Compliance Insights February 2019

Compliance Insights February 2019
Compliance Insights February 2019

CFPB Seeks Clearly Defined Supervisory Authority Over the Military Lending Act

In January 2019, Kathleen Kraninger, director of the Consumer Financial Protection Bureau (CFPB), sent a letter to Congress seeking explicit authority to conduct supervisory examinations of financial institutions for compliance with the Military Lending Act (MLA). The letter included a draft legislative proposal to amend the Dodd-Frank Wall Street Reform and Consumer Protection Act to clarify and affirm the CFPB’s supervisory authority for MLA compliance. The draft proposal echoes similar legislation proposed in the House of Representatives (H.R. 442) by Republican Andy Barr of Kentucky on January 10, 2019, which was also intended to grant the CFPB supervisory authority over the MLA.

The MLA was enacted in 2006 to protect active duty service members, and their spouses and dependents, from certain lending practises. The MLA sets a cap on interest rates and charges assessed to service members and limits certain contract terms for a broad range of consumer credit products, such as payday loans, credit cards, installment loans and overdraft lines of credit.

Last year, Mick Mulvaney, who served as acting director of the CFPB from November 2017 to December 2018, halted MLA examinations and called into question the CFPB’s statutory supervisory authority regarding the MLA. Mulvaney asserted that, although a 2013 amendment to the MLA grants clear enforcement authority to the CFPB, it did not explicitly impart authority to conduct routine examinations for MLA compliance. Mulvaney further indicated that the Dodd-Frank Act, which tasks the CFPB with conducting examinations to assess compliance with “Federal consumer financial laws,” does not specifically enumerate the MLA. Mulvaney’s perspective was met with criticism from certain lawmakers and state attorneys general, who asserted that the CFPB did possess the requisite examination authority. Furthermore, the Department of Defense and various military and veterans groups opposed the rollback of MLA examinations, citing bipartisan support for ensuring that service members receive the full protections of the MLA.

Director Kraninger, who was confirmed as director of the CFPB in December 2018, now seeks explicit supervisory authority from Congress. The draft legislative proposal would affirmatively grant the CFPB nonexclusive authority to require reports and conduct examinations on a periodic basis to assess MLA compliance. Along with the letter to Congress, the CFPB issued a press release, affirming the Bureau’s commitment to the financial well-being of America’s service members.

Given the proposed legislation and anticipated bipartisan support, financial institutions may expect the CFPB will soon have clearly defined authority to resume supervisory examinations for MLA compliance. In the meantime, the CFPB maintains MLA enforcement authority and may investigate and pursue cases arising from servicemember complaints. Lenders should review product rates (including finance charges and associated costs), terms, and compliance controls to ensure that servicemembers and eligible family members receive the full protections of the MLA. Lenders should also review their compliance management systems (including policies and procedures, training, monitoring and testing, internal audit, consumer complaint response, and oversight functions) for MLA compliance to prepare for a new and refreshed lens of CFPB supervision.

United States Sanctions Venezuela’s State-Owned Oil Company

The United States has had economic sanctions in place against Venezuela for several years. Those sanctions were established and have been increasing over time largely due to perceived human rights violations by the Venezuelan government as well as concerns over the legitimacy of the election of President Nicolas Maduro. In January 2019, the impact of these sanctions was further intensified as the Office of Foreign Assets Control (OFAC) designated, or sanctioned, Petróleos de Venezuela, S.A. (PdVSA), the Venezuelan state-owned oil company, pursuant to Executive Order 13850. As a result of this action, all property and interests in property of PdVSA subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from engaging in transactions with them. The sanctions also extend to entities that are 50 percent or more owned, directly or indirectly by PdVSA, which includes PdVSA’s U.S. subsidiary CITGO Holding, Inc.

The recent designation of PdVSA comes at a time of heightened political unrest within Venezuela. On January 10, 2019, President Nicolas Maduro was sworn in for a second term based on the results of a highly controversial May 2018 election in which many opposition candidates were reportedly barred from running or were jailed. The election was not recognised by the opposition-controlled National Assembly, which is considered by the U.S. to be the legislative body within Venezuela that was elected by a legitimate vote of the Venezuelan people. In response to Maduro being sworn in, Juan Guaido, leader of the National Assembly, declared himself as acting president, invoking two provisions of the Venezuelan constitution. Shortly after Guaido’s declaration, the U.S. and many other countries officially recognised him as the legitimate president of Venezuela.

