Senate strikes down the CPFB prohibition on class action waivers

On Tuesday, Oct. 24, , the U.S. Senate voted 51-50 (with Vice President Pence breaking the tie) to strike down a rule issued by the Consumer Financial Protection Bureau (CFPB) that prevented banks, educational institutions and other businesses from including arbitration clauses in consumer contracts that bar consumer class action lawsuits. The Senate vote followed a prior vote in the House to overturn the rule.  The White House said Trump “applauds” Congress for voting to repeal the rule, which would have given consumers “fewer options for quickly and efficiently resolving financial disputes.”

The proposed rule had a troubled and lengthy history. In 2010, as part of the Dodd-Frank reforms, Congress created the CFPB and directed the new agency to study and promulgate regulations on the use of mandatory arbitration provisions in consumer financial contracts. The CFPB released its study in 2015. It criticized mandatory arbitration provisions and specifically called out the use of class action waivers. In July 2017, the CFPB issued a rule that prohibited “providers of certain consumer financial products and services” from including class action waivers in arbitration agreements.  By the time the CFPB rule which resulted from the underlying study was finally issued, the Trump Administration and a new Congress were in power. Once the rule came into effect, the Trump Administration and Congress immediately spoke out against it, resulting in the recent House vote.

Additionally,  a collateral attack on the rule started on September 29, 2017, when the U.S. Chamber of Commerce and other organizations filed suit in federal court in Texas claiming the rule violates both the Administrative Procedures Act and the Dodd-Frank Act because it fails to advance the public interest or consumer welfare.

OCC Releases Updated List of Permissible Activities for National Banks and Federal Savings Associations

The Office of the Comptroller of the Currency (OCC) today released an updated list of permissible activities for national banks and federal savings associations.

The publication titled, Activities Permissible for National Banks and Federal Savings Associations, Cumulative, updates the list of permissible activities to reflect applicable precedent for national banks, streamlines certain entries for readability, and includes applicable interpretive letters and corporate decisions issued by the OCC affecting federal savings associations. OCC precedent remains applicable until rescinded, superseded, or revised.

National banks and federal savings associations should not rely solely on this document to determine the activities permissible for their institutions. Instead, the banks and federal savings associations should review the authorities cited in the publication and other relevant precedent before engaging in an activity. Regulated institutions are responsible for determining whether changes to applicable laws and regulations affect the permissibility of an activity. Previously permissible activities may become impermissible as a result of statutory or regulatory changes.

Individual OCC-regulated institutions may be precluded from engaging in otherwise permissible activities based on safety and soundness or other supervisory reasons.

Any activity permissible for a national bank or federal savings association is also permissible for its operating subsidiary.

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The Office of the Comptroller of the Currency Just Released its 2018 Bank Supervision Operating Plan – Are Your BSA/AML Compliance Programs Ready?

The Office of the Comptroller of the Currency’s (OCC) Committee on Bank Supervision (CBS) just released its Bank Supervision Operating Plan for 2018 which outlines the OCC’s supervision priorities for individual national banks, federal savings associations, federal branches, and federal agencies and service providers.  For the OCC’s 2018 fiscal year, which begins October 1, 2017 and ends September 30, 2018, the development of supervisory strategies will focus on the following areas:

  •  Cybersecurity and operational resiliency
  •  Commercial and retail credit loan underwriting, concentration risk management, and the allowance for loan and lease losses
  • Business model sustainability and viability and strategy changes
  • Bank Secrecy Act/anti-money laundering (BSA/AML) compliance management
  •  Change management to address new regulatory requirements

Consistent with this supervisory strategy, examiners will be tasked with determining whether banks have designed and implemented effective BSA/AML and Office of Foreign Assets Controls programs and controls to address continued risks from traditional money laundering schemes, evolving vulnerabilities resulting from the rapid pace of technological change, and emerging payment solutions and terrorist financing.  In their examination, examiners will evaluate risk assessment processes, and policies, procedures, and processes to effectively mitigate identified risks and consider the appropriateness of controls for the nature and level of risk present in a banks’ products, services, customers, and geographies and include conducting sufficient customer due diligence and suspicious activity identification and monitoring.

