Legal Seminar, Denver, CO
This is the student handbook for the July 18-20, 2018 Legal Seminar held in Denver, CO.
CSBS Legal Seminar Denver, Colorado July 18-20, 2018
Wednesday, July 18, 2018
7:30 AM
Breakfast
8:30 AM
Joint Deputy & Legal Seminars - Welcome Remarks Sebastien Monnet
Vice President, Learning & Development Conference of State Bank Supervisors
8:45 AM
CSBS Regulatory & Legislative Update Jim Cooper Senior Vice President, Policy Chuck Cross Senior Vice President, Consumer Protection & Non-Depository Supervision Margaret Liu Senior Vice President, Legislative & Deputy General Counsel
Michael L. Stevens (moderator) Senior Executive Vice President Conference of State Bank Supervisors
10:00 AM
Break
10:15 AM
Blockchain, Smart Contracts, and Ramifications Alanna Gombert Founding Member Digital Asset Trade Association
11:30 AM
Conclusion of the 2018 Deputy Seminar
11:30 AM
Lunch
1:00 PM
Docket Review Thomas Pinder Deputy General Counsel American Bankers Association
2:15 PM
Break
2:30 PM
Legal Aspects of DeNovo Banking Paul Allred Deputy Commissioner Utah Department of Financial Institutions
Shauna Shields Bank Bureau Chief Iowa Division of Banking
Mark Flanigan Senior Counsel Federal Deposit Insurance Corporation
3:30 PM
Break
3:45 PM
Marketplace Lenders & Preemption of State Interest Rate Limitations Ashley M. Simonsen Covington & Burling LLP Diane Standaert Director of State Policy, EVP Center for Responsible Lending
4:45 PM
Open Forum
5:00 PM
Adjourn
7:30 PM - 9:30 PM Dessert Reception
Thursday, July 19, 2018
7:30 AM
Breakfast
8:30 AM
Ethics and Professional Responsibility Frank Bucaro, CSP, CPAE Frank C. Bucaro & Associates
10:30 AM
Break
10:45 AM
Electronic Payment Systems: Law and Emerging Technologies Edward A. Morse Professor of Law McGrath North Mullin & Kratz Chair in Business Law Creighton University School of Law
12:00 PM
Lunch
1:15 PM
Preemption: Historical Perspectives and Current Issues Margaret Liu Senior Vice President, Legislative & Deputy General Counsel Michael Townsley Policy Counsel Conference of State Bank Supervisors
2:30 PM
Break
2:45 PM
NMLS Data Security and Privacy Todd Scharf Chief Information Security Officer Tarcy Thompson Staff Attorney & Chief Privacy Officer Conference of State Bank Supervisors
4:00 PM
Break
4:15 PM
Open Forum
4:30 PM
Adjourn
Friday, July 20, 2018
7:30 AM
Breakfast
8:30 AM
Marijuana Legalization & Financial Services Karmen Hanson, MA Program Director, Health Program National Conference of State Legislatures
9:30 AM
Break
9:45 AM
State-by-State Legislative Developments and Proposals Lucinda Fazio Chief of Regulatory Affairs, Consumer Services Washington Department of Financial Institutions Shane Foster Senior Litigation Counsel Arizona Office of the Attorney General Kristin Rice Counsel North Carolina Office of Commissioner of Banks Stacy L. Serrano Staff Attorney Connecticut Department of Banking Mary Pfaff (moderator)
Senior Director, Policy & Supervision Conference of State Bank Supervisors
11:00 AM
Facilitated Group Discussion on Other Issues of Interest Margaret Liu (facilitator) Senior Vice President, Legislative & Deputy General Counsel Conference of State Bank Supervisors
11:30 AM
Conclusion of the 2018 Legal Seminar
Legal Seminar Denver, Colorado July 18-20, 2018
Attendees Arizona Attorney General's Office Shane Foster
Shane.foster@azag.gov
602-542-8766
California Department of Business Oversight Julie Jacob
Julie.Jacob@dbo.ca.gov
916-322-6927 415-263-8541
Shavaugn Lewis
Shavaugn.Lewis@dbo.ca.gov
Connecticut Department of Banking Stacey Serrano
stacey.serrano@ct.gov
860-240-8143
Consumer Financial Protection Bureau Vanessa Careiro
vanessa.careiro@cfpb.gov
202-435-9394
Delaware Office of the State Bank Commissioner Frank Broujos
dawn.hollinger@state.de.us robert.glen@state.de.us
302-739-4235 302-739-4235
Robert Glen
Federal Deposit Insurance Corporation Edward Lanning
elanning@fdic.gov mtynan@fdic.gov
816-234-8045 312-382-6555
Monica Tynan
