The pendency of three cases in circuit courts challenging the CFPB’s constitutionality has given rise to speculation as to whether the CFPB will continue to defend its constitutionality under Director Kraninger’s leadership.  The CFPB continued to defend its constitutionality in these cases while under former Acting Director Mulvaney’s leadership.  It did so, however, as a fallback to its primary argument that because Mr. Mulvaney was removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit in question, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured.

On January 9, a Ninth Circuit panel heard oral argument in CFPB v. Seila Law LLC, one of the three pending circuit court cases.  The appellant in Seila Law is asking the Ninth Circuit to overturn the district court’s refusal to set aside a Bureau civil investigative demand, arguing that the CID is invalid because the CFPB’s structure is unconstitutional.  In its answering brief filed with the Ninth Circuit, the CFPB relied on the ratification argument and its fallback constitutionality argument. (Mr. Mulvaney was Acting Director at the time of briefing.)

At the oral argument, the CFPB maintained the positions taken in its brief, namely that Mr. Mulvaney’s ratification cured any constitutional defect and, in any event, the Bureau’s structure is constitutional under U.S. Supreme Court precedent and the D.C. Circuit’s en banc PHH decision.  This would suggest that Director Kraninger, like former Acting Director Mulvaney, will continue to defend the CFPB’s constitutionality in the other pending cases.

Should she do so, however, Ms. Kraninger will be at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied this week), DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank Act’s for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  It also noted that its position “is that of the United States, not the position of the Bureau to date.”  The DOJ had asked the Supreme Court to allow the CFPB to weigh in should it grant the petition for certiorari.  (The DOJ’s position could have added significance because of the Dodd-Frank provision that requires the Bureau to seek the Attorney General’s consent before it can represent itself in the Supreme Court.)

If Director Kraninger does have a change of heart, she will be following in the shoes of Joseph Otting, who was appointed Acting FHFA Director by President Trump (and also serves as Comptroller of the Currency).  Next week, the Fifth Circuit is scheduled to hold oral argument in the en banc rehearing of Collins v. Mnuchin, in which a Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.

The Fifth Circuit panel had 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.”  The plaintiffs sought a rehearing en banc to overturn 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 also sought a rehearing en banc but with the goal of overturning the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge.

Despite having argued in its petition for rehearing that the panel’s constitutionality ruling was incorrect, the FHFA has now announced that it will not defend the FHFA’s constitutionality to the en banc court.  In the En Banc Supplement Brief of the FHFA and Mr. Otting, the FHFA states that Mr. Otting “has reconsidered the issues presented in this case.”  It further states that while it remains the FHFA’s position that the plaintiffs’ lack of standing makes it unnecessary for the en banc court to reach the constitutionality issue, to the extent the court concludes it is necessary to do so “FHFA will not defend the constitutionality of HERA’s for cause removal provision and agrees with the analysis in Section II.A of the Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.”

The two other pending circuit court cases challenging the CFPB’s constitutionality are the All American Check Cashing case pending in the Fifth Circuit and the RD Legal Funding case pending in the Second Circuit.  Oral argument is tentatively calendared for the week of March 11, 2019 in the All American Check Cashing case and briefing is scheduled to begin next month in the RD Legal Funding case.

 

 

Last July, the OCC announced its decision to accept applications for special purpose national bank (SPNB) charters from fintech companies.  At that time we observed that, while not discussed in the materials released by the OCC, it appeared that a fintech company holding an SPNB charter would be required to be a member of the Federal Reserve System and be subject to oversight as a member bank.  As a Federal Reserve member, an SPNB would have access to the Federal Reserve discount window and other Federal Reserve services.

According to a Reuters article published today, Federal Reserve officials have expressed reservations about allowing such access to fintech companies.  Reuters reports that “many Fed officials fear that these firms lack robust risk-management controls and consumer protections that banks have in place.”  The article quotes the President of the St. Louis Fed as having expressed concern that “fintech will be the source of the next crisis.” The Atlanta Fed President is quoted as having said that “almost none of [the fintech entrepreneurs he has talked to] has risk at the top of what they’re thinking about, and that makes me nervous.”

