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Bipartisan group of state Attorneys General seek legislative enhancements to combat anonymous shell companies
On August 2, a bipartisan group of 24 state Attorneys General sent a letter to ranking leaders of the House Financial Services Committee expressing support for legislation that requires disclosure of the owners of companies at the time of incorporation—in order to prevent “individuals from using anonymous shell companies to evade accountability”—but encouraged the adoption of additional components. The letter emphasizes that the use of anonymous shell companies allows criminals to launder and spend money attained through activities such as human trafficking and drug dealing, and legislative change could assist states in their investigation and enforcement against these crimes. Specifically, the letter requests that legislation addressing anonymous shell companies include the following components: (i) availability of information to state and local law enforcement to assist in civil and criminal investigations and provide states authority to enact relevant state laws; (ii) continued access to information throughout the investigation; and (iii) the definition of “beneficial ownership” does not allow loopholes that can be exploited by criminals.
Federal Reserve chair delivers semi-annual congressional testimony, discusses U.S. financial conditions and regulatory relief act
On July 17, Federal Reserve Chair Jerome Powell testified before the Senate Banking Committee and spoke the next day before the House Financial Services Committee. In his semi-annual congressional testimony, Powell presented the Federal Reserve’s Monetary Policy Report, and discussed the current economic situation, job market, inflation levels, and the federal funds rate. Powell stressed, among other things, that interest rates and financial conditions remain favorable to growth and that the financial system remains in a good position to meet household and business credit needs. Chairman of the Committee, Senator Mike Crapo, R-Idaho, remarked in his opening statement that, while recent economic developments are encouraging, an effort should be made to focus on reviewing, improving, and tailoring regulations to be consistent with the recently passed Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174 (the Act). During the hearing, Powell confirmed that the Fed plans to implement provisions of the Act as soon as possible. (See previous InfoBytes coverage here.) When questioned by Senator Sherrod Brown, D-Ohio, about the direction the Fed plans to take to address stress test concerns, Powell responded that the Fed is committed to using stress tests, particularly for the largest, most systemically important institutions, and that going forward, the Fed wants to strengthen the tests and make the process more transparent. Powell also indicated the Fed intends to “publish for public comment the range of factors [the Fed] can consider” when applying prudential standards. Powell also stated that he believes government-sponsored-enterprise reform would help the economy in the long term.
When giving testimony to the House Financial Services Committee, Powell also commented that cryptocurrency does not currently impair the Fed’s work on monetary policy and that the Fed will not seek jurisdiction over cryptocurrency and instead will defer to the SEC’s oversight as well as Treasury’s lead to identify the right regulatory structure.
On June 26, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing titled, “Examining the International and Domestic Implications of De-Risking,” which examined financial institutions terminating “high risk” relationships to minimize compliance exposure. The press release notes that high-risk entities can also include legitimate businesses such as firearms sellers and payday lenders. Subcommittee Chairman, Blaine Luetkemeyer (R-MO), stated that the termination of these relationships has “resulted in the elimination of consumer and small business access to financial products and services, a decrease in the availability of money remittances, and reduced flow of humanitarian aid globally.” Agreeing with the Chairman, many witnesses emphasized the impact de-risking has on the international financial system, including access to banking in the U.S. southwest border region and in the Caribbean and Central America. While recognizing the importance of anti-money laundering regulations and financial sanctions policies, the witnesses encouraged Congress to consider opportunities to ensure equal access to the financial system for legitimate businesses.
On April 27, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Implementation of FinCEN's Customer Due Diligence Rule—Financial Institution Perspective” to discuss challenges facing financial institutions when complying with FinCEN’s Customer Due Diligence Rule (CDD Rule). As previously covered in InfoBytes, the CDD Rule takes effect May 11, and imposes standardized customer due diligence (CDD) requirements under the Bank Secrecy Act (BSA) for covered financial institutions, including the identification and verification of the beneficial owners of legal entity customers. The hearing’s four witnesses expressed certain concerns regarding the effects of implementation on financial institutions, as well as the timing of additional guidance released April 3 in the form of frequently asked questions.
In prepared remarks, Executive Director of The Financial Accounting and Corporate Transparency (FACT) Coalition, Gary Kalman, commented that the CDD Rule, which calls for additional AML requirements, is a “positive step forward but falls short of what is needed to protect the integrity of [the] financial system”—particularly in terms of what defines a “beneficial owner.” Greg Baer, President of The Clearing House Association, expressed concerns that the CDD Rule (i) requires financial institutions to verify beneficial owners for each account that is opened, instead of verifying on a per-customer basis; and (ii) does not explicitly state in its preamble that FinCEN possesses sole authority to set CDD standards, which may present opportunities for examiners to make ad hoc interpretations.