Federal Reserve Bank of Cleveland Carrie Moore
carrie.v.moore@clev.frb.org
216-579-2875
Georgia Department of Banking and Finance Elizabeth Harris
eharris@dbf.state.ga.us lkim@dbf.state.ga.us
770-986-1649 770-986-1648
Lilia Kim
Hawaii Division of Financial Institutions James Paige
james.c.paige@hawaii.gov lsasaki@dcca.hawaii.gov
808-586-1180 808-586-2820
Laura Sasaki
Idaho Attorney General's Office Joseph Jones
joseph.jones@finance.idaho.gov
208-332-8091
Idaho Department of Finance Mary Hughes
mary.hughes@finance.idaho.gov
208-332-8030
Illinois Division of Banking Louis Butler
louis.butler@illinois.gov john.crees@illinois.gov kara.ervin@illinois.gov daniel.kelber@illinois.gov robert.stearn@illinois.gov
312-814-6161 312-814-1694 312-793-7469 312-793-4921 312-793-1454
John Crees Kara Ervin
Daniel Kelber Robert Stearn
Indiana Department of Financial Institutions Nicole Buskill
nbuskill@dfi.in.gov Lmiller@dfi.in.gov
317-232-3959 317-232-3955
Lyndsay Miller
Iowa Division of Banking Zak Hingst
zak.hingst@idob.state.ia.us Shauna.Shields@idob.state.ia.us
515-281-4014 515-281-4014
Shauna Shields
Kansas Office of the State Bank Commissioner Melissa Wangermann
melissa.wangermann@osbckansas.org
785-296-2266
Louisiana Office of Financial Institutions Paul Melancon
pmelancon@ofi.la.gov srouprich@ofi.la.gov
225-925-4633 225-922-1028
Susan Rouprich
Maine Bureau of Financial Institutions David Laurendeau
David.G.Laurendeau@maine.gov
207-624-8574
Maryland Office of Financial Regulation Sandra Small
Sandra.Small@maryland.gov
410-230-6122
Mississippi Department of Banking & Consumer Finance Charles Plunkett
Charles.Plunkett@dbcf.ms.gov
601-321-6944
Montana Division of Banking and Financial Institutions Don Harris Don.Harris@mt.gov
406-841-2923 406-841-2920
Kelly O'Sullivan
kosullivan@mt.gov
North Carolina Office of Commissioner of Banks Katie Bosken
kbosken@nccob.gov aholmes@nccob.gov
919-733-3016 919-733-3016 919-733-1823
Ashley Holmes
Kristin Rice
krice@nccob.gov
Ohio Division of Financial Institutions Kyle Evans
Kyle.Evans@com.state.oh.us
614-728-8400 614-728-8400 614-728-8400
Matthew Walker Jennifer Whitehurst
matthew.walker@com.state.oh.us Jennifer.Whitehurst@com.state.oh.us
Oklahoma State Banking Department Dudley Gilbert
dudley.gilbert@banking.ok.gov
405-521-2782
Pennsylvania Department of Banking and Securities Robert Lopez rolopez@pa.gov
717-783-4242
Rhode Island Division of Banking Jenna Giguere
jenna.giguere@dbr.ri.gov
401-462-9593
South Dakota Division of Banking Brock Jensen
brock.jensen@state.sd.us
605-773-3421
Tennessee Department of Financial Institutions Denise Cole
denise.e.cole@tn.gov Daniel.Espensen@tn.gov greg.gonzales@tn.gov
615-917-7512 615-854-6177 615-532-1010 615-854-6893
Daniel Espensen Greg Gonzales
Eric Rogers
eric.rogers@tn.gov
Texas Department of Banking Chris Bell
chris.bell@dob.texas.gov ejobe@dob.texas.gov
512-475-1300 512-475-1321
Everette Jobe
Texas Department of Savings & Mortgage Lending Roberto Ramirez
rramirez@sml.texas.gov
512-475-0788
Utah Department of Financial Institutions Paul Allred
pallred@utah.gov
801-538-8837
Vermont Department of Financial Regulation Steven Knudson
steven.knudson@vermont.gov Karla.Nuissl@vermont.gov
802-828-4891 802-828-2963
Karla Nuissl
Washington Department of Financial Institutions Lucinda Fazio
lucinda.fazio@dfi.wa.gov barbara.penttila@dfi.wa.gov joseph.vincent@dfi.wa.gov isaac.williamson@dfi.wa.gov
360-902-8800 360-902-0522 360-902-0516 360-902-8755
Barbara Penttila Joseph Vincent Isaac Williamson
Wisconsin Department of Financial Institutions Amesia Xiong
Amesia.Xiong@dfi.wisconsin.gov
608-266-8830
Wyoming Division of Banking Albert Forkner
albert.forkner@wyo.gov
307-777-7797 307-777-8614
Cecil Alice Johnstone
cecilalice.johnstone@wyo.gov
Speakers American Bankers Association Thomas Pinder
tpinder@aba.com
202-663-5123
Center for Responsible Lending Diane Standaert
diane.standaert@responsiblelending.org
202-349-1850
Covington & Burling LLP Ashley Simonsen
asimonsen@cov.com
