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A recent flurry of FTC enforcement activity targeting companies offering student loan debt relief services suggests such companies could be the subject of the announcement scheduled for tomorrow “of a major coordinated consumer fraud enforcement initiative” between the FTC and state attorneys general.

The announcement was originally scheduled to be made on October 11 at a press conference in Chicago, Illinois featuring Thomas Pahl, Acting Director of the FTC’s Bureau of Consumer Protection, and Illinois Attorney General Lisa Madigan.  However, after postponing the press conference and rescheduling it for October 13, the FTC issued an update stating that the FTC “and attorneys general in 11 states and the District of Columbia will issue an announcement” on October 13 that “will be posted on FTC.gov.”  The FTC also indicated that “[s]enior officials from the FTC and the offices of the state attorneys general will be available for telephone interviews upon request.”

Earlier this month, the FTC filed a complaint in a Florida federal court for a permanent injunction and other equitable relief against Student Debt Doctor LLC and its individual principal alleging that the defendants conducted a deceptive student loan debt relief operation.  At the FTC’s request, the court entered an ex parte order temporarily freezing the company’s assets and appointing a receiver.  The FTC filed at least two other actions in federal courts in September 2017 against companies and individuals also alleged to have conducted deceptive student loan debt relief operations.

A group of Democratic House members led by Rep. Maxine Waters has introduced H.R. 3937, the “Megabank Accountability and Consequences Act of 2017,” that would require federal bank regulators to consider the revocation of a bank’s charter and deposit insurance if the bank is found to have engaged in a “pattern or practice” of violations of federal consumer protection laws.  The bank’s officers and directors would also be subject to civil and criminal liability.

The 45-page bill includes 10 pages of “findings.”  One such finding is that since the enactment of Dodd-Frank, “some very large banking organizations operating in the United States have repeatedly violated Federal banking and consumer protection laws by engaging in unethical business practices” and that such banks “continue to act with impunity and violate numerous laws designed to protect consumers” despite enforcement actions that have been taken “most notably” by the CFPB.

Other findings include:

  • Senior bank executives “rarely have been held personally accountable for Federal consumer protection law violations and other illicit practices that occurred during their tenure.”
  • Federal prudential banking agencies, despite their wide-ranging statutory powers to address violations, “continue to rely on enforcement tools such as consent orders, cease and desist orders, and civil money penalties, even in instances when an institution’s violations have demonstrated unsafe or unsound business practices and past supervisory and enforcement actions have not sufficiently deterred illegal practices.”
  • Institutions have continued to engage in inappropriate and illegal practices because the federal prudential banking agencies have failed to “exercise statutorily provided enforcement authorities—such as revoking a bank’s national charter or terminating its Federal deposit insurance” or “hold the institution’s board of directors and senior officers accountable.”
  • Even if a bank’s violations of federal consumer financial laws “are deemed not to technically constitute unsafe or unsound banking practices, it may still demonstrate a pattern of wrongdoing causing unacceptable harm to its customers, such that continuing to enable it to engage in the business of banking distorts the regulatory purpose of providing national banks charters, deposit insurance and other benefits.”

The bill’s provisions would apply to a national bank, federal savings association, state Federal Reserve member bank, insured depository institution, foreign bank, or federal branch or agency of a foreign bank if such entity is “affiliated with a global systematically important bank holding company.”  A “global systematically important bank holding company” is defined as a bank holding company that the Fed has identified as a “global systematically important bank holding company” or a “global systematically important foreign banking organization” pursuant to existing federal regulations.

The bill contains a definition of “pattern or practice of unsafe or unsound banking practices or other violations related to consumer banking” that lists 7 types of activities and provides that a bank satisfies the “pattern or practice” definition if it engages in all of such activities “to the extent each activity was discovered or occurred at least once in the 10 years preceding the date of the enactment of this Act.”  It also contains a definition of “pattern or practice of violations of federal consumer protection laws.”

