www.doddfrankupdate.com Clarifying the full spectrum of regulatory changes Talk of eliminating the Consumer Financial Protection Bureau’s (CFPB) supervisory authority granted by the Dodd-Frank Act remains just that for the time-being. That means when the bureau says it is implementing a program to supervise service providers directly, it’s best for companies to take note. The bureau did just that in the April edition of its Supervisory Highlights, stating: “Because a single service provider might affect consumer risk at many institutions, the CFPB has begun to develop and implement a program to supervise these service providers directly. Direct examination of key service providers will provide the CFPB the opportunity to monitor and potentially reduce risks to consumers at their source.” To this point, service providers have been subject to CFPB enforcement and investigation requests because they are service providers to lenders. However, this shift by the CFPB would for the first time allow the bureau to provide ongoing, on-site supervision of service providers in the mortgage market. “In its initial work, the CFPB is conducting baseline reviews of CFPB to supervise service providers, directly Continued on Page 3 ON THE INSIDE Page 4 CFPB starts small business lending process inquiry Page 6 CFPB inquiry evokes neglect of duty accusations Page 8 Committee again passes Choice Act, trades react Page 12 Prepaid card rule survives CRA Page 16 FHFA director talks GSE transition plan Page 20 ICBA to enter next generation of leadership Let’s Be Frank Get in on the conversation. “Are service providers ready for direct CFPB supervision?” June 2017 Volume 7, No. 3
Transcript
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Clarifying the full spectrum of regulatory changes
Talk of eliminating the Consumer Financial Protection Bureau’s (CFPB) supervisory authority granted by the Dodd-Frank Act remains just that for the time-being. That means when the bureau says it is implementing a program to supervise service providers directly, it’s best for companies to take note.
The bureau did just that in the April edition of its Supervisory Highlights, stating: “Because a single service provider might affect consumer risk at many institutions, the CFPB has begun to develop and implement a program to supervise these service providers directly. Direct examination of key service providers will provide the CFPB the opportunity to monitor and potentially reduce risks to consumers at their source.”
To this point, service providers have been subject to CFPB enforcement and investigation requests because they are service providers to lenders. However, this shift by the CFPB would for the fi rst time allow the bureau to provide ongoing, on-site supervision of service providers in the mortgage market.
“In its initial work, the CFPB is conducting baseline reviews of
CFPB to supervise service providers, directly
Continued on Page 3
ON THE INSIDEPage 4CFPB starts small business lending process inquiry
Page 6CFPB inquiry evokes neglect of duty accusations
Page 8Committee again passes Choice Act, trades react
Page 12Prepaid card rule survives CRA
Page 16FHFA director talks GSE transition plan
Page 20ICBA to enter next generation of leadership
Let’s Be FrankGet in on the conversation.“Are service providers ready for direct
CFPB supervision?”
June 2017Volume 7, No. 3
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ABOUT US EDITOR'S NOTEThe more you know
Dear Readers,
We live in the “Information Age” where the more you know, the more you want to know more. And, perhaps, the less actually gets done.
That term “Information Age” is not as widely used as it once was but it is no less true, despite the number of people who may argue that the Internet has given rise to the “Misinformation Age.”
Consider the prominent role the collecting and disseminating of information plays in nearly everyone’s daily life, regardless of your profession. Whether it’s providing statutorily-required data points to a federal agency, reading a news publication or trying to learn more about a competitor, a customer, business developments, legislative developments or how long is the world’s longest usable golf club (28 feet, 1 inch), you are likely affected by it, benefi t from it or are driven crazy by it in one way or another.
We even gather information about information gathering. Case in point: The Consumer Financial Protection Bureau (CFPB) recently launched an inquiry to learn more about the process lenders use to collect data about small businesses that are woman-owned or minority-owned.
Meanwhile, the bureau continues to face criticism over its own data collection methods, most notably the Home Mortgage Disclosure Act, which the CFPB recently decided to amend and clarify to facilitate compliance. That decision came with its own information gathering effort in the form of a mandatory 30-day public comment period on the technical corrections and clarifi cations proposed.
Aside from the bureau, other federal agencies and government offi cials do their fair share of data mining, whether to inform policies relating to housing fi nance reform or as a result of a presidential directive to conduct an investigation into ways of loosening fi nancial regulations, as President Donald Trump recently instructed Treasury Secretary Steven Mnuchin to do.
Clearly, this iterative information gathering should, in theory, lead to well-informed actions on the part of those doing the gathering. If not, what’s the point? The good news is, regardless of the decisions made by those endeavoring to tap into the vast wealth of information that is more readily available now than ever before in human history, those in disagreement always have boundless intelligence sources to corroborate their decision to cry out “hogwash” as a retort.
EditorsKatherine Bercik, Esq., RESPA NewsAndrea Golby, The Legal DescriptionMike Holzheimer, Valuation ReviewMark Lowery, The Title ReportRobert Rozboril, Dodd Frank Update
Sales & MarketingFrank Carson, Senior Account ExecutiveJake Dean, Sales Support
Circulation / Customer ServiceKathy Hurley
Business Offi cesSam Warwar, Esq.Michelle Easter, Accounting
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Cover Story
some service providers to learn about the structure of these companies, their operations, their compliance systems, and their CMS (compliance management systems),” the bureau said in the Supervisory Highlights report. “In more targeted work, the CFPB is focusing on service providers that directly affect the mortgage origination and servicing markets. The CFPB will shape its future service provider supervisory activities based on what it learns through its initial work.”
Maria Moskver is the general counsel and enterprise compliance offi cer at LenderLive, which operates in two categories, both as a licensed entity and a service provider specializing in mortgage fulfi llment, title and settlement, critical borrower communications and other loan cycle functions. This affords Moskver a uniquely well-rounded perspective on compliance, which she shared with Dodd Frank Update. Specifi cally, she addressed the bureau’s intention to start supervising third-party vendors.
Dropping hints“The bureau has long taken an interest in the role service providers play in the fi nancial services industry,” Moskver said. “In 2012, the bureau published a bulletin which outlined its expectations for fi nancial institutions in monitoring their vendors. That bulletin was recently re-issued by the bureau, highlighting its continued importance.”
Speaking in reference to Cordray’s speeches, Moskver said, “Director Cordray has also been very outspoken about his concern that vendors are a weak link in the compliance chain.” Specifi cally, she noted the 2015 address at the Mortgage Bankers Association annual convention in which Cordray spoke about the important role played by service providers in the industry.
In that speech, he discussed how “disturbed” he was by reports of the amount of diffi culty vendors were causing with the implementation of the new TRID requirements. He sent a shot across the bow of service providers by stating that federal and state fi nancial regulators may “need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the fi nancial marketplace.”
“The enforcement actions that have come out recently also are indicative of the bureau’s intent to regulate that space because service providers are so critical in the fi nancial services industry,” Moskver said. “It
goes to the intent of the bureau’s main focus, which is protecting consumers.” Data security may be one of the most important compliance challenges vendors will need to address as the industry enters an era of direct CFPB supervision, Moskver said. She noted how important it is for companies, even those not considered “covered entities,” to have a compliance management system that accounts for data security issues, as well as an incident response plan.
Supervisory learning curveBecause most service providers never have been subject to direct supervision from a regulator, many companies will have to learn how CFPB examinations might differ from those conducted by their clients. Zoot Enterprises, which provides clients solutions for advanced origination, client acquisition and credit-decisioning, has been in business for more than 25 years, yet is still among the long list of companies that soon could face its fi rst examination from a regulator.
However, as Zoot Vice President of Sales and Marketing Travis Tuss told Dodd Frank Update, the company is no stranger to having to provide the types of information regulators may be looking for during such an examination, noting that clients generally audit its operations at least once annually.
“Each of those audits is very thorough and in-depth, and they take time to prove to our clients that their assets are safe here,” Tuss said. “In relation to an audit by the CFPB, specifi cally, we would take that very seriously, as have really all of our banks and I’d leave it at that for now. I don’t think there would be a lot of difference (from client audits). They would still be seeking to study and verify the same information, I think.”
Zoot typically completes an audit for any one of its clients on any given week. On top of that, Zoot also conducts its own audits in-house and publishes the results.