424-332-4782
Creighton University School of Law Edward Morse
morse@creighton.edu
402-280-3091
Digital Asset Trade Association Alanna Gombert
alanna@metax.io
Federal Deposit Insurance Corporation Mark Flanigan
mflanigan@fdic.gov
202-898-7426
Frank C. Bucaro & Associates Frank Bucaro, CSP, CPAE
frank@frankbucaro.com
630-483-2276
National Conference of State Legislatures Karmen Hanson
karmen.hanson@ncsl.org
303-364-7700
CSBS Staff Jim Cooper Chuck Cross Margaret Liu Tom McVey Mary Pfaff Todd Scharf Mike Stevens
jcooper@csbs.org ccross@csbs.org mliu@csbs.org tmcvey@csbs.org smonnet@csbs.org mpfaff@csbs.org tscharf@csbs.org mstevens@csbs.org tthompson@csbs.org mtownsley@csbs.org
202-808-3557 202-728-5745 202-728-5749 304-549-9584 202-549-2017 202-728-5748 202-802-9558 202-728-5701 202-759-9401 202-728-5738
Sebastien Monnet
Tarcy Thompson Michael Townsley
Day One Presentations
CSBS Policy Briefing
Community Bank Leverage Ratio in S. 2155 • Qualifying Community Bank (QCB) for banks under $10 billion • QCB that meets a tangible leverage ratio between 8% and 10% will be exempt from current risk-based capital standards. – Disqualified based on
• Off-Balance Sheet exposures • Trading Assets and Liabilities • Notional value of derivative exposures • QCB will be deemed “Well Capitalized” • Requires consultation with State Regulators
Confidential / Sensitive / Pre‐Decisional – For Discussion Purposes Only
Implementation Issues related to S. 2155 • Home Mortgage Disclosure Act • Short-form Call Report • Appraisal Relief • TRID • QM Status for loan in portfolio for banks under $10 billion • Reciprocal Deposits • Volcker Rule exemption for Banks under $10 billion • 18 month examination cycle from $1billion to $3 billion • Fed small bank holding company policy $1 billion to $3 billion
Confidential / Sensitive / Pre‐Decisional – For Discussion Purposes Only
We can rebuild it . . . Better, stronger, faster than before!
People Are Policy
Agency/Committee
Leadership
Term Expires
Treasury
Steven Mnuchin Jelena McWillaims
Pleasure of President
FDIC OCC
6 /5/2023
Joseph Otting
11/27/2022
CFPB
Mick Mulvaney Kathy Kraninger Mike Crapo (R‐ID)
Acting Nominated Thru 2018 Thru 2018
Senate Banking
House Financial Services Jeb Hensarling (R‐TX)
Federal Reserve Board Chair Jerome Powell (Term as Chair ends 2/5/2022) (1/31/2028)
Richard Clarida Nominated for Vice Chair (4 years) Nominated for term expiring 1/31/22 Michelle Bowman Nominated for term expiring 1/31/20 Vacancy for term expiring 1/31/2024
Randal Quarles (1/31/18) Vice Chairman for Supervision (10/5/2020) Nominated for term to 1/31/2032
Lael Brainard (1/31/2026)
Marvin Goodfriend Nominated for term expiring 1/31/2030
Community Bank Research Conference: Driving a Better Policy Outcome
• National survey
– Closed July 15 th ‐ 478 banks responded in 90 days
• 5 questions for 5 bankers • Community Bank Index • Academic research ‐ 27 Submissions • Case Study Competition – Eastern Kentucky University
www.communitybanking.org
Pinder 2018 Wrap Up
Tom Pinder, Deputy General Counsel tpinder@aba.com 202-663-5028
CSBS Seminar July 18, 2018
aba.com 1-800-BANKERS
The ALJ Conundrum
• The Supreme Court’s Lucia decision leaves unresolved more questions than it actually resolves.
Timeline Leading up to Lucia
• Summer 2014 – SEC Enforcement Director Andrew Ceresney said the SEC would use its administrative forum more often. The SEC increased its ALJs from three to five. • November 2014 – Southern District of New York Judge Rakoff criticizes the SEC’s administrative proceedings at a PLI conference, noting its recent 100 percent win rate versus only 61 percent in the courts. • 2015 - Wall Street Journal and other media report on alleged ALJ agency biased • The SEC won against 86% of defendants in contested cases in its own courts from October 2010 through September 2015, according to an updated analysis by The Wall Street Journal— significantly higher than the agency’s 70% win rate in federal court.
