The Banking Law Committee considers the major and developing issues affecting depository institutions and other financial services providers. The Committee’s work includes examination and presentations on regulatory, legislative, transactional and lending topics. Its members include in house and outside counsel having a variety of disciplines, as well as attorneys employed by regulatory agencies. The Committee meets at least three times in each year.
Committee Activity in Review
As published in the NY Business Law Journal
SUMMER 2018 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
The members of the Banking Law Committee include banking, regulatory, and corporate attorneys. We meet in connection with the Spring, Fall and Annual Meetings of the Business Law Section. At the Spring Meeting on May 24, held at the Harvard Club in Manhattan, we had presentations on Blockchain Technology and Banking and covered:
• Blockchain and ICO basics—what you need to know
• Regulatory paradigm
• Implications of blockchain and tokens on the banking industry
The presenters, Blank Rome partners Michelle Gitlitz and Scott Wortman, enthralled the members with an interactive and riveting discussion with ample time for questions. Our next meeting is planned for October in conjunction with the Business Law Section’s Fall meeting, where we will discuss cybersecurity and other relevant banking issues.
– Tanweer Ansari, Chair
winter 2017 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
The Banking Law Committee held a meeting on October 12, 2017 at the law offices of Norton Rose Fulbright US LLP, in conjunction with the Fall meeting of the Business Law Section. The Committee was addressed by Trevor Goering, CEO and co-founder of Gotham Security, who specifically presented on the Equifax data breach and all aspects of how it happened, its impact, and next steps. As October was National Cybersecurity Awareness month and the Equifax breach affected well over 140 million consumers, this was a very timely presentation. Mr. Goering, assisted by Ms. Blake Pearlstein, COO and cofounder of Gotham Security, was able to offer a detailed analysis of the various components of the breach. Those in attendance walked away with a chilling sense of how vulnerable all our data really is to the “Dark Web” and other nefarious criminal elements. A copy of the presentation was made available via Community to all members of the Banking Law Committee.
– Tanweer Ansari, Chair
summer 2017 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
A Banking Law Committee meeting was held at the Harvard Club on May 12, 2017, in conjunction with the Section’s Spring Meeting. We had a strong turnout of Committee Members. The format of the meeting was set up as an interactive panel discussion on various “hot button” regulatory and legal issues. Following the presentations, the Chair moderated a lively and open conversation among the members and the presenters. Materials were distributed to attendees in advance. The topics for discussion were as follows: President Trump’s immigration-related Executive Orders and their effect on the provision of banking services; the New York State Department of Financial Services’ Final Rule imposing cybersecurity requirements on all entities it licenses or oversees; and the US Court of Appeals ruling (which has been stayed pending rehearing en banc ) holding the structure of the Consumer Financial Protection Bureau unconstitutional, and its potential implications for the Bureau’s actions to date. There was a spirited discussion on all topics, but in particular the Immigration Order issue. Additionally, there was ancillary discussion about the potential for regulatory reform under the Trump Administration. The Committee will meet again during the Section’s Fall Meeting.
– Tanweer Ansari, Chair
winter 2016 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
A meeting of the Banking Law Committee was held at Gallet, Dreyer & Berkey LLP in New York, New York on November 10, 2016. This was our ﬁrst formal meeting since May 2016 and we had a good turnout of Commit-tee Members both in person and via teleconference. The format of the meeting was an interactive roundtable discussion on various hot button regulatory and legal issues. Several committee members were assigned to present on the topics and then lead the conversation with the group. Materials were distributed in advance to attendees. The topics for discussion were as follows: NYS DFS Cyber-security Rules/Privacy Shield as it affects New York Businesses using EU Data; NYS DFS AML Rules; Zombie Housing Law; Consumer Foreclosure Bill of Rights; the Beneﬁcial Ownership Rule (FINCEN); the CFPB Structure Ruling (PHH Case); and a spirited discussion of potential regulatory consequences of the presidential election. The members were able to reinforce the scope and impacts of the matters discussed and ultimately plan action items for the future. The Committee will meet again during the NYSBA Annual Meeting in January 2017.
