August 03, 2020

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Consumer Finance

Supreme Court’s Seila Law Decision Brings Clarity to the CFPB (for Now)

By Mark E. Rooney, Hudson Cook, LLP

On June 29, 2020, in Seila Law LLC v. CFPB, the U.S. Supreme Court struck down the leadership structure of the CFPB as unconstitutional. The case resolves a long-simmering question over the CFPB’s viability but the court’s other holding—that the offending provision limiting the president’s ability to remove the director can simply be severed from the rest of the statute—ensures that the agency will continue to operate. 

Going forward, the director of the CFPB is now considered at “at will” appointee, meaning the president can remove her at any time, for any reason.  The current director, Kathy Kraninger, has said all along that she considers herself to serve at the pleasure of the president, suggesting that the Supreme Court’s decision will have little practical impact at this time. Nonetheless, important questions remain over whether actions taken by the Bureau prior the Supreme Court’s decision are still valid.  Since the decision, Director Kraninger issued a statement purporting to “ratify” some of the Bureau’s prior rules.  Whether that will be enough to insulate the Bureau from further legal challenges remains to be seen. 

Bureau to Issue an Advanced Notice of Proposed Rulemaking on Consumer Access to Financial Records

Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On July 24, 2020 the Bureau announced that it intends to issue an ANPR later this year on consumer-authorized access to financial records.  According to the announcement, the ANPR will provide the Bureau with the opportunity to: (i) solicit input on how to implement the financial access rights described in section 1033 of the Dodd-Frank act; (ii) seek information regarding the possible scope of data that might be made subject to protected access, and other information that might bear on other terms of such access; and (iii) inquire into whether and how issues of regulatory uncertainty related to section 1033 and its interaction with other consumer financial protection statutes may be impacting the market for consumer-authorized third-party access to financial records. 

The ANPR follows from the Bureau’s February 26 symposium entitled “Consumer Access to Financial Records.”  The Bureau's summary of the proceedings describes the key facts, issues, and points of contention raised by the symposium panelists with respect to the following topics: data access and scope; credential-based access and “screen scraping;” disclosure and informed consent; privacy; transparency and control; security and data minimization; accuracy; disputes, and accountability; and legal issues.  The ANPR and summary do not provide an outline of the direction the Bureau will take in future rulemakings.

Director Kraninger Ratifies Enforcement Action Following Seila Law

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

In a federal court filing on July 14, 2020 the CFPB stated that Director Kathleen Kraninger has ratified an enforcement complaint filed in 2017 against a student loan servicer.  This ratification was made advisable by last month’s Supreme Court opinion in Seila Law v. CFPB, which ruled that the Bureau Director was unconstitutionally insulated from Presidential termination in 2017.

While the Director promptly responded to the Seila Law decision by issuing a sweeping ratification of almost all of the Bureau's prior regulatory activity, the notice stated that the Bureau was still “considering whether ratifications of certain other legally significant actions by the Bureau, such as pending enforcement actions, are appropriate.”  This week we learned that, in at least one pending case, “the Bureau’s Director has considered the basis for the decision to file the complaint in this proceeding, and has ratified that decision.” 

Having ratified one proceeding, it seems likely that the Bureau will decide to ratify others, including enforcement matters that have not yet reached court.  Litigation is likely to ensue, as the Supreme Court explained that the "lingering ratification issue," including "whether and when the temporary involvement of an unconstitutionally insulated officer in an otherwise valid prosecution requires dismissal" is "best resolved by the lower courts in the first instance."

Bureau Issues First-Ever Compliance Assistance Sandbox Approval

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On July 17, 2020 the Bureau announced the release of a new Compliance Assistance Statement of Terms Template that employers may use to create automatic savings programs for their employees.  Build Commonwealth, Inc., a Massachusetts-based financial nonprofit, submitted an application for the template through the Compliance Assistance Sandbox, an innovation program that the CFPB announced in September 2019.  The Sandbox permits market participants to petition the CFPB to approve the use of a new product or service.  Build Commonwealth’s template is the first product or service that the CFPB has approved under the Sandbox.

CFPB Issues Final Rule on Small Dollar Lending

By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On July 7, 2020 the CFPB announced that it had issued a final rule concerning small dollar lending.  The final rule rescinds the mandatory underwriting provisions of the 2017 rule after new Bureau leadership re-evaluated the legal and evidentiary bases for those provisions and found them to be insufficient.  The Bureau noted that rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit in the 32 states that have decided to allow their residents to use such products. 

