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

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

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

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

As previously reported, the National Flood Insurance Program was scheduled to expire on November 30, 2018. Once again, Congress has kicked the can down the road by authorizing a temporary extension of the Program, rather than adopting a long-term, sensible reform of the Program. This time the kick was short, as the extension is only until December 7, 2018.

 

Attorneys for defendants, U.S. Comptroller and the Office of the Comptroller of the Currency (together “the OCC”), in the pending Southern District of New York lawsuit, Vullo v. OCC, submitted a letter to the court announcing their intent to move to dismiss the complaint brought by New York’s Superintendent of the Department of Financial Services (“DFS”). This is the second lawsuit brought by Superintendent Vullo against the OCC and mirrors the litigation being pursued by the Conference of State Bank Supervisors (CSBS) in the District of Columbia. DFS’s lawsuit alleges that the OCC’s decision to accept applications for “Special Purpose National Bank Charters” (or “fintech charters”) from non-fiduciary institutions that do not accept deposits exceeds the OCC’s authority under the National Banking Act (“NBA”) and would violate the Tenth Amendment by removing such institutions from state regulatory oversight. The first lawsuit, Vullo v. OCC et al. (“Vullo I”), was dismissed without prejudice last December when Southern District of New York Judge Buchwald ruled that DFS lacked standing to assert its claims, which were unripe for judicial determination.

In its letter, the OCC announced its intention to file a motion to dismiss the latest DFS complaint on substantially identical grounds to those it advanced in Vullo I. The OCC intends to argue that: (1) DFS lacks sanding to bring these claims as it has not suffered an injury in fact; (2) the OCC interpretation of the ambiguous term “business of banking” in the NBA is reasonable, and the OCC therefore has authority under the NBA to issue fintech charters; (3) DFS’s challenge is barred by the applicable statute of limitations; and (4) the OCC’s decision to issue fintech charters would not violate the Tenth Amendment because of the Supremacy Clause and the authority granted to the OCC by the NBA. While DFS had tried to cure its standing issues in the most recent complaint by emphasizing the OCC’s decision to issue fintech charters was the “agency’s final decision,” the OCC has signaled in its letter that it believes the DFS complaint remains premature. The OCC’s letter emphasizes that while “it will accept applications for fintech charters, [the agency] has not actually received any such applications, let alone granted one.” Accordingly, the OCC will argue that any harm DFS describes in its complaint or in its response to the motion to dismiss remains “future-oriented and speculative.”

DFS filed its own letter in response, announcing not only DFS’s strategy for overcoming the OCC’s anticipated motion to dismiss, but also its intent to file a motion for preliminary injunction in order to prevent the OCC from issuing any fintech charters while the lawsuit is pending. DFS focused on the reasoning of Judge Buchwald’s Vullo I opinion and highlighted several subsequent changes to the regulatory landscape that should change the result. In particular, DFS noted that at the time Judge Buchwald found DFS’s claims unripe: (1) the OCC had not yet announced its intent to accept applications from non-depository institutions; (2) the relevant supplement to the OCC licensing manual was still in “draft” form; and (3) the Comptroller at the time was a nominee who had made no public statements regarding whether to offer charters to non-depository institutions. In contrast, presently the OCC has announced that it is accepting fintech charter applications, the manual detailing procedures for the process has been finalized, and the then-nominee-now-Comptroller has made several public statements regarding the OCC’s intent to issue fintech charters. DFS will argue that, based on these changes to the facts underpinning Judge Buchwald’s determination, DFS now has standing to make its claims against the OCC.

DFS also strongly implied that the OCC had been less-than-forthright with the court in its letter when the OCC stated that DFS lacked standing (in part) because the OCC had not actually received, much less granted, any applications for fintech charters. DFS cited to reports that the OCC has already singled-out the first entity to receive a fintech charter, and characterized the OCC’s representation to the Court that no fintech charters were currently being considered as “brutishly inconsistent” and duplicitous.

Regarding the merits of the claims (on which DFS will have to prove a substantial likelihood of success if it does indeed seek a preliminary injunction), DFS signaled in its letter that it intends to focus primarily on the history of the NBA, the OCC’s traditional deference to congressional authority when regulating non-depository institutions, and the degree to which the OCC’s actions in the realm of offering fintech charters has no precedent. In emphasizing the need for a preliminary injunction, DFS characterized the OCC’s “unprecedented issuance” of fintech charters as “destructive to New York and New Yorkers” insofar as it would preempt state laws that “powerfully protect” consumers from the industry’s “well-known abuses.”

The OCC anticipates filing its motion to dismiss in early December, though the court has neither ruled on the parties’ jointly proposed briefing schedule, nor DFS’s request for a pre-motion conference or briefing schedule on the motion for preliminary injunction.

While the OCC’s position that the DFS lawsuit is not yet ripe for adjudication because the OCC has not yet approved a fintech charter may have some merit, it is important to the industry that the legal question of the OCC’s authority to issue such a charter get resolved expeditiously. Until that happens, there is likely to be limited interest on the part of the industry in pursuing such a charter.

