President Trump Signs Executive Order to Reduce Regulation and Control Regulatory Costs. On January 30, President Trump signed an executive order (Executive Order) designed to reduce the regulatory burden on American businesses and control regulatory costs. The Executive Order, which was previewed in Goodwin’s client alert on Financial Regulatory Reform in the Trump Administration, provides that “Unless prohibited by law, whenever an executive department or agency…publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.” While the term “executive department or agency” is not expressly defined in the Executive Order, a White House spokesperson clarified that the Executive Order would not apply to independent agencies and would directly capture only those agencies that report to the Office of Management and Budget (OMB), which does not include the Securities and Exchange Commission or financial institution regulators. It is possible, however, that such regulators could elect to voluntarily comply with the Executive Order in the same manner they did with the federal hiring freeze announced on January 23.
The Executive Order also requires the Director of the OMB to establish an annual cap on the incremental cost of new regulations for each agency. If a regulation caused an agency to exceed the annual cap, such agency would not be permitted to issue the regulation. For fiscal year 2017, the cap is zero, which requires that the cost of any new regulations be offset by savings associated with the repeal of existing regulations. It appears that the term “costs” includes private costs as well as governmental costs. The “Purpose” section of the Order includes the following statement: “In addition to the management of the direct expenditure of taxpayer dollars through the budgeting process, it is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with Federal regulations.”
Certain categories of regulations are exempt from the requirements of the Executive Order, including regulations issued with respect to a military, national security or foreign affairs function of the United States; regulations related to agency organization, management or personnel; and any other category of regulations exempted by the Director of the OMB.
Significantly, the Executive Order does not address the benefits of regulation, which may offset the costs associated with them. In addition, the requirement to identify two regulations for repeal for every new regulation proposed for adoption does not specifically make allowance for regulations that reduce regulatory costs, such as new exemptions, or regulations that are potentially cost-neutral, such as rules that merely codify existing interpretive guidance. The Executive Order does, however, give the Director of the OMB the power to provide guidance, including with respect to “emergencies and other circumstances that might justify individual waivers of the requirements of” the regulatory cap.
CFPB Publishes Small Entity Compliance Guide
On January 31, the Consumer Financial Protection Bureau (CFPB) published a Small Entity Compliance Guide (Guide) to help the financial industry understand the Prepaid Account Rule (Prepaid Rule). The Prepaid Rule was issued in October of 2016, and amends Regulations E and Z to provide consumer protections to “prepaid accounts,” such as general use prepaid cards and virtual wallets that store funds electronically. The Guide is not meant to change the Prepaid Rule, introduce additional regulatory requirements or provide official staff commentary. Rather, it offers a Plain English summary of the Prepaid Rule and tools to help the consumer financial services industry determine whether the scope of the Prepaid Rule covers a particular financial product. It also contains charts and reference tools to help business line and compliance staff understand and comply with the Prepaid Rule by the effective date, October 1, 2017. Though the Prepaid Rule is not yet effective, the CFPB is actively bringing enforcement actions regarding prepaid accounts, using its authority to take action against unfair, deceptive, and abusive acts and practices. On February 1, the CFPB announced that it ordered Mastercard and UniRush to pay a civil money penalty of $3 million and $10 million in restitution for system failures which prevented users of the RushCard, and government benefit and payroll cards offered by UniRush, to access their funds, and caused errors in the processing of debits and credits to over 45,000 consumer accounts. The CFPB alleged that UniRush failed to provide adequate service to impacted consumers and provided inaccurate account information.
OCC Issues Supplemental Examination Procedures for Third-Party Risk Management
On January 24, the Office of the Comptroller of the Currency (OCC) issued supplemental examination procedures for risk management of third-party relationships applicable to national banks and federal savings associations. These examination procedures are intended to supplement OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” issued October 30, 2013. In conjunction with existing guidance, the supplemental procedures are expected to help OCC examiners determine the scope of an institution’s third-party risk management examination, and instruct examiners to perform only relevant objectives and steps, noting that every objective or step will seldom be necessary. Thus, examiners can adapt examinations in accordance with the level of risk and the complexity of an institution’s third-party relationships. With respect to an institution’s third-party relationships, the supplemental procedures detail how examiners should assess both the quantity of risk, such as operational, compliance, reputation, strategic and credit risk, as well as the quality of risk management at all stages of a relationship, including planning, due diligence, contract negotiation, ongoing monitoring, termination and contingency planning. An institution’s rating for the quality of its third-party risk management will be impacted by the adequacy of the personnel and control systems performing related supervisory and risk management functions.
