Legal Seminar, Denver, CO

CSBS Legal Seminar Denver, Colorado July 18-20, 2018

Wednesday, July 18, 2018

7:30 AM

Breakfast

8:30 AM

Joint Deputy & Legal Seminars - Welcome Remarks Sebastien Monnet

Vice President, Learning & Development Conference of State Bank Supervisors

8:45 AM

CSBS Regulatory & Legislative Update Jim Cooper Senior Vice President, Policy Chuck Cross Senior Vice President, Consumer Protection & Non-Depository Supervision Margaret Liu Senior Vice President, Legislative & Deputy General Counsel

Michael L. Stevens (moderator) Senior Executive Vice President Conference of State Bank Supervisors

10:00 AM

Break

10:15 AM

Blockchain, Smart Contracts, and Ramifications Alanna Gombert Founding Member Digital Asset Trade Association

11:30 AM

Conclusion of the 2018 Deputy Seminar

11:30 AM

Lunch

1:00 PM

Docket Review Thomas Pinder Deputy General Counsel American Bankers Association

2:15 PM

Break

2:30 PM

Legal Aspects of DeNovo Banking Paul Allred Deputy Commissioner Utah Department of Financial Institutions

Shauna Shields Bank Bureau Chief Iowa Division of Banking

Mark Flanigan Senior Counsel Federal Deposit Insurance Corporation

3:30 PM

Break

3:45 PM

Marketplace Lenders & Preemption of State Interest Rate Limitations Ashley M. Simonsen Covington & Burling LLP Diane Standaert Director of State Policy, EVP Center for Responsible Lending

4:45 PM

Open Forum

5:00 PM

Adjourn

7:30 PM - 9:30 PM Dessert Reception

Thursday, July 19, 2018

7:30 AM

Breakfast

8:30 AM

Ethics and Professional Responsibility Frank Bucaro, CSP, CPAE Frank C. Bucaro & Associates

10:30 AM

Break

10:45 AM

Electronic Payment Systems: Law and Emerging Technologies Edward A. Morse Professor of Law McGrath North Mullin & Kratz Chair in Business Law Creighton University School of Law

12:00 PM

Lunch

1:15 PM

Preemption: Historical Perspectives and Current Issues Margaret Liu Senior Vice President, Legislative & Deputy General Counsel Michael Townsley Policy Counsel Conference of State Bank Supervisors

2:30 PM

Break

2:45 PM

NMLS Data Security and Privacy Todd Scharf Chief Information Security Officer Tarcy Thompson Staff Attorney & Chief Privacy Officer Conference of State Bank Supervisors

4:00 PM

Break

4:15 PM

Open Forum

4:30 PM

Adjourn

Friday, July 20, 2018

7:30 AM

Breakfast

8:30 AM

Marijuana Legalization & Financial Services Karmen Hanson, MA Program Director, Health Program National Conference of State Legislatures

9:30 AM

Break

9:45 AM

State-by-State Legislative Developments and Proposals Lucinda Fazio Chief of Regulatory Affairs, Consumer Services Washington Department of Financial Institutions Shane Foster Senior Litigation Counsel Arizona Office of the Attorney General Kristin Rice Counsel North Carolina Office of Commissioner of Banks Stacy L. Serrano Staff Attorney Connecticut Department of Banking Mary Pfaff (moderator)

Senior Director, Policy & Supervision Conference of State Bank Supervisors

11:00 AM

Facilitated Group Discussion on Other Issues of Interest Margaret Liu (facilitator) Senior Vice President, Legislative & Deputy General Counsel Conference of State Bank Supervisors

