ABA Section of Business Law Banking Law Committee Fall Meeting

November 5, 2010

NEW KIDS ON THE BLOCK: An Update on

BCFPDonald C. Lampe

Womble Carlyle Sandridge & Rice, PLLCCharlotte, NC

dlampe@wcsr.com

DODD-FRANK FROM THE TOP

•

Nomenclature: Title X establishes Bureau of Consumer Financial Protection, but industry still learning how the other 2000 pages will affect retail financial services

•

Focus today: description of Bureau of Consumer Financial Protection (“BCFP”

or “CFPB”) under Title

X •

Get ready for a new ballgame

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BCFP: WHAT IS IT?•

Independent uber-agency, housed w/in Fed but separate executive agency

•

Budget: % of Fed ops $$, now would be ~ $500 mm/yr [4x FTC’s cons/prot budget] plus “victims fund”

from CMP’s

•

Headed by Prez-appointed Director w/ 5 yr term •

“Consumer financial protection”

functions of other

federal agencies to be transferred to it

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BCFP: WHAT IS IT? cont’d

•

“Transferor agencies”

= Fed, FDIC, FTC, NCUA, OCC, OTS and HUD

•

FTC gives up rulemaking or guidance-issuing but keeps its employees and enforcement powers

•

Key date: “designated transfer date”•

Treasury has power to get started even before Director is appointed

4

BCFP: WHEN?

•

Effective on enactment (technically): rulemaking and supervision authority in Title X

•

Enforcement on “designated transfer date”

(DTD) - July 21, 2011, Treasury can extend by 6 more months

•

No Director yet; Prof. Elizabeth Warren is “special assistant”

to the President

5

BCFP: WHEN? cont’d

•

Many effective dates in Title X tied to DTD•

On DTD, BCFP gets exclusive authority over consumer financial protection laws; existing gov’t agency lawsuits go over, & existing orders, rulings, determinations, agreements

•

NOTE: Treasury’s authority to help get agency going before DTD

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TREASURY’S INTERIM AUTHORITY

•

Under §

1066, Treas Sect authorized to perform transfer & transition functions of Bureau until Director appointed and confirmed (Subtitle F)

•

Does not appear Treasury authorized to perform core duties or exercise basic authority of CFPB before Director confirmed EXCEPT FOR tag-

along in examinations (see §

1067(e))

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IN THE INTERIM?

•

Treasury working to “stand up”

new agency, effort led by E. Warren, with expanding staff and resources at Treasury

•

Constituent agencies, such as Fed, can (and will) press forward w/ rules, such as l.o. compensation, higher-priced mortgages, etc.

•

FDIC likely to continue with guidance and could even start rulemakings(?)

8

SOME DEFINITIONS TO KNOW (and watch for) IN TITLE X

•

“Consumer”

= individual or agent, trustee or representative of individual (> than now)

•

“Fair lending”

= “fair, equitable and nondiscriminatory access to credit”

•

“Enumerated consumer laws”

means what you think it would mean

•

Last but not least: “covered person”

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“COVERED PERSON”

DEFINED•

“Any person engaged in offering or providing a consumer financial product or service”

and any

affiliate of such person•

For consumer lending, very broad, but need to note:–

Real emphasis on intermediaries, brokers and service providers –

anyone who “touches”

a

consumer financial product or service–

Some exceptions to BCFP authority

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EXPANSION OF COVERED PERSONS

•

“Not who you are, but what you do”•

BCFP can expand def of “financial product or service”

by reference to Reg Y•

BCFP can exempt classes of covered persons

•

Title X borrows from FIRREA, by making “related persons, ”

“covered persons”

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EXPANSION OF COVERED PERSONS (cont’d)

-

“Related persons”

= officers, directors, managerial employees, controlling shareholders, agents; any person determined by Bureau to “materially participate in conduct of affairs”

of CP; indy

contractors (including attys) who knowingly participate violation or breach fiduciary duty

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WHAT ABOUT . . .•

Retailers? BFCP has no authority over retailer of “nonfinancial good or service”

(NFGS)

•

Dealers? Limited coverage, if extend credit exclusively to enable consumer to purchase NFGS, but the limit is limited

•

Structure of “dealer exemption”: an exception followed by an exception with another exception following that –

confusing!

