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State AGs urge OCC to withdraw Madden proposal
On January 21, a bipartisan collation of attorneys general from 21 states and the District of Columbia, along with the Hawaii Office of Consumer Protection, submitted a comment letter in response to the OCC’s proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. (See Buckley Special Alert on the proposed rule.) The coalition, led by California, Illinois, and New York, urges the OCC to withdraw the proposed rule. Among their concerns, the AGs argue that the OCC’s proposal conflicts with the National Bank Act and Dodd-Frank, exceeds the OCC’s statutory authority, and is in violation of the Administrative Procedure Act. Specifically, the AGs claim that the proposed rule conflicts with National Bank Act (NBA) provisions that grant benefits of federal preemption only to national banks and no one else. Moreover, the AGs assert that Congress explicitly stated in Dodd-Frank that “that the benefits of federal preemption provided by the NBA accrue only to [n]ational [b]anks,” (emphasis in original) and argue that the proposed rule would contravene “this important limitation” and “cloak non-banks in [the NBA’s] preemptive power.” Moreover, the NBA sections say “nothing about interest chargeable by assignees, transferees, or purchasers of bank loans,” the AGs write.
The AGs also argue that the proposed rule would facilitate predatory “rent-a-bank schemes” by allowing non-bank entities to ignore state interest rate caps and usury laws. “The OCC has not addressed, even summarily, how the [p]roposed [r]ule, if adopted, will serve to incentivize and sanction predatory rent-a-bank schemes,” the AGs state. “This failure to consider the substantial negative consequences this rule would have on consumer financial protection across the country renders the OCC’s [p]roposed [r]ule arbitrary and capricious.” Furthermore, the AGs contend that the OCC’s proposed rule contains no factual findings or reasoned analysis to support its proposal to extend NBA preemption to all non-bank entities that purchase loans from national banks. “[T]his is beyond the agency’s power,” the AGs argue, asserting that “[t]he OCC simply ‘may not rewrite clear statutory terms to suit its own sense of how the statute should operate.’”
SEC files Supreme Court brief in favor of disgorgement
On January 15, the SEC filed a brief in a pending U.S. Supreme Court action, Liu v. SEC. The question presented to the Court asks whether the SEC, in a civil enforcement action in federal court, is authorized to seek disgorgement of money acquired through fraud. The petitioners were ordered by a California federal court to disgorge the money that they collected from investors for a cancer treatment center that was never built. The SEC charged the petitioners with funneling much of the investor money into their own personal accounts and sending the rest of the funds to marketing companies in China, in violation of the Securities Act’s prohibitions against using omissions or false statements to secure money when selling or offering securities. The district court granted the SEC’s motion for summary judgment, and ordered the petitioners to pay a civil penalty in addition to the $26.7 million the court ordered them to repay to the investors. The petitioners appealed to the Supreme Court and in November, the Court granted certiorari.
The petitioners argued that Congress has never authorized the SEC to seek disgorgement in civil suits for securities fraud. They point to the court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement is a penalty and not an equitable remedy. Under 28 U.S.C. § 2462, this makes disgorgement subject to the same five year statute of limitations as are civil fines, penalties and forfeitures (see previous InfoBytes coverage here). The petitioners also suggested that the SEC has enforcement remedies other than disgorgement, such as injunctive relief and civil money penalties, so loss of disgorgement authority will not hinder the agency’s enforcement efforts.
According to the SEC’s brief, historically, courts have used disgorgement to prevent unjust enrichment as an equitable remedy for depriving a defendant of ill-gotten gains. More recently, five statutes enacted by Congress since 1988 “show that Congress was aware of, relied on, and ratified the preexisting view that disgorgement was a permissible remedy in civil actions brought by the [SEC] to enforce the federal securities laws.” The agency notes that the Court has recognized disgorgement as both an equitable remedy and a penalty, suggesting, however, that “the punitive features of disgorgement do not remove it from the scope of [the Exchange Act’s] Section 21(d)(5).” Regarding the petitioner’s reliance on Kokesh, the brief explains that “the consequence of the Court’s decision was not to preclude or even to place special restrictions on SEC claims for disgorgement, but simply to ensure that such claims—like virtually all claims for retrospective monetary relief—must be brought within a period of time defined by statute.”
In addition to the brief submitted by the SEC, several amicus briefs have been filed in support of the SEC, including a brief from several members of Congress, and a brief from the attorneys general of 23 states and the District of Columbia.
FHFA raises annual CFI cap
On January 22, the Federal Housing Finance Agency published its annual adjustment to the cap on average total assets used to determine whether a Federal Home Loan Bank member qualifies as a community financial institution (CFI). The new cap is $1,224,000,000. Under the Federal Home Loan Bank Act, insured depository institutions that qualify as a CFI receive certain advantages in qualifying for bank membership and the ability to receive and collateralize long-term advances. The adjustment took effect January 1.