Additionally, Executive Vice President of the International Bank of Commerce Dalia Martinez, observed, among other things, that compliance with the CDD Rule is costly and burdensome, and that banks have not been provided with the tools or guidance to determine whether the information provided by legal entity customers is accurate when verifying beneficial owners. The “gray areas” within the CDD Rule, Martinez noted, present challenges for compliance. A fourth witness, Carlton Green, a partner at Crowell & Morning, expressed concerns with the relationship between FinCEN and the federal functional regulators, stating that because FinCEN has delegated examination authority to these regulators, there is a chance regulators will “create and enforce their own interpretations of or additions to BSA rules” that may “diverge from FinCEN’s priorities.”
Twenty state Attorneys General oppose bill that would remove attorneys engaged in debt collection litigation from FDCPA purview
On April 19, a coalition of twenty state Attorneys General issued a letter to leaders of Congress expressing opposition to the Practice of Law Technical Clarification Act, HR 5082, which would amend the FDCPA to exclude law firms and attorneys engaged in debt collection-related litigation activities from the scope of the FDCPA. The House Financial Services Committee passed HR 5082 on March 21 with a vote of 35-25. In the letter, the Attorneys General state, “debt collection lawsuits comprise the majority of many state-court dockets” and note numerous actions brought by the CFPB and state Attorneys General against debt collection law firms and attorneys for illegal collection practices. The letter argues that debt collection attorneys should be held accountable when using litigation for improper purposes and that HR 5082 would preclude Attorneys General from using the FDCPA to pursue improper behavior. Additionally, the letter notes, “the FDCPA is the only consumer protection tool available to State Attorneys General in a significant number of jurisdictions where state consumer protection law does not govern the conduct of attorneys.”
On April 17, Vice Chairman for Supervision of the Federal Reserve Board, Randal Quarles, testified at a hearing with the House Financial Services Committee entitled “Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System.” Quarles’ prepared testimony covered (i) the current condition of U.S. bank institutions; (ii) the Fed’s supervisory and regulatory agenda; and (iii) the Fed’s engagement with foreign regulators. During the hearing, Quarles emphasized transparency and simplicity, specifically highlighting the Fed’s recent proposed changes to the capital rules for large banks (previously covered by InfoBytes here). With regard to the global systemically important banks (GSIB) surcharge, Quarles responded to committee member concerns that the surcharge calculation may be seen as a penalty based on a growing economy and acknowledged that the Fed will look into the calculation with respect to those concerns. However, Quarles also emphasized that, “it is generally accepted that [the calculation] has resulted in improvement in the resolvability of the firms.” With regard to the Volker Rule, Quarles stated it is “unarguable” that the rule is detrimental to capital markets, and while the rule cannot be repealed by the Board because of statutory limitations, “there is a lot that [the Fed] can do to increase the certainty of application, to reduce the burden of application.” As previously covered by InfoBytes, the House passed a bill granting the Federal Reserve exclusive authority to implement the Volker Rule (currently the Fed, the OCC, the FDIC, the SEC, and the CFTC share rulemaking authority under the Rule). Quarles also discussed the Treasury Department’s recommendations (previously covered by InfoBytes here) to regulators regarding suggestions to modernize the Community Reinvestment Act (CRA), calling the CRA “a little formulaic and ossified,” commending Treasury’s efforts to review the CRA, and stating that regulators should “think about ways to apply [the CRA] more effectively.”
CFPB Succession: Mulvaney pleads for Congress to restructure the CFPB; oral arguments held in English litigation
On April 11 and 12, acting Director of the CFPB, Mick Mulvaney, testified before the House Financial Services Committee and the Senate Banking Committee regarding the Bureau’s semi-annual report to Congress. (Previously covered by InfoBytes here). Mulvaney’s prepared testimony, which was submitted to both committees, covers the salient points of the semi-annual report but also includes the same request to Congress that he made in the report: change the law “in order to establish meaningful accountability for the Bureau.” This request, which includes four specific changes (such as, subjecting the Bureau to the Congressional appropriations process and creating an independent Inspector General for the Bureau), was the focus of many of Mulvaney’s responses to questions posed by members of each committee. Specifically, during the House Financial Services hearing, Mulvaney encouraged the members of the committee to include the CFPB restructure in negotiations with the Senate regarding the bipartisan regulatory reform bill, S.2155, which passed the Senate last month. (Previously covered by InfoBytes here).
