On March 9, the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Consumer Financial Protection Bureau (CFPB), National Credit Union Administration (NCUA), and Conference of State Bank Supervisors issued a rare joint statement encouraging financial institutions to meet the financial needs of customers and members affected by COVID-19. In the statement, the agencies pledged to “provide appropriate regulatory assistance to affected institutions subject to their supervision.” In this regard, the agencies indicated that “In cases in which operational challenges persist, regulators will expedite, as appropriate, any request to provide more convenient availability of services in affected communities. The regulators also will work with affected financial institutions in scheduling examinations or inspections to minimize disruption and burden.” The agencies also instructed financial institutions to “work constructively with borrowers and other customers in affected communities” and, notably, indicated that “prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”
On March 6, the Federal Financial Institutions Examination Council (FFIEC), which includes the Federal Reserve, OCC, FDIC, CFPB, and NCUA, updated guidance to remind financial institutions that business continuity plans should address the threat of a pandemic outbreak and its potential impact on the delivery of critical financial services. The ten-page guidance emphasizes that a financial institution’s business continuity plan should provide for:
- A preventive program to reduce the likelihood that an institution’s operations will be significantly affected by a pandemic event;
- A documented strategy that provides for scaling the institution’s pandemic efforts so they are consistent with the effects of a particular stage of a pandemic outbreak;
- A comprehensive framework of facilities, systems, or procedures that provide the organization the capability to continue its critical operations in the event that large numbers of the institution’s staff are unavailable for prolonged periods;
- A testing program to ensure that the institution’s pandemic planning practices and capabilities are effective and will allow critical operations to continue; and
- An oversight program to ensure ongoing review and updates to the pandemic plan so that policies, standards, and procedures include up-to-date, relevant information provided by governmental sources or by the institution’s monitoring program.
In addition, the guidance discusses:
- The differences between traditional business continuity planning and pandemic planning;
- Board and senior management responsibilities in implementing and overseeing the pandemic plan;
- Incorporating pandemic risk into the business continuity plan’s business impact analysis;
- The risk assessment and risk management steps that are important for pandemic planning; and
- Risk monitoring and testing of the pandemic plan.
The guidance also provides links to additional U.S. Government and industry association resources on developing and implementing plans for pandemic events.
The SEC recently published a press release that reminds public companies of several important disclosure obligations that they should consider in light of the potential impacts of COVID-19. The SEC also issued an order providing companies and others that are subject to SEC reporting obligations with an additional 45 days to make certain reports and other filings that would otherwise have been due between March 1 and April 30, 2020, if the company or other filer is unable to meet a filing deadline due to circumstances related to COVID-19. The SEC relief is subject to certain conditions, including a requirement to furnish a Form 8-K or Form 6-K report that includes specified disclosures by the later of March 16 or the original filing deadline. The SEC order also provides conditional relief for delivery of proxy materials to security holders in areas where common carrier delivery has been suspended. The SEC press release also describes how SEC staff will treat annual and quarterly reports filed in reliance on the SEC order for purposes of Form S-3 and Form S-8 eligibility, the Rule 144(c) “current public information” requirement, and Rule 12b-25. For a summary of the SEC order and press release in FAQ form, read the client alert issued by Goodwin’s Public Companies practice.
In February 2019, the SEC staff provided fund boards no-action relief with respect to in-person voting on certain contracts and arrangements. The Investment Company Act of 1940 requires fund boards to vote in-person on whether to approve the following (the Required Approvals): investment advisory (or subadvisory) contracts; principal underwriting contracts; distribution plans (or 12b-1 Plans) and related agreements; certain interim investment advisory contracts; and the selection of independent public accountants. However, the no-action relief allows board members, under limited circumstances, to provide the Required Approvals via telephone, video conference or other means that allow all participating board members to communicate with each other simultaneously. Specifically, they may do so when the board members needed for the Required Approvals cannot meet in person due to unforeseen or emergency circumstances, provided that (a) no material changes to the relevant fund contracts are proposed or approved at the meeting, and (b) the board members who did not attend the meeting where the approval(s) occurred in-person ratify such approval(s) at the next in-person meeting (the Relief). Unforeseen or emergency circumstances include any circumstances that, as determined by the board, could not have been reasonably foreseen or prevented and that make it impossible or impracticable for directors to attend a meeting in-person (including, e.g., illness or death, weather events or natural disasters, acts of terrorism and disruptions in travel). The Relief, as applied in the context of unforeseen or emergency circumstances, previously only applied to: (i) board action related to the renewal of an existing fund contract; and (ii) the selection of an independent public accountant that is the same as the independent public accountant that audited the funds in the immediately preceding fiscal year.