13

SOMETHING ELSE YOU NEED TO KNOW: DATA COLLECTION

•

BCFP statutory authority to hire “attys, compliance examiners, compliance supervision analysts, economists, statisticians”

and others

•

Expect new data collection, reporting & analysis requirements

•

Expect studies and data-driven pronouncements, with the “microphone”

not in industry’s hands

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BCFP’S 3-LEGGED STOOL•

(1) Rulemaking, (2) Supervision (by exam or otherwise), and (3) Enforcement

•

EXCLUSIVE POWERS related to covered persons and consumer financial products & services (some “sharing”

with FTC)

•

“Ancillary”

powers thru “functional units”

of agency (7 in all), including Research, Comm Affairs, Complaints, Fair Lending & EE, FinEdu, Servicemembers & Older Americans

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CFPB RULEMAKING•

Exclusive authority under Federal consumer financial laws

•

But agency has own separate authority to regulate under “unfair, deceptive or abusive”

standard

•

Agency’s power to monitor “risks to consumers” will set regulatory agenda –

agency can (and will)

require “reports”

from CP’s, as bases for rulemakings

16

LIMITS ON CFBP RULEMAKING?

•

Pru’tial regulator (banks/CU’s) can object to proposed rule but CFPB need only note as finding in final rule

•

Member of Fin Stab O’sight C’cil (Fed, SEC, CFTC, OCC, FDIC, FHFA, NCUA and CFPB) can object on safety and soundness/financial stability grounds

17

CFPB RULEMAKING cont’d

•

But FSOC member “protest”

starts after reg effective & overturn requires 2/3’s Council vote –

low chance!•

Appears: “protests”

could be for non-bank, non-

CU covered persons (but likely?)•

Effective date of Title XIV will impel mortgage-

related rulemakings

BCFP SUPERVISORY POWER•

ALL “covered persons”

subject to BCFP

supervision•

BCFP will supervise servicer providers under Bank Service Company Act standards (even if no bank involved) –

see 12 USC 1867(e)

•

BCFP to issue rule w/in 1 yr of DTD on coverage of its supervision authority

•

Note: coordination with federal examiners and (especially) state regulators

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WHAT TO EXPECT IN SUPERVISION?

•

Compliance exams –

not safety & soundness•

Risk-based exercise, based on “risks posed to consumers”

•

Extent of existing state supervision –

will see agency “relying”

on state exams of state-chartered

entities•

Note: data gathering & reporting requirements apply to all covered persons, so expect “exam lite”

through data collection

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CFPB ENFORCEMENT

•

Broad power, “every arrow in the quiver”•

Investigations, CID’s, administrative cases (APA), litigation

•

3 BCFP powers “work together,”

w/ enforcement being central strategy ––

BCFP makes rules (which can be broken), conducts exams and gathers information (can and will be used against you) and then enforces

–

BUT BCFP has enforcement power w/o other two powers being in play

21

LOWDOWN ON PREEMPTION•

Trimmed back –

bank federal preemption based on

“prevents or significantly interferes”

w/ bank power (Barnett Bank)

•

OCC’s “preemption determinations”

reviewed not under Chevron deference but detailed review of OCC action

•

State laws apply to bank subs, including op subs -

no preemption there anymore –

agency relationships

negated (e.g., RAL’s)

22

LOWDOWN ON PREEMPTION cont’d

•

Visitorial powers –

Cuomo v. C-house gets codified

•

Effective date of new preemption DTD; existing contracts entered to before enactment are preserved

•

BCFP: no authority to establish usury limit in credit made or offered by CP to consumer, but expect regulation based on “deceptive, unfair or abusive”

(see, e.g., HOEPA)

23

BIG BANKS COVERED

•

Per §

1025, depository institutions total assets >$10B subject to exclusive CFPB examination authority for compliance with Federal consumer financial laws

•

One enumerated purpose: “detecting and assessing risks to consumers”

•

Safety & soundness not part of mission

24

BIG BANKS cont’d•

Likewise CFPB primary enforcement authority for Federal consumer financial laws

•

Prudential regulator backup authority to bring action if CFPB doesn’t after notified

•

Exams to be coordinated, pru regulator given chance to comment on exam findings and if conflict bank may request joint statement

•

Appeal and resolution process if agencies continue to differ

25

“OTHER BANKS”

•

Per §

1026, DI’s w/ assets ≤

$10B, CFPB does not have examination authority but has full scope “tag along”

rights

•

Pru regulator rather than CFPB enforcement authority for Federal consumer financial laws