Examiners will also focus on compliance with new regulations and changes to existing regulations, including the Financial Crimes Enforcement Network’s final rule to enhance customer due diligence:  Monitoring banks’ progress in meeting the May 11, 2018, implementation deadline for the customer due diligence and beneficial ownership rules. This rule requires that banks identify and verify the identity of the beneficial owners of all “legal entity customers” (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted). Banks may comply either by obtaining the required information on a standard certification form or by any other means that comply with the substantive requirements of this obligation. Banks may rely on the beneficial ownership information supplied by the customer, provided that it has no knowledge of facts that would reasonably call into question the reliability of the information. The identification and verification procedures for beneficial owners are very similar to those for individual customers under a bank’s customer identification program, except that for beneficial owners, a bank may rely on copies of identity documents. Banks are required to maintain records of the beneficial ownership information they obtain, and may rely on another financial institution for the performance of these requirements, in each case to the same extent as under their customer identification program rule.

Because regulatory issues relative to a bank’s BSA/AML compliance program may prove problematic to the implementation of a bank’s strategic plans and given the OCC’s continued supervisory focus on BSA/AML compliance through 2018, now may be a good time to reexamine your compliance programs as examiners will be sure to focus on the effectiveness of this program relative to your risk profile.

More information can be found here and here.

Federal Banking Agencies Issue Notice of Proposed Rulemaking to Exempt Commercial Real Estate Transactions of $400,000 or Less from Appraisal Requirements

Responding to concerns about the time and cost associated with completing real estate transactions, today the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency today issued a notice of proposed rulemaking to raise the threshold for commercial real estate transactions requiring an appraisal to $400,000.  The agencies believe raising this threshold for commercial real estate transactions from the current level of $250,000 will significantly reduce the number of transactions that require an appraisal and will not pose a threat to the safety and soundness of financial institutions.  

Instead of an appraisal, the proposal would require that commercial real estate transactions at or below the threshold receive an evaluation.  As defined by agency guidance, evaluations are less detailed than appraisals, do not require completion by a state licensed or certified appraiser, and provide a market value estimate of the real estate pledged as collateral.  During the Economic Growth and Regulatory Paperwork Reduction Act review process, financial industry representatives raised concerns that the current exemption level had not kept pace with price appreciation in the commercial real estate market.  This proposal responds, in part, to these concerns.  


Proposed Revisions to the Consolidated Reports of Condition and Income (Call Report)

Effective today, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and the Office of the Comptroller of the Currency (collectively, the agencies) are requesting comment on additional burden-reducing revisions and certain other reporting changes to all three versions of the Call Report. These revisions are proposed to take effect March 31, 2018. The proposal results from ongoing efforts by the Federal Financial Institutions Examination Council (FFIEC) to ease reporting requirements and lessen reporting burden that is focused on, but not limited to, small institutions. The proposed reporting changes have been approved by the FFIEC and would affect the recently implemented FFIEC 051 Call Report for eligible small institutions as well as the FFIEC 041 and FFIEC 031 Call Reports. The FFIEC and the agencies will review and consider the comments as they finalize the revisions to the Call Report.

A key element of the community bank Call Report burden-reduction initiative is a statutorily mandated review of all existing Call Report data items based on responses to a series of nine surveys of internal users of Call Report data within the FFIEC member entities. Each survey covers a group of Call Report schedules. Reporting changes resulting from the agencies’ evaluation of the responses to the first portion of the user surveys were included in the Call Report proposal published in August 2016 and finalized in December 2016 (see FIL-82-2016, dated December 30, 2016). The burden-reducing changes included in the agencies’ current proposal result from the evaluation of responses to another portion of the user surveys, the re-evaluation of responses to certain previously reviewed surveys, and the agencies’ consideration of industry comments and feedback, including comments received on the August 2016 Call Report proposal. These changes include the removal or consolidation of existing data items, reductions in the reporting frequency for other data items, and increases in certain reporting thresholds. A summary of the FFIEC member entities’ uses of the data items retained in the Call Report schedules covered in the portion of the user surveys evaluated in the development of this proposal is included in an appendix to the attached Federal Register notice.