– Tanweer Ansari, Chair
SUMMER 2016 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
A meeting of the Banking Law Committee was held during the NYSBA Annual Meeting in January; our theme was “Hot Topics for January 2016.” We were very fortunate to have Joy Feigenbaum from the New York State Department of Financial Services and Alan Lawitz from the Ofﬁce of Children & Family Services discussing elder ﬁnancial abuse and the state’s initiative to provide training sessions for ﬁnancial professionals on effectively recognizing, preventing, and reporting elder ﬁnancial abuse. Our panel also included Scott Wortman, who spoke about the Telephone Consumer Protection Act, recent FCC rulings regarding robo-calling, and relevant litigation. As those who attended will attest, it was a very lively discussion, especially with Joy and Alan, but they told me they very much enjoyed the give-and-take! Scott’s presentation was also well-received, and very informative—I now will monitor my cell robo-calls much more intensively.
A Banking Law Committee meeting was held on May 13, 2016, during the NYSBA Business Law Section spring meetings in New York, New York. The topic was “Regulatory Roundup 2016” and featured speakers from the legal divisions of the FDIC’s New York Ofﬁce, the Ofﬁce of the Comptroller of the Currency’s (OCC’s) New York Ofﬁce and the Federal Reserve Bank of New York, along with the General Counsel and COO of the New York Bankers Association. The panelists discussed issues of importance to their agencies and the New York Bankers Association.
The audience was very attentive to the presentations and posed thoughtful questions. At the meeting, it was announced that the new chair of the committee beginning June 1 will be Tanweer Ansari, succeeding Kathleen Scott. The next Banking Law Committee meeting will be sched-uled sometime this fall.
– Kathleen Scott, Chair
WINTER 2015 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
The Committee on Banking Law held a meeting on October 2, 2015, during the NYSBA Business Law Section Fall Meeting in Tarrytown, New York. The topic was “AML Compliance—Stories from the Front Lines,” and featured speakers from the FDIC’s New York Office, the UN Federal Credit Union, NBT Bank and First National Bank of Long Island. The bank panelists discussed their experiences as compliance officers at NY banking institutions and the FDIC speaker spoke about current AML topics. A lively discussion ensued between the panelists and the audience. The next Banking Law Committee meeting is scheduled for January 27, 2016, during the NYSBA Annual Meeting.
– Kathleen A. Scott, Chair
SUMMER 2015 NY BUSINESS LAW JOURNALBANKING LAW COMMITTEE
A meeting of the Banking Law Committee was held during NYSBA’s Annual Meeting week on January 28, 2015. The theme for the meeting was cybersecurity, with a panel consisting of Jay Hack, partner at Gallet, Dreyer & Berkey LLP; Sabra Baum, Vice President and Senior Counsel at M&T Bank; Mark Clancy, Managing Director for Technology Risk Management at The Depository Trust & Clearing Corporation; Sean Reilly, Senior Vice President and Associate General Counsel at The Clearing House Payments LLC; and myself. Topics covered included federal bank regulations and guidance relating to data security; NY State data breach laws applicable to all New York businesses; current schemes on cyberattacks and what banks can do to protect their systems; federal resources available to banks regarding cybersecurity, and how one bank is handling the almost-constant attacks on its computer systems. There was a lively discussion among the panelists and the audience and the speakers were kind enough to stay around afterwards to speak with members who had additional questions.
The spring meeting of the Banking Law Committee was held on May 15, 2015, in New York City. The theme was legislative and regulatory updates and a panel moderated by Kathleen Scott, Banking Law Committee chair, and consisting of Ashby Hilsman, Regional Counsel for the FDIC, James Porreca (Assistant District Counsel, OCC— Northeastern District), and Roberta Kotkin, General Counsel and COO, New York Bankers Association, provided updates on various legislative and regulatory initiatives. As always, there was a lively discussion among the panel and the committee members.
