Regulation
With Trump and Co. Now in Control, Has The CFPB Made a Costly Mistake?
November 11, 2016
For years, the CFPB has rejected all calls by republicans (and even some democrats) to reconfigure its one-director leadership to a multi-member commission. At present, Director Richard Cordray has full authority to create the rules and enforce the rules and reports to no one, not even the President of the United States. As the only executive agency with significant authority to operate in this manner, critics have become increasingly worried the CFPB might abuse its power. And just last month, the agency was accused to have actually done so.
In PHH Corp. v. CFPB, the CFPB was alleged to have made legal errors in their enforcement action against a mortgage lender, but more to the point, that the CFPB itself was unconstitutional. The United States Court of Appeals for the District of Columbia Circuit agreed in part, ruling the agency’s structure unconstitutional. The agency was ordered to cure the defect either by conceding its directorship to a multi-member commission or making its leader report directly to the President of the United States.
But the CFPB has refused to comply, arguing shortly thereafter in another case that the “decision was wrongly decided and is not likely to withstand further review,” amplifying fears that the agency had gone rogue and potentially become drunk with power.
Cordray, who has tried to assure critics that his agenda is merely meat and potatoes, now faces a new challenge, a Republican president and a Republican-controlled Congress, who may see this as their only opportunity to rein him in.
According to Bloomberg, sources contend that the CFPB’s and Democrats’ previous unwillingness to concede anything at all, now puts the entire agency itself in jeopardy. Cordray himself is at great risk of losing his job, the Huffington Post asserts.
Already there is chatter of firing Cordray on Trump’s first day in office either for cause as Dodd-Frank allows for, or simply at his own discretion, as the Appeals Court ruled would be acceptable.
Has the CFPB erred all this time?
Coming Soon: The OCC’s Fintech Innovation Office
October 27, 2016Coming soon: An innovation office to work with fintech upstarts poised to disrupt to the industry.
The Office of Comptroller of the Currency that regulates and supervises banks plans to set up a dedicated “fintech innovation office” early next year with branches in New York, San Francisco and Washington.
In an attempt to “identify, understand and respond” to the changing banking landscape, the OCC said that the unit will establish an outreach and technical assistance program for banks and nonbanks, conduct research and promote inter-agency collaboration and act as a point of contact for information and requests.
“By establishing an Office of Innovation, we are ensuring that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision that supports it,” said OCC chief Thomas Curry.
Last month, Curry said that his office was evaluating the “unique risks” fintech companies might pose to the banking system under a less favorable credit cycle. The OCC also plans to release a paper in the next two months raising issues with a limited-purpose charter for nonbanks similar to credit card banks and non-deposit taking entities.
For The CFPB, A Diet of ‘Meat and Potatoes’
October 24, 2016CFPB Director Richard Cordray gave the closing keynote speech during Money2020’s first night in Las Vegas, and he sounded an assertive, yet amenable tone. “We can help push [the innovators] in the right direction,” he said, but he conceded that the agency can’t actually create the products. “That’s what the people here [at this conference] are doing.”
Since their purpose is to go after companies when they do something wrong, there’s only so much they can do to nurture companies to do things right, but they have tried to do their best to reduce uncertainty, he explained, through the use of aids like no-action letters.
Despite this, some fintech companies have already been on the receiving end of an enforcement action, and Cordray explained the reason behind that is very simple. “Our enforcement actions to date have dealt with meat and potatoes issues,” he said, adding that it’s typically centered around deceptive practices, where a company promises something and then doesn’t deliver it.
And being innovative first and patching the holes in the customer experience second, is not the type of formula that Cordray’s CFPB is very accepting of. Be consumer-focused and compliant with all laws from the very beginning, he advised.
Cordray didn’t mention small business lending at all, but Ori Lev, the CFPB’s former deputy enforcement director for litigation, said on an earlier panel that “they’re going to nibble on the edges of it.” Lev couldn’t speak on the agency’s behalf however, since he now works in the private sector as a partner at law firm Mayer Brown.
Still, some folks in commercial finance have told deBanked that they’re afraid a few nibbles could turn into a bite. That’s because even if Cordray is a meat and potatoes kind of guy for now, his unchecked authority is so extensive, that a federal court recently declared it unconstitutional. The CFPB plans to challenge that ruling however, which currently only affects the D.C. Circuit.
