On May 24, the U.S Solicitor General (SG) filed a brief with the U.S. Supreme Court (the Court) in the matter of Madden v. Midland Funding, in response to the Court’s request for its views on whether the case should be heard (which was reported in the March 23rd edition of the Roundup). While the SG’s brief recommends that the petition for a writ of certiorari be denied, the brief also contends that the Second Circuit’s decision was incorrect and that, under the National Bank Act, an assignee of a loan from a national bank can continue to charge the interest rate on the loan.
On May 19, the Office of the Comptroller of the Currency (OCC) released guidance on compliance with the Securities and Exchange Commission’s (SEC) revised money market fund (MMF) rules for banks that offer MMFs, that invest in MMFs, or that automatically sweep funds between deposit accounts. The regulatory changes include enhanced disclosure requirements, stronger diversification requirements and enhanced fund level stress testing. The guidance highlights certain process and product changes that such banks should consider related to, among other things, redemption gates and liquidity fees for retail and prime funds, and floating NAV and intraday liquidity for prime funds.
On May 20, SEC Chair Mary Jo White delivered the keynote address at the Investment Company Institute 2016 General Meeting during which she focused on the future of investment company (fund) regulation. After discussing the SEC’s recent proposed rulemakings in the areas of liquidity risk management and the regulation of the use of derivatives, Chair White outlined various regulatory initiatives that she expects to be advanced by the SEC beyond 2016, including to (i) examine the effectiveness of fund disclosures and consider ways to further improve their form, content and delivery to fund shareholders and (ii) enhance regulations for exchange-traded funds (ETFs) in order to address a number of recent issues relating specifically to ETFs, such as unusual price volatility and a lack of liquidity in certain securities. Chair White also discussed other emerging challenges that she believes will be priorities for the SEC, which include addressing increased risks to funds in using technology and service providers (e.g., cybersecurity risks) and pricing portfolio holdings and determining per share net asset value (NAV) accurately.
On May 18, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) issued interagency guidance regarding deposit reconciliation practices (Guidance) to address supervisory concerns related to practices that may be detrimental to customers in situations where the amount that a financial institution credits a customer’s account differs from the total of the items deposited. Such discrepancies may result from human or technological errors in a variety of circumstances, such as inaccuracies on a deposit slip, encoding errors, or poor image capture. The Guidance provides little detail, but asserts the Agencies’ expectation that financial institutions adopt deposit-reconciliation policies and practices designed to avoid or reconcile such discrepancies, or designed to resolve such discrepancies without disadvantaging customers.
On May 18, the Consumer Financial Protection Bureau (CFPB) posted its 2016 Rulemaking Agenda, setting forth its major current initiatives. Top on the list were the arbitration and payday lending rules. The CFPB issued its Notice of Proposed Rulemaking (NPR) concerning arbitration earlier this month and will issue an NPR on payday, auto title, and similar loan products on June 2, 2016. Other agenda highlights include the expected release of two final rules this summer: prepaid accounts (such as general purpose reloadable cards) and amendments to the mortgage servicing rules. The CFPB further anticipates releasing an NPR this summer to make clarifications to the Know Before You Owe mortgage disclosure rule and is continuing pre-rule activities to develop rules governing overdraft services on checking accounts and debt collection practices, among other items.
On May 18, laying the groundwork for its auto title lending rule proposal expected on June 2, 2016, the CFPB issued a new report highlighting the “dangers auto title loans pose for consumers.” The CFPB press release unveiling the study stated that consumers who take out auto title loans risk losing their car or truck and becoming swamped in a cycle of debt. The study has four notable findings: (1) one-in-five auto title loan borrowers have their vehicle seized by the lender; (2) four-in-five auto title loans are not repaid in a single payment; (3) more than half of auto title loans become long-term debt burdens; and (4) borrowers stuck in debt for seven months or more supply two-thirds of title loan business.
FinCEN’s new customer due diligence rule requires covered financial institutions to, among other things, collect information on the significant beneficial owners of customers that are legal entities. Financial institutions have two years – until May 11, 2018 – to comply. For more information, please see the client alert prepared by Goodwin partner Bill Stern.
