CFPB Report October 25, 2013

CFPB Issues Remittance Exam Procedures

On Tuesday, October 22, 2013, the CFPB announced the publication of exam procedures and a small entity guide for the remittance rules, which take effect on October 28, 2013. The CFPB also announced the launch of an eRegulations tool, a web-based version of the Bureau’s rules. Regulation E, including the remittance rule, is the first regulation to be included in the new application. 

CFPB examiners will use the remittance transfer procedures in review of various areas, including required disclosures; proper error resolution procedures; consumer refund and cancellation rights; and unfair, deceptive, or abusive acts or practices. 

CFPB Sues Law Firm for RESPA Violations

The CFPB announced on Thursday, October 24, 2013, the filing of a federal lawsuit against a Kentucky law firm, Boarders and Borders PLC, claiming the firm paid illegal kickbacks for real estate settlement referrals through a network of shell companies. The CFPB cited the firm for violations of the Real Estate Settlement Procedures Act (RESPA). The Bureau claims Boarders and Borders PLC operated a network of affiliated companies to pay kickbacks for referrals of mortgage business. 

Lawsuit Against CFPB Dismissed

A federal judge dismissed a lawsuit brought against the CFPB by a legal support firm, Morgan Drexen. The California-based firm and Connecticut bankruptcy attorney, Kimberly Pisinksi, sued the CFPB in July, claiming its structure "insulates it from political accountability and internal checks and balances in violation of the United States Constitution." U.S. District Judge Colleen Kollar-Kotelly dismissed the lawsuit, finding that Morgan Drexen can "obtain complete relief on its constitutional claim in the currently pending enforcement action in the Central District of California." No decisions were made on the merits of the case. Morgan Drexen has vowed to continue its fight against the “goliath” agency.

Federal Reserve Files Brief in Debit Interchange Appeal

On Monday, October 21, 2013, the Federal Reserve Board (Fed) filed a brief in its appeal against U.S. District Court Judge Richard Leon’s July decision in which he found the current rule on debit interchange to be inconsistent with legislative intent and ordered the Fed’s rule be vacated. Judge Leon subsequently placed a stay on his decision, pending conclusion of an appeal. 

In its brief, the Fed argued that it correctly followed Congressional intent when it wrote regulations (Reg. II) implementing Durbin Amendment restrictions on debit interchange as required by the Dodd-Frank Act, and, therefore, should be entitled to deference. The Fed also argued it reasonably interpreted the network exclusivity provisions included in the Dodd-Frank Act.

The brief has been placed on an expedited hearing schedule in the U.S. Court of Appeals for the District of Columbia Circuit.

CBA Files Amicus Brief in Debit Interchange Appeal

CBA, along with several trade groups, filed an amicus brief in the debt interchange appeal on Monday, October 21, 2013. The groups argue the final rule imposes below cost caps on interchange fees and fails to provide for a reasonable return. They further argue that the district court ignored an important aspect of the Durbin Amendment’s overarching interchange-fee mandate: the statute does not provide merely for recovery of an issuer’s transaction cost, but also provides that the interchange fee shall be reasonable and proportional to that transaction cost. 

The groups also argue that the district court’s decision is wrong on network non-exclusivity. The statute directs the Board to issue regulations prohibiting networks and issuers from imposing certain restrictions on the number of networks available to process an electronic debit transaction. Departing from the statute, the Final Rule instead requires issuers affirmatively negotiate new contracts with unaffiliated networks to enable multiple networks on a debit card. Departing further in its interpretation, the court mandates issuers to enable additional networks on their debit cards: two unaffiliated networks for every method of authorization so that every transaction, regardless of a merchant’s self-imposed restrictions, can be routed over more than one network. There is no statutory mandate for this requirement.

Federal Regulators Issues Fair Lending Statement for Qualified Mortgages

On Tuesday, October 22, 2013, the Federal Reserve, CFPB, FDIC, OCC, and the National Credit Union Administration (NCUA), through a joint press release, issued an interagency statement on fair lending compliance with the Ability-to-Repay/Qualified Mortgage (QM) rule. In the statement, the agencies noted that they “do not anticipate that a creditor's decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution's fair lending risk.” However, creditors must continue to evaluate fair lending risks as they would other loan products. 

