On January 24, 2020, the Consumer Financial Protection Bureau (CFPB) announced a new policy regarding the prohibition on abusive acts or practices. The CFPB has clarified how it will define, supervise and enforce “abusive” standards under Dodd Frank § 1031(a) and (d).  The Bureau’s announcement acknowledges that there has been uncertainty in this area. The Director intends the Policy Statement to help avoid adverse consequences which may “chill or overly deter covered persons from engaging in conduct that may be beneficial to consumers.” The Policy Statement is effective January 24, 2020 and will govern supervisory and enforcement conduct going forward. The full Policy Statement is available here.

Dodd Frank Abusiveness Standard

Section 1031(d) of Dodd Frank defines broad parameters for abusiveness. The practice may be determined to be abusive if it:

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of—

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

See 12 U.S.C. 5531(d).

Bureau’s Historical Prosecution of Abusiveness

The Policy Statement provides background on the Bureau’s enforcement activities specific to abusiveness. Since 2011, the Bureau “has brought 32 enforcement actions that included an abusiveness claim, including as recently as fall 2019.” However, more than 90% of the actions included both abusiveness and unfairness or deception claims. According to the Bureau, “only two enforcement actions contained just an abusiveness claim.” Demonstrating the challenge of amorphousness, the Bureau acknowledges “in many of those 30 actions, the abusiveness claim arose from the same course of conduct as the unfairness or deception claim.”

2019 Symposium – Differing Perspectives

Director Kraninger has been active in seeking input from various constituents since taking the helm. In  June 2019, the Bureau held its Symposium on Abusive Acts or Practices. “Eight academics and practitioners with expertise in UDAAP issues engaged in dialogue…” According to the Statement topics included the following:

• “the necessity of clarifying the abusiveness standard (and if so, whether rulemaking or another tool should be used),
• the degree of uncertainty posed by the statutory language, the particular aspects of the standard most in need of clarification,
• the practical consequences of this uncertainty on consumer financial markets, and how the Bureau should enforce the abusiveness standard.”

Happy Holidays to all clients, referral sources and potential clients.

Instead of sending printed holiday cards, Bryan Cave Leighton Paisner is making donations to a number of our charity partners.

On Thursday, December 12, 2019, the OCC and the FDIC issued a notice of proposed rulemaking (NPR) in an effort to modernize the regulatory framework behind the Community Reinvestment Act (CRA). Last autumn, renewed deliberations began when the OCC published an advanced notice of proposed rulemaking (ANPR) that solicited answers to 31 questions about the CRA. In response, national and state-chartered banks, trade associations, community advocates, government representatives, and others submitted nearly 1,500 individual comments. Thursday’s NPR is the culmination of the regulators’ review of these comments and proposed recommendations.

The proposed rule has received support from the OCC and the FDIC. However, the Federal Reserve has been unwilling to sign on to draft plan, leading some to speculate about prospective, competing CRA regimes. Disharmony among the regulators as to how they examine institutions under the CRA would be unprecedented, as the three prudential regulators have implemented the CRA and examined financial institutions in substantially similar manners since the law’s promulgation in the 1970s.

The proposed changes in the NPR to the CRA’s regulatory framework are significant. Key components of the revamped CRA and the NPR include:

