Iowa Banking Law Blog

The Mighty Sword of Preemption Sheathed; State AGs Can Enforce State Lending Laws

The battle between federal banking regulation and state regulation of national banks has been brewing for years.  It has been primarily a one-sided battle; the OCC has wielded the mighty sword of preemption and consistently vanquished state regulators, with their consumer protection warhorn around their neck, in courtrooms across the country.  The OCC has aggressively maintained its power to preempt state laws that affect national banks’ federally authorized activities.  State regulators have argued that the broad preemption endorsed by the OCC weakens state consumer protection and fair lending laws.  In Cuomo v. Clearing House Association, LLC, the Supreme Court ruled in favor of state regulation, at least partially, forcing the OCC to sheath its mighty sword in state judicial enforcement actions. 

 

In Cuomo, the New York Attorney General sent letters to various national banks requesting nonpublic information regarding their lending practices.  The AG was investigating the banks' residential lending practices for violations of the state fair lending laws.  The OCC and a trade group for the banks brought suit to enjoin the request claiming that the National Bank Act preempts the enforcement of state fair lending laws against national banks.  The Court held that the NBA does not prohibit the ordinary enforcement of state law.  The Court clearly delineated between any purported state “visitorial powers” or general oversight of national banks, which is preempted by the NBA, and the “prosecution enforcement actions,” which is not preempted.  When the state sues to enforce a state law against a national bank, it is not exercising visitorial or oversight powers; it is exercising its power to enforce state law.  Thus, the New York Attorney General could not simply request nonpublic lending information from national banks, but could bring suit or get a judicial search warrant and obtain the information though legal channels.  Under the Court’s ruling, only the OCC can exercise administrative visitorial oversight of national banks.  Substantive state law, on the other hand, can be enforced judicially by state authorities. 

 

This decision levels the playing field between state and national banks.  National banks now must clearly abide by the same fair lending and consumer protection laws as state banks.  The decision also will likely increase the regulatory burden on national banks, as they will have to be sure to comply with the differing consumer protection and lending laws of individual states.  It is unclear at this time how this decision will fit into the Obama administration's planned reform of the banking system.  For the time being, however, the mighty sword of preemption has lost a bit of its shine, and the warhorns of state attorney generals are sounding across the nation.

 

If you have questions, please contact Jeff Andersen at 515-246-4503 or jandersen@dickinsonlaw.com.

Turf Battles May Impede Financial Regulatory Reform

The global credit crisis, the global recession, the decline in real estate values and the negative effects of these events on the banking industry have stimulated interest in regulatory reform of the financial sector.  The existence of complex interactions among participants and products in the global financial markets has become more apparent.  Unprecedented measures have been taken to address frozen credit markets, the collapse of massive financial firms and the spreading contagion associated with “toxic” assets.   Questions have been raised about the adequacy and effectiveness of many existing regulatory structures and about whether regulation should be extended to activities that currently are unregulated.  There are perceived advantages and risks associated with concentrating regulatory authority in a single regulator.  There has been discussion of the possibility of having a panel of regulators deal with systemic risk issues. Such an approach would be similar to the proposed European Systemic Risk Council, which would include the president of the European Central Bank and central bank governors from the European Union’s 27 member countries. 

 

Although there is general recognition that disruptions in financial markets cannot be eliminated, the need for more effective safeguards against systemic risk is clear.  Despite statements that something must be done, there is considerable disagreement about the exact nature of the changes that should be made.  Reform will be politically difficult because of the interests of market participants, regulators and Congressional committees in preserving existing regulatory jurisdictions and objectives. Any financial industry regulatory reform raises questions about who should be performing particular kinds of regulation and how that regulation should be performed. Set forth below are some of the more contentious issues:

• Should there be one or more than one systemic risk regulators?

• Should hedge funds be regulated?

• Should currently unregulated derivatives be regulated?

• Should there be increased regulation of the mortgage industry?

• Should there be regulation of the sale of securitized assets?

• Should there be federal regulation of the insurance industry?

• Should some or all federal bank regulatory agencies be consolidated?

• Should failing non-bank financial companies be placed into receivership?

• Should there be a reallocation of jurisdiction between the SEC and the CFTC?

• Should there be a clearinghouse for over-the-counter derivatives?

• Should credit default swaps be regulated?

• Should short selling be more tightly regulated?

• Should there be more countercyclical capital requirements?

• Should the use of leverage be more tightly regulated?

