that it intends to work with the CFPB and other stakeholders “to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”  (The statement issued by CFPB Acting Director Mulvaney applauding the OCC bulletin further reinforces our expectation that the CFPB will work with the OCC to change the Payday Rule.)

When the OCC withdrew its prior restrictive deposit advance product guidance, we commented that the OCC appeared to be inviting banks to consider offering the product.  The bulletin appears to confirm that the OCC intended to invite the financial institutions it supervises to offer similar products to credit-starved consumers, although it suggests that the products should be even-payment amortizing loans with terms of at least two months.  It may or may not be a coincidence that the products the OCC describes would not be subject to the ability-to-repay requirements of the CFPB’s Payday Rule (or potentially to any requirements of the Payday Rule).

The new guidance lists the policies and practices the OCC expects its supervised institutions to follow, including:

  • “Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants.  Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.”
  • “Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk.  Such analysis could facilitate sound underwriting for credit offered to consumer who have the ability to repay but who do not meet traditional standards.”

While the OCC’s encouragement of bank small-dollar lending is a welcome development, the bulletin contains potentially troubling language.  The OCC’s “reasonable policies and practices specific to short-term, small-dollar installment lending” also include “[l]oan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs.  The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entities licensing state(s).”  (emphasis added).  This statement raises at least two concerns:

  • The OCC’s reference to “[l]oan pricing that complies with applicable state laws” is confused (or likely to cause confusion).  Federal law (12 U.S.C. Section 85) governs the interest national banks may charge.  It authorizes 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.  The OCC should clarify that it did not mean to suggest otherwise.
  • The OCC’s unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits, could be read to call into question a valuable distribution channel for bank loans.  While the context is “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85.  The statement in question seems at odds with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision. 

 

The U.S. Department of Justice announced earlier this week that it has reached an agreement with KleinBank, a state-chartered Minnesota bank, to settle the redlining lawsuit that the DOJ filed against the bank in January 2017, only a week before President Trump’s inauguration.  The agreement represents the first fair lending settlement entered into by the DOJ under the Trump administration.

The DOJ’s complaint, which related to the bank’s residential mortgage lending business, alleged that KleinBank violated the Fair Housing Act and the Equal Credit Opportunity Act by engaging in a pattern or practice of unlawful redlining of the majority-minority neighborhoods in the Minneapolis-St. Paul metropolitan area.  From 2010 to at least 2015, the bank was alleged to have avoided serving the credit needs of individuals seeking residential mortgage loans in majority-minority census tracts in the Metropolitan Statistical Area encompassing Minneapolis and St. Paul (MSA).

The redlining claim was based, in part, upon an allegation that KleinBank established and maintained a discriminatory Community Reinvestment Act (CRA) assessment area that was “horseshoe-shaped,” “include[d] the majority white suburbs, and carve[d] out the urban areas of Minneapolis and St. Paul that have higher proportions of minority populations.”  Specifically, the complaint alleges that the bank’s main CRA assessment area excluded 78 of 97 majority-minority census tracks in the MSA, “all but two of which are located in Hennepin and Ramsey Counties.”  The DOJ alleged that, in addition to the main CRA assessment area of the bank, the “proper CRA assessment area would include the entirety of Hennepin and Ramsey Counties.”

Unlike other redlining lawsuits that the DOJ had recently filed when it sued KleinBank, the DOJ’s action against KleinBank was contested by the bank which issued a statement in which it vigorously disputed the alleged redlining claims and called them an “unprecedented reach by the government.”  Although supported by the American Bankers Association, the Independent Community Bankers Association, the Minnesota Bankers Association, and forty other state bankers associations, the bank’s motion to dismiss the complaint was unsuccessful.