Mulvaney also fielded many questions regarding the Bureau’s announcement that it plans to reconsider the final rule addressing payday loans, vehicle title loans, and certain other extensions of credit (Rule); however, his responses gave little indication of what the Bureau’s specific plans for the Rule are. As previously covered by InfoBytes, resolutions have been introduced in the House and the Senate to overturn the rule under the Congressional Review Act. Additionally, on April 9, two payday loan trade groups filed a lawsuit in the U.S. District Court for the Western District of Texas asking the court to set aside the Rule because, among other reasons, the CFPB is unconstitutional and the Bureau’s rulemaking failed to comply with the Administrative Procedure Act. The complaint alleges that the Rule is “outside the Bureau's constitutional and statutory authority, as well as unnecessary, arbitrary, capricious, overreaching, procedurally improper and substantially harmful to lenders and borrowers alike.” The complaint also argues that the rule is a product of an agency that violates the Constitution’s separation of powers due to the Bureau’s structure of a single director who may only be removed by the president “for cause.” A similar argument in CFPB v. PHH Corporation was recently rejected by the U.S. Court of Appeals for the D.C. Circuit (covered by a Buckley Sandler Special Alert).
Additionally, on April 12, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments in English v. Trump. In this suit, Leandra English, the current deputy director of the CFPB, challenges Mulvaney’s appointment as acting director. Unlike previous arguments, which focused on the president’s authority to appoint Mulvaney under the Federal Vacancies Reform Act (FVRA), the court spent considerable time discussing Mulvaney’s concurrent role as head of the Office of Management and Budget (OMB), and whether that dual role is inconsistent with the independent structure of the Bureau, as established by the Dodd-Frank Act.
House Financial Services Committee holds hearing on potential regulation of cryptocurrencies and ICOs
On March 14, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing entitled “Examining Cryptocurrencies and ICO Markets” to discuss recommendations for Congress concerning the regulation of cryptocurrencies and initial coin offering ("ICO") markets. Subcommittee Chairman Bill Huizenga, R-Mich., opened the hearing by stating that “[c]ryptocurrencies and ICOs provide an innovative vehicle for startups to potentially access capital and grow their businesses,” and emphasized that potential regulation of this market should not stifle innovation in the area of digital currencies and capital formation.
The hearing’s four witnesses offered numerous insights into the shaping of regulation in the crytopcurrency and ICO markets. The witnesses discussed emphasizing the potential of ICOs for U.S. investors, disclosures in the ICO market, and the need for regulation to be clear with definitive classification guidelines. Additionally, witnesses commented on the unanticipated negative consequences of regulation, including the risk associated with developing a regulatory framework around the cryptocurrency market since the market is still emerging. The hearing included discussion on the functions of cryptocurrency and the ICO market, including distinguishing an ICO offering from a traditional Initial Public Offering (IPO) and the different uses of “scarce tokens,” such as bitcoin, which would impact whether cryptocurrencies were regulated as commodities or securities.
House passes two bipartisan bills to increase transparency for regulatory appeals process and tailor regulations based on size and complexity
On March 15, the House passed H.R. 4545, the “Financial Institutions Examination Fairness and Reform Act,” which would amend the Federal Financial Institutions Examination Council Act of 1978 to increase transparency and accountability for financial institutions. Among other things, the bill will require federal financial regulatory agencies to comply with deadlines established in the bill to improve the timeliness of examination reports and exit interviews, and will establish the Office of Independent Examination Review to adjudicate financial institutions’ appeals and complaints concerning examination reports. The bill further “requires the establishment of an independent internal agency appellate process at the CFPB for the review of supervisory determinations made at institutions supervised by the CFPB.”
Separately, on March 14, the House passed H.R. 1116, the “Taking Account of Institutions with Low Operation Risk Act of 2017” (TAILOR Act), which would require federal financial regulatory agencies to tailor regulations to a financial institution’s size and complexity. The TAILOR Act would apply not only to future regulatory guidance and rulemaking but also to regulations adopted seven years prior from February 16, 2017. According to a press release issued by the House Financial Services Committee, the TAILOR Act “moves financial regulatory agencies away from the current one-size-fits-all approach to instead consider additional factors such as an institution's risk profile, unintended potential impact of implementation of such regulations, and underlying policy objectives of the statutory scheme which led to the regulation.” In registering her opposition to the bill, Ranking Member of the Committee, Representative Maxine Waters, D-CA, argued that it would “weaken important safeguards established since the financial crisis” and “provide all financial institutions, including the largest banks, with opportunities to challenge any and every regulation in court if they felt it was not 'uniquely tailored' to their business needs.”