• Should there be more regulation of money market funds?

• Should the role of state banking regulation be diminished?

• Should there be more robust enforcement of consumer protection laws?

• Should there be more disclosure of positions of larger market participants?

• Should regulatory changes extend to compensation and corporate governance?

Whether or not all of these issues are resolved in the near future, it seems clear that substantial changes in the operation of financial market regulation lie ahead. What is also clear is that the outcome of turf battles will have a major role in determining the future of the financial regulatory structure.

 

Recent news reports highlight some of the problems that can arise in the context of turf disputes.  According to a recent article in The Economist, “The stiffest resistance to change is coming not from Wall Street but from Washington, DC, where government officials, regulators and congressional leaders are locked in turf wars and ideological battles.”  Bloomberg reports that because of “resistance on Capitol Hill” and “pushback from entrenched interests,” a merger of the SEC and the CFTC may not be pursued.   An article in The Wall Street Journal comments on the FDIC’s “increasingly tough position” toward the management of Citigroup Inc. leading to “a bitter clash between regulators” about the speed and adequacy of efforts to improve the firm’s capital position.  In an earlier article The Wall Street Journal reported on Congressional committee disputes over jurisdiction of the regulation of over-the counter derivatives.  As the most traumatic aspects of the financial crisis pass into memory, it seems increasingly likely that bureaucratic infighting will play a major role in limiting the scope of any reform of the financial sector.  

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

NEW IDENTITY THEFT RULES TAKE EFFECT

On January 1, 2008, the final rules propounded by the OCC, Board of Governors, FDIC, OTS, NCUA and FTC requiring financial institutions and creditors to develop an Identity Theft Prevention Program finally became effective. 

Under these guidelines, an Identity Theft Prevention Program must identify those accounts where identity theft is most likely to occur.  Only financial institutions and creditors that offer or maintain “covered accounts” must develop such a program.  A “covered account” is an account used for personal, family, or household purposes involving multiple payments or transactions or any other account for which there is a reasonably foreseeable risk of identity theft to customers or to the safety and soundness of the institution.  The program must also be designed to detect, prevent, and mitigate identity theft and should be tailored to the size, complexity and nature of each financial institution.

Under the rules, the four basic elements that must be included in the program include:  1) identifying red flags for covered accounts and incorporating those red flags into the program; 2) detecting those red flags; 3) responding to the red flags; and 4) ensuring the program is updated periodically to reflect any changes in the risks to the customer or to the institution.

There are also certain steps that must be taken to administer the program including obtaining approval of the written program by the board of directors or committee of the board, ensuring oversight of the program, training staff, and overseeing service provider relationships.

Financial institutions and creditors should take note – the mandatory compliance date for these rules is November 1, 2008.

Regulators Issue Statement on Avoiding Losses Associated with Securitized Mortgages

The federal banking regulators (the FDIC, Federal Reserve, OCC, OTS, and NCUA), along with the Conference of State Bank Supervisors (CSBS) issued a statement encouraging regulated institutions that service mortgage loans to employ certain "loss mitigation techniques" that would preserve homeownership.  The statement is a follow-up to the April 2007 Statement on Working with Mortgage Borrowers and the July 2007 Statement on Subprime Mortgage Lending.  Unlike these previous statements, which urged prudent workout arrangements, the new statement is focused on mortgage loans that have been transferred into securitization trusts. 

The regulators state that when faced with an increased risk of default, servicers of loans should: contact the borrower and assess their ability to repay, assess whether default is reasonably foreseeable, and explore, where appropriate, a loss mitigation strategy that avoids foreclosure, such as loan modifications, payment deferral, conversion into fixed rate, and capitalization of delinquent amounts.

In considering loss mitigation techniques, the statement urges services to consider the borrower's income, debt, and housing related expenses.  Servicers are also urged to refer borrowers to government programs, non-profits, and counseling services that could assist the borrower.  The statement claims that "loss mitigation techniques" that preserve homeownership are less costly than foreclosure. 

This guidance was issued as political pressure to address the mortgage industry mounts.  Presidential candidates have increasingly integrated mortgage and foreclosure issues into their agendas.  President Bush threw his hat in the ring last week by announcing that his administration would put forth proposals to prevent some expected defaults over the next two years.

Unfortunately, this regulatory statement may not stem the congressional tide to over-regulate the industry.