The next committee meeting will take place during the Business Law Section’s Fall Meeting in October
– Kathleen A. Scott, Chair
WINTER 2014 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
A meeting of the Banking Law Committee was held during the Business Law Section Fall Meeting, on September 11, 2014. Committee member Sabra Baum discussed some of the pressing regulatory matters she has followed, highlighting cybersecurity, virtual currency (bitcoin), payday lenders, and proposed Bank Secrecy Act regulations that would require customer due diligence to be performed on beneficial owners of legal entity customers, as well as on the customers themselves. The theme for the panel discussion was “An Inside Look at the Regulators” with Sara Kelsey, former General Counsel at the FDIC and former Deputy Superintendent and Counsel at the former New York State Banking Department (predecessor of the current Department of Financial Services), and Barbara Kent, former Acting Superintendent of Banks and former Director of Consumer Affairs and Financial Products at the New York State Banking Department. They each provided their views on various regulatory and enforcement issues using the backdrop of recent events in the banking industry such as the mortgage crisis. A lively discussion among the attendees and the speakers ranged over a host of issues about regulations and regulators. The discussion lasted far beyond the time allotted, and many attendees wished it could have gone on far longer. So Ms. Kelsey and Ms. Kent may be appearing again at another committee meeting in the foreseeable future.
The next Banking Law Committee meeting was scheduled to be held during the Annual Meeting of the New York State Bar Association on January 28, 2015. The agenda has not yet been decided, but the members of the committee will be contacted with information once it is available.
— Kathleen A. Scott, Chair
SUMMER 2014 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
A meeting of the Banking Law Committee was held during Annual Meeting week on January 29, 2014. The theme for the meeting was community banking issues, and senior officers from the New York offices of the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency and from the Federal Reserve Bank of New York discussed several areas of particular concern to community banks, including capital requirements, banking trends and the Volcker Rule applicability to community banks. The members were not shy about asking questions, and even after the formal part of the meeting was over, the speakers were kind enough to stay around and speak with members who had additional questions.
A meeting also was held in conjunction with the Section’s May meeting in New York City, featuring a panel discussion by key regulators and industry representatives before a packed house. The speakers were Jonathan Rushdoony, Regional Counsel of the Office of the Comptroller of the Currency, which regulates national banks (OCC); Ashby Hilsman, Regional Counsel of the FDIC; Greg Rozansky, an attorney with the New York Clearing House Association; and Roberta Kotkin, General Counsel of the New York Bankers Association. Key topics included cybersecurity; the OCC’s “heightened expectations” program, whereby large banks will be expected to enhance their risk management framework, including the adoption of the “three lines of defense” model (front line management, compliance, and internal audit) as well as more vigorous Board oversight; and more pro-consumer initiatives at the State and City level. Our next meeting is scheduled for September at the Section’s annual Fall Meeting, to be held this year at the Equinox in Manchester, Vermont.
Our next meeting is scheduled for September at the Section’s annual Fall Meeting, to be held this year at the Equinox in Manchester, Vermont.
— Kathleen A. Scott, Chair
Winter 2013 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
The chairmanship of the Banking Law Committee passed to me June 1, and I have big shoes to fill—David Glass has been a great chair of the committee, and fortunately he remains a member of the committee and has been of great assistance helping me learn the ropes.
At the October 3-5, 2013, Business Law Section Fall Meeting held at the Cranwell Resort in Lenox, Massachusetts, a meeting of the members of the Banking Law Committee (and anyone else who wished to attend) was held on Friday, October 4. The title of the program was “Current Ethical Issues for Banking Law Practitioners,” and we had as our distinguished guests Robert Mundheim and Robert Evans III, both of Shearman & Sterling LLP and both experts on ethics issues. The panel and attendees discussed several interesting hypotheticals, each of which raised questions that many of the attendees had seen come up in their own practices. This meeting also provided the opportunity to obtain those all-important Ethics CLE credits that all New York lawyers need. We hope to have Messrs. Mundheim and Evans present again at a future meeting..
The next formal meeting of the Banking Law Committee will be held during the NYSBA Annual Meeting in January 2014. Following up on comments made at the May meeting, when a representative of the Federal Reserve Bank of New York spoke about the FRB’s supervisory concerns regarding foreign and large domestic financial institutions that it oversees, I am working at putting together a program at the January meeting that focuses on supervisory issues for community banks, with a panel of state and federal banking regulators to discuss those issues.
Suggestions have been made about having additional meetings during the year that focus on current issues, and I am pursuing that suggestion and will be surveying the committee members to determine the format and frequency of such meetings, which we may be able to do via webcast.