Although the recent action by the Treasury Department imposes a broad ban on transactions with PdVSA and its subsidiaries, OFAC has issued eight new general licenses that permit transactions that would otherwise be prohibited. Of the general licenses issued, the majority serve the purpose of allowing the wind-down of operations, contracts, and activities of PdVSA, and its U.S. subsidiary, CITGO, for a limited period. OFAC has also amended a previously issued general license by issuing general license 3A relating to specified Government of Venezuela bonds. All of the general licenses, as well as all of the new and existing frequently asked questions (FAQs), are available on the Venezuela-related sanctions section of the Treasury website.

As a result of the designation of PdVSA, financial institutions should evaluate the effectiveness of internal OFAC compliance controls for detecting and blocking sanctioned transactions. Financial institutions who serve customers within the energy industry or related industries should also take special care to understand the new complexities of the sanctions landscape. Such institutions should evaluate the impact to customer and correspondent bank relationships, high-risk accounts, and ongoing due diligence reviews, and may wish to reevaluate their risk appetite and tolerance for conducting financial transactions within the energy industry.

FDIC Chairman Discusses Principles of Supervision

Jelena McWilliams was confirmed as the twenty-first Chair of the Federal Deposit Insurance Corporation (FDIC) in May of 2018. Since being sworn in, McWilliams has been spearheading multiple initiatives, with a focused effort on being more “mindful of the regulatory burden” on supervised entities. In January 2019, McWilliams addressed the American Bar Association Banking Law Committee at its annual meeting. McWilliams’ comments to the group provide insight on her viewpoint on regulatory enforcement and what financial institutions can expect from the FDIC in the coming months and years.

McWilliams addressed five topics that are key components of her supervisory approach:

  • Certainty: McWilliams communicated her belief that the FDIC should be clear in its rules and expectations. In her remarks, McWilliams addressed the September 2018 Interagency Statement Clarifying the Role of Supervisory Guidance (Interagency Statement). The Interagency Statement clarifies that supervisory guidance does not have the force and effect of law and that agencies do not issue enforcement actions and will not criticise a supervised financial institution based on supervisory guidance. She also indicated that the FDIC has taken a number of steps, including developing training and written instructions, to ensure examiners understand the distinction. McWilliams also referenced the October 2018 launch of the FDIC’s “Trust through Transparency” initiative. The intent of the initiative is to make public previously unpublished FDIC information, such as how case managers and examiners implement the risk-focused supervision programme or what the turnaround times are for examinations. McWilliams advised institutions to pay close attention to the FDIC’s website, press releases, and financial institution letters for updates on this initiative.
  • Consistency: McWilliams addressed the importance of consistency in supervision among the regulatory agencies and highlighted the role of the Federal Financial Institutions Examination Council (FFIEC) in promoting such consistency. McWilliams indicated the FFIEC is currently exploring how to ensure different agencies and examiners are consistently and uniformly applying the “CAMELS” rating system, which is used to rate a bank’s overall safety and soundness. She also stated that the FDIC has partnered with the other FFIEC agencies to explore the further use of technology in the exam process.
  • Diligence: McWilliams shared her approach to supervision and examinations, which is, in part, to focus on the overall health of an institution rather than try to find isolated problems in institutions that are performing well.
  • Communication: McWilliams emphasised the importance of communication during the examination process and stated that examiners are expected to maintain open lines of communication with institutions to ensure examinations are “fair, unbiased, and free of outside influence.” Outside of the examination process, McWilliams touched on the FDIC’s efforts to improve and streamline its communication and indicated that the agency has recently retired nearly 500 financial institution letters, or guidance documents, that were outdated or duplicative.
  • Regulatory Burden: McWilliams addressed the issue of regulatory burden and expressed her belief that the regulatory system is too complicated for many community banks. She also spoke to one of her key priorities, which is to “substantially simplify capital requirements for community banks,” and referenced the proposed rule issued jointly with the Federal Reserve and the Comptroller of the Currency in November 2018. The proposal, in part, provides community banks the option to calculate a simple leverage ratio, as opposed to utilising the current and more complicated measures of capital adequacy.

The closing comments to the American Banking Association’s Banking Law Committee left attendees with the message that Chairman McWilliams would be taking action to help clarify and simplify the supervisory process. Her initial objectives include making it easier for financial institutions to apply through the de novo application process, to limit the regulatory burden on community banks, and to improve the supervisory process. While these changes may not be immediate, they will likely be helpful to financial institutions once implemented. Financial institutions should continue to keep a close watch on the actions of the FDIC for progress on the initiatives addressed above.

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