Despite its reported reservations about the SPNB charter, the Federal Reserve has acknowledged the increasing role played by fintech in shaping financial and banking landscapes and indicated that it is interested in developing policy solutions that would result in greater efficiencies and benefits to all parties.  To that end, the Philadelphia Fed sponsored a conference last November on “Fintech and the New Financial Landscape.”  At the conference, Ballard Spahr partner Scott Pearson was a member of a panel that discussed “The Roles of Alternative Data in Expanding Credit Access and Bank/Fintech Partnership.”

 

 

 

The OCC has filed a motion to dismiss the lawsuit filed in D.C. federal district court in October 2018 by the Conference of State Bank Supervisors (CSBS) to stop the OCC from issuing special purpose national bank (SPNB) charters to fintech companies.

The CSBS had previously filed a lawsuit challenging the OCC’s authority to grant SPNB charters to fintech companies at a time when the OCC had not yet decided whether it would move forward on its charter proposal.  That lawsuit was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.  The new lawsuit was filed in response to the OCC’s July 2018 announcement that it would begin accepting applications for SPNB charters from fintech companies.

In its brief, the OCC makes the following principal arguments in favor of dismissal:

  • CSBS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could a CSBS member suffer an injury in fact.
  • Because the OCC “remains several stages away from actually granting an SPNB Charter” and “has not finalized its decision to issue an SPNB Charter to a particular applicant,” the matter remains both constitutionally and prudentially unripe for judicial review.
  • Because the OCC’s July 2018 announcement was not a final agency action within the meaning of the Administrative Procedure Act, it is not subject to judicial review under the APA’s arbitrary and capricious standard.
  • The OCC’s July 2018 announcement does not represent a preemption determination to which notice and comment procedures apply “because the question of whether granting a proposed national bank will result in the preemption of any particular state consumer financial law is not relevant to the chartering process.”  (According to the OCC, in deciding whether to grant a charter, its focus is on ”the proposed institution’s prospects and whether it will operate in a safe and sound manner.”)
  • The OCC’s rule (12 C.F.R. Section 5.20(e)(1)) interpreting the term “business of banking” in the National Bank Act by reference to three core banking functions—receiving deposits, paying checks, or lending money—represents a reasonable interpretation of such term and supports treating any one of such functions as the required core activity for purposes of the OCC’s chartering authority.  Nothing in the NBA identifies deposit-taking as an indispensable function for a national bank to be engaged in the “business of banking.”

In September 2018, the New York Department of Financial Services (DFS) filed a second in a New York federal district court to block the OCC’s issuance of SPNB charters.  Like the first CSBS lawsuit, the first DFS lawsuit challenging the OCC’s authority to grant SPNB charters was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.

]Last month, the OCC submitted a letter to the court indicating that it intends to file a motion to dismiss the DFS lawsuit. The grounds for the motion set forth in the OCC’s letter substantially mirror its arguments for dismissal above in the CSBS lawsuit.  The DFS also submitted a letter to the court in which, in addition to outlining the arguments it would make in opposing an OCC motion to dismiss, it indicated that it intends to file a motion for a preliminary injunction to prevent the OCC from issuing any SPNB charters while the lawsuit is pending.

The next step in the case is likely to be the entry of an order by the court setting a motion schedule.  However, based on a docket entry indicating that a standing order was entered on December 27 requiring the U.S. Attorney’s Office to notify the court immediately upon the restoration of DOJ funding, it appears any further developments will not occur until the partial government shutdown ends.

 

 

I am pleased to share with our blog readers that Alan Kaplinsky, who leads our firm’s Consumer Financial Services Group, was recently awarded the National Law Review’s Go-To Thought Leadership Award in Consumer Finance for his work on our blog, Consumer Finance Monitor.

Alan is one of just 65 authors from around the country to receive the award, which recognizes contributors for their reporting of complex legislative and litigation news, as well as their strategic insight and overall knowledge of the legal industry.  He is one of only five authors to receive the award in the finance category and the only author to receive an award for a blog focusing on consumer financial services.

