Weekly RoundUp
March 9, 2016

Financial Services Weekly News

The CFPB continues to show an expansive reach. This week, the CFPB issued an enforcement action against Dwolla, Inc., an Iowa-based online payment platform, which was the agency’s first enforcement action related to data security procedures. In another area where the CFPB had not previously acted, the bureau announced that it will be accepting complaints against marketplace lenders and published a consumer bulletin designed to educate consumers about marketplace lending practices. The complaint process puts marketplace lenders in the same position as banks, for which the CFPB already has a complaint process in place.

Regulatory Developments

CFPB Now Accepting Complaints on Online Marketplace Lenders

On March 7, the Consumer Financial Protection Bureau (CFPB) announced two initiatives: it will now accept complaints from consumers experiencing issues dealing with marketplace lenders and it will publish a two-page consumer bulletin called “Understanding Online Marketplace Lending.” The CFPB accepts complaints on many consumer financial products and will now forward complaints on online marketplace lenders directly to those companies with the goal of getting a response from the lender within 15 days. The CFPB expects that all complaints should be closed within 60 days of the date of the complaint. To better educate consumers, the CFPB bulletin on marketplace lending advises consumers to evaluate income and spending, check credit reports, and shop around prior to taking out a loan with an online marketplace lender. The bulletin also warns that consumers may sign away federal benefits such as income-driven repayment, or service member benefits, when refinancing certain types of debt with an online marketplace lender.

Federal Agencies Issue Additional Guidance on Volcker Rule Addressing Capital Treatment of Certain TruPs CDOs

The federal agencies responsible for implementing the Volcker rule (the Agencies) have issued guidance in the form of a Frequently Asked Questions (the FAQ) and response addressing whether a banking entity must deduct from its Tier 1 capital an investment in a collateralized debt obligation (CDO) backed by trust preferred securities (TruPS). According to the new FAQ, a banking entity is not required to deduct from Tier 1 capital an investment in a CDO backed by qualifying TruPS if the banking entity holds its investment pursuant to an interim final rule issued by the Agencies in January 2014. This interim final rule permits a banking entity to retain an interest in or act as sponsor to a CDO backed by TruPS, provided that (i) the issuer was established before May 19, 2010, (ii) the banking entity reasonably believes that the offering proceeds received by the issuer were invested primarily in qualifying TruPS collateral consisting of TruPS or subordinated debt issued prior to May 19, 2010, by a depository institution holding company that had total consolidated assets of less than $15 billion during any reporting period in the year prior to May 19, 2010, or was issued prior to May 19, 2010, by a mutual holding company, and (iii) the banking entity acquired its interest in the CDO on or before December 13, 2013. However, the FAQ clarifies that if a banking entity acts as market maker to a CDO that would otherwise qualify for this relief, the capital deduction requirements of the Volcker rule will apply to those interests.

Federal Reserve Board Proposes Rule Limiting Credit Exposure of Large Banking Organizations

On March 4, the Federal Reserve Board (the Board) proposed a rule that would establish single-counterparty credit limits for domestic and foreign bank holding companies with $50 billion or more in total consolidated assets. The proposed limits increase in stringency as the systemic footprint of a firm increases: a global systemically important bank would be restricted to a credit exposure of no more than 15 percent of the bank’s Tier 1 capital to another systemically important financial firm, and up to 25 percent of the bank’s Tier 1 capital to another counterparty; a bank holding company with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance-sheet foreign exposure, would be restricted to a credit exposure of no more than 25 percent of the bank’s Tier 1 capital to a counterparty; and a bank holding company with $50 billion or more in total consolidated assets would be restricted to a credit exposure of no more than 25 percent of the bank’s total regulatory capital to another counterparty. Bank holding companies with less than $50 billion in total consolidated assets, including community banks, would not be subject to the proposal. The Board also released a white paper explaining the analytical and quantitative reasoning behind the restrictions. Comments on the proposed rule are invited until June 3, 2016.

FDIC Issues Guidance to Large Financial Institutions on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks

A recent FDIC Financial Institution Letter conveys interagency guidance clarifying supervisory expectations for an effective funds transfer pricing (FTP) framework for funding and contingent liquidity risk at large financial institutions. The guidance is intended to help avert poorly designed FTP programs, which can result in misaligned risk-taking incentives and the misallocation of financial resources, such as those during the 2008 financial crisis. The guidance focuses on four principles underlying effective frameworks:

  1. FTP cost and benefit allocations based upon funding risk and contingent liquidity risk;
  2. A consistent and transparent FTP framework for the timely and sufficiently detailed identification and allocation of FTP costs and benefits;
  3. A robust governance structure for FTP, including FTP reporting to and oversight from centralized management; and
  4. The alignment of business incentives with risk management and strategic objectives through incorporation of FTP costs and benefits into product pricing, business metrics, and new product approval.