Under the settlement agreement, the DOJ agrees to jointly stipulate with KleinBank to the dismissal of the lawsuit and KleinBank agrees to take various actions including:

  • Opening one full-service brick and mortar office within a majority-minority census track within Hennepin County
  • Continuing to develop partnerships with community organizations to help establish a presence in majority-minority census tracks in Hennepin County
  • Employing a full-time Community Development Officer who is a member of management to oversee the development of the bank’s lending in majority-minority census tracks in Hennipin County
  • Spending a minimum of $300,000 on advertising, outreach, education, and credit repair initiatives over the next 3 years
  • Providing at least 2 outreach programs annually for real estate brokers and agents, developers, and public or private entities already engaged in residential and real estate-related business in majority-minority census tracks in Hennepin County to inform them of the products offered by KleinBank
  • Investing a minimum of $300,000 over 3 three years in a special purpose credit program that will offer residents of majority-minority census tracks in Hennepin County home mortgage  and home improvement loans on a more affordable basis than otherwise available from KleinBank, with such more affordable terms to be provided through one or more of the following means:
    • Originating or brokering a loan at an interest rate that is at least 1/2 of a percentage point (50 basis points) below the otherwise prevailing rate
    • Providing a direct grant of a portion of the loan amount for the purpose of down payment assistance, up to a maximum of 3.5%
    • Providing closing cost assistance in the form of a direct grant of a minimum of $500 and a maximum of $1,500
    • Paying the initial mortgage insurance premium on loans subject to mortgage insurance
    • Using other means approved by the DOJ

Most notably, unlike previous redlining settlements, such as those involving Hudson City Savings Bank and BankcorpSouth Bank, the KleinBank settlement does not require the bank’s payment of a civil money penalty.

The U.S. Court of Appeals for the D.C. Circuit has rejected a trade group’s attempt to invalidate a November 2016 FTC opinion in which the agency concluded that outbound telemarketing calls made using soundboard technology are subject to the prior written consent requirement for robocalls in the FTC’s Telemarketing Sales Rule (TSR).

The TSR’s robocall written consent requirement applies to “any outbound telephone call that delivers a prerecorded message.”  The FTC’s 2016 opinion revoked a 2009 opinion in which it had concluded that because soundboard technology allows the caller and recipient to have a two-way conversation, such calls were not subject to the TSR’s robocall consent requirement.  (In calls using soundboard technology, the caller can play pre-recorded audio clips in response to the call recipient’s statements and break in to the call when needed to speak directly to the recipient.)  The FTC changed its position in response to an increasing number of consumer complaints that consumers were not receiving appropriate responses to their questions and comments and live operators were not intervening in the calls as well as evidence that callers using soundboard technology were handing more than one call at a time.  In its 2016 opinion, the FTC made the revocation of its 2009 opinion effective on May 12, 2017 so that industry would have time to make the changes necessary to bring itself into compliance.

The district court determined that the FTC’s 2016 opinion was a reviewable “final agency action” but rejected the trade group’s claim that the FTC’s action violated the Administrative Procedure Act (APA) because the FTC did not follow the notice and comment process.  According to the district court, because the 2009 opinion revoked by the 2016 opinion was clearly an “interpretive rule” rather than a “legislative rule,” the FTC’s “decision to rescind that opinion did not change the fundamental character of the agency’s action and transform an interpretive rule into a legislative one.”  As a result, the FTC was not required to follow the APA notice and comment procedures before issuing the 2016 opinion.

The district court also ruled on the trade group’s claim that subjecting soundboard technology to the TSR robocall written consent requirement violated the First Amendment because it constituted an impermissible content-based restriction on the speech of the trade group’s members engaged in charitable fundraising.  Having found the restriction, which distinguished between calls to new donors and calls to prior donors or members of the non-profit on whose behalf the calls were made, to be relationship-based rather than content-based and therefore only subject to intermediate First Amendment scrutiny, the district court concluded that the restriction  satisfied such scrutiny because it was narrowly tailored to serve a significant governmental interest (namely, “protecting against unwarranted intrusions into a person’s home or pocket”).

The D.C. Circuit, ruling on the trade group’s appeal, concluded that the 2016 opinion did not constitute a “final agency action.”  As a result, the D.C. Circuit vacated the district court’s opinion and dismissed the trade group’s complaint for failure to state a claim under the APA.  According to the D.C. Circuit, the 2016 opinion did not satisfy one of the two conditions for “final agency action” established by the U.S. Supreme Court in its 1997 decision in Bennett v. Spear.  The D.C. Circuit determined that the condition that the FTC’s action represent “the consummation of agency decisionmaking” was not satisified because the opinion was informal, expressing the views of the FTC staff, and did not represent “the conclusive view of the Commission.”  The D.C. Circuit also concluded that because the trade group’s First Amendment claims were pleaded only as APA claims, it was required to dismiss such claims “for want of a final agency action.”

