E-ALERT Financial Institutions

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1 E-ALERT Financial Institutins May 26, 2010 FINANCIAL REGULATORY REFORM LEGISLATION SENATE PASSES CONSUMER FINANCIAL PROTECTION LEGISLATION On May 20, 2010, the U.S. Senate passed the Cnsumer Financial Prtectin Act f 2010, under Title X f the Restring American Financial Stability Act f The Senate bill must nw be recnciled thrugh the cnference prcess with the Huse s versin f cnsumer financial prtectin refrm legislatin, which was passed in December Bth the Huse and the Senate versins f the cnsumer financial prtectin refrm legislatin wuld create a new, independent Federal regulatry bdy with brad new authrities as well as authrities transferred frm ther regulatrs under existing cnsumer financial prtectin laws. These authrities wuld extend t a wide array f peple and institutins (r cvered persns ) engaged in certain activities related t cnsumer financial prducts r services. There fllws a side-by-side cmparisn that summarizes the key elements f the Huse-passed legislatin and that als identifies the principal respects in which the Senate-passed legislatin differs frm the Huse-passed versin. If yu shuld have any questins regarding either the Husepassed legislatin r the Senate-passed legislatin, please free t cntact any f the members f Cvingtn s Financial Institutins Grup listed at the end f this alert. CFPA AUTHORITY Cnsumer Financial Prtectin Agency (CFPA) is established as a new independent federal agency (headed by a Directr fr the first tw years and thereafter by a fivemember Cmmissin) that is empwered t exercise brad regulatry, supervisry and enfrcement authrity ver cvered persns and service prviders with respect t bth new cnsumer financial prtectin prvisins (see belw) and an array f existing Federal cnsumer financial prtectin laws and prvisins fr which respnsibility is transferred frm the federal banking agencies, including: CFPB AUTHORITY Senate Bill Differences Bureau f Cnsumer Financial Prtectin (CFPB) is established within the Federal Reserve System (headed by a Directr appinted by the President fr a 5-year term), with brad regulatry, supervisry, and enfrcement authrity similar t that prvided in the Huse Bill. Federal Reserve Bard (the Bard ) may delegate t the CFPB authrity t examine persns subject t the Bard s jurisdictin fr cmpliance with federal cnsumer financial laws, but the Bard may nt appint, direct, r remve any CFPB fficer r emplyees and 1 The Huse f Representatives passed the Wall Street Refrm and Cnsumer Prtectin Act f 2009 (H.R. 4173) n December 11, The Senate legislatin was passed as a substitute amendment t H.R BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON

2 The Electrnic Funds Transfer Act. The Equal Credit Opprtunity Act. The Fair Credit Reprting Act. The Fair Debt Cllectin Practices Act. The Hme Mrtgage Disclsure Act. The Real Estate Settlement Prcedures Act. The Secure and Fair Enfrcement fr Mrtgage Licensing Act. The Truth in Lending Act. The Truth in Savings Act. may nt intervene in any CFPB matter r prceedings (including any examinatin r enfrcement prceeding) unless specifically authrized by ther Federal law. The Truth in Lending Act is amended t prhibit the cmpensatin paid t lan riginatrs frm varying based n lan terms ther than the lan principal amunt. The Senate Bill wuld prhibit prepayment penalties fr residential mrtgage lans that d nt meet specified criteria (e.g., fully dcumented, fixed-rate, and fully amrtizing mrtgage lans). Otherwise, the CFPB prvisins f the Senate Bill are generally cmparable t thse f the Huse Bill, with exceptins nted belw. DEFINITIONS Cvered Persns Any persn wh engages directly r indirectly in a financial activity in cnnectin with the advertising, marketing, slicitatin, sale, disclsure, delivery, r accunt maintenance r servicing f a cnsumer financial prduct r service. Service Prvider Any persn wh prvides a material service t a cvered persn in the advertising, marketing, slicitatin, sale, disclsure, delivery, r accunt maintenance r servicing f a cnsumer financial prduct r service. Cnsumer Financial Prduct r Service Any prduct r service that results frm r is related t engaging in a financial activity and that is t be used by a cnsumer primarily fr persnal, family r husehld purpses. Cnsumer Any individual r an agent, trust r representative acting n behalf f an individual (there is n net wrth r ther limitatin). Financial Activity Includes: Depsit-taking. Extending credit and servicing lans, and any activity usual in cnnectin with Cvered Persns Any persn r affiliate service prvider wh engages in ffering r prviding a cnsumer financial prduct r service. Service Prvider Any persn wh prvides a material service t a cvered persn, althugh the prvisin f a material service is nt expressly defined. Financial Prduct In additin t the financial activities listed in the Huse Bill, includes: Prviding payments r ther financial 2