The final rule does not rescind or alter the payments provisions of the 2017 rule.  These provisions prohibit lenders from making a new attempt to withdraw funds from an account after two consecutive attempts have failed unless consumers consent to further withdrawals.  The payment provisions also require such lenders to provide consumers with written notice before making a first attempt to withdraw payment from their accounts, and before any subsequent attempts that involve different dates, amounts, or payment channels. Although the payments provisions are currently stayed by court order, the Bureau plans to have them go into effect after a reasonable period for entities to come into compliance. 

The Bureau also took several related measures.  First, the Bureau denied a petition to commence a rulemaking to exclude debit and prepaid cards from the payments provisions of the small dollar lending rule.  Second, the Bureau issued guidance clarifying the payments provisions’ scope and assisting lenders in complying with those provisions.  Third, the Bureau released a ratification of the payment provisions in light of the Supreme Court’s recent decision in Seila Law

Tax Law

New IRS Rules for Reporting Non-Employee Compensation

By Kathy Conklin and Douglas W. Charnas, McGlinchey Stafford, PLLC

On July 6, 2020, the IRS issued Tax Tip 2020-80 to remind business taxpayers that, commencing with payments made in 2020, they must report any payments of over $600 per year for services by non-employees on Form 1099-NEC (for Non-Employee Compensation), a form last used by the IRS in 1982. Box 7 of the pre-2020 Form 1099-MISC was used in the intervening years to report these types of payments, but the resurrection of the Form 1099-NEC indicates that the IRS may be focusing on individuals who likely owe self-employment taxes on the income. The payments that must be reported only include payments made in the course of a taxpayer’s trade or business, but do include amounts attributable to parts and materials incidental to the provision of the services, as well as state and local sales taxes that are imposed on the service provider but which the service recipient pays to the service provider. The instructions provide that non-profit organizations and state, local, and federal agencies are all considered businesses that are subject to the Form 1099-NEC reporting requirements.

As is customary for Form 1099 reporting, payments to corporations (which includes limited liability companies that are taxed as S or C corporations) are exempt from Form 1099-NEC reporting; however, the instructions explicitly require cash payments to purchase seafood for resale and payments for attorneys’ fees to be reported on the Form 1099-NEC even if the seafood vendor or attorney is a corporation. With respect to payments to attorneys or law firms, only the portion of the payment that is for the attorneys’ fees is reported on Form 1099-NEC; gross proceeds paid to attorneys continue to be reportable on Line 10 of the Form 1099-MISC (even though that means that the attorneys’ fees are potentially reported twice). Similarly, payments made with a credit card or payment card and payments in the nature of third-party network transactions must be reported on Form 1099-K by the payment settlement entity, and are not subject to reporting on Form 1099-NEC.

Banking Law

OCC issues "True Lender" Notice of Proposed Rulemaking

By Catherine M. Brennan, Hudson Cook LLP

On July 20, 2020, the Office of the Comptroller of the Currency issued a notice of proposed rulemaking

to address when, in the context of a partnership between a national bank or federal savings association (bank) and a third party, the bank makes a loan and is the "true lender." Under this proposal, a bank makes a loan and is the "true lender" if, as of the date of origination, the bank is named as the lender in the loan agreement or funds the loan. The proposed rule would provide certainty about key aspects of the legal framework that applies to loans made as part of banks' relationships with third parties. The deadline for comments on the proposed rule is September 3, 2020.

Lynette Hotchkiss

EVP/General Counsel & Corporate Secretary; Rabobank, N.A

Lynette Hotchkiss is EVP/General Counsel & Corporate Secretary for Rabobank, N.A., where she also previously served as Associate General Counsel. Prior to joining Rabobank, Lynette was with OneWest Bank, N.A, where her responsibilities included monitoring and reporting on regulatory developments impacting the bank’s operations and providing legal support for regulatory compliance matters. Before that, Lynette was an attorney in the Financial Practices Division of the Federal Trade Commission, where she focused on mortgage servicing issues. For much of her career, Lynette used her knowledge and experience in consumer finance laws and regulations to build compliance tools to help financial institutions comply with the complex array of federal and state requirements, first acting as the lead compliance attorney at CFI ProServices Inc. (now Finastra) to develop the Laser Pro® loan documentation system and later leading the legal team at Mavent Inc. (now part of Ellie Mae) to develop the Mavent Expert System, an automated compliance system for mortgage origination.