•

All banks otherwise have to follow rules and guidelines issued by CFPB

26

IS THIS WHAT IT SEEMS?•

Maybe not –

small banks req’d to respond to RFI’s,

exam reports must be shared w/ CFPB & CFPB can ask pru regulator take action

•

Standards and guidelines, not to mention rules, developed by CFPB will apply to everyone

•

Service providers still subject to all CFPB authority – just like BSCA

27

SMALL BANK SUPERVISION

•

For small banks, FDIC establishing new Division of Depositor and Consumer Protection (DCP), to carry out “responsibility to enforce [consumer protection] rules”

•

Consumer protection examinations housed in DCP –

expect cooperation with CFPB

•

Should help, but smaller institutions disadvantaged by Title X (and Title XIV)

28

REGULATORY BLINDNESS?

•

Regulators, policymakers & other proponents of Title X “new world order”

share same delusion –

“compliance burden same on all institutions”•

Compliance is scalable –

bigger is better

•

Smaller institutions as source of innovation for consumer products & services?

•

Most important to follow rules

29

Donald C. Lampe Womble

Carlyle Sandridge

& Rice, PLLC

Charlotte, NC dlampe@wcsr.com

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Billing Code 4810-25-P

FINANCIAL STABILITY OVERSIGHT COUNCIL

12 CFR Chapter XIII

Advance Notice of Proposed Rulemaking Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies

AGENCY: Financial Stability Oversight Council.

ACTION: Advance notice of proposed rulemaking.

SUMMARY: Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act

(the “DFA”) gives the Financial Stability Oversight Council (the “Council”) the authority to

require that a nonbank financial company be supervised by the Board of Governors of the

Federal Reserve System (“Board of Governors”) and subject to prudential standards if the

Council determines that material financial distress at such a firm, or the nature, scope, size, scale,

concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the

financial stability of the United States.

This advance notice of proposed rulemaking (ANPR) invites public comment on the

criteria that should inform the Council’s designation of nonbank financial companies under the

DFA.

DATES: Comments on this ANPR must be received by [INSERT DATE 30 DAYS AFTER

FEDERAL REGISTER PUBLICATION]

ADDRESSES: Interested persons are invited to submit comments regarding this advance notice

of proposed rulemaking according to the instructions for “Electronic Submission of Comments”

below. All submissions must refer to the document title. The FSOC encourages the early

submission of comments.

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Electronic Submission of Comments. Interested persons must submit comments

electronically through the Federal eRulemaking Portal at www.regulations.gov. Electronic

submission of comments allows the commenter maximum time to prepare and submit a

comment, ensures timely receipt, and enables the FSOC to make them available to the public.

Comments submitted electronically through the www.regulations.gov website can be viewed by

other commenters and interested members of the public. Commenters should follow the

instructions provided on that site to submit comments electronically.

Note: To receive consideration as public comments, comments must be submitted through the

method specified above. Again, all submissions must refer to the docket number and title of the

notice.

Public Inspection of Public Comments. All properly submitted comments will be

available for inspection and downloading at www.regulations.gov.

Additional Instructions. Please note the number of the question to which you are

responding at the top of each response. Though the responses will be screened for obscenities

and appropriateness, in general comments received, including attachments and other supporting

materials, are part of the public record and are immediately available to the public. Do not

enclose any information in your comment or supporting materials that you consider confidential

or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: For further information regarding this

interim final rule contact the Office of Domestic Finance, Treasury, at (202) 622-1703.

All responses to this Notice and Request for Information should be submitted via

www.regulations.gov to ensure consideration.

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SUPPLEMENTARY INFORMATION:

I. BACKGROUND

The Council was established by section 111 of the DFA for the purposes of “ (A)

…identify[ing] risk to the financial stability of the United States that could arise from the

material financial distress or failure, or ongoing activities, of large, interconnected bank holding

companies or nonbank financial companies, or that could arise outside the financial services

marketplace; (B) . . . promot[ing] market discipline, by eliminating expectations on the part of

shareholders, creditors, and counterparties of such companies that the Government will shield

them from losses in the event of failure; and (C) . . . respond[ing] to emerging threats to the

stability of the United States financial system.” The Council has ten voting members and 5

nonvoting members. The voting members consist of the Secretary of the Treasury who also is

the Chairperson of the Council, the Chairman of the Board of Governors of the Federal Reserve

System, the Comptroller of the Currency, the Director of the Bureau of Consumer Financial

Protection, the Chairman of the Securities and Exchange Commission, the Chairperson of the

Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading

Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National

Credit Union Administration Board, and an independent member appointed by the President with

the advice and consent of the Senate, having insurance expertise. The nonvoting members are the

Director of the Office of Financial Research, the Director of the Federal Insurance Office, and a

State insurance commissioner, a State banking supervisor, and a State securities commissioner,

each designated by a selection process determined by their respective state supervisors or

commissioners.