3 extensins f credit r servicing lans. Check-cashing and check-guarantee services. Cllecting, analyzing, maintaining and prviding cnsumer reprt infrmatin r ther accunt infrmatin. data prcessing prducts r services t a cnsumer by any means, including payments made thrugh an nline banking system r mbile telecmmunicatins netwrk. Cllectin f debt related t any cnsumer financial prduct r service. Prviding real estate settlement services. Leasing real r persnal prperty (n a nn-perating lease basis). Acting as an investment r financial adviser (if nt regulated by SEC, CFTC r a state securities regulatr). Financial data prcessing where the data are financial, banking r ecnmic in nature. Mney transmitting. Sale, prvisin, r issuance f stred value. Acting as a mney services business. Acting as a custdian f mney r any financial instrument. Any ther activity that the CFPA defines, by regulatin, t be a financial activity (subject t certain required findings). EXCLUSIONS The CFPA s authrity is subject t a number f express exclusins, including fr: The business f insurance. Persns regulated by state insurance regulatrs, but nly t the extent acting in a regulated capacity. Exclusins frm the CFPB s authrity are similar t the exclusins in the Huse Bill, with the fllwing exceptin: Aut dealers are nt given the same brad exemptin as in the Huse Bill. Persns registered with r regulated by the SEC r by a state securities 3

4 cmmissin, but nly t the extent acting in a registered capacity. Persns registered with r regulated by the CFTC, but nly t the extent acting in a registered capacity. Merchants, retailers and sellers f nnfinancial prducts; accuntants, tax preparers and attrneys; real estate license hlders; aut dealers; and retailers f manufactured r mdular hmes. SCOPE OF CFPA AUTHORITY The CFPA s authrity includes: Examinatin, reprting and enfrcement authrity2 ver all cvered persns and service prducers with respect t all laws and regulatins within the CFPA s jurisdictin, subject t an exceptin fr insured depsitry institutins with assets f $10 billin r less as t which primary examinatin and enfrcement authrity is t be exercised by an institutin s primary federal regulatr (with the CFPA having back-up enfrcement authrity and authrity t remve the primary federal regulatr fr failure t cnduct adequate examinatins r bring apprpriate enfrcement actins). Develpment f registratin requirements fr all cvered persns that are nt credit unins r depsitry institutins, and als f mandatry examinatin prgrams fr such cvered persns. SCOPE OF CFPB AUTHORITY The CFPB s authrity includes: Primary enfrcement authrity ver insured depsitry institutins r insured credit unins with mre than $10 billin in ttal assets, and ver any affiliates f such a depsitry institutin r credit unin (unless the affiliate is expressly exempt frm CFPB authrity, e.g., registered brker-dealers). Secndary enfrcement authrity ver insured depsitry institutins r insured credit unins with ttal assets f $10 billin r less, and ver any affiliate f such a depsitry institutin r credit unin (unless the affiliate is expressly exempt frm CFPB authrity). Pwer t require reprts and cnduct peridic examinatins f certain nndepsitry cvered persns, with: Shared enfrcement authrity with the FTC ver a cvered persn wh prvides riginatin, brkerage, lan servicing, lan mdificatin, r freclsure relief services fr lans secured by real estate fr persnal, family, r husehld purpses. 2 Under the Huse Bill, t the extent that the CFPA and anther federal agency bth have enfrcement authrity ver a prvisin f law, the CFPA is t have primary enfrcement authrity, except that where the CFPA and the FTC have cmmn enfrcement authrity, either agency can initially exercise such authrity and then the ther may intervene in the enfrcement actin. 4