Federal Reserve vice chairman discusses supervision
On January 17, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke before the American Bar Association Banking Law Committee meeting in Washington, D.C. on bank supervision and ways to improve transparency, efficiency, and effectiveness. With respect to supervision, Quarles said that the Fed’s communication with supervised banks could be improved and made several specific proposals in the areas of large bank supervision, transparency improvements, and overall supervisory process improvements. In terms of large bank supervision, Quarles discussed how banks are added to the list of complex institutions overseen by the Large Institution Supervision Coordinating Committee (LISCC), particularly with respect to decreases in foreign banking organizations’ (FBOs) size and risk profiles. According to Quarles, over the past decade, four foreign banks have significantly shrunk their presence in the U.S. and reduced risk within their U.S. operations. As a result, these banks’ “estimated systemic impact” is now much smaller than that of the U.S. global systemically important banks. Moving these FBOs to a lower category, he noted, would allow the firms to be supervised alongside other foreign and domestic firms with similar risk profiles. However Quarles emphasized that any changes in these four FBOs’ supervisory portfolios “would have no effect on the regulatory capital or liquidity requirements that currently apply.” Quarles also discussed the Fed’s stress capital buffer proposal—which “will give banks significantly more time to review their stress test results and understand their capital requirements before we demand their final capital plan”—noting that the Fed continues to research ways to “reduce the volatility of stress-test requirements from year to year.”
Concerning transparency, Quarles stated, among other things, that he supports submitting significant supervisory guidance documents with Congress for the purposes of the Congressional Review Act, as it already does with new rules. Quarles also proposed the creation of a database of all significant agency rules and interpretations and seeking public comments on significant supervisory guidance before it is issued. Finally, Quarles said the Fed hopes to maintain “firm and fair supervision” by (i) increasing the ability of supervised firms to share confidential supervisory information; (ii) adopting a rule on the use of guidance in the supervisory process; (iii) restoring the “‘supervisory observation’ category for lesser safety and soundness issues”; and (iv) limiting the use of future Matters Requiring Attention to violations of law, violations of regulation, and material safety and soundness issues.
OFAC identifies Venezuelan aircraft as blocked property, issues amended Venezuela-related general licenses
On January 21, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced amendments to the list of property implicated by the Specially Designated Nationals List (SDN List) pursuant to Executive Order (E.O.) 13884, which blocks the property of the Venezuelan government. OFAC identified 15 aircraft that either transported senior members of the Maduro regime or “operated in an unsafe and unprofessional manner in proximity to U.S. military aircraft, while in international air space.” OFAC reiterated that its “regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of blocked persons.”
In connection with the designations, OFAC issued amended Venezuela General License (GL) 20B, titled “Authorizing Official Activities of Certain International Organizations Involving the Government of Venezuela.” GL 20B authorizes certain transactions and activities otherwise prohibited under E.O.s 13850 and 13857 involving Banco Central de Venezuela, and E.O. 13884 involving the Government of Venezuela.
Earlier, on January 17, OFAC issued two additional amended Venezuela GLs. GL 5B provides that on or after April 22, all transactions related to the financing for, and other dealings in the Petróleos de Venezuela SA 2020 8.5 Percent Bond that would be prohibited under a certain subsection of E.O. 13835, as amended by E.O. 13857, are authorized. GL 8E, titled “Authorizing Transactions Involving Petróleos de Venezuela, S.A. (PdVSA) Necessary for Maintenance of Operations for Certain Entities in Venezuela,” supersedes GL 8D to extend the expiration date for certain authorizations through April 22.
New York Fed analyzes potential impact of cyber attacks on payments network
In January, the Federal Reserve Bank of New York (New York Fed) released a staff report that analyzes how a cyber attack transmitted through a payment network could be amplified throughout the U.S. financial system. According to the report, Cyber Risk and the U.S. Financial System: a Pre-Mortem Analysis, cyber attacks that impair the most active U.S. banks’ ability to send payments “would likely be amplified to affect the liquidity of many other banks in the system,” including smaller or mid-sized banks that are connected through a shared service provider. The New York Fed notes, however, that the report’s primary focus is on a cyber attack’s impact within a single day, and cautions that should a cyber attack compromise the integrity of the banking system, “the reconciliation and repercussion process would be an unprecedented task.” Among other things, the report (i) establishes a framework for estimating “cyber vulnerability” and understanding the impairments of a cyber attack on a bank’s payment activities; (ii) creates a baseline scenario to study the five largest institutions within the wholesale payment network and the high concentration of payments between large institutions, as well as the resulting imbalance in liquidity that occurs if even a single large institution is unable to remit payments to its counterparties; and (iii) conducts a reverse stress test exercise, in which it analyzes “how many smaller institutions it would take to impair any of the most active ones,” in order to highlight “how the impairment of many smaller institutions also presents a systemic risk.”
State AGs support congressional disapproval of 2019 Borrower Defense Rule
On January 14, a coalition of attorneys general from 19 states and the District of Columbia sent a letter to Congress in support of H.J. Res. 76, which was passed by the House of Representatives on January 16, and provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (covered by InfoBytes here). The Department’s 2019 Borrower Defense Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for loan forgiveness applicable for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.”
