Financial Services Report - Quarterly News, Spring 2013

EDITOR'S NOTE

By William Stern, Editor-in-chief

This is a dignified law firm newsletter, not like the "Brand X" versions. You won't find pandering, attention-grabbing stories about Justin Bieber, Kim Kardashian, Ashton Kutcher, Prince William, or Charlie Sheen. Lady Gaga will not be mentioned. Sure, there are those who would resort to tricks to game the search engines, in order that their cartoonish scrawls clog the top of everyone's Google "hit list," but George Clooney is not someone we're going to talk about. Nothing here about Ben Affleck's Oscar or Oscar Pistorius's arraignment either. And forget about Adele's baby. Angelo. That's not to say that someone wouldn't sprinkle celebrity names throughout these pages (think "Where's Waldo" for bank lawyers), but that would simply ensure that you actually read these important articles because if you don't your institutions will fail. Consider this a public service. Kate Middleton's pregnancy? Not R Us! Try the other guys. You're welcome.

This quarter we had a lot of important stuff happen. A comet barely missed the planet, a bus-sized meteor exploded over Russia, and the President issued a cyber-security order. There were remittance transfer rules and then there weren't; lots of privacy, mortgage, and arbitration developments; and so much CFPB stuff that we almost had to ship by the pound.

Until next issue, don't litter, look both ways, and recycle this newsletter.

BELTWAY REPORT

Finally!

Despite numerous predictions of quick and easy passage, Congress finally passed and President Obama signed into law an amendment to the Federal Deposit Insurance Act (FDIA) specifying that submission of privileged information to the Consumer Financial Protection Bureau (CFPB) and any sharing of that information by the CFPB with other federal agencies does not waive the attorney-client privilege as to third parties. The legislation provides much-needed protection for entities under the CFPB's supervisory authority.

Tit for Tat

By Charles Horn

On February 12, 2013, the Federal Deposit Insurance Corporation (FDIC) proposed for public comment a rule that would exclude from federal deposit insurance coverage those deposits made at insured U.S. banks that are payable at a foreign branch of a U.S. bank. Dually payable deposits, which are payable at both domestic and overseas branches, would be subject to this rule, although they would be treated the same as purely domestic deposits in the event of a bank resolution. The FDIC's action responds to action taken by UK regulators last fall to prohibit UK branches of a non- EU bank from taking deposits if those deposits are not accorded depositor preference status under the laws of the bank's home country. Comments on the proposal are due by April 22, 2013. Read the details in our News Bulletin at http://www.mofo.com/files/Uploads/ Images/130221-FDIC-Insurance- Deposits.pdf.

Layer Up

By Obrea Poindexter

The Federal Reserve Board (FRB) has proposed rules to strengthen the oversight of U.S. operations of foreign banks, requiring foreign banks with a significant U.S. presence to create an intermediate holding company over their U.S. subsidiaries. The Board's proposal is intended to facilitate consistent and enhanced supervision and regulation of the U.S. operations of these foreign banks and resolution of failing U.S. operations of a foreign bank, if needed. Foreign banks also would be required to maintain stronger capital and liquidity positions in the U.S. to help increase the resiliency of their U.S. operations. The proposal implements provisions of the Dodd-Frank Act designed to address the risks associated with the increased complexity, interconnectedness, and concentration of the U.S. operations of foreign banks. Public comments will be accepted through March 31, 2013.

OPERATIONS REPORT

Check Yourself

By Obrea Poindexter

The FRB issued a supplemental policy statement on the internal audit function and its outsourcing, supplementing 2003 interagency guidance. The statement applies to supervised financial institutions with greater than $10 billion in total consolidated assets. It identifies ways to strengthen internal audit practices, including by analyzing the effectiveness of all critical risk management functions, adoption of appropriate policies and procedures and effective controls, and active involvement of the board of directors and senior management in setting and monitoring compliance with the institution's risk tolerance limits. The policy statement reminds institutions that the responsibility for maintaining an effective system of internal controls cannot be delegated to a third party, and addresses various issues relating to outsourcing of internal audit functions.