WSJ Articles
• Andrew Ceresney, the SEC enforcement chief, said at a legal event in Washington this month that this comparison doesn’t take into account summary judgments in federal court. • The SEC won on summary judgment against 51 defendants and lost against five in the two years through September, according to previously unpublished SEC data. The agency doesn’t have data for earlier years, the officials said. Adding the summary judgments to the trial wins would give the SEC an overall win rate in federal court for the two years of 82%. • Judge Brenda Murray explained to the brokers that the commissioners who run the SEC and approve all the civil charges filed by the agency don’t want its judges second-guessing them. • “So for me to say I am wiping it out,” Ms. Murray said at the hearing last year, “it looks like I am saying to these presidential appointee commissioners, I am reversing you. And they don’t like that.” • Alj Elliott said that “The SEC can’t fire us, decide our pay or grade our performance,“ he said. ”There’s nothing the SEC can do to influence us and they don’t try to."\\ This prompted the SEC, on Nov. 30, 2017, to issue an order “ratifying” the historic appointments of its five sitting ALJs. • Burgess v. FDIC , No. 17-60579 (5th Cir. 2017).
Supreme Court: SEC ALJs Unconstitutional
• In Lucia v. SEC , the Supreme Court held that SEC ALJs are “Officers” of the United States and their appointment by SEC staff violated the Appointments Clause of the US Constitution. • Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a "Department." • The Court looked to its decision in Freytag v. Commissioner , which concluded that US Tax Court special trial judges qualified as officers not employees. • The Supreme Court found the SEC ALJs to be "near-carbon copies" of the special trial judges examined in Freytag . In applying the Freytag test, the Court found that, like special trial judges, the SEC ALJs: • Occupy a continuing position established by law because SEC ALJs receive a career appointment. • Exercise significant authority and discretion • Issue decisions containing factual findings, legal conclusions, and remedies. • Because the ALJ in this case was not constitutionally appointed, but instead hired by agency staff, the Court reversed and remanded the case for a new hearing before a properly appointed official.
Public Company Accounting Oversight Board (PCAOB) • On June 28, 2010, the Supreme Court held in Free Enterprise Fund v. Public Company Accounting Oversight Board , that Sarbanes-Oxley's limitations on the SEC's authority to remove members of the PCAOB violate Article II of the Constitution. • The Court declined to issue an injunction preventing the PCAOB from continuing its operations (or to declare the entire statute unconstitutional), holding that the violation is remedied by the SEC receiving authority to remove members of the PCAOB at will.
Implications of Lucia
• Lucia did not overturn all prior decisions issued by SEC ALJs. • Instead, the Supreme Court held that only parties who made timely constitutional challenges could request new hearings, which must be overseen by a different ALJ. • The Supreme Court expressly declined to decide: • The validity of a 2017 SEC order ratifying prior ALJ appointments, which sought to cure any violation of the Appointments Clause • See Order re: Pending Administrative Proceedings, Securities & Exchange Commission, SEC Release No. 10440 (Nov. 30, 2017) • The constitutionality of statutes protecting ALJs from removal except for good cause
What Does Lucia Mean for Federal Banking Agencies? • It appears that the Fed, OCC, FDIC, and NCUA do not have their own ALJs, but instead use the same ALJs who are hired by the Office of Financial Institution Adjudication (OFIA). • Two ALJs for OFIA are Judges Misrendino and McNeil. • OCC regulations describe the OFIA as "the executive body charged with overseeing the administration of administrative enforcement proceedings for the [four agencies]." • In Burgess v. FDIC (2017), the Fifth Circuit ruled that a bank official seeking to stay a FDIC order pending review showed a likelihood of success on the merits of his argument that the FDIC ALJ was an "Officer" whose appointment violated the Appointments Clause. • Assuming banking agencies’ ALJs are considered “Officers" under the Appointments Clause, the validity of their appointments depend on: • how ALJs are hired by the OFIA (i.e. are they hired by OFIA or other agency staff or by one or more agency heads), and • if ALJs hired by the OFIA are hired by one or more agency heads, whether those agencies qualify as "Departments" for purposes of the Appointments Clause. • For example, the OCC might not qualify as a Department because it is housed in the Treasury Department. • If the banking agencies’ ALJs were unconstitutionally appointed, it would raise the question of how the agencies must deal with past decisions issued by those ALJs.
SEC ALJ Cameron Elliot
• Cameron Elliot was appointed in 2011
• Previously, Elliot was an ALJ for the Social Security Administration
• He was previously an attorney at the law firm of Darby & Darby P.C. in New York, where he handled intellectual property litigation. • Prior to his private-sector work, Mr. Elliot spent eight years at the U.S. Department of Justice, starting in 1998 as a trial attorney in Washington, D.C., where he was responsible for civil litigation in patent and copyright cases. • From November 2001 until September 2006, Mr. Elliot was an Assistant U.S. Attorney, first in the Southern District of Florida and then in the Eastern District of New York. • Elliot graduated from Harvard Law School in 1996 and clerked for Judge Edward Reed in the U.S. District Court in Nevada from July 1996 to August 1998. • Elliot holds a Bachelor of Science degree in physics and applied physics from Yale College, where he graduated magna cum laude in 1987. He then served for six years as a submarine officer in the U.S. Navy and Naval Reserve.