Agencies Issue Proposed Illustrations on Subprime Mortage Lending

          The federal agencies this week issued proposed illustrations contemplated by last month's jointly issued Statement on Subprime Mortgage Lending (Subprime Statement).  Triggered by the agencies' concerns over subprime mortgage lending practices for certain adjustable-rate mortgage (ARM) products, the illustrations aim to improve communications between lenders and consumers by providing examples of the types of communications anticipated by July's Subprime Statement. 

          The Subprime Statement encourages lenders to provide consumers clear, balanced, and timely information to help consumers more effectively weigh the costs and benefits of certain ARM products.  The illustrations both:

• explain some important features and hazards identified in the Subprime Statement (such as payment shock), and
• provide a chart of potential implications of payment shock in a specific, easy-to-understand fashion.

          Use of the illustrations is completely voluntary.  Institutions are free to tailor the illustrations to reflect their product offerings, current market conditions, and a consumer's particular loan requirements.  Whether institutions choose to use the illustrations or not, they should review their statements to consumers regarding subprime lending to ensure that they are clear, balanced, and full explain the terms and risks of such loans.

         The agencies seek public comment on the proposed illustrations.  Comments are due 60 days from the Federal Register publication.  The proposed illustrations are available here on the OTS website.

          For more information on ensuring that your institution is making the necessary disclosures, contact Megan Erickson of Dickinson, Mackaman, Tyler & Hagen, P.C. at 515-244-2600. 

OTS Issues Notice of Proposed Rulemaking on Unfair and Deceptive Practices

On August 3, 2007, the Office of Thrift Supervision (OTS) issued an Advance Notice of Proposed Rulemaking seeking comments not only about defining unfair and deceptive practices but also about whether the OTS should expand current prohibitions against unfair or deceptive acts.  The OTS seeks comment on various issues, including:

• Should the OTS consider further rulemaking on unfair and deceptive practices that would cover products and services in addition to consumer credit? 
• Should the rulemaking cover non-savings institution entities that are related to a savings institution? 
• What principles should OTS consider in defining an act or pratice as unfair and deceptive? 
• Is the FTC guidance on unfair and deceptive practices appropriate for the OTS?
• Should the OTS expand its advertising regulation?

The OTS's proposal does not commit the agency to any particular course of action, if merely seeks comment on the most effective course of action.  Nonetheless, it is a strong indication that the OTS intends to strengthen its unfair and deceptive practices regualtions.  Many analysts think that, at the very least, any OTS rule or guideline will address issues related to unfair mortgages due to the increasing delinquency and foreclosure rates on home loans.

As a bit of background, the Federal Trade Commission Act shields depository institutions from FTC enforcement, leaving unfair and deceptive practices to the Federal Reserve, OTS, and NCUA to deal with.  In June, Rep. Barney Frank threatened the Federal Reserve, stating that if it does not use its rulemaking authority to address unfair and deceptive pratices, and subprime lending specifically, then Congress may take away the Federal Reserve's rulemaking authority on the issue and give it back to the FTC. 

By taking this step, the OTS has put further pressure on the Federal Reserve to take action.  To date, the Federal Reserve has expressed a preference for using its supervisory authority on a case-by-case basis, as opposed to writing proscriptive regulations.  (link to article on Federal Reserve Governor Kroszner's statements in House hearing). 

The full text of the proposed rulemaking can be found here:  http://www.ots.treas.gov/docs/7/73373.pdf

For further information contact Mary A. Zambreno and Jeffrey J. Andersen of Dickinson, Mackaman, Tyler & Hagen, P.C.

Federal Agencies Issue Final Illustrations of Consumer Information for NonTraditional Mortgage Products

After reviewing comments on proposed illustrations, the OCC, Federal Reserve, OTS, FDIC, and NCUA have issued three final illustrations intended to help institutions implement the consumer protection portion of the Interagency Guidance on Nontraditional Mortgage Product Risks adopted in 2006.  A copy and description of the illustrations are available on the Federal Reserve website (link).  The use of the illustrations is optional, institutions are free to provide consumer information described in the Interagency Guidance in another manner.  Since the illustrations come directly from the regulatory agencies, however, the prudent approach may be to use the illustrations and tailor them to your institution’s circumstances and your customer’s needs.  Each of the agencies will post the illustrations on their web sites in a downloadable and printable form. 

If you have any questions concerning the final illustrations or the implementation of these illustrations at your institution, please contact

Jeffrey J. Andersen.