Legal Blog

Lender Legal Update- The Impending Financial Choice Act 2.0

In May’s Lender Legal Update, I covered the impending Financial Choice Act 2.0 passed through committee and on its way to the house and senate—delving into how it would affect both depository and smaller, non-depository institutions. If passed, 2.0 will make substantial revisions to Dodd Frank, would replace the CFPD with a less autonomous CLEA, help depository banks offer more diversified portfolios—greatly impacting smaller institutions— and ostensibly help provide more enforcement continuity, helping circumvent unpredictability in our industry overall.

 

Elimination of the CFPD and More Agency Oversight

 

One major element of this legislation is the replacement of the CFPD with the CLEA (Consumer Law Enforcement Agency), which would have a director appointed by President Trump—giving way to contention in the house and senate over who is chosen. Regardless of who runs the agency, it’s going to have a lot less power and a lot more oversight, which is a major plus for banks.

 

There’s essentially going to be an Inspector General and the agency will be required to undergo economic oversight, meaning anytime the CLEA wants to try and pass something, the new legislation would have to be analyzed to determine if the legislation’s benefit outweighed its negative impact on the economy. This ultimately shirks the agency’s autonomy.

 

The Inspector General would also have the right to review appeals from examination findings.  As such, the agency would no longer be able to employ their unfettered “judge, jury, executioner” approach, and companies being examined would have the opportunity to appeal findings.  In addition, immediate appeal rights would be created for companies facing enforcement.

 

Currently a company has to undergo a lengthy and costly administrative process before getting to a court. Now a lender could bypass that and have the right to immediately petition to go to court, saving a lot of money and time.

 

Another advantageous aspect of this bill is the CLEA would now be required to have an advisory opinion process implemented, where lenders will be able to come in and pitch new technologies or products to enhance risk and competition, without the current limitations. The agency will have to provide answers in order to get pitches underway.

 

The Impact on Non-Depository Institutions

 

One major amendment being proposed in this legislation is that it would amend the ‘ability to repay’ laws, providing additional flexibility for products offered by large depository institutions. The institution could basically treat that loan as a QM even if it’s otherwise a non-QM as long as the lender held the loan long enough for the ATR risk to effectively become moot. For instance, if you had a loan that was theoretically stated income, a depository institution could now hold the loan until sufficient payments were made negating any ATR risk. This would allow depositories to offer a whole array of diversification of products, putting non-depository lenders at a disadvantage. Even small depositories would be limited in the extent they could provide these products since they would not have sufficient capitalization to hold loans long enough to negate AATR risks. In either case, this proposal would put large depositories at a marked advantage over smaller depositories and non-depositories.

 

 

Look out non-depository or small community banks. If this gets passed, you won’t be able to offer what depository banks can.

 

More Continuity

 

Despite any negative blows to non-depositories, both small and large institutions alike can look forward to more consistency if 2.0 is passed. For instance, the CLEA would be cutting out the ability to impose enforcement actions on UDAP, which will be limited to other regulators like the FDIC etc. This new agency won’t be able to impose fines for supposed violations or unfair practices, further cutting the agency’s authority and eliminating more unpredictability and uncertainty.

 

One silver lining, with perhaps more of an overshadowing, for the non-depositories is the matter of transitional licensing, with the legislation providing loan officers the ability to go to non-depositories or non-federal insured institutions without having to acquire a new license. However, given the diversification that will be allotted to depositories, few are going to be migrating away from them.

 

Perhaps one of the most significant arms of this bill is the change to how the agency will be funded. As it stands congress has very little oversight on the CFPD, but the CLEA will be better regulated due to shifts in funds, greatly benefiting banks across the board.

 

Whether working with a non-depository or depository institution, the Financial Choice Act 2.0 foreshadows significant changes to how businesses will be run, and it’s urges you take a look at how it would effect you now rather than when it’s too late.

For more information, please contact Ari at akaren@offitkurman.com or 240.507.1740

 

ABOUT ARI KAREN

akaren@offitkurman.com | 240.507.1740

Ari Karen is an experienced litigator and speaker who has focused his practice in representing financial institutions in both government investigations and litigation before state and federal trial and appellate courts nationwide.

Mr. Karen’s practice is diverse, representing clients on matters concerning banking regulations, Dodd Frank financial reform laws, contractual disputes, employment and labor statutes, wage-hour class actions, employment discrimination and fair lending matters, whistleblower complaints and non-competition claims, among others.

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 135 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eleven offices serve individual and corporate clients in the Virginia, Washington, DC, Maryland, Delaware, Pennsylvania, New Jersey, and New York City. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

You can connect with Offit Kurman via our Blog, Facebook, Twitter, Google+, YouTube, and LinkedIn pages. You can also sign up to receive Law Matters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.

MARYLAND | PENNSYLVANIA | VIRGINIA| NEW JERSEY | NEW YORK | DELAWARE | WASHINGTON, DC