— Kathleen A. Scott, Chair
Summer 2013 NY BUSINESS LAW JOURNAL BANKING LAW COMMITTEE
With the never-ending barrage of new regulations, especially under Dodd-Frank, it has been a busy year for the Banking Law Committee. In 2012 we liaised with the Association of the Bar of the City of New York regarding that Association’s efforts to (finally) bring New York, the presumptive leader in commercial law, into line with the other 49 states by adopting an omnibus package of amendments to the Uniform Commercial Code, many of which have been in place elsewhere for 20 years or more. These would include key amendments to Articles 3 and 4 of the UCC, which govern commercial paper and bank deposits and collections. A major sticking point for the New York legislature in the 1990s was the concept of check truncation, whereby banks are no longer required to return the paper checks to their customers, at best a costly and labor-intensive process. The concern: how can grandma prove that she paid the rent if she doesn’t get her cancelled check back? That concern was effectively mooted by federal law, the Check 21 Act, in 2003, which allowed all banking institutions to effect truncation by providing a substitute check where required. The Committee members expressed support for the omnibus package and recommended to the Section Executive Committee that it do likewise.
In January, in conjunction with the NYSBA Annual Meeting, the Committee held a well-attended meeting at which our guest speakers were Richard Charlton, Counsel and Vice President of the Federal Reserve Bank of New York, and Roberta Kotkin, General Counsel and Chief Operating Officer of the New York Bankers Association. Mr. Charlton discussed the Federal Reserve’s ongoing implementation of the Dodd-Frank Act through rule-making, highlighting the difficulties presented in adapting the Act’s provisions to the many different types of banking institutions, ranging from small community banks to large foreign banks with U.S. operations. With respect to the latter, Mr. Charlton focused on the Federal Reserve’s proposal to implement Dodd-Frank’s mandate for heightened prudential standards by, among other things, requiring foreign banking organizations to establish wellcapitalized intermediate holding companies in the U.S. to hold their U.S. subsidiaries. Ms. Kotkin reviewed the NYBA’s position on signify cant federal and state legislation and regulations affecting banks, and discussed the efforts of NYBA’s member banks to assist in recovery from Superstorm Sandy—for example, by providing a means to expedite payment of insurance proceeds to homeowners where the bank’s endorsement of the check is required because it holds the lien on the home.
Our May meeting featured Jeffrey Ingber, senior vice president in the Financial Institutions Group of the Federal Reserve Bank of New York. Mr. Ingber discussed the Fed’s supervisory concerns regarding the foreign and large domestic institutions it oversees, noting that it was attempting to be more of a prudential regulator, rather than seeking to play “gotcha” in the bank examinations process. There was a lively and interactive discussion. Mr. Ingber pledged to line up a Fed colleague whose focus is more on community banks to speak at our next meeting. With regret, I relinquished the Chair’s gavel as my second three-year term came to an end. The good news is that the Committee leadership is in good hands, as I will be succeeded by Kathleen Scott of Arnold & Porter, an experienced and knowledgeable banking lawyer.
— David L. Glass, Chair
Winter 2012 NY Business Law Journal Banking Law Committee
At the Section’s Spring Meeting in New York City, the Banking Law Committee held a well-attended meeting, featuring Jonathan Rushdoony, regional counsel of the Office of the Comptroller of the Currency (“OCC”) and his colleague, James Porreca, who was formerly counsel to the Office of Thrift Supervision (“OTS”). The OTS was abolished under the Dodd-Frank reform law and its functions merged into other bank regulatory agencies, paralleling their existing responsibilities for commercial banks. Thus, the OCC, which charters and regulates national banks, took on responsibility for federally chartered thrift institutions; the FDIC, which supervises state banks, for state-chartered thrifts; and the Federal Reserve, which supervises bank holding companies, for savings and loan holding companies. Messrs. Rushdoony and Porreca discussed the progress made in transitioning the supervisory authority for federal thrift institutions to the OCC. The meeting also featured a presentation by Mark Zingale, Esq., Senior Vice President and Deputy General Counsel to The Clearing House. Mr. Zingale described the functions of The Clearing House, which represents its twenty largest bank members, and discussed the outstanding exposure draft on corporate governance practices for banking organizations. Attendees received two CLE credits.