The AGs claim, however, that the 2019 Borrower Defense Rule “provides no realistic prospect for borrowers to discharge their loans when they have been defrauded by predatory for-profit schools, and . . . eliminates financial responsibility requirements for those same institutions.” The AGs further argue that the new provisions require “student borrowers to prove intentional or reckless misconduct on the part of their schools,” which they claim is “an extraordinarily demanding standard not consistent with state laws governing liability for unfair and deceptive conduct.” Other standards, such as requiring student borrowers to “prove financial harm beyond the intrinsic harm caused by incurring federal student loan debt as a result of fraud” and establishing a three-year time bar on borrower defense claims, would further reduce protections for student borrowers. Citing to several state enforcement actions taken against for-profit schools for alleged deceptive and unlawful tactics, the AGs stress the need for a “robust and fair borrower defense rule.”
7th Circuit says “time sensitive document” on envelope violates FDCPA
On January 21, the U.S. Court of Appeals for the Seventh Circuit partially reversed a district court’s dismissal of an action concerning a debt collector’s use of language or symbols other than the collector’s address on an envelope sent to a consumer. According to the opinion, the consumer received a debt collection letter enclosed in an envelope stamped with the words “TIME SENSITIVE DOCUMENT” in bold font. The consumer filed a complaint against the defendant asserting various claims under the FDCPA, including that inclusion of “TIME SENSITIVE DOCUMENT” on the envelope was a violation of section 1692f(8). The defendant had argued that an exception should be carved out for “benign” language in this instance, and the district court agreed.
As previously covered by InfoBytes, the 7th Circuit invited the CFPB to file an amicus brief on whether there is a benign language exception to section 1692f(8)’s prohibition, and, if so, whether the phrase “TIME SENSITIVE DOCUMENT” falls within that exception. The Bureau asserted that there is no benign language exception, and stressed that while section 1692f(8) recognizes that debt collectors may be permitted to include language and symbols on an envelope that facilitate the mailing of an envelope, section 1692f(8), by its own terms, does not allow for benign language. Additionally, the Bureau commented that section 1692f’s prefatory text does not “provide a basis for reading a ‘benign language’ exception into section 1692f(8),” nor does the prefatory text suggest that the prohibition applies only in instances where it may be “‘unfair or unconscionable’” in a general sense.
The 7th Circuit concluded that section 1692f(8) is clear. Because the language at issue does not fall within the list of exceptions—it is not the debt collector’s name or its address—the inclusion of the phrase “TIME SENSITIVE DOCUMENT” is a violation of section 1692f(8), and the district court erred in dismissing this claim. However, the appellate court agreed with the district court’s dismissal of the consumer’s section 1692e claims that the language used on the envelope and in the body of the letter were false and deceptive.
OCC fines bank on flood insurance
On January 21, the OCC assessed a nearly $18 million civil money penalty against a national bank lender for alleged violations of the Flood Disaster Protection Act (FDPA). According to the OCC, the bank allegedly maintained FDPA policies and procedures which allowed the bank’s third-party servicer to extend the 45-day period after notification to the borrower that the flood insurance did not adequately cover the collateral. The OCC alleged that this resulted in the “untimely force placement of flood insurance” on loans secured by buildings or mobile homes located in special flood hazard areas. The bank agreed to pay the penalty without admitting or denying any wrongdoing.
FDCPA class action garnishments award overturned
On January 16, the U.S. Court of Appeals for the Sixth Circuit overturned a district court’s class action award to the plaintiffs in an FDCPA action. According to the opinion, the credit card company hired the defendant, a law firm, to collect an unpaid credit card debt from the plaintiff. The defendant filed suit against the plaintiff and secured a judgment against her. The defendant then filed several writ of garnishment requests attempting to satisfy the judgment and, in addition, seeking the costs of the current writ request. In later garnishment requests, the defendant also added the costs of prior failed garnishments. The plaintiff then filed a class action in district court against the defendant alleging the requests for writ of garnishment from the defendant contained false statements in violation of the FDCPA. The court found for the plaintiff and awarded class members a total of $3,662, and attorney’s fees of $186,680 and the defendant appealed.
After rejecting a jurisdictional argument by the defendant, the appellate court addressed whether the defendant’s writ of garnishment requests seeking all total costs to date, including the cost of the current garnishment,” were false, deceptive, or misleading. The appellate court concluded that it was reasonable to request the costs of the current garnishment request, as Michigan law at the time allowed creditors to include “the total amount of the post-judgment costs accrued to date” in their garnishment requests. Additionally, the opinion pointed to the recently revised Michigan rule that explicitly allows debt collectors to “include the costs associated with filing the current writ of garnishment” as clarification that the prior version of the rule was intended to cover current costs.
Regarding the costs of prior failed garnishment requests, the opinion stated that Michigan law did not allow a creditor to seek these costs and that including them was therefore a false representation under the FDCPA. The appellate court remanded the case, however, to provide the defendants an opportunity to prove the violation was a “bona fide” mistake of fact and that its procedure for preventing such mistakes were sufficient. In addition to vacating the award and attorney’s fees, and remanding the case, the court vacated the class certification order.