The agencies’ statutory review of the Call Report data items is ongoing, and the agencies are analyzing the responses to the final portion of the user surveys. Further burden-reducing Call Report changes based on the review of these surveys will be proposed in a future Federal Register notice.

The agencies’ proposal also includes two other revisions to the Call Report. The first proposal would revise the instructions by aligning the method for determining the past-due status of certain loans and other assets for Call Report purposes with an accepted industry standard. The second proposal would revise portions of several Call Report schedules in response to changes in the accounting for investments in equity securities under the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

Redlined copies of the FFIEC 051, FFIEC 041, and FFIEC 031 report forms showing the proposed burden-reducing changes and equity securities revisions are available on the FFIEC’s website ( on the web page for each report form. Lists detailing the schedules and data items affected by the proposal are included as appendices to the attached Federal Register notice. These lists also have been posted on the FFIEC’s website.


Interagency Advisory on the Availability of Appraisers

Today, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration today issued an advisory that discusses two existing options to help insured depository institutions address shortages of state-certified and licensed appraisers, particularly in rural areas: temporary practice permits and temporary waivers.  The agencies issued this advisory in response to comments received from the financial industry regarding the timeliness of appraisals due largely to what the commenters believe to be problems with the availability of certified and licensed appraisers.


  • Temporary practice permits allow certified and licensed appraisers to provide their services in states experiencing a shortage of appraisers, particularly in rural areas, subject to state law The advisory also discusses reciprocity, in which one state allows appraisers that are certified or licensed in another state to obtain certification or licensing without having to meet all of the state’s certification or licensing standards.
  • Temporary waivers set aside requirements relating to the certification or licensing of individuals to perform appraisals under Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 in states or geographic political subdivisions when certain conditions are met.

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Are the Federal Courts or the Republican Controlled Congress the Greater Threat to the CFPB?

Many banking lawyers believe recent actions by federal courts, and by Congress represent the greatest threat to the Consumer Financial Protection Bureau (CFPB) since its existence. Clearly, recent actions by federal courts and by Congress threaten the broad authority of the CFPB and how it exercises that authority. There is an outstanding question regarding which of the two threats is greater.

Two recent federal court holding threaten the CFPB’s aggressive enforcement strategies unlike in prior actions. First, on October 11, 2016, by a 2-1 margin, a three-judge panel of the US Court of Appeals for the DC Circuit (DC Circuit) in PHH Corp. v. CFPB held, among other things, that the CFPB’s single-director structure was unconstitutional because it permitted removal of the CFPB Director only for cause. The panel in the PHH case also provides excellent language that restricts the CFPB’s ability to unilaterally overrule another federal agency’s decision. Subsequently, the DC Circuit vacated the decision of the panel and granted the CFPB a re-hearing in banc scheduled for May 24, 2017. If the DC Circuit en banc rules against the CFPB, then it is widely expected that President Trump will remove CFPB Director Richard Cordray, and replace him with a new director who will change the direction of the CFPB to a more industry-friendly CFPB. Second, on March 17, 2017, the US District Court for the District of North Dakota in CFPB v. Intercept Corporation also delivered a major defeat to the CFPB by granting a motion to dismiss a CFPB complaint against the Intercept Corporation defendants because the CFPB complaint failed to allege facts sufficient to support a plausible claim upon which relief could be granted. The CFPB essentially claimed that Intercept Corporation, which is a payment processor, engaged in unfair, deceptive and abusive activities and practices by knowingly and illegally processing payments for its clients who were engaged in fraudulent or illegal transactions. The district court characterized the CFPB allegations as “an unadorned, the-defendant-unlawfully-harmed-me accusation.” A common theme between the three-judge DC Circuit panel decision in PHH and the federal district court in Intercept is that federal courts will require the CFPB to prove its claims and will not permit the CFPB to substitute its judgment for the judgment of Congress.

Congress has also recently taken action in response to the CFPB. On May 4, 2017, by a party line vote of 34-26, the House Financial Services Committee approved the Financial CHOICE Act of 2017 (CHOICE Act). Title VII of the CHOICE Act, if it became law, would, among other things, strip the CFPB of much of the authority it currently has under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank):

1. Section 711 of the CHOICE Act would rename the CFPB the Consumer Law Enforcement Agency (CLEA), and strike the section of the law which limits the president’s ability to remove the CFPB Director only for cause.

