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Federal Reserve Board Initiates Acquisition Guidance Program
On July 12, the Federal Reserve Board issued supervisory guidance outlining a new optional process for a supervised institution to request feedback on a potential bank and nonbank acquisition or other transactional proposal prior to the submission of a formal application or notice. The supervision and regulation letter explains that under the new optional process, supervised institutions may submit “pre-filings” to the appropriate Reserve Bank. Pre-filings can include inquiries seeking (i) advice about a specific aspect of a proposal, business plans or pro forma financial information related to a potential filing, or presentations outlining specific potential proposals, (ii) feedback on draft transactional and structural documents, and (iii) guidance regarding the type of filing required or the individuals or entities that would need to join a filing. In most cases, pre-filing and submitted information will be reviewed within 60 days. The guidance cautions that Federal Reserve staff review will focus on the specific request, and a review is not intended to identify or resolve all issues or concerns related to a possible future application or notice. The Federal Reserve also notes that it is not inviting negotiations on the structure of a potential proposal or for resolving significant issues of policy or law as part of this advance guidance program.
CFPB Finalizes Rule to Supervise "Larger Participant" Consumer Reporting Agencies
On July 16, the CFPB finalized a rule that will allow it to begin supervising certain consumer reporting agencies (CRAs). Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, nonbanks offering (i) certain mortgage-related products and services, (ii) private education loans, and (iii) payday loans. The CFPB also has the power to supervise “larger participants” in any other market for consumer financial products or services, provided that it first conducts a rulemaking to define “larger participants.” Under this first “larger participant” rule, the CFPB will have supervisory authority over CRAs with more than $7 million in annual receipts from consumer reporting activities, effective September 30, 2012. The CFPB believes that the $7 million threshold will cover 30 companies that account for 94% of total industry receipts. The final rule is divided into two parts: (i) Subpart A sets the definitions and other terms applicable to the CFPB’s supervision of “larger participants” in general, and (ii) Subpart B identifies the market, terms, and “larger participant” test for the CRA industry. This latter part will be expanded for each new market the CFPB opts to supervise under its “larger participant” authority. While the rule as proposed also included a threshold for use in identifying “larger participants” in the debt collection market, the CFPB has postponed issuance of the final debt collection “larger participant” rule until the fall. The CFPB described the final rule as “the first in a series of rules to define larger participants of other markets.”
First Circuit Holds Bank May Be Liable For Customer Losses from Cyber Attacks
On July 3, the U.S. Court of Appeals for the First Circuit became the first federal appellate court to address the issue of bank liability for the loss of customer funds resulting from a breach of a bank’s cyber security, reversing a district court’s holding that the bank was not liable for such losses because its security protections were commercially reasonable. Patco Const. Co., Inc. v. People’s United Bank, No. 11-2031, 2012 WL 2543057 (1st Cir. Jul. 3, 2012). Patco Construction Company, a commercial banking customer suffered losses when cyber attackers gained electronic access to its account and made a series of unauthorized withdrawals. The customer sued the bank to recover the lost funds. The district court granted summary judgment in favor of the bank, holding that the customer should bear the loss from the fraudulent transfers because the bank’s cyber security protections were commercially reasonable, and the customer agreed that the procedures were reasonable when it signed the contract to add its electronic account. On appeal the customer argued that the procedures were not commercially reasonable, that it did not agree to the procedures, and that the bank did not comply with its own procedures. Specifically, the customer argued that the bank increased the risk of compromised security when it decided to lower the threshold that triggered account verification questions from $100,000 to $1, essentially requiring that the verification questions be answered for every transaction without considering the circumstances of the customer and the transaction. The First Circuit agreed. It found that the procedure change increased the risk of fraud through unauthorized use of compromised security answers. Moreover, after it had warning that fraud was likely occurring, the bank did not monitor the transaction or provide notice to the customer. The court held that the bank’s collective security failures, when compared to the security measures employed by other financial institutions and the bank’s capacity to implement more robust protections, rendered its security procedures commercially unreasonable. The court reversed the district court’s ruling in favor of the bank and remanded for further proceedings.
House Subcommittee Presses CFPB on White House Ties
On July 2, the Chairman of a House Oversight and Government Reform Subcommittee, Representative McHenry (R-NC), sent a letter to CFPB Director Richard Cordray seeking information and documents regarding the CFPB’s contacts with the executive branch. As an independent federal agency, the letter explains, the CFPB should operate “free from executive control.” The letter catalogues meetings and other interactions between CFPB staff and executive branch personnel that Mr. McHenry believes “raise concerns about the [CFPB’s] commitment to regulatory independence.” Representative McHenry asks that the CFPB produce documents and information in response to a series of questions by July 16, 2012. For example, the letter seeks (i) information about requested or suggested actions originating from the Executive Office of the President (EOP), (ii) CFPB internal guidelines and procedures to ensure independence from the executive branch, and (iii) all documents and communications between the CFPB and any employee of the EOP.
