Potential CFPB Reform in the Wake of the Election. The November 16 edition of the Roundup indicated that the Financial CHOICE Act (Act) may be a blueprint for legal changes affecting the financial services industry that might result from the recent election. A closer look at the Act reveals what may be in store for the Consumer Financial Protection Bureau (CFPB) in the next Administration. The Act did not provide for the elimination of the CFPB. It did seek to alter its structure to a five-person, bipartisan commission renamed the “Consumer Financial Opportunity Commission.” Other key proposals to reform the CFPB included: subjecting the new Commission to the congressional appropriations process and oversight; increasing the current threshold for banks, thrifts and credit unions to be subject to the Commission’s supervisory authority from $10 billion in assets to $50 billion; creating an Office of Economic Analysis within the Commission to perform cost-benefit analyses on all of the Commission’s proposed rules and regulations; permitting individuals and institutions to seek relief from civil investigative demands in federal court; providing defendants the right to require enforcement actions to proceed in federal court; forming a mechanism for interested parties to request and receive advisory opinions; and repealing the CFPB’s authority to regulate consumer arbitration clauses and “abusive” conduct. For additional information, view the full LenderLaw Watch blog post.
CFPB Issues Compliance Bulletin: Detecting and Preventing Consumer Harm from Production Incentives
On November 28, the CFPB issued a bulletin warning financial companies of the compliance risks posed by employee incentive programs that are tied to sales goals for consumer financial products and services. While recognizing the value of properly implemented incentive programs, the CFPB warned that they may drive employees and service providers to pursue aggressive or deceptive marketing tactics, steer consumers toward unsuitable products, and open accounts without consumer knowledge or consent. These practices may constitute or lead to violations of federal consumer financial law. The bulletin sets forth the CFPB’s expectation that financial companies utilizing incentive programs adopt a robust compliance management system with effective controls to address the risk that incentive programs will lead to violations of law and consumer harm. The CFPB presented a long, non-exhaustive list of steps that financial companies should take to mitigate these risks. For example, companies are expected to effectively oversee employees and service providers that participate in incentive programs. Oversight should include monitoring programs designed to track key metrics and outliers that indicate that incentives are leading to improper behavior. Companies should have written policies and procedures for operating an incentive program, which are transparent to program participants, contain mechanisms for identifying and addressing conflicts of interest, and create reasonably attainable sales goals. Employees and service providers should be trained to understand and accurately describe the company’s products and services to their customers, and to follow operating procedures designed to ensure compliance with the law. Companies should have mechanisms that allow employees to recognize and report unethical behavior of others without fear of retribution, and a fair process for investigating suspected misbehavior. The board of directors and executive managers are expected to take responsibility for oversight and compliance management, setting a “tone from the top” and fostering a strong culture of customer service and regulatory compliance.
FCC Warns that Robotexts are Subject to the TCPA
On November 18, the Federal Communications Commission (FCC) issued an enforcement advisory, warning that autodialed text messages, also known as robotexts, are subject to the consent requirements of the Telephone Consumer Protection Act of 1991 (TCPA). The FCC’s enforcement advisory prohibits sending robotexts to wireless numbers unless the recipient provides prior express consent or the message meets one of the FCC’s exemptions. A recipient of robotexts may revoke consent at any time. When a recipient has revoked consent, the text sender may immediately send one final robotext to confirm the recipient’s revocation. Robotext violations can incur up to $18,936 per violation. The enforcement advisory relies, in part, on the FCC’s July 2015 Omnibus Declaratory Ruling and Order, which expanded the TCPA’s scope. The D.C. Circuit is reviewing a challenge to the Order and held oral argument on the matter on October 19, 2016.
Fed Finalizes Dividend Cut
On November 23, the Board of Governors of the Federal Reserve System finalized the dividend cut required by the Fixing America’s Surface Transportation Act of 2015 (commonly known as the “FAST Act”). The FAST Act included the dividend cut to help pay for roads and bridges without having to raise the gasoline tax. Prior to January 1, 2016, in return for purchasing Federal Reserve bank stock, all member banks were entitled to a six percent dividend on their paid-in capital. As of January 1, 2016, the FAST Act amended the Federal Reserve Act to provide that stockholders with more than $10 billion in total consolidated assets would receive a dividend equal to the lesser of six percent and the high yield 10-year Treasury note from the most recent auction prior to dividend payment (this rate is currently 2.355%). The FAST Act did not change the dividend paid to member banks with $10 billion or less in assets. The $10 billion threshold is subject to change yearly based on the Bureau of Economic Analysis publication of the Gross Domestic Product Price Index.
SEC Allows Non-Integration of Rule 506(b) Private Offering with Subsequent Rule 506(c) Offering Using General Solicitation
The Securities and Exchange Commission (SEC) Division of Corporation Finance has amended its Compliance and Disclosure Interpretations (C&DIs) to add guidance in new Question 256.34 on the situation where an issuer has been conducting a private offering in which it has made offers and sales in reliance on Rule 506(b), which does not permit general solicitation, and less than six months later decides to use general solicitation in a Rule 506(c) offering. The question was whether, given that the six-month safe harbor from integration was not satisfied, the issuer would need to satisfy the older five-factor test listed in the Note to Rule 502(a). The SEC replied by noting that, under Rule 152, a securities transaction that at the time involves a private offering will not lose that status even if the issuer subsequently decides to make a public offering. Consequently, the SEC believes that “offers and sales made in reliance on Rule 506(b) prior to the general solicitation would not be integrated with subsequent offers and sales of securities pursuant to Rule 506(c).” All of the conditions of Rule 506(b) would have to have been met for offers and sales made prior to the commencement of general solicitation, and all of the conditions of Rule 506(c) would have to be met thereafter.
