Trump Administration Gears Up for Financial Services Changes
With the new administration weeks from taking over, President-elect Donald J. Trump's transition team is getting ready to make changes in the financial services industry, including a potential overhaul of the Dodd-Frank Act and a reduction in corporate tax rates.
As January 20, 2017, draws closer, President-elect Donald J. Trump has begun to firm up the plans for his new administration, including appointments to various Cabinet posts.
For the Secretary of the Treasury Department, Trump has selected Steven Mnuchin, the finance chair for Trump's campaign and a 17-year veteran of Goldman Sachs. After his Wall Street career, Mnuchin founded a movie financing company (funding hits including Avatar) and was a member of a group that purchased mortgage bank IndyMac.
The group renamed the company OneWest Bank, and during Mnuchin's tenure, the bank was eventually sold for more than twice what the group paid for it.
Despite his long-standing support of Trump, Mnuchin's selection arguably sits at odds with the President-elect's repeated campaign attacks on the financial industry, including an advertisement featuring Trump holding a picture of Goldman Sachs' chief executive and describing the company as the "personification of the global elite" who "robbed our working class."
Mnuchin—who has no government experience—will be tasked with overseeing Trump's economic policy plans, such as tax cuts, changes to foreign trade agreements, and the country's relationship with Cuba.
During a television appearance following the announcement of his selection, Mnuchin confirmed he will work to make significant tax cuts, including dropping the corporate tax rate from 35 percent to 15 percent. "This will be the largest tax change since Reagan," he said. "We're going to cut corporate taxes, which will bring huge amounts of jobs back to the United States."
A similar tax cut will be made for the middle class, Mnuchin said, but any tax cuts for the upper class "will be offset by less deductions that pay for it." He also suggested that the administration will support a cap on the mortgage deduction for second homes and mansions and will label China a currency manipulator "if we determine" that such a move is warranted.
In other Cabinet moves, Trump named Wilbur Ross, an investor with an estimated fortune of $2.9 billion and an economic adviser to Trump's campaign, as his Commerce Secretary. Ross has previously signaled his support to cut the corporate tax rate as well as an overall reduction of taxes. For Deputy Commerce Secretary, Trump tapped Todd Ricketts, a part owner of the Chicago Cubs.
The top regulatory priority for the financial advisors: eliminating "parts" of the Dodd-Frank Wall Street Reform and Consumer Protection Act, albeit without a full repeal of the statute. "As we look at Dodd-Frank, the number one problem with Dodd-Frank is it's way too complicated, and it cuts back lending," Mnuchin said during an appearance on CNBC after his appointment was announced. "We want to strip back parts of Dodd-Frank that prevent banks from lending. That will be the number one priority on the regulatory side."
Why it matters
Many have speculated that for its efforts to dismantle Dodd-Frank, the Trump administration will turn to the Financial Choice Act for guidance. The bill, proposed by Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, would add a new section to the Bankruptcy Code specific to large financial institutions (ending "too big to fail"), allow banks to use a 10 percent leverage ratio, cap the fraud penalties imposed by the Securities and Exchange Commission, effect a full repeal of the Volcker Rule, and have a significant impact on the Consumer Financial Protection Bureau (changing the structure of the agency to a five-member commission along with a tweak to its name and funding through the appropriations process)—all areas that President-elect Trump has highlighted as concerns with regard to the statute. President-elect Trump's new Cabinet appointments and senior advisors will have much to say in the direction the new administration takes on the financial services front over the next four years.
back to top
CFPB Releases RFI About Consumer Choice, Security and Control
The Consumer Financial Protection Bureau plans to take a closer look at "the challenges consumers face in accessing, using, and securely sharing their financial records," asking for information about how much choice consumers are being given about the use of their records, how secure it is for them to share their records, and to what extent consumers have control over their records.
Are consumers facing challenges in accessing, using, and securely sharing their financial records? The Consumer Financial Protection Bureau (CFPB) wants to find out, releasing a Request for Information (RFI) about the issue.