Positive thinkingTuss, whose company has not been subject to direct supervision from a regulator in the past, said it defi nitely could benefi t from more guidance about what the bureau might want to explore or verify during an examination. He added that such guidance could be useful in accommodating regulators throughout the audit process to ensure effi ciency and usefulness.
3
Continued from cover
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CFPB News
Moskver said that as part of its next steps in implementing its third-party oversight plan, the bureau likely will publish such guidance materials to establish a common compliance standard.
“If they are planning to supervise them directly, they will publish an examination manual for service providers,” she said. “They’ll provide the framework that’s needed. The hope in the industry is that the bureau will move away from regulation by enforcement a little bit more towards regulatory guidance.”
Moskver noted that many in the industry long have objected that the CFPB’s guidance in service provider bulletins is too vague.
“I actually think it’s probably a benefi cial thing for the industry because, up until now, there’s been really no uniform assessment for service providers,” Moskver said. “And, going forward there will be a baseline standard that everyone will have to meet. From a data security perspective, we’ve already seen that, both at the federal and state level. The bureau may follow guidelines that are already in existence, such as the Cybersecurity Framework published by the National Institution of Standards and Technology (NIST) and the Federal Financial Institutions Examination Council’s Cybersecurity Assessment Tool, and those that some states, most notably New York, have put in place to build their cybersecurity framework.”
What to be ready for
Moskver noted that system failures and cybersecurity issues have been cited in multiple enforcement actions, which the bureau tends to refer to when talking about requirements for the companies it supervises. Many such issues can be traced back to
third-party companies used by fi nancial institutions named in CFPB complaints. Reports from such enforcement actions, as well as the bureau’s Supervisory Highlights, might be the best resources for service providers looking to avoid compliance pitfalls – much the way fi nancial institutions have done since the bureau’s creation – as well as Cordray’s speeches.
“Cordray’s speeches contain good information if you can read in between the lines about service providers and what they expect,” she said. “Even just keeping an eye on the bureau’s latest engagement between the bureau and innovators to improve their fi nancial services market, ‘Project Catalyst,’ and what they are doing there will most likely produce some best practices, too.”
But, won’t the CFPB lose its supervisory authority soon?
As far as the prospect of the bureau losing its supervisory authority because of potential legislative changes to the Dodd-Frank Act, Moskver advises against betting that such a change will occur in the immediate future, if at all.
“I don’t think everything is going to get deregulated,” she said. “If somehow Dodd-Frank was completely rolled back, it would take considerable time.
“Also, the states have already started to step in to fi ll any regulatory void that exists. Compliance is a key component of this industry, and it was missing before, so there is a baseline that should exist for the industry. I think, at some point, it was overregulated as a reaction to the housing crisis. But for now, we are in a state where we can go in and assess whether this is how we want to proceed going forward.”
4
Ahead of statutorily required rulemaking activities regarding the collection of small business lending information, the Consumer Financial Protection Bureau (CFPB) recently launched an inquiry to learn about methods of gathering and utilizing new and existing data to identify the financing needs of small businesses, particularly those owned by women and minorities.
CFPB Director Richard Cordray noted in prepared remarks about the request for information that the bureau will take into account lessons learned from
its compliance and rulemaking work related to the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA).
“Given the importance of small businesses to our economy and their critical need to access financing if they are to prosper and grow, it is vitally important to fill in the blanks on how small businesses are able to engage with the credit markets,” Cordray said. “That is why Congress required financial institutions to report information about their applications for credit from small businesses in accordance with regulations
CFPB starts small business lending process inquiry
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CFPB News 5
to be issued by the consumer bureau.”
The announcement, made at a field hearing in Los Angeles, comes just weeks after Cordray was taken to task by House Financial Services Committee Chairman Jeb Hensarling (R-Texas) for prioritizing discretionary rulemaking over the Dodd-Frank mandated small business rules in Section 1071. The news was met by opposition from trade organizations representing community banks and credit unions. Section 1071, subsection (b), states, “Subject to the requirements of this section, in the case of any application to a financial institution for credit for women-owned, minority-owned, or small business, the financial institution shall — ‘(1) inquire whether the business is a women-owned, minority-owned, or small business, without regard to whether such application is received in person, by mail, by telephone, by electronic mail or other form of electronic transmission, or by any other means, and whether or not such application is in response to a solicitation by the financial institution; and ‘(2) maintain a record of the responses to such inquiry, separate from the application and accompanying information.”
The section also includes a provision that states, “Any applicant for credit may refuse to provide any information requested pursuant to subsection (b) in connection with any application for credit.”
“The inquiry we are launching today is a first step toward crafting this mandated rule to collect and report on small business lending data,” Cordray said. “To prepare for the project, we have been building an outstanding team of experts in small business lending. We are enhancing our knowledge and understanding based on our Equal Credit Opportunity Act compliance work with small business lenders, which is helping us learn more about the credit application process; existing data collection processes; and the nature, extent, and management of fair lending risk. We also have learned much from our work on the reporting of home loans under the Home Mortgage Disclosure Act, which has evolved and improved considerably over the past 40 years.”
The scope of the CFPB’s rulemaking in the area could be an issue moving forward. Although Dodd-Frank mandates the collection of small-business lending data, it does not spell out the extent to which “small business” is detailed.
In his remarks, Cordray said the line between consumer finance and small business finance is “quite blurred. ... More than 22 million Americans are small business owners and have no employees,” he said.
“And, according to data from the Federal Reserve, almost two-thirds of them rely on their business as their primary source of income.”
That could mean the CFPB would be looking into lending done to small business owners who are independent contractors, such as real estate agents, cab drivers and photographers. It also could mean the CFPB is looking into business lending made in different channels than traditional mortgage lending.
“Our initial research tells us that term loans, lines of credit, and credit cards are the all-purpose products used most often by our small businesses,” Cordray said.
The bureau recognizes the differences between the lending markets for small businesses and mortgages, Cordray said, noting that the small business market is “even more diverse in its range of products and providers, which range from large banks and community banks to marketplace lenders and other emerging players in the fintech space.”
Because small-business lending can involve individuals rather than companies, and loans made through credit cards rather than lines of credit, Cordray said the CFPB recognizes that “community banks play an outsized role in making credit available to small businesses in their local communities” and “unlike the mortgage market, many small business lenders have no standard underwriting criteria or widely accepted scoring models.”
“For these reasons and more, we will proceed carefully as we work toward meeting our statutory responsibilities,” Cordray added. “And we will seek to do so in ways that minimize the burdens on industry.”
The CFPB also has released a whitepaper analyzing the current environment for small business lending. The bureau states that available evidence suggests that small businesses have access to approximately $1.4 trillion in financing. However, the available information on how small businesses engage with credit markets is incomplete or outdated. Because of this, the available data “does not paint a full picture of access to financing, particularly for small business owned by women and minorities,” the CFPB notes.
The bureau asserts that available information lacks insight into whether location or business type plays a role in the amount of credit available to certain small businesses, the number of small businesses turning to alternative lenders or the limits on credit triggered by the Great Recession continue to persist.
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CFPB News 6
Among the things the bureau hopes to learn through its inquiry are:• What defines a small business: In an effort to develop “a practical definition” of what a small business is, the bureau states that it is trying to learn what characteristics lenders use to define what qualifies as a small business and how that classification affects the credit application processes for such entities.• Who lends to small businesses: The bureau is trying to learn more about the roles of lending marketplaces, brokers, dealers and other third parties in the small business lending application process, as well as where small businesses turn for financing and what products they tend to choose.• What types of information financial institutions utilize: While exploring options for implementing reporting requirements that satisfy section 1071 of Dodd-Frank, and attempting to minimize the burden
financial institutions face as a result, the bureau is analyzing the types of data lenders currently collect from small business borrowers and when it is collected during the application process.• Privacy impact of publicly reporting lending data: Acknowledging that some data collected could contain information that is sensitive, private or confidential, the bureau states that it is “exploring how to protect the privacy of loan applicants and borrowers, as well as the confidentiality interests of financial institutions in this process.”
