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On May 5, the Consumer Financial Protection Bureau (CFPB) released its long-awaited proposed rule (Proposed Rule) on the use of arbitration clauses by consumer financial services companies in their customer contracts that restrict a customer’s ability to file or join a class action lawsuit. The Proposed Rule will be open for comment for 90 days after the date it is published in the Federal Register.

Section 1028(a) of the Dodd-Frank Act required the CFPB to study the use of the mandatory arbitration clauses in consumer financial markets. The CFPB released its study early last year and later introduced an outline of proposed restrictions on mandatory arbitration. The study’s results and the outline left little doubt that the CFPB intended to act aggressively to limit the use of arbitration clauses with class action waivers in financial consumer agreements, and in that respect, the Proposed Rule does not disappoint.

The Proposed Rule would enact the following:

  • Prohibit providers of “covered consumer financial products and services,” such as credit cards, deposit accounts, other consumer loans, and automobile loans from using an agreement with a consumer that provides for arbitration of any future dispute between the parties and bars the consumer from filing or participating in a class action. Excluded are transactions subject to FINRA arbitration.
  • Require providers that participate in predispute arbitration to submit certain records to the CFPB (including the arbitrator’s judgment or award) so the CFPB can monitor arbitration proceedings and determine if further rulemaking is required.

The Proposed Rule would apply prospectively to agreements entered into 211 days after the final rules’ publication in the Federal Register.

Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) instructed six federal financial regulatory agencies—the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the US Securities and Exchange Commission (SEC), the Federal Housing Finance Authority (FHFA), and the National Credit Union Administration (NCUA) (collectively, the Agencies)—to jointly issue rules or guidelines limiting incentive-based executive compensation for certain financial institution senior officers and employees. Such guidelines must (1) prohibit incentive-based payment arrangements that the Agencies determine encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss and (2) require “covered financial institutions” (in general, financial institutions with $1 billion or more in total assets) to disclose information regarding the structure of their incentive-based compensation arrangements to their federal regulator.

So far, four of the Agencies (OCC, FDIC, SEC, and NCUA) have approved the proposed rule (Proposed Rule), and the Board and the FHFA are expected to approve the Proposed Rule shortly. The Proposed Rule is actually a reproposal of an April 2011 proposed rule that was never issued in final form, and according to the draft release, reflects the numerous comments on the 2011 proposal as well as experience that the Agencies have gained in applying prior guidance on incentive-based compensation. The Proposed Rule has an effective date of at least 18 months after the final rule is published, and as proposed, would not apply to any incentive-based compensation plan with a performance period that begins before the effective date.

The recent disclosure of the so-called “Panama Papers” has brought customer due diligence of nominee companies into renewed focus. Perhaps coincidentally, the disclosure of these papers comes as the Financial Crimes Enforcement Network (FinCEN) appears to be reaching the homestretch on finalizing its proposed rules that impose enhanced customer due diligence requirements on financial institutions. On April 13, FinCEN submitted a final version of the rule to the Office of Management and Budget (OMB) for review.

As discussed in our LawFlash FinCEN Proposes to Expand Financial Institution Customer Due Diligence Requirements, the proposed rule’s enhanced customer due diligence requirements would require covered financial institutions to (1) identify and verify the natural persons who are the principal beneficial owners of legal entity customers and (2) codify explicit customer due diligence requirements for covered financial institutions to (a) understand the nature and purpose of customer relationships and (b) conduct ongoing customer monitoring, both of which would become required elements of a core anti-money laundering (AML) program.

Interestingly, on April 8, FinCEN also submitted to OMB for review proposed rules to impose AML programs on banks that do not have a Federal functional regulator. The proposed rule would remove the AML program exemption for banks and similar financial institutions that lack a Federal functional regulator. Banks that could be captured by the proposed rule include private banks, non–federally insured credit unions, and certain trust companies. If eventually finalized, we would expect FinCEN to also impose customer identification program and enhanced due diligence requirements on these banking entities.

In a clear and concise decision, the US District Court for the District of Columbia has ruled that the Consumer Financial Protection Bureau (CFPB) lacked the statutory authority to issue a Civil Investigative Demand (CID) to the Accrediting Council for Independent Colleges and Schools (ACICS), an accreditor of for-profit colleges. In Judge Richard Leon’s opinion in Consumer Financial Protection Bureau vs. Accrediting Council for Independent Colleges and Schools, he termed the CFPB’s action “a bridge too far.”

In August 2015, the CFPB issued a CID to ACICS with the stated purpose of determining whether ACICS had engaged in “unfair, deceptive or abusive acts and practices” (UDAAP). However, the CFPB’s supervisory and enforcement authority with respect to UDAAP is limited by statute to a “covered person or service provider” and only in connection with a transaction with a consumer for “consumer financial products or services.”

Because ACICS does not meet the definition of a “covered person,” the CFPB argued that the CFPB’s authority to investigate the consumer lending practices of schools accredited by ACICS grants it the necessarily authority to investigate whether ACICS has engaged in violations of the law in accrediting those schools.

This, the district court held, was “a bridge too far.” In addition, Judge Leon looked to the demands made in the CID and noted that the information sought far exceeded what could reasonably be required for the CFPB to determine whether ACICS’s conduct furthered or otherwise assisted and facilitated the schools’ conduct. Accordingly, he denied the CFPB’s motion to enforce its CID and dismissed the action.

On March 30, a judge in the US District Court for the District of Columbia invalidated the determination by the Financial Stability Oversight Council (FSOC) to designate MetLife as a “systemically important financial institution” (SIFI) that would be subject to stringent prudential regulation and supervision by the US Federal Reserve Board and other regulatory authorities. The opinion invalidating the FSOC designation (Decision) was initially filed under seal, but was unsealed on April 7. Not surprisingly, the US Treasury Department, under whose auspices the FSOC is organized, has appealed the district court’s Decision.

The Dodd-Frank Act allows FSOC to designate a nonbank financial institution as “systemically important” on the basis of specific factors and considerations set forth in section 113 of the Dodd-Frank Act. In turn, the FSOC has adopted substantive and procedural regulations and guidelines implementing the provisions of section 113. Among other things, the FSOC requirements specify several factors that FSOC will take into account in making a SIFI determination.

The Decision invalidated the FSOC determination on relatively narrow administrative law grounds, concluding in substance that FSOC

  • unilaterally changed the criteria for the SIFI determination during the MetLife review process without allowing public comment on these changes,
  • failed to take into account all of the factors that FSOC regulations and guidance stated that FSOC would consider, and
  • failed to conduct a full cost-benefit analysis of the MetLife SIFI determination.

In a spirited oral argument on April 12, a panel of the US Court of Appeals for the DC Circuit questioned the constitutionality of the Consumer Financial Protection Bureau’s (CFPB’s) governance structure. Specifically, the court is examining the decision by the US Congress to concentrate the power of this independent federal agency in a single director—and then largely insulate that director not only from the checks and balances of Congress and the courts, but also in large part from review and control by the President.

The oral argument was made in a case brought by mortgage lender PHH Corp., appealing a CFPB administrative order that charged it with alleged illegal kickbacks under the Real Estate Settlement Procedures Act (RESPA). An administrative law judge appointed by CFPB Director Richard Cordray had initially imposed a penalty of $6.4 million. When both PHH and the CFPB staff appealed, Director Cordray sat as the appellate officer and increased the penalty by over 1,600% to $109 million.

PHH then filed an appeal of Director Cordray’s order with the US Court of Appeals, as was its right under the Dodd-Frank Act. It marked the first challenge to a CFPB administrative action since the agency’s creation in 2011.

As we reported in our LawFlash titled “CFPB Issues First Appellate Ruling,” in June 2015, the Consumer Financial Protection Bureau’s (CFPB’s) Director issued his first decision on appeal from his own administrative law judge (ALJ). In the matter, CFPB Director Richard Cordray increased the monetary penalty imposed on a mortgage loan originator and trader from the $6.4 million imposed by the ALJ (who, it should be noted, was authorized by the Director to decide the matter) to $119 Million (see Decision of the Director, In the Matter of PHH Corporation, et al).

The matter is now scheduled for oral argument before a Panel of the District of Columbia Circuit on April 12, 2016. In a relatively unique procedural order, the court directed the parties to be prepared to answer two questions:

1. What independent agencies now or historically have been headed by a single person? For this purpose, consider an independent agency as an agency whose head is not removable at will but is removable only for cause.

2. If an independent agency headed by a single person violates Article II as interpreted in Free Enterprise Fund v. PCAOB, what would the appropriate remedy be? Would the appropriate remedy be to sever the tenure and for-cause provisions of this statute, see 12 U.S.C. §5491(c)? Or is there a more appropriate remedy? And how would the remedy affect the legality of the Director’s action in this case?

Order, PHH Corporation, et al. v. Consumer Financial Protection Bureau (D.C. Cir. April 4, 2016) (internal citations omitted).

In an April 6 speech before the FDIC Community Banking Conference, Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg discussed the FDIC’s interest in promoting the creation of new community banks. His speech was followed today by the FDIC’s posting of additional supplementary questions and answers on new deposit insurance applications.

Noting that the number of new applications for federal deposit insurance had declined “to a trickle in recent years,” Gruenberg said yesterday that the FDIC “welcomes” applications for deposit insurance. He described recent and ongoing FDIC efforts to facilitate the application process for deposit insurance, including

(i) the publication in the fall of 2014 of Questions and Answers on the application process,

(ii) a fall 2015 FDIC training conference on new deposit insurance applications,

(iii) the designation of subject matter experts in the FDIC regional offices as application points of contact,

(iv) the announcement of a reduction from seven to three years as the period of heightened supervisory monitoring for new banks, and

(v) the expected publication of a new handbook to guide applicants through the deposit insurance application review process.

Wasting no time after returning from a two-week recess, the US Senate Committee on Banking, Housing, and Urban Affairs (the Committee) is holding two full committee hearings this week to discuss consumer financial services and the Consumer Financial Protection Bureau (CFPB).

On April 5, the Committee is holding the hearing “Assessing the Effects of Consumer Finance Regulations.” Based on available submitted testimony, the hearing will focus on the CFPB and the impact of its regulations and enforcement actions on consumer protection and the availability and cost of consumer financial products. The submitted testimony ranges from very supportive of the CFPB to highly critical.

Two days later, on April 7, CFPB Director Richard Cordray will be the sole witness for “The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.” The semi-annual report is always interesting and often contentious, as support and criticism of the CFPB and its performance continues to be a divisive issue on Capitol Hill. For those watching at home, keep an eye out in this hearing for Committee members referencing parts of the testimony given in the April 5 hearing.

Although committee hearings tend to produce interesting testimony from witnesses and some newsworthy sound bites from members of Congress, no consumer financial services legislation has been reported out of the Committee for consideration by the full Senate, and the Committee currently has no scheduled legislation markups.

On March 22, the Consumer Financial Protection Bureau (CFPB) announced on its website that it has issued its annual summary and analysis of the 19,000 complaints it received from servicemembers last year, titled “Servicemembers 2015: A Year in Review.” The CFPB’s report provides aggregate statistics concerning the sources, subject matters, resolutions, and financial products involved in those complaints.

Several issues identified in the report relate to the unique circumstances of servicemembers:

  • The availability of home mortgage loss mitigation options for servicemembers who receive permanent change of station (PCS) orders remains the subject of a significant number of complaints. Federal law does not impose any general affirmative obligation to offer specific loss mitigation options for private mortgages, but CFPB regulations require servicers to accurately and promptly evaluate loss mitigation applications for all options that the servicer and investors make available.
  • A specific complaint claiming that the terms of automobile loans prevented servicemembers from shipping their cars outside the country even when traveling on PCS orders. The report implies a potential interest in evaluating this issue from an unfair, deceptive, or abusive acts or practices (UDAAP) perspective, noting that servicemembers “were often completely unaware of this restriction when they took out the loan.”
  • A number of servicemembers complained about creditors’ and reporting agencies’ handling of identity theft while on active duty. By contrast to the other issues, the report implied that this problem could be addressed through consumer education: servicemembers already have the right to place an “active duty” alert on their accounts to help protect against identity theft in this scenario.