2. Section 713 would bring CLEA into the Congressional appropriation process and allow Congress to control its budget.

3. Section 715 would grant a party who is the subject of an administrative action by the CLEA to terminate the action and force the CLEA to bring the action into court.

4. Section 716 would grant the recipient of a CLEA civil investigative demand (CID) the right to file a petition in federal court to modify or set aside the CID.

5. Section 717 would require CLEA to conduct a cost benefit analysis for CLEA regulations, administrative actions, and civil actions.

6. Section 718 would make it clear that courts are not required to defer to CLEA interpretations of the laws it administers.

7. Section 720 would require CLEA to establish a procedure for responding to requests for advisory opinions.

8. Section 727 would eliminate CLEA’s examination and supervisory authority.

9. Section 729 would strip CLEA of any rulemaking, enforcement or other relating to employee benefit compensation plans or persons regulated by the CFTC or the SEC.

10. Section 733 would strip CLEA’s rulemaking, enforcement or other authority over payday loans, vehicle title loans and other similar loans.

11. Section 734 would nullify the CFPB’s March 2013 auto lending guidance. Section 736 would strip CLEA of any UDAAP authority.

12. Section 738 would repeal CLEA’s authority to restrict arbitration.

While the answer to which threat is greater is difficult, it is likely that the courts are a greater threat than Congress, at this point, because Congressional actions to date, including the CHOICE Act, have not had any direct impact on the CFPB. Recent court cases, however, have proven to be very helpful to those lawyers who regularly challenge positions of the CFPB, and, the CFPB has had to respond to those challenges in ways that it had not done so in the past.

Is the FDIC’s Shift To De Novo Banking Real?

On May 1, 2017, the FDIC released an update to its guidance on the de novo banking – “Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions.” The updated guidance purports to provide organizers with a “clear and transparent explanation of the path to obtaining deposit insurance.” This may be the FDIC’s response to the 2014 joint letter of the American Association of Bank Directors (AABD) and the Independent Community Bankers of America (ICBA) in which the AABD and the ICBA recommended that the FDIC issue a new Financial Institution Letter (FIL) to “to help dispel misconceptions and reaffirm the FDIC’s support for the formation of de novo banks.” These misconceptions relate to the uncertainty in the application process, the second-guessing of business plans for a de novo bank, capital requirements, examination schedules and the degree of regulatory oversight during the first seven years. The FDIC appears to be on a “get-out-the-message” campaign that de novo banking is back and the FDIC is poised to provide guidance on the process.
The banking group at Duane Morris has been involved in de-novo banking for over 40 years. We’ve advised on the de novo process and assisted in the formation of many banks throughout the Western United States and have represented these same banks throughout their life cycle. The recent recession which was sparked by excessive risk-taking by some financial institutions led to a shift in the FDIC’s regulatory philosophy towards more oversight and a period of consolidation. It appears that we are coming out of this period with a possible shift in the regulatory philosophy at the FDIC on de novo banking. To make this point, the FDIC has held industry outreach meetings in San Francisco, New York, Atlanta, and Dallas to inform industry participants about the FDIC’s application process and has planned additional outreach events on May 12, 2017, in Kansas City, Missouri, and May 31, 2017, in Chicago, Illinois.
It appears that we may be entering (finally) the cycle of de novo banks which would add to the health of the community banking industry. Small businesses may finally rejoice in the return of specialized relationship banking.

The FIL/Guidance can be found here:

FDIC Makes Public March Enforcement Actions

The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in March. There are no administrative hearings scheduled for May 2017.

The FDIC issued a total of 23 orders and one adjudicated decision. The administrative enforcement actions in those orders consisted of five removal and prohibition orders; six Section 19 orders; two civil money penalties; four voluntary terminations of insurance; six terminations of consent orders and cease and desist orders; three termination of restitution orders; and one adjudicated decision.

To view the orders and notice online, please visit the FDIC’s Web page by clicking the link:  March 2017 Enforcement Decisions and Orders

Safety and Soundness and the Bankruptcy Code: Does a Bank Commit a Safety and Soundness Violation by Failing to Comply with the Bankruptcy Rules?

