The Most Powerful Agency in Government?

“All things are subject to interpretation whichever interpretation prevails at a given time is a function of power and not truth.”  Friedrich Nietzsche

In 1933 President Roosevelt established the NRA (National Recovery Administration) as part of his “100 days” to get the U.S. out of the depression. Its symbol was a blue eagle.   It had vast powers over business, markets and labor.  Among other things it instituted a system of industrial codes for key industries and labor, farmers and businesses.  It attempted to abolish child labor, instituted minimum wages in coded industries. It promoted a system of price stabilization which effectively leads to cartels and price fixing.  It had approximately 5000 business practices that were prohibited and administrative orders numbering over 3000.   In 1935 the U.S. Supreme Court declared the NRA unconstitutional, in a case involving a chicken farmer, Schechter Poultry Corp. v. U.S.    Some referred to the holding as “the sick chicken killed the blue eagle.”

Has the Consumer Financial Protection Bureau (“CFPB”) inherited the NRA mantle of the “most powerful agency in government”?  With the I.R.S. hobbled by scandal, arguably the CFPB is the most powerful agency in the U.S. government.  Some key factors support this view:  (1) it is not subject to budget control or oversight by the Congress, and is financed by having access up to 12% of the Federal Reserve Board’s total operating budget; (2) its rulings and regulations are not subject to any monitoring and can only be overturned by a vote of 2/3 of the members of the Financial Stability Oversight Council and only if the CFPB’s actions would put the “safety and soundness  of the United States banking system or the stability of the financial system of the United States at risk.”; and (3) its director has a five year term and can only be removed by the President  “for cause”.  The Financial Stability Oversight Council is made up of the Secretary of Treasury and most regulatory agencies of the federal government, 10 in number, including the Director of the CFPB.

With extremely limited exceptions, most of the consumer financial functions of the Federal Reserve, OCC, OTS [gone now], FDIC and NCUA were transferred to the CFPB.  Neither the Federal Reserve nor any listed agency can overrule the CFPB. Because of CFPB’s jurisdiction over the alphabet soup of consumer law (RESPA, SAFE Act, Truth in Lending, etc.) CFPB has issued more than 25 guidance and regulation documents and more are coming almost every day.  Mortgages and mortgage servicing are under CFPB’s jurisdiction and news comes out almost every day on some new development or exemption.  CFPB does not have direct or supervisory jurisdiction over banks or credit unions that are smaller than $10 billion in assets.  However, the responsible regulator (usually FDIC) must coordinate with the Bureau and may recommend action if there are material violations of consumer laws.  CFPB can also use its regulatory and supervisory authority over “covered persons”, which do not have to be financial services.  For example, in the last few days the CFPB asserted jurisdiction over AIG, the large insurance giant, on the basis that it was a key player in the economy and engaged in consumer services.  CFPB has also drawn a bead on credit reporting agencies and issued a report on private student loans. 

Most New Mexico banks and credit unions will have immediate and direct contact with CFPB in the mortgage industry.  A bank or credit union mortgage compliance officer who does not subscribe to the CFPB periodic internet releases is risking his or her institution’s regulatory well-being.  The Bureau’s Supervision and Examination Manual is also available on line at the Bureau’s website.   

Is there a “sick chicken” on the horizon?  A Texas bank, the Competitive Enterprise Institute (“CEI”) and others filed suit against CFPB, the Treasury Department, and the Director of CFPB and others claiming that the CFPB and its enabling legislation in Dodd-Frank was unconstitutional.  The suit is pending in in federal court in the District of Columbia.  The Director, Richard Cordray, was alleged to have been fraudulently appointed and various constitutional grounds were alleged as the basis for declaring the Bureau and its founding legislation invalid.  The case is in the judicial process and there is no guidance as to its likely outcome. 

If Richard Cordray is not confirmed by the Senate the CFPB may face other problems.  Recently the D.C. Circuit Court of Appeals held that President Obama’s recess appointments of three N.L.R.B. commissioners were invalid.  The Third Circuit Court of Appeals has just joined in a similar ruling.  Since N.L.R.B. rules and decisions are by a vote of the commissioners, the recess appointment threatens to invalidate most the Board’s actions over the last years.  President Obama used the same recess appointment procedure when Richard Cordray was appointed as Director of CFPB.  It appears that Cordray’s appointment is similarly in jeopardy if he is not confirmed by the Senate—and Republicans have threatened filibuster.  CFPB’s regulations to date are probably not at risk, since CFPB does not act as a board like N.L.R.B.  However, there is serious doubt if the Bureau can continue it regulatory avalanche without a director.

And so the beat goes on.