Ninth Circuit: National Banks are Subject to California’s Mortgage Escrow Interest Law • In Lusnak v. Bank of America, N.A . (“BofA”) , the Ninth Circuit held that the National Bank Act (“NBA”), interpreted in light of the Dodd-Frank Act and the case law it codified, does not preempt a California law requiring banks to pay interest earned on residential mortgage escrow accounts. • According to the Ninth Circuit, the Dodd-Frank Act addressed NBA preemption by: • Endorsing the standard provided in Barnett Bank of Marion County, N.A. v. Nelson permitting a state to regulate a national bank if it does not prevent or significantly interfere with the bank's exercise of its powers. • Requiring the OCC to follow specific preemption determination procedures. • Confirming that the OCC's preemption determinations are subject to only Skidmore deference • The court concluded that Congress, in passing the Dodd-Frank Act, explicitly recognized the viability of state escrow interest laws and, by extension, did not deem their existence prohibitively disruptive to national banks. To support its holding, the court: • Noted that the Dodd-Frank Act amended existing federal statutes to permit the payment of escrow interest if required by applicable state law. • Cited legislative history revealing Congress's concern over the abuse of escrow accounts by mortgage lenders and servicers. • Determined that the OCC regulation in question erroneously interpreted the Barnett Bank standard and was entitled to little or no deference under Skidmore. • The Ninth Circuit observed that approximately 13 states have escrow interest laws similar to California's.
Supreme Court: AmEx Anti-Steering Provisions Not Anticompetitive
• In. Ohio v. American Express Co. , the Supreme Court held that AmEx’s anti-steering contract provisions, which forbid merchants that accept AmEx cards from steering customers towards using other cards with lower rates, do not violate Section 1 of the Sherman Act. • Antitrust Treatment of Two-Sided Platform Markets • The Court defined two-sided platform markets as those that offer different products or services to two different groups who both depend on the platform to connect them. • The majority found that platform markets must be analyzed differently than traditional markets under the Sherman Act, with effectively a higher standard of evidence that requires a showing of harm on both sides of the platform. • Relevant Market • The Court defined the relevant market as including both sides of the two-sided platform for credit card services. For this platform to succeed, both consumers and merchants must participate in the transaction. • Anticompetitive Effects • The Court held that the plaintiffs failed to show that the anti-steering provisions caused anticompetitive effects in the credit card transaction market • For the plaintiffs to have successfully proven anticompetitive effects, the Court held that they had to show the contract provisions either: • Increased the cost of credit card transactions above competitive level • Reduced the number of credit card transactions • Stifled competition in the two-sided credit card market.
Dissent
• Writing for the dissent and joined by Justices Ginsburg, Sotomayor, and Kagen, Justice Breyer argued that: • The market definition should be two separate, complementary markets subject to the traditional rule-of-reason framework. The dissent argued that there was no sound reason to treat two-sided platform markets differently under the antitrust laws. • Market definition is not necessary where a plaintiff has direct evidence of anticompetitive harm, because the direct evidence itself proves market power. • The majority ignored the plaintiffs' evidence of anticompetitive effects, particularly with respect to Discover, and overlooked the detailed factual findings of the trial court. • The majority incorrectly relied on evidence of overall increasing output to disregard the plaintiffs' evidence that net prices had increased due to AmEx’s anti-steering provisions. The relevant economic question is instead whether output is higher or lower than it would have been absent the anti-steering provisions, which courts cannot expect plaintiffs to prove. • The majority's definition of two-sided platform markets is not meaningful and could include everything from farmers' markets to internet retailers.
ABA Challenges NCUA’s Field of Membership Rule
• Federal Credit Union Act limits membership in community common-bond credit unions to persons or organizations within a “well-defined local community, neighborhood, or rural district.” 12 U.S.C. §1759(b)(3). • Congress expressly delegated to the NCUA the power to define this term. 12 U.S.C. §1759(g). • 2016: NCUA broadens definitions of “local community” and “rural district.” • ABA files lawsuit challenging four aspects of new rule.
Core-Based Statistical Areas Without the Core
• Prior rule: A “local community” is any portion of a Core-Based Statistical Area that contains less than 2.5 million people. • New rule: Same as prior rule, but the “local community” need not include the “core.” • Court’s ruling : Upheld NCUA’s new interpretation as a “barely reasonable” one. • Commuting patterns to “core” establish “some traces of the social, economic, and geographic commonalities of a local community.” • Court not troubled by potential for redlining, because NCUA believes credit unions are adequately serving low-income areas.
