Community Banks – Week in Review
The most significant development of last week was the decision of the U.S. Court of Appeals for the D.C. Circuit in PHH Corp. v. CFPB that the CFPB is unconstitutionally structured, that its enforcement action against PHH incorrectly interpreted the RESPA provisions on captive reinsurance, and that the action was retroactive and partly outside RESPA's three-year statute of limitations. Critically, however, the court cured the constitutional issue by invalidating the provision of Dodd-Frank that protected the CFPB Director from termination at will by the President. The 110-page decision is available at https://www.cadc.uscourts.gov/internet/opinions.nsf.
Elsewhwere, regarding FinTech, an OCC representative stated that the OCC would release a FinTech white paper on Nov. 15. The full set of developments over the past week includes:
- Federal Open Market Committee releases minutes of Sept. 20-21 meeting (Oct. 12).
- "Participants agreed that information received over the intermeeting period suggested that the labor market had continued to strengthen and growth of economic activity had picked up from the modest pace seen in the first half of the year."
- "Participants generally expected that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further."
- "Participants generally agreed that the case for increasing the target range for the federal funds rate had strengthened in recent months. Many of them, however, expressed the view that recent evidence suggested that some slack remained in the labor market."
- "Among the participants who supported awaiting further evidence of continued progress toward the Committee’s objectives, several stated that the decision at this meeting was a close call."
- "Some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labor market continued to improve and economic activity strengthened, while some others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s 2 percent objective."
- Minutes available at http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
- "Why Are Interest Rates So Low? Causes and Implications," remarks of Federal Reserve Vice Chairman Fischer at the Economic Club of New York (Oct. 17).
- "That the actual federal funds rate has to be so low for the Fed to meet its objectives suggests that the equilibrium interest rate--that is, the federal funds rate that will prevail in the longer run, once cyclical and other transitory factors have played out--has fallen."
- Low growth rate attributable to slowing pace of innovation, rising fraction of population entering retirement, increase in aggregate household saving, weak investment, and developments abroad.
- "One development that would boost the equilibrium interest rate would be a further waning in the investor precaution that seems to have been holding back investment--in Keynesian terms, an improvement in animal spirits." Also, an expansionary fiscal policy.
- Remarks available at http://www.federalreserve.gov/newsevents/speech/fischer20161017a.htm.
- "Macroeconomic Research After the Crisis," remarks of Federal Reserve Chair Yellen before the 60th annual economic conference sponsored by the Federal Reserve Bank of Boston (Oct. 14).
- Remarks available at http://www.federalreserve.gov/newsevents/speech/yellen20161014a.htm.
- NY Dep't of Financial Services issues Guidance on Incentive Compensation Arrangements (Oct. 11).
- Elements of guidance:
- Balance between risks and rewards: Any incentive compensation arrangement must appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks;
- Effective controls and risk management: A banking institution's risk management processes and internal controls must reinforce and support the development and maintenance of any incentive compensation arrangements: and
- Effective corporate governance: Incentive compensation arrangements must be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.
- Guidance available at http://www.dfs.ny.gov/legal/industry/il161011.pdf.
- Elements of guidance:
- U.S. Court of Appeals for the D.C. Circuit declares structure of CFPB to be unconstitutional and a RESPA-based enforcement action to be inconsistent with RESPA (Oct. 11).
- Constitutionality issue:
- No checks and balances within the executive branch on decisions and actions by the single-director CFPB.
- CFPB unique among independent federal agencies in having a single director not removable at will by the President.
- Relief is to sever portion of Dodd-Frank that limits President's removal power. President now may remove Director at will.
- RESPA issues:
- CFPB took position that captive reinsurance arrangements are illegal under RESPA, a departure from previous interpretations by HUD.
- Court rulings:
- Captive reinsurance arrangements are permissible, subject to requirement that amount paid by insurer does exceed reasonable market value of reinsurance.
- Retroactive application of new CFPB interpretation violated due process.
- RESPA includes three-year statute of limitations that applies to administrative enforcement actions.
- Case remanded to CFPB to determine whether, within three-year limitations period, mortgage insurers paid more than reasonable market value to reinsurer.
- Slip opinion in PHH Corporation v. CFPB, No. 15-1177, available at https://www.cadc.uscourts.gov/internet/opinions.nsf.
- Constitutionality issue:
- FFIEC and OCC issue FAQs on Cybersecurity Assessment Tool (Oct. 17).
- FFIEC FAQs are for banks.
- OCC FAQs are for OCC examiners and are in addition to the FFIEC FAQs.
- FFIEC FAQs available at http://www.ffiec.gov/cybersecurity.htm.
- OCC FAQs available in Bulletin 2016-34, https://occ.gov/news-issuances/bulletins/2016/bulletin-2016-34.html.
- FDIC De Novo Outreach Meeting on Oct. 13 in New York.
- Review of filing and approval process.
- De novo initial capital requirements:
- $2 million net of organizational expenses.
- Sufficient capital to maintain 8% tier 1 leverage after anticipated losses. (Well capitalized requirement for mature banks is 5%.)