5 Exclusive enfrcement authrity ver any larger participant f a market fr ther cnsumer financial prducts r services. Exclusive rulemaking and examinatin authrity ver all nndepsitry cvered persns. Pwer t exercise authrity ver a service prvider t any cvered persn t the same extent that the cvered persn is subject t CFPB authrity with regard t the activity in which the service prvider is engaged n behalf f the cvered persn. Transfer f authrity frm the Federal Trade Cmmissin t the new CFPB under enumerated cnsumer laws, authrities which include rulemaking, cnducting studies, and issuing guidelines r reprts; but this transfer f authrity des nt affect the FTC s existing authrity under the Federal Trade Cmmissin Act r any law ther than an enumerated cnsumer law. Als, the FTC is given authrity t enfrce CFPB-issued regulatins with respect t cvered persns subject t FTC jurisdictin under the FTC Act. Prmulgatin f new regulatins Prmulgatin f new regulatins T ensure timely, apprpriate and effective disclsure t cnsumers f the csts, benefits and risks assciated with any cnsumer financial prduct r service. Regarding the manner, settings, and circumstances fr the prvisin f any cnsumer financial prducts r services.... T identify unlawful, unfair, deceptive, r abusive acts r practices in cnnectin with any transactin with r ffering f a cnsumer fr a cnsumer financial prduct r service. Prescribing minimum standards t deter and detect unfair, deceptive, T ensure that the features f any cnsumer financial prduct r service, bth initially and ver the term f the prduct r service, are fully, accurately, and effectively disclsed t cnsumers, t permit cnsumers t understand the csts, benefits, and risks assciated with the prduct r service. T set new limits n fees charged by payment card netwrks with respect t debit card transactins, cmmnly called interchange transactin fees. Regulatins prmulgated by the CFPB may be appealed by a Federal banking agency t the Financial Stability Oversight Cuncil, which upn a 2/3 vte may issue a stay (pstpning the effective date f a regulatin) r a set 5

6 abusive, fraudulent, r illegal transactins in the prvisin f cnsumer financial prducts r services by cvered persns that are nt federally r state regulated depsitry institutins. Impsing duties n any cvered persn, and their emplyees, agents and independent cntractrs, wh deal r cmmunicate directly with cnsumers in the prvisin f a cnsumer financial prduct r service, as the CFPA deems necessary r apprpriate t ensure fair dealing with cnsumers. Requiring banks t display prminently in each cnsumer branch ffice infrmatin regarding fees and charges assciated with the bank s verdraft prtectin prgram. Identifying unlawful, unfair, deceptive, r abusive acts r practices in cnnectin with reverse mrtgage transactins r the ffering f reverse mrtgages. aside (rendering the regulatin unenfrceable). The CFPB lacks authrity t: Prescribe new duties fr cvered persns, r their emplyees, agents, and independent cntractrs wh deal directly with cnsumers in the prvisin f a cnsumer financial prduct r service. FUNDING AND ASSESSMENTS The CFPA is t be funded by: An annual transfer frm Fed f an amunt equal t 10 percent f Fed s ttal expenses fr the mst recent year, and Assessments f cvered persns based n their size, cmplexity, risks psed by such persns, and recrd f cmpliance with applicable cnsumer laws and regulatins, with such assessments subject t The CFPB is t be funded by an annual transfer frm the Fed f an amunt determined by the Directr t be reasnably necessary t carry ut the authrities f the Bureau under Federal cnsumer financial law. This transfer is limited t a percentage f the ttal perating expenses f the Federal Reserve, capped at 10% fr 2011, 11% fr 2012, and 12% fr subsequent years. Cap fr insured depsitry institutins s that such an institutin s ttal annual charterer/regulatr assessments fr the first three years fllwing the enactment f the Act d nt exceed its ttal assessments fr