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Through this ANPR the Council is seeking to gather information as it begins to develop

the specific criteria and analytical framework by which it will designate nonbank financial

companies1 for enhanced supervision under the DFA.

a. Considerations in making a determination

Under the provisions of the DFA, in making a determination on whether the company should be

subject to supervision by the Board of Governors, the Council must consider:

(A) The extent of the leverage of the company;

(B) The extent and nature of the off-balance-sheet exposures of the company;

(C) The extent and nature of the transactions and relationships of the company with other

significant nonbank financial companies and significant bank holding companies;

(D) The importance of the company as a source of credit for households, businesses, and

State and local governments and as a source of liquidity for the United States financial

system;

(E) The importance of the company as a source of credit for low-income, minority, or

underserved communities, and the impact that the failure of such company would have on

the availability of credit in such communities;

(F) The extent to which assets are managed rather than owned by the company, and the

extent to which ownership of assets under management is diffuse;

(G) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities

of the company;

1 As defined in Section 102(a)(4) of DFA.

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(H) The degree to which the company is already regulated by 1 or more primary financial

regulatory agencies;

(I) The amount and nature of the financial assets of the company;

(J) The amount and types of the liabilities of the company, including the degree of reliance

on short-term funding; and

(K) Any other risk-related factors that the Council deems appropriate.

The Council must consider similar factors in determining whether a foreign nonbank

financial company should be designated and its U.S. operations and activities subject to

supervision by the Board of Governors. In addition, the Council must consider the factors

relevant to a U.S. or foreign nonbank financial company in determining whether a U.S. or

foreign company, respectively, should be designated for supervision by the Board of Governors

under the special anti-evasion provisions in section 113(c) of the DFA.

b. Process for making a determination

Under the provisions of the DFA, the Council must provide a nonbank financial firm with

advance notice that it plans to designate the firm, and the firm has up to 30 days to request a

hearing and an additional 30 days to submit material. Upon holding a hearing, the Council has

up to 60 days to make a final determination. If a firm does not make a timely request for a

hearing, the Council must notify the firm of its final determination within 40 days of the firm’s

receipt of advance notice from the Council. In making a determination, the Council must consult

with the primary financial regulator, if any, of the affected firm, and with the appropriate foreign

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regulatory authorities as appropriate.2 Once designated, the Council must reevaluate its

determination regarding each designated firm at least annually. Council designations are subject

to judicial review. The Council is not requesting comments on these procedural requirements.

2 Under Section 113(f), the Council may waive the requirements on an emergency basis if necessary to prevent or mitigate threats to financial stability.

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II. CRITERIA FOR DESIGNATION

1. What metrics should the Council use to measure the factors it is required to consider when

making determinations under Section 113 of DFA?

a. How should quantitative and qualitative considerations be incorporated into the

determination process?

b. Are there some factors that should be weighted more heavily by the Council than

other factors in the designation process?

2. What types of nonbank financial companies should the Council review for designation under

DFA? Should the analytical framework, considerations, and measures used by the Council

vary across industries? Across time? If so, how?

3. Since foreign nonbank companies can be designated, what role should international

considerations play in designating companies? Are there unique considerations for foreign

nonbank companies that should be taken into account?

4. Are there simple metrics that the Council should use to determine whether nonbank financial

companies should even be considered for designation?

5. How should the Council measure and assess the scope, size, and scale of nonbank financial

companies?

a. Should a risk-adjusted measure of a company’s assets be used? If so, what

methodology or methodologies should be used?

b. Section 113 of DFA requires the Council to consider the extent and nature of the off-

balance-sheet exposures of a company. Given this requirement, what should be

considered an off-balance sheet exposure and how should they be assessed? How

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should off-balance sheet exposures be measured (e.g., notional values, mark-to-

market values, future potential exposures)? What measures of comparison are

appropriate?

c. How should the Council take managed assets into consideration in making

designations? How should the term “managed assets” be defined? Should the type of

asset management activity (e.g., hedge fund, private equity fund, mutual fund) being

conducted influence the assessment under this criterion? How should terms,

conditions, triggers, and other contractual arrangements that require the nonbank

financial firm either to fund or to satisfy an obligation in connection with managed

assets be considered?

d. During the financial crisis, some firms provided financial support to investment

vehicles sponsored or managed by their firm despite having no legal obligation to do

so. How should the Council take account of such implicit support?

