On June 2, the Consumer Financial Protection Bureau (CFPB) proposed a rule designed to limit payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans by requiring lenders to take steps to make sure consumers have the ability to repay their loans. The proposed ability-to-repay protections include a “full-payment” test that would require lenders to determine upfront that consumers can afford to repay their loans without reborrowing. The proposal includes a “principal payoff option” for certain short-term loans and two less risky longer-term lending options so that borrowers who may not meet the full-payment test can access credit without “getting trapped in debt.” Lenders also would be required to use credit reporting systems to report and obtain information on certain loans covered by the proposal.
On May 25, FINRA filed with the SEC a proposal to amend FINRA Rules 2210 (Communications with the Public), 2213 (Requirements for the Use of Bond Mutual Fund Volatility Ratings) and 2214 (Requirements for the Use of Investment Analysis Tools). The proposal resulted from a retrospective review, launched by FINRA in April 2014, of its rules on communications with the public to assess their effectiveness and efficiency and, according to FINRA, is intended to “better align the investor protection benefits and the economic impacts” of its rules. FINRA is proposing amendments, first published in Regulatory Notice 15-16, to the filing requirements in FINRA Rule 2210 and FINRA Rule 2214 and the content and disclosure requirements in FINRA Rule 2213. Currently, Rule 2210(c)(1)(a) requires new members to file any retail communications used in any public media at least 10 days prior to publication for a period of one year from the effective date of the filing firm’s membership. FINRA is now proposing that this requirement apply only to broadly disseminated retail communications, such as generally accessible websites and print media, and that members be permitted to file the communications within 10 business days after first use, as opposed to at least 10 business days prior to use. FINRA is also proposing to (1) clarify that the Rule 2210 filing requirement does not apply to annual and semiannual reports on file with the SEC; (2) revise Rule 2210(c)(7)(F) to exclude “offering documents concerning securities offerings that are exempt from SEC or state registration requirements”; (3) eliminate the ranking and comparison backup material filing requirement in Rules 2210(b)(4)(A) and 2210(c)(3)(A); (4) eliminate the filing requirement for investment analysis tool report templates and retail communications concerning such tools; (5) exclude “generic” investment company retail communications from the filing requirement in Rule 2210(c)(3)(A); and (6) allow members to update previously filed communications with narrations of market events and factual reports of portfolio variations, without having to refile the template previously required under Rule 2210(c). Additionally, FINRA is proposing to eliminate the Rule 2213 requirement that retail communications that include mutual fund bond volatility ratings be preceded or accompanied by a prospectus, and to allow such communications to be filed within 10 business days of first use, rather than within 10 business days prior to use. Comments on the proposal are due 21 days after publication in the Federal Register.
On June 3, the Board of Governors of the Federal Reserve System (FRB) released an advance notice of proposed rulemaking (NPR), seeking public comments on proposed regulatory capital standards applicable to FRB-supervised insurance companies. Under the NPR, systemically important insurance companies would be subject to a “consolidated approach” to capital, under which an entire firm’s assets and insurance liabilities would be categorized according to risk, appropriate risk factors would then be applied, and a minimum capital ratio would be set for the firm. In parallel, insurance companies owning a bank or thrift would be subject to a “building block approach” to capital, under which the aggregate capital requirements of a firm’s entities would be used to determine a combined group-level minimum capital requirement. Noting the differences between insurance companies and banks, the FRB indicated that the risk-weights and formulas used to calculate capital requirements would be tailored to the insurance industry. Additionally, the FRB approved a proposed rule that would apply enhanced prudential standards to systemically important insurance companies. The rule addresses such firms’ liquidity, corporate governance, and risk management standards. It also requires firms to employ a chief risk officer and chief actuary to help oversee enterprise-wide risk management. Comments on the NPR and proposed rule are due by August 2, 2016.
On June 7, in a speech to the Economic Club of New York, House Financial Services Committee Chairman Jeb Hensarling (R-TX) unveiled details of the Financial CHOICE Act, an ambitious regulatory reform bill touted as the “the Republican plan to replace the Dodd-Frank Act and promote economic growth.” The Financial CHOICE Act would (1) provide an “off-ramp” from the supervisory regime established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and Basel III capital and liquidity standards for banking organizations that choose to make a “qualifying capital election by, among other things, exempting such banking organizations from certain federal laws, rules, and regulations; (2) retroactively repeal the authority of the Financial Stability Oversight Council (FSOC) to designate firms as systemically important financial institutions (SIFIs) and replace the orderly liquidation regime established by Title II of Dodd-Frank with a new chapter of the Bankruptcy Code designed to accommodate the failure of a large, complex financial institution; (3) reform the CFPB by replacing the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations and establishing an independent, Senate-confirmed Inspector General; (4) make all financial regulatory agencies subject to the REINS Act, bipartisan commissions, and place them on the appropriations process so that Congress can exercise proper oversight (except for Fed monetary policy); (5) impose enhanced penalties for financial fraud and self-dealing and promote greater transparency and accountability in the civil enforcement process; (6) repeal sections and titles of Dodd-Frank, including the Volcker Rule, that limit capital formation; and (7) incorporate more than two dozen regulatory relief bills for community financial institutions. A summary of the Financial CHOICE Act can be found here. While it is conceivable that the bill could pass the House on a party line vote, prospects to overcome a potential Senate filibuster appear limited.
