In This Issue. The Consumer Financial Protection Bureau (CFPB) released prototypes of “Know Before You Owe” overdraft disclosure forms and provided an updated rulemaking agenda for 2017; the Federal Reserve proposed guidelines to clarify the roles of bank boards and management, and also proposed a new rating system for large financial institutions; the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) staff issued a Risk Alert regarding the findings from its second cybersecurity initiative; an important decision from the Delaware Supreme Court clarified the role of deal price in appraisal proceedings; and the Seventh Circuit affirmed the dismissal of two Fair Credit Reporting Act (FCRA) class actions on Spokeo grounds. These and other recent developments are covered below.
CFPB Releases Prototypes of “Know Before You Owe” Overdraft Disclosure Forms
On August 4, the CFPB published four prototypes of model overdraft disclosure forms the CFPB is testing as part of its larger “Know Before You Owe” efforts. The prototypes attempt to clarify costs and risks associated with opting in to overdraft coverage offered by many banks and credit unions. While many view overdraft coverage as an important tool for consumers in meeting their short-term financial needs, the CFPB has published a report showing that “frequent” overdrafters incur substantial fees in connection with their overdrafts. Based on this and other studies, the CFPB has taken the position that clearer disclosures about overdraft coverage may be needed. The release of the disclosure prototypes is important both because it may mean financial institutions will need to change their disclosure forms in the near future and also because it signals continued focus on overdrafts by the CFPB, which has previously indicated that it may engage in formal rulemaking on overdraft issues at some point in the future.
CFPB Updates Its Spring 2017 Rulemaking Agenda
On July 20, the CFPB announced that updates to its Spring 2017 rulemaking agenda have been posted online on the Office of Management and Budget’s webpage. The amended agenda highlights both areas of anticipated regulatory focus as well as recent rule changes that the CFPB is already in the process of implementing. View the LenderLaw Watch blog post.
Fed Proposes Guidance Distinguishing Roles of Bank Boards and Management
On August 3, the Board of Governors of the Federal Reserve System issued a proposal to streamline its supervisory expectations for bank boards of directors. The proposal clarifies the distinction between the roles of bank boards and senior management teams. For large banks with more than $50 billion in assets, the Federal Reserve proposed new criteria by which it will assess bank boards. These five “key attributes” include setting clear, consistent strategic direction and risk tolerance; actively managing information flow and board discussions; holding senior management accountable; supporting independent risk management and internal audit functions; and maintaining a capable board composition and governance structure. The Federal Reserve proposed additional changes that would apply to banks of all sizes, including revising or rescinding supervisory expectations for boards that do not relate to their core responsibilities. It also clarified that in most cases, matters requiring attention should be directed to the bank’s senior management team, not to the board. Comments on the proposal are due 60 days after the notice is published in the Federal Register.
Fed Proposes New Rating System for Large Financial Institutions
On August 3, the Federal Reserve proposed a new supervisory rating scale for large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate holding companies of foreign banking organizations operating in the United States (covered financial institutions). The proposed supervisory rating scale would assign ratings for three categories: capital planning, liquidity risk management and governance and controls. Covered financial institutions would receive ratings in each category. To be considered “well-managed,” a covered financial institution would need to be highly rated in each category. The Federal Reserve hopes that the new supervisory rating system will better align the ratings system with its existing supervisory program as well as provide clarity and consistency around its supervisory expectations. Comments on the proposal are due 60 days after the notice is published in the Federal Register. Consistent with existing practice, the new rating system would not apply to insurance companies supervised by the Federal Reserve. Firms with less than $50 billion in total consolidated assets, including community banks, would continue to use the current rating system, which reflects longstanding supervisory practices for those firms.
OCC Revises “Failure Acquisitions” Booklet
On August 3, the Office of the Comptroller of the Currency (OCC) released a revised “Failure Acquisitions” booklet of the Comptroller’s Licensing Manual (Manual), which supersedes the April 1998 version of the booklet. The revised booklet is the latest in a series of recent updates to the Manual, and it provides an overview of the bidding process for national banks and federal savings associations interested in acquiring failing depository institutions through the Federal Deposit Insurance Corporation’s (FDIC) failure resolution process. Among other things, the revised booklet describes the procedures bidders should follow in seeking OCC clearance for such transactions, as well as the criteria considered by the OCC when evaluating a bid.
OCIE Issues Risk Alert: Observations From Cybersecurity Examinations
The SEC’s OCIE staff issued a Risk Alert discussing the findings from its second cybersecurity initiative designed to assess preparedness of firms in the securities industry. The staff reported an overall improvement in cybersecurity preparedness since its first cybersecurity initiative in 2014 and highlighted several elements that the staff views as a “robust” set of controls, including maintenance of a current inventory of data, information and vendors, policies and procedures containing detailed cybersecurity-related instructions, maintenance of testing schedules and processes for testing data integrity and vulnerabilities, established and enforced controls to access data and systems, mandatory employee training and engaged senior management that has vetted and approved the policies and procedures. Nonetheless, the staff observed areas where compliance and oversight had room for improvement. For example, with respect to written policies and procedures, OCIE staff found that firms’ policies and procedures often were either not reasonably tailored or were not adhered to or enforced in actual practice. OCIE staff also observed issues related to firms’ Regulation S-P obligations to protect customer information and privacy where firms continued to use outdated operating systems no longer supported by security patches, or where firms failed to fully remediate negative findings from previous testing in a timely manner.