On March 4, given concerns related to the spread of COVID-19, the SEC expanded the Relief through June 15, 2020, to apply to all fund contracts, plans and arrangements that would otherwise require in-person board approval, including with respect to new contracts, material changes to existing contracts, and the selection of new independent public accountants. The expanded Relief is conditioned on board ratification of these actions at the next in-person board meeting.
On March 2, the SEC announced that it is seeking comments on Rule 35d-1 under the Investment Company Act of 1940 (also known as the Names Rule). The Rule restricts the use of materially deceptive or misleading fund names. In light of market changes (e.g., increasing focus on environmental, social and governance factors or use of derivatives) since the SEC adopted the Names Rule in 2001, the SEC is considering whether the current requirements are effective or whether it should consider other alternatives to meet its goal of investor protection. Interested parties and the public may comment until May 5, 2020.
On March 4, the SEC announced that it adopted proposed amendments that would harmonize, simplify, and improve the exempt offering framework to promote capital formation and expand investment opportunities while preserving and enhancing important investor protections. Specifically, the proposed amendments would:
- address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
- increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the SEC’s experience with the rules, marketplace practices, capital raising trends, and comments received;
- provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and
- harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.
The comment period for the proposal will remain open for 60 days following publication in the Federal Register. Additional information on the proposed amendments will be provided in a forthcoming client alert to be issued by Goodwin’s Public Companies practice.
On March 6, the CFPB announced it will implement an advisory opinion program, amend and reissue its “responsible business conduct” bulletin, and engage with Congress to propose new whistleblower legislation.
Under the advisory opinion program, the CFPB will publish advisory opinions in the Federal Register and on its website. The advisory opinions are published in response to party requests. Prior, opinions were provided only to the individual requestor. To help clarify this new process, the CFPB will issue additional procedures to explain how advisory opinion requests will be prioritized and addressed. While the current guidance process will remain available, the new advisory opinion program will help create transparency and provide regulatory certainty to all regulated entities and other stakeholders.
The amended and reissued “responsible business conduct” bulletin identifies four categories of responsible conduct: self-assessing, self-reporting, remediation, and cooperation. In addressing violations of federal consumer financial law in supervisory and enforcement matters, the CFPB will look more favorably upon companies that engage in these activities. The original “responsible business conduct” bulletin was published in June 2013. The amended and reissued bulletin provides greater detail and is intended to clarify the CFPB’s approach to responsible business conduct.
The proposed whistleblower legislation would grant the CFPB authority to establish a whistleblower award program. Amending Title X of the Dodd-Frank Act, it would permit the CFPB in successful actions to pay an award to whistleblowers who voluntarily provide information. The CFPB has submitted the proposed language to House Speaker Nancy Pelosi and Senate President Mike Pence, as well as the Chairs and Ranking Members of the authorizing committees in both chambers.
On March 4, the Federal Reserve issued a final rule (Rule), which integrates the Federal Reserve’s regulatory capital rule with its capital plan rule implementing the Comprehensive Capital Analysis and Review by using the results of supervisory stress tests to establish the size of a firm’s stress capital buffer requirement. A firm’s stress capital buffer requirement will vary according to the firm’s risk, and the stress capital buffer requirement will replace the fixed 2.5% of risk-weighted assets component of a firm’s capital conservation buffer requirement. The Rule includes assumptions and calculation mechanics used to determine the stress capital buffer requirement and related limits. The Rule’s approach is intended to eliminate redundancies among the Federal Reserve’s rules and to simplify its approach to capital regulation. The Rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations that have $100 billion or more in total consolidated assets. It becomes effective 60 days after publication in the Federal Register, with a firm’s first stress capital buffer requirement, as determined under the Rule, effective October 1, 2020.
On March 6, the FDIC and Federal Reserve invited public comment on proposed changes to the guidance for resolution plans submitted by large foreign banks, including plans that are due by July 1, 2021. The updates focus on the agencies' expectations around a firm's derivatives and trading activities and payment, clearing, and settlement activities. The proposed guidance is largely similar to the guidance from March 2017, and includes certain updates based on the agencies' review of the firms' most recent resolution plans and changes to the resolution planning rules. The proposed guidance also seeks comment on objective, quantitative criteria to determine its applicability. Comments on the proposal will be accepted through May 5, 2020.