Combined Statistical Areas
• A Combined Statistical Area is a collection of adjacent Core-Based Statistical Areas that share substantial employment interchange. • New rule: A “local community” is any portion of a Combined Statistical Area that contains less than 2.5 million people. • Court’s ruling : Invalidated NCUA’s new interpretation. • A “local community” is a generally small area. • Combined Statistical Areas “stretch across vast regions that include multiple separate urban centers with suburban and rural communities.” • Residents in Combined Statistical Areas “may have no common bond at all beyond regional proximity.”
Adjacent Areas • New rule: A “local community” may include areas adjacent to a portion of a single political district, Core-Based Statistical Area, or Combined Statistical Area that a credit union demonstrates shares common interests or interactions with areas they already serve. • Court’s ruling : Upheld NCUA’s new interpretation from facial attack. • NCUA did not presumptively declare any particular “adjacent area” to be part of a “local community” • Credit unions must make case-by-case showing to NCUA that an “adjacent area” belongs to a local community. • Door open for individual challenges to particular expansions.
Rural Districts • Old rule: A “rural district” is any area composed of 250,000 or less people and that does not exceed 3 percent of the state where most of the district is located, provided (i) the population density does not exceed 100 persons per square mile, or (ii) most of the area’s population resides in rural areas. • New rule: Same as prior rule, except that the “rural district” can now include up to 1 million people and the 3% cap is removed. • Court’s ruling : Invalidated NCUA’s new interpretation. • “Rural districts” are small, non-urban areas. • NCUA’s definition problematic because it permits “rural districts” to serve areas that (i) are larger than entire states or (ii) primarily encompass urban centers.
Implications of Court’s Decision
• Latest in a string of significant ABA victories against NCUA • NCUA v. First National Bank & Trust (U.S. 1999)
• ABA v. NCUA (D. Utah 2004) • ABA v. NCUA (M.D. Pa. 2008)). • NCUA’s instructions to credit unions:
• No new applications will be granted under invalidated rule. • Approval of credit unions’ expanded charters under invalidated rule will be withdrawn. • Credit unions should not accept new members only eligible for membership under invalidated rule. • Credit unions not required to de-list members who joined under invalidated rule. • NCUA appealed on May 29, 2018; ABA cross-appealed on June 13, 2018 • Rulemaking implications • No impact on multiple common-bond credit unions
NCUA’s New Final Rule • NCUA finalizes new round of loosened credit union membership limits (June 21, 2018) • Final rule allows federal credit unions to use a “narrative” to apply for expansion of a community charter rather than relying on statistical benchmarks. • Final rule requires a public hearing when FCUs apply to include a statistical area larger than 2.5 million people in its field of membership • However, NCUA imposed strict limits on who may participate: • only up to six entities may apply in writing within 10 days to oppose the expansion • each will be limited to a 30-minute presentation. • A seventh entity may be permitted to make a presentation, but only at the discretion of NCUA staff.
DC Circuit Clarifies Opinion Work Product Protection • In FTC v. Boehringer Inglehein Pharmaceuticals, Inc. (2018), the DC Circuit held that a party asserting opinion work product bears the burden of showing how disclosure would reveal the attorney’s legal impressions and thought processes. • The court clarified that general or routine document requests reveal nothing about an attorney’s mental impressions, and therefore do not qualify for opinion work product protection. • Where it appears that the attorney's opinion is obvious or non-legal, the party claiming the privilege must show specifically how the disclosure would reveal the attorney's legal impressions and thought processes. • Because the district court failed to demand such a showing, the DC Circuit remanded the case to the district court for further consideration.
CSBS Legal Conference Panel on Legal Issues and De Novo Banks (Wednesday, July 18, 2:30 pm MDT) Discussion Outline
Legal Nuts and Bolts I.
High Level Process Overview Two key elements to forming a de novo bank a. Obtain permission from chartering authority from the state b. Obtain FDIC insurance from the FDIC c. (If forming a holding company, must also get HoCo approval from the Fed)
II.
Statutory Criteria a. Overview b. Potential Hurdles
i. Convenience and needs ii. Economic support and reasonable chance for success – Camp v. Pitts, 411 U.S. 138 (1973) iii. ___ ‐ (Texas case – see if lower court provides factual context) iv. Character and fitness 1. Breach of fiduciary duty 2. Other “hypothetical examples” Legal Challenges to Chartering Decisions a. Consider whether the legal avenue challenge is based on is appropriate. i. Administrative Procedures Act 1. Have the exhausted their administrative remedies ii. Tort claims act – maybe not the right vehicle See Magellsen v. FDIC, 341 F. Supp. 1031 (D. Mont. 1972) b. How your state’s administrative law applies to your agency’s decision – especially if the decision is challenged i. Applicant challenges denial ii. Third party challenges the application (State Banking Bd. V. Allied Bank, 748 S.W.2d 447 (Texas 1988)) c. Administrative law standard of review i. Iowa – 2 types of challenges to agency action 1. Contested case proceeding (evidentiary hearing) 2. Other agency action ii. The applicable standard of review is different depending on what type of challenge it is 1. Contested case proceeding (very deferential to the agency) 2. Other agency action (several different potential tests – boil down to arbitrary and capricious) iii. You need to figure out what kind of challenge it is
Additional Legal Considerations III.
