On April 21, President Trump issued two presidential memoranda directing the Secretary of the Treasury (Secretary) to review and report on certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) within 180 days, including consistency with the principles set forth in President Trump’s Executive Order 13772 of February 3, 2017, “Core Principles for Regulating the United States Financial System.” One memorandum seeks a report on the Financial Stability Oversight Council’s (FSOC) processes for determining whether a nonbank financial institution could pose a threat to the financial stability of the United States, and FSOC’s processes for designating financial institutions to be “systemically important” (SIFIs). The memorandum sets forth a number of criteria for the Secretary to evaluate and asserts that any entity under FSOC consideration for a determination or designation should receive “due, fair, and appropriately transparent process.” The memorandum also provides a temporary moratorium on non-emergency determinations and designations until the completion of the Secretary’s review and report. The other memorandum seeks a report on the Secretary’s Orderly Liquidation Authority (OLA) and related processes for placing a financial company in receivership and liquidation after determining that the company, inter alia, risks default or could, through its failure, have a serious adverse impact on financial stability of the United States. The memorandum expresses concerns about the related Orderly Liquidation Fund created by the Dodd-Frank Act, which the memorandum cites as a “government backstop” that potentially encourages risk taking by creditors, counterparties and shareholders of financial companies who are protected from losses by a taxpayer-funded entity. The memorandum instructs the Secretary to review the potential costs and effects of the OLA and to explore the viability of a new chapter of the U.S. Bankruptcy Code as an alternative. The memorandum also provides a temporary moratorium on determinations to exercise OLA unless the Secretary, in consultation with the president, determines that such action is required by Section 203(b) of the Dodd-Frank Act.
House Financial Services Committee Releases “CHOICE Act 2.0”
On April 19, the House Financial Services Committee (Committee) released a discussion draft of a revised Financial CHOICE Act. The revised bill differs from the version passed by the Committee in September 2016, which was discussed in a previous client alert, in several material ways. With respect to the Consumer Financial Protection Bureau (CFPB), the revised bill would preserve the CFPB’s single director structure but make the director removable by the president at-will, restructure the CFPB as a law enforcement agency without rulemaking authority (similar to the Federal Trade Commission), and repeal the CFPB’s authority to regulate and bring enforcement actions against unfair, deceptive, or abusive acts or practices. The revised bill also would retain the “qualifying capital election,” which would grant regulatory relief to banks that maintain a leverage ratio of 10% or greater, but would eliminate the requirement that banks making such election maintain a composite CAMELS rating of 1 or 2. In addition, the regulatory relief provided under the qualifying capital election would be expanded to include an exemption from stress-testing requirements. The revised bill would also remove the Federal Deposit Insurance Corporation from the resolution plan process and overturn the 2015 decision of the Second Circuit Court of Appeals in Madden v. Midland Funding, which provided that loans held by nonbank entities may be subject to state usury laws even in cases where the loans were originated by banks for which such laws are preempted. A hearing to discuss the revised bill was scheduled for April 26, 2017.
On April 12, FINRA published Regulatory Notice 17-16 requesting comment on proposed amendments to FINRA Rule 2241, Research Analysts and Research Reports, and FINRA Rule 2242, Debt Research Analysts and Debt Research Reports (the Research Rules). The amendments seek to create a limited safe harbor from the Research Rules for desk commentary meeting the conditions of the safe harbor. The proposed amendments would require firms to include a “health warning” on desk commentary and to obtain consent, which could be negative consent, from eligible institutional investors to receive such commentary without the protections of the Research Rules. Desk commentary is a form of brief, written analysis focused on the near term and disseminated quickly to eligible institutional investors by sales and trading or principal trading personnel but that may rise to the level of a research report. The suggested safe harbor would be available for desk commentary that meets the three-pronged author, content and recipient conditions set out in the proposed rule. If the conditions are met, both the communication and its author would be excused from some, but not all, of the provisions of Rule 2241 or 2242, as applicable. The proposed safe harbor would require firms to maintain and enforce written policies and procedures designed to preclude the use of reports or research analysts to manipulate the market and to prohibit prepublication review by persons engaged in investment banking activities. Among the questions raised by FINRA are whether other Rule 2241 or Rule 2242 requirements should apply to desk commentary subject to the safe harbor, such as the requirement to disclose an analyst’s personal holdings in a subject company. Comments on the proposal are due by May 30, 2017.
