Financial Services Report, Summer 2012

EDITOR'S NOTE

New York Mayor Michael Bloomberg wants to ban sodas sold in containers of more than 16 ounces. Thank you for asking our opinion. Or, as the young folks say, "no problem."

It's a brilliant idea, but doesn't go far enough. Why just soda? If we were serious about obesity, we wouldn't let Banana Republic sell pants with waists larger than 38. We could solve the problem of rowdy frat boys by making them quaff beer from vessels no bigger than a shot glass. As for those obnoxious oldsters in their earsplitting Harley Hogs trying to channel "Easy Rider"? No more motorcycles with engines larger than a hamster wheel. Wait, we're just getting warmed up. Why shouldn't government wear a corset too? Imagine if every law passed by Congress had to fit inside a Starbuck's "venti" cup. For federal regulators, we might downsize even more, say, to a Starbuck's "tall" . . . with room for milk (low fat or soy, natch).

Alas, stuff happened this quarter. Stuff does that. There is news (reported in these pages) about SIFIs (see "Beltway Report") and the Bureau's decision to go after prepaid cards and police everything for "disparate impact." (See "Bureau Report.") The Volcker Rule starts July 21, yet there are no final regulations. (See "Operations Report.") In arbitration, it was a year since the SCOTUS decided Concepcion, for which we have a birthday celebration plus a report on what has happened since. (See "Arbitration Report.") And speaking of SCOTUS, the Freeman v. Quicken Loan decision was a very big deal. (See "Mortgage Report.") Finally, privacy continues to simmer. (See "Privacy Report.") More action this quarter than a Secret Service party in Cartagena.

Until next time, steer clear of any of John Edwards's celebrity endorsements, avoid plaids with prints, and go pull out those misplaced Greek drachmas in the back of the sock drawer.

William Stern, Editor-in-chief

BELTWAY REPORT

Sticker Shock

By Rebekah Kaufman

You know those scrape-and-sue shakedowns where the guy scratches off a sticker from an ATM machine while his lawyer stands by with a camera and a complaint at the ready? Those guys may have to get into the unemployment line. Congress is poised to put an end to class action lawsuits under the Electronic Fund Transfer Act (EFTA) over ATMs that lack fee sticker notices. These lawsuits have long been a favorite of class action lawyers who troll for ATMs whose fee stickers may have been, um, misplaced. The EFTA currently requires dual notice of ATM fees (an on-screen notice and a fee sticker notice) and permits recovery of statutory damages up to $500,000 for failure to comply. House and Senate bills would amend the EFTA to eliminate the fee sticker requirement, putting an end to these garbage lawsuits. If the legislation is enacted, ATM owners would only be required to provide notice of fees on screen at a point when consumers can still opt to cancel their transactions.

Are You My Regulator?

By Obrea Poindexter

The Federal Reserve Board approved a final rule outlining the procedures for securities holding companies, nonbank companies owning at least one registered broker or dealer (SHC), to elect to be supervised by the Federal Reserve. This rule implements the Dodd-Frank provision authorizing SHCs to seek Federal Reserve supervision to satisfy foreign regulations requiring that the firm be subject to comprehensive, consolidated U.S. supervision to operate in the country. Upon effective registration, an SHC is supervised and regulated as if it were a bank holding company, but the Bank Holding Company Act restrictions on nonbanking activities do not apply.

Liquidation Logistics

By Dwight Smith and Charles Horn

FDIC Acting Chairman Martin Gruenberg outlined his strategy for unwinding distressed systemically important financial institutions (SIFIs) through the FDIC's orderly resolution authority. Under this strategy, the FDIC will place the toptier holding company into receivership and attempt to maintain the operational integrity of subsidiary organizations. The process would have particular significance for the unsecured creditors of the holding company, whose claims would be paid out as stock, effectively converting them from creditors to shareholders. Want to know more? Read our Client Alert at: http://www.mofo.com/files/Uploads/Images/120516-Orderly-Liquidation-Authority-FDIC-Announces-Its-Strategy.pdf.

Are You a SIFI?

By Dwight Smith and Charles Horn

Is there intelligent life in the universe? Wait, that's SETI (Search for Extraterrestrial Intelligence) not SIFI. Did we get our leaders mixed? You decide.

The Financial Stability Oversight Council issued a final rule and guidance for determining which nonbank firms pose a threat to U.S. financial stability and will be designated as SIFIs subject to FRB supervision. The three-stage designation process will analyze companies with at least $50 billion in total consolidated assets that meet one of five thresholds relating to credit and liquidity risk. The FSOC may consider other large nonbank financial firms as well, even if they do not meet these thresholds. Two-thirds of the FSOC must vote to designate a company as systemically important, and the Treasury Secretary must approve. The FSOC plans to designate the first nonbank financial firms by the end of the year.

It's Finals Period

By Dwight Smith and Charles Horn

The FRB, FDIC, and OCC released final guidance on stress testing for banking organizations with more than $10 billion in assets. The guidance builds on the instructions that the Federal Reserve had used for stress testing by the 19 largest banking organizations in 2009 and 2011, but it will reach approximately 60 firms in addition to the original 19. The guidance emphasizes the need for intensive, enterprise-wide testing, covering a wide range of possible adverse scenarios, including different methodologies, and assessing both capital and liquidity. Still to come are rules implementing the stress testing requirements of Dodd-Frank.

Community banks (institutions with less than $10 billion in assets) did not escape. The same agencies issued a Joint Statement clarifying that these organizations are not subject to the requirements for larger banking organizations, but emphasizing that all banking firms should have the capacity to analyze the impact of adverse outcomes on their financial condition.

BUREAU REPORT

Prepaid Cards in the Crosshairs

By Rick Fischer and Obrea Poindexter

The CFPB has released an advance notice of proposed rulemaking (ANPR) to collect information about general-purpose reloadable prepaid cards (GPR cards), including bank-issued GPR cards. The CFPB is interested in learning more about the costs, benefits, and potential risks to consumers posed by these cards. The plan is for the CFPB to use the information gathered to determine whether to extend the consumer protections of Regulation E to GPR cards. The CFPB also launched a searchable online tool with answers to more than 80 questions about prepaid cards. For additional information on the ANPR, review our client alert: http://www.mofo.com/files/Uploads/Images/120529-CFPB-Prepaid-Cards.pdf.

My Vendor, My Responsibility

By Obrea Poindexter

The CFPB released a bulletin providing that financial institutions under its supervision may be held responsible for the actions of the companies with which they contract. The CFPB expects supervised financial institutions to have an effective process for managing the risks of service provider relationships, including taking steps to ensure that these business arrangements do not present unwarranted risks to consumers.

Discretion is the Better Part of Valor

By Obrea Poindexter

The CFPB is proposing to amend Regulation Z provisions that limit credit card fee amounts in response to a federal court victory for the issuers of high-fee credit cards. Although the CARD Act limited account-opening fees, the FRB issued a rule, later transferred to the CFPB, which also limited fees imposed before account opening. After a court struck down the rule as an unreasonable interpretation of the statute, the CFPB proposed to amend it in accordance with the court's ruling.

Smart Shopper Tool

By Andrew Smith

The CFPB has released the beta version of an online tool designed to help families make informed decisions on student loans. The tool allows users to input the names of three colleges, gathers data from the Department of Education about the annual cost and the average amount of financial aid for each school, and displays the difference between the cost and the aid as the amount of required borrowing for each year in school. We can probably count on similar price comparison tools for other financial products and services to be released by the CFPB in the coming...