• Additional Assessment Areas Based on Deposit Locations: Currently, whether a bank’s activities qualify for consideration under the CRA depends on the characteristics of the activities and where those activities take place. Under the current framework, the CRA requires that banks delineate assessments areas where the bank has its main office, branches, and deposit-taking facilities, in addition to the surrounding areas where the bank originated or purchased a substantial portion of the loans in its portfolio. Under the NPR, the definition of geographic area is expanded to include areas where banks receive five percent or more of their deposits, if the banks themselves source 50 percent or more of their retail domestic deposits from outside their facility-based assessment areas. Further, the NPR permits banks to receive CRA consideration for qualifying activities outside of the assessments areas, including tribal lands and rural areas.
• Home Mortgage Lending Restrictions: Under the current CRA framework, home mortgage loans made to high- and middle-income individuals living in low-to-moderate income (LMI) areas receive credit under CRA examination. Moving forward, such home mortgage loans would not receive CRA consideration. Mortgage-backed securities, a controversial yet CRA-eligible activity under the current CRA framework, would not receive the same credit under the NPR. Such securities would only be deemed CRA creditworthy if backed by loans to LMI borrowers and businesses.
• A Non-exhaustive List of CRA Pre-Approved Activities: As it stands, the CRA does not provide much insight as to prequalified CRA-approved activities. The NPR proposes to create more descriptive and expansive criteria for the type of activities that qualify for CRA credit. To this end, the regulators would provide a publicly available, non-exhaustive list of activities that automatically qualify for CRA credit. Further, the NPR provides a process through which interested parties may submit additional items for consideration for inclusion on the list.
• Increased Minimum for Small Business and Farm Loans: Under the current CRA framework, the threshold for small business loan or farm loan consideration is set at $1 million. The NPR raises the loan size to $2 million.
• Metric-Based Benchmarks: The CRA regulations provide for different methods to evaluate a bank’s CRA performance, relative to factors such as the bank’s asset size and business strategy. Banks both small and large have commented that these different methods provide for inconsistent examination processes and results, prompting them to request more streamlined examination criteria. The new performance standards under the NPR would assess (1) the distribution and level of qualifying retail loan originations to LMI individuals, businesses, and farms within its assessment area; and (2) the total dollar value of the bank’s CRA-qualifying activities relative to its retail domestic deposits.
• Preferential Treatment for Small Banks: Small banks, those defined as institutions with $500 million or less in assets, are provided some preferential treatment under the NPR. Small banks would have the option to be examined under the existing CRA regulatory framework or under the revised framework of the NPR.
• New Reporting Requirements: Currently, the CRA requires banks to collect and report on a variety of data and loans. Small banks, however, are generally exempt from such requirements. Under the NPR, banks evaluated under the small bank performance standards would be required to collect, but not to report, data related to their retail domestic deposits. Additionally, banks evaluated under the NPR standards would be required to collect, maintain, and report certain data related to qualifying activities non-qualifying activities, and retail domestic deposits, and assessments areas. Banks would be required to collect and maintain all necessary data in machine-readable form.

On Tuesday, December 3, 2019, U.S. federal banking regulators issued an interagency statement supporting the evaluation of alternative data when assessing consumers’ creditworthiness. Recognizing that the use of alternative data may improve the speed and accuracy of credit decisions, the agencies hope to address the difficulty facing consumers who are often unable to obtain credit from traditional credit sources. According to FinRegLab, a nonprofit research organization, an estimated 45 million to 60 million consumers lack the credit history needed to generate satisfactory credit scores. Further, millions more do not have access to affordable credit due to low scores and low incomes. The use of alternative data in the rendering of credit decisions may improve credit opportunities, as firms may choose to use these alternatives for those applicants who would otherwise be denied credit.

One such data source is a borrower’s cash flow as an alternative to the traditional credit-evaluation system. Although not an entirely novel concept, and an already well-established part of the underwriting process, some firms are now automating the use of cash flow data to determine a borrower’s ability to repay loans. These newer automation methods have been found to improve the measurement of a borrower’s income and expenses. Most importantly, the automation of a borrower’s cash flow better illustrates income patterns over time from multiple sources as opposed to evaluating a single income source; the borrower information gleaned from these alternative sources is more robust and comprehensive than the information relied upon by traditional credit-evaluation companies. As the regulators highlight in their interagency statement, “cash flow data are specific to the borrowers and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy.”

To the extent firms are using or contemplating using alternative data, the agencies encourage responsible use of such consumer data. As the sources of alternative data grow, both banks and non-banks will need to determine which types of alternative data might carry more risk to consumers – and do their best to minimize or justify the use of such data sources. Although cash flow data provides a relatively unbiased predictor of loan repayment ability, some lenders have garnered fair lending scrutiny for their use of certain alternative data such as borrower occupation, education and information from social media. As the agencies made clear in their statement, lenders considering the use of alternative data must take steps to ensure consumer protection risks are “understood and addressed.” Accordingly, it will remain vitally important for lenders leveraging alternative data to do so within a well-developed fair and responsible lending program that includes, among other things, periodic fair lending testing.

On November 25, 2019, the Securities and Exchange Commission voted to propose a new rule regarding the regulation of the use of derivatives by registered investment companies, including mutual funds, exchange-traded funds (ETFs) and closed-end funds, as well as business development companies. See the Press Release.

Under the new proposed rule the General Statement of Policy (Release 10666) would be withdrawn after a one-year transition period.

The new rule is in some regards similar to the Commission proposal made in 2015 with respect to the use of derivatives by funds, particularly with respect to its Value at Risk or VaR approach.