The bill includes the following requirements and sanctions:

  • If the OCC, after consultation with the CFPB, determines that a bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the OCC must “immediately initiate proceedings to terminate the [bank’s] Federal charter…or appoint a receiver for [the bank].”
  • If the FDIC, after consultation with the CFPB, determines that an insured depository institution “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the FDIC must “immediately initiate an involuntary termination of the [bank’s] deposit insurance.”
  • If the Fed, after consultation with the CFPB, determines that a state member bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the Fed must “immediately initiate proceedings to terminate such bank’s membership in the Federal Reserve System.”
  • If the Fed, after consultation with the CFPB, determines that a foreign bank or federal branch or agency of a foreign bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the Fed must “immediately initiate proceedings to terminate the foreign bank’s ability to operate in the United States” or recommend to the OCC that the branch’s or agency’s license be terminated.
  • If the OCC, Fed, or FDIC makes a determination to initiate proceedings to terminate a bank’s charter or deposit insurance, the agency must notify the bank “that removal is required of any director or senior officers responsible, as determined by [that agency], for overseeing any division of the [bank] during the time the [bank] was engaging in the identified pattern or practice of unsafe or unsound banking practices.”  Any current or former director or senior officer determined to have such responsibility “shall also be permanently banned from working as an employee, officer, or director of any other banking organization.”
  • If the FDIC determines that an insured depository institution “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm” or is notified by the OCC or Fed of the termination of a bank’s charter or an agency’s or branch’s license, the FDIC must not only initiate an involuntary termination of deposit insurance, it also must place the institution into receivership and can transfer the institution’s assets as provided in the bill.
  • Every “executive officer and director” of a national bank or federal savings association or a branch, representative office, or agency of a federally-licensed foreign bank must annually certify in writing to the appropriate banking agency, the CFPB, and any relevant federal law enforcement agency, that he or she has “regularly reviewed the institution’s lines of business and conducted due diligence to ensure,” that the institution (1) has established and maintained internal risk controls to identify significant federal law consumer compliance deficiencies and weaknesses, (2) has promptly disclosed all known violations of applicable federal consumer protection laws to the CFPB and appropriate banking agency, (3) is taking all reasonable steps to correct any identified federal law consumer compliance deficiencies and weakness based on prior examinations, and (4) is in substantial compliance with all federal consumer protection laws.
  • An officer or director who submits a certification that contains a false statement is subject to a fine or imprisonment if the statement is “done knowingly” or “done intentionally.”
  • An officer or director who knowingly violates any federal consumer protection law or directs any of the institution’s agents, officers, or directors to violate such a law is personally liable for any damages sustained by the institution or any other person as a result of the violation.  An officer or director who knowingly causes an institution to violate any federal consumer protection law or directs any of the institution’s agents, officers, or directors to commit a violation that results in the director or officer “being personally unjustly enriched and the institution being conducted in an unsafe and unsound manner” can be fined in an amount up to all of the compensation he or she received during the period in which the violations occurred or in the one to three years preceding discovery of the violations, and is subject to up to 5 years imprisonment.  The OCC, Fed, or FDIC, as applicable, must remove an officer or director who engaged in the foregoing conduct from his or her position and permanently ban such person from being involved in the operation and management of a federally-chartered or federally-insured bank.

Were it to become law, the bill’s certification requirement would likely make it very difficult for banks to attract and retain highly-qualified officers and directors.  It could also lead to instability in the banking system by creating a  “run” on deposits by depositors of a bank that became subject to the bill’s sanctions, particularly those whose deposits at the bank exceeded the insured deposit limit.

Fortunately, given the large Republican majority in the House, the bill is very unlikely to advance.

 

Among the more than 20 bills that the House Financial Services Committee is scheduled to mark-up this Wednesday, October 11, is a bill to provide a “Madden fix” as well as several others relevant to consumer financial services providers.

These bills are the following:

