Banking Law
Banking Agencies Finalize Revisions to Volcker Rule
By Lynette I. Hotchkiss, Mechanics Bank
On October 8, 2019, five federal financial regulatory agencies (the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission – collectively, the “Agencies”) finalized revisions to the “Volcker rule,” simplifying compliance requirements. By statute, the Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. Under the revised rule, requirements have been simplified and streamlined for firms that do not have significant trading activities. Conversely, firms with significant trading activity will have more stringent compliance requirements. The Agencies announcement states that the “revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law. The Agencies expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the Agencies’ 2013 rule.”
Banking Agencies Issue Final Management Interlock Rules
By Lynette I. Hotchkiss, Mechanics Bank
On October 2, 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation issued a final rule updating the management interlock rules (interlock rules). Previously, the management interlock rules prohibited a management official working at a depository institution or holding company with more than $2.5 billion in total assets from simultaneously working at an unaffiliated depository organization with more than $1.5 billion in total assets. The final rule increases both thresholds to $10 billion in total assets.
Federal Reserve and FDIC Update their Resolution Planning Rule
By Andrew B. Samuel and Sumeet Sanjeev Shroff, Davis Polk & Wardwell LLP
The Federal Reserve and the Federal Deposit Insurance Corporation (the “Agencies”) have approved a final rule updating their resolution planning requirements (the “165(d) rule”) for large bank holding companies. The 165(d) rule implements § 165(d) of the Dodd-Frank Act, which requires large bank holding companies to develop resolution plans, commonly known as living wills, that describe each firm’s strategy for its rapid and orderly resolution in the event of material financial distress or failure.
The 165(d) rule defines three types of resolution plan submissions – full, targeted, and reduced plans – and defines the substantive content that each type of plan must include. Content requirements remain unchanged for full resolution plans, which must include detailed information about the firm’s resolution strategy as well as its structure and operations. Targeted plans must include the core elements of full plans (such as capital and liquidity analyses) and any areas of interest identified by the Agencies, but may omit other categories of information such as descriptions of the firm’s material entities and core business lines. Reduced plans focus primarily on material changes, if any, since the firm’s previous submission. The 165(d) rule replaces the annual submission requirement with a submission cycle of either two or three years, alternating between full and targeted plans for large U.S. bank holding companies and foreign banking organizations with significant U.S. operations. The type of plan and the submission cycle required for each firm are based on its asset size and certain financial thresholds established in the final tailoring rules released by the Agencies on the same day as the 165(d) rule. The 165(d) rule also makes various substantive and procedural changes to the resolution planning process, including the provision of periodic review and reconsideration of each firm’s designated “critical operations,” i.e. operations whose failure would pose a threat to U.S. financial stability.
OCC Issues Final Stress Testing Rule
By Lynette I. Hotchkiss, Mechanics Bank
On October 2, 2019, the Office of the Comptroller of the Currency issued a final rule amending the company run stress testing rule for national banks and federal savings associations. Under the final rule:
- the minimum threshold is raised from $10 billion to $250 billion for national banks and federal savings associations to conduct stress tests
- the frequency with which stress tests are required is revised
- the number of required stress testing scenarios is reduced from three to two
- certain additional technical changes to the stress testing requirements are made
The final rule is effective November 24, 2019.
OCC Releases Bank Supervision Operating Plan for 2020
By Lynette I. Hotchkiss, Mechanics Bank
On October 1, 2019 the Office of the Comptroller of the Currency (OCC) released its bank supervision operating plan for fiscal year 2020. OCC staff members use this plan to guide their supervisory priorities, planning, and resource allocations.
The OCC’s plan points to a focus on the following supervisory strategies for fiscal year 2020:
- cybersecurity and operational resiliency.
- Bank Secrecy Act/anti-money laundering (BSA/AML) compliance management.
- commercial and retail credit underwriting practices and oversight and control functions.
- impact of changing interest rate outlooks on bank activities and risk exposures.
- preparedness for the current expected credit losses (CECL) account standard, and preparation for the potential phase-out of the London Interbank Offering Rate (LIBOR).
- technological innovation and implementation.
Consumer Finance
License Application Process Streamlined for Federally Registered MLOs
By Angela Cheek, EllieMae
On March 15, 2018, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155), which included a new section under the SAFE Act of 2008. This new section, known as the Temporary Authority to Operate, streamlines the license application process for federally registered mortgage loan originators (MLOs) pursuing a state license, and state-licensed MLOs pursuing a license in another state. The Temporary Authority to Operate authorizes a MLO to temporarily conduct business while applying for a state license. This portion of the Economic Growth, Regulatory Relief and Consumer Protection Act takes effect November 24, 2019.