In its request for information, the CFPB is seeking comments from individual businesses, consumer groups, community development organizations, lenders (bank and nonbank), regulators and any other interested parties for a 60-day period, beginning after the “Request for Information” is published in the Federal Register.
No sooner did the Consumer Financial Protection Bureau (CFPB) begin the process of shaping a new statutorily required rule for collecting data on small business loans than opponents alleged that the bureau’s sluggishness in creating such a rule constitutes cause to dismiss Director Richard Cordray.
The accusations came shortly after the CFPB launched an inquiry to identify best practices to consider for a rule requiring financial institutions that lend to small businesses to gather data, indicating whether they are women-or minority-owned.
Members of the House Financial Services Committee (FSC), in a blog posting, characterized the fact that the bureau has yet to finalize such a rule, approximately six years after its formation, as “neglect of duty” and “inefficiency” on Cordray’s part.
Section 1071, subsection (g), of the Dodd-Frank Act states, “(1) In general – The bureau shall prescribe such rules and issue such guidance as may be necessary to carry out, enforce, and compile data pursuant to this section. (2) Exceptions – The bureau, by rule or order, may adopt exceptions to any requirement of this section and may, conditionally or unconditionally, exempt any financial institution or class of financial institutions from the requirements of this section, as the bureau deems necessary or appropriate to carry out the purposes of this section. (3) Guidance – The bureau shall issue
guidance designed to facilitate compliance with the requirements of this section, including assisting financial institutions in working with applicants to determine whether the applicants are women-owned, minority-owned, or small businesses for purposes of this section.”
The FSC notes that under Dodd-Frank, the CFPB director can be removed for cause if found guilty of malfeasance, neglect of duty or inefficiency in office, and went on to define those terms in the post to further its point:
“According to The American Heritage Dictionary of the English Language, ‘neglect of duty’ is best understood as, e.g., ‘[t]o fail to do or carry out, as through carelessness or oversight,’ a ‘service, function, or task assigned to one,’ ” the post states. “ ‘Inefficiency’ is best understood as, e.g., the state of being ‘[w]asteful of time, energy, or materials,’ according to the same dictionary. Republicans have already cited numerous statutory grounds for removing Director Cordray from office. Democrats, for their part, largely dismiss these legitimate grounds for removal. In fact, in a letter to President (Donald) Trump dated Jan. 24, 2017, Financial Services Committee Ranking Member Maxine Waters and 37 other House Democrats asserted that ‘Director Cordray has done nothing to give the necessary cause for his removal from office.’ ”
Although Dodd-Frank does not specify a timetable for
CFPB inquiry evokes neglect of duty accusations
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CFPB News 7
the finalization or implementation of section 1071, the FSC cited multiple examples to support its assertion that Cordray did act inefficiently in adhering to his statutory requirements under the law.
The FSC pointed out a 2011 letter written by then-CFPB General Counsel Leonard Kennedy, stating that “[t]he bureau will act expeditiously to develop such rules in recognition that section 1071 is an important tool that will significantly bolster both fair lending oversight and a broader understanding of the credit needs of small businesses” and “[d]eveloping effective implementing regulations will be crucial to achieving Congress’s objectives. Congress intended section 1071 to produce reliable and consistent data that can be analyzed by the bureau, other government agencies, and members of the public to facilitate enforcement of fair lending laws and identify business and community development needs.”
The FSC continued, stating that Cordray testified before the committee, two years after the letter was written, promising that the bureau was “under way” on the statutorily required rule, and acknowledged the mandate for the bureau to create such a rule before the Senate Banking Committee.
Financial trade organizations, including the American Bankers Association (ABA), the Credit Union National Association (CUNA) and the Independent Bankers of America (ICBA) oppose the creation of a CFPB rule on collecting small business lending data and/or believe smaller financial institutions should be exempt from them.
The ABA stressed in a press release its belief that section 1071 represents a “conflation of consumer and commercial lending,” is “misguided” and “Congress should repeal the provision.”
Cordray noted the differences between markets in prepared remarks about the inquiry, saying “we recognize that the small business lending market is much different from the mortgage market. It is even more diverse in its range of products and providers, which range from large banks and community banks to marketplace lenders and other emerging players in the fintech space. Community banks play an outsized role in making credit available to small businesses in their local communities. And unlike the mortgage market, many small business lenders have no standard underwriting criteria or widely accepted scoring models.”
ICBA urged the CFPB, as it has multiple times, to “use its authority under the Dodd-Frank Act to exempt
community banks from any reporting rules it issues and to limit mandatory data points to those required by statute.”
CUNA pointed out the fact that the National Credit Union Administration excludes member business loans from its statutory cap when loan balances are equal to or less than $50,000. Sharon Lindeman, vice president of regulatory advocacy for the California and Nevada Credit Union Leagues, said in a statement that the bureau should exempt those same loans from any small business lending rulemakings.
“The leagues urge the bureau to narrowly define a small business loan, and not create a conflicting definition that would result in an administrative nightmare for credit unions,” she said.
Each of the aforementioned trade associations asserts that a rule implementing section 1071 would place undue burdens on smaller financial institutions.
“Community banks continue to implement and comply with an unprecedented number of new and amended regulatory requirements put into effect over the past several years,” ICBA President and CEO Camden R. Fine said in a statement. “The CFPB’s data-collection and reporting mandates will compound existing regulatory and paperwork burdens, to the detriment of economic and job growth. ICBA continues its call for Congress and the CFPB to address the mounting regulatory burdens harming local communities.”
CUNA compared the burdens to credit unions that would be associated with those experienced as a result of the Home Mortgage Disclosure Act (HMDA), and the new rule expanding HMDA to create new data points not originally included under Dodd-Frank while also altering other data points that are used during the mortgage lending process.
Lindeman urged the bureau to use caution when defining small businesses and small business loans. In a reference to the new HMDA rule, she also asked that the CFPB limit data collection to the elements specifically required by Dodd-Frank.
“Since the Great Recession, credit unions have actually seen growth in small business lending. Many consumers turned to their credit union for their small business loan needs after they experienced difficulty obtaining loans from larger institutions,” Lindeman said.
“Credit unions provide needed capital to existing small business as well as startups.”
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Legislation 8
The House Financial Services Committee voted 34-26 in favor of Rep. Jeb Hensarling’s (R-Texas) Financial Choice Act (FCA) after a three-day markup session that ended May 4.
The bill includes provisions that would eliminate or modify several key aspects of the Dodd-Frank Act, such as the Financial Stability Oversight Council (FSOC), Orderly Liquidation Authority (OLA) for institutions the FSOC deems systemically-important, the Durbin Amendment, the Volcker Rule and statutes pertaining to the leadership structure and abilities of the Consumer Financial Protection Bureau (CFPB). These aspects have proven to be some of the most divisive between Republicans, who generally support the bill, and Democrats, who generally oppose it and offered more than 50 amendments to the bill during the three-day markup.
The bill was passed out of committee in September 2016 as well, but did not come to a vote before the full House. The bill is expected to come up for a House vote this year, although its future in the Senate is uncertain. Democrats have enough votes in the Senate to filibuster the bill, but Hensarling has made the case that the Senate could use a reconciliation process that requires only a simple majority of 51 votes to pass the bill.
Financial trade organizations such as the American Bankers Association (ABA), the Consumer Bankers Association (CBA), the Credit Union National Association (CUNA), the Independent Community Bankers of America (ICBA) and the National Association of Federally-Insured Credit Unions (NAFCU) expressed support for the committee’s passage of Hensarling’s bill.
ABA President and CEO Rob Nichols released a statement calling the committee’s vote in favor of the FCA “a very important step toward reforming the Dodd-Frank Act and providing much-needed regulatory relief,” adding that “we look forward to working with lawmakers from both parties as this important process moves forward.”
“The thousands of pages of new regulations facing banks have become a tremendous driver of decisions to sell or merge,” Nichols continued. “Given the cost
of complying with all the new rules, some community banks are having to choose between meeting those regulatory requirements and meeting the financial needs of their individual and business customers.”
The ABA pointed out in a blog post that the legislation “includes a number of regulatory relief provisions long sought by ABA as part of its ‘Blueprint for Growth,’ including a Qualified Mortgage safe harbor for mortgage loans held in portfolio, more tailored supervision based on an institution’s risk profile and business model and repeal of the Durbin Amendment, which capped prices on debit interchange, as well as the Volcker Rule.”