This afternoon the Senate voted 50 – 49 to invoke cloture and proceed to debate and a final vote on the nomination of Kathy Kraninger to be the next Director of the Bureau of Consumer Financial Protection (“BCFP”).  The vote was along strict party lines, with Senator James Inhofe (R-OK) not voting.  The Senate could begin debate on Kraninger’s nomination as early as Monday.  If all 50 senators who voted affirmatively today do so again for the full Senate vote, Kraninger’s confirmation is assured.  Once confirmed by the Senate, Kraninger will serve a 5-year term as the Director of the BCFP.

We talk with Evan Daniels, Fintech Counsel in the Arizona Attorney General’s office, about Arizona’s first-in-the-nation Fintech sandbox and how it is being used to drive innovation in consumer financial services.  We also discuss how the CFPB’s current push to encourage innovation interacts with state efforts, such as those in Arizona.

To listen and subscribe to the podcast, click here.

On November 20, the Federal Reserve Board (FRB) and CFPB jointly proposed amendments to Reg. CC, which implements the Expedited Funds Availability Act (EFA Act), and also reopened for public comment various amendments that the FRB had proposed in March of 2011. This new proposal is in addition to the amendments to Reg. CC’s liability provisions that the FRB approved in September, which involved provisions that remain within the FRB’s sole rulemaking authority. In contrast, this more recent proposal relates to EFA Act sections for which the FRB and CFPB have joint rulemaking authority.

First, the FRB/CFPB Reg. CC proposal sets forth a methodology for adjusting a variety of dollar amounts in the EFA Act every five years by the aggregate annual percentage increase in the Consumer Price Index for Wage Earners and Clerical Workers rounded to the nearest multiple of $25. This would implement a statutory requirement under the EFA Act, which was introduced by section 1086(f) of the Dodd-Frank Act, and the proposed effective dates are April 1, 2020 for the first set of adjustments, April 1, 2025 for the next set, and then April 1 every fifth year thereafter. The change would affect various dollar amounts, including the minimum amount of deposited funds that banks must make available for withdrawal by opening of business on the next day, the amount of funds deposited by certain checks in a new account that are subject to next-day availability, and the civil liability amounts for failing to comply with the EFA Act, among others.

Second, the proposal seeks to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) amendments to the EFA Act, which include extending coverage to American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam. The EGRRCPA amendments subject banks in these jurisdictions to the EFA Act’s requirements related to funds availability, payment of interest, and disclosures. Among other things, the proposed amendments would treat each of these jurisdictions as “states” for purposes of Reg. CC.

Finally, the proposed amendments would make various other technical changes to Reg. CC, including a clarification in the regulation that the FRB and CFPB have joint rulemaking authority under certain provisions of the EFA Act.

As noted above, the FRB and CFPB are also reopening for public comment amendments that that the FRB proposed in 2011. That proposal included changes aimed at encouraging banks to clear and return checks electronically, new provisions governing electronic items cleared through the check-collection system, a shorter safe harbor period for exception holds on deposited funds, and new model disclosure forms. Last week’s announcement states that “there may have been important changes in markets, technology, or industry practice since the public submitted comments seven years ago in response to the Board’s 2011 Funds Availability Proposal,” and notes that now the FRB and CFPB have “assumed joint rulemaking authority with respect to some of those proposed amendments.” Previously submitted comments will remain part of the rulemaking docket.

 

FCC Chairman Ajit Pai proposed the creation of a comprehensive reassigned numbers database, addressing a significant compliance challenge under the TCPA. The TCPA’s prohibitions on the use of automatic telephone dialing systems (ATDS) allows calls to be made with the express consent of the recipient. However, as the Chairman noted in the press release announcing this proposal, millions of phone numbers are reassigned each year. Because businesses who have received prior express consent cannot rely on consumers to inform them of a reassignment, they risk violating the TCPA by placing any calls with an ATDS to those numbers after they have been reassigned.

The Chairman’s press release and proposed order recognize this challenge and outline the establishment of a database of all phone numbers that have been permanently disconnected (and that are therefore eligible for reassignment). With a single, comprehensive, and authoritative repository for this information, business callers can check the database and determine whether a recipient’s number has become eligible for reassignment. This will allow callers to know before placing an ATDS call whether the consumer who consented to receive calls still holds that phone number—and thus whether the prior express consent is still valid.

If approved by the FCC, the proposed order would establish a database based on information provided by phone companies obtaining geographic numbers from the North American Numbering Plan. Voice providers would report all permanently disconnected numbers (i.e., numbers that have thus become eligible for reassignment) on a monthly basis. The draft order would also require an aging period of 45 days before permanently disconnected numbers may be reassigned, ensuring that eligible numbers will be in the database before reassignment occurs. An independent third-party administrator would be responsible for managing the data with funding assessed from voice providers.