- CFPB enters into consent order with Navy Federal Credit Union regarding unlawful debt collection practices (Oct. 11).
- Factual allegations:
- False threats of litigation and contacting commanding officers.
- Misrepresentation of consequences of failure to repay.
- Accounts unlawfully frozen.
- Actions constituted unfair and deceptive practices.
- $23 million in restitution.
- $5.5 million civil money penalty.
- Consent order available at http://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-navy-federal-credit-union-pay-285-million-improper-debt-collection-actions/.
- Factual allegations:
- FDIC Advisory Committee on Economic Inclusion to meet on Oct. 20, to discuss results and release of full FDIC National Survey of Unbanked and Underbanked Households.
- Announcement available at https://www.fdic.gov/news/news/press/2016/pr16089.html.
- FDIC to sponsor symposium on Oct. 21 on fostering youth savings.
- Announcement available at https://www.fdic.gov/news/news/press/2016/pr16091.html.
- CFPB releases Your Money, Your Goals: Focus on Native Communities (Oct. 11).
- Companion guide for native Americans to CFPB financial empowerment toolkit.
- Guide available at http://www.consumerfinance.gov/about-us/blog/new-financial-empowerment-tools-native-communities/.
- OCC to release white paper on Nov. 15.
- SEC to hold forum on financial technology innovation in the financial services industry on Nov. 14 in Washington DC.
- Forum designed "to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts into Fintech innovation and evaluate how the current regulatory environment can most effectively address these new technologies."
- Agenda not yet available.
- Announcement available at https://www.sec.gov/news/pressrelease/2016-195.html.
- U.S. Court of Appeals remands CFPB enforcement decision on captive reinsurance arrangements (Oct. 11).
- Arrangements permissible provided insurer does not pay reinsurer more than reasonable market value.
- For more details, see CFPB above.
- FDIC releases interagency examination procedures to reflect Defense Department's 2015 amendments to regulations implementing the Military Lending Act of 2006 (Oct. 17).
- FIL-65-2016 available at https://www.fdic.gov/news/news/financial/2016/fil16065.html.
- CFPB releases Annual report of the CFPB Student Loan Ombudsman: Transitioning from default to an income-driven repayment plan (Oct. 17).
- Report projects that one in three rehabilitated borrowers could re-default within two years.
- Report also criticizes servicing practices.
- Report available at http://www.consumerfinance.gov/about-us/newsroom/cfpb-projects-one-three-rehabilitated-student-loan-borrowers-will-re-default-within-two-years/.
Too Big to Fail
- U.S. and European financial regulators hold coordination exercise on cross-border resolution planning (Oct. 10).
- FDIC announcement available at https://www.fdic.gov/news/news/press/2016/pr16087.html.
- Oct. 19
- FDIC Money Smart Train-the-Trainer Online Live Meeting.
- Oct. 27
- FDIC Atlanta Region Regulatory Conference Call, Reasonably Expected Market Area, Trade Area, and Assessment Area: Where Do They Fit under CRA and Fair Lending?
- Oct. 27-28
- OFR and Center on Finance, Law, and Policy, Big Data: Improving the Scope, Quality, and Accessibility of Financial Data, Ann Arbor, MI.
- Oct. 28
- FDIC 6th Annual Consumer Research Symposium.
- Oct. 31
- FFIEC webinar, Getting the Most Out of Your FS-ISAC Membership.
- Nov. 9
- FDIC Banker Teleconference Series: Overdraft Practices webinar.
- OCC Directors Workshop, "Compliance Risk", Cincinnati OH.
- Nov. 10
- OCC Directors Workshop, "Operational Risk", Cincinnati OH.
- Nov. 14
- SEC FinTech forum, Washington DC.
- Nov. 15
- OCC Directors Workshop, "Compliance Risk", Little Rock AR.
- Nov. 16
- OCC Directors Workshop, "Operational Risk", Little Rock AR.
- Nov. 29
- FDIC Community Banking Initiative: De Novo Outreach Meeting, Atlanta GA.
- OCC Directors Workshop, "Risk Governance", Houston TX.
- Nov. 30
- OCC Directors Workshop, "Credit Risk", Houston TX.
Regulatory Comment Deadlines
- Oct. 24 – FinCEN: extension of BSA/AML requirements to banks without a federal functional regulator.
- Oct. 27 – FDIC: third-party lending guidance.
- 45 days after publication in NYS Register – NY Dep't of Financial Services: cybersecurity requirements.
- Nov. 14 – OCC: receiverships of uninsured national banks (with implications for possible FinTech charter).
- Nov. 14 – OCC: prohibition from dealing and investing in industrial and commercial metals.
- Nov. 25 – Federal Reserve: changes to capital planning and stress testing for large, noncomplex banking firms.
- 90 days after publication in Federal Register – Federal Reserve: limits on physical commodity activities of financial holding companies.
For more information, contact Dwight Smith, email@example.com, or 202.545.2885.
The articles published in this newsletter are intended only to provide general information on the subjects covered. The contents should not be construed as legal advice or a legal opinion. Readers should consult with legal counsel to obtain specific legal advice based on particular situations.