On March 10, the Securities and Exchange Commission (SEC) rejected the highly anticipated Winklevoss twins’ COIN bitcoin exchange-traded fund (ETF), causing the digital currency to plummet 18% in value, to $978.76, “the lowest intraday price in a month.” Then, on March 28, the SEC rejected a second bitcoin ETF, providing additional guidance that it continued to believe bitcoin was too easily used for fraudulent purposes. In explaining its reasoning for denying both COIN and the SolidX Bitcoin Trust, the SEC stated that it rejected the rule changes (for COIN, BZX Rule 14.11(e)(4), and for SolidX, NYSE Arca Equities Rule 8.201) because it did not find them “to be consistent with Section 6(b)(5) of the Exchange Act.” Specifically, it stated that the proposed exchange-traded products (ETPs) had to satisfy certain requirements in order to be approved. In particular, any “national securities exchange [must] be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.” To satisfy such requirements, the SEC stated that “the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.” The SEC found that because “significant markets for bitcoin are unregulated,” the exchange “would be unable to enter into the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs.” In its March 28 rejection of SolidX Bitcoin Trust, the SEC sang the same tune. In short, the SEC continues to believe that bitcoin as a currency is too unregulated and that the exchanges seeking to list the ETPs are too exposed to fraud and manipulation for the SEC to approve either one. View the Digital Currency and Blockchain Perspectives blog post.
Enforcement & Litigation
On April 19, the U.S. Department of Housing and Urban Development (HUD) announced that it had entered an agreement with a group of California mortgage lenders to resolve allegations that they discriminated against a mortgage applicant. That consumer had filed a complaint with HUD in October 2016, alleging that the lenders failed to prequalify him for a mortgage loan on the basis of his national origin in violation of the Fair Housing Act (FHA). View the Enforcement Watch blog post.
On April 18, the United States Supreme Court, once again with nine justices sitting on the bench, heard oral arguments in Henson v. Santander Consumer USA, Inc., No. 16-349, concerning the scope of the Federal Debt Collection Practices Act (FDCPA), codified at 15 U.S.C. § 1692 –1692p. As previously reported, the issue presented in Henson is “[w]hether a company that regularly attempts to collect debts it purchased after the debts had fallen into default, is a debt collector subject to the Fair Debt Collection Practices Act?” View the LenderLaw Watch blog post.
On April 17, the CFPB announced that it had filed a complaint in the U.S. District Court for the Northern District of Ohio against an Ohio-based debt collection law firm, alleging violations of the Fair Debt Collection Practices Act (FDCPA) and Consumer Financial Protection Act (CFPA). View the Enforcement Watch blog post.
On April 13, the CFPB issued proposed amendments to clarify certain requirements of the Home Mortgage Disclosure Act (HMDA). HMDA requires that financial institutions collect and report certain information regarding their mortgage lending activities. The information that financial institutions are required to collect and report includes information about home loan applications, originations, and purchases. The purpose of HMDA is to provide publicly available information that will allow for (1) evaluation of whether financial institutions meet community housing needs, (2) facilitate government support of community investment opportunities, and (3) identification of discriminatory lending practices. View the LenderLaw Watch blog post.
On April 12, the Massachusetts Attorney General’s Office (AG) announced that it had reached a settlement with a mortgage broker, its employee, and an insurance agent, resolving allegations that they had preyed on elderly consumers by causing them to take out reverse mortgages on their homes. The AG alleged that the broker and agent induced elderly consumers to invest the proceeds from these mortgages into risky annuities that, in some cases, charged severe withdrawal penalties during the first few years. According to the AG, the broker and agent deceived these consumers by failing to disclose or by misrepresenting material information about the financial products and their terms. As a result of the alleged scheme, the broker and agent earned significant commissions. View the Enforcement Watch blog post.
On April 10, the California Department of Business Oversight (DBO) announced that it had entered into a consent order with a Michigan-based residential mortgage lender and servicer over allegations that the firm was overcharging consumers for interest on a number of loans. The DBO brought an enforcement action against the company following two regulatory investigations, alleging that the company had violated Section 50204 of the California Financial Code and Section 2948.5 of the California Civil Code by charging excess per diem interest on loans made to California borrowers. Specifically, the firm had allegedly been charging interest on mortgage loans prior to the business day preceding the day of loan disbursement, in direct violation of California law. As a result of self-audits submitted to the DBO in 2015 and 2016, the company had already paid $293,127 in refunds to affected borrowers prior to entering into this consent order. View the Enforcement Watch blog post.
On April 5, the Colorado Attorney General’s Office (Colorado AG) announced that it had secured a judgment against a debt collection agency and two of its principals. The Colorado AG had accused the company of operating without a license and of deceptive collection practices. According to the Colorado AG, the company operated in the Denver area from early 2014 through January 2015, collecting money from thousands of consumers under its own name and various aliases. View the Enforcement Watch blog post.