Regulators Propose Standards for Assessing Diversity Policies

The Federal Reserve, CFPB, FDIC, the National Credit Union Administration (NCUA), OCC, and the SECannounced their proposal of joint standards for assessing diversity policies and practices of the institutions they regulate. Announced Wednesday, October 23, 2013, the standards cover four key areas, including organizational commitment to diversity and inclusion; workforce profile and employment practices; procurement and business practices and supplier diversity; and, practices to promote transparency of organizational diversity and inclusion. Section 342 of the Dodd-Frank Act requires each financial institution’s Office of Minority and Women Inclusion develop these standards. The proposed policy statement will be open for comment for 60 days following publication in the federal register.

Senator Warren Seeks Enforcement Details from Regulators

On Wednesday, October 23, 2013, Senator Elizabeth Warren (D-MA) sent a letter to the Federal Reserve, SEC, and OCC seeking enforcement records from 2009 to 2012. In the letter, the Senator acknowledged the record penalties levied on financial institutions to hold them accountable for “breaking rules” and to “protect consumers and taxpayers from future violations.” Warren highlighted operating budgets, enforcement lawyers and penalties assessed by the agencies, and praised the Special Inspector General for the Troubled Asset Relief Program for obtaining civil and monetary penalties associated with the crisis.

Senator Markey Questions FTC on Auto Lending

On Wednesday, October 23, 2013, Senator Ed Markey (D-MA) sent a letter to the Federal Trade Commission seeking an investigation into unfair lending practices by auto dealers. In his letter, Senator Markey expressed concern regarding dealers and third party lenders conspiring to hike auto loan interest rates. The letter urges regulatory action to protect consumers from unfair or damaging loan practices which violate federal laws.

Federal Reserve Votes to Propose New Minimum Liquidity Standards

At its meeting on October 24, 2013, the Federal Reserve Board of Governors voted to unanimously issue a proposed rule that would implement new minimum liquidity standards for financial institutions as required under the Basel III international agreements. The proposed rule would affect large domestic bank holding companies, savings and loan holding companies, and depository institutions, as well as nonbank financial companies designed by the Financial Stability Oversight Council. Under the proposed rule, all covered companies and modified liquidity coverage ratio (LCR) companies would be required to continuously maintain a minimum LCR of 100 percent.

The Board of Governors evaluated the strengths and possible shortfalls of the proposed rule, discussing the flexibility for compliance with the minimum LCR in the event of a liquidity crisis. The proposed rule requires a plan in the event a covered institution falls below the minimum LCR. It also allows the institution to use high quality liquid assets (HQLA) in certain cases. 

The Federal Reserve offered a summary of the proposal, the comments for which will be accepted for 90 days upon publication in the Federal Register.

Consumer Groups Question Relationships between Banks and Higher-Risk Merchants

On Thursday, October 24, 2013, a national coalition of 30 consumer groups wrote to regulators regarding relationships between banks and higher-risk merchants, such as online payday lenders. The letter questions both the legality of some higher-risk merchant operations and the responsibility of financial institutions that participate as a third party to consumers through payment networks. The letter was addressed to the heads of the Federal Reserve, CFPB, FDIC, Department of Justice, National Credit Union Administration, and Federal Trade Commission.

Representative Waters Introduces Money Laundering Legislation

On Thursday, October 24, 2013, House Financial Services Committee Ranking Member Maxine Waters introduced legislation to strengthen anti-money laundering laws and hold bank executives and board members personally liable for misconduct associated with such actions. In a press release, Rep. Waters touted the bill entitled, “Holding Individuals Accountable and Deterring Money Laundering Act,” which increases monetary and civil penalties for institutions and individuals who willingly neglect the Bank Secrecy Act (BSA). The legislation also calls for internal controls. A summary of the bill is available online.