  • H.R. 3299, “Protecting Consumers’ Access to Credit Act of 2017.  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  The bill would add the following language to Section 85 of the National Bank Act: “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.”
    This language is identical to language in a bill introduced in July 2017 by Democratic Senator Mark Warner as well as language in the Financial CHOICE Act and the Appropriations Bill that is also intended to override Madden.  Like those bills, H.R. 3299 would add the same language (with the word “section” changed to “subsection” when appropriate) 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.  In the view of Isaac Boltansky of Compass Point, the bill is likely to be enacted in this Congress.
  • H.R. 2706, “Financial Institution Consumer Protection Act of 2017.”  This bill is intended to prevent a recurrence of “Operation Chokepoint,” the federal enforcement initiative involving various agencies, including the DOJ, the FDIC, and the Fed. Initiated in 2012, Operation Chokepoint targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  The bill includes provisions that (1) prohibit a federal banking agency from (i) requesting or ordering a depository institution to terminate a specific customer account or group of customer accounts, or (ii) attempting to otherwise restrict or discourage a depository institution from entering into or maintaining a banking relationship with a specific customer or group of customers. unless the agency has a material reason for doing so and such reason is not based solely on reputation risk, and (2) require a federal banking agency that requests or orders termination of specific customer account or group of customer accounts to provide written notice to the institution and customer(s) that includes the agency’s justification for the termination.  (In August 2017, the DOJ sent a letter to the chairman of the House Judiciary Committee in which it confirmed the termination of Operation Chokepoint.  Acting Comptroller Noreika in remarks last month, in which he also voiced support for “Madden fix” legislation, indicated that the OCC had denounced Operation Choke Point.)
  • H.R. 3072, “Bureau of Consumer Financial Protection Examination and Reporting Threshold Act of 2017.”  The bill would raise the asset threshold for banks subject to CFPB supervision from total assets of more than $10 billion to total assets of more than $50 billion.
  • H.R. 1116, “Taking Account of Institutions with Low Operation Risk Act of 2017.”  The bill includes a requirement that for any “regulatory action,” the CFPB, and federal banking agencies must consider the risk profile and business models of each type of institution or class of institutions that would be subject to the regulatory action and tailor the action in a manner that limits the regulatory compliance and other burdens based on the risk profile and business model of the institution or class of institutions involved.  The bill also includes a look-back provision that would require the agencies to apply the bill’s requirements to all regulations adopted within the last seven years and revise any regulations accordingly within 3 years.  A “regulatory action” would be defined as “any proposed, interim, or final rule or regulation, guidance, or published interpretation.”
  • H.R. 2954, “Home Mortgage Disclosure Adjustment Act.”  The bill would amend the Home Mortgage Disclosure Act to create exemptions from HMDA’s data collection and disclosure requirements for depository institutions (1) with respect to closed-end mortgage loans, if the institution originated fewer than 1,000 such loans in each of the two preceding years, and (2) with respect to open-end lines of credit, if the institution originated fewer than 2,000 such lines of credit in each of the two preceding years.  (An amendment in the nature of a substitute would lower these thresholds to fewer than 500 closed-end mortgage loans and fewer than 500 open-end lines of credit.)
  • H.R. 1699, “Preserving Access to Manufactured Housing Act of 2017.”  The bill would amend the Truth in Lending Act and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) to generally exempt a retailer of manufactured housing from TILA’s “mortgage originator” definition and the SAFE Act’s “loan originator” definition.  It would also increase TILA’s “high-cost mortgage” triggers for manufactured housing financing.
  • H.R. 2396, “Privacy Notification Technical Clarification Act.”  This bill would amend the Gramm-Leach-Bliley Act’s requirements for providing an annual privacy notice.  (An amendment in the nature of a substitute is expected to be offered.)

The Department of Justice’s Civil Rights Division has issued its annual report to Congress regarding its activities to enforce the ECOA, FHA and SCRA.  The report covers 2016 activities that would have taken place under the Obama Administration.  As a result, although it concludes by noting the role of the DOJ’s “vigorous enforcement of fair lending laws” in expanding credit access, it is unclear how the DOJ will carry out that role under the leadership of Attorney General Jeff Sessions.

The report states that the DOJ opened 18 fair lending investigations in 2016, filed seven fair lending lawsuits of which it settled six, obtaining nearly $37 million in relief.  The six settled cases, which are described in the report, include cases involving alleged mortgage redlining (one from June 2016 and the other from December 2016), alleged discrimination on the basis of national origin in connection with vehicle-secured loans, alleged discrimination on the basis of familial status or disability and source of income, and alleged predatory targeting of minority homeowners.

The report indicates that at the end of 2016, the DOJ had 33 open fair lending investigations, including seven redlining investigations.  It also indicates that in 2016, the DOJ “continued to build its working relationships with the federal banking agencies, [HUD] and the [FTC] to strengthen our individual and collective capabilities to enforce fair lending laws,” and that the DOJ also continues “to seek opportunities to work in partnership with various state attorneys general.”  (We note that the CFPB is not specifically mentioned as one of the agencies with which the DOJ is working to improve collaboration.)

One section of the report is devoted to ECOA and FHA referrals made to the DOJ by other federal agencies.  According to the report, the DOJ received 22 ECOA and FHA referrals in 2016: eight from the CFPB, four from the FDIC, seven from the Fed, one from the OCC, and two from HUD.  The report indicates that the DOJ opened eight investigations based on the 22 referrals and returned 12 to the referring agency for administrative enforcement without opening an investigation.  It also indicates that all but one of the fair lending lawsuits filed by the DOJ in 2016 were based in part on referrals.

