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OCC publishes Volcker Rule quantitative measurement instructions
On November 30, the OCC released instructions and technical specifications for preparing and submitting quantitative measurements relating to Section 13 of the Bank Holding Act, commonly known as the Volcker Rule. As previously covered by InfoBytes, in 2019, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule amending the regulations implementing the Volcker Rule. Under the amendments, “banking entities with significant trading assets and liabilities” are required to “submit certain quantitative measurements on a quarterly basis and in accordance with the XML schema posted on the OCC’s ‘Volcker Rule Implementation’ web page.” The compliance date for the final rule is January 1, 2021.
CFPB issues automated underwriting NAL to Fintech
On November 30, the Bureau issued a no action letter (NAL) to a Fintech covering its automated underwriting and pricing model that facilitates the origination of unsecured, closed-end loans made by third party lenders. The NAL states that the Bureau will not bring supervisory or enforcement actions against the lender concerning alleged discrimination on a prohibited basis from its use of the automated model for unsecured, closed-end loans under (i) Section 701(a) of ECOA and Sections 1002.4(a) and (b) of Regulation B; or (ii) its authority to prevent unfair, deceptive, or abusive acts or practices. According to the lender’s application, after applicants meet initial eligibly requirements, the automated model, which uses artificial intelligence techniques and alternative data, is designed “to assess the individual risk profile of [eligible] applicants…and is responsible for assigning the maximum amount an applicant can borrow and the appropriate interest rate based on that risk assessment.” If the model’s assigned interest rate “falls within the parameters of a lending partner’s loan program,” the applicant will be approved. The NAL expires after 36 months.
OFAC sanctions entities for assisting North Korean regime
On November 19, the U.S. Treasury Department’s Office of Foreign Assets Control announced sanctions pursuant to Executive Order 13722 against two entities allegedly involved in the exportation of forced labor from North Korea. According to OFAC, the sanctioned entities—a Russian construction company and a North Korean company—have “engaged in, facilitated, or been responsible for the exportation of forced labor from North Korea, including exportation to generate revenue for the Government of North Korea or Workers’ Party of Korea.” In addition, OFAC updated the Specially Designated Nationals and Blocked Person List to provide additional information on three previously designated companies responsible for sending North Korean workers to Russia and China. As a result of the sanctions, “all property and interests in property of these targets that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.” OFAC noted that its regulations “generally prohibit” U.S. persons from participating in transactions with the designated persons, and warned foreign financial institutions that if they knowingly facilitate significant transactions for any of the designated individuals or entities, they may be subject to U.S. secondary sanctions.
1st Circuit: Original creditor’s arbitration agreement applies to debt buyer
On November 25, the U.S. Court of Appeals for the First Circuit affirmed a grant of a motion to compel arbitration in a debt collection action, concluding that a debt buyer holds the same arbitration rights as the original creditor under a cardmember agreement entered into with the plaintiff. The debt buyer purchased a pool of defaulted credit card debts from the original creditor, including the plaintiff’s charged-off account. After a municipal judge ruled that the debt buyer could not prove it owned the unpaid debt, the plaintiff filed a class action lawsuit alleging, among other things, that the debt buyer and its law firm (collectively, “defendants”) violated the FDCPA by attempting to collect the debt after the statute of limitations had expired. The defendants filed a motion to compel arbitration, and the district court approved the magistrate judge’s recommendation that an enforcement clause in the cardholder agreement between the plaintiff and the original creditor be enforced. The plaintiff appealed, arguing that the defendants should not be able to compel arbitration because they were not the signatories of the original cardholder agreement.
On appeal, the 1st Circuit concluded that the plaintiff offered no support for deviating from the “long-standing given in contract law. . .that ‘an assignee stands in the shoes of the assignor,’” holding that the original creditor’s rights were assigned to the debt buyer and its agents, including the right to invoke the cardmember agreement’s arbitration provision.
