November 02, 2020

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Banking Law

States Sue FDIC Over Final "Valid When Made" Rule

By Catherine M. Brennan, Hudson Cook, LLP

The states of New York, California, Illinois, Massachusetts, Minnesota, New Jersey, and North Carolina and the District of Columbia have sued the Federal Deposit Insurance Corporation over its "valid when made" rule, one day before it is scheduled to take effect. The states allege that the FDIC rule extends the ability of state-chartered banks to export interest rates and interest fees allowed by their home states to non-bank debt buyers, such as payday lenders or any other entity that purchases debt from a state-chartered bank. The  lawsuit  is similar to one filed last month by California, Illinois, and New York challenging a similar rule promulgated by the Office of the Comptroller of the Currency, the regulator of national banks.

CCPA Regulations Approved by California Office of Administrative Law and Become Enforceable Immediately

By Webb McArthur, Hudson Cook, LLP

On Friday, August 14, 2020, the Office of the Attorney General of California  announced that the California Office of Administrative Law approved regulations  to implement the California Consumer Privacy Act. As a result of this approval, the Office of Administrative Law also announced that the approved regulations would go into effect and become enforceable immediately.

The approved regulations have undergone some changes since they were submitted to the Office of Administrative Law in June. While most changes are not substantive, there are some substantive changes to the regulations. Below we list some of the most important substantive changes. This list is not exhaustive, and affected businesses should review the approved version of the regulations alongside qualified counsel.

  • Relating to Using Information for Purposes Different than Disclosed at Collection. The proposed regulations provided that businesses would be prohibited from using personal information for a purpose materially different than those disclosed in the Notice at Collection and, in order to use the information for a new purpose, would have to obtain explicit consent for the use from the consumer. The approved regulations do not contain this provision.
  • Relating to Providing the Notice of Right to Opt Out Offline. The proposed regulations provided that a business that substantially interacts with consumers offline must provide Notice of Right to Opt Out in an offline format, providing several ways to satisfy the requirement. The approved regulations do not include this provision.
  • Relating to Submitting Opt Out Requests. The proposed regulations provided that methods for consumers to opt out must involve minimal steps. The approved regulations do not include this provision.

The CCPA provides California residents with certain rights with regard to their personal information and imposes related requirements on certain businesses in California. Regulated businesses should consult the current and complete text of the law and regulations alongside knowledgeable counsel. Significant exemptions may apply to financial services businesses. The CCPA became effective on January 1, 2020, and enforceable on July 1, 2020.

The Federal Reserve and Central Bank Digital Currencies

By Kendall Howell, Davis Polk & Wardwell LLP

Federal Reserve Board Governor Lael Brainard outlined the Federal Reserve’s ongoing research and work on central bank digital currency (CBDC) in a recent speech. She described several interesting new and ongoing initiatives that are being pursued by the Federal Reserve System. First, to further the Federal Reserve’s understanding of CBDC, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology to build and test a hypothetical central bank digital currency. The Federal Reserve will publish the results of this study, along with any codebase developed through the effort.

Second, the purpose of its research is to “assess the safety and efficiency of digital currency systems, to inform [the Federal Reserve’s] understanding of private-sector arrangements, and to give [the Federal Reserve] hands-on experience to understand the opportunities and limitations of possible technologies for digital forms of central bank money.” The Federal Reserve acknowledged that before it would consider issuing CBDC, it would first engage in significant policy and legal analysis to determine the implications of such an issuance.

The Federal Reserve also will continue to collaborate with the CBDC coalition of central banks to share lessons learned, conduct joint experiments, and integrate expertise in an effort to improve the efficiency of cross-border transactions, as well as address threats related to cybersecurity, fraud and money laundering.

Colorado Settles Two Bank Partnership Lawsuits

By Catherine M. Brennan, Hudson Cook, LLP

The Colorado Attorney General reached a settlement in two lawsuits involving a conflict over state usury caps and federal law. Under federal law, national banks and state-chartered banks can lend in Colorado at interest rates that exceed Colorado's limits. The attorney general alleged that non-banks partnered with two out-of-state banks in a scheme to "rent" those banks' ability to lend above Colorado's rate limits. Under the settlement, two banks and their partners committed that they will not lend to Colorado consumers at rates above 36% per year and will provide consumers with other protections required by Colorado law. In addition, non-bank partners have agreed to maintain a Colorado lending license. Finally, the settlement adopts certain requirements for bank partnerships that have developed over time and are standard in most bank partnerships.