The report reviews the factors considered by the DOJ when evaluating referrals, listing the characteristics of a referral that will generally result in its return and those that generally will result in its retention by the DOJ.  According to the report, the same factors apply when the DOJ has conducted an investigation and is deciding whether a lawsuit is warranted.

The report also includes descriptions of four settlements involving alleged SCRA violations.

The FTC has launched a new page on its website dedicated to its Military Task Force.  According to the FTC, it created the Task Force “to focus on identifying the particular needs of military consumers and developing initiatives to empower servicemembers, veterans, and their families more effectively.”  The Task Force consists of representatives of different FTC divisions.

The new webpage includes links to resources for servicemembers and veterans, workshops, related FTC cases and other initiatives, and congressional testimony.

 

The Department of Education (ED) recently delivered a letter to the Consumer Financial Protection Bureau (CFPB) providing notice of its intent to terminate the Memoranda of Understanding (MOUs) between the agencies. The letter is highly critical of the CFPB. The sharp rebuke proclaims ED’s “full oversight responsibility of federal loans” and does not explicitly salvage any part of the agencies’ former cooperation.

Signed by Acting Assistant Secretary of the Office of Postsecondary Education Kathleen Smith and Chief Operating Officer of Federal Student Aid (FSA) Dr. A. Wayne Johnson, the letter was addressed to Director Richard Cordray and dated August 31, 2017. The letter provides that the MOUs will terminate thirty-days after the date of the letter—on September 30th, 2017—as provided by the terms of the MOUs.

The letter references two specific MOUs: the “Memorandum of Understanding Between the Bureau of Consumer Financial Protection and the U.S. Department of Education Concerning the Sharing of Information” (Sharing MOU), dated October 19, 2011; and the “Memorandum of Understanding Concerning Supervisory and Oversight Cooperation and Related Information Sharing Between the U.S. Department of Education and the Consumer Financial Protection Bureau” (Supervisory MOU), dated January 9, 2014.

The Sharing MOU provided that the agencies would collaborate to resolve borrower complaints related to their private education or federal student loans. The Supervisory MOU encouraged additional information sharing with respect to the coordination of student financial services oversight and supervisory activities.

As we have noted, the CFPB began accepting federal student loan complaints in February of 2016. Previously, such complaints were directed to ED. Unlike the expansion of complaints regarding private student loan complaints or online marketplace lender complaints, the CFPB did not publish a press release announcing the new complaint solicitation. Instead, the CFPB referenced the expansion in its midyear update on student loan complaints in August 2016 and its monthly complaint reports from November 2016.

As justification for the split, ED accuses the CFPB of “violating the intent” of the agreements by failing to forward Title IV federal student loan complaints within ten days of receipt and handling complaints itself. The letter provides that the CFPB’s “intervention” caused “confusion to borrowers and servicers who now hear conflicting guidance” related to Title IV loans, and that the “unilateral” action of the CFPB allowed it to usurp ED’s data as a means to expand its jurisdiction—a “characteristic of an overreaching and unaccountable agency.”

The U.S. House of Representatives’ Committee on Education and the Workforce shared the letter as part of a press release. Chairwoman Rep. Virginia Foxx (R-NC) issued a statement praising ED for “taking its authority back from the CFPB,” which was “complicating and undermining” ED’s efforts to serve students. Rep. Foxx criticized the Obama administration for letting the CFPB “abuse its privilege” with respect to student loan oversight because “Congress bestowed the powers to oversee student loans and student loan servicing solely to the Department of Education.”

On the same day as the letter, ED announced a “stronger approach” to FSA oversight, including a broadening of scope, an increase in capacity, and a “more sophisticated strategy.” That strategy includes targeting “illegitimate debt relief organizations, schools defrauding students and institutions willfully ignoring their Clery Act responsibilities.” (The Clery Act requires disclosure of campus security policies and crime statistics.) ED intends to ensure parties understand their new compliance responsibilities and the consequences of non-compliance by “comprehensive” executive outreach. The release also noted FSA’s continued coordination with its “stakeholders”—including the Department of Justice and the Federal Trade Commission—but not the CFPB, which was conspicuously absent from the list.

The letter does not reference the agencies’ joint MOU with the Departments of Veterans Affairs and Defense “to prevent abuse and deceptive recruiting practices by schools serving servicemembers, veterans, spouses and other family members” under a 2012 Executive Order from President Obama. The letter also follows a previous decision to withdraw various memoranda issued by the Obama Administration ED Secretary and FSA that provided policy direction for a new student loan servicing scheme.

