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.
The Consumer Financial Protection Bureau (CFPB) has moved into its fourth round of testing of a new consumer mortgage loan disclosure. Acting under the mandate of the Dodd-Frank Act, the CFPB is preparing a single, integrated disclosure to address the disclosure requirements of both the Truth in Lending Act and Real Estate Settlement Procedures Act.
The specific focus of this fourth round of testing is comparison shopping. Consumers and the lending industry have been asked to compare two different types of loan products using the same version of the form. The CFPB states that it wants to be sure that the disclosure actually helps consumers to understand the features of competing loan products, from the overall loan amount to estimates of tax and insurance costs.
The CFPB’s efforts in this area have generally met with approval from all interested parties. The proposed form is more clear, concise and informative than either the existing TILA or RESPA disclosures. For example, all of the useless “seller’s column” and “buyer’s column” information on the RESPA good faith estimate has been eliminated in favor of total dollar amounts for the services the consumer can shop for and for the services the consumer cannot shop for. Implementing the new requirements will require systems changes, but we might finally arrive at a disclosure that eliminates useless information, reconciles the differences between TILA and RESPA, and that is easier to explain to borrowers.
Past efforts to reconcile TILA and RESPA disclosures were hampered by the fact that the Federal Reserve had primary regulatory authority for TILA and the Department of Housing and Urban Development had primary authority for RESPA. The Dodd-Frank Act removed this roadblock by transferring these powers to the Bureau.
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.
Final interchange regulations under the Durbin Amendment of the Dodd Frank Act will go into effect October 1, changing the rules for interchange transaction fees. The Bryan Cave Payments team will present a live webinar and Q&A session on Tuesday, August 2, 2011 from 2:00 to 3:00 pm EDT explaining what the new interchange and routing rules mean for the prepaid industry and how to comply.
The Durbin Amendment:
What Does the Final Ruling Mean for Prepaid?
You can register for free online. Attendees are encouraged to submit in advance and without attribution, any questions they would like addressed during the webinar. Please enter your questions when you register.
The Webinar will be presented by Judie Rinearson (Bryan Cave – New York), Linda Odom (Bryan Cave – Washington, D.C.) and Courtney Stolz (Bryan Cave – Washington, D.C.).
CLE credit for this webinar will be available for attendees in California, Georgia, Illinois, New York and Virginia.
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.
On June 29, 2011, the Federal Reserve Board approved its final interchange rules, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible interchange fee that an issuer may receive for an electronic debit transactions made with debit cards and general use prepaid cards, codes, and other account access devices.
Under the final rules, issuers are permitted to charge a base fee of 21 cents plus 5 basis points (.05%) multiplied by the full value of the transaction, to cover fraud losses. In addition, a 1 cent per transaction fraud prevention adjustment was also proposed, for those issuers who meet eligibility requirements (such as having fraud prevention and data security policies and procedures in place, which must be updated and certified on an annual basis.) The fraud prevention adjustment rules are new, and are open for comment through September 30, 2011.
Under the new rules, a covered $50 debit or prepaid transaction would have a total possible interchange fee of = 23.5¢ [21¢ + 2.5¢ ($50 x .05 /100) + 1¢], and a $500 transaction would have a total possible interchange fee of = 47¢ [21 ¢ + 25¢ ($500 x.05 /100) + 1¢]. While this is a significant improvement over the original suggested cap of 12¢, it still represents a substantial decrease in interchange revenues for both prepaid and debit card issuers.
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.
The OCC recently issued a Notice of Proposed Rulemaking (NPRM) on integration of the OTS into the OCC and other Dodd-Frank Act implementation matters, including changes to national bank preemption and the OCC’s visitorial authority. Per Dodd Frank, the OCC will assume responsibility for the ongoing examination, supervision and regulation of federal savings associations on July 21, 2011.
The NPRM revises OCC rules related to internal agency functions and operations (and integrates references to the OTS and federal thrifts, where applicable), including those related to OCC organization, availability of information under FOIA, release of non-public OCC information and post-employment restrictions for senior examiners. The NPRM also amends the OCC’s assessment fee rule to include federal savings associations and to synchronize payment due dates. In addition, the NPRM implements the Dodd Frank three-year moratorium on changes in control of credit card banks, industrial banks and trust banks, where the change would result in direct or indirect control by a commercial firm.
Perhaps most significant, however, are the changes made to the OCC regulations governing preemption and the OCC’s visitorial authority. As mandated by Dodd Frank, these changes will:
- Eliminate preemption of state law for national bank operating subsidiaries, agents and affiliates.
- Remove language permitting field preemption (that is, preemption over an entire body of law, even if there is no conflict, because federal law “occupies the field”).
- Implement statutory changes made by Dodd Frank as to when state consumer financial laws may be preempted, based in part on the Barnett standard for conflict preemption.
- Revise the OCC’s visitorial powers rule to conform to the Supreme Court’s Cuomo decision, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks.
- Apply the national bank and national bank subsidiary preemption and visitorial powers standards to federal thrifts and their subsidiaries. (The affected OTS preemption regulations will be repealed.) (more…)
The FDIC continues to work on its processes for liquidating a nonbank financial company whose failure is deemed to pose a significant risk to the financial stability of the United States. The bank holding companies of the largest 50 banks in the US are automatically included in that group. Final rules on what other companies will be included in that group are still being developed. There is currently a great deal of lobbying going on before the Federal Reserve by large mutual funds, hedge funds and insurance companies all of whom are trying to explain why they are not so important after all. A designation of systematically important carries with it significant consequences including the fact that such companies must develop a regulator approved “resolution plan” that outlines how the company could be liquidated in an orderly manner, federal regulators can preempt the use of bankruptcy by such entities and finally, the fact that a FDIC resolution effectively shuts out interested parties (management, shareholders and creditors) from a seat at the table during the resolution process.
One aspect of the proposed rules being developed by the FDIC concerns Section 210(s) of the Dodd-Frank Act dealing with recoupment of compensation from senior executives and directors of a failed nonbank financial company who were substantially responsible for the failed condition of the company. Section 201(s) provides that the FDIC may seek to recover “any compensation” paid to those parties in the previous two years. This would include salaries, bonuses, deferred compensation, golden parachute payments, stock option plans and profits realized from the sale of securities in the covered company. The proposed rule builds on this anti-incumbent theme by creating a presumption that a senior officer or director is substantially responsible for the company’s failure if they served as chairman of the board, CEO, president, CFO or any other position where they had responsibility for the strategic, policymaking, or company-wide operational decisions of the company. The presumption is rebuttable by providing evidence that the person did in fact perform their duties with the requisite skill and care.
It is unclear whether the FDIC position concerning the presumption of culpability will survive as the final rules are developed and whether it will stand up to legal scrutiny if it remains in the rules. For example, the Dodd-Frank Act itself does not appear to move the evidentiary burden to the directors and officers. It is also difficult to understand the interplay of the FDIC proposed rule with state laws that provide gross negligence standards for liability for officers and directors as well as defenses based on the business judgment rule. Moving the burden of proof to the directors and officers upends our normal understanding of how the government normally pursues parties against whom it is seeking to impose a monetary penalty. The issue for defendants in such actions will be whether the imposition of the sanction by the FDIC can be opposed as a practical matter.