Regulation and Innovation, Part IV. In the April 6, June 22 and September 14 editions of the Roundup, we discussed the approaches of various banking regulators generally, and the Office of the Comptroller of the Currency (OCC) in particular, to financial innovation. This week, the Securities and Exchange Commission (SEC) announced that it will host a public forum to discuss financial technology (FinTech) innovation in the financial services industry. According to the SEC, “the forum is designed to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts into FinTech innovation and evaluate how the current regulatory environment can most effectively address these new technologies.” We have openly wondered in the past whether Washington was serious about its stated intention of approaching financial innovation with, in the words of Comptroller Curry, “eyes wide open to the attendant risks, but also an open mind to promising new ideas and new technology.” The SEC is now taking its turn at the plate. Batter up.
With federal and religious holidays observed next week, the Roundup will be on hiatus. We will resume publication on October 19.
CFPB Finalizes Rule Providing Federal Consumer Protections to Prepaid Account Users
On October 5, the Consumer Financial Protection Bureau (CFPB) issued a final rule providing federal consumer protections for prepaid account users. The final rule applies to traditional prepaid cards (including general purpose reloadable and payroll cards), mobile wallets, person-to-person payment products, and other electronic prepaid accounts that can store funds, such as student financial aid disbursement cards, tax refund cards, and certain federal, state, and local government benefit cards such as those used to distribute unemployment insurance and child support. The final rule replaces existing regulations governing payroll cards and government benefit accounts in Regulation E. The final rule requires issuers to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, and give consumers free and easy access to account information. The final rule also requires prepaid issuers to offer protections similar to those for credit cards if consumers are allowed to use credit to pay for transactions that they lack the money to cover. The CFPB also finalized new “Know Before You Owe” disclosures for prepaid accounts “to give consumers clear, upfront information about fees and other key details.” The CFPB declined to address digital currencies in the final rule. The final rule becomes effective on October 1, 2017, with the requirement to submit certain prepaid account agreements to the CFPB being delayed until October 1, 2018.
OCC Publishes Final Guidelines for Large Bank Recovery Plans
On September 29, the OCC released final guidelines for recovery planning by large insured OCC-regulated institutions. The guidelines apply to insured national banks, federal savings associations, and federal branches of foreign banks with $50 billion or more in average total consolidated assets and will become part of the OCC’s safety and soundness regulations as an appendix and be enforceable by statute. The guidelines will take effect on a phased schedule. Banks with assets of over $750 billion will need to comply within six months of January 1, 2017; banks with $100-$750 billion in assets will have 12 months to comply; and banks with $50-$100 billion in assets will have up to 18 months to comply.
OCC Proposes Mandatory Contractual Stay Requirements for Qualified Financial Contracts
On October 3, the OCC proposed a new part to its rules on qualified financial contracts (QFC) of national banks and federal thrifts that are subsidiaries of U.S. and foreign-based global systemically important banks. The objective of the proposal is to facilitate the orderly resolution of a failed institution by limiting the ability of the firm’s QFC counterparties to terminate contracts immediately upon the entry of the covered entity or one of its affiliates into resolution. Under the proposed rule, a covered bank would be required to ensure that a covered QFC (1) contains a contractual stay-and-transfer provision analogous to the statutory stay-and-transfer provision imposed under Title II of the Dodd-Frank Act and in the Federal Deposit Insurance Act, and (2) limits the exercise of default rights based on the insolvency of an affiliate of the covered bank. In addition, the proposed rule would make conforming amendments to the OCC’s Capital Adequacy Standards and the Liquidity Risk Measurement Standards in its regulations. The requirements of the proposed rule are substantively identical to those contained in a notice of proposed rulemaking issued by the Board of Governors of the Federal Reserve System on May 3, 2016. Comments must be received by October 18, 2016.
CFPB Monthly Complaint Snapshot Spotlights Money Transfer Complaints
On September 27, the CFPB released its monthly complaint snapshot, which highlighted consumer complaints about money transfers. According to the CFPB, the most frequent complaints in money transfers involved holds being placed on accounts by money transfer service providers without explanation, problems with the dispute resolution process, and fraud (often consumers sending money to a seller but not receiving the items purchased in return). The snapshot also found that debt collection was by far the most-complained-about financial product or service (accounting for 34.0% of the 28,651 complaints handled by the CFPB in July 2016), followed by credit reporting (17.9%) and mortgages (15.0%).
CFPB Releases Updated Exam Procedures for Military Lending Act
On October 3, the CFPB issued the procedures its examiners will use in identifying consumer harm and risks related to the Military Lending Act rule which was updated in July 2015. In 2006, Congress passed the Military Lending Act to help address the problem of high-cost credit as a threat to military personnel and readiness. In July 2015, the Department of Defense issued a final rule expanding the types of credit products that are covered under the protections of the Military Lending Act.