At the Section’s annual Fall Meeting at Cornell University in Ithaca, the Committee assisted in putting together a panel discussion on the role of the Consumer Financial Protection Bureau (“CFPB”) created by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act to establish uniform rules for an array of consumer fi nancial products, such as credit cards and mortgage loans, without regard to the type of institution that issues them. Cornell Law Professor Charles Whitehead, formerly an international attorney with Citibank and other financial institutions, offered a probing and insightful analysis of how consumer financial product regulation was likely to evolve under the CFPB. Section Vice Chair Jay Hack discussed the new agency from the perspective of community banks. Of particular interest was the discussion of the CFPB’s first enforcement action, against Capital One Bank, for alleged deceptive practices in marketing add-on products, such as credit insurance and credit monitoring, in conjunction with marketing its credit cards to consumers. The Bank was required to pay $140 million in restitution to customers, and an additional $60 million in fines to the CFPB and the Bank’s primary regulator, the Office of the Comptroller of the Currency.
The Committee was also addressed by Janet Nadile, Esq., of Cravath Swaine & Moore, who is coordinating the efforts of the New York City Bar Association to introduce and enact an Omnibus UCC reform bill in the New York State Legislature. Ms. Nadile explained that New York State is the only state that has failed to enact the reforms, which date back to the early 1990s. One of the principal objections to the proposal in the State legislature had related to check truncation (i.e., banks not returning the physical checks drawn on customers’ accounts); this concern was effectively mooted in the early 2000s with the enactment of the federal Check 21 law. The City Bar is seeking the NYSBA’s support for the legislation. At this writing, the proposal is being vetted by the NYSBA’s Executive Committee (see the report of the Legislative Affairs Committee, below).
— David L. Glass, Chair
Summer 2012 NY Business Law Journal Banking Law Committee
The Banking Law Committee held a meeting as part of the New York State Bar Association’s Annual Meeting in New York City in January. The Committee heard presentations from Michael V. Campbell, Counsel and Assistant Vice-President at the Federal Reserve Bank of New York (“FRBNY”), and Roberta Kotkin, General Counsel, Chief Operating Officer, and Corporate Secretary of the New York Bankers Association (“NYBA”).
Mr. Campbell, who has served a pivotal role in the start-up of the Consumer Financial Protection Board within the Federal Reserve System, as mandated by 2010’s Dodd-Frank reform law, compared Pennsylvania’s Homeowner’s Emergency Mortgage Assistance Program (“HEMAP”), begun in 1983 in response to steel industry layoffs of that decade, with the federal government’s home loan extension program. He explained that the FRBNY would be approaching the Banking Law Committee for its support to enact a similar legislative proposal for New York that would provide a bridge loan in response to specific types of financial hardship such as a temporary loss of income, where there is a reasonable expectation that the person will shortly be able to resume making mortgage payments, including repaying the State’s bridge loan.
Ms. Kotkin described the continuing implementation of the merger of the New York State Banking Department and the New York Insurance Department into the Department of Financial Services. She highlighted the authorizing legislation’s emphasis on improving the state banking charter, commitments to increase resources, and the specialization of consumer protection in other agencies.
She also described the NYBA’s efforts with respect to various pieces of legislation proposed to broaden the definition of financial fraud, to reduce the escheat period from five to three years, to permit the electronic recording of real estate instruments, and to impose greater burdens on banks that foreclose properties.
At the Section’s Spring Meeting the Banking Law Committee held a well-attended meeting, featuring Jonathan Rushdoony, regional counsel of the Office of the Comptroller of the Currency (“OCC”), and his colleague, James Porreca, who was formerly counsel to the Office of Thrift Supervision (“OTS”), which was abolished under the Dodd-Frank reform law with its functions merged into other bank regulatory agencies. Messrs. Rushdoony and Porreca discussed the progress made in transitioning the supervisory authority for federal thrift institutions to the OCC. The meeting also featured a presentation by Mark Zingale, Esq., Senior Vice President and Deputy General Counsel to The Clearing House. Mr. Zingale described the functions of The Clearing House, which represents its 20 large bank members, and discussed the outstanding exposure draft on corporate governance practices for banking organizations. Attendees received two CLE credits.