With Cybersecurity Rule Looming, It’s About To Get Way More Expensive To Be A Traditional Lender In New York State
October 18, 2016
Coming soon to New York, any company required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the banking law, the insurance law or the financial services law, will need to implement a cybersecurity program.
“Senior management must take this issue seriously and be responsible for the organization’s cybersecurity program and file an annual certification confirming compliance with these regulations,” the NYDFS proposed rule states. That likely means hiring computer experts to comply. Actually, it definitely does because one of the requirements is to employ cybersecurity personnel sufficient to manage cybersecurity risks and to perform core cybersecurity functions. That includes training, monitoring, penetration testing, auditing, implementing multi-factor authentication, and encrypting non-public data, among other tasks.
Based on the language, MCA companies are likely exempt, as are companies that have fewer than 1,000 customers a year, are generating less than $5 million in revenue a year and have less than $10 million in assets.
In Leasing News, Barton, Klugman & Oetting attorney Tom McCurnin, argued the proposal will be a disaster for small banks with branch offices in New York.
The rule is slated to go into effect on January 1, 2017. And even if the rule doesn’t apply to you, it might be a good time to start bolstering your cybersecurity anyway, if for no other reason than to protect your customers and your company.
SBA’s Office of Advocacy Goes to Bat for Payday Lenders
October 17, 2016
What’s the Small Business Administration’s Office of Advocacy doing advocating for payday lenders? Well they’re small businesses first and foremost, according to a letter submitted to CFPB Director Richard Cordray, and the CFPB’s short-term lending proposal puts them at risk.
Coming in at a cool 1,341 pages, the proposal no doubt exudes costly compliance. And it’s not just lawyers and compliance officers that payday lenders need to worry about, they’re also asked to forfeit some of their major profit centers, a condition that has left many of them outraged. In a roundtable convened by the Office of Advocacy, “some [short-term lenders] stated that they may experience revenue reductions of greater than 70 percent and be forced to exit the market.”
The CFPB has more-or-less acknowledged these steep revenue loss projections and if you read between the lines, having these companies be forced to exit the market seems to be the unspoken consequence they’re probably hoping for.
But at what cost?
“The CFPB’s proposed rule may force legitimate businesses to cease operation,” The Office of Advocacy argues. “Imposing such a regulation will not alleviate a consumer’s financial situation. The consumer will still need to pay his/her bills and other expenses. Imposing these strict regulations may deprive consumers of a means of addressing their financial situation.”
CFPB’s Power Structure Ruled Unconstitutional – Concentration of Enormous Power a Threat to Individual Liberty
October 11, 2016
The enforcement agency long panned for not being accountable to anyone, including Congress, has finally been checked by the judicial branch. On Tuesday, October 11th, the United States Court of Appeals for the District of Columbia Circuit, ruled the CFPB’s structure is unconstitutional because as a single-person-run agency of the executive branch, it is not even accountable to the President of the United States. The CFPB’s existence challenges the very framework set forth by the nation’s founders, the Court asserted.
The opening of the 110-page decision cites Article II of the United States Constitution. “The executive Power shall be vested in a President of the United States of America,” adding that Article II grants the President alone the authority and responsibility to “take Care that the Laws be faithfully executed.” As time has passed however, independent executive agencies have been created and overseen by multi-member commissions, which have become an acceptable check on the individual power of one person.
In other words, to help preserve individual liberty under Article II, the heads of executive agencies are accountable to and checked by the President, and the heads of independent agencies, although not accountable to or checked by the President, are at least accountable to and checked by their fellow commissioners or board members. No head of either an executive agency or an independent agency operates unilaterally without any check on his or her authority. Therefore, no independent agency exercising substantial executive authority has ever been headed by a single person. Until now. – Excerpt from the Court of Appeals decision
As it stood previously, CFPB Director Richard Cordray essentially had unlimited power to write his own rules, attack and fine companies whether warranted or not, personally motivated or not, on whatever whim he so desired. While very unpopular among Republicans and even among some Democrats, he received recent acclaim for his agency’s work on the Wells Fargo fake account scandal. Other moves have been more dubious, like their foray into lawmaking without the legislative branch (see a 1341-page law they invented) and reinterpreting their own statutory authority by expressing an interest to regulate commercial finance, all while potentially engaging in “chokepoint-like” tactics to intimidate business models they don’t like.
The Court of Appeal’s decision is especially damning because the CFPB was caught making legal errors in their enforcement action against a mortgage lender that led to this review to begin with. In effect, in a case that questioned whether or not the agency’s mere existence is rogue in that of itself, the CFPB was actually going rogue in how they applied the law. Basically, they removed any doubt about whether or not oversight should be warranted.