The National Law Review praised our blog’s coverage of the CFPB and litigation surrounding consumer finance and said it helps readers stay informed on this constantly shifting topic.  We certainly hope that our readers will agree.

In addition to our blog and webinars, we offer a weekly podcast program that features Ballard Spahr attorneys as well as regulators and other guests involved in the consumer finance industry.  The topics we have discussed since launching our podcast program last September include debt collection, Fintech, anti-money laundering/Bank Secrecy Act, military lending, fair lending, and small dollar lending.

 

 

The FCC has taken a step toward getting control over the potential TCPA exposure a business faces when it calls one of its customers at a phone number that, unbeknownst to the business, has been reassigned from the customer to someone else.

On December 13, 2018, the FCC released an order directing the creation of a single comprehensive database of disconnected numbers.  Phone service providers will be required to periodically report (the 15th of each month) the last date of permanent disconnection of phone numbers to a database administrator.  A caller can then use the database to determine whether a telephone number has been permanently disconnected and thus is no longer assigned to the person the caller wants to reach.  More specifically, callers will have the ability to query the database using the phone number, and a date on which the caller is reasonably certain that the consumer the caller intends to reach could in fact be reached at that number.  In response to the query, the database will tell the caller if the number has been reassigned since the date the caller input – if the database tells the caller the number was reassigned, the caller will know not to call that number to reach its customer.

The FCC’s order establishes a safe harbor from TCPA liability for callers that properly use the database.  To avail itself of the safe harbor, the caller must demonstrate that it checked the most recent update of the database, and the database reported that the number had not been permanently disconnected since the date the caller last contacted that consumer or the date on which the caller could be confident that the consumer could still be reached at that number.  The caller bears the burden of proof and persuasion that it checked the database before making a call.  The safe harbor would then shield the caller from liability should the database return an inaccurate result.

Although the concept of the database is a positive development for businesses trying to minimize TCPA liability, businesses may be waiting awhile before they can take advantage of it.  The FCC will not put the database in place until it hires an administrator, and the FCC stated that it intends to start the bidding process for an administrator “within the next twelve months.”  The FCC otherwise set no deadline for the database’s implementation.

 

 

 

 

As we reported, the Department of Education announced earlier this month that it would begin implementing its “borrower defense” final rule which was issued in November 2016 by providing discharges of federal student loans made to any borrowers who, in addition to other conditions, could not complete his or her program of study because the borrower’s school closed.  The final rule was the subject of litigation that resulted in an October 2018 ruling requiring the Department to implement the rule.

In addition to requiring the discharges, the final rule includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act.  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses.  In addition, schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions that were entered into before the final rule’s effective date.

In August 2018, following negotiated rulemaking, the ED published a notice of proposed rulemaking that would rescind the final rule and replace it with the “Institutional Accountability regulations” contained in the proposal.  Among the major changes to the final rule that would be made by the proposal is the removal of the arbitration ban.

Although the October 2018 ruling requires the Department to implement the final rule, the Department has not yet indicated whether it will enforce the arbitration ban, such as by requiring schools to retroactively cancel arbitration agreements in existing contracts.  Politico reported last week however that Department Spokeswoman Liz Hill has indicated that guidance from the Department on mandatory arbitration agreements will be forthcoming.

 

 

 

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.  

 

In a December 13 posting, the Department of Education announced that on December 14, it would begin sending emails to borrowers “to inform them that the company that handles billing and other services related to their federal student loans will discharge some or all of the borrower’s loans within the next 30-90 days.”

The discharges are required by Department’s “borrower defense” final rule which was issued in November 2016 and the subject of litigation that resulted in an October 2018 ruling requiring the Department to implement the rule.  It provides for the automatic discharge of federal student loans made to borrowers who, in addition to other conditions, could not complete his or her program of study because the borrower’s school closed.  Borrowers are also entitled to refunds of payments made on the loans.

According to media reports, the Department is expected to discharge $150 million in federal student loans owed by approximately 15,000 borrowers, with about half of the borrowers consisting of students who attended Corinthian Colleges.

