The CFPB published its Supervision and Examination Manual (the “Manual”) on October 13, 2011, designed to provide CFPB examiners with direction on how to determine if providers of consumer financial products are complying with consumer protection laws. The CFPB’s press release states that the Manual incorporates procedures already used by other federal regulators. The Manual does simply recite certain interagency procedures, such as for fair lending examinations. At the same time, the Manual addresses new Dodd-Frank concepts, such as unfair, deceptive and abusive acts or practices.
The CFPB will use the Manual initially to supervise the more than 100 large banks, thrifts, and credit unions that are subject to the CFPB’s examination authority pursuant to the Dodd-Frank Act (those with total assets over $10 billion, as well as their affiliates). The Bureau’s examiners will also ultimately use the Manual to supervise non-depository consumer financial service companies (e.g., mortgage lenders), with the stated goal of promoting “fair, transparent, and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.”
The CFPB Examination Framework and Philosophy
While only certain entities will be subject to CFPB examination, the Manual outlines an examination approach that is illustrative of the Bureau’s bend on matters over which it has rulemaking authority. This is particular true of its view of its authority over matters it considers unfair, deceptive or abusive acts or practices (UDAAP).
Like other bank regulators, the CFPB will prepare for examinations by gathering and reviewing a wide array of regulatory and public data about an institution: state and/or prudential regulator reports of examination and correspondence, enforcement actions, state licensing and registration information, complaint data, call reports, HMDA LARs, HAMP data, fair lending analyses, SEC or other securities-related filings, the institution’s website and advertising, and, among other things, “newspaper articles, web postings, or blogs that raise examination related issues.” The CFPB will then contact the institution about the examination and prepare its customized Information Request.
No, nothing to worry about yet, though it may be confusing for some time. One bureaucratic consequence of the Dodd-Frank Act moving the various consumer protection laws and regulations under the jurisdiction of the Consumer Financial Protection Bureau (CFPB) is that they now must reissue the relevant regulations.
Referred to by CFPB insiders as the “restatement project,” the CFPB is preparing to reissue over 3,000 pages of regulations through approximately fourteen Federal Register notices. The reissued regulations will be changed to reflect jurisdictional changes and some scope changes, but they are not expected to change substantively at this time (although we will be watching). We expect publication of these reissued regulations to begin within days.
The possible source of confusion will be a new numbering system. The regulations will still be in Title 12 of the Code of Federal Regulations, but moved to Chapter X. We understand that most of the numbers will be unchanged after the decimal point, but the other numbers could be very different. So, for example, 12 CFR § 226.1 of Regulation Z could become 12 CFR § 1000.1. In some cases, however, due to rules of the Office of the Federal Register, new numbers will be required. For example, Regulation Z sections 226.5a and 226.5b could become 12 CFR § 10XX.40 and 12 CFR § 10XX.60.
None of this is all that earth shaking except to lawyers with nothing else to worry about. All those years memorizing regulation numbers for naught.
The Georgia Court of Appeals recently issued a very favorable ruling for banks that have purchased loans from the FDIC. In the case of KENSINGTON PARTNERS, LLC et al. v. BEAL BANK NEVADA, the guarantors argued that the purchaser of a $7 million loan from the FDIC did not possess a valid assignment from the FDIC. The original loan had been extended by BankFirst in 2006. BankFirst subsequently failed and the FDIC sold the loan to Beal Bank Nevada.
The record established that the FDIC sold the loan and all related documents, including the guaranties and the court rejected the argument put forth by the guarantors. In a helpful comment, the court noted that even if the assignment from the FDIC had not referenced the guaranties, under Georgia law, the assignment of the note carried with it the assignment of the guaranties. The guarantors also argued that there were genuine issues of fact concerning the amounts owed under the note.
The court rejected these arguments as well based on evidence from the FDIC loan portfolio manager accounting for the loan balance from its inception. The case is typical of some of the lender liability litigation that lenders are having to grapple with right now as well heeled borrowers and guarantors attempt to put off the day of reckoning. The litigation can be lengthy and expensive and the loan obligors are seeking to use that to extract a settlement form the lender that is favorable to the obligors.
Lenders seeking to collect against loan obligors that have sufficient assets to cover the loan should enter into collection activities with realistic expectations about the time and cost involved. Bank counsel’s awareness of typical or new lender liability theories is also vital to a successful collection effort.