Do Good

Marshall G. Martin

 Office   505 982 4611

 Cell       505 228 8506

The Consumer Financial Protection Bureau and a New Wire Transfer Case

"President Obama’s pick to head the Consumer Financial Protection Bureau [“CFPB”] got a firsthand taste of the effects of the government sequester while trying to get to his confirmation hearing Tuesday. Richard Cordray... had to wait outside in the rain in a long line that wrapped around the corner of the Dirksen Senate office building to get into his 10 a.m. hearing before the Senate Banking Committee. Citing the budget cuts from the automatic sequester cuts, the Capitol Police have shut down several entrances to the congressional office building, resulting in longer waits at the doors and security checkpoints that are open."  Washington Times March 12, 2013.

The Business Lawyer, published by the American Bar Association’s Business Law Section, in its annual survey of Consumer Financial Services devotes 71 pages of single-spaced, heavily footnoted text to the first year of the CFPB.  The CFPB’s activities resemble nothing more than a whirling regulatory dervish.  It has jurisdiction over banks and credit unions with assets over $10 billion, over all mortgage companies, payday lenders and private education lenders (student loans).  It also has jurisdiction over larger participants in consumer financial products or services.  It has issued a number of final rules, a study on private student lending (just followed up in May with another report on private student loans), and a report on the three largest credit reporting agencies.  It is currently studying arbitration in consumer services (an area of law protected by the U.S. Supreme Court in recent years).    

CFPB has engaged in significant regulatory action in residential mortgage lending, through its RESPA, TILA and HOEPA jurisdiction.  It will shortly issue new regulations on “ability to repay” and “qualified mortgage” standards.  It is also preparing to regulate all residential mortgage servicers, with some indication that smaller servicers may be exempt.  It has also taken enforcement action against some of the same banks and credit card companies that Attorney General King recently sued in New Mexico state court over sale of payment protection plans.  It has issued rules on credit reporting services. It maintains an active complaint response program, and a cursory look at CFPB’s website shows that it encourages complaints.

For most New Mexico banks the main compliance issues will arise in the area of residential mortgage operations.  New and enhanced disclosures will cause compliance headaches without any easy cure-all. If Mr. Cordray is not confirmed, he risks ouster from his directorship under recent federal court cases which held that similar “recess” appointments of NLRB commissioner were void.  Unlike the NLRB rule making, Cordray’s ouster will not invalidate CFPB regulations or actions. 

A significant and long running case involving wire transfers and internet banking has finally come to a close after more than four years of intense litigation.  As you know, wire transfers and internet banking is under Article 4A of the Uniform Commercial Code.  In Patco Construction Co., Inc. v. People’s United Bank, Patco suffered a loss or more than $500,000 through a fraudulent hacking scheme.  Patco, a Maine company, used the bank’s internet banking system primarily for payroll.  In 2009 hackers drained funds from Patco’s payroll account on a daily basis over a substantial period of days.  The system vendor warned by its usual signals that these transactions might be fraudulent.  No monitoring occured.  The bank had instituted a system that essentially complied with federal guidelines with challenge questions and similar protections.  However, the “trigger” for the challenge questions was set at $1.00.  This low trigger enabled the hackers to have almost unlimited shots at deciphering the challenge questions.  At trial in the U.S. District Court, the judge found all the bank’s protections “commercially reasonable”—the Article 4A standard for bank freedom from liability.  On appeal, the U.S. Court of Appeals reversed  and found in favor of Patco.  The Court  found that the low trigger, failure to change challenge questions frequently and lack of monitoring not “commercially reasonable” and sent the case back for re-trial.  Patco, which had sought attorney fees and damages above the $500,000 actual loss then settled with the bank, based on the Court of Appeals statements that Patco may have been partially at fault for not monitoring its own accounts. 

One clear lesson stands out from Patco:  the Court of Appeals criticized the bank for having a “one size fits all” security system.  In other words, banks should have much more sophisticated and complex security for large depositors with significant flows of funds.  Otherwise, in the age of genius hackers, a bank risks an adverse outcome and as anyone who has experienced large scale hacking, a lot of money can leave very quickly. 

As an aside, I had to go to the Southeast part of the State last week.  For those suffering the malaise of the Albuquerque and Santa Fe recovery, a trip to Roswell, Artesia and that area is a real eye opener.  Roswell now has at least four new large chain hotel-motels on the border of N.M.M.I.  Committed to progress Roswell has  a prominent natural gas refueling station which resembles a small filling station.  Artesia is booming and housing is in short supply.  One prominent banker in Artesia said there were many jobs (not just oil field) vacant and unfilled in the market area.  A new apartment is being built, the first in many years. Albuquerque and Santa Fe ignore this part of the state, and do so at their peril. 

Have a good day and do good.