During an April 26 committee hearing, the topic of repealing the Volcker Rule saw Republicans and Democrats come as close to common ground regarding the bill as could be expected, with Democrats conceding that, although they believe it would be a mistake to repeal because it would open the door for increased systemic risk, the rule could be implemented more efficiently. Many of the bill’s proponents have argued that the rule prevents businesses from engaging in activities that could be beneficial to the economy.
The ABA also favors the bill’s provisions altering the CFPB, as well as its proposed changes to capital requirements, a topic on which the association recently published a whitepaper with recommendations for Congress.
“Since Dodd-Frank’s passage, banks have been working diligently to comply with the sometimes onerous and duplicative requests of regulators,” CBA President and CEO Richard Hunt said in a statement. “We are encouraged by Chairman Hensarling’s commitment to meaningful and targeted changes to Dodd-Frank, and welcome many of the Financial Choice Act’s provisions which provide regulatory relief for both banks and consumers, such as the repeal of the Durbin Amendment. With almost no debate prior to passage, the Durbin Amendment imposed price controls on debit interchange fees while promising lower prices for consumers — but the savings never came.”
Hunt reiterated the CBA’s stance that the CFPB should
Committee again passes Choice Act, trades react
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Legislation 9
be restructured into a five-member committee. Such a provision was included in the original version of the FCA, introduced in the 114th Congress, however, the revised version would allow the CFPB to retain its single-director structure and simply eliminate the Dodd-Frank statute making the director removable only for cause.
“CBA appreciates many of the committee’s reforms to the CFPB. However, we continue to believe consumers would be best served by establishing a five-person, bipartisan commission at the bureau,” Hunt said. “In order to achieve long-term economic stability and sustain consumer confidence, the CFPB must be governed by a diverse group of policymakers and industry experts who understand the everyday needs of American families and small businesses.”
Republicans have argued that changes to the CFPB’s structure and abilities would increase the bureau’s accountability and other agencies, such as the Federal Trade Commission, could provide necessary supervision to protect consumers while the bureau could simply act as an enforcement agency. Conversely, Democrats reiterated their argument that weakening or eliminating the CFPB’s supervisory authority and leadership would be a step toward exposing consumers to many of the risks from financial companies they faced prior to the crisis.
NAFCU President and CEO Dan Berger released a statement supporting the committee’s vote in favor of the legislation that would specifically repeal the Durbin Amendment, require regulatory agencies to improve their cost-benefit analyses, tailor regulations to account for the size and scope of financial institutions and preserve the National Credit Union Administration board’s three-member structure and mandate agency budget transparency.
“Passage of the Financial Choice Act is an important step toward creating a regulatory environment where the nation’s credit unions can thrive. NAFCU thanks committee Chairman Jeb Hensarling for introducing this important legislation,” Berger said in his statement. “NAFCU supports many provisions of this bill, but one of the most significant is the repeal of the failed Durbin interchange amendment. We urge lawmakers to see this bill through, including the repeal of this government interference that harms consumers. NAFCU will continue its work with members of Congress to create a better regulatory environment for
the credit union industry.”
CUNA President and CEO Jim Nussle also released a statement following the committee’s vote in which he also praised the bill’s provision to eliminate the Durbin Amendment and rollback the CFPB’s authority.
“It’s good news that we’re seeing regulatory relief legislation move forward, and CUNA will continue our engagement with policymakers and staff as the process continues,” Nussle said in his statement. “During the markup, several committee members specifically cited the negative effects that overly broad rules stemming from the Consumer Financial Protection Bureau have had on credit unions and their members, so our message is getting out there.”
ICBA President and CEO Camden R. Fine issued a statement the first day of the markup, stating his association’s support of the FCA, noting that it proposes multiple regulatory changes that are in line with ICBA’s “Plan for Prosperity.”
“Comprehensive reform of our nation’s financial regulatory system is sorely needed to strengthen the community banking industry, financial services sector and American economy,” Fine said in his statement. “ICBA looks forward to continuing to work with Chairman Hensarling and other members of Congress to advance the Financial Choice Act and other regulatory relief measures that will help unleash the economic power of the nation’s community banks.”
Following the vote, Ranking Member Maxine Waters (D-Calif.), who along with other Democrats has taken to calling the bill “The Wrong Choice Act,” stated that she has heard from 183 groups that oppose all or part of the FCA.
“We are encouraged by Chairman (Jeb) Hensarling’s commitment to meaningful and targeted changes to Dodd-Frank.”
- Richard Hunt, CEO,
Consumer Bankers Association
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Legislation 10
Rep. Jeb Hensarling (R-Texas) and Rep. Maxine Waters (D-Calif.) both released statements detailing their arguments for and against the revised version of Hensarling’s Financial Choice Act (FCA), which he plans to reintroduce to Congress before the end of June.
The updated legislation promises to include several changes from the original, one of the most notable and controversial being alterations to its proposal for restructuring the Consumer Financial Protection Bureau (CFPB). Bloomberg BNA published a chart, breaking down the changes from the original bill to the revised version.
The original version of the FCA is that rather than restricting the CFPB into a multi-member commission, the revised version proposes to have a single director but enable the president to remove him/her at will.
It also would: take away the agency’s UDAAP enforcement authority, prevent the agency from publishing its complaint database and eliminate all of its Dodd-Frank-mandated advisory boards while stipulating that the director has discretion over the creation or maintaining of any such boards. The Office of Economics would be required to report directly to the director and review all rulemaking and enforcement activities. The CFPB would also be renamed the “Consumer Financial Opportunity Agency,” whereas the original version would have dubbed it the “Consumer Financial Opportunity Commission.”
Hensarling’s statement says that the bureau’s mission is important but lamented that “it was purposefully designed by Democrats to evade checks and balances that apply to other regulatory agencies, including those responsible for consumer and investor protection” and called it “an affront to the Constitution.” He said that CFPB Director Richard Cordray has used his “incredibly broad” authority under Dodd-Frank in a way that “recklessly ignores the due process protections that have been deeply rooted in our American legal system for centuries.”
Hensarling states that the FCA’s supporters’ hope for the legislation is that it “will truly make the CFPB the ‘cop on the beat’ its supporters claim they want. Cops
don’t write the laws; they investigate and enforce the laws — and they don’t serve as cop on the beat, judge, jury and Congress all rolled into one.”
Waters argues that the revised version of the FCA is worse than the original, asserting that it “will essentially kill the most important aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to prevent another financial crisis. Republicans and Donald Trump have once again prioritized the needs of Wall Street over the needs of hard-working Americans, with a proposal that would take away much needed protections and put our economic security at risk.”
First among Waters’ objections to the updated FCA are its provisions pertaining to the CFPB that would: eliminate the bureau’s supervision authority over the largest banks and limiting of the CFPB’s enforcement abilities; subject the bureau to congressional appropriations, which she contends would allow the CFPB’s opponents to “shrink it”; hide consumer complaints, although the “CFPB’s transparent database has produced results: 97 [percent] of complaints referred to a company get timely responses;” and afford the president “extraordinary power to fire CFPB’s director at will, politicizing it as an arm of the White House and preventing it from serving as an independent cop on the beat.”
The updated FCA also introduces several new provisions. One would remove the Federal Deposit Insurance Corp. from the orderly liquidation process in creating living wills. The revised living will proposal indicates that it “[e]nhances stress test regulatory relief by (1) requiring only an annual company-run DFA (Dodd-Frank) stress test; (2) changing CCAR to a two-year cycle; (3) expanding the Federal Reserve’s CCAR qualitative relief to all banking organizations; and (4) codifying certain GAO’s recommendations for stress test improvements including requiring better understanding of the trade-offs between financial stability and cost/availability of credit and potential for model risks and pro-cyclicality” and “[e]xtends Choice’s updates to the living will process, including limiting them to biennial submissions, public disclosure of their assessment framework, and six-month deadline for feedback, to the FDIC’s living wills for insured depository institutions.”