SEC to Hold Forum to Discuss FinTech Innovation in the Financial Services Industry
On September 28, the SEC announced it will host a public forum to discuss financial technology (FinTech) innovation in the financial services industry. The panels will discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors. The FinTech forum will be held at the SEC's Washington D.C. headquarters on November 14 and will be open to the public and webcast live on the SEC's website. Information on the agenda and participants will be published in the coming weeks.
Client Alert: New York State Department of Financial Services Proposes Far-Reaching Cybersecurity Rules
The New York State Department of Financial Services (the DFS) has issued a proposed regulation that would impose cybersecurity-related requirements on entities it supervises. In some cases, these requirements would go beyond existing requirements. For more information, view the client alert from Goodwin’s Financial Industry practice.
Client Alert: IRS Addresses RIC Qualification Matters Related to Derivatives and Use of Blocker Corporations
On September 28, the IRS and Treasury Department proposed regulations under Section 851 of the Code that, if finalized, could prospectively invalidate dozens of private letter rulings treating subpart F and passive foreign investment company (PFIC) inclusions as regulated investment company (RIC) qualifying income without regard to whether the relevant offshore corporation makes a distribution to the RIC out of its earnings and profits (e&p) attributable to such inclusion during the taxable year. The regulations, if finalized, would clarify that subpart F and PFIC inclusions are neither “dividends” nor other qualifying income for RICs in the absence of such a distribution. The preamble to the proposed regulations states that the distribution requirement is unambiguous under Section 851, notwithstanding that the IRS has previously granted private letter rulings to RICs concluding otherwise. For more information, view the client alert from Goodwin’s Tax practice.
Client Alert: New California Law Mandates Public Disclosure of Private Fund Information
A new California law requires public pension and retirement systems to obtain and publicly disclose information about their investments into venture capital, private equity, hedge and absolute return funds. The law appears to have been specifically crafted to disrupt prior efforts to shield such information from public disclosure. General Partners should anticipate significant demands for information regarding both new and pre-existing investments. For more information, view the client alert from Goodwin’s Private Investment Funds practice.
Enforcement & Litigation
CFPB Enters $9 Million Consent Order with Title Lender Over Disclosures and Debt Collection Activities
On September 26, the CFPB entered into a consent order with one of the country’s largest auto title lenders over allegations that the lender misled consumers about the terms and costs of their loan agreements and engaged in unlawful debt collection activities. The CFPB alleged that the lender’s “Voluntary Payback Guide” failed to disclose that the cost of a consumer’s loan would increase when a consumer chose to repay the loan over a longer period of time, and failed to disclose the total cost of the loan. In addition, the CFPB alleged that when consumers failed to pay their loans, the lender would reveal the consumer’s private financial information to co-workers, neighbors, and family members while attempting to collect the debt. Under the terms of the consent order, the lender agreed to pay a $9 million civil money penalty, disclose the full cost of consumer’s loans, and cease illegal debt collection activities. For more information, view the Enforcement Watch blog post.
CFPB and California DBO Settle with Online Lender Over Alleged Misrepresentations
On September 27, the CFPB announced that it had entered into a consent order with an online lender, after a joint investigation with the California Department of Business Oversight (DBO), over allegations that the lender deceptively marketed its loan products and hid the true cost of credit from consumers. Specifically, the consent order alleged that the lender represented that its loan products would rebuild a consumer’s credit, which would allow consumers to obtain “more money at better rates for longer periods of time.” But many of the lower-cost loan products were allegedly never made available to most consumers. For more information, view the Enforcement Watch blog post.
Massachusetts AG Settles Abusive Debt Collection Claims Against Mortgage Servicer
On September 28, the Massachusetts Attorney General’s Office announced that it had entered into a settlement with a national mortgage servicer to resolve allegations that the servicer had engaged in abusive debt collection practices affecting over 5,000 Massachusetts consumers. The assurance of discontinuance, filed in Suffolk County Superior Court, alleged that the servicer violated regulations promulgated under the Massachusetts Consumer Protection Act, which prevent a debt collector from contacting a consumer more than twice in a seven day or thirty day period, depending on the type of phone number involved. The Attorney General Office’s further alleged that the servicer failed to comply with Massachusetts regulations requiring debt collectors to provide consumers with a debt validation notice within five days after their initial communication. Under the terms of the settlement, the servicer agreed to pay a $1.4 million penalty and to discontinue its allegedly unlawful debt collection practices. For more information, view the Enforcement Watch blog post.