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Federal Reserve Publishes Rules to Simplify Administration of Reserve Requirements
On April 12, the FRB published two final rules designed to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and the Federal Reserve Banks. The FRB amended Regulation D to (i) create a common two-week maintenance period, (ii) create a penalty-free band around reserve balance requirements in place of using carryover and routine penalty waivers, (iii) discontinue “as-of adjustments” related to deposit report revisions and replace all other such adjustments with direct compensation, and (iv) eliminate the contractual clearing balance program. These changes will be phased in, with the latter two taking effect on July 12, 2012, and the first two taking effect on January 24, 2013. A second rule amends Regulation J to make it consistent with the Regulation D amendments by eliminating references to “as-of adjustments.” The rule also clarifies the handling of checks sent to the Federal Reserve Banks and the application of funds transfer rules to remittance transfers. These changes will take effect on July 12, 2012. Finally, with these rule changes, the FRB also announced modifications to its overnight overdraft policy, which also will take effect on July 12, 2012.
West Virginia Revises Mortgage and Consumer Lending Statutes
West Virginia recently enacted several bills to amend statutes related to mortgage licensing and servicing and consumer lender licensing. House Bill 4271 was enacted March 30 and takes effect June 8, 2012. It amends existing reporting requirements for licensed residential mortgage lenders and brokers to direct lenders and brokers to submit reports through the Nationwide Mortgage Licensing System and Registry (NMLS) for periods established by the NMLS. The law allows the Commissioner of the Division of Banking to require direct reporting, preserves the confidentiality of the reports, and alters certain public reporting obligations of the Commissioner. Also enacted on March 30, House Bill 4274, authorizes the Commissioner of the Division of Banking to fine regulated consumer lenders required to be licensed up to $2,000 for violating applicable statutory and regulatory requirements. Each day that a consumer lender engages in covered conduct without being licensed is considered a separate violation subject to a separate fine. This change takes effect June 7, 2012. On April 2, effectively retroactive to January 1, 2012, Senate Bill 551 creates an exemption to mortgage loan limitations to allow for modification or refinancing loans made between January 1, 2012 and January 15, 2015 as part of the federal Home Affordable Modification Program or any other federal or state program or litigation settlement.
FTC Announces First Actions Against Auto Loan Modification Schemes
On April 4, the FTC released complaints filed recently against two operations allegedly engaged in deceptive auto loan modification schemes. According to the FTC, the two companies and several related individuals instructed consumers to stop paying their auto loans and promised to lower their monthly payments in exchange for up-front payment of fees, but then did not provide promised refunds when they failed to obtain car loan modifications. The FTC complaints detail the companies’ Internet and other marketing efforts and alleged false promises of lower monthly payments and money-back guarantees. These are the first auto loan modification cases filed by the FTC, which has been actively pursuing allegations of similar mortgage loan modification schemes. Concurrent with these announced cases, the FTC released an alert for consumers seeking assistance in managing their auto loans. The FTC also recently closed out a year of seeking public input on consumer protection issues that arise in auto sales, financing, and leasing.
FTC Files Case Against Tribe-Affiliated Payday Lenders
On April 2, the FTC announced that it filed a complaint in the United States District Court for the District of Nevada against a payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. The FTC alleges that the operation, consisting of numerous defendants including three Internet-based lending companies, seven related companies and numerous individuals (i) violated the FTC Act by making misrepresentations and false threats, (ii) violated TILA by failing to accurately disclose APR and other loan terms, and (iii) violated the Electronic Fund Transfer Act by requiring consumers to preauthorize electronic fund transfers from their accounts. According to the FTC, the defendants have claimed in state court that they are immune from legal action because of their affiliation with Native American tribes. The FTC argues that notwithstanding any such affiliation, the defendants are still subject to federal law. This is the second time in seven months that the FTC has brought suit against a payday lender that has used a tribal affiliation defense against actions by state authorities.
FSOC Approves Final Rule to Designate Systemically Important Nonbanks
On April 3, the Financial Stability Oversight Council (FSOC) voted to approve a final rule and interpretive guidance regarding the process it intends to use in designating nonbank financial companies as systemically important and subject to supervision by the Federal Reserve Board (FRB). The final rule and guidance follow an advanced notice of proposed rulemaking, two proposed rules, and proposed guidance. The final designation process is substantially similar to that outlined in the second proposed rule, issued in October 2011, with some clarifications. For example, the final rule provides a longer time period (no less than 30 days) for companies to respond to a notice that it is being considered for a systemically important determination and makes clear that hearings conducted as part of the determination process are nonpublic. The FSOC also clarified in response to comments that it intends to interpret the term "company" broadly to include any corporation, limited liability corporation, partnership, business trust, association, or similar organization, but not unincorporated associations. The rule does not provide any industry-based exemptions and the FSOC indicated that it does not intend to provide any, but will consider related comments as part of the determination process. Regarding coordination, the FSOC declined to delay finalizing this rule until related regulatory activities are completed, for example, the FRB's rule for determining if a company is "predominantly engaged in financial activities," choosing to view those considerations as non-essential to its consideration of whether a nonbank financial company could pose a threat to U.S. financial stability.