Marshall G. Martin
Comeau Maldegen Templeman & Indall
Cell:  505-228-8506
Office: 505-982-4611

New "Pay Equity" Bill, Some Dead Legislation and the Attorney General on a Consumer Crusade

"I saw the head of NOW--National Organization of Women--saying that women still only make 70 cents on the dollar to every man.  I am not sure I'm going to believe that. Women are notoriously bad at math."  Bonnie McFarlane

 The New Mexico House and Senate ignored Ms. McFarlane.  During the last legislature they passed HB 216 the "Fair Pay for Women Act" ("FPWA") almost unanimously--with the House voting 64-0 and the Senate 31-2 in favor.  Governor Martinez signed the bill and it will go into effect on June 1, 2013.  From the vote one can see that the legislature reflects the broad support for the “equal pay” concept.  Unfortunately, the Act carries some unneeded baggage which will cause litigation.

 Despite its title, the Act is gender neutral, prohibiting discrimination between "employees of the opposite sex...”.  There are exceptions such as compensation based established seniority systems, merit systems and others.  The Act applies to any employer with more than four employees.  It is unclear the extent to which it applies to the State or political subdivisions.  Although the State is listed as a "person" under the Human Rights Act, it is not listed in the FPWA. 

The Act uses the same standards as the federal Equal Pay Act, ie. whether the jobs require "equal skill, effort and responsibility" and are performed under "similar working conditions".  But important questions will have to be decided by the New Mexico courts, such as who has the burden of proof.   One would expect the New Mexico courts to look to the federal courts for guidance on interpretation.

A fertile ground for litigation may be in the Act's retaliation provisions which prohibit discrimination against employees for asserting a claim, for assisting another person to assert a claim or for "informing another person about employment rights or other rights provided by law." Robert Tinnin, a leading New Mexico employment lawyer in Albuquerque, has questioned whether informing another person about employment rights might be broader than information about the Act--e.g. about union organization or sex or age discrimination.

The most mysterious portion of the Act is its "two track" remedy provisions.  The claimant under the Act has the choice of proceeding administratively by first going to the Human Right Division under the Human Rights Act or going directly to court for damages and injunctive relief. 

There are numerous questions raised by Tinnin on the dual track procedure.  The court option clearly provides for treble damages but does not expressly provide for a jury trial (as does the Human Right Act).  The court option also provides for punitive damages.  If the claimant uses the Human Rights Act (which can end up in court) does she get treble damages or other court option remedies?

 Most troubling is the provision which would permit the claimant to seek remedies on behalf of   "all employees similarly situated."  That language is the magic language of class action litigation.  One can see a claimant employed by a large national or regional bank filing what amounts to a FWPA class action in New Mexico growing out of purely New Mexico circumstances.

Banks should look at their policies to insure equal pay for everyone similarly situated. 

The New Mexico Act has some real litigation risk for employers because of its unknowns. Documentation should be carefully drafted and reviewed.

The New Mexico Attorney General continues to view  the financial services industry as fair game for his current “consumer protection” crusade—perhaps as grist for his 2014 campaign for Governor.  He has just filed a series of separate suits in Santa Fe County accusing major credit card companies of “slamming”, i.e. misleading sales of credit card protection plans, etc. to consumers.  The Santa Fe New Mexican listed the named defendants as JPMorgan Chase & Co. Barclay’s Bank of Delaware, Capital One Bank, Bank of America Corp., Citygroup, GE Capital Retail Bank and HSBC Bank Nevada . There are others.  The Attorney General has associated the Branch Law Firm of Albuquerque and an Arkansas firm, the latter presumably with  expertise in this type of litigation.  In the era of Attorney General Patsy Madrid there were several private law firms who were known to contribute to her future electoral ambitions and were often chosen as outside counsel on cases such as this.  It is unknown if the practice has resurfaced with this Attorney General.  The Attorney General sued under the Unfair Practices Act (“UPA”) and seeks $5000 per violation.  There is some question if the Attorney General is entitled to attorney fees, although that remedy is sought. 

The Attorney General’s latest consumer protection crusade brings up interesting pieces of failed legislation from the 2013 Session.   The Attorney General sought to amend the existing UPA to provide for an award of attorney fees in UPA cases which he files.  His effort, SB270,   failed.  In a similar vein, the Attorney General sought legislative approval in HB531 to authorize him to hire outside counsel on a contingent fee basis.   This Bill also failed. 

As a postscript to an earlier Blog,  the Governor vetoed SB159 which provided that when a contract provided for an award of attorney fees, the opposing party had a right to seek attorney fees even though not provided in the contract and that right could not be waived. Since most bank documents provide for attorney fees the veto is welcome.

I trust you read that one Congressional Committee Chair refused to let Richard Cordray, head of the Consumer Financial Protection Bureau testify at a hearing, observing that the D.C. Federal Courts had previously voided “recess” appointments identical to his recess appointment. 

Take care, Do Good.

Marshall G. Martin

Comeau, Maldegen, Templeman & Indall, LLP

505-982-4611 (office)

505-228-8506 (cell)