Investment Management Director to Leave SEC
On August 3, the SEC announced that David W. Grim, Director of the Division of Investment Management, will leave the agency next month after more than 20 years of public service. The announcement listed key initiatives that were advanced under Mr. Grim’s two-year leadership as the division’s Director. Chairman Jay Clayton commended his service.
Enforcement & Litigation
Client Alert: Delaware Supreme Court Clarifies the Role of Deal Price in Appraisal Proceedings
In a long-awaited decision regarding Delaware’s appraisal statute, the Delaware Supreme Court ruled that in determining the fair value of a company, there is no presumption that the agreed upon transaction price is the fair value. However, if there is a sufficiently robust sale process, free of self-interest conflicts, the Chancery Court may be justified in looking solely at the agreed upon price as the best indicator of fair value. For more information, view the client alert issued by Goodwin’s Mergers and Acquisitions and Securities and Shareholder Litigation practices.
Seventh Circuit Affirms Spokeo Dismissal of FCRA Class Action
Last week, the Seventh Circuit affirmed the dismissal of two FCRA class actions on Spokeo grounds. The cases, which were consolidated for appeal, were filed by the same plaintiff against two corporate defendants alleged to have provided credit-report disclosures that did not comply with the FCRA. The Seventh Circuit affirmed the dismissal of Groshek v. Time Warner Cable, Inc. and Groshek v. Great Lakes Higher Education Corp. (together, “Groshek”) because it concluded that the plaintiff failed to adequately allege any concrete injury. The decision has strategic implications for defendants considering whether to seek dismissal of similar FCRA cases and for those planning defenses to certification motions. View the LenderLaw Watch blog post.
CFPB Orders National Bank to Pay $4.6 Million in Civil Penalties for Credit Reporting Practices
On August 2, the CFPB announced that it had entered into a consent order with a national bank, resolving allegations as to the bank’s allegedly unlawful credit reporting activities. According to the CFPB, the bank violated several federal laws with respect to its reporting practices, including the Fair Credit Reporting Act, 15 U.S.C. §§ 1681(m)(a)(3)(A),1681s-2(a)(8)(E)(iii), Regulation V, and the Consumer Financial Protection Act, 12 U.S.C. § 5536(a)(1)(A). View the Enforcement Watch blog post.
Virginia AG Settles With Local Small Dollar Lender Over Excessive Fees
On August 1, the Virginia Attorney General’s Office (AG) announced that it had entered into a consent order with a state pawnbroker, settling allegations that the company overcharged consumers and was “skirting laws.” According to the AG, the company was in the business of offering consumers small dollar loans in exchange for the consumer’s personal property, which was held by the company as security for the loan. View the Enforcement Watch blog post.
Debt Collection Firm Enters Consent Judgment for $1 Million in Restitution With Massachusetts AG
On July 27, the Massachusetts Attorney General’s Office (Massachusetts AG) announced that it entered into a consent judgment with the largest debt collection law firm in the state and two of its principals. The consent judgment, which asserted violations of the Massachusetts Consumer Protection Act, G.L. chapter 93A, section 2, was entered in Suffolk County Superior Court. The lawsuit that formed the basis for the consent judgment was originally filed in 2015. View the Enforcement Watch blog post.
Arizona AG Obtains Judgment and Injunction Against Mortgage Relief Operation
On July 27, the Arizona Attorney General’s Office (Arizona AG) announced that it had obtained a judgment against an allegedly fraudulent mortgage relief company and its owner. The company is alleged to have targeted homeowners who were considering defaulting on “upside down” mortgages. The company purportedly promised to take over the mortgages with tenant buyers who would live in the houses and whose ultimate goal would be to purchase the home. According to the Arizona AG, the company failed to make promised mortgage payments or apply the tenants’ payments to the mortgages, causing the homes to go into foreclosure and negatively impact the homeowners’ credit ratings. View the Enforcement Watch blog post.
U.S. Department of Justice Indicts Russian National and Bitcoin Exchange
On July 26, the U.S. Department of Justice announced that a grand jury in the Northern District of California had indicted Alexander Vinnik, a Russian national, and BTC-e, the bitcoin exchange that Vinnik allegedly operated, and one of the world’s largest and most widely used digital currency exchanges. The 21-count indictment alleges that Vinnik, who had been arrested in Greece a day earlier on July 25, owned and operated several BTC-e accounts, including administrator accounts. View the Digital Currency and Blockchain Perspectives blog post.