Supreme Court to Decide Whether the CFPB’s Structure Violates the Separation of Powers
By James Morrissey, Pilgrim Christakis LLP
On October 18, 2019, the Supreme Court announced that it will review Ninth Circuit’s opinion in CFPB v. Seila Law LLC. In Seila, a law firm argued that a civil investigative demand it received from the CFPB was invalid because the bureau’s structure violates Article II by vesting executive power in a single director removable only for cause. The district court rejected this argument and the Ninth Circuit affirmed. Relying heavily on PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), the Ninth Circuit found that the CFPB exercises “quasi-legislative” and “quasi-judicial” powers along with executive powers. The court also rejected then-Judge Kavanaugh’s dissent in PHH and found that Morrison v. Olson, 487 U.S. 654 (1988) precludes “drawing a constitutional distinction between multi-member and single-individual leadership structures.” Thus, the court held that “the for-cause removal restriction protecting the CFPB’s Director does not ‘impede the President’s ability to perform his constitutional duty’ to ensure that the laws are faithfully executed.”
The Supreme Court granted certiorari to decide whether “the vesting of substantial executive authority in the [CFPB], an independent agency led by a single director, violates the separation of powers.” In doing so, the Court directed the parties to also brief the following question: “If the [CFPB] is found unconstitutional on the basis of separation of powers, can 12 U.S.C. § 5491(c)(3) be severed from the Dodd-Frank Act.” Tellingly, now-Justice Kavanaugh addressed this exact issue in his PPH dissent and concluded “precedents require that we sever the CFPB's for-cause provision, so that the Director of the CFPB is supervised, directed, and removable at will by the President.”
6th Circuit Holds FCRA Preempts State Common Law Claims, Joins 2nd and 7th Circuits
By Eric Tsai, Maurice Wutscher LLP
The U.S. Court of Appeals for the Sixth Circuit recently affirmed a judgment in favor of the furnisher of credit information in an action filed under the federal Fair Credit Reporting Act (FCRA) and other claims under state common law. As you may recall, FCRA provides that “[n]o requirement or prohibition may be imposed under the laws of any State with respect to any subject matter regulated under [section 1681s-2 of this title], relating to the responsibilities of persons who furnish information to consumer reporting agencies.” 15 U.S.C. § 1681t(b)(1)(F). Because the consumers’ common law claims of breach of the duty of good faith and fair dealing and tortious interference with contractual relationships arose from the bank’s reporting incorrect information to the credit bureaus, the Sixth Circuit held that FCRA preempted these claims, joining similar rulings by the Seventh and Second Circuits. However, the Sixth Circuit noted that FCRA’s preemption provisions did not apply to the fraudulent misrepresentation claim because this claim did not arise from the bank’s reporting obligations as a furnisher of consumer credit information.
Director Kraninger Appears Before House Committee on Financial Services
By Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP
On October 16, 2019, the House Committee on Financial Services held a hearing entitled “Who is Standing up for Consumers? A Semi-Annual Review of the Consumer Financial Protection Bureau.” At the hearing, CFPB Director Kathleen L. Kraninger presented the Bureau’s Spring 2019 (October 1, 2018 to March 31, 2019) Semi-Annual Report. Director Kraninger praised the work of the Bureau, while Democrats on the Committee, including Chairwoman Rep. Maxine Waters, criticized Director Kraninger for what they see as the Bureau’s weak stance on enforcement. The specifics of their concerns are described in the Majority Staff Report, which is described below.
The hearing was contentious. Relying on the Report, Carolyn Maloney asserted that the Bureau's current leadership was "worthless" if unwilling to follow the advice of career enforcement staff. That statement caused Republican Committee members to protest that the remarks violated the Committee’s rules on decorum. Republican members of the Committee urged Director Kraninger to foster competition in the marketplace and lauded her legal position that her protection from termination is unconstitutional.
House Democrats Release Report Critical of Bureau Leadership
By Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP
In conjunction with the House Committee on Financial Services hearing described above, the Majority Staff released a report entitled “Settling for Nothing: How Kraninger’s CFPB Leaves Consumers High and Dry.” The report alleges that the current leadership of the CFPB has failed consumers by undermining the CFPB’s previously robust policing of misconduct in the financial sector. The report is the result of a Majority Staff investigation into the enforcement activities of the CFPB that began in February 2019.
The report relies upon previously confidential internal CFPB memoranda to identify occasions in which the Bureau's new leadership failed to approve career staff recommendations on potential legal claims and/or restitution in enforcement matters. The report concludes that Congress must find ways to reduce the politicization of the Bureau and that the Bureau must be equipped with stronger enforcement mechanisms to protect consumers. The report's appendices offer a revealing window into the Bureau's deliberations on enforcement matters, including the current dynamic between new Bureau leadership and the enforcement staff they inherited.