OCC Identifies Risks Facing National Banks, Federal Savings Associations
On July 5, the OCC’s National Risk Committee issued its Semiannual Risk Perspective, which identifies issues that pose threats to the safety and soundness of banks. According to the report, the three major risks facing national banks and federal savings associations are (i) the lingering effects of a weak housing market, (ii) revenue challenges related to slow economic growth and market volatility, and (iii) the potential that banks may take excessive risks in an effort to improve profitability. Within each of the three major risk areas, the report identifies “key risk themes.” For example, with regard to the aftereffects of the housing market bust, the report observes as themes: (i) flaws in foreclosure processing that are exacting large remediation costs, record penalties, and reputational damage for mortgage servicers, (ii) continued above average rates of delinquency and charge-off for housing-related loans, and (iii) persistently high commercial real estate vacancy rates and high levels of problem assets. This is the first semiannual risk report published by the OCC; it is based on data as of December 31, 2011.
Seventh Circuit Compels Coverage Under D&O Policy Despite "Insured vs. Insured" Exclusion
On June 29, the U.S. Court of Appeals for the Seventh Circuit directed a D&O insurance provider to cover certain claims against defendants insured under the same policy as some plaintiffs despite an “insured vs. insured” exclusion from coverage under the insurance arrangement. Miller v. St. Paul Mercury Ins. Co., No. 10-3839 (7th Cir. June 29, 2012). The dispute began when five plaintiffs sued Strategic Capital Bancorp, Inc. (“SCBI”) for fraud and other state law claims flowing from SCBI’s alleged material misstatements relating to the company’s financial condition. Three of the plaintiffs were directors or officers covered under SCBI’s policy; the other two plaintiffs were not insureds under the policy. When SCBI notified its insurance carrier and requested indemnity and defense coverage under the insurance agreement, the carrier refused, citing the policy’s “insured vs. insured” provision. All parties to that initial lawsuit then filed a new action against the carrier in an effort to force it to provide coverage. The Seventh Circuit reversed the district court’s dismissal of those claims brought by the two non-insured plaintiffs. In a lawsuit involving both insured and non-insured plaintiffs, the court ruled, the insurance carrier must “provide indemnity for losses on claims by non-insured plaintiffs but not for losses on claims by insured plaintiffs.” The court reasoned that such a holding conforms to the parties’ expectations, minimizes the risk of arbitrary results, and discourages efforts to manipulate the result through strategic party joinder or case consolidation.
FDIC Reveals Banks' Living Wills
On July 3, the Federal Deposit Insurance Corporation (FDIC) posted the public sections of the initial resolution plans submitted by sixteen large bank holding companies. The resolution plans were required by the Dodd-Frank Act. The documents are meant to act as living wills that spell out how the banks could wind themselves down in the event of their failure. Generally, the public portions of these plans contain an outline of the banks organization, assets and capital ratios, and describe in high-level detail the mechanisms that each would employ to wind up its operations in the event of failure. The plans are subject to revisions following review by the FDIC and the Federal Reserve.
West Virginia AG Reaches Settlement with Debt Collection Firm
On July 3, West Virginia Attorney General (AG) Darrell McGraw announced that his office had reached an agreement with a debt collection firm for allegedly engaging in unlawful and threatening debt collection practices and attempting to collect debts without being properly licensed. Under the terms of the settlement, the company will be required to pay $1.7 million in refunds and cancelled debts to 124 West Virginians. The AGs Consumer Protection Division started investigating the company in January 2012 after receiving a complaint about its debt collection practices. According to the AGs investigation, the debt collection firm engaged in a pattern of abusive collection methods which included threatening to arrest consumers for non-payment of debts.
CFPB Finalizes Rule Governing Treatment of Privileged Information
On June 28, the CFPB released a final rule that will govern how it handles privileged information submitted by supervised financial institutions. In the final rule, the CFPB adopted the proposed rule without modification. The rule allows parties to submit information to the CFPB in the supervisory or regulatory process without waiving any applicable privileges; it further permits the CFPB to share that information with federal and state agencies without affecting federal or state privileges. The rule takes effect 30 days following its publication in the Federal Register.
CFPB Releases Report on Reverse Mortgages
On June 28, the CFPB released a report to Congress detailing the characteristics and evolving uses of reverse mortgages in today’s marketplace. The report presents findings from a CFPB study on reverse mortgages required by the Dodd-Frank Act. Among the findings, the CFPB report states that reverse mortgages are often difficult for consumers to understand. The report further observes that reverse mortgages are being used by younger borrowers to obtain all available equity upfront, a use that contravenes the original and intended use of reverse mortgage products and may pose substantial risks to consumers. Concurrent with the release of the report, the CFPB issued a Notice and Request for Information on topics related to reverse mortgages and will accept comments for 60 days following publication of the Notice in the Federal Register. The CFPB intends to use the information and comments received from the public, as well as the findings from its study, to determine whether further consumer education or regulatory action related to reverse mortgages is necessary.