On March 5, the OCC issued frequently asked questions (FAQs) to supplement its OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” issued on October 30, 2013 (Bulletin). The Bulletin addresses risk management of third-party relationships, specifically, any business arrangement between the bank and another entity, by contract or otherwise. The FAQs, which rescind prior FAQs issued on June 7, 2017, address questions related to how the terms “third-party relationship” and “business arrangement” are determined; a bank’s responsibilities for a third party’s subcontractors; and relationships with fintech firms, cloud services providers and data aggregators. The OCC made clear a “bank’s third-party risk management should be commensurate with the level of risk and complexity of its third-party relationships; the higher the risk of the individual relationship, the more robust the third-party risk management should be for that relationship.” The OCC provided that it is the bank’s responsibility to determine the risks associated with its third-party relationships.
On March 5, the OCC issued a notice of proposed rulemaking (Proposed Rules) regarding revisions to its Rules, Policies, and Procedures for Corporate Activities. The Proposed Rules seek to update and clarify the OCC’s licensing policies and procedures. Under the Proposed Rules, national banks and federal savings associations could, for certain business combinations, elect to follow the licensing procedures applicable to state banks or state savings associations, respectively, chartered by the state in which their main or home office is located. Additionally, the Proposed Rules would expand the agency’s operating subsidiary notice and expedited review processes to include activities that are substantively the same as activities previously approved by the OCC. Other notable changes included in the Proposed Rules are:
- permitting non-controlling investments and pass-through investments in entities that have not agreed to OCC supervision, and permitting certain other investments without a filing;
- providing procedures for granting and revoking citizenship and residency waivers for national bank directors; and
- adding chief risk officer to the list of positions for which a bank in troubled condition must provide notice when making a change in personnel.
Comments to the Proposed Rules are due by or before May 4, 2020.
Enforcement & Litigation
On March 3, the Supreme Court heard arguments in Seila Law LLC v. Consumer Financial Protection Bureau, a case involving two questions about the structure of the CFPB: (1) whether the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that limits removal of the CFPB Director to “inefficiency, neglect of duty, or malfeasance in office” impermissibly restricts the President’s ability to remove the Director and therefore violates the separation of powers; and (2) if so, whether that provision can be severed from the remainder of Dodd-Frank, or whether the entire statute must fall. Read the LenderLaw Watch blog post.
On February 14, the CFPB released its Winter 2020 Supervisory Highlights (Report). The Report summarizes the CFPB’s findings on violations in the areas of debt collection, mortgage servicing, payday lending, and student loan servicing completed between April 2019 and August 2019. The CFPB notes that it published its Report in order to aid CFPB-supervised entities “in their efforts to comply with Federal consumer financial law.” The Report shares information regarding “general supervisory and examination findings,” identifies “operational changes to the [entities’] program[s],” and provides “a convenient and easily accessible resource for information on the Bureau’s guidance documents.” Read the LenderLaw Watch blog post for a summary of notable findings from the Report.
On January 17, student loan servicer Educational Credit Management Corporation filed a notice of appeal in the United States District Court for the Southern District of New York, challenging the decision of Chief Bankruptcy Judge Celelia Morris, which granted summary judgment for a student loan debtor and discharged his student loan debt of $221,385.49. Rosenberg v. N.Y. State Higher Education Services Corp., et al., Case No. 18-35379 (Bankr. S.D.N.Y. January 7, 2020). Read the LenderLaw Watch blog post.
2019 largely came and went with few notable surprises as predicted by the consumer finance industry. Enforcement activity remained down at both the federal and state levels as a result of the current administration’s policies and agenda, and with the resolution of financial crisis-era litigation in the rearview mirror. Analyzing the key developments from last year will allow financial services companies looking forward to 2020 to anticipate and prepare for changes in the law, new regulatory interpretations, and shifting legislative and enforcement priorities.
To help our clients stay on the cutting edge in this developing legal landscape, we are proud to present our Consumer Finance Year In Review. In this year-end review, we synthesize our prior coverage of 2019’s most significant developments and actions from both our LenderLaw Watch and Consumer Finance Enforcement Watch blogs, and use our detailed industry and regulatory knowledge to offer our predictions on what the industry might expect in 2019 in the mortgage, credit card, student lending, credit reporting, auto lending, debt collection, TCPA, payday lending, FinTech and appellate areas. To review the online Year In Review, click here.