On May 18, the Federal Housing Administration (FHA) proposed a new rule to strengthen its Home Equity Conversion Mortgage (HECM) Program with the intent to make FHA-insured reverse mortgages remain a viable resource for senior homeowners. According to the FHA, the new rule would complement the reforms implemented by the FHA over the past two years by adding new consumer protections that would: (1) ensure that HECM counseling occurs before a mortgage contract is signed; (2) require lenders to fully disclose all HECM loan features; (3) cap lifetime interest rates on HECM Adjustable Rate Mortgages (ARMs) at 5%; (4) reduce the cap on annual interest rate increases on HECM ARMs from 2% to 1%; (5) require lenders to pay mortgage insurance premiums until the HECM is paid in full, foreclosed on or a Deed-in-Lieu (DIL) is executed; (6) include utility payments in the property charge assessment; and (7) create a “cash for keys” program to encourage borrowers to complete a DIL to exit the property.
Based on a new rule issued by the Department of Labor, the minimum salary for most exemptions from the Fair Labor Standards Act’s overtime pay requirement will increase from $23,660 per year to $47,476 per year. The duties tests, which must also be met to qualify for any exemption, will remain unchanged. Most employees who are currently classified as exempt and receive a salary of less than $47,476 per year will need either to be provided with a raise or to be reclassified to non-exempt status, which will entail maintaining time records and paying overtime. The new standard, which goes into effect on December 1, 2016, could have a significant impact on financial services companies. Please see the client alert prepared by Goodwin’s Labor & Employment Practice for more information.
The SEC has released a series of new Compliance and Disclosure Interpretations, or C&DIs, on the use of non-GAAP financial measures by reporting companies and new SEC registrants in public communications and SEC filings. Financial services companies that disclose non-GAAP measures in their public communications, and especially in their SEC filings, should carefully review these C&DIs to assess the impact on the substance and the presentation of their non-GAAP disclosures. Please see the client alert prepared by Goodwin attorneys Daniel P Adams, John O. Newell, David H. Roberts, Ettore A. Santucci, and Bradley C. Weber.
Enforcement & Litigation
On May 18, the New York State Department of Financial Services (DFS) announced that it entered into consent orders with National Credit Adjusters, LLC and Webcollex LLC (doing business as CKS Financial), who had bought and collected on illegal payday loans. The buyers agreed to stop collection on payday loans and to pay $3 million in restitution in the form of discharged debt and refunds to over 3,000 affected New Yorkers. The consent orders are the first DFS settlements to provide restitution to New York consumers harmed by payday loans.
Because of the procedural reforms enacted by the Private Securities Litigation Reform Act of 1995 and the heightened pleading standards adopted by the Supreme Court in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, securities plaintiffs often prefer to litigate in state court. The Supreme Court recently held in Merrill Lynch v. Manning that, despite the exclusive federal jurisdiction provision of the Securities Exchange Act of 1934, plaintiffs can bring state law claims in state courts complaining about conduct that violates the federal securities laws. Only when a plaintiff’s claim turns on the resolution of a substantial and disputed issue of law under the Exchange Act or its regulations will the federal courts be the exclusive jurisdiction for resolution of state law claims. Please see the client alert prepared by Goodwin partners Inez Friedman-Boyce and Brian Pastuszenski.
Goodwin Procter News
The Maryland Bankers Association's 120th Annual Convention brings together hundreds of bank CEOs, directors, and senior management decision-makers for educational programs, networking events, and the annual election of association leadership. Financial Institutions Group partner Bill Stern and counsel Matt Dyckman will present on "Friend or Foe: Partnering with Marketplace Lenders." Goodwin Procter is a sponsor for the event, which will be held on June 5-8 in Amelia Island, Florida.
Financial Institutions Group partner Mike Flynn will be speaking at the Mortgage Bankers Association’s HMDA Implementation Workshop on June 10 in Austin, Texas. This program will focus on the new Home Mortgage Disclosure Act (HMDA) rule, with a panel of MBA and industry experts discussing all aspects of the rule as well as the implementation, compliance and possible fair lending challenges it will present for mortgage lenders.
Dan Glosband, of counsel in Goodwin Procter’s Financial Institutions Group and a member of its Financial Restructuring Practice, will be speaking at the 5th Annual European Insolvency & Restructuring Congress, taking place June 16-17 in Brussels, Belgium, on a panel to discuss the “Forum Shopping, Choice of COMI – US vs. EU” panel.