It is fair to say that not many, if any, banks have internal controls or policies and procedures to identify and mitigate deficiencies in the bankruptcy practices of banks. Indeed, banks typically rely on their Legal Department or external counsel to make sure banks protect their interests when bank customers file bankruptcy. While the Compliance Department and the Risk Management Department track compliance and risks related to numerous laws, rules and regulations, the Bankruptcy Code and its rules are typically not among those laws and rules. Certainly, it would be unexpected to find a Compliance Department or Risk Management Department that focuses on reviewing bankruptcy notices and filings by bank customers, and the responses by banks to those notices and filings to determine whether the banks filed, among other things, timely and accurate proofs of claim, payment change notices, claims of post-petition mortgage fees, expenses and charges or accurate notices of final cures. It is not unreasonable to think that those areas are all issues for the Bankruptcy Court to address, and for bank counsel to make sure the interests of the banks are protected. Perhaps, Compliance Departments and Risk Management Departments along with Audit Departments should rethink the importance of bank compliance with Bankruptcy laws and rules both as a way to mitigate regulatory risk and as a way to make sure the risk profile of the bank is accurate. As an incentive to do so, banks should consider a recent civil money penalty (CMP) action by the Office of the Comptroller of the Currency (OCC) against U.S. Bank National Association (US Bank).

On April 25, 2017, the OCC imposed a $15 million CMP against US Bank and required US Bank to make approximately $29 million in remediation to approximately 22,000 US Bank accountholders. The basis upon which the OCC took action against US Bank was that:

“Between 2009 and 2014, the Bank committed various errors related to  bankruptcy filings, including: (a) untimely, not filed, or inaccurately filed Proofs of Claim; (b) payment application inaccuracies resulting in overpayments by debtors or trustees; (c) untimely and/or inaccurate Payment Change Notices; (d) untimely, and/or inaccurate Post-Petition Mortgage Fees, Expenses, and Charges; (e) inaccurate Notices of Final Cure; (f) exposure of confidential customer information in court-filed documents; and (g) inconsistent application of the Bank’s fee waiver practices.”

The OCC’s action against US Bank should be a second wake-up call for those Compliance Departments, Risk Management Departments and Audit Departments that assume that the Legal Department or external counsel will take care of any risks related to banks compliance with Bankruptcy law, rules and regulations during the Bankruptcy process. The first wake-up call for Compliance Departments and Risk Management Departments should have be the actions taken by the OCC and other federal prudential supervisors (and the Consumer Financial Protection Bureau) against mortgage servicers in connection with an interagency horizontal review of major residential mortgage servicers of the residential real estate mortgage foreclosure processes. In those enforcement actions, the OCC and the other agencies based their actions on deficiencies and unsafe or unsound practices in residential mortgage servicing and in the initiation and handling of foreclosure proceedings.

Clearly, the OCC’s action against US Bank shows that a bank may commit a safety and soundness violation by failing to comply with the Bankruptcy laws and rules. The challenge for banks is to determine what changes need to be made to their internal controls, including their policies and procedures, and what role the Legal Department, the Compliance Department, the Risk Management Department and the Audit Department should play in addressing the deficiencies.

Under the Three Lines of Defense Approach, the Legal Department must be the first line of defense, especially since the Legal Department should either have the expertise or have access to the expertise through external counsel. This means the Legal Department should either have an internal quality control process within the Legal Department or the Legal Department should properly manage and oversee the quality of the work performed by external counsel. Similarly, the Compliance Department and the Risk Management Department, as the second line of defense, should, at a minimum, obtain confirmation from the Legal Department that the Legal Department has engaged qualified and experienced external counsel to protect the interests of the bank. The purpose of the confirmation is both to make sure the Legal Department (and not any line manager) has engaged external counsel and that the Legal Department has assigned one or more attorneys to manage and oversee the bankruptcy legal services performed by external counsel on behalf of the bank. Finally, the Audit Department, as the third line of defense, should audit the Compliance Department to determine whether the Compliance Department has received the appropriate confirmation from the Legal Department and to make sure the Legal Department or the Compliance Department has a process in place to limit or mitigate any risk of a pattern or practice of deficiencies in the bankruptcy practices of the bank.