On November 18 and 19 of this week, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued Advanced Notices of Proposed Rulemaking (ANPRs) to clarify how state interest rate caps should apply when loans are sold across state lines.

The proposal from the OCC reaffirms the “valid when made” doctrine, on which many marketplace lenders have relied and which was central to the Second Circuit’s 2015 decision in Madden v. Midland Funding LLC, 786 F.3d 246 (2nd Cir. 2015). The Second Circuit’s decision contradicted the “valid when made” theory, whereby an obligation is considered valid under the law that applied at the time of origination. The Second Circuit held that a loan’s interest rate was no longer valid when resold to an entity in a state with a lower interest rate cap than where the loan was originally issued. In its proposed rule, the OCC “has concluded that when a bank sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.” The OCC’s proposed rule would cut against Madden, allowing the interest rates attached to bank loans to remain valid once transferred to a bank’s fintech partner of investors.

The FDIC’s proposed rule parallels that of the OCC, but focuses on Madden’s relation to state-chartered banks. The FDIC’s proposed rule clarifies that the legal interest rate on a loan originated by a state bank remains legal even after the loan is sold to a non-bank. Speaking in a statement on Tuesday, FDIC Chairwoman Jelena McWilliams said “This proposed rule would correct the anomaly by establishing in regulations … that the permissibility of interest would be determined when a loan is made and is not impacted by subsequent assignment, sale, or transfer.” The draft regulations issued on Tuesday by the FDIC affirm that state banks are not bound by the interest rate caps of other states in which they operate. Further, the validity of the loans’ interest rates would be fixed at the time of origination.

As I have repeatedly written on this site, without regard to other benefits associated with the Troubled Asset Relief Program (such as avoiding a further collapse of the global financial system), the TARP program, and particularly the Capital Purchase Program, was profitable for the U.S. Taxpayer. As a banking lawyer and son and grandson of community bank presidents, I’ll concede that I’m biased. But the numbers speak for themselves.

Even ProPublica acknowledges that TARP was profitable.

Overall, the TARP remains in the black, though just barely.

What does ProPublica means by “barely” profitable? Apparently, “a narrow profit of about $1 billion.”

I hate it when I only have a billion dollars in profit. That’s $1,000,000,000.00 to put it in context.

Whenever discussing bank charter types, I’m reminded of a comparison made by Walt Moeling. Walt would always say that the bank charter choice is like choosing between a Ford and a Chevy truck. There are strong, die-hard advocates for the superiority of one over the other. But either one is functionally adequate, and will enable you to get from location a to b. Of course, neither is going to be confused for a Lamborghini or a Maserati either.

Looking at the breakdown of charters as of the beginning of 2019, while the majority of all U.S. banks are state, non-member banks (i.e. with primary federal supervision by the FDIC), each charter choice appears to continue to have its advocates.

The Office of the Comptroller of the Currency, the primary federal prudential regulator for national banks, has earned a reputation as the regulator of the largest banks, but the underlying data doesn’t necessarily support that viewpoint. While all of the four largest U.S. banks are national banks, in all asset classifications, there remains a variety of bank charter, showing that no one charter type is necessarily better based purely on asset size.

Enforcement, Innovation, Consumer Data and Unconstitutionality

Director Kraninger and the Consumer Financial Protection Bureau have been busy this month. Summer is over, and back to school it is.

In addition to convening a symposium and two Director speeches, the Bureau released ten plus statements this month spanning enforcement activity, no action letter policy, innovation, and consumer data enhancements. Not to be overlooked, the Director also announced her position that the Bureau’s structure is unconstitutional. In this relatively short article, we cannot dive deeply into the specifics of each new development, but we can offer some highlights to help keep you abreast of Bureau changes. Definitely, more to come.

Enforcement: Two actions. One stipulated judgment. The Bureau’s actions assert (a) violations of Consumer Financial Protection Act of 2010 and Reg O in connection with allegedly deceptive and abusive mortgage assistance services and (b) violations of the Fair Credit Reporting Act, Regulation V and the CFPA in connection with allegedly improper debt collection practices. The former included a proposed stipulated judgment, which if entered, would resolve the matter by imposing civil money penalty and other relief. See September 6 and September 25 case announcements here.

The increasing number of banks selling to credit unions has been a hot topic at investor conferences, within the trade press, amongst clients, at trade associations events, and in conversations with investment bankers. To that end, I’ll be on the main stage at BankDirector’s 2020 Acquire or Be Acquired Conference discussing the new players in the bank M&A game.

And the numbers would appear to support that conversation…