Some Reprieve

By Dwight Smith

On January 6, 2013, the Group of Governors and Heads of Supervision (GHOS), which oversees the Basel Committee on Banking Supervision (BCBS), approved a significantly revised version of the BCBS's liquidity coverage ratio (LCR). The LCR was designed to test a banking organization's ability to withstand a liquidity crisis over a 30- day period. The revised LCR modifies certain elements of the original LCR, published in December 2010 as part of the Basel III framework, and extends the deadline for full compliance with the LCR requirements. If all of these acronyms whet your appetite for more, read our News Bulletin at http://www.mofo.com/files/Uploads/Images/130110-Liquidity-Coverage-Ratio.pdf.

Size Adjustments

By Obrea Poindexter

The federal bank regulatory agencies announced the annual adjustment to the asset-size thresholds used to define small bank, small savings association, intermediate small bank, and intermediate small savings association under the Community Reinvestment Act (CRA) regulations. These thresholds impact applicable CRA examination procedures and reporting requirements. As of January 1, 2013, "small bank" or "small savings association" now means an institution that had assets of less than $1.186 billion as of December 31 of either of the prior two calendar years; and an "intermediate small bank" or "intermediate small savings association" is one with assets of at least $296 million and less than $1.186 billion as of December 31 of either of the prior two calendar years.

BUREAU REPORT

After several enforcement actions during the summer and early fall, the CFPB appears to have spent the past few months hitting the books and brushing up its understanding of several consumer financial services markets through requests for information, including those on products and credit cards offered to college students. Like college and university students, various divisions at the CFPB have found time for extracurricular activities, such as proposing new trial disclosure programs. There also has been a lot of time spent worrying about what President Obama and CFPB Director Richard Cordray have done during recess. Too busy with your own homework to keep up? Not to worry— we highlight all this, and more, below.

Who's in Charge?

By Andrew Smith

Lending credence to those who argue recess is the most important school subject, the D.C. Circuit Court of Appeals issued a unanimous decision on the President's appointment power calling into question Richard Cordray's original 2012 recess appointment. Noel Canning v. NLRB, __ F.3d __, 2013 WL 276024 (D.C. Cir. Jan. 25, 2013). The court ruled that National Labor Relations Board appointments President Obama made on January 4, 2012, were not made in accordance with the Recess Appointments Clause of the U.S. Constitution because they were not made during a recess that occurred between sessions of Congress. President Obama appointed Richard Cordray at the same time as he made the appointments invalidated by this decision. If it stands, the decision has the potential to undermine several of the CFPB's authorities and decisions, including several final rules that the CFPB has issued and supervisory actions that the CFPB has taken.

For more information, see our Client Alert at http://www.mofo.com/files/Uploads/Images/130129-CFPB-Setback.pdf .

Exemption at Your Own Risk

By Andrew Smith

On December 13, 2012, the CFPB proposed a new policy that, if implemented, would allow individual companies to apply to the CFPB for specific exemptions from federal disclosure laws to allow those companies to test the effectiveness of new disclosures. In proposing its policy, the CFPB exercised its authority pursuant to Section 1032(e) of the Dodd-Frank Act, which authorizes the CFPB to approve "trial disclosure programs." Participants would have to share the results of their disclosure testing with the CFPB and would have to self-identify any federal laws or regulations they believe they may have violated, essentially admitting fault. As a result, the program has the potential to expose those market participants who may already be using similar disclosure practices to litigation risk, especially if plaintiffs' attorneys begin using the CFPB's waivers as evidence of a violation of federal consumer financial law. Comments were due February 15, 2013.

How Has It Been for You?

By Rick Fischer

On December 19, 2012, the CFPB requested public comment regarding the impact of the Credit Card Accountability, Responsibility, and Disclosure Act (CARD) Act, as required by Section 502(a) of that Act. In the announcement, CFPB Director Cordray explained that "the Bureau is seeking to understand how the credit card market is working in practice and how the CARD Act changes have affected consumers...