"Consumers should be able to use their financial records and account information and securely share access in an electronic format," Bureau Director Richard Cordray said in a statement about the inquiry. "Technology provides opportunities to use these records to create new consumer tools that help improve financial lives. To realize that potential, we are launching a public inquiry into how much control consumers have over their records and how easy and secure it is for them to share their records with third parties."
Historically, banks and credit unions kept paper records of consumers' financial account activity. As records have shifted into digital account histories, consumers are typically able to view their information by logging in to their online accounts. This data is sought by third parties, often data aggregators, who process the information and provide it to companies offering various products and services, the Bureau explained.
Digital financial records can be leveraged to make it easier, cheaper, or more efficient for consumers to manage their financial lives, the CFPB added, with new products and services ranging from tax help to budgeting advice to underwriting new lines of credit.
Consumers have the right to access their financial records and account-related information, the CFPB said, with rulemaking authority in this area granted to the Bureau by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In light of the burgeoning use of digital financial records, the CFPB released the RFI "to understand the full range of issues associated with how consumers access their financial records and how that information can be used."
The Bureau focused its inquiry on three topics: consumer choice, security, and consumer control. Under the heading of consumer choice, the CFPB expressed concern that financial institutions "may make it difficult or impossible" for consumers to allow others to access and use their digital financial records. Blocking access to digital financial records can prevent new companies from offering innovative products, the Bureau said, and reduce incentives for financial institutions to compete with new entrants.
"Consumers should be able to access their financial records and have the choice to use that information for their own benefit," the CFPB emphasized. So the agency asked for more information about the business burdens that must be addressed to facilitate access and use of financial records, as well as whether consumers are being given appropriate opportunities to access and allow others to securely access their personal financial records.
Security poses a challenge for financial institutions when providing third-party companies with access to consumers' financial records, with banks unwilling to compromise consumer privacy or put consumers' funds and account relationships at risk. What options do financial institutions have to ensure that financial records are securely obtained, stored, and used? the Bureau wondered in the RFI.
Finally, the CFPB requested comment on consumer control over their financial records. Questions include what information consumers are given about how their records will be accessed and used and to what extent consumers are able to control how the information will be used by third parties—can consumers limit the frequency and purpose of companies' access to their records, for example, or request deletion of the records?
The CFPB will accept comments for 90 days.
To read the CFPB's RFI, click here.
Why it matters
"The CFPB wants to foster an environment where competing providers can securely obtain, with the consumer's permission, the information needed to deliver innovative products and services that will benefit consumers," the Bureau said, expressing its hopes for the future of data sharing. But the issue creates a divide between traditional financial institutions and fintechs, with banks and credit unions concerned about the risks of allowing consumers to share their digital records, from privacy to cybersecurity to liability in the case of a data breach. Banks should keep an eye on the RFI, which noted that comments will be used "to evaluate whether any guidance or other action by the Bureau is called for, including future rulemaking."
back to top
BSA/AML Violations Trigger $215M Consent Order With New York's DFS
Violations of state anti-money laundering laws tripped up the Agricultural Bank of China, which recently entered into a consent order with New York's Department of Financial Services for $215 million.
The New York branch of the Agricultural Bank of China was hit with a $215 million penalty and the installation of an independent monitor due to violations of the state's anti-money laundering (AML) laws, the Department of Financial Services (DFS) announced.
During DFS examinations in 2014 and 2015, the agency uncovered "serious and persistent" compliance failures with both state AML laws as well as the federal Bank Secrecy Act (BSA) at the bank's New York branch, according to the consent order.
A subsequent investigation by the DFS discovered that the branch conducted U.S. dollar clearing "in rapidly increasing volumes" since 2013 through foreign correspondent accounts, even after the DFS warned the bank not to do so. Willfully ignoring the regulator's warning, dollar clearing transactions at the branch "skyrocketed" in 2014 and 2015, the DFS said, "creating an untenable risk" when the branch was not able to meet even basic compliance requirements.
The bank also employed "non-transparent and evasive" transaction methods, the regulator alleged, such as sending coded messages through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system that masked the true parties to a transaction and avoided screening by the DFS.