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Legislation 11
Waters asserts that the FCA would replace Dodd-Frank’s orderly liquidation authority with “enhanced bankruptcy, which fails to fix the many shortcomings with the Bankruptcy Code exposed by Lehman Brothers’ chaotic bankruptcy.”
The revised FCA also proposes to eliminate the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR).
Waters argues against the abolishment of both entities, stating that FSOC is a “tool to designate non-banks, like AIG, as systemically important financial institutions (SIFIs) for purposes of enhanced supervision and regulation” and that the OFR “collects data and provides valuable research and analysis to help the council identify and stop risks to our financial stability.”
The House Financial Services Committee held a hearing on the Financial Choice Act (FCA) on April 26. Supporters and opponents of the revised bill, largely divided along party lines, picked apart its provisions, many of which propose to change or eliminate parts of Dodd-Frank. The hearing was held ahead of a vote scheduled for May 2 to determine whether the bill moves forward.
During the hearing, which lasted nearly four hours, many of the arguments Republicans and Democrats presented and discussed with the bipartisan panel of financial experts, acting as witnesses, were a retread of past assertions made in regard to the FCA’s proposed provisions.
Among the most hotly debated aspects of the bill were its proposed modifications to or elimination of Titles I and II of Dodd-Frank. Title I pertains to the Financial Stability Oversight Council (FSOC) and Title II created the Federal Deposit Insurance Corp.’s (FDIC) Orderly Liquidation Authority (OLA). Both were subjects of April 21 presidential memorandums through which President Donald Trump directed Treasury Secretary Steven Mnuchin to scrutinize the provisions.
FSOC designations
Republican supporters of the bill reiterated past arguments that the process FSOC uses in designating financial institutions as systemically important is
arbitrary and capricious. Because the council is made up of representatives of three regulatory supervisory agencies, who are unelected, opponents assert that it is unaccountable to the people represented by Congress and its designations are politically motivated.
Democrats asserted that removing FSOC’s authority to designate certain institutions as systemically important, therefore subjecting them to heightened prudential standards by the Federal Reserve, would place greater risk on the economy.
Orderly Liquidation
Republicans argued that OLA “enshrines” taxpayer-funded bailouts for the country’s largest banks.Democrats countered, saying that eliminating OLA would be a step back toward the issues that led to the financial crisis. They argued that because OLA was created with the intent to allow large financial institutions to fail safely, without significant negative impacts to the economy, it is not the same as offering taxpayer-funded bailouts. They further argued that repealing OLA actually would be a step toward such bailouts, not away from them.
Consumer Financial Protection Bureau
Republicans expressed their oft-stated support for putting the Consumer Financial Protection Bureau (CFPB) under congressional appropriations,
Reps, Dems recap arguments for, against Choice Act
www.doddfrankupdate.com
Legislation 12
eliminating is supervisory authority and making the director removable at will, which are both included in the revised FCA. They argued that such changes would increase the bureau’s accountability and other agencies, such as the Federal Trade Commission, could provide necessary supervision to protect consumers while the bureau could simply act as an enforcement agency. They asserted, as has been argued numerous times, that the CFPB director has dictator-like power to practice regulation by enforcement on rules that are not well defined, such as those regarding unfair, deceptive or abusive acts or practices (UDAAP).
Democrats reiterated their argument that weakening or eliminating the CFPB’s supervisory authority and leadership would be a step toward exposing consumers to many of the risks from financial companies they faced prior to the crisis.
Volcker Rule
The FCA provision that proposed to repeal the Volcker Rule saw the two sides come as close to common ground regarding the bill as could be expected. Some of the bill’s advocates argued that the rule prevents businesses from engaging in activities that could be beneficial to the economy. Although opponents contended that repealing the bill would be a mistake that could open the door for more systemic risk to the financial system, a point was made that the rule could be implemented more efficiently.
Lack of GSE provisions
Representatives and panelists on both sides of the debate noted that it lacks provisions pertaining to the government-sponsored enterprises (GSEs). The absence of such provisions was curious to some
involved in the discussion, considering how large a role Fannie Mae and Freddie Mac played throughout the financial crisis.
The discussion turned into a continuation of past arguments about whether the GSEs are to blame for buying and supposedly facilitating bad mortgage loans or whether poor underwriting standards and/or misleading credit ratings led to the purchase of such faulty loans in the first place.
Continued discussion
The notion that further discussion about the complicated bill is necessary was broached multiple times during the hearing. The bill’s author and committee chairman Rep. Jeb Hensarling (R-Texas) stated that there have been 145 meetings concerning the FCA and Dodd-Frank, but did not specify how many centered on each one individually or both when asked.
The committee’s ranking member Rep. Maxine Waters (D-Calif.) announced during the hearing that there would be a minority day hearing on the bill.
The full hearing witness panel included: Peter J. Wallison, a senior fellow and Arthur F. Burn Fellow of financial policy studies at the American Enterprise Institute; Norbert J. Michel, a senior research fellow of financial regulations and monetary policy at the Heritage Foundation; Michael S. Barr, a law professor at the University of Michigan; Alex J. Pollock, a senior fellow at The R Street Institute; Lisa D. Cook, an associate professor of economics and international relations at Michigan State University; Hester Peirce, a senior research fellow at George Mason University; and John Allison, former president and CEO at the Cato Institute.
The Consumer Financial Protection Bureau’s (CFPB) final rule on prepaid accounts has survived deadline for repeal via the Congressional Review Act (CRA).
Which means, despite the conversation after the presidential election that the Republican Congress would roll back CFPB rules, none of the CFPB’s rules subject to the CRA have been repealed.
The CFPB final prepaid rule, published in the Federal Register Nov. 22, 2016, but not reported to Congress until Dec. 22, seeks to amend Regulation E and Regulation Z to include prepaid cards under the Electronic Fund Transfer Act and the Truth in Lending Act. It was proposed with the intention of limiting consumer liability on lost or stolen cards and standardizing fee disclosures to make comparison
Prepaid card rule survives CRA
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Executive News 13
President Donald Trump recently signed a presidential memorandum directing Treasury Secretary Steven Mnuchin to examine key Dodd-Frank Act provisions, one of them being Orderly Liquidation Authority (OLA) outlined in Title II.
The memo is one of two Trump signed April 21 directing Mnuchin to identify ways of reducing regulations, including one directing him to examine the Financial Stability Oversight Council’s (FSOC) process for designating nonbank financial companies as systemically important.
Trump said in remarks to the press that the OLA implemented regulations to “enshrine ‘Too Big to Fail’ and encourage risky behavior” rather than protect taxpayers as promised.
The OLA provision grants the Treasury Secretary authority to place a financial company in receivership and initiate liquidation after consulting with the president and determining that it is in default, or in danger of default, and that its failure and resolution under otherwise applicable law would have serious adverse effects on financial stability in the United States. The memo pertaining to the OLA also points out that Section 214(c) of Dodd-Frank, 12 U.S.C. 5394(c), stipulates that taxpayers “bear no losses from the exercise of” OLA.
The memo states that the Treasury secretary is to “conduct a thorough review of OLA and provide a report to the president within 180 days of the date of this memorandum. The review shall consider: (i) the potential adverse effects of failing financial companies on the financial stability of the United States; (ii) whether
shopping easier. The rule elicited more than 65,000 comments and took approximately two years to finalize.
Rep. Roger Williams (R-Texas) introduced a bill to repeal the prepaid card rule in February, with expressed support from Rep. Jeb Hensarling (R-Texas) and on the Senate side from Sen. David Perdue (R-Ga.).
“While President Obama’s CFPB was marketed as an extra layer of protection for consumers, it has actually cornered millions of Americans who have limited or no access to the products offered by our traditional banking system,” Williams said in a statement following the bill’s introduction. “It is my hope that we undo this harmful rule before it takes effect so that all families can go about their everyday lives.”
The May 9 deadline for a CRA vote passed at a time when Congress is mulling over controversial bills concerning healthcare reform and sweeping changes to the Dodd-Frank Act via the Financial Choice Act.The rule’s future has been uncertain since the bureau delayed its effective date by six months in March to give the industry more time to ensure compliance. The rule initially was slated to become effective Oct. 1, 2017, but now will not go into effect until April 1, 2018.
