Regulatory Developments
Federal Banking Regulators Propose Net Stable Funding (Liquidity) Ratio
The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) proposed a rule (the Proposed Rule) that would require U.S. banks with more than $250 billion in assets and more than $10 billion in foreign exposure to ensure that they have access to stable funding for at least a year. The Proposed Rule details what regulators consider appropriate sources of stable funding, including long-term debt, Tier 1 capital and core deposits, and separately lays out a "less stringent" standard for banks with between $50 billion and $250 billion in assets. The Proposed Rule will be open for public comment through August 5, 2016 and would be effective as of January 1, 2018.
Federal Regulators Propose New Incentive Compensation Rules
On April 26, the OCC, FDIC, Federal Reserve, Federal Housing Finance Agency, Securities and Exchange Commission, and the National Credit Union Administration unveiled a proposed rule (the Proposed Rule) to revise the proposed rule the agencies published in the Federal Register on April 14, 2011 to implement section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Proposed Rule, among other things, would require executives at banks to defer a percentage of their qualifying incentive-based compensation for each performance period for four years. The deferral percentage would range from 40% to 60% of qualifying incentive-based compensation depending on the asset size and risk profile of the institution. Banks under $1 billion in assets are exempt from the Proposed Rule. The Proposed Rule will be open for comment until July 22, 2016.
Federal Reserve Implements New Procedures for Off-Site Loan Review for Small Banks
On April 19, the Federal Reserve issued SR Letter 16-8, which details procedures for examiners to conduct off-site loan reviews for community and small regional banks. State member banks and U.S. branches and agencies for foreign banking organizations with less than $50 billion in total assets can opt to allow Federal Reserve examiners to review loan files off-site, during both full-scope or target examinations, so long as loan documents can be sent securely and with the required information. While some banks may prefer an off-site loan review, the program is optional so that any bank can still choose an on-site review. The letter is part of the Federal Reserve’s ongoing efforts to improve efficiency and reduce regulatory burden while maintaining quality supervision.
FDIC Issues Final Rule on Small Bank Deposit Insurance
On April 26, the FDIC approved a final rule for assessing deposit insurance premiums on banks with assets under $10 billion. Under the rule, assessment rates will be calculated using financial measures and supervisory ratings derived from a statistical model estimating the probability of failure over three years. The final rule eliminates the risk categories currently used for banks that do not have a rating of CAMELS I or II, and instead bases assessment rates for all banks on a standardized formula. The final rule will take effect beginning the quarter after the FDIC’s deposit insurance fund reserve ratio reaches 1.15%, which is expected to occur in the third quarter of 2016.
Enforcement & Litigation
CFPB Takes Action Against Debt Collection Law Firm
On April 25, the CFPB ordered the debt collection law firm Pressler & Pressler, LLP, two principal partners, and New Century Financial Services, Inc., a debt buyer, to stop “churning out unfair and deceptive debt collection lawsuits based on flimsy or nonexistent evidence.” The consent orders bar the companies and individuals from illegal practices that can deceive or intimidate consumers, such as filing lawsuits without determining if debts in question are valid. The orders also require the firm and the named partners to pay $1 million, and New Century to pay $1.5 million to the Bureau’s Civil Penalty Fund.
CFPB Takes Action Against Co-Founders of Online Lead Aggregator
On April 21, the CFPB took action against two co-founders of a company that resold loan applications containing sensitive personal data to lenders and data brokers without assessing the sources of those leads or the purchasers they sold to. In complaints filed in federal court, the CFPB alleged that Dmitry Fomichev and Davit Gasparyan (also known as David Gasparyan) co-founded and operated T3Leads, a lead aggregator that bought and sold payday and installment loan applications without properly vetting buyers and sellers. A “lead aggregator” purchases personal information about consumers (“leads”) from lead generating websites and then sells those leads to interested businesses. The CFPB filed a separate lawsuit against T3Leads and two other individuals in December 2015.
Federal District Court Holds CFPB Lacked Authority to Issue CID
On April 21, Judge Leon of the United States District Court for the District of Columbia dismissed a petition filed by the CFPB seeking to require an accreditor of for-profit colleges, Accrediting Council for Independent Colleges and Schools (ACICS), to answer a Civil Investigative Demand (CID) issued by the CFPB. Judge Leon held the CFPB did not have authority to investigate the process for accrediting for-profit schools because the subject matter falls outside its statutory authority to investigate whether there has been a violation of consumer financial laws. The Court rejected the CFPB’s argument that its CID was related to lending and financial-advisory services by for-profit schools, noting the accreditation process has no real connection to a school’s private lending practices and the CFPB’s claim that it is entitled to learn whether ACICS is connected to potential violations of consumer financial laws is belied by the CID’s statement of purpose and requests, which solely related to accreditation.
Goodwin Procter News
2016 Inaugural Reps & Warranties & Transactional Liability Insurance ExecuSummit
The Reps & Warranties & Transactional Liability Insurance Summit will take place in Uncasville, CT on May 3-4. Carl Metzger, a partner in Goodwin Procter’s Business Litigation Group and head of the firm’s Insurance & Risk Management Practice, will chair the program and moderate the session "Understanding the Transactional Liability Marketplace: The History, the Present & the Future." Brian Mukherjee, a counsel in the firm's Litigation Department, will moderate the panel "The Art of the Deal: Recent Deal Trends and the Impact of Reps & Warranties Insurance on M&A Transactions."
The states of New York and California have enacted laws phasing in minimum wage levels reaching $15 per hour over several years. New York State has adopted a Paid Family Leave statute covering most employees after six months of employment, funded solely by employee payroll deductions. Employees will receive a percentage of their average wage, initially for up to eight weeks but rising to 12 weeks, for leaves qualifying under the federal Family and Medical Leave Act. The city of San Francisco is implementing a Paid Parental Leave Ordinance applicable to most employees working within its boundaries. Covered employers must pay a portion of the employee’s salary for up to six weeks, covering time off for bonding with a newborn, adopted or foster child, and may be sued for terminating employees who exercise their paid leave rights. Please see the client alert prepared by Goodwin’s Labor & Employment Practice for more information.
Client Alert: Sun Capital Decision Implicates Private Company Investing
A federal district court recently held that two private equity funds were liable for the pension plan withdrawal liability of one of their portfolio companies by finding that each fund was engaged in a “trade or business” and that the funds had formed a “partnership-in-fact” that was a trade or business under common control with their portfolio company. The Court focused heavily on the funds’ management fee offsets and carryforwards, as well as the investigative activities carried out by the funds prior to making their investment. This may have broad implications in how private investment funds structure their investments, and funds should consider possible ways to mitigate this exposure. Please see the client alert prepared by Goodwin’s ERISA & Executive Compensation Practice for more information.