Client Alert: ISS Updates 2017 Voting Policies, Including Adoption of Policy to Recommend Against NCG Committee Members of Companies that Restrict Stockholders’ Ability to Amend Bylaws
On November 21, Institutional Shareholder Services (ISS) released final changes to its voting policies for 2017. One of ISS’s changes is the adoption of a new policy to recommend against the election of Nominating & Corporate Governance (NCG) committee members of any company that eliminates or imposes “undue restrictions” on its stockholders’ ability to unilaterally amend its bylaws (i.e., submit a binding stockholder proposal to amend the company’s bylaws under Rule 14a-8). This change had previously been included among ISS’s proposed changes for 2017 that were released in October. As noted in our prior Alert regarding the proposed change, many companies have provisions in their charter and/or bylaws stating that the bylaws may only be amended by the board of directors. ISS’s new voting policy will result in recommendations against NCG committee members at these companies unless and until they take action to change these provisions. The updates to ISS’s voting policies for 2017 may be found on ISS’s website. For more information, view the client alert issued by Goodwin’s REITs and Real Estate M&A Practice.
Enforcement & Litigation
Client Alert: Nationwide Injunction Issued Preventing New Overtime Rule from Taking Effect
A federal court in Texas has issued a nationwide injunction preventing the implementation of the Department of Labor’s “Final Rule” increasing the minimum salary for most of the so-called “white collar” exemptions from the Fair Labor Standards Act’s overtime pay requirements. The Final Rule had been slated to become effective on December 1, 2016. It would have increased the minimum annual salary level for most white collar exemptions from $23,660 to $47,476. The injunction does not affect the standards for job duties that are necessary to satisfy the white-collar exemptions. The current salary standards also remain in effect. For more information, view the client alert issued by Goodwin’s Labor & Employment Practice.
SCOTUS Holding Could Exacerbate Already-Backlogged Federal Dockets
On November 8, the U.S. Supreme Court heard oral arguments in Lightfoot v. Cendant Mortg. Corp., a case that will decide an important jurisdictional issue for the Federal National Mortgage Association (Fannie Mae). See 769 F.3d 681 (9th Cir. 2014), cert. granted, 136 S. Ct. 2536 (2016). The question before the Court is whether Fannie Mae’s federal charter—which grants Fannie Mae the power “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal”— itself confers federal question jurisdiction over claims brought by or against Fannie Mae. See 12 U.S.C. § 1723a(a). View the full LenderLaw Watch blog post.
Massachusetts AG Announces $2.4 Million Settlement with Student Loan Servicer Over Improper Servicing Practices
On November 22, the Massachusetts Attorney General announced that it entered into a settlement agreement with a national student loan servicing company over allegations the company violated various state and federal consumer protection laws. The investigation into the company’s student loan servicing practices began in December 2015. View the full Enforcement Watch blog post.
CFPB Files Suit Against Structured Settlement Company for Allegedly Defrauding Lead Paint Victims
On November 21, the CFPB announced that it filed suit in the U.S. District Court for the District of Maryland against a structured settlement company and certain of the company’s principals, alleging that the company violated the Consumer Financial Protection Act (CFPA) by defrauding lead paint victims. View the full Enforcement Watch blog post.
United States Attorney’s Office Announces Guilty Pleas in Criminal Prosecution of Alleged $31 Million Debt Collection Scheme
On November 18, the U.S. Attorney’s Office for the Southern District of New York (USAO) announced that the co-owner and chief financial officer of a debt collection company, and a company manager, pleaded guilty to engaging in illegal and abusive debt collection practices. The Court also sentenced another company employee to 70 months in prison. View the full Enforcement Watch blog post.
Q3 2016 Sees Significant Decrease in State Enforcement Actions; Federal Agencies Hold Steady
In the third quarter of 2016, Consumer Enforcement Watch tracked 37 enforcement actions taken against consumer financial service providers. This represents a decrease from the 46 enforcement actions that were tracked last quarter and the 50 actions that we tracked in Q1. Twenty-five of the Q3 enforcement actions were settlements (with or without consent orders), while the remaining actions were court judgments, new actions, and new activity in ongoing enforcement actions. For more information including interactive charts, view the full Enforcement Watch blog post.
Client Alert: Triumph for Energy Future Noteholders in Third Circuit Make-Whole Decision
On November 17, in Delaware Trust Co. v. Energy Future Intermediate Holding Company LLC (In re Energy Future Holdings Corp.), Case No. 16-1351 (3d Cir. Nov. 17, 2016), the United States Court of Appeals for the Third Circuit reversed the District and Bankruptcy Courts for the District of Delaware, holding that first and second lien noteholders in the Energy Future bankruptcy case were entitled to hundreds of millions of dollars in make-whole payments due upon an early redemption of their notes. This decision is in stark contrast to the recent trend in case law that make-whole premiums only survive bankruptcy acceleration when the language in the underlying indenture is painstakingly explicit. For more information, view the client alert prepared by Goodwin’s Financial Restructuring Practice.