With the threat presented by Republicans unafraid
to exercise the authority afforded by the CRA and President Donald Trump’s executive actions calling for widespread regulatory rollbacks, there has been a considerable talk of rules being repealed.
The rule in which the CFPB issued the delay, published April 25, also marked just the 20th document of 23 the CFPB has published in the Federal Register in 2017 through May 8, a relatively low amount compared with the number of documents it published at the same point the year prior.
Overall, federal regulators have published about 33 percent fewer notices of proposed rulemaking in the Federal Register than last year. This includes all regulators belonging to the Federal Financial Institutions Examination Council (FFIEC), including the Federal Deposit Insurance Corp. (FDIC), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), National Credit Union Administration (NCUA) and the Federal Reserve.
Through May 8, the five agencies published 215 notices, very few of which involve rulemaking, compared with 326 at the same point in 2016. The following is a breakdown illustrating the number in notices published by each agency during that time period – FDIC: 47 in 2017 (79 in 2016); OCC: 18 (38); CFPB: 23 (32); NCUA: 11 (25); and Fed: 116 (158).
Presidential directive targets ‘Too Big to Fail’
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Executive News 14
The process through which the Financial Stability Oversight Council (FSOC) designates financial companies as systemically important soon will come under close scrutiny from Treasury Secretary Steven Mnuchin.
President Donald Trump recently signed a presidential memorandum directing Mnuchin to determine whether a nonbank financial company poses a threat to the nation’s financial stability and,
therefore, be subject to increased regulatory standards.
The memo is one of two Trump signed April 21 directing Mnuchin to examine Dodd-Frank regulations, including one directing him to examine the Dodd-Frank provision outlining Orderly Liquidation Authority.
“Secretary Mnuchin and my entire administration are working around the clock to help struggling
the framework for using OLA is consistent with the principles set out in Sections 1(b) and 1(c) of Executive Order 13772 of Feb. 3 (Core Principles for Regulating the United States Financial System); (iii) whether invoking OLA could result in a cost to the general fund of the Treasury; (iv) whether the availability or use of OLA leads or could lead to excessive risk taking on the part of creditors, counterparties and shareholders, or otherwise leads market participants to believe that a financial company is ‘too big to fail’; and (v) whether a new chapter in the U.S. Bankruptcy Code, in which the claims against a failed financial company would be resolved pursuant to the procedures of bankruptcy law rather than the provisions of the Dodd-Frank Act, would be a superior method of resolution for financial companies.”
The review shall include, where applicable and feasible, a quantitative assessment of OLA’s anticipated direct and indirect effects. The report shall provide recommendations for improvement, including any recommended legislative changes.
Mnuchin said the goal of the Treasury’s analysis will be to make sure that OLA “doesn’t encourage excess risk-taking, moral hazard and exposure to taxpayers.”
“In regards to [the question of whether the administration’s new policies will help eliminate Too Big To Fail],” Mnuchin added, “let me make it absolutely clear, President Trump is absolutely committed to make sure that taxpayers are not at risk for government bailouts of entities that are too big to fail.”
When asked about former Fed Chair Ben Bernanke’s view that repealing Title II of Dodd-Frank to eliminate the OLA would be a mistake and imprudently put the economy and the financial system at risk, Mnuchin responded by saying the administration will do “what we
think makes sense” following its review.
“And I would just say – nothing against him, I have a lot of respect for him – again, we’re listening to regulators’ views; we’re listening to people who were previously in the administration; we’re listening to people who were impacted by this and we’ll be taking that all into account,” Mnuchin said.
Mnuchin also referenced Rep. Jeb Hensarling’s (R-Texas) Financial Choice Act, which proposes to eliminate several aspects of Dodd-Frank.
“We have been working closely with Chairman Hensarling,” Mnuchin said. “We have been in discussions about all different aspects of regulatory reform. It’s obviously a complicated bill, so I won’t go through the entire bill, but I will say we are supportive of him bringing forward this legislation and look forward to working with him and Congress on the specifics of it.”
Rep. Maxine Waters (D-Calif.) expressed concern regarding the directives in a statement saying “these two executive actions are two steps back to the risky financial system that brought us the Great Recession and very nearly dragged our economy into a death spiral.”
“Orderly Liquidation Authority is the back-up mechanism we put in place to ensure that when a large financial firm like Lehman Brothers fails, it can be wound down safely, without a bailout or bringing the economy crashing down with it,” Waters said. “If Orderly Liquidation Authority is replaced with so-called enhanced bankruptcy, the next taxpayer bailout for Wall Street could be right around the corner. Another important lesson from the financial crisis, demonstrated by the near catastrophic failure and bailout of AIG, was the need to more thoroughly supervise mega-sized non-banks, to prevent threats to our economy.”
Trump directs Mnuchin to examine FSOC process
www.doddfrankupdate.com
Americans achieve their financial dreams, earn a great paycheck, have a job that they love going to every single day and have real confidence in the future,” Trump said in his remarks to the press.
Mnuchin referred to the directives as essentially following up to the president’s Feb. 3 executive order, which laid out a set of “core principles” for regulating the U.S. financial system, during a press conference following the memos’ signings.
“We have been busy since [the president] signed the initial executive order on core principles, looking at financial reform,” Mnuchin said.
“It encompasses all the aspects of Dodd-Frank, but goes much further than Dodd-Frank. We’ve already conducted a large number of meetings – I think we’ve had over 16 group meetings, and in many of these meetings there [are] 50 people in each meeting or more. So we’ve been [receiving] a lot of feedback overall on regulatory reform.”
The memo summarizes the council’s authority to gather information about financial organizations and make recommendations to the Federal Reserve about whether a company’s material financial distress or activities pose significant risks to the economy.
Such entities can then be designated as systemically important financial institutions (SIFIs), thereby subjecting them to increased regulatory standards.
“These determinations and designations have serious implications for affected entities, the industries in which they operate, and the economy at large,” the memo states.
“Therefore, it is important to ensure that these processes for making determinations and designations promote market discipline and reduce systemic risk. It is equally important to ensure that, once notified by FSOC that it is under review, any entity under consideration for a determination or designation decision is afforded [a] due, fair and appropriately transparent process.”
The memo directs the Treasury Secretary to “conduct a thorough review of the FSOC determination and designation processes under Section 113 (12 U.S.C. 5323) and Section 804 (12 U.S.C. 5463) of the Dodd-Frank Act and provide a written report to the president within 180 days of the date of this memorandum.
“As part of this review, and along with any other considerations that the secretary deems appropriate, the secretary shall consider the following:
“(a) whether these processes are sufficiently transparent; (b) whether these processes provide entities with adequate due process; (c) whether these processes give market participants the expectation that the federal government will shield supervised or designated entities from bankruptcy; (d) whether evaluation of a nonbank financial company’s vulnerability to material financial distress, under 12 CFR 1310 App. A.II.d.1, should assess the likelihood of such distress; (e) whether any determination as to whether a nonbank financial company’s material financial distress could threaten the financial stability of the United States, under 12 CFR 1310 App. A.II.a, should include specific, quantifiable projections of the damage that could be caused to the U.S. economy, including a specific quantification of estimated losses that would be likely if the company is not subject to supervision under Section 113; (f) whether these processes adequately consider the costs of any determination or designation on the regulated entity; (g) whether entities subject to an FSOC determination under Section 113 or designation under Section 804 are provided a meaningful opportunity to have their determinations or designations reevaluated in a timely and appropriately transparent manner; and (h) whether, prior to being subject to an FSOC determination under Section 113 or designation under Section 804, the entity should be provided with information on how to reduce perceived risk, so as to avoid being subject to such determination or designation.”
Rep. Maxine Waters (D-Calif.) expressed concern regarding the directives in a statement.
She characterized the moves as “steps back to the risky financial system that brought us the Great Recession and very nearly dragged our economy into a death spiral.”
“Trump is taking us back to the risky system we had before Wall Street reform, with an executive action that paves another path for Wall Street to run free of needed oversight,” Waters said.
“By using his executive authority to dish out favors for Wall Street, Donald Trump is once again showing who he really is, and in the process, putting our economy on a dangerous path.”