OCC finalizes regulatory requirements for covered institutions
On November 23, the OCC announced a final rule that updates and eliminates outdated regulatory requirements for national bank and federal savings association activities and operations. The final rule, originally proposed in June (covered by InfoBytes here), amends 12 CFR 7 to clarify and codify recent OCC interpretations related to the modern financial system. Among other things, the changes will (i) incorporate and streamline interpretations concerning permissible derivatives activities; (ii) codify interpretations which permit covered institutions to engage in certain tax equity finance transactions; (iii) “codify[] interpretations regarding national bank membership in payment systems and clarify[] that federal savings associations are subject to the same requirements as national banks; (iv) “expand[] the ability of national banks and federal savings associations to choose corporate governance provisions under state law; (v) clarify anti-takeover provisions; and (vi) codify National Bank Act interpretations concerning capital stock issuances and repurchases. The final rule takes effect April 1, 2021.
CFPB finalizes Advisory Opinions Policy, issues two opinions
On November 30, the CFPB announced the finalization of its Advisory Opinions Policy, which will allow entities seeking to comply with existing regulatory requirements to request an advisory opinion in the form of an interpretive rule from the Bureau to address areas of uncertainty. Persons or entities interested in submitting a request for an advisory opinion should email advisoryopinion@cfpb.gov. As previously covered by InfoBytes, last June the Bureau launched a pilot advisory opinion program to focus primarily on clarifying ambiguities in Bureau regulations, and issued a request for public comment on a proposal for a new policy on advisory opinions. Under the final policy, the Bureau will review submissions, prioritize requests for response, issue opinions with a description of the incoming request, and “may also decide to issue advisory opinions on its own initiative.” All advisory opinions will be published in the Federal Register to increase transparency. The Bureau notes that it will prioritize open questions within its purview that can be addressed legally through an interpretive rule and adds that it “intends to further evaluate potential topics for advisory opinions based on additional factors, including: alignment with the Bureau’s statutory objectives; size of the benefit offered to consumers by resolution of the interpretive issue; known impact on the actions of other regulators; and impact on available Bureau resources.”
Concurrently, the Bureau issued two advisory opinions: one on earned wage access (EWA) products and one clarifying the definition of certain student education loan products. The EWA advisory opinion addresses the uncertainty as to whether EWA providers that meet short-term liquidity needs that arise between paychecks “are offering or extending ‘credit’” under Regulation Z, which implements TILA. The advisory opinion states that “a Covered EWA Program does not involve the offering or extension of ‘credit,’” noting that the “totality of circumstances of a Covered EWA Program supports that these programs differ in kind from products the Bureau would generally consider to be credit.”
The second advisory opinion addresses a different area of uncertainty concerning the application of Regulation Z, clarifying that “loan products that refinance or consolidate a consumer’s pre-existing Federal, or Federal and private, education loans meet the definition of ‘private education loan’ in [TILA] and Regulation Z and are subject to the disclosure and consumer protection requirements in subpart F of Regulation Z.”
Agencies: Cease LIBOR-based contracts as soon as practicable
On November 30, the Federal Reserve Board, FDIC, and OCC issued a joint statement encouraging banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable, but by December 31, 2021 at the latest. The statement notes that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks given the range of consumer protection, litigation, and reputation risks at stake. As previously covered by InfoBytes, the agencies announced that they do not intend to recommend a specific credit-sensitive rate for use in place of LIBOR. Instead, the agencies encourage banks to “either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation” for all new contracts prior to December 31, 2021, in order to “facilitate an orderly—and safe and sound—LIBOR transition.” Additionally, the statement recognizes certain instances in which it would be appropriate for banks for enter into LIBOR contracts after December 31, 2021, including novations of LIBOR transactions executed before January 1, 2022.
FTC charges company with passive debt collection
On November 30, the FTC announced a stipulated order entered by the U.S. District Court for the Eastern District of Missouri against a debt collection company and three of its officers (collectively, “defendants”) for allegedly engaging in passive debt collection in violation of the FTC Act, the FDCPA, and the FCRA. According to the complaint, the defendants would place debts that consumers did not owe or the defendants were not authorized to collect on consumers’ credit reports without first attempting to communicate with the consumers about the debts. The complaint alleges further that consumers often did not discover these debts until they “threatened to interfere with an important, time-sensitive transaction.” The FTC alleges that each month, after receiving and investigating complaints from consumers, the defendants would determine between 80 to 97 percent of disputed debts were inaccurate or invalid. However, the defendants continued to collect on unauthorized debts “[d]espite the persistent inaccuracies.”
