Bank litigation and regulation in 2017

With major changes coming in Washington and important cases making their way through the court system, 2017 looks to be a busy year for bank litigation and regulation. This includes litigation and legislative challenges to the CFPB’s authority, enforcement actions involving allegations of unsafe and unsound banking practices, lawsuits over the validity of credit union regulations, and litigation surrounding the Wells Fargo fake account scandal.

1. Challenges to Dodd-Frank and the CFPB

One of the most significant regulatory developments of 2017 will be the future of Dodd-Frank and the CFPB. One such challenge comes from the ongoing PHH Corp. case, in which the Court of Appeals for the D.C. Circuit concluded that the CFPB’s single-director structure was unconstitutional. Based on this finding, the court altered the CFPB’s rules to permit the President to terminate the CFPB Director for any reason. The CFPB has asked the full D.C. Circuit to reconsider the ruling and, if unsuccessful, is likely to seek review from the Supreme Court. The outcome of this case has significant ramifications, with an incoming President who may want to replace Director Richard Cordray with a less aggressive director.

The CFPB and the Dodd-Frank Act more broadly face a potential legislative challenge from the new Republican Congress. Republicans have previously sought to repeal or scale back Dodd-Frank, including with last year’s proposed CHOICE Act. The CHOICE Act, which would provide a potential starting point for Dodd-Frank reforms now that Republicans control both houses of Congress and the White House, included many provisions that would seem to benefit community banks. These provisions included an option to maintain a simple leverage ratio of 10% in lieu of the Basel III capital requirements, repeal of the Durbin Amendment on debit interchange price controls, several relief provisions for smaller banks, and an overhaul of the CFPB.

2. Unsafe and Unsound Banking Practices

In September 2016, the Office of Financial Institution Adjudication heard a rare administrative trial involving FDIC allegations of unsafe and unsound banking practices against Cornelius Campbell Burgess, a director of Herring Bank in Amarillo, Texas. The FDIC’s Notice of Charges alleged that Burgess “engaged in unsafe or unsound practices and breached his fiduciary duty to the Bank by causing the Bank to pay his personal expenses, including the expenses of his girlfriend . . ., who was not a Bank employee, without full and truthful disclosure to, or informed approval from the Board” and “without adequate or truthful support for the business nature of the expenses.” The FDIC further contended that Burgess’s actions caused loss to the Bank and gain to himself, and “demonstrate a willful or continuing disregard for the safety or soundness of the Bank and personal dishonesty.” Relying on these claims, the FDIC sought an order of removal and prohibition and a civil money penalty.

A recommended decision from the administrative law judge is expected in early 2017, followed later in the year by a final decision from the FDIC Director. This would be the first enforcement decision from a bank regulator on unsafe and unsound practices since the Adams case, which I have written about here and here. The decision may provide some guidance on regulators’ interpretation of unsafe and unsound banking practices and may also provide an opportunity for review by a federal court.

3. Banks vs. Credit Unions Litigation

There are two ongoing lawsuits involving the validity of new regulations on credit union commercial lending and membership eligibility. In the first lawsuit, the Independent Community Bankers Association sued to block a rule that would expand a credit union’s ability to make commercial loans. In the second, the American Bankers Association sued to prevent the implementation of a rule expanding credit union membership. A federal judge heard a motion to dismiss the ICBA case on December 15, 2016 and expects to make a ruling in early 2017. The ABA case is in the preliminary stages but will likely also be challenged by an early motion to dismiss. Both cases could reshape the competition community banks face from credit unions.

4. Wells Fargo Litigation

In the aftermath of the Wells Fargo fake accounts scandal, numerous lawsuits have been filed by Wells Fargo customers, terminated employees, and shareholders. Most of the lawsuits are still in the preliminary stages of litigation. The outcome of these lawsuits could provide guidance to banks on how to shape their own employee incentive programs and how to manage the aftermath of adverse regulatory action.

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