While the exact course the CFPB will take remains to be seen, ED has made its position clear that there is no room for CFPB involvement here, and by implication, no room for state regulators or state attorneys general either. In a statement obtained by Politico, CFPB spokesman David Mayorga said that the Bureau seeks further justification as to why ED is terminating the agreements. The Bureau noted that it will “continue to work with” ED towards its shared goals, but also signaled its intent to continue independent enforcement efforts under its “statutory responsibilities to protect student borrowers.”

The Office of the Comptroller of the Currency (OCC) has filed a motion to dismiss the lawsuit filed by the New York Department of Financial Services (DFS) challenging the OCC’s authority to grant special purpose national bank (SPNB) charters to nondepository fintech companies.

The DFS lawsuit, which was filed in May 2017 in a New York federal district court, is similar to the lawsuit filed in April 2017 by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court.  Earlier this month, the OCC filed a motion to dismiss the CSBS lawsuit.

The arguments made by the OCC in support of its motion to dismiss the DFS lawsuit track those made in support of its motion to dismiss the CSBS lawsuit.  Most notably, the OCC again makes the central argument that because it has not yet decided whether it will offer SPNB charters to companies that do not take deposits, the DFS complaint should be dismissed for failing to present either a justiciable case or controversy under the U.S. Constitution or a reviewable final agency action under the Administrative Procedure Act.

In remarks given last month, Acting Comptroller Keith Noreika confirmed that the OCC is continuing to consider its SNPB charter proposal despite the departure of the SPNB proposal’s architect, former Comptroller Thomas Curry, who Mr. Noreika replaced.  While indicating that the OCC planned to vigorously defend its authority to grant an SNPB charter to a nondepository company in the DFS and CSBS lawsuits, Mr. Noreika was noncommittal about what the OCC’s ultimate position would be on implementing the proposal.  He also suggested that fintech companies consider seeking a national bank charter by using more established OCC authority.

As expected, the Federal Financial Institution Examination Council (FFIEC) member agencies issued new data resubmission guidelines under the Home Mortgage Disclosure Act (HMDA) effective for the 2018 data collection year.  The change coincides with the substantial expansion of the HMDA data reporting fields that is effective January 1, 2018.

When examining an institution’s HMDA Loan Application Register (LAR), regulators will assess if the correction and resubmission of any data is required based on a review of a sample of reported loans.  Currently for institutions that have a total of less than 100,000 loans or applications on their annual LAR, which is the vast majority of HMDA reporting institutions, (1) an institution must correct and resubmit its entire LAR if 10% or more or of the entries in the sample contain errors, and (2) an institution must correct and resubmit an individual data field in the LAR if there are errors in that field with 5% or more of the entries in the sample.  An institution can be required to correct and resubmit data even if the 10% or 5% thresholds are not reached, if the errors would make analysis of the institution’s data unreliable.  Regulators will first assess a smaller set of entries in a LAR, and if one or no errors are found they typically cease the verification process at that point.

Under the new guidelines, there are revised thresholds for requiring resubmission, and for assessing if a full review of the sample will be performed based on errors in the initial smaller set of loans.  Assessment of the data will be conducted on an individual data field basis.  The new testing sample sizes and thresholds are as follows:

For institutions with fewer than 30 LAR entries, the resubmission threshold is still 3, so the effective resubmission threshold percentage is higher than 10%.  As is the case currently, even if the thresholds are not met an institution can be required to correct one or more data fields and resubmit one or more data fields in its HMDA LAR if examiners have a reasonable basis to believe that errors in the field or fields will likely make analysis of the HMDA data unreliable.

Under the revised guidelines, if an institution has a total of 1,000 entries on its LAR, the regulator would first review an initial sample of 35 loans.  If the regulator finds two or more errors in a data field, the regulator would then review the full 79 loan sample.  If four or more errors are found in any data field, the institution would be required to resubmit its LAR with the applicable data field corrected.

Unlike the current approach, under the new guidelines there are tolerances for certain data fields, and an error within the applicable tolerance will not be considered an error for either threshold.  The tolerances are as follows:

  • Date of Application: Three calendar days or less with regard to the date the application was received or date shown on application form and the date reported in the LAR.
  • Loan Amount: One thousand dollars or less in the amount of the covered loan or loan applied for and the amount reported in the LAR.
  • Date Action Taken: Three calendar days or less with regard to the date the action was taken and the date reported in the LAR, provided that the difference does not result in reporting data for the wrong calendar year.
  • Income: Errors in rounding the gross annual income relied upon to the nearest thousand.