Fed Announces Capital Planning Relief for Banks Under $250 Billion In Assets
On January 30, the Board of Governors of the Federal Reserve System (Federal Reserve) finalized a rule adjusting its capital plan and stress testing rules, effective for the 2017 cycle. The final rule removes the qualitative assessment of Comprehensive Capital Analysis and Review (CCAR) for large and noncomplex firms, which are bank holding companies and U.S. intermediate holding companies of foreign banking organizations with total consolidated assets between $50 billion and $250 billion, total nonbank assets of less than $75 billion, and that are not identified as global systemically important banks. Large and noncomplex firms will still be required to meet their capital requirements under stress as part of CCAR’s quantitative assessment and will be subject to regular supervisory assessments that examine their capital planning processes. The largest and most complex bank holding companies will remain subject to the qualitative and quantitative components of CCAR, and the Federal Reserve may continue to object to their capital plans on both qualitative and quantitative grounds. The final rule also decreases the amount of additional capital a firm can distribute to shareholders in connection with a capital plan that has not been objected to without seeking prior approval from the Federal Reserve from 1.0% to 0.25% of Tier 1 capital beyond the amount in its capital plan.
State Banking Regulators Release BSA/AML Self-Assessment Tool
State regulators and the Conference of State Bank Supervisors have released a new voluntary self-assessment tool to help banks better manage Bank Secrecy Act and anti-money laundering risk. The tool is meant to help institutions better identify, monitor and communicate BSA/AML risk, reduce uncertainty surrounding BSA/AML compliance and foster greater transparency within the industry.
Enforcement & Litigation
Client Alert: New Jersey Supreme Court Adopts the Substantial-Interest Test for Statute of Limitations Choice of Law
On January 24, the New Jersey Supreme Court adopted the substantial-interest test to determine choice-of-law questions in the application of statutes of limitations. New Jersey’s statute of limitations applies if (1) New Jersey has a substantial interest in the maintenance of the claim; and (2) there are no “exceptional circumstances” that “make such a result unreasonable.” The Court also found that the first part of the test is met by the state’s interest in deterring New Jersey manufacturers from placing dangerous products into the stream of commerce. This ruling is likely to result in plaintiffs suing local defendants in New Jersey on claims time-barred elsewhere. For more information, view the client alert issued by Goodwin’s Products Liability and Mass Torts Practice.
Federal Banking Regulators Assess $65 Million Penalty Against Default Management Company
On January 24, the Federal Deposit Insurance Corporation, the Federal Reserve, and the OCC announced a $65 million fine assessed against a default management services company. The company’s predecessor had consented to a cease and desist order in 2011, stemming from allegations that it had engaged in unsafe or unsound practices in providing default management services to financial institutions. Specifically, the agencies alleged that the company had engaged in unsafe and unsound banking practices in connection with document execution services that it performed on behalf of financial institutions. View the Enforcement Watch blog post.
Ninth Circuit Compels Tribal Lenders to Comply with CFPB Investigative Demand
On January 20, the Ninth Circuit affirmed a trial court ruling that ordered three tribal lending entities to comply with the CFPB’s civil investigative demands. The CFPB’s investigation concerns whether small-dollar online lenders or similar persons had engaged in illegal advertising, marketing, or collection practices in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Truth in Lending Act, the Electronic Funds Transfer Act, the Gramm-Leach Bliley Act, and other consumer protection laws. During the course of the investigation, it served several investigative demands on the three tribal lending entities, to which the entities’ affiliated tribes directed them not to respond on grounds of tribal sovereign immunity. View the Enforcement Watch blog post.
DOJ Settles Mortgage Discrimination Lawsuit Against National Bank for $54 Million
On January 20, the U.S. Attorney’s Office for the Southern District of New York announced that it had settled a recently filed lawsuit against a national bank, resolving allegations of mortgage discrimination. As previously covered, the government alleged that from 2006 to 2009, the bank charged minority borrowers higher rates and fees on home loans in violation of the Fair Housing Act and the Equal Credit Opportunity Act. View the Enforcement Watch blog post.
CFPB Secures Consents Orders Against Mortgage Servicers for $28.8 Million
On January 23, the CFPB announced that it entered into consent orders with affiliated mortgage servicers, resolving alleged violations of the Real Estate Settlement Procedures Act (RESPA), the Fair Credit Reporting Act (FCRA), and the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices. For additional information, view the Enforcement Watch blog posts here and here.