FRB Reissues Proposal to Determine Significant Nonbanks
On April 2, the FRB released an amended proposed rule to establish requirements for determining whether a company is “predominantly engaged in financial activities.” The original proposal also defined the terms “significant nonbank financial company” and “significant bank holding company.” Comments received in response to the February 2011 proposed rule raised questions as to whether conditions imposed on the conduct of financial activities by the Bank Holding Company Act and the FRB’s implementing regulations should be considered in defining financial activities. In response, the FRB amended the proposal to clarify that any activity referenced in section 4(k) of the Bank Holding Act will be considered to be a financial activity without regard to conditions that were imposed on bank holding companies that do not define the activity itself. The revised proposal also adds an appendix that lists all activities that would be considered to be financial activities as of April 2, 2012. While the FSOC can designate nonbanks as systemically important, it can only do so with regard to nonbank financial companies that are predominantly engaged in financial activities which, under Section 102 of the Dodd-Frank Act, means that 85 percent or more of the company’s revenues or assets are related to financial activities, as defined in section 4(k) of the Bank Holding Act. The FRB is tasked with establishing the detailed criteria for determining whether a company meets this definition.
Federal Appeals Court Limits Review of FTC Interpretation of FCRA
Recently, the U.S. Court of Appeals for the District of Columbia Circuit held that the FTCs interpretation of a Fair Credit Reporting Act (FCRA) provision is not subject to direct review by the federal appeals court. Natl Auto. Dealers Assoc. v. FTC, 670 F.3d 268 (D.C. Cir. 2012). In July 2011, the FTC promulgated a rule to implement changes made by the Dodd-Frank Act to FCRAs risk-based pricing protections. Those protections entitle consumers to a notice when they are offered credit at materially less favorable terms based on information contained in their credit reports. As part of the July 2011 rule, the FTC provided supplementary information that included an interpretation of the scope and applicability of the rule, stating that automobile dealers are subject to the rule, even when dealers rely on third-party financing sources and not directly on credit reports obtained from a consumer reporting agency. The National Association of Automobile Dealers (NADA) filed a petition asking the appeals court to review the FTCs interpretation. NADA concurrently filed a complaint in district court seeking a review of the rule under the Administrative Procedures Act. The appeals court held that direct appellate review of an agency action is only permissible when a statute unambiguously grants such a review. In this case, the direct review provision of the FTC Act is not ambiguous and clearly does not apply to the FCRA interpretation at issue. Under the FTC Act, direct review is only available for challenges to trade regulation rules and substantive amendments thereto. NADA is not challenging a substantive amendment, but rather an interpretation, and in any case the FCRA interpretive statement is not related to a trade regulation rule. Therefore, the appeals court dismissed the petition without prejudice to the parallel district court action.
Financial Services Committee Members Seek Information on CFPB Cost-Benefit Analysis
On March 29, Representatives Randy Neugebauer and Shelley Moore Capito sent a letter to CFPB Director Richard Cordray seeking his assurance that the CFPB will “conduct rigorous, transparent cost-benefit analysis whenever it drafts a new rule.” The letter also asks the CFPB to respond by April 19 to a series of questions related to its rulemaking and other regulatory processes and procedures, as well as the applicability of federal regulatory reform initiatives to the CFPB’s regulatory activities.
Federal Banking Regulators Propose Joint Revisions to Leveraged Finance Guidance
On March 26, the Federal Reserve Board, the FDIC, and the OCC proposed revisions to the interagency leveraged finance guidance issued in 2001. Leveraged finance transactions are characterized by a borrower with a degree of financial or cash flow leverage that significantly exceeds industry norms as measured by various debt, cash flow, or other ratios. According to the agencies, the guidance needs to be revised given increasing leveraged lending volumes, deteriorating underwriting practices, limited protection of debt agreements, aggressive capital structures and repayment prospects, and less than satisfactory management information systems. Specifically, the agencies believe that the guidance should be updated to refocus attention on the following five key areas: (i) establishing a sound risk-management framework, (ii) underwriting standards, (iii) valuation standards, (iv) pipeline management, and (v) reporting and analytics. The agencies are accepting comments on the proposed guidance through June 8, 2012.
CFPB Files Amicus in TILA Rescission Case
On March 27, the CFPB announced that it recently filed an amicus brief in the U.S. Court of Appeals for the Tenth Circuit in a case involving the Truth in Lending Act (TILA) right to rescind a transaction, Rosenfield v. HSBC Bank, No. 10-1442 (10th Cir.). The CFPB argued that borrowers who do not receive the material disclosures required by TILA can rescind the transaction as long as they notify the lender of the cancellation within three years of consummation, even if they do not file suit within the three-year period. The CFPB urged the Tenth Circuit to reject the view of the majority of courts that the borrower must both notify the lender and file suit within three years. Citing both the statute and the CFPB’s implementing Regulation Z, the CFPB argued that the holding in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), that the right to rescind expires completely after three years, simply means that “consumers [must] exercise their rescission right by providing notice to their lender within three years of obtaining the loan,” and that consumers could file suit after three years if the lender failed to honor the rescission notice. As an indication of the Bureau’s intense interest in this issue, it noted that it plans to file amicus briefs on the same question in at least three other circuits in which briefing is still pending.