On March 30, Judge Karas of the Southern District of New York dismissed multiple claims in a putative nationwide class action challenging default servicing activities. In the case, Tardibuono-Quigley v. HSBC Mortgage Corp., the plaintiff sued her lender (HSBC) and mortgage servicer (PHH) to contest charges she claimed were wrongly assessed to her. Tardibuono-Quigley v. HSBC Mortgage Corp., 2017 WL 1216925 (S.D.N.Y. Mar. 30, 2017). The Court dismissed all claims against PHH, but permitted one state statutory claim and one contract claim to continue against HSBC. View the LenderLaw Watch blog post.
Join members of Goodwin’s Fintech team at our San Francisco office for a symposium on the OCC’s new Fintech bank charter. This seminar for tech-enabled lending and payments leaders will provide a deep dive on the ins and outs of the OCC’s bank charter for Fintech companies. Attendees will come away with a command of the advantages and challenges of the bank charter, empowering you to do your own reasoned cost-benefit analysis of this opportunity. Topics covered will include powers and permissible activities; financial inclusion, including expectations on how product and service offerings should meet the needs of all members of communities served; application process, including preparation, written business plan, pre-filing meeting with the OCC, application content, application information publicly available and subject to public comment, confidential portions of application submission, decision criteria, timing and cost; capital requirements; and OCC supervision, examinations and major requirements. To register for the event, click here.
Marshall Fishman, litigation partner in Goodwin’s Financial Industry Practice and Practice Head of New York Commercial and Financial Litigation, is speaking at the NYSBA’s Commercial Litigation Academy 2017 NYC Live & Webcast. He will be participating on the “Pleadings in State Court, Federal Court, and Arbitration” panel. For more information, please visit the event website.
MBA's Legal Issues and Regulatory Compliance Conference gathers industry leaders to consider best practices, organizational changes needed to assimilate to final rules and knowledge to educate staff. Goodwin is a sponsor. Thomas Hefferon will be speaking on the "Major Litigation Update" panel. This discussion will assess major litigation facing the industry, including cases heard or pending before the Supreme Court, U.S. Courts of Appeal and other federal courts. Major cases and case trends in major state court actions will also be considered. Matthew Sheldon will be speaking on the "Litigation Forum: TILA, RESPA, ECOA, FHA" panel. This discussion will center on the latest activity around Truth-in-Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Equal Credit Opportunity Act (ECOA), and fair lending. Joseph Yenouskas will be speaking on the "Litigation Forum: The Landscape" panel. This discussion will center on the litigation trends from the past year and predictions about what Litigator should be on the lookout for in 2017-2018.
Bill Weintraub, partner in Goodwin's Financial Industry Practice and co-chair of its Financial Restructuring Practice, will be speaking at the American Bankruptcy Institute's Walter Shapero Bankruptcy Symposium. The program will feature a lively debate on the following resolution: Asset sales under § 363 should lawfully be free and clear of successor-liability claims. For more information, please visit the event website.
Alison Douglass, partner in Goodwin’s Financial Industry Practice and ERISA Litigation Practice, and Jack Cleary, a partner in Goodwin’s Financial Industry Practice, will be panelists at the Callan Associates Workshop. The discussion will focus on “Facing Today’s Challenges: Toward More Effective Fiduciaries.”
The Financial Research Associates Bank/Alternative Lender Strategic Partnership Summit will take a deeper look at partnership strategy for banks and alternative lenders, especially in the small business lending space. The agenda consists of both bankers and alternative lending professionals who provide a wide range of experienced voices to weigh-in on the many challenges facing both sides of the industry. Mike Whalen, a partner in Goodwin’s Financial Industry and Fintech practices, will be speaking on a panel at the summit. For more information, please visit the event website.
Jim McGarry, partner in Goodwin’s Financial Industry and Consumer Financial Services Litigation practices and Kimberly Monty Holzel, associate in Goodwin’s Financial Industry, Consumer Financial Services and Fintech practices, will be panelists on Knowledge Group’s live webinar, “CFPB’s Final Prepaid Card Rule: Maximizing Opportunities and Minimizing Risks.”
Bill Weintraub, partner in Goodwin’s Financial Industry Practice and co-chair of its Financial Restructuring Practice, will be a speaker at the American Bankruptcy Institute’s 2017 New York City Bankruptcy Conference. He will be speaking on the “Equitable Mootness” panel which will focus on the current state of the doctrine and recent criticisms, especially from the Third Circuit (Philadelphia Newspapers, SemCrude, One2One Communications), and its applications (City of Detroit (invoking the doctrine to reject the attempted restoration of pension benefits in the city’s bankruptcy)). Goodwin is a sponsor. For more information, please visit the event website.