 

At the end of last week, the Federal Trade Commission (FTC) and the Department of Veterans Affairs (VA) announced that they have entered into a Memorandum of Agreement (MOA) “to provide mutual assistance in the oversight and enforcement of laws pertaining to the advertising, sales, and enrollment practices of institutions of higher learning and other establishments that offer training for military education benefits recipients.”

Pursuant to 38 U.S.C. section 3696, the Secretary of Veterans Affairs is prohibited from approving the enrollment of a veteran eligible for military education benefits “in any course offered by an institution which utilizes advertising, sales, or enrollment practices of any type which are erroneous, deceptive, or misleading either by actual statement, omission, or intimation.”  Section 3696 also requires the VA Secretary to enter into an agreement with the FTC “to utilize, where appropriate, its services and facilities, consistent with its available resources, in carrying out investigations and making the Secretary’s determinations [whether an institution has used erroneous, deceptive or misleading practices.]”  The agreement must provide for referrals to the FTC where the VA believes an institution is engaging in erroneous, deceptive or misleading advertising, sales, or enrollment practices and the FTC “in its discretion will conduct an investigation and make preliminary findings.”

The MOA is intended to implement the requirements of Section 3696.  It provides that the VA can request that the FTC investigate an institution approved for the enrollment of veterans eligible for military education benefits and that, when making a referral, the VA’s Director of Education Services must “provide a written explanation of the basis for his or her belief that the institution subject to the referral is utilizing or has utilized, advertising, sales, or enrollment practices of any type that are deceptive.  Upon receiving a referral, the FTC’s Director of the Bureau of Consumer Protection (Director) must evaluate the information provided by the VA and “in his or her discretion, determine whether acceptance of the referral is consistent with the Commission’s existing investigative, enforcement, and resource priorities.”  The MOA lists factors the Director can consider in determining whether to accept a referral, such as “whether the violations allegedly occurred on a regular and ongoing basis” and “the nature and amount of consumer injury at issue and the number of consumers affected.”

The MOA also provides that:

  • The FTC’s acceptance or rejection of a referral is not to be construed as a decision by the FTC on the merits of the referral and a rejection of a referral may not be the sole basis on which the VA determines whether an institution is engaging in erroneous, deceptive or misleading advertising, sales, or enrollment practices.
  • If the FTC accepts a referral, the Director must direct the FTC staff to conduct an investigation and prepare preliminary findings.  For purposes of the MOA, “preliminary findings” means “either a nonpublic analysis prepared by FTC staff or an administrative or federal district court complaint approved by the Commission and which contains the FTC’s allegations regarded the referred institution’s practices.”
  • The FTC’s preliminary findings are intended to be used by the VA in deciding whether or not to approve an eligible veteran’s enrollment in an institution because the institution is engaging in erroneous, deceptive or misleading advertising, sales, or enrollment practices.  However, the MOA provides that the FTC’s preliminary findings “are not a determination by the Commission as to whether the institution has been or is violating Section 5 of the FTC Act, an order finalized thereunder, or any other laws enforced by the FTC.”
  • The MOA does not require the FTC, or limit the FTC’s authority, to investigate whether educational institutions or others have violated [Section 5 of the FTC Act] by committing unfair or deceptive sales, advertising, or enrollment practices, or any other laws enforced by the FTC” and the FTC can use materials obtained pursuant to the MOA when carrying out investigations under the FTC Act and other laws.

Tomorrow, December 18, from 12 p.m. to 1 p.m. ET, Ballard attorneys will hold a webinar focusing on the FTC: “New Enforcement Actions by the Old Sheriff in Town: Recent Developments at the Federal Trade Commission.”  For more information and to register, click here.

 

The OCC’s decision to issue special purpose national bank (or fintech) charters has sparked renewed litigation.  In this episode, we review the charter’s potential benefits and drawbacks, provide a litigation update and examine its possible impact on charter applicants, and flag issues for potential applicants.  We also look at fintech charter alternatives, including full-service and Utah industrial banks.

To listen and subscribe to the podcast, click here.