— David L. Glass, Chair
Winter 2011 NY Business Law Journal Banking Law Committee
In September the Banking Law Committee held a meeting at the Business Law Section’s Fall Meeting in Cooperstown, which featured an extensive discussion with the New York State Banking Department’s two most senior counsel, Marj Gross, Esq., general counsel, and Rosanne Notaro, Esq., deputy general counsel, regarding issues related to that department’s consolidation with the New York Insurance Department to form the New York State Department of Financial Services effective October 3, 2011. As part of his budget program for the current year, Governor Cuomo proposed, and the Legislature enacted, a sweeping consolidation of the State agencies, which included the merger of the Banking and Insurance Departments. Ms. Gross and Ms. Notaro noted that the merger would not significantly affect banks and their counsel, as the staffs of the two agencies will remain largely intact in the near term. Randy Henrick, Esq., Associate General Counsel of DealerTrak, Inc., reported on changes—statutory and regulatory—to adverse action and credit score disclosures brought about by the Wall Street Reform and Consumer Protection (“Dodd-Frank”) Act which are being implemented by both the Federal Reserve Board and the Federal Trade Commission. The rules are complex, but generally relate to the disclosures required to be given to a consumer when a creditor takes an “adverse action” on a credit application—i.e., denying the application or offering credit on less favorable terms than those requested. The committee also heard from Clifford S. Weber, Esq., partner at Hinman, Howard & Kattell, LLP on the application of the Business Judgment Rule by New York courts to community bank business combinations. Mr. Weber reported that the business judgment rule has been upheld in a situation involving the merger of two banks in the state—i.e., the directors of the bank will not be personally liable in a cause of action by aggrieved shareholders, as long as they acted in good faith in approving the transaction. Mr. Weber’s article on this matter appears elsewhere in this issue.
At its Spring Meeting, the committee’s featured guest was Richard Coffman, Esq., general counsel of the Institute of International Bankers (“IIB”). Mr. Coffman discussed the IIB’s recent initiatives, in particular the issues raised by Dodd-Frank that affect foreign banks. He also reported on Koehler v. Bank of Bermuda , 12 N.Y.3d 533 (2009) in which New York’s Court of Appeals held that the Bank of Bermuda must turn over to the creditor stock certificates to satisfy a judgment granted by a Maryland court and the subsequent cases to which this decision has given rise. The concern of the banking community in the state is that New York will become a forum to sue banks to recover assets of judgment debtors held by banks at non-New York offices, and with respect to matters that have no relationship to New York. To date, however, the legislature has not been amenable to corrective legislation. Cases subsequent to Koehler appear to be limiting its applicability, however.
—David L. Glass, Chair
Summer 2011 NY Business Law Journal Banking Law Committee
The Banking Law Committee has continued to pursue an active agenda in 2011, broadened by the newly consummated merger with the former Consumer Finance Committee. At the Committee’s January meeting, held in conjunction with NYSBA’s Annual Meeting, the program included Mr. Randy Henrick, Associate General Counsel of DealerTrak, Inc., who reported on the final rules issued jointly by the Federal Reserve Board and the Federal Trade Commission to implement, effective January 1, 2011, the risk-based pricing provisions of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA). The purpose of the rule is to require notice to consumers when they are offered or provided credit on terms that are materially less favorable than those available to a substantial proportion of consumers from that creditor, based in whole or in part on a credit report obtained for that consumer. The agencies issued the rules to clarify that the risk-based pricing notice requirements apply only in connection with credit that is primarily for personal, household, or family purposes—not credit extended for business purposes. The final rules provide two alternative methods for determining which consumers must receive risk-based pricing notices for those creditors that prefer not to compare directly the material terms offered to their consumers:
1) the credit score proxy method. A credit score is a numerical representation of a consumer’s credit risk based on information in the consumer’s credit file. The final rules permit a creditor that uses credit scores to set the material terms of credit to determine a cutoff score, representing the point at which approximately 40 percent of its consumers have higher credit scores and 60 percent of its consumers have lower credit scores, and provide a risk-based pricing notice to each consumer who has a credit score lower than the cutoff score. When credit has been granted, extended, or provided on the most favorable material terms to more than 40 percent of consumers, the creditor may set its cutoff score at a point at which the approximate percentage of consumers who historically have been granted, extended, or provided credit on material terms other than the most favorable terms would receive risk-based pricing notices. The cutoff score must be updated once every two years.