Subject to an exception, for purposes of the guidelines a “data field” generally refers to an individual HMDA Filing Instructions Guide (FIG) field, and such fields are identified by a distinct Data Field Number and Data Field Name.  The July 2017 version of the FIG for data collected in 2018 is available here.    The exception is for information on the ethnicity or race of an applicant or borrower, for which a data field consists of a group of FIG fields as follows:

  • The Ethnicity of Applicant or Borrower data field group—comprised of six FIG fields with information on an applicant’s or borrower’s ethnicity (FIG Data Field Numbers 19-24);
  • The Ethnicity of Co-Applicant or Co-borrower data field group—comprised of six FIG fields with information on a co-applicant’s or co-borrower’s ethnicity (FIG Data Field Numbers 25-30);
  • The Race of Applicant or Borrower data field group—comprised of eight FIG fields with information on an applicant’s or borrower’s race (FIG Data Field Numbers 33-40); and
  • The Race of Co-Applicant or Co-borrower data field group—comprised of eight FIG fields with information on a co-applicant’s or co-borrower’s race (FIG Data Field Numbers 41-48)

If one or more of the six data fields for such a data field group has errors, this would count as one error.

 

In a letter dated August 16, 2017 to House Judiciary Committee Chairman Bob Goodlatte, Assistant U.S. Attorney General Stephen Boyd stated that “[a]ll of the [DOJ’s] bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again.”  Acting Comptroller of the Currency Keith Noreika, in a letter sent yesterday to House Financial Services Committee Chairman Jeb Hensarling, indicated that the OCC “welcome[d] the recent clarification by the [DOJ] of its position ending Operation Chokepoint” and would “continue to articulate [the OCC’s] position rejecting the tactics and goals of Operation Chokepoint….”

“Operation Chokepoint” was a federal enforcement initiative involving various agencies, including the DOJ, the FDIC, and the Fed.  Initiated in 2012, Operation Chokepoint targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In his letter, which responded to a letter sent by Representative Goodlatte to Attorney General Jeff Sessions, Assistant AG Boyd called Operation Chokepoint “a misguided initiative conducted during the previous administration.”  He stated that the DOJ “share[s] your view that that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor.  Enforcement should always be based on the facts and the applicable law.”

Assistant AG Boyd indicated that to the extent the DOJ continues to pursue ancillary investigations involving criminal activity discovered as a result of subpoenas issued as part of Operation Chokepoint, none of such investigations “relates to or seeks to deter lawful conduct.”  He also stated that the DOJ “will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms-related activities.”

Acting Comptroller Noreika’s letter was sent in response to a letter sent by Representative Hensarling asking the OCC to issue a formal policy statement repudiating Operation Chokepoint.  In his response, Mr. Noreika stated that “[t]he OCC is not now, nor has it ever been part of Operation Chokepoint.”  He indicated that the OCC “rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.”  Mr. Noreika observed that the OCC “expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”

Operation Chokepoint is currently the target of a lawsuit pending in D.C. federal district court in which several payday lenders allege that certain actions taken by regulators as part of Operation Chokepoint violated their due process rights.  (The action was filed against the OCC as well as the Fed and FDIC.)  In a decision issued last month, the district court denied the agencies’ motion to dismiss, holding that the plaintiffs had established both standing and a plausible claim for relief, and concluded that the agencies were not entitled to judgment on any of the plaintiffs’ due process claims.

A new research paper released by the Federal Reserve Bank of Philadelphia found that fintech lending has expanded consumers’ ability to access credit.  The paper, “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information,” used account-level data provided by a large fintech lender to “explore the advantages/disadvantages” of loans made by such lender “and similar loans that were originated through traditional banking channels.”

The study’s key findings include:

  • The fintech lender’s consumer lending activities penetrated into areas that could benefit from additional credit supply, such as areas that have lost a disproportionate number of bank branches and highly concentrated banking markets.
  • Consumers presenting the same credit risk could obtain credit at lower rates through the fintech lender than through traditional credit cards offered by banks.
  • The lender’s use of alternative credit data allowed consumers with few or inaccurate credit records (based on FICO scores) to access credit at lower prices, thereby resulting in enhanced financial inclusion.

In February 2017, the CFPB issued a request for information that seeks information about the use of alternative data and modeling techniques in the credit process.