6. How should the Council measure and assess the nature, concentration, and mix of activities

of a nonbank financial firm?

a. Section 113 of DFA requires the Council to consider the importance of the company

as a source of credit for households, businesses, and State and local governments, and

as a source of liquidity for the United States financial system. Given this

requirement, are there measures of market concentration that can be used to inform

the application of this criterion? How should these markets be defined? What other

measures might be used to assess a nonbank financial firm’s importance under this

criterion?

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b. Section 113 of DFA requires the Council to consider the importance of the company

as a source of credit for low-income, minority, and underserved communities. Given

this requirement, are there measures of market concentration that can be used to

inform the application of this criterion? How should these markets be defined? What

other measures might be used to assess a nonbank financial firm’s importance under

this criterion?

7. How should the Council measure and assess the interconnectedness of a nonbank financial

firm?

a. What measures of exposure should be considered (e.g., counterparty credit exposures,

operational linkages, potential future exposures under derivative contracts,

concentration in revenues, direct and contingent liquidity or credit lines, cross-

holding of debt and equity)? What role should models of interconnectedness (e.g.,

correlation of returns or equity values across firms, stress tests) play in the Council’s

determinations?

b. Should the Council give special consideration to the relationships (including

exposures and dependencies) between a nonbank financial company and other

important financial firms or markets? If so, what metrics and thresholds should be

used to identify what financial firms or markets should be considered significant for

these purposes? What metrics and thresholds should be used in assessing the

importance of a nonbank financial company’s relationships with these other firms and

markets?

8. How should the Council measure and assess the leverage of a nonbank financial firm? How

should measures of leverage address liabilities, off-balance sheet exposures, and non-

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financial business lines? Should standards for leverage differ by types of financial activities

or by industry? Should acceptable leverage standards recognize differences in regulation?

Are there existing standards (e.g., the Basel III leverage ratio) for measuring leverage that

could be used in assessing the leverage of nonbank financial companies?

9. How should the Council measure and assess the amount and types of liabilities, including the

degree of reliance on short-term funding of a nonbank financial firm?

a. What factors should the Council consider in developing thresholds for identifying

excessive reliance on short-term funding?

b. How should funding concentrations be measured?

c. Do some nonbank financial companies have funding sources that are contractually

short-term but stable in practice (similar to “stable deposits” at banks)?

d. Should the assessment link the maturity structure of the liabilities to the maturity

structure and quality of the assets of nonbank financial companies?

10. How should the Council take into account the fact that a nonbank financial firm (or one or

more of its subsidiaries or affiliates) is already subject to financial regulation in the Council’s

decision to designate a firm? Are there particular aspects of prudential regulation that should

be considered as particularly important (e.g., capital regulation, liquidity requirements,

consolidated supervision)? Should the Council take into account whether the existing

regulation of the company comports with relevant national or international standards?

11. Should the degree of public disclosures and transparency be a factor in the assessment?

Should asset valuation methodologies (e.g., level 2 and level 3 assets) and risk management

practices be factored into the assessment?

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12. During the financial crisis, the U.S. Government instituted a variety of programs that served

to strengthen the resiliency of the financial system. Nonbank financial companies

participated in several of these programs. How should the Council consider the

Government’s extension of financial assistance to nonbank financial companies in

designating companies?

13. Please provide examples of best practices used by your organization or in your industry in

evaluating and considering various types of risks that could be systemic in nature.

a. How do you approach analyzing and quantifying interdependencies with other

organizations?

b. When and if important counterparties or linkages are identified, how do you evaluate

and quantify the risks that a firm is exposed to?

c. What other types of information would be effective in helping to identify and avoid

excessive risk concentrations that could ultimately lead to systemic instability?

14. Should the Council define “material financial distress” or “financial stability”? If so, what

factors should the Council consider in developing those definitions?

15. What other risk-related considerations should the Council take into account when

establishing a framework for designating nonbank financial companies?

Alastair Fitzpayne Deputy Chief of Staff and Executive Secretary, Department of the Treasury

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Dated: October 1, 2010

[FR Doc. 2010-25321 Filed 10/04/2010 at 4:15 pm; Publication Date: 10/06/2010]