1. What does your statute say 2. Note – if it provides the potential for a “hearing” if challenged, that is not necessarily a contested case hearing. See Camp v. Pitts, 411 U.S. 138 (1973)
IV. Practical Considerations a. Importance of pre‐filing/pre‐application meetings b. Include enough support for each of the factors to meet the applicable standard of review (more important if the decision is likely to be challenged V. Policy Issues a. Various bank charter options b. Fintech business models and bank charters
Preemption of State Interest Rate Limitations: Current Challenges Involving Marketplace Lenders Conference of State Bank Supervisors – Legal Seminar July 18, 2018
Ashley Simonsen
Legal Framework
National Bank Act & Federal Deposit Insurance Act
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Marketplace Lending and Preemption
Diane Standaert Center for Responsible Lending
CSBS Legal Seminar July 2018
Overview of Presentation
1. Market Trends 2. Benefits and Risks 3. Interaction with State Laws 4. Recent Developments
Online Lending Ecosytem
Source:OrchardPlatform, https://www.orchardplatform.com/company/lendscape/
Market Trends: Size & Growth
Source: Orchard Platform (2017), http://bit.ly/2x4pCBq
Marketplace lending is still relatively small compared to market
Source: Lending Club
Another Trend: Securitization of Marketplace Loans
Delinquencies on Securitized Loans are Trending Higher, Earlier
Source: PeerIQ, Marketplace Trends Report, May 2018, https://bit.ly/2NnFsP4
Marketplace Lending: Potential Benefits
• Ability to reach underserved communities • Allow borrowers to build credit • Ease of use and simplicity of digital platforms • Speed of approval process of loans and access to funds • Lower cost of the loans for borrowers
Marketplace Lending: Potential Risks
• Consumer privacy • Unsound underwriting practices • Predatory lending practices
• Evasion of state laws • Fair lending concerns
Interaction with State Laws
1. Laws limiting interest rates and other fees 2. Consumer finance, lender licensing or bonding, and other consumer protection laws 3. Debt collection laws 4. State privacy laws 5. State fair lending laws 6. Debt management or debt relief laws 7. Credit repair laws 8. Choice of law provisions
High‐cost lenders have continue rent‐a‐bank schemes using FDIC‐supervised banks:
• CashCall made loans up to 99% in Maryland and West Virginia using First Bank of Delaware and First Bank & Trust, but courts later shut them down.
• Elevate makes loans at 100% interest using Republic Bank & Trust in Kentucky, ignoring the voter‐approved 36% or lower rate caps in Arkansas, Montana, South Dakota and other states. • On Deck Capital makes small business loans with rates that go up to 99.7% APR, originating loans through Celtic Bank in states where it cannot make the loans directly.
State Usury Laws Remain Critical Protection
“Congress did not intend to authorize such arrangements when it created national banks with the National Bank Act in 1864, which also gave national banks the right to preempt state usury laws….[S]tate usury laws have long served an important consumer protection function in America.” ‐ Bi‐Partisan AG coalition letter to Congress, July 2018, https://bit.ly/2NoMIu1 “The ability to export interest rates across states lines – like the benefit of deposit insurance – is a privilege afforded only to banks, in part, because they must comply with a host of “cradle‐to‐ grave” regulations... Non‐bank lenders do not have the same connection to the federal safety net, and the regulatory structures and requirements for these lenders reflects the decisions of the duly elected state legislatures about the credit needs of their communities.” ‐ CSBS letter to Congress, May 2018, https://bit.ly/2Ltpan2 “The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” ‐ OCC Principles on Short‐Term, Small Dollar Installment Lending, May 2018
Legal & Regulatory Developments
1. Madden v. Midland Funding (2d Cir. 2015) 2. OCC Fintech Charter and OCC Revised Small Dollar Guidance 3. Congressional Proposals Seek to Preempt State Law • HR 3299 & S 1642 – overturns Madden ruling on “valid when made” • HR 4399 ‐ overturns True Lender case law 4. State‐level responses and developments • NY DFS Report on Online Lending: https://on.ny.gov/2zxGpSQ • Enforcement actions, e.g. MA, NH, CA, and others • "Sandbox" bills, e.g. AZ, IL, and NY (2018) • Colorado AG Lawsuits
• State suits against Avant and Marlette Funding • Suits against state by WebBank & Cross River Bank
Additional Resources & Information
• U.S. Treasury Report (2016) – “Opportunities and Challenges in Online Marketplace Lending”: http://bit.ly/27bRLDC • Congressional testimony of Adam Levitan on “Valid When Made” & “True Lender”: https://bit.ly/2uuPrL • Letters from Civil and Consumer Groups: – Opposition to HR 3299, https://bit.ly/2z7gq2I and HR 4399, https://bit.ly/2Jv9n5q – Consumer and Civil Rights Letter Re: Bank Payday Lending (May 2018): https://bit.ly/2NXCUbA – CRL Comments to the OCC on Fintech Charter • Fintech and Civil Rights: – Panel Discussion (2017) – “Fintech: How Can Innovation Advance Civil Rights?” http://bit.ly/CRLfintech – Federal Trade Commission Report (2016) – “Big Data: A Tool for Inclusion or Exclusion?” http://bit.ly/1n52gG6 1. January 2017: http://bit.ly/2vdanoL 2. April 2017: http://bit.ly/2wlJBOH
For more information or questions, contact:
Diane Standaert Director of State Policy, EVP Center for Responsible Lending 919‐313‐8550 dianes@responsiblelending.org
Day Two Presentations
CSBS LEGAL SEMINAR
Trust Me! Insights into Ethical Leadership Grand Hyatt Hotel July 19,2018
Norman R. Augustine: Former CEO of Lockheed Martin Corporation “I can think of no commitment more important to a corporation or its survival than its commitment to ethics. That means not only conducting our business affairs within the letter of the law, but also in the spirit of the law.”
