In a major blow to the bank regulators’ enforcement powers, the Fifth Circuit Court of Appeals has stayed an FDIC order of removal, finding a strong likelihood that the FDIC’s use of administrative law judges (ALJs) violates the Constitution. The case is Burgess v. FDIC and arises from the FDIC’s allegation that Cornelius Campbell Burgess, a director and former officer of Herring Bank, violated bank laws and regulations by charging personal expenses to the Bank. The FDIC sought a civil money penalty and order of removal and prohibition against Burgess. An FDIC ALJ recommended granting the civil money penalty and the order of removal (a decision I wrote about here), and the FDIC Board accepted the recommendation. Burgess appealed the FDIC’s decision to the Fifth Circuit and asked the court to stay the implementation of the order of removal until deciding the merits of the case. On September 7, the Fifth Circuit granted Burgess’s motion to stay.
The Dodd-Frank Act vested the CFPB with extremely broad authority, particularly the power to regulate unfair, deceptive, or abusive acts or practices (UDAAP). The CFPB has wielded this power broadly and arguably strayed into areas beyond what Congress intended in passing Dodd-Frank. Although courts have allowed the CFPB broad discretion, a recent decision from the Court of Appeals for the DC Circuit suggests that the CFPB’s authority is not limitless. In CFPB v. Accrediting Council for Independent Colleges and Schools (ACICS), the DC court rejected the CFPB’s civil investigative demand (CID) for information relating to the accreditation of for-profit colleges, concluding that the CFPB failed to comply with statutory requirements in issuing the CID.
Last month, the Department of Justice (DOJ) filed a civil rights lawsuit accusing KleinBank, a Minnesota-based community bank, of violating fair lending laws by engaging in the practice of “redlining” by denying mortgage loans to predominantly minority neighborhoods. The DOJ’s complaint alleges that KleinBank “engaged in a pattern or practice of unlawful redlining by structuring its residential mortgage lending business so as to avoid serving the credit needs of neighborhoods where a majority of residents are individuals of racial and ethnic minorities, in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).”
On January 11, 2017, an administrative law judge (ALJ) issued a 176-page recommended decision finding merit in the FDIC’s charges that a Texas banker engaged in unsafe and unsound banking practices and breached his fiduciary duties. The case arose out of the FDIC’s allegation that the Respondent ignored Bank policy and misused Bank resources by paying personal expenses from Bank funds, failing to keep adequate records of his expenses, and concealing information relating to his misuse of Bank funds. The ALJ sustained the FDIC’s charges and recommended that the Respondent be banned from banking activities and fined $200,000. The recommended decision contains important information for banks regarding proper business expense policies and the scope of unsafe and unsound practices.
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.
The D.C. Court of Appeals ruled today that the CFPB’s unchecked leadership by a single director is unconstitutional. The long-awaited decision in the case of PHH Corp. v. CFPB involved a $109 million fine for alleged violations of the Real Estate Settlement Procedures Act (RESPA). In addition to the constitutionality ruling, the court also struck down the fine assessed by CFPB Director Richard Cordray, ruling that he was not permitted to ignore the statute of limitations or retroactively apply a reinterpretation of policy.
Earlier this month, Wells Fargo entered into a consent order with the CFPB and OCC after regulators discovered that bank employees had opened more than 1.5 million fake deposit and credit card accounts. The scandal involved more than 5,000 employees who opened the fake accounts in order to pad sales numbers and meet quotas the bank used as part of an incentive compensation plan. In the aftermath of the scandal, Congress and the regulators have begun to scrutinize what went wrong and what steps can be taken to prevent these problems going forward. Although big banks are the focus of this scrutiny, it is important for community banks to pay attention to possible regulatory changes that may impact banks of all sizes.