Executive News 15
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Agency News 16
Having long contended that conservatorship for the government-sponsored enterprises (GSEs) is unsustainable, Federal Housing Finance Agency (FHFA) Director Mel Watt recently testified to the Senate Banking Committee about actions he feels need to take place to work toward reforming the housing finance market.
His testimony touched on a wealth of concerns and potential solutions for issues facing the market, such as: transitioning the GSEs out of conservatorship, transferring GSE risk to the private sector, withholding GSE dividends from the Federal Reserve to help offset the pending loss of its buffer from preferred stock purchase agreements (PSPAs), the future of the common securitization platform (CSP) and ensuring smaller financial institutions access to the reformed mortgage market.
Watt said that Congress must devise a transition plan that does not disrupt the housing finance market and establishes what roles the FHFA and other entities should play during such a transition.
“Among the important decisions for Congress are the following; one, how much backing, if any, should the federal government provide, and in what form? Two, what transition process should be followed to avoid disruption to the housing finance market, and who should implement that process? Three, what roles, if any, should the enterprises play in the reformed housing finance system, and what statutory changes will be required to ensure that they played those roles effectively? And four, what regulatory framework and authorities are needed in a reform system, and who will have that responsibility?” Watt said.
Senate Banking Committee Chairman Mike Crapo (R-Idaho), Ranking Member Sherrod Brown (D-Ohio), Sen. Bob Corker (R-Tenn.) and others discussed with Watt what can be done to improve the way the market functions.
Capital buffer for GSEs
The fact that the GSEs must reduce their taxpayer-backed emergency fund each year until the reserves reach zero in Jan. 1, 2018, at which point they would be prohibited from retaining any capital at the end
of each subsequent quarter, is cause for concern, according to Watt. As of Jan. 1, 2017, the buffer afforded under the PSPAs was $600 million.
“Like any business, the enterprises need some buffer to shield against short-term operating losses. In fact, it is especially irresponsible for the enterprises not to have a limited buffer, because a loss in any quarter would result in an additional draw of taxpayer support and reduce Treasury (Department’s) fixed dollar commitments under the PSPAs,” Watt said. “As conservator, we reasonably foresee that this could erode investor confidence and stifle liquidity in ways that could increase the cost of mortgage credit to borrowers. As conservator, FHFA cannot risk these consequences and meet our statutory obligation to ensure that each enterprise fosters ‘liquid efficient, competitive and resilient national housing finance markets.’ ”
Brown supported Watt’s argument, noting that such a prohibition would be in spite of the fact that the enterprises back more than $5 trillion in the mortgage market.
“Unlike those warnings about predatory lending, which the administration largely ignored at the time, I’m hopeful we can protect taxpayers from what is an avoidable situation created by an agreement entirely within the executive branch,” Brown said. “Some argue any adjustment to the retained capital levels is equivalent to the supporting of supporting a return to the old structure of the GSEs. As arguments go, this is surely a straw man. There’s no reason we can’t protect taxpayers and homeowners; protecting taxpayers in the near term should be a shared and a bipartisan goal. The committee should continue its work examining the gaps in the housing market that the housing crisis exposed.”
Brown noted that Watt “has been raising his concerns about the dangers of the capital levels at the GSEs for some time” and “was one of the first members of the House of Representatives to warn about predatory lending prior to the housing crisis.”
Watt stated that he has considered using his authority to withhold quarterly profits from the Federal Reserve without congressional approval as a means to build
FHFA director talks GSE transition plan
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Agency News 17
up capital reserves for Fannie Mae and Freddie Mac. Doing so would create a buffer to allow the GSEs to cover short-term operating losses without drawing from their $258 billion Treasury line of credit.
Watt noted that this would not be a long-term solution, however. Watt acknowledged that there are some factors “that could adversely impact that, and especially when it’s done on a quarterly basis, those fluctuations can be exaggerated.”
Crapo noted his concern that such a measure would only be a temporary fix to cover short-term losses, and might lead some people in the public and in Washington to believe housing finance reform is not as pressing a matter as it really is and negatively impact public support. Watt responded by explaining his view of the situation regarding the FHFA’s role in the conservatorship, using an analogy about cars.
“First of all, let me just say I absolutely agree with you,” Watt said. “We’re going to try to avoid a draw at all cost because we think there are risks associated with it. And as conservator, our position is a little bit different than everybody else. I kind of liken that to the situation I faced several weeks ago when I went home and had a letter in my mailbox that said my car was subject to recall because of the airbag.
“Well, there were a number of people who were saying the risk of you driving that car is minimal. And I absolutely agreed with them, but I was the responsible party, and my family was going to have to ride in that car. And so in this situation, the cars that you all have given us are Fannie Mae and Freddie Mac. It’s our responsibility to keep them safe and sound to make them efficient while they are in conservatorship, and it’s your responsibility to change cars if you want to after that, whatever you decide to do.”
Later in the hearing, Corker questioned whether the FHFA needs a buffer to mitigate risk presented by market fluctuations when it has the ability to draw from the Treasury to cover shortfalls.
“It’s one of the most baseless arguments I’ve ever heard,” Corker said. “Any company in America that had access to $258 billion line of credit from the U.S. government – backed by the U.S. government I don’t think would be concerned about market fluctuations. But something’s happened recently, I don’t know what it is.”
Watt responded by saying that, given the number of uncertainties facing the market, the FHFA, as conservator of the enterprises, cannot afford to assume the line of credit afforded by the Treasury will be adequate to cover all shortfalls in the future.
Private sector involvement
Crapo pointed out that a crucial aspect to consider when reforming the housing finance system is whether to utilize the current CSP or consider other alternatives, such as expanding the Ginnie Mae platform.
“The platform was originally intended to function like a market utility independent from the enterprises that would be used to issue both agency securities and private-label securities,” Crapo said. “The platform has instead been developed specifically for securities issued by Fannie Mae and Freddie Mac.”
Stating that it is “essential to protect taxpayers to build a more robust and sustainable market,” Crapo said he believes the FHFA and the enterprises should experiment with a variety of methods for transferring risk away from the government and into the private sector, including both front-end and back-end structures.
“Increasing the amount of credit risk borne by the private sector will be a critical component of housing finance reform, regardless of which direction the committee ultimately decides to take,” he said. “I encourage the director to consider other policies and options to incentivize further private sector participation and help facilitate the transfer to a new system.”
When asked by Crapo what the FHFA and the enterprises need to do to reduce taxpayer risk and to attract more private capital to the mortgage markets, Watt said they could begin by taking care not to accept loans that borrowers could not afford to repay.
“We have a defined credit box and we try to encourage lenders to use that credit box, but we will not take a loan outside that credit box,” Watt said. “The second thing we have aggressively done is had the enterprises innovate in the risk transfer space. Moving first to kind of second loss positions or intermediary positions, but then moving to first loss positions when it is financially feasible to do so. So I think the objective
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Agency News 18
here is to make the whole system responsible, and not obviously move back to the kinds of practices that were taking place prior to the crisis. I reiterate that it is the role of Congress to do housing finance reform, and I encourage you to do so expeditiously.”
Watt elaborated on the FHFA’s goals for private-sector
risk-sharing later in the hearing: “We have a goal of risk-sharing on at least 90 percent of the single-family new loans that fit our criteria.
“And that’s a substantial part of our portfolio. The goal obviously would be to transfer as much of it as you can.”
In an effort to prevent the Office of the Comptroller of the Currency (OCC) from creating a national nonbank charter, the Conference of State Bank Supervisors (CSBS) has filed a complaint in the U.S. Court for the District of Columbia.
The CSBS asserts that the creation of such charters is unlawful and would harm markets, innovation and consumers.
“The OCC’s action is an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks,” CSBS President and CEO John W. Ryan said in a statement. “If Congress had intended it to be used for another purpose, it would have explicitly authorized the OCC to do so. If the OCC is allowed to proceed with the creation of a special purpose nonbank charter, it will set a dangerous precedent that any federal agency can act beyond the legal limits of its authority. We are confident that we will prevail on the merits.”
The complaint alleges that the OCC has exceeded its authority under the National Bank Act and other federal banking laws, which only authorize the agency to charter institutions that engage in the “business of banking.”