The title of the FTC’s blog posting about the D.C. Circuit decision, “Decision bolsters FTC position on soundboard tech FTC staff,” suggests that the FTC staff believes the decision provides support for its view.  The press release reminds marketers that “the message…has not changed,” namely that “FTC staff regard calls using soundboard technology as robocalls for TSR purposes.  This means that companies must have each consumer’s express written consent before calling and that fundraisers can only use soundboard technology to solicit charitable contributions from previous donors: no robocalls to new donors.”

The use of soundboard technology also raises TCPA compliance issues.  In addition to generally prohibiting autodialed calls to wireless numbers without the called party’s prior express written consent, the TCPA generally prohibits calls to wireless numbers using ” an artificial or prerecorded voice.”  The TCPA also prohibits telemarketing calls to residential numbers using “an artificial or prerecorded voice” without the called party’s prior express written consent.

 

 

Yesterday, a coalition of numerous trade organizations, including, among others, the U.S. Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, and the Mortgage Bankers Association, filed a Petition for Declaratory Ruling with the Federal Communications Commission (the “FCC”), seeking clarification of the definition of “automatic telephone dialing system” (“ATDS”) under the Telephone Consumer Protection Act (“TCPA”).  Specifically, Petitioners request that, in light of the D.C. Circuit’s recent guidance on this topic in ACA International v. FCC, the FCC (1) confirm that to be an ATDS, equipment must use a random or sequential number generator to store or produce numbers and dial those numbers without human intervention, and (2) find that only calls made using actual ATDS capabilities are subject to the TCPA’s restrictions.

The Petition sets the stage for its request by explaining that the TCPA’s original purpose was to prevent a specific type of abusive call by telemarketers, but that its implementation has resulted in a whirlwind of litigation against legitimate businesses attempting to lawfully communicate with their customers.  The Petition further asserts that the current state of TCPA litigation is hurting businesses, not helping consumers, and instead is just serving as a boondoggle for plaintiffs’ lawyers.  The Petitioners then urge the FCC to use the D.C. Circuit’s recent decision in ACA as an opportunity to rationalize the dysfunctional TCPA landscape.

Turning to their specific requests, the Petitioners argue that the FCC should not deviate from the straightforward text of the TCPA in defining ATDS.  Thus, Petitioners contend that for equipment to constitute an ATDS, it must be able to generate numbers in either random order or sequential order, be able to store or produce those numbers, and be able to dial those numbers.  The Petitioners also request the FCC to make clear that if human intervention is required in generating the list of numbers to call or in making the call, then the equipment in use is not an ATDS.

In addition, the Petitioners argue that the FCC should make clear that the ATDS functions must be actually – not theoretically – present and active in a device at the time the call is made.  Thus, a device that requires alteration to add auto dialing capability is not an ATDS.  Rather, the capability must be inherent or built into the device for it to constitute an ATDS.  For example, if a smartphone required downloading an app or changing software code to gain autodialing capabilities, the smartphone would not qualify as an ATDS.

Finally, the Petitioners request that the FCC clarify that a caller must use the statutorily defined functions of an ATDS to make a call for liability to attach.  As such, a device’s potential capabilities would not be relevant to determining whether it is an ATDS, because the inquiry will focus only on the functions actually used to make the call or calls in question.

The Petitioners repeatedly urge the FCC to take prompt and speedy action on their Petition.  Significantly, the FCC is now controlled by Republicans, two of whose dissents from the FCC’s 2015 TCPA Declaratory Ruling and Order demonstrate that they strongly prefer a narrow interpretation.  We will keep a close watch on the progress of the Petition, and report on developments as they occur.

On May 7, 2018, in Arlington, Virginia, the FDIC will host a forum, “Use of Technology in the Business of Banking.”  Registration is required to attend.  The forum will also be webcast live and recorded for on-demand access after the event.

The FDIC’s notice states that panels at the forum  “will focus on emerging technologies that are transforming banking operations, the impact of emerging technologies on retail banking, including new and innovative delivery channels, enhanced customer experiences, economic inclusion; and consumer financial data access—balancing rights and security.”

It further states that the forum “will bring together representatives from banks that use or are considering using emerging technologies, representatives from firms offering emerging technologies, representatives from bank trade associations, thought leaders on the use of technology in the business of banking, leaders of consumer and community organizations, and representatives from federal and state financial regulatory agencies.”