Financial Services Regulatory

Recent interest-rate decreases have led to a resurgence in the mortgage market, with refinance activity up sharply from levels a year ago. But lenders have underwriting on their minds for reasons other than increased application volume.

The CFPB recently affirmed that it intends to allow the so-called GSE Patch to its Ability-to-Repay/Qualified Mortgage Rule to expire in early 2021. This has home loans executives and their advisors assessing their underwriting obligations in a world without this heavily utilized compliance safe harbor. In advance of the elimination of the patch, the Bureau is requesting comments regarding potential changes to the Rule and the Qualified Mortgage definition.
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Article 9 of the Uniform Commercial Code (“UCC”) has become highly technical, reflecting the complexity of modern secured transactions and the intricate relationships of debtors, secured parties and others who have or may have interests in a debtor’s assets.  Some of its rules, however, seem relatively easy to understand and apply.

One of those is the rule that protects buyers who buy goods in the ordinary course of business, allowing such buyers to make purchases free and clear of security interests created by their sellers. UCC 9-320.  This relatively simple concept is consistent with everyday buyers’ expectations.  When one purchases at a store and pays for goods, one expects the secured party to follow the sales proceeds rather than unfairly repossess the purchased goods. 
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Justice Kavanaugh’s first authored opinion as a Supreme Court Justice in Henry Schein, Inc. v. Archer and White Sales, Inc., No. 17-1272, 586 U.S. ____ (2019) further cements the Supreme Court’s stance on arbitration.

Over the years, the Supreme Court has consistently held in favor of arbitration and rejected attempts by parties and the lower courts to ignore binding arbitration clauses. For instance, in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (April 2011), the Supreme Court rejected state laws that attempted to prohibit arbitration for certain types of claims, holding “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the [Federal Arbitration Act (“FAA”) 9 U.S.C. § 1 et seq.].” More recently, in Epic System Corp. v. Lewis, 138 S. Ct. 1612 (May 2018), the Supreme Court held that arbitration clauses prohibiting class actions in employment contracts were enforceable and were not preempted by the National Labor Relations Act (“NLRA”), 29 U.S.C. § 151 et seq.—which guarantees basic rights of private sector employees to take collective action. The Supreme Court reasoned that the FAA and NLRA “have long enjoyed separate spheres of influence . . .” and the FAA is “a Congressional command requiring us to enforce, not override, the terms of the arbitration agreements….” 
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One of the key provisions of the Dodd-Frank Act rollback law signed by President Trump on May 24, 2018, hasn’t met its early promise for U.S. community banks. Recently proposed rules to implement simplified capital requirements have fallen short of the industry’s expectations when the bank deregulation law was enacted in May.

On November 21, 2018, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly announced a proposed rule to simplify capital requirements for qualifying community banking organizations that opt into the community bank leverage ratio framework. The agencies are seeking public comment on a proposal that would simplify regulatory capital requirements for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155 regulatory reform bill). 
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Co-Authored by Erin Fonte and Brenna McGee

Continuing from last week’s post, here is the second half of our “Top 10 List” of key issues U.S. financial institutions, non-banks providing financial services, and financial technology (fintech) entities should plan for and watch throughout 2019.

  1. OCC Fintech Charter

On July 31, 2018, after several years of discussion, the Office of the Comptroller of the Currency (OCC) announced that it is accepting applications for special purpose national bank charters for fintech companies. Long anticipated by the fintech industry and opposed by multiple state regulators, the OCC fintech charter could potentially alter the financial services landscape for nondepository financial institutions. For fintech companies serving customers in multiple states, the OCC fintech charter could reduce the administrative and compliance challenges posed by the existing patchwork of state licensing requirements. But it comes at a steep cost because fintech companies would have to meet the stricter, bank-like regulatory requirements associated with a bank charter. 
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Co-Authored by Erin Fonte and Brenna McGee

As an eventful 2018 comes to a close, we look ahead to 2019 and our “Top 10 List” of key issues U.S. financial institutions, non-banks providing financial services, and financial technology (fintech) entities should plan for and watch throughout the upcoming year. The first five items on the list are discussed below, and the remainder of our list will follow shortly in another post.

  1. Brexit

We will start the list with a couple of topics from “over the pond” that will have a continuing impact on U.S. financial services entities. The British Parliament was scheduled to vote on Tuesday on the agreement that Prime Minister Theresa May reached with the European Union (EU) for Britain’s departure from the EU, commonly referred to as “Brexit.” But in an unscheduled address to Parliament on Monday, May said that she would seek to postpone the parliamentary vote, noting that if the vote were to be held as planned, her proposal “would be defeated by a significant margin.” As a result, May’s own party triggered a no-confidence vote on May that would have seen her removed as Prime Minister if she lost. By a vote of 200 to 117, May won a vote of confidence in her leadership and is now immune from a leadership challenge for a year. 
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After a highly publicized and controversial confirmation process, the senate voted to approve Brett Kavanaugh’s nomination to the Supreme Court this past Saturday, October 6, 2018. Kavanaugh was sworn in later that day and began hearing cases on Tuesday, October 9, 2018.

It goes without saying that Justice Kavanaugh is a conservative judge and is expected to lean to the right. It also goes without saying that Justice Kavanaugh’s appointment pushes the Supreme Court to the right with a 5-4 ratio. But what does Justice Kavanaugh’s appointment mean for the financial services industry? 
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Generally

In an important joint statement issued on September 11, 2018, the federal financial regulatory agencies (the FDIC, the OCC, the Federal Reserve, the NCUA, and the CFPB) clarified the role of supervisory guidance, stating that supervisory guidance “does not have the force and effect of law.” Community and regional banks and other regulated financial institutions are applauding this effort by regulators to ensure that both the regulated and their regulators have a clear understanding of the appropriate role of guidance in supervision. Financial institutions over the years have raised numerous concerns about the application of guidance in the examination process, and will likely view this as a positive step towards providing greater clarity.

The agencies said guidance can provide examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers. “Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach,” the agencies point out in the joint statement.  
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Co-Authored by Erin Fonte

On July 31, 2018, the U.S. Department of the Treasury (“Treasury”) released a report on “Nonbank Financials, Fintech, and Innovation,” its fourth and final report on the U.S. financial system pursuant to Executive Order 13772 (the “Report”). At over 200 pages long, with 80 separate recommendations, the Report addresses products and services ranging from payments and marketplace lending to debt collection and wealth management. While many of Treasury’s recommendations would have a positive impact on creating a national and state regulatory environment to foster innovation in financial services, the Report is ambitious, and implementing many of its recommendations will be a massive effort in legislation, policy-making and regulatory oversight. 
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While speculation about the leadership, mandate, and future path of the Consumer Finance Protection Bureau remains at the forefront of financial news, the CFPB’s regulatory functionality has to some extent avoided the spotlight since the appointment of Mick Mulvaney as its acting director in November 2017. Still, as emphasized by intermittent flurries of news activity, the administration of President Donald Trump has significantly accelerated the pace of reform. Before prognosticating about the future course of the Bureau, we will review its recent trajectory for indications of what might lie ahead.
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