The OCC has authority to grant charters for national banks and federal savings associations, including charters for special purpose national banks (SPNB) under the National Bank Act and Home Owners’ Loan Act. A special purpose national bank that conducts activities other than fiduciary activities must conduct one or more of the following three core banking functions: receiving deposits, paying checks or lending money. Special purpose national banks are governed by and organized under provisions of the National Bank Act, which outline classes of shares, voting rights, number of directors and terms of office, along with all other national banks. They also may only
engage in activities permissible for national banks, which are identified in statutes, OCC regulations and legal opinions and corporate decisions, regularly published by the OCC.
The CSBS argues that the OCC does not have the authority to create a special purpose charter for nonbanks without specific congressional approval. CSBS also asserts that because Congress has not explicitly given the OCC authority to create nonbank charters, such charters are unlawful and unconstitutional so the states should retain the authority to regulate and supervise non-depository companies.
“The OCC’s proposed action ignores Congress, seeks to preempt state consumer protection laws, harms markets and innovation, and puts taxpayers at risk of inevitable fintech failures,” Ryan said. “This is a dangerous combination and one the court should decisively halt. To protect consumers and taxpayers, to promote innovation and to ensure fair and open competition, CSBS was forced to take legal action against the OCC charter.
“State regulators already supervise a vibrant financial services marketplace that includes non-banks and banks. Tens of thousands of mortgage, money transmission, debt collection and consumer finance companies – not to mention over 75 (percent) of this nation’s banks – already operate under the state system. That regulatory structure has produced a robust platform for innovation. Moving forward, state regulators will continue to streamline regulation and automate licensing across state lines, ensuring the system will work even better for state-licensed companies and consumers while protecting taxpayers.”
Independent Community Bankers of America (ICBA) President and CEO Camden Fine released a statement
CSBS sues OCC over nonbank charters
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Enforcement Action 19
supporting the CSBS in its lawsuit.
“The Conference of State Bank Supervisors’ lawsuit filed today against the Office of the Comptroller of the Currency illustrates the serious concerns raised by the OCC’s unprecedented proposal to grant special-purpose national bank charters to financial technology companies,” Fine said. “The CSBS suit seeks to prevent the national bank regulator from instituting a nonbank charter that the OCC is pursuing without congressional approval or a formal rulemaking process that would have clarified such important questions as the OCC’s expectations for capital, liquidity, supervision and examination as well as whether new charter holders would have direct access to the Federal Reserve’s clearing and payment system and its discount window.
“ICBA commends the CSBS for elevating this
issue and remains deeply concerned with the OCC’s proposed fintech charter, which the agency has pursued without congressional authorization or a formal rulemaking process subject to public comment,” Fine added.
The ICBA wrote to the OCC about the association’s concerns about fintech charters and again in early April, urging the agency to rescind its proposal to grant special purpose charters for fintechs.
The April letter from ICBA also urged the OCC to request specific congressional authorization to grant such charters, propose rules for public comment, consult with the other banking agencies, clearly define which companies would be eligible and ensure that any new chartered institution is subject to the same supervision and regulation as required of community banks.
Four online lenders are the subject of a lawsuit filed by the Consumer Financial Protection Bureau (CFPB), alleging that they deceived consumers by collecting debt they were not legally owed on high-cost, small-dollar loans.
The complaint alleges violations of the Truth in Lending Act, Dodd Frank Act and Consumer Financial Protection Act against Golden Valley Lending, Silver Cloud Financial, Mountain Summit Financial and Majestic Lake Financial for deceptive practices, collecting payments on debts that were not legally owed and failing to disclose the real cost of credit.
“We are suing four online lenders for collecting on debts that consumers did not legally owe,” CFPB Director Richard Cordray said in a press release. “We allege that these companies made deceptive demands and illegally took money from people’s bank accounts. We are seeking to stop these violations and get relief for consumers.”
The CFPB states that Golden Valley and Silver Cloud have offered online loans with annual interest rates ranging from 440 percent to 950 percent since at least 2012. Mountain Summit and Majestic Lake started offering similar loans more recently. The high interest rates were not disclosed on the companies’ websites,
the complaint states, and were the result of “service fees” charged on each installment payment associated with the loans.
“Defendants originate, service and collect high-cost, small-dollar installment loans in nearly all fifty states,” the complaint states. “Consumers can borrow between $300 and $1,200 from defendants. The standard repayment schedule for loans offered by each defendant is 20 payments over the course of 10 months, with one payment made every two weeks. For each installment payment, a consumer must pay a ‘service fee’ (often $30 for every $100 of principal outstanding) and [5] percent of the original principal.”
To illustrate the point, the complaint offers an example, pointing out that for an $800 loan a typical loan contract would require the borrower to repay about $3,320 total over a 10-month period.
Through its investigation, the bureau found that the loans violated licensing requirements and/or interest-rate caps in at least 17 states, making them completely or partially void. The bureau alleges that the four lenders are collecting money that consumers do not legally owe. The CFPB is seeking monetary relief for consumers, civil money penalties and injunctive relief, including a prohibition on collecting on void loans.
CFPB sues four online lenders over small-dollar loans
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Leading the largest trade organization representing community banks is a major responsibility, and one that Independent Community Bankers of America (ICBA) President and CEO Camden R. Fine will have shouldered for 15 years when he steps down in May 2018.
He announced his plans to retire during the 2017 ICBA Capital Summit in Washington, D.C. Speaking with Dodd Frank Update, Fine noted that although he currently is the longest-serving executive of a major national financial trade association, his tenure is on the short side by ICBA standards. His predecessors each spent more than 20 years at the helm since ICBA’s founding in 1930. The main reason that Fine, 66, decided he would not continue the trend is his advanced age, compared with other community bank executives.
“I’m not getting any younger and, over the last couple of years, I’ve just felt that it was time,” Fine said. “It was time for younger leadership to better reflect the average age of our member CEOs. I thought it was time for the next generation of community bank leadership at ICBA.”
His retirement will coincide with his 15th anniversary. During his announcement, the native Missourian and longtime community banker and bank owner emphasized that he plans to remain fully engaged in his role over the next year. Fine pointed out that since 2003, when he took the helm at ICBA, he has had three or four different counterparts at other major financial trade organizations, such as the American Bankers Association (ABA) and Consumer Bankers Association (CBA). He noted that he’s come across information saying that trade CEOs typically don’t serve much longer than five years.
“I am very pleased with my accomplishments and I’ve pretty much achieved all of the goals I had for ICBA that I set for myself many years ago,” Fine said. “I’m satisfied that I have accomplished those things so it’s time for younger eyes, younger leadership and a new
generation of leadership at ICBA.”
The ICBA Executive Committee has named Centinel Bank of Taos Chairman and CEO Rebeca Romero Rainey as Fine’s successor, a decision he applauds.
“I’m thrilled that Rebeca will be succeeding me,” said Fine, who spent nearly 20 years as president and CEO of Midwest Independent Bank in Missouri before taking over at ICBA. “She, like me, is a community banker so we continue the pattern of having a community banker leading the association. I think she has the passion and capability to lead ICBA forward over the next 20 years or so. That was our goal. We wanted someone who would be willing to lead the association for an entire generation.”
In addition to holding the chairmanship for the association, during her 15 years serving ICBA, Romero Rainey also has chaired the Federal Delegate Board and the Minority Bank Council and served on the FDIC Community Bank Advisory Committee and the Kansas City Federal Reserve Community Depository Institution Advisory Council. She is a former president and a current board member of the Independent Community Bankers of New Mexico and has received the New Mexico Governor’s Award for Outstanding Women.
“My dream has always been to run my community bank and I’ve been doing that for the past 20 years,” Romero Rainey told Dodd Frank Update. “This is an opportunity to direct my efforts not just to my bank but to helping every community bank across the country. I’m thrilled to jump into this opportunity to be the voice of community banks, helping to ensure that they continue to grow and thrive.”
Romero Rainey said being named Fine’s successor has been “an on-going and very thorough process” and that she is exceedingly happy to be joining the staff at ICBA. Starting Jan. 2, 2018, she will begin working side-by-side with Fine and continue to do so before taking over her new role.