Compliance personnel at the branch found "alarming" transactions patterns, such as unusually large round-dollar transfers between Chinese and Russian companies and unusually large round-dollar payments from Yemen to companies in China, as well as suspicious dollar-denominated payments from trading companies located in the Middle East and transactions remitted by a Turkish Bank customer for an Afghan Bank client known by the U.S. Treasury Department for associations with illicit cash flows and narcotics traffickers.
The branch's chief compliance officer (CCO) brought the problems to the attention of bank management in late 2014 but was "effectively silenced," the DFS said, and eventually resigned after being instructed not to communicate with regulators.
The DFS's investigation found other compliance issues at the branch, including the inability to retain a qualified, permanent CCO; no point of contact for the interim BSA officer with the head office of the bank; deficiencies in documentation; and insufficient resources for the CCO, who also held the role of BSA officer.
Pursuant to the consent order, the Agricultural Bank of China will pay the DFS a $215 million penalty. In addition, the bank will retain and install an independent monitor (selected by and reporting directly to the regulator) who will conduct a comprehensive review of the New York branch's BSA/AML compliance program, both federal and state laws and regulations. An 18-month look-back at the branch's U.S. dollar clearing transaction activity will also be conducted by the monitor to determine whether any transactions ran afoul of laws or regulations. Findings from this review could subject the bank to additional enforcement actions, the DFS noted.
Why it matters
The action provides an important reminder not just about general BSA/AML compliance obligations, but also the DFS's new regulation focused on AML and antiterrorism. Set to take effect January 1, 2017, the new regulation requires covered entities to submit an annual board resolution or senior officer compliance finding that confirms the steps taken to ascertain compliance with the requirement to maintain programs to monitor and filter transactions for potential BSA/AML violations and prevent transactions with sanctioned entities. "DFS will take swift and appropriate action when our investigation finds egregious conduct and intentional circumvention of a regulated bank's compliance program," DFS Superintendent Maria T. Vullo warned in a statement. "Central to bank management's responsibilities is creating, fostering, and maintaining a healthy culture of compliance, which is foundational to effective risk management. The failure of a strong compliance program at the New York Branch of the Agricultural Bank of China created a substantial risk that terrorist groups, parties from sanctioned nations, and other criminals could have used the Bank to support their illicit activities."
back to top
Prepaid Card Company Deceived Consumers, FTC Alleges in New Suit
A prepaid card company deceived consumers about their access to funds that were deposited on their cards, the Federal Trade Commission alleged in a new complaint, seeking injunctive relief and restitution for consumers.
Delaware-based NetSpend Corporation markets, sells, and services prepaid debit cards, managing cardholder accounts, processing card transactions, performing dispute and fraud management services, and handling customer service for cardholders.
The company's prepaid debit cards—including general purpose reloadable (GLR) cards—are sold nationwide. Consumers can load cash on the cards at retail locations and have their paychecks, government benefits, and tax refunds deposited directly onto the cards. Consumers can use the cards as they would a credit or debit card to make purchases, withdraw cash, and pay bills.
Targeting unbanked and underbanked consumers, NetSpend touted its cards as available for immediate use with guaranteed approval, and provisional credit provided for disputed transactions, the FTC alleged.
Marketing materials for the cards emphasized that consumers would have immediate access to the funds deposited on the cards, with claims including "Ready to use? Immediately," "instant access to money with no holds, no waiting," "Use it today!" and "No waiting!" Similar claims were made for the guaranteed approval of consumers, as well as the speed with which NetSpend addressed account errors and applied provisional credits for funds subject to such errors, according to the agency.
"Despite these claims, many consumers have been unable to use their cards immediately or access funds on their cards, including for prolonged periods of time—sometimes as much as weeks, or at all, meaning they never regain access to their own money," the FTC alleged. "Despite NetSpend's claim of 'guaranteed approval,' NetSpend's approval is contingent upon consumers meeting unexpected requirements; ultimately, many consumers have not been approved, and have lost funds they have already placed on the cards."