West Virginia Attorney General Announces Settlement with Online Lender Over Alleged Usurious Loans
On June 6, the West Virginia Attorney General announced a settlement with a regional online lender over allegations that the lender’s business practices violated West Virginia’s Consumer Credit and Protection Act. The company markets and sells online installment loans, through an alleged “bank-partnership model.” Under the bank-partnership model, a company partners with a local bank to originate the loan, but the bank immediately sells the loan to the company after origination. The company does all the origination work – including advertising the loans, taking applications and analyzing credit history. The bank-partnership model allegedly permits lenders to avoid a state’s usury law because banks are only bound by their home state’s usury laws (which in some cases are nonexistent) and the bank officially originates the loan. According to the Attorney General, the company used this model to originate loans that violated West Virginia’s usury laws. The company also allegedly misled consumers about its credit monitoring and loan modification services. The company expressly denied that it acted unlawfully and noted that it stopped originating loans to West Virginia consumers after the West Virginia Supreme Court concluded that the bank-partnership model violates the West Virginia Consumer Credit and Protection Act. Under the settlement agreement, the company will refund all interest collected on the subject loans, pay a $225,000 fine, and repair any negative credit reports.
On June 1, the Securities and Exchange Commission (SEC) charged brokerage firm Albert Fried & Company with failure to sufficiently evaluate or monitor customers’ trading for suspicious activity as required by federal securities laws. The SEC found that the firm failed to file Suspicious Activity Reports with bank regulators for more than five years despite red flags tied to its customers’ high-volume liquidations of low-priced securities. The firm, which did not admit or deny the SEC’s findings, agreed to be censured and pay a $300,000 penalty to settle the charges. This is the first case against a firm solely for failure to file Suspicious Activity Reports.
On June 2, FINRA accepted E*Trade’s letter of acceptance, waiver, and consent in regards to violations of NASD Rule 2320 (Best Execution) and FINRA Rules 5310 (Regular and Rigorous Review of Execution Quality) and 2010 (Standards of Commercial Honor and Principles of Trade) as well as NASD Rule 3010 and FINRA Rule 2010 (Supervision). Specifically, FINRA found that the firm’s Best Execution Committee did not sufficiently analyze the firm’s best execution quality because it (i) did not take into account the firm’s internalization model used in routing the majority of its market and marketable limit orders to its affiliated market maker, G1 Execution Services (“G1X”); (ii) relied on execution-quality statistics based on flawed data, and (iii) was overly reliant on comparisons of execution quality to industry and custom averages, rather than focusing on comparisons to actual execution quality provided by the market centers to which orders were routed. These failures were found to be violations of NASD Rule 2320 and FINRA Rule 5310. Furthermore, the firm violated FINRA Rule 2010 by regularly accepting requests from G1X to change its priority in the firm’s order routing system and to redirect order flow, without making any determination of whether those changes would improve execution. Additionally FINRA found that the firm failed to establish and maintain a system reasonably designed to achieve compliance with respect to its review for best execution in violation of FINRA Rule 2010 and NASD Rule 3010. Finally, the firm violated FINRA Rule 2010 and NASD Rule 3010 by allowing individuals dually registered with the firm and G1X to have access to the firm’s order management and routing systems while failing to have adequate systems and controls in place to ensure that there was no misuse of confidential order information by the dually registered individuals. E*Trade consented to a fine of $900,000 for these violations without admitting or denying the findings.
On June 1, the U.S. Chamber of Commerce and eight other industry groups filed a lawsuit challenging the Department of Labor's (DOL) recently finalized fiduciary rule (Fiduciary Rule). In Chamber of Commerce of the U.S. v. Perez, N.D. Tex., No. 3:16-cv-01476-G, plaintiffs asserted claims under the Administrative Procedure Act and the First Amendment to the United States Constitution, alleging that the Fiduciary Rule and related “prohibited transaction exemptions” promulgated by the DOL violate the DOL’s authority, create unwarranted burdens and liabilities, undermine the interests of retirement savers, and are contrary to law.
Goodwin Procter News
Goodwin’s Consumer Finance Enforcement Watch published its quarterly enforcement blog post this week: Q1 2016 Sees Continued Focus on Mortgages, Fair Lending, and CFPB Enforcement (Interactive Charts Inside). For the first quarter of 2016, we tracked the 50 enforcement actions taken against consumer finance providers, marking a slight increase from the 46 actions we had tracked a year ago in Q1 2015. Of the Q1 2016 enforcement actions, the majority were settlement agreements. We encourage you to check out the unique interactive charts in the blog post: CFBP and FTC Lead Enforcement Actions in Q1 2016; and Mortgages Remain Primary Target in Q1 2016.
Financial Institutions associate Greg Fox’s article entitled “Sun Capital Partners III: Tagging a Sponsor with Its Failed Portfolio Company’s Pension Liability” was published in the June 2016 issue of the American Bankruptcy Institute Journal. The article analyzes the most recent opinion in the groundbreaking litigation over whether investment funds managed by Sun Capital Advisors Inc. can be held liable for a bankrupt portfolio company’s pension withdrawal liability. To view the article, click here.
On June 22, keynote speaker Dan Tapscott, author of “The Block Chain Revolution,” will kick off the presentation and host fireside chats with industry experts and payment processing incumbents. Grant Fondo, a partner in Goodwin Procter's Securities Litigation & White Collar Defense Group and its Privacy & Cybersecurity Practice, will be a featured speaker. Goodwin Procter is a sponsor of the event. For more information, click here.