2) the tiered pricing method. Under this method, a creditor that sets the material terms of credit by assigning each consumer to one of a discrete number of pricing tiers, based in whole or in part on a consumer report, may use this method and provide a risk-based pricing notice to each consumer who is not assigned to the top pricing tier or tiers.
The final rules also include certain exceptions, including one for creditors that provide a consumer with a disclosure of the consumer’s credit score in conjunction with additional information that provides context for the credit score disclosure.
Mr. Henrick also reviewed the changes to FTC “Red Flags Rules” that require that each “financial institution” or “creditor” that offers or maintains one or more “covered accounts” to develop and implement a written Identity Theft Prevention Program that is designed to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account. The changes enabled the FTC to begin full-fl edged enforcement of the rules on January 1, 2011.
With echoes of its previous ill-considered treatment of lawyers as “financial institutions” required to send consumer privacy notices to their clients—a position defeated in court in a lawsuit brought by the NYSBA—the FTC has been seeking to apply the Red Flags Rule to lawyers as well. The Congress has overridden this effort in the Red Flag Program Clarifi cation Act (“RFPCA”), which narrows the term “creditor” to one who regularly and in the ordinary course of business:
- obtains or uses consumer reports in connection with credit transactions;
- furnishes information to a consumer reporting agency (CRA) in connection with a credit transaction; or
- advances funds to or on behalf of a person based on that person’s obligation to repay the funds or repayable from specific property pledged by or on behalf of the person.
The third category does not include a creditor that advances funds on behalf of a person that are incidental to a service provided by the creditor to the person. The exclusion for an entity that “advances funds on behalf of a person that are incidental to a service provided by the creditor to the person” is meant to exempt professional service providers such as lawyers, doctors, and dentists. At the same time, the RFPCA also allows the FTC and the banking agencies to include, by regulation, any other entity that is a “creditor” under the Equal Credit Opportunity Act that the FTC determines to offer or maintain accounts that are subject to a reasonably foreseeable risk of identity theft. This creates a potential tension between provisions in the RFPCA, as the FTC, by regulation, could arguably include entities that would otherwise be excluded by the RFPCA. Because this would have to be done through the rulemaking process, there would presumably be at least one public comment period during which the public could express support for, or object to, the coverage of any entity as a creditor.
The Chair then led a discussion of the legal impediments to investing in a bank or thrift institution by a non-banking investor (e.g., a private equity or sovereign wealth fund) and the Federal Reserve Board’s and FDIC’s efforts to facilitate such investments, based upon his article “So You Think You Want to Buy a Bank?” (which appeared in the Winter 2010 issue of the NY Business Law Journal ). Although the number of problem banks on the FDIC’s “watch list” has reached the highest level in more than 20 years, the results of the FRB’s and FDIC’s efforts to encourage non-bank investments in banks have been less than they might have been because of the thicket of regulation that surrounds any entity that would presume to own or invest in a bank and the uncertain legislative climate. While private equity firms seek a controlling position in undervalued companies, then “fi x them, grow them, and sell them,” usually in a period of three to five years, bank regulatory laws place severe restrictions on entities that control banks that may make this difficult or impossible to achieve.
During the Spring, at the request of NYSBA President Stephen Younger, the Committee actively debated whether the NYSBA should take a position regarding Governor Cuomo’s proposal, as part of his budget bill, to combine the State Banking and Insurance Departments and the Consumer Protection Board. The Committee members expressed some concerns about the breadth and scope of the new Department’s authority, particularly with respect to the expansive definitions of financial fraud and financial products and services. However, subsequent amendments alleviated those concerns, by eliminating from the definition of financial fraud, among other things, Martin Act (securities law) violations and criminal activity. The definition of financial products has also been narrowed to appropriately encompass only the banking law and insurance law, rather than an array of undefined “other laws.” Further amendment assured that the safety and soundness of financial institutions would be a clearly articulated policy goal of the Department, along with consumer protection, and that assessments on insurance companies and financial institutions would be structured to ensure that no insurance company expenses are assessed against banks, and vice versa.
—David L. Glass, Chair