Financial Services Regulatory

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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Co-Authored by Erin Fonte

The recent flurry of activity and press coverage, over the past 18 months in particular, concerning “initial coin offerings” (also referred to as a “digital token sale”) has created confusion regarding their relationship to cryptocurrencies. While certainly connected in both concept and actuation, those with an interest in this burgeoning marketplace will be wise to note that both the risk and the regulatory landscape for existing cryptocurrencies (also referred to as “virtual currencies”) differ from ICOs/tokens. Those who forge ahead, uninformed, stand to learn an expensive lesson. We hope to illuminate certain fundamental concepts here.
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July 13, 2018, marks the comment deadline for the federal bank agencies’ proposed capital rules amendments to grant all banks the option to elect a three-year phase-in of the “day 1” regulatory capital effects from adopting the new and burdensome FASB Current Expected Credit Losses (CECL) methodology under GAAP (scheduled to become effective for the first group of banking organizations in their first fiscal year beginning after December 15, 2019). Critically, the election to use the three-year phase-in approach would be required to be made by the end of the first regulatory reporting period in which the banking organization applies CECL, otherwise it is forfeited. The proposed three-year phase in period affords community banks with much-needed time to plan and test for CECL implementation thereby easing some of the CECL anxiety community bankers are experiencing.

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Coauthored by Dykema Summer Associate Shaun Sullivan-Towler.

For financial institutions interested in banking state-legal marijuana businesses, 2018 has been a rollercoaster. In January, Attorney General Jeff Sessions rescinded the Obama-era policy of lenient federal enforcement, creating new confusion for banks and credit unions about the future of marijuana-related banking. Many feared that the Financial Crimes Enforcement Network (FinCEN) would withdraw or amend its guidance as well, thereby eliminating the only federal guidance directed to financial institutions on banking marijuana businesses. But FinCEN has since been clear that its guidance remains in place and announced that, as of March 31, 2018, a total of 411 banks and credit unions now provide services to marijuana-related businesses, up from 365 a year ago.
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Amid the uncertainty over the future of the CFPB, another continuing question is whether state consumer protection authorities will act to fill gaps left by the CFPB’s inaction. State attorneys general have tools available to pursue financial services practices that they believe harm consumers, and some have announced intentions to do so. But to date, the states have not initiated a flurry of suits regarding consumer financial protection.

Under the leadership of purported Acting Director Mick Mulvaney, the CFPB has curtailed investigative and enforcement activities, which states could take as a cue to step in. In fact, Mulvaney seemingly exhorted states to do so, as in a speech to the National Association of Attorneys General where he said that the CFPB would look to states for “a lot more leadership when it comes to enforcement.”
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As federal legislation abridging the Dodd-Frank Act remains in play, comparably radical changes to federal financial supervision could come without any need for Congressional action. This could happen through federal banking agencies’ modifications to the regulations they issue, and how they choose, or decline, to enforce them. This could effect sweeping changes to the current framework—or even dismantle it altogether.

While the latter possibility may sound extreme, the Consumer Financial Protection Bureau (CFPB) is in the process of reevaluating essentially every aspect of what the agency does. This initiative is taking place under the leadership of Mick Mulvaney, a longtime adversary of the CFPB and one of the two people currently claiming the right to be known as Acting CFPB Director. (The other, Leandra English, appointed to that role by outgoing Director Richard Cordray, is continuing to pursue her lawsuit. The latest oral argument in the case is scheduled for this Thursday, April 12 in the US Court of Appeals for the DC Circuit.)
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It has been almost easy to forget that the PHH v. CFPB case started life as an appeal of an enforcement action taken by the Consumer Financial Protection Bureau (CFPB) for purported violations of the Real Estate Settlement Procedures Act (RESPA).  Technical RESPA issues quickly took a back seat in public discourse to the juicier issue in the case—whether the structure of the CFPB itself was unconstitutional. (Among the factors heightening the drama was the fact that, post-election, the new leadership at the Department of Justice reversed the Obama-era course in the litigation, directing its lawyers to argue against the CFPB and contend that the CFPB was unconstitutional.)

In the latest turn in the case, in a January 31 opinion, the US Court of Appeals for the DC Circuit brought the RESPA issues back to the fore — ironically, in an opinion that does not substantively discuss the RESPA issues. 
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2018 has a tough act to follow, after a 2017 full of momentous developments—starting with a new Administration and wrapping up with a showdown over the right to serve as Acting Director of the Consumer Financial Protection Bureau (CFPB) (a fight that continues as of this writing, as discussed below).

But 2018 is unlikely to be a quiet year. In addition to developments in the CFPB leadership battle and other litigation, the year is expected to bring developments such as effective and compliance dates for major regulations on data protection, Bank Secrecy Act/anti-money-laundering (BSA/AML), mortgage servicing, and other topics, and could bring changes in supervisory focus at multiple federal agencies. 
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The state-legal marijuana sector operates in a largely cash-based economy—only about 400 banks and credit unions in the U.S. actively provide financial services to this sector—because marijuana remains illegal under federal law, despite the increasing number of states acting to legalize medical and/or recreational use. There is no carveout for state-legal activity and no safe harbor for financial institutions to serve customers engaged in such activity.

Until last week, though, banks and credit unions wanting to work with this sector could rely to some degree on guidance from the U.S. Department of Justice (DOJ) and from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Now, with the DOJ guidance withdrawn and the fate of the FinCEN guidance in question, the future of marijuana banking faces even more uncertainty.
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It has been a tumultuous few days for the Consumer Financial Protection Bureau (CFPB), with dueling acting directors and emergency hearings. But while Office of Management and Budget (OMB) Director Mick Mulvaney is now officially the acting director of the CFPB—at least as of this writing—the story does not end there. Many questions remain to be answered regarding the legal framework governing the CFPB’s leadership structure, the future of the CFPB under a permanent director nominated by President Donald Trump, and the prospects for federal and state regulation of consumer financial matters.
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