On March 7, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Legislative Proposals to Reform the Current Data Security and Breach Notification Regulatory Regime” to discuss data security and breach notification rules and cybersecurity supervision and examination standards for reporting agencies. Subcommittee Chairman Blaine Luetkemeyer, R-Mo., opened the hearing by stating that “[f]orty-eight states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands have all enacted differing laws requiring private companies to notify individuals of breaches of personal information,” and emphasized the need for a “national solution” to create data security safeguards and responsible notification processes.
Legislation. The hearing discussed two legislative proposals sponsored by Representatives Luetkemeyer and Patrick McHenry, R-NC, respectively: the “Data Acquisition and Technology Accountability and Security Act” (DATAS Act) and the “Promoting Responsible Oversight of Transactions and Examinations of Credit Technology Act of 2017” (PROTECT Act). The DATAS Act would, among other things, (i) establish broad standards for data protection across industries; (ii) create new federal post-data breach notification requirements; and (iii) establish steps that covered entities must take to notify regulators, law enforcement, and victims after certain types of data breaches. Included within the PROTECT Act are provisions that would (i) subject large consumer reporting agencies to cybersecurity supervision and examination measures; (ii) amend the FCRA to allow consumers to request security freezes be placed, removed, or temporarily lifted on their credit reports; (iii) provide provisions for fees and exceptions from such fees; and (iv) prohibit consumer reporting agencies from including a consumer’s Social Security number in a credit report or being used as a method to identify a consumer.
Hearing Testimony. The hearing’s four witnesses provided testimony related to current issues with data beaches and protecting consumer information, and commented on the inconsistencies in data breach laws. Among the issues discussed were (i) the challenges of creating a “universal, unique identifier” separate from a Social Security number; (ii) efforts to establish streamlined, uniform, national data breach notification, security, and credit freeze standards; and (iii) the need for U.S. businesses that handle sensitive financial information to implement measures to protect the data and maintain consumers’ trust. Massachusetts Assistant Attorney General and Director of Data Privacy & Security for the Attorney General’s Consumer Protection Division, Sara Cable, stated in her written testimony and during the hearing that the proposed DATAS Act’s consumer notice provisions would “leave consumers in a worse position than the status quo.” She also expressed concern that the bill “allows entities to push the cost of the data security crisis onto consumers without providing any meaningful remedy, strips the state Attorneys General of the authority they are presently and actively using to protect their consumers from breaches, and hamstrings efforts of the States to enact laws in response to future risks in an era of increasing and rapidly evolving technology.”
- Valerie L. Hletko to discuss "Forecasting litigation and settlement trends in the mortgage servicing and fair lending context" at the American Conference Institute National Forum on Residential Mortgage Regulatory Enforcement & Litigation
- Michelle L. Rogers and Jonice Gray Tucker to discuss “Building a govt affairs program; Government investigations” at the TechGC National Summit
- Tina Tchen to deliver keynote address at the American Bar Foundation Montgomery Summer Research Diversity Fellowship 30th Anniversary Celebration
- Douglas F. Gansler to discuss "Privacy, security and protection of your assets in contracts; Security exercises and tactical measures" at the TechGC National Summit
- H Joshua Kotin will discuss federal regulatory developments in mortgage lending and servicing at the Mortgage Bankers Association of Arkansas Fall Conference
- Kate Shrout to discuss "Conducting workplace investigations" at the TechGC National Summit
- Kathryn R. Goodman to discuss "HECM servicing policies and updates" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Fredrick S. Levin to discuss "Reverse mortgage litigation trends" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Melissa Klimkiewicz to speak at the "Digital marketing compliance roundtable" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Hank Asbill to discuss "The role of the media in white collar criminal investigations and the Mueller probe" at the American Bar Association White Collar Crime Town Hall
- John C. Redding to discuss "Regulatory compliance update" at PowerSports Finance
- Matthew P. Previn to discuss "Enforcement trends: Who is doing what and how?" at the Cambridge Forums Inc. Forum on Consumer Finance Litigation & Enforcement
- Jonice Gray Tucker to discuss "Protect yourself from a CFPB investigation" at the National Association of Settlement Purchasers Conference
- Tina Tchen to deliver keynote address at the American Bar Association Professional Success Summit
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "New CDD Rule: Pitfalls in compliance" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference