Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

A variety of federal laws and regulations require banks and financial institutions to make certain disclosures to holders of deposit accounts. Many of these disclosures are designed for consumer protection and accordingly, are only required to be made to those "consumer" deposit accountholders who hold deposit accounts primarily for personal, family, or household purposes.

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") transferred the rulemaking authority for some of these consumer regulations from other federal regulators to the Consumer Financial Protection Bureau ("CFPB") on July 21, 2011. To reflect this change in authority, the CFPB has republished certain previously existing regulations to Title 12, Chapter X of the Code of Federal Regulations ("C.F.R."), effective December 30, 2011. (It is unclear when the older versions of these regulations will be removed from the CFPB's predecessors' sections of the C.F.R.) This recent republication included regulations requiring financial institutions to provide account disclosures, thus providing an excellent opportunity to review the newly republished regulations and take note of how disclosures required to be made to consumer deposit accountholders differ from those required to be made to business deposit accountholders.

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In October, the Consumer Financial Protection Bureau published its first supervision examination manual which will be of interest to bankers and other financial service executives.

On one level, the manual is fairly pedestrian and may contain little surprising in that most bankers have a fairly extensive appreciation of (and experience with) an examination process. And, of course, the Bureau has direct supervisory authority only over the roughly 100 large banks, thrifts, and credit unions that have assets more than $10 billion.

What should be interesting to many bankers, however, is the insight the Manual provides into the examination approach of the Bureau, an approach that will doubtlessly influence and inform the practices and procedures of all other financial institution regulators, large and small. Essentially, the Manual describes the Bureau's process for risk assessment: first there will be the establishment of the inherent risk of a particular "product" line for consumers and then there will be an assessment of an entity's set of quality controls to manage and mitigate the risks.

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The United States Supreme Court held yesterday that the Federal Arbitration Act preempted California state contract law which courts had applied to find arbitration agreements invalid if they did not permit class arbitration. The Supreme Court’s decision appears to clear the way for consumer contracts to require the individual arbitration of disputes and prohibit consumers’ use of class action in litigation or arbitration. Some commentators are even saying the decision “could spell the death-knell of consumer class actions.” 

In AT&T Mobility LLC v. Concepcion, the Concepcions brought an action in federal court alleging that AT&T had engaged in false advertising and fraud by charging sales tax on mobile phones it advertised as free. Their action was later consolidated with a putative class action. AT&T tried to compel arbitration because the Concepcions had entered into a contract that contained an arbitration clause. Both the District Court and the Ninth Circuit Court of Appeals denied AT&T's motion to compel arbitration. The lower courts relied on the California Supreme Court’s decision in Discover Bank v. Superior Court to invalidate the arbitration clause in the contract as “unconscionable” under state law because the provision did not allow for class action arbitration. The Ninth Circuit rejected the argument that “class proceedings will reduce the efficiency and expeditiousness of arbitration.”

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Bankers and other financial product and service providers should expect to provide their consumer customers with far greater access to information than ever before.

The financial reform law adopted last year, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, established a new financial regulatory agency known as the Consumer Financial Protection Bureau. Under Dodd-Frank, the CFPB has the authority to promulgate regulations governing the credit agency reporting practices of financial institutions, including community banks. Also, under Dodd-Frank, banks must make available to each consumer all information regarding a financial product or service such consumer has purchased, including transaction history, cost, and usage information. All of this must be made available in an electronic, usable format, which will be prescribed and overseen by the CFPB.

The CFPB will now have authority to promulgate rules related to privacy and data security under the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the Right to Financial Privacy Act and the Financial Privacy Act. Under Dodd-Frank, the CFPB is authorized to promulgate rules "identifying as unlawful, unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service." The portion of CFPB authority focusing on abusive acts or practices is new in the consumer protection world—giving the CFPB broad authority to regulate in a completely undeveloped area of the law.

All these privacy and data security regulatory changes, some of them known and others forthcoming, will potentially mean large changes in the information storage and transmission practices of all financial institutions. Consider the following:

• Because consumers will be able to request far more information than ever before, all financial institutions must maintain integrated databases and networks to provide all requested information in a timely manner.
• Because the CFPB will require certain procedures for reporting to credit agencies, all financial institutions must analyze their current procedures to ensure prompt compliance with the forthcoming CFPB rules.
• Also, for both the above reasons, all financial Institutions should review their data storage practices to ensure the security and accuracy of all information they provide to consumers and to credit agencies.

In addition to the above, stay ahead of the curve by taking part in the rulemaking process. One last suggestion – contact your legal counsel for assistance in providing comments during the rulemaking process and for assistance with your compliance efforts regarding both Dodd-Frank and the final CFPB rules.

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The Higher Education Opportunity Act (“HEOA”), signed into law on August 14, 2008, regulates private education loans and the relationships between postsecondary education institutions and private education lenders. The Board of Governors of the Federal Reserve (the “Fed”) recently issued a Final Rule amending Regulation Z, which implements the disclosure requirements of HEOA and imposes a number of substantive restrictions on lenders. Compliance with these requirements becomes mandatory on February 14, 2010.  

The Final Rule also sets forth a fairly regimented process for the application, approval and disbursement of private student loans. In connection with loan applications or solicitations, lenders must provide general information about loan rates, fees and terms, including an example of the total cost of the loan based on the highest interest rate permitted under the loan. The initial disclosures must also inform the student of the possibility of obtaining federal student aid.

Once the application has been submitted and the loan approved, the lender must provide a second set of disclosures, this time based on the specific terms of that consumer’s loan. Once the consumer has received the approval and disclosures, he or she will have 30 days during which to decide whether to accept the loan offer. Other than changes to the variable interest rate brought about by changes in the index to which it is tied, the lender may not change the terms of the loan during this period. 

After the borrower accepts the loan and delivers to the lender a student self-certification, the lender must send out yet another set of disclosures, which should reflect the terms and conditions of the prior set of disclosures. After the loan has been accepted and all disclosures and certifications have been delivered, the student has another three business days during which he or she may terminate the loan transaction. Only after this three day period has expired may the lender finally disburse funds.  

Because the disclosure requirements for private education loans differ from those for other loans, lenders that offer private education loans will have to implement specific procedures to ensure compliance.

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