The CFPB will not be dismantled as a result of the decision and it will still possess incredible enforcement power. The decision instead directs the organization to conform to an existing executive agency structure, either through a multi-member commission or be directly accountable to the President of the United States.
The WSJ reported that the CFPB had no comment and is currently reviewing the decision.
“The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the Court asserted.
Morgan Stanley, Deutsche Bank and Santander Stress Under Fed’s Test
June 30, 2016The unemployment rate is 10 percent, the stock market is worth half its value and short-term treasury rates are negative making investors pay the US government to hold their money.
This was the Fed’s hypothetical scenario for this year’s stress test for big banks, and all but three of 33 banks passed.
Wednesday’s stress test announcement pertained to the Fed’s evaluation of how well big banks planned for risk and allocated capital under stress. The first part of the tests announced last week, examined and monitored whether big banks had sufficient capital to sail through economic turbulence, which all 33 banks passed.
Deutsche Bank, Banco Santander and Morgan Stanley were among 33 banks that felt the stress during the second round. The regulator objected to the capital distribution plans put forth by the US subsidiaries of Deutsche Bank and Banco Santander and stopped them from issuing dividends or making share buybacks and asked Morgan Stanley to submit a revised plan for “qualitative reasons.” The banks who passed the test will be able to pay out as much as two thirds of the projected net income for the next four quarters and can also continue to retain capital.
Deutsche Bank has failed the test two years in a row and Santander for three. The Fed is concerned about the banks’ ability to measure risk but in practice, the Fed’s rejection means that these banks cannot send US profits back home until they pass the test.
Santander blamed its regulatory trouble on “growing pains” and said that the bank is building up a holding company to oversee the banking unit and consumer-lending subsidiary.
In part, these capital restrictions placed on big banks under Dodd Frank is what bolsters the alternative non-bank lending sector where lenders pride themselves on being lean and agile. While the industry is still negotiating its relationship with Wall Street, total insulation from bank capital for now seems like a distant dream. Santander is an investor in Atlanta-based small business lender Kabbage and also uses its technology to underwrite loans for small businesses quickly.
1,334 Page CFPB Loan Rule Proposal Warns Business Lenders
June 2, 2016
Congress isn’t responsible for lending lawmaking anymore it seems, the CFPB is. That’s a bit chilling considering the federal agency is also tasked with enforcing the laws it creates. A new 1,334 page law proposal published by Richard Cordray at the CFPB to assert control over payday loans, vehicle title loans, and certain high-cost installment loans also mentions business loans in it.
“The Bureau intends to exclude loans that are made primarily for a business, commercial, or agricultural purpose,” the proposal states. However, since the proposal is not a bill that would be brought before Congress for a vote, the weakly and seemingly intentionally phrased statement of “intends to exclude” is not the most reassuring language. Cordray concedes in an earlier paragraph though that Dodd-Frank only empowered the Bureau to prescribe rules over consumer finance, which was defined primarily as personal, family, or household purposes.
Already the proposal explains how a business lender might violate that threshold:
“A lender would violate this part if it extended a loan ostensibly for a business purpose and failed to comply with the requirements of this part if the loan in fact is primarily for personal, family, or household purposes. See the section-by-section analysis of proposed § 1041.19 for further discussion of evasion issues.”
That referenced further analysis basically says that if the lender is really just pretending a personal loan is a business loan, then they’re just trying to evade the rules and that won’t work.
If a consumer claims they’re going to use the money for a personal purpose but then decides to use it to finance a small business, well then it’s still a consumer loan, Cordray argues:
“Proposed § 1041.3(b) specifies that the proposed rule would apply only to loans that are extended to consumers primarily for personal, family, or household purposes. Loans that are made primarily for a business, commercial, or agricultural purpose would not be subject to this part. The Bureau recognizes that some covered loans may be used in part or in whole to finance small businesses, both with and without the knowledge of the lender. The Bureau also recognizes that the proposed rules will impact the ability of some small entities to access business credit themselves. In developing the proposed rule, the Bureau has considered alternatives and believes that none of those alternatives considered would achieve the statutory objectives while minimizing the cost of credit for small entities.”
Business lenders and even merchant cash advance companies should make sure they ask every applicant what the intended use of the funds are. If it’s for a personal purpose, the CFPB could try to exercise jurisdiction in the future.