NetSpend's claims are also inconsistent with federal laws that apply to many payment card providers, the FTC pointed out, which require such companies to take steps before granting access to funds and approving cards. Many consumers had difficulty satisfying the identity verification process required by law and NetSpend before their cards could be activated.
Customers also experienced delays in obtaining access to payroll deposits, government benefits, and other funds deposited on their cards, the agency said, and NetSpend "often is slow to resolve account errors, and fails to provide or significantly delays providing provisional credits for account errors."
"In many instances, NetSpend blocks all use of consumers' cards until they are activated, completely cutting off consumers' access to their funds," the FTC alleged, and in some cases, the company continued to charge account usage fees ranging from $5 to $9.95 per month while consumers' accounts were blocked.
Many consumers use NetSpend cards as their only source of funds, the FTC told the court, causing them to suffer severe financial hardship due to the inability to access their money, such as eviction, repossession of automobiles, and late fees on bills. Thousands of consumers have complained about NetSpend's business practices, the agency noted.
For the alleged deceptive representations in violation of Section 5 of the Federal Trade Commission Act, the agency requested a temporary and preliminary injunction, a permanent injunction against future violations of the FTC Act, and monetary relief, in the form of rescission or reformation of contracts, restitution, refunds to consumers, and disgorgement.
To read the complaint in FTC v. NetSpend Corp., click here.
Why it matters
"Innovative financial products can offer many benefits to consumers," Jessica Rich, director of the FTC's Bureau of Consumer Protection, said in a statement. "However, when companies promise consumers 'immediate access' to their funds, they need to honor those promises." The FTC's complaint emphasized that many NetSpend customers do not have bank accounts and were left in severe financial straits by the allegedly misleading representations made by the company. "If you work in the financial services sector or have clients interested in alternative payment methods, this is a case to watch," the agency noted in a blog post about the action.
back to top
FCC Declines TCPA Exemption for Mortgage Servicers
Rejecting a mortgage industry request, the Federal Communications Commission (FCC) has formally denied an exemption from the prior-express-consent mandates of the Telephone Consumer Protection Act for mortgage servicers, finding that consumers' right to privacy trumped the ease of making autodialed calls.
In June 2016, the Mortgage Bankers Association (MBA) petitioned the FCC to exempt mortgage servicing calls from Telephone Consumer Protection Act (TCPA) provisions that require prior consent before communication.
The statute and accompanying Commission rules prohibit calls made with an automatic telephone dialing system and prerecorded- or artificial-voice calls to wireless telephone numbers. Certain exceptions apply, including calls made for an emergency purpose, solely to collect a "debt owed to or guaranteed by the United States," pursuant to an FCC-granted exemption, and with the prior express consent of the called party. FCC-granted exemptions are given sparingly, the Commission noted, and are limited to calls that are not charged to the consumer.
In its petition, the MBA requested an exemption from the FCC to make non-telemarketing residential mortgage servicing calls to wireless telephone numbers. Examples of the types of calls included determining whether a borrower has abandoned or vacated a property, discussing missing documentation needed to complete a loss mitigation application, and/or determining the homeowner's current perception of his or her financial circumstances and ability to pay the debt.
The mortgage market is the single largest for consumer financial products and services in the country, the MBA told the Commission, and mortgage servicers are responsible for numerous day-to-day management responsibilities that necessitate contact with borrowers. Particularly in cases of mortgage default, it is very important that mortgage servicers be able to speak with delinquent borrowers as early as possible to communicate options.
Various federal agencies and state regulators, as well as mortgage servicing contracts, require servicers to make timely communications with borrowers, the MBA added, noting that Congress recently directed the FCC to adopt rules to create a TCPA exemption for calls made solely to collect a debt owed to or guaranteed by the United States.
In its November 15 ruling, the FCC was not persuaded. "MBA has not demonstrated that it can make these calls free to the end user," the FCC wrote. "Furthermore, we find the public interest in, and the need for the timely delivery of, the calls described by the MBA do not justify setting aside the privacy interests of called parties."
