Editor's Note
The Return of Glass-Steagall? On March 13, Federal Deposit Insurance Corporation Vice Chairman Thomas M. Hoenig made a speech to the Institute of International Bankers Annual Washington Conference entitled "A Market-Based Proposal for Regulatory Relief and Accountability.” In the speech, Hoenig asserted that, while the Dodd-Frank Wall Street Reform and Consumer Protection Act was “well intended, its many and complicated regulations are burdensome for all banks, but especially smaller banks. The legislation also has served to enshrine too-big-to-fail for the largest, most complex universal banks, providing them with a powerful competitive advantage.” Hoenig went on to outline “an alternative approach to better address the challenge of too-big-to-fail, regulatory burden, and competitive equity.” Specifically, Hoenig’s proposal (the Proposal) would “partition nontraditional bank activities into separately managed and capitalized affiliates to return the safety net back to its original scope and purpose.” According to Hoenig, with these conditions in place, “too-big-to-fail would be well on its way to being addressed, and a true opportunity for regulatory relief for these largest banks would be provided.”
The Proposal contemplates a three-year period to restructure and separate the nontraditional banking activities and a multi-year period to meet enhanced capital requirements. Once implemented, Hoenig asserts “the opportunity for a significant reduction of regulatory requirements would become possible; much more than the 2-for-1 called for by the new Administration. All banks—including the largest, most complex, universal banks—could be relieved of the costs and burdens of risk-based capital and liquidity requirements. Dodd-Frank Act Stress Testing (DFAST), the Comprehensive Capital Analysis and Review (CCAR), Title II and Living Wills, and other requirements mandated under section 165 of the Dodd-Frank Act could be simplified or eliminated.” While not eliminated, the burdens of the Volcker Rule would be “dramatically reduced.” The Proposal could be adopted separately or in tandem with the regulatory relief proposal for traditional banks that Hoenig recommended in April 2015.
Several analysts have characterized the Proposal as a return to Glass-Steagall. However, a careful review of the Proposal demonstrates that it is less an attempt to bring back Glass-Steagall and more an attempt to modernize it. Unlike Glass-Steagall, the Proposal would not reduce the ability of a bank to conduct any of its current portfolio of activities. It would, however, require that nontraditional banking activities, such as investment banking, be conducted by entities outside of the depository institution and therefore outside the reach of the FDIC insurance fund. Along with the Financial CHOICE Act, the Proposal could serve as a blueprint for financial regulatory reform in a Trump administration.
Regulatory Developments
CFPB Proposes Extension of Prepaid Accounts Rule Effective Date
On March 8, the Consumer Financial Protection Bureau (CFPB) proposed to delay the October 1, 2017, effective date of the rule governing Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) (“Prepaid Rule”) by six months, to April 1, 2018 (an in-depth analysis of the rule can be found here). The delay would address industry concerns about the ability to comply with packing requirements for prepaid cards sold at retail locations. In the final Prepaid Rule, providers of prepaid accounts are not required to pull and replace prepaid account access devices and packaging materials with noncompliant disclosures that were produced in the normal course of business prior to October 1, 2017. Nonetheless, some providers believe that they should pull and replace noncompliant packaging, to avoid the communication of misleading information to consumers. This, industry participants say, may not be feasible due to increased demand on a limited number of card and packaging manufacturers. In addition, the CFPB noted industry concerns about “complexities arising from the interaction of certain aspects of the rule with certain business models and practices.” We understand that this may refer, in part, to financial products that do not fit neatly into the category of “prepaid accounts,” which are covered by the Prepaid Rule, or “checking accounts,” which are exempt. Delaying the effective date will “allow the [CFPB] to more closely evaluate concerns raised by industry participants … that they assert are posing particular complexities for implementation.” The CFPB is seeking comment on whether it should extend the effective date of the Prepaid Rule, and if so, whether six months is an appropriate length of time for such a delay. Comments must be received within 21 days of the date this proposal is published in the Federal Register. The CFPB is not proposing to delay the effective date of the requirement to submit prepaid account agreements to the CFPB in Regulation E § 1005.19(f)(2), which effective date is October 1, 2018.
NYDFS Attempt to More Closely Regulate FinTech Firms Suffers Setback
The attempts of the New York State Department of Financial Services (NYDFS) to more closely regulate online lenders suffered a setback, when the Assembly rejected Governor Cuomo’s proposal to include such authority in its budget bill. As discussed in the February 13 edition of the FinTech Flash, the governor’s 2018 proposed budget had included a proposed amendment to New York’s Licensed Lender Law that would “[a]llow the Department of Financial Services...to better regulate the business practices of online lenders.” The Assembly also rejected a provision to ban “bad actors,” as determined by the New York Superintendent of Financial Services, from working in a state-regulated financial institution. The budget bill remains subject to amendment, as well as consideration by the state Senate.