On August 16, 2011, the Financial Institutions and Consumer Credit subcommittee of the House Committee on Financial Services held a field hearing in Newnan, Georgia, with a stated topic of “Potential Mixed Messages: Is Guidance from Washington Being Implemented by Federal Bank Examiners?”
Representatives Shelley Moore Capito, Spencer Bachus, Lynn A. Westmoreland and David Scott each heard testimony from panels of federal banking regulators and Georgian bankers about the condition of banking in Georgia, including the effect that federal banking regulations, guidance, policies and actions have had on community banks. Copies of the written testimony submitted, including that of the FDIC, OCC and Federal Reserve are now available on the Subcommittees website.
Although it is hard to draw any overall themes from the hearings (other than possibly that the issues involved aren’t easily addressed in this format), there were several good points made.
From the FDIC’s written testimony, addressing the challenges faced by Georgia banks:
As the Subcommittee has discussed in previous oversight hearings, the collapse of the U.S. housing market in 2007 led to a financial crisis and economic recession that has adversely affected banks and their borrowers in Georgia and nationwide. Georgia’s economy was hit especially hard following years of strong economic growth characterized by rising real estate prices, abundant credit availability, and robust job creation. Financial institutions, whose performance is closely linked to economic and real estate market conditions, have been significantly affected by a rise in the number of borrowers who are unable to make payments.
Gil Barker, the Deputy Comptroller for the Southern District, specifically addressed many concerns expressed by bankers in his written testimony, including statements of regulators criticizing loans to a particular industry, performing non-performing loans, criticizing loans merely because of a decline in collateral value, and the second guessing of independent appraisers. While one can certainly question whether the interpretations provided by Mr. Barker line up with some of the actions of the on-site examiners, it is definitely a good read for anyone dealing with the OCC in the Southern District.
The loss share method of resolving closed institutions seems to have significant benefits over the FDIC retaining the assets for bulk sale, but there is significant disagreement as to whether the loss share agreements properly incent the acquiring bank with regard to working with borrowers to minimize losses. The representatives seemed particularly attuned to the additional issues related to loan participations where the lead bank has gone through receivership.
On June 13, 2011, the Federal Reserve published an interim final rule nominally offering some relief from the capital effects of the Tier 2 treatment for SBLF funds for Sub S and Mutual bank holding companies.
As recognized by the Federal Reserve, “the SBLF Subordinated Securities, like the CPP Subordinated Securities, are issued to Treasury as part of a nationwide program to provide capital to eligible banking organizations that are in generally sound financial condition in order to increase the capital available for lending to small businesses, thereby mitigating the ongoing effects of the financial crisis on small business and promoting financial stability.” The Federal Reserve also acknowledged that “the SBLF Subordinated Securities are in terms and substance substantially equivalent to the CPP Subordinated Securities.” (more…)
Courtesy of William Linkous, Jr. and Kimberly Civins, two of Bryan Cave’s trusts and estates attorneys.
On July 1, 2010, the provisions of a completely revised Georgia trust code became effective. This month we celebrate its first anniversary, so it seemed to be a good time to reflect on what were the top “attention-getters” of the new code. In thinking about this “top three” list, we’re reminded of the last time we trained a new puppy. The theme was: reward the good behavior, ignore the bad. Fortunately, the new code will help you take care of your dog and rewards good trustee behavior, but there could be serious consequences for a trustee not complying with some of the new provisions.
1. The Dog: By far and away, for better or for worse, most attention has been focused on the new provisions allowing pet trusts. In the past, we were able to (somewhat) accommodate people’s wishes to provide for their pets upon their deaths by naming an individual as beneficiary of the trust fund so long as they were caring for the pet. Now, it’s much easier because the pet itself can be a trust beneficiary.
2. The Carrot: Trustees of Georgia trusts now may take comfort in a shorter period during which a beneficiary can sue for a breach of fiduciary duty. If the trustee has provided the beneficiary a “written report” that “adequately discloses the existence of a claim against the trustee”, then a shortened two-year statute of limitations applies instead of the former six-year period. Without that “written report” the beneficiary has the normal six years to sue beginning when the beneficiary discovered, or should have discovered, the existence of the claim. Over this first year, virtually all trustees we talk to praise this new provision.