“We are not disturbed by things, but by the view we take of them…. When we meet with troubles, become anxious or depressed, let us never blame anyone but…our opinion about things.” Epictetus ‐ 60 A.D.
Compliance is not Ethics
1.Compliance is the letter of the law Ethics is the spirit of the law.
2. Compliance is reactive. Ethics is only proactive.
Ethics Definition Ethics is a tough decision with the payout at the end.
An unethical decision is an easy one with the ayout upfront.
Ethics
• Focus on action not behavior. • Justify action not behavior.
• Acknowledge the gap between “ought” and “is.”
Negative Ethics
Tell us what not to do. Prevent harm. Imply the obligation to not do harm . -Marvin T. Brown
Positive Ethics Give guidelines for what we should do. Promote a good. Imply a responsibility to do good. Rely on the power of the organization to be responsive, and to love the ability to respond. ‐Marvin T. Brown
People get in trouble at work for four reasons
1. Abuse of power.
2. Abuse of knowledge.
3. Abuse of access.
4. Abuse of relationships.
Decision Making Process
REFLECTION
EXPERIENCE
DECISION
Three Psychological Persons
CHILD Go For It!
PARENT No! No! No!
ADULT Go Slow!
Five Emotions
1. Sad 2. Mad 3. Glad 4. Scared 5. Hurt
The Problem
Values We Profess
disconnect
Behavior We Demonstrate
Kolberg & Piaget
1. Punishment 2. Reward 3. “Good” 4. Rules and Regulations 5. Choice and Commitment 6. Internalization
Authoritarian Power
– Empowers oneself at the cost of the other. – Self serving as one uses fear to get obedience. Must have power over others. – Commands, does not invite. To command is to settle for behavior change. NO value change or understanding.
Authoritative Power
– Empowers the other through service for the other. – They are chosen by their peers, They don’t force themselves, but gain our trust. – Invites, does not command. To invite is to recognize the value of the other.
You Must Consider:
The Act Circumstances
Criteria for Judgment Communal Wisdom
You Need to Ask:
How Will This Help Them…
1. Feel like they belong?
2. Feel significant?
3. Develop a unique identity?
People Want Two Things in Life
1. To belong
2. To receive recognition
Social Significance Question
How do I fit in here?
Issues of Respect 1 . My right to decide is being questioned. 2. My right to control is being jeopardized. 3. My judgment and my ideas are not being considered here. 4. My prestige and my status are being questioned.
Issues of Respect‐2
5. My feelings don’t count here. 6. I feel unfairly treated.
7. I feel defeated. 8. I feel powerless. 9. I feel inferior.
Moral Compass The moral compass is based on:
An individual’s values, i.e. code of ethics, mission statement, personal values. Experience: what does it teach me? What have I learned? Desired outcome: setting the course.
Moral Obligations 1. Put people first in decision‐making.
2. Respect for individual human dignity.
3. Treat all fairly.
4. Be honest.
There are only four dilemmas for humanity
1. Truth vs. Loyalty 2. Individual vs. Community 3. Short Term vs. Long Term 4. Justice vs. Mercy
Institute for Global Ethics
Just do it!!
“Just do it!”
1. Is it legal/ethical? 2. Is it good for the patient?
3. Is it consistent with our shared values 4. Are you willing to be held accountable?
If yes to all, then “Just do it.”
Being Accountable Being accountable is more that just being responsible… …it means that you have the privilege of leading, not only by example, but by the consent of your people.
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