7 Prhibitin n any assessment f an insured depsitry institutin with ttal assets f $10 billin r less. NATIONAL BANK ACT (NBA) AND HOME OWNERS LOAN ACT (HOLA) PREEMPTION AND OCC VISITORIAL POWERS Expressly restricts NBA and HOLA preemptin f all state laws t instances where ne f the fllwing requirements is met Applicatin f a state law wuld have a discriminatry effect n federallychartered institutins in cmparisn t state-chartered institutins. State cnsumer financial laws are preempted by the NBA r HOLA nly t the extent they discriminate against the federally-chartered institutins r they are preempted, n a case-by-case basis, under the standard set frth by the Supreme Curt f the United States in Barnett Bank f Marin Cunty, N.A. v. Nelsn, 517 U.S. 25 (1996). The caseby-case determinatin may be made by the Cmptrller based n substantial evidence r by a curt de nv. Befre state cnsumer financial law may be fund preempted, it must first be determined that there is an applicable federal standard t gvern the cnduct regulated by the preempted state cnsumer financial law. NBA and HOLA preemptin f state cnsumer prtectin laws under the Senate Bill mirrrs the Huse prvisins: State attrney general may bring judicial actin against federally-chartered institutins t enfrce a rule f the CFPB after prir ntice t the CFPB and the OCC. Same substantive NBA and HOLA preemptin standard as Huse bill except that a federal standards determinatin is nt required fr a state cnsumer financial law t be preempted by the NBA r HOLA; nr is a curt required t make a de nv determinatin. State law is preempted by a federal law ther than the NBA r HOLA. Overturns Supreme Curt s Watters decisin and eliminates NBA and HOLA preemptin fr perating subsidiaries. Restricts judicial deference t OCC preemptin determinatins. Cdifies Supreme Curt s Cum decisin allwing State Attrneys General t enfrce nn-preempted state laws against federallychartered institutins, and in additin Visitrial pwers prvisin adpts the Cum ruling by statute; state attrneys general may bring curt actins t enfrce applicable law against federally-chartered institutins; n prvisin made fr parens patriae actins as 7

8 empwers State Attrneys General T enfrce any applicable federal law against a federally-chartered institutin. T bring actins against federallychartered institutins n behalf f state residents seeking damages r ther relief based n any applicable federal r state law. in Huse bill, nr fr explicit enfrcement authrity f federal law by state attrneys general against federally-chartered institutins. Attrneys in Cvingtn s Financial Institutins Grup advise a range f clients n recent financial services and banking develpments. The Financial Institutins Grup s expertise derives frm advising clients n the impact f such develpments ver the curse f the past three decades. Please d nt hesitate t cntact any member f ur Financial Institutins Grup, including the undersigned, shuld yu have any questins. Stuart Stck sstck@cv.cm Keith Nreika knreika@cv.cm D. Jean Veta jveta@cv.cm Mark Pltkin mpltkin@cv.cm Gregry Frischmann gfrischmann@cv.cm This infrmatin is nt intended as legal advice. Readers shuld seek specific legal advice befre acting with regard t the subjects mentined herein. Cvingtn & Burling LLP, an internatinal law firm, prvides crprate, litigatin and regulatry expertise t enable clients t achieve their gals. This cmmunicatin is intended t bring relevant develpments t ur clients and ther interested clleagues. Please send an t unsubscribe@cv.cm if yu d nt wish t receive future s r electrnic alerts Cvingtn & Burling LLP, 1201 Pennsylvania Avenue, NW, Washingtn, DC All rights reserved. 8