The defendants neither admit nor deny the allegations in the settlement order. In addition to the $24,300,000 in monetary relief, which is partially suspended due to the inability to pay (with one officer and corporate defendant required to pay over $56,000), the order also, among other things, (i) prohibits the defendants from furnishing credit information prior to communicating with the consumer; (ii) requires the defendants to request deletion of any debts reported prior to the order; and (iii) bars the defendants from engaging in unlawful debt collection practices.
The vote authorizing the complaint and settlement was 4-1, with Commissioner Chopra voting no, arguing that the agency should work “in concert” with the CFPB for debt collection enforcement in order to “help make victims whole through access to the CFPB's Civil Penalty Fund and reduce duplicative efforts.”
OCC proposes CRA performance standards
On November 24, the OCC released a notice of proposed rulemaking (and accompanying Bulletin 2020-103) covering evaluation measure benchmarks, retail lending distribution test thresholds, and community development (CD) minimums under the new general performance standards outlined in the Community Reinvestment Act’s (CRA) final rule issued earlier this year. As previously covered by a Buckley Special Alert, on May 20, the OCC announced the final rule to modernize the regulatory framework implementing the CRA. The final rule was technically effective on October 1, but provides for at least a 27-month transition period for compliance based on a bank’s size and business model. Large banks and wholesale and limited purpose banks will have until January 1, 2023 to comply, and small and intermediate banks that opt-in to the final rule’s performance standards will have until January 1, 2024. In the preamble to the final rule, the OCC noted a future proposal would provide details of the calibration process of the requirements for each of the three components (the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and CD minimums) of the objective performance standards. Highlights of the proposal include:
- Requirements for each of the three components such that the proportion of banks that would have received presumptive ratings of outstanding and satisfactory would be no greater than the historical proportion of banks that received the same ratings under the previous CRA regulations.
- The OCC would issue an information survey to institutions subject to the general performance standards to obtain bank-specific information and would use this information to calculate CRA evaluation measures and CD minimum calculations for each bank’s assessment areas, as well as a bank-level CRA evaluation measure and CD minimum calculation for each bank.
- For each major retail lending product line, the OCC proposes to calculate the numerator used in determining each bank’s retail lending distribution test ratios for each bank’s assessment areas. Each bank’s numerators under the borrower and geographic distribution tests would be divided by the applicable demographic and peer comparators to calculate each bank’s retail lending distribution test ratios for each bank’s assessment areas.
- The retail lending distribution tests would yield up to 18 different threshold values. The CRA evaluation measure would involve six different benchmark values (one at the bank level and one at the assessment area level for needs to improve, satisfactory, and outstanding presumptive ratings, respectively), while the CD minimum would involve two values, one at the bank level and one at the assessment area level.
- The OCC would consider a decline of 10 percent or greater in a bank’s performance on the general performance standards that could not be explained by market conditions or other performance context factors, as “precipitous,” which may warrant a downward adjustment in the OCC’s determination of the bank’s assigned rating.
Once the proposal is finalized, the OCC stated that it will take the necessary steps to publicize the specific benchmarks, thresholds, and minimums, and will periodically review and adjust these benchmarks, thresholds, and minimums, as necessary.
Comments on the proposal are due within 60 days of publication in the Federal Register.
FDIC releases October enforcement actions
On November 27, the FDIC released a list of administrative enforcement actions taken against banks and individuals in October. During the month, the FDIC issued eight orders and two notices consisting of “one consent order, one order to pay a civil money penalty, one section 19 order, one removal order, two orders terminating consent or cease and desist orders, two orders modifying removal orders, one notice of assessment, and one notice of charges.” The consent order, issued against a Wisconsin-based bank, relates to alleged violations of 12 C.F.R. Part 339, which implements the requirements of the National Flood Insurance Act (NFIA) and the Flood Disaster Protection Act. Among other things, the FDIC claims that the bank failed to (i) obtain an adequate amount of flood insurance at the origination of several loans; (ii) provide notice to borrowers of the insufficiencies or follow force-placement requirements; or (iii) provide notice to borrowers about the availability of flood insurance under the NFIA. The consent order requires the payment of a $12,841 civil money penalty.