After almost a year of debate on whether to unwind the legislation and delay its implementation, the Durbin Amendment to the Dodd-Frank Act will soon be implemented by the Federal Reserve Board’s final rule on debit interchange or “swipe” fees. Judie Rinearson explains in flow-chart format how the final rule, most of which takes effect October 1, 2011, applies to prepaid card programs. Her article “The Effect of the Fed’s Final Rule on Your Prepaid Program: The 13 Questions You Must Ask” was originally published by Paybefore.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, on July 21, the OCC assumed responsibility from the OTS for the ongoing examination, supervision, and regulation of federal savings associations and rulemaking for all savings associations, state and federal. Accordingly, the OCC issued an Interim Final Rule with request for comments that republishes regulations issued by the Office of Thrift Supervision that the OCC has authority to promulgate and enforce as July 21. The rule is effective July 21 and the comment period will close on October 11.
This rule renumbers and issues these former OTS regulations as new OCC regulations, with nomenclature and other technical amendments to reflect OCC supervision of federal savings associations. These newly issued OCC regulations will supersede OTS regulations for purposes of OCC supervision of federal savings associations, as provided by the Act.
This interim final rule is part of a larger OCC review of OCC and OTS regulations to determine what changes are needed for the transition to OCC supervision of federal savings associations. As a continuation of this review, the OCC will consider more comprehensive substantive amendments to these regulations, as appropriate, later this year.
A year ago today, the Dodd-Frank Act was signed into law. Today the Consumer Financial Protection Bureau “stands up,” the Office of Thrift Supervision has 90 days to live, and the Comptroller General’s study on the independence of presidentially appointed inspectors general of certain federal entities was due to Congress (don’t worry if you missed that last one). For many provisions of the Act, the legislation requires that implementing rules were to be finalized by today. As few of the hundreds of required rules have actually been proposed yet alone finalized, there is an argument that those aspects of the law requiring rules by today are not yet effective. Provisions of the law that are certainly effective today:
- Preemption standard for national banks and federal thrifts is altered
- Codification of the requirement that a bank holding company act as a “source of strength” for any subsidiary that is a depository institution
- Federal Reserve is authorized to issue orders and regulations relating to the capital requirements of holding companies
- Heightened capital requirements for interstate acquisitions
- New restrictions on insider asset sales and lending
- Truth in Lending Act exemption threshold for certain credit transactions and consumer leases is increased from $25,000 to $50,000 (i.e., TILA coverage is increased)
- Repeal of Regulation Q and the underlying statute (permitting payment of interest on demand deposit accounts)
- Increase in next-day availability requirement for deposit items not themselves subject to next-day availability under the Expedited Funds Availability Act from first $100 to first $200
- Required credit score disclosure under the Fair Credit Reporting Act where adverse action is based in whole or part on a consumer report
We will continue to follow rulemaking and enforcement of the Act and provide updates linked to our dedicated Dodd-Frank page. Regulators (and Barney Frank) are celebrating the law’s milestone today by testifying before the U.S. Senate on how the Act has improved supervision. Stay tuned.
Prepaid Industry Gets Some Relief but General Purpose Reloadable Cards Face Unanticipated Restrictions
At a publicly held board meeting on June 29, 2011, the Federal Reserve Board approved its final interchange rule, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible swipe fee an issuer may receive for an electronic debit transactions, adopting routing requirements and applying unanticipated new restrictions to General Purpose Reloadable (GPR) cards to take advantage of the interchange cap exemption. In addition—to the relief of the banking industry—the Fed announced that the rules on pricing requirements will go into effect on Oct. 1, 2011, as opposed to July 21 as dictated by the Durbin Amendment.
Under the final rule, issuers are permitted to charge a base fee of 21 cents (representing 80 percent of an issuer’s average transaction cost), plus five basis points on the full value of the transaction to cover fraud losses (representing the average per-transaction fraud loss of the median issuer). The fraud loss recoupment (referred to by the Fed as an “ad valorem” or “according to value” charge) came as a surprise to most and is viewed as a big win for the banking industry. The Fed also issued an interim final rule that would allow issuers to charge an additional fraud prevention adjustment of one cent if the bank meets, and certifies compliance of, certain security standards. The Fed requested comments on whether the one-cent cap should be adjusted.
In addition, the Fed approved rules governing routing and exclusivity, requiring issuers to offer two unaffiliated networks for routing debit transactions.
Perhaps the biggest surprise in the final rule is that GPR cards will not benefit from the interchange cap exclusion if they allow funds to be accessed through means other than the card.
Open Board Meeting
At the board meeting, Chairman Ben Bernanke stated that the interchange rule has been one of its most challenging rulemakings under the Dodd-Frank Act to date. The Fed had to consider myriad players impacted by debit interchange, as demonstrated by the more than 11,000 comment letters the Fed received.