Free-to-end-user exemptions to the general prohibitions on calls to wireless numbers are only granted in limited circumstances, the FCC explained, after consideration of three elements: whether the petitioner was clear that the messages would be free to the end user, whether the messages are time-sensitive or there is some other compelling public interest that supports timely receipt of these calls, and whether the caller could apply conditions to the exemption to preserve consumer privacy interests.
While the MBA acknowledged that its members would be obligated to refrain from charging the called party for the call, the group failed "to provide any information on how its members would comply with this requirement," the FCC said. "Moreover, MBA fails to show that exempted calls would not count against any plan limits on the consumer's voice minutes or texts. We are therefore unable to find that MBA has shown that it is capable of meeting the statutory exemption provision's requirement that calls will not be charged to the called party."
Even if the MBA satisfied the "no charge" requirement, "we find the public interest in and the need for the timely delivery of the calls described by MBA do not justify 'setting aside a consumer's privacy interests in favor of an exemption,' " the Commission wrote, emphasizing that petitioners must demonstrate the necessity for immediate communication.
For example, exemptions were permitted for the American Bankers Association to allow financial institutions to make calls to wireless numbers where there was indication of fraudulent transactions or identity theft, the FCC said. These types of calls were intended to address exigent circumstances "in which a quick, timely communication with a consumer could prevent considerable consumer harm from occurring." The Commission denied permission for calls regarding account communications, payment notifications, and Social Security disability eligibility, however, as they lacked the requisite time sensitivity to justify granting an exception.
"While the calls MBA describes may help and be welcomed by some consumers, we cannot agree with MBA that they are particularly time-sensitive," the FCC wrote, noting that the regulations cited by the group do not require telephone contact until a borrower is at least 20 to 36 days into the delinquency period. "Although the Commission has not precisely defined how time-sensitive messages must be, MBA's evidence here strongly suggests that these messages lack the urgency of robocalls to alert consumers to possible fraudulent credit card transactions on their accounts or data breaches of their identity, when seconds or minutes count."
The FCC also rejected the MBA's attempt to piggyback on the recently created exemption for calls regarding the collection of a debt owed to or guaranteed by the United States. The exception was created at the behest of federal lawmakers, the Commission said, and if Congress "had intended the exception to apply universally, regardless of who owned or guaranteed a debt, it easily could have done so." In staking out this position, however, the FCC ignores its own authority to issue exemptions for calls that are not made for a commercial purpose, and such classes of calls for a commercial purpose where the FCC determines that such calls do not adversely affect privacy rights the TCPA intended to protect, and that do not include an unsolicited advertisement. See 47 C.F.R. § 64.1200(a)(3)(iii). It also ignores the separate recommendation of numerous governmental entities, such as the Federal Housing Finance Agency (FHFA), in formal comments to the FCC, to exempt mortgage servicers of one- to four-unit residential mortgage loans from TCPA requirements.
Why it matters
The FCC position conflicts with the public policy underlying the federal laws governing the residential mortgage markets and, to a certain extent, with other federal law designed to keep residential mortgagors informed about their mortgages. For example, the CFPB Mortgage Servicing Rules require telephone or in-person contact within the 36th day of delinquency (12 C.F.R. § 1024.39(a)), and the federal Home Affordable Modification Program (HAMP) rules require not less than four telephone calls to the last known telephone numbers of record, within a short 30-day period. See HAMP Handbook, 2.2.1. The TCPA presents several obstacles for financial institutions seeking to communicate with customers, and banks have been the target of many class action lawsuits under the statute, including the largest settlement on record, a $75 million deal agreed to by Capital One Bank. Attempting to address the many deadlines faced by mortgage servicers, the FCC offered the MBA alternatives to an exemption, suggesting that mortgage servicers could rely upon the prior express consent provided by a consumer who includes a wireless phone number on a mortgage application or by obtaining new consent from borrowers. "[M]ortgage servicers have effective means, other than robocalls, to make contact with customers and that they must already stay in close contact with customers, providing them ample opportunities to request express consent for robocalls," the Commission wrote.
back to top