Although the TCPA compliance problems around reassigned numbers have existed for years, these issues took on new importance this year after the DC Circuit set aside two components of the FCC’s 2015 Declaratory Ruling and Order in ACA International v. FCC. The ACA International decision both eliminated the FCC’s one-call safe harbor for calls placed to reassigned numbers and set aside the FCC’s interpretation of “called party” to mean the current actual subscriber instead of the intended recipient, increasing the uncertainty faced by business callers. The FCC issued a notice seeking comments on this and other issues arising from the ACA International decision in April. This was followed later in the summer by a bipartisan letter from two U.S. Senators calling for the establishment of a reassigned number database, demonstrating consensus that a comprehensive solution to reassigned numbers is overdue.

While the establishment of a reassigned numbers database would certainly be a welcome development, it would not resolve all of the compliance challenges relating to reassigned numbers that resulted from ACA International. The chairman’s draft order establishing the database specifically says it would not address “how a caller’s use of this database would impact its potential liability under the TCPA for calls to reassigned numbers” but “that use of the database will be a consideration” when the FCC does address the other topics raised in the May 2018 notice.

We recently addressed these and other TCPA compliance developments on our podcast, including the FCC’s response to a number of other issues raised by the ACA International decision around what constitutes an ATDS and how a party can revoke prior express consent to receive calls.

The FCC is expected to vote on the Chairman’s database proposal at its next Open Commission Meeting on December 12.

The CFPB, Fed, and OCC have published notices in the Federal Register announcing that they are increasing three exemption thresholds that are subject to annual inflation adjustments. Effective January 1, 2019 through December 31, 2019, these exemption thresholds are increased as follows:

In this week’s episode, we discuss recent state legislative and enforcement developments involving state analogues to the federal Servicemembers Civil Relief Act.  We review state efforts to increase the duration of federal protections, expand the groups entitled to them, and extend similar protections to additional products and services.

To listen and subscribe to the podcast, click here.

 

 

Virginia’s Attorney General has announced that “he has secured more than $50 million in debt relief and ordered civil penalties” as a result of his lawsuit filed in state court in March 2018 against Future Income Payments, LLC; FIP, LLC; and their individual owner for allegedly making loans to Virginia consumers, many of whom were military veterans, that were falsely marketed as asset purchases.  As discussed below, the court’s order is a default judgment in favor of the Virginia AG.

Although the AG’s complaint alleged that the interest rates charged on the transactions exceeded Virginia’s usury limits, it did not charge the defendants with violating the state’s usury laws.  Instead, the complaint charged the companies’ with violating the Virginia Consumer Protection Act (VCPA) based on their alleged misrepresentations to consumers and sought to hold the individual defendant personally liable for the companies’ VCPA violations based on his active participation in their business activities.  (The complaint alleged that the affected consumers could have brought private actions under Virginia’s usury laws but that the defendants avoided such potential actions by misrepresenting its transactions as “sales.”)

In September 2018, the CFPB filed a lawsuit against the defendants in a California federal district court in which it alleged that defendants made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, the CFPB alleged that the defendants had committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act.  The CFPB also alleged that numerous state and local regulators and agencies, including the Virginia AG, had concluded that the defendants’ transactions were loans for purposes of applicable state laws.  The defendants have not yet filed an answer to the CFPB’s complaint or otherwise responded.

While the CFPB’s complaint provided no explanation for why the defendants’ transactions are in fact extensions of credit, the Virginia AG’s complaint alleged that although the defendants’ agreements had some variations, they have “always been virtually guaranteed repayment by Virginia pensioners, or [the defendants] built-in potential events that would discharge the pensioners’ obligations to repay, knowing those events were unlikely to occur.”

The Virginia court’s docket indicates that the defendants’ counsel withdrew from the case on May 30, 2018 following their filing of a motion to dismiss.  Based on a July 23, 2018 Wall Street Journal article that referred to the individual defendant as a “felon,” the defendant companies have been shut down and investors in the companies are expected to bring lawsuits against the individual defendant.  On September 11, 2018, the court denied the motion to dismiss and ordered the defendants to answer the complaint.

On November 14, the court entered a Permanent Injunction and Final Judgment that provided the defendants were in default due to their failure to answer the complaint.  The Permanent Injunction and Final Judgment includes a finding that the defendants’ transactions were loans disguised as sales and a declaration that the transactions were usurious to the extent they were made at rates exceeding 12% per annum.  However, the Virginia AG’s recharacterization of the transactions as loans was not litigated because the factual allegations against the defendants are deemed admitted for purposes of a default judgment.

The Permanent Injunction and Final Judgment also awards the following relief to the Virginia AG:

  • A civil penalty of $31,740,000
  • A permanent injunction barring the defendants from collecting usurious interest in the amount of $20,098,159.63
  • Restitution to consumers for losses in the amount of $414,473.72
  • Costs and attorneys’ fees in the amount of $198,000
  • A permanent injunction barring the defendants from violating the VCPA