Consumer Finance

Bureau Releases Proposal to Expand Regulation Z “Qualified Mortgage” Definition

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On August 18, 2020 the CFPB issued a notice of proposed rulemaking that would extend protections from liability under Regulation Z to a new class of mortgages.  Regulation Z’s Ability-to-Repay/Qualified Mortgage Rule (“ATR/QM Rule”) generally requires mortgage lenders to make a reasonable, good faith estimate of a borrower’s ability to repay a residential mortgage loan according to its terms.  However, loans that are “Qualified Mortgages” (“QMs”) under the Rule enjoy certain protections from liability.  The CFPB’s proposal would create a new class of QMs deemed “Seasoned QMs” encompassing first-lien, fixed-rate covered transactions that:  (i) have met enumerated performance requirements over a 36-month seasoning period, (ii) are held in portfolio during such period, (iii) comply with restrictions on product features, points, and fees, (iv) satisfy underwriting requirements, and (v) span a term of no more than 30 years.  In a press release announcing the proposal, Director Kathleen L. Kraninger stated that the proposal aims to “protect, promote and preserve the financial well-being of American consumers while at the same time offering access to responsible, affordable mortgage credit.”  The proposal’s comment window will run for 30 days following its publication in the Federal Register.

The proposal is the third planned revision to ATR/QM Rule announced in recent months.  In June, the Bureau released two proposals to amend the Rule:  one that would incorporate a price-based approach to the QM definition, and another that would extend the temporary patch that includes certain mortgages offered by Fannie Mae and Freddie Mac into the QM definition (informally known as the “GSE Patch”).

District Court Rejects Constitutional Challenge to Bureau Document Request

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On August 18, 2020 a federal judge in the Southern District of New York orally ruled in favor of the CFPB in a dispute over its investigatory authority.  In litigation to enforce a Civil Investigative Demand, the defendant sought to resist turning over documents on the grounds that the Bureau’s funding, which avoids the annual congressional appropriations process, made the Bureau unconstitutional.  The district court rejected the constitutional challenge, noting historical analogues for the Bureau’s funding structure, including that of the Federal Reserve.

Bureau Files Brief in Suit Challenging Consumer Financial Laws Taskforce

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On August 17, 2020 the CFPB filed a brief arguing for partial dismissal of a lawsuit regarding its Taskforce on Federal Consumer Financial Law.  The CFPB organized the Taskforce, unveiled in an October 2019 announcement, with the intent to “examine ways to harmonize and modernize federal consumer financial laws.”  In June, the National Association of Consumer Advocates and Professor Kathleen Engel, a Suffolk University Law School professor who claims she was denied a position on the Taskforce, filed a lawsuit in a Massachusetts federal court seeking to dissolve the Taskforce.  They argue that the Bureau violated the Federal Advisory Committee Act in constructing the Taskforce.  The Bureau responds in this week’s brief that the plaintiffs in the suit lack standing to challenge the procedures the Bureau followed in establishing the Taskforce.

CFPB Joins other Federal Financial Agencies Chiefs in Issuing Joint Statement on Additional Loan Accommodations Related to COVID-19

By Eric Mogilnicki and Devika Singh, Covington & Burling LLP

On August 3, 2020 the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement providing financial institutions with risk management and consumer protection principles for working with borrowers.   This guidance comes as consumer and business loans near the end of the initial accommodation periods provided due to the COVID-19 pandemic.  With respect to consumer protection, the guidance encourages financial institutions to provide consumers with all available options for repaying any missed payments in order to avoid delinquencies or other adverse consequences.  Further, the FFIEC encourages financial institutions, where appropriate, to provide consumers with options for making "prudent changes to credit product terms to support sustainable and affordable long-term payments."  The FFIEC cites payment deferrals, loan modifications, and loan extensions as possible accommodations.  

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.