FTP plays a role in balance sheet management and can influence risk-adjusted profitability, so the focus on FTP stems from its ability to influence the volume and terms of new business and ongoing portfolio composition by allocating funding and contingent liquidity risks to business lines, products, and activities. FTP programs should be tailored to an institution’s size, complexity, business, and risk profile.

Agencies Clarify Expectations for the Use of Property Evaluations

On March 4, the OCC, FDIC and Federal Reserve Board issued an advisory to clarify expectations for the use of property evaluations by banking institutions. The advisory responds to questions raised during outreach meetings held by the agencies last year pursuant to the Economic Growth and Regulatory Paperwork Reduction Act. The advisory describes the agencies' existing supervisory expectations for the use of an evaluation instead of an appraisal to estimate a property's market value for certain real estate-related financial transactions. The advisory also addresses the use of alternative valuation approaches, methods, and other information that financial institutions may use to develop an evaluation in areas with few, if any, recent comparable property sales in reasonable proximity to the subject property.

FinCEN Proposes Revising FBAR Rules for Certain Financial Professionals

On March 1, FinCEN issued a Notice of Proposed Rulemaking intended to revise and clarify certain rules regarding the filing of Reports of Foreign Bank and Financial Accounts (FBAR). The revisions, which would mainly affect financial professionals who file FBARs due to their employment responsibilities, would (i) remove the provisions that limit the information reported with respect to situations when a filer has 25 or more foreign financial accounts, and instead require all U.S. persons obligated to file an FBAR to report detailed account information on all foreign financial accounts for which they are required to file an FBAR; (ii) eliminate the requirement for officers and employees of institutions to report on institutional accounts in certain circumstances; and (iii) require institutions to maintain a list of all officers and employees with signature authority over those same accounts. Comments on the proposed revisions may be submitted on or before 60 days following publication of the notice in the federal register.

Client Alert: Supreme Court Severely Restricts Federal-Court Access for Non-Corporate Entities, Including Certain REITs and RICs

The Supreme Court on March 7 severely restricted federal-court access for business trusts, including many REITs, in Americold Realty Trust v. Conagra Foods. Under Americold, business trusts are now citizens for diversity-jurisdiction purposes of every state of which at least one of their shareholders is a citizen. For business trusts with wide shareholder bases, this ruling significantly curtails the ability to invoke diversity jurisdiction to get into federal court except in certain class actions. Business trusts involved in federal-court litigation should immediately assess whether the Americold decision affects the jurisdiction of the court to continue to hear their cases. Business trusts should also consider whether the benefits of increased federal-court access justify converting from a trust to a corporation. Please see the client alert prepared by Goodwin’s Appellate Litigation and Securities Litigation & White Collar Defense groups.

Enforcement & Litigation

CFPB Issues Enforcement Action Against Dwolla, Inc.

The CFPB issued an enforcement action against Dwolla, Inc., an Iowa-based online payment platform, for material misrepresentation of its data security procedures. The order is the CFPB’s first enforcement action related to data security. The CFPB alleged that Dwolla represented in its privacy policies and consumer-facing statements that the company employed strong data security measures to protect consumers' sensitive personal information, when their actual practices were not industry standard. Dwolla was ordered to pay a $100,000 civil money penalty and take measures to improve its data security policies and procedures.

OCC Bulletin Describes Process for Administrative Enforcement Actions for BSA Compliance Problems

In a recent bulletin, the OCC described its administrative enforcement process for potential noncompliance with Bank Secrecy Act (BSA) compliance program requirements or repeat or uncorrected BSA compliance problems. Once the OCC has identified a potential deficiency, the OCC generally provides banks with notice and a 15-day opportunity to respond. The OCC then reviews examination findings and any information provided by the bank before determining whether to pursue an enforcement action. If pursuing an action, the OCC will provide the bank with a final supervisory letter or report of examination and a proposed cease-and-desist order. If the bank does not consent to the proposed order, the OCC will pursue the order through administrative hearings.

Goodwin Procter News

SIFMA Compliance and Legal Society Annual Seminar 2016

Goodwin Procter is proud to be a sponsor of SIFMA's 48th Annual Compliance & Legal Society Seminar. This premier financial industry event features more than 65 timely panels addressing the latest trends and developments affecting the industry, including compliance, regulation and litigation. For more information, please visit the event website.

5K Good Run in Conjunction with 2016 ICI Mutual Funds Conference

Goodwin Procter's Investment Management Practice is hosting its 8th Annual Good Run in conjunction with ICI’s 2016 Mutual Funds Conference. In recognition of the participants, Goodwin will make a donation to Expect Miracles, a leading advocate in the fight against cancer within the financial services industry.

VALCON 2016: Emerging Valuation Issues in Bankruptcy and Beyond

Goodwin Procter is a sponsor of VALCON 2016, a joint program of the American Bankruptcy Institute, Association of Insolvency & Restructuring Advisors (AIRA) and The University of Texas School of Law, which brings together leading professionals and dealmakers in the distressed debt, restructuring and valuation industry. Goodwin Procter partner Michael Goldstein is a member of the conference Advisory Board. Please click here for additional information.