Republican Congressmen Urge OCC Not to Rush Fintech Charter
On March 10, Republican members of the House Financial Services Committee sent a letter to Comptroller Thomas J. Curry urging the Office of the Comptroller of the Currency (OCC) not to “rush” its decision on whether to create a special purpose national bank charter for fintech companies. The letter further stated that the “OCC should provide a full and fair opportunity for stakeholders to see the details of the special charter, solicit feedback, and allow the incoming Comptroller the opportunity to assess the special purpose charter.” Comptroller Curry’s term expires in April of 2017. The letter went on to state that “If the OCC proceeds in haste to create a new policy for “fintech” charters without providing the details for additional comment, or rushing to finalize the charter prior to the confirmation of a new Comptroller, please be aware that we will work with our colleagues to ensure that Congress will examine the OCC’s actions and, if appropriate, overturn them.” As discussed in the January 25 edition of the Roundup, the OCC’s proposal to establish a special purpose national bank charter for fintech companies previously had come under fire from Democratic senators and state banking regulators. However, Republican calls for a deliberative process may be grounded less in opposition to the proposed charter and more in the desire for a Republican appointed comptroller to preside over its implementation.
Comptroller Curry Supports Flexibility for Thrifts to Expand Their Business Models
In a speech on March 9, Comptroller Thomas J. Curry of the OCC addressed the condition of the federal banking system and commented on issues of importance to community banking institutions. He discussed the resiliency of the banking system in light of capital and liquidity requirements implemented in the wake of the 2008 financial crisis and highlighted efforts to lighten the regulatory burdens of such institutions, including recently streamlined “Call Reports” and expanded examination cycles for qualifying institutions. However, Comptroller Curry indicated more should be done to help community institutions. First, he called on Congress to help reduce compliance costs by exempting community institutions from the Volcker Rule. Second, he asked Congress to make it easier for thrifts to expand their business models, such as increasing commercial lending or some types of consumer credit, without incurring the expense of changing their governance structures. This recommendation follows on the March 8, 2017, introduction of parallel bills in the House of Representatives (HR 1426) and Senate (S 567) to amend the Home Owners’ Loan Act to allow federal savings associations to elect to operate as national banks.
FINRA Proposes Streamlining Competency Exams
The Financial Industry Regulatory Authority (FINRA) announced on March 8 that it has filed a proposal with the Securities and Exchange Commission (SEC) to streamline competency exams and facilitate opportunities for professionals seeking to enter or re-enter the securities industry. FINRA rules currently require individuals who work for a FINRA-regulated firm in various capacities to demonstrate their qualifications by passing specific exams. These individuals must be associated with a FINRA-regulated firm to be eligible to take FINRA qualification exams. The proposal revises the current exam structure to eliminate duplicative testing and barriers to demonstrating and maintaining qualifications. Once a proposal is filed with the SEC, SEC staff reviews it to determine whether it is consistent with the requirements of the Securities Exchange Act of 1934. SEC staff may request changes or amendments to the proposal. The SEC then publishes the proposal for comment in the Federal Register. In general, the comment period is open for 21 days following publication.
Enforcement & Litigation
New York Man Sentenced to 15 Years in Prison for Loan Modification Scheme
On March 7, the United States Attorney’s Office for the Eastern District of New York announced the sentencing of an individual defendant to 15 years in prison and $2.5 million in forfeiture in connection with a loan modification scheme. The defendant may also be subject to additional restitution under the Mandatory Victims Restitution Act. The Federal Bureau of Investigation (FBI), the Department of Housing and Urban Development (HUD), and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) also participated in the investigation of the individual. View the Enforcement Watch blog post.
National Debt Relief Provider Reaches $9 Million Settlement with FTC for Deceptive Solicitations
On March 7, the Federal Trade Commission (FTC) announced that the United States District Court for the Eastern District of Texas entered a stipulated order prohibiting a national debt relief provider from making misleading claims about its debt relief services. The court also entered a $9 million judgment against the defendants, with all but $510,000 suspended based on their financial conditions. View the Enforcement Watch blog post.
Massachusetts Appellate Division: A Debt Buyer is a Debt Collector Under MA Law
On February 15, the Massachusetts Appellate Division of the District Court Department found in Midland Funding, LLC v. Juba, No. 16-ADMS-40011, that a debt buyer violated the Massachusetts Debt Collection Practices Act (MDCPA) and the Massachusetts Consumer Protection Act (Chapter 93A) by attempting to collect on a consumer debt it had purchased without being a licensed debt collector in the Commonwealth of Massachusetts. View the LenderLaw Watch blog post.