11:30 AM

Conclusion of the 2018 Legal Seminar

Legal Seminar Denver, Colorado July 18-20, 2018

Attendees Arizona Attorney General's Office Shane Foster

Shane.foster@azag.gov

602-542-8766

California Department of Business Oversight Julie Jacob

Julie.Jacob@dbo.ca.gov

916-322-6927 415-263-8541

Shavaugn Lewis

Shavaugn.Lewis@dbo.ca.gov

Connecticut Department of Banking Stacey Serrano

stacey.serrano@ct.gov

860-240-8143

Consumer Financial Protection Bureau Vanessa Careiro

vanessa.careiro@cfpb.gov

202-435-9394

Delaware Office of the State Bank Commissioner Frank Broujos

dawn.hollinger@state.de.us robert.glen@state.de.us

302-739-4235 302-739-4235

Robert Glen

Federal Deposit Insurance Corporation Edward Lanning

elanning@fdic.gov mtynan@fdic.gov

816-234-8045 312-382-6555

Monica Tynan

Federal Reserve Bank of Cleveland Carrie Moore

carrie.v.moore@clev.frb.org

216-579-2875

Georgia Department of Banking and Finance Elizabeth Harris

eharris@dbf.state.ga.us lkim@dbf.state.ga.us

770-986-1649 770-986-1648

Lilia Kim

Hawaii Division of Financial Institutions James Paige

james.c.paige@hawaii.gov lsasaki@dcca.hawaii.gov

808-586-1180 808-586-2820

Laura Sasaki

Idaho Attorney General's Office Joseph Jones

joseph.jones@finance.idaho.gov

208-332-8091

Idaho Department of Finance Mary Hughes

mary.hughes@finance.idaho.gov

208-332-8030

Illinois Division of Banking Louis Butler

louis.butler@illinois.gov john.crees@illinois.gov kara.ervin@illinois.gov daniel.kelber@illinois.gov robert.stearn@illinois.gov

312-814-6161 312-814-1694 312-793-7469 312-793-4921 312-793-1454

John Crees Kara Ervin

Daniel Kelber Robert Stearn

Indiana Department of Financial Institutions Nicole Buskill

nbuskill@dfi.in.gov Lmiller@dfi.in.gov

317-232-3959 317-232-3955

Lyndsay Miller

Iowa Division of Banking Zak Hingst

zak.hingst@idob.state.ia.us Shauna.Shields@idob.state.ia.us

515-281-4014 515-281-4014

Shauna Shields

Kansas Office of the State Bank Commissioner Melissa Wangermann

melissa.wangermann@osbckansas.org

785-296-2266

Louisiana Office of Financial Institutions Paul Melancon

pmelancon@ofi.la.gov srouprich@ofi.la.gov

225-925-4633 225-922-1028

Susan Rouprich

Maine Bureau of Financial Institutions David Laurendeau

David.G.Laurendeau@maine.gov

207-624-8574

Maryland Office of Financial Regulation Sandra Small

Sandra.Small@maryland.gov

410-230-6122

Mississippi Department of Banking & Consumer Finance Charles Plunkett

Charles.Plunkett@dbcf.ms.gov

601-321-6944

Montana Division of Banking and Financial Institutions Don Harris Don.Harris@mt.gov

406-841-2923 406-841-2920

Kelly O'Sullivan

kosullivan@mt.gov

North Carolina Office of Commissioner of Banks Katie Bosken

kbosken@nccob.gov aholmes@nccob.gov

919-733-3016 919-733-3016 919-733-1823

Ashley Holmes

Kristin Rice

krice@nccob.gov

Ohio Division of Financial Institutions Kyle Evans

Kyle.Evans@com.state.oh.us

614-728-8400 614-728-8400 614-728-8400

Matthew Walker Jennifer Whitehurst

matthew.walker@com.state.oh.us Jennifer.Whitehurst@com.state.oh.us

Oklahoma State Banking Department Dudley Gilbert

dudley.gilbert@banking.ok.gov

405-521-2782

Pennsylvania Department of Banking and Securities Robert Lopez rolopez@pa.gov

717-783-4242

Rhode Island Division of Banking Jenna Giguere

jenna.giguere@dbr.ri.gov

401-462-9593

South Dakota Division of Banking Brock Jensen

brock.jensen@state.sd.us

605-773-3421

Tennessee Department of Financial Institutions Denise Cole

denise.e.cole@tn.gov Daniel.Espensen@tn.gov greg.gonzales@tn.gov

615-917-7512 615-854-6177 615-532-1010 615-854-6893

Daniel Espensen Greg Gonzales

Eric Rogers

eric.rogers@tn.gov

Texas Department of Banking Chris Bell

chris.bell@dob.texas.gov ejobe@dob.texas.gov

512-475-1300 512-475-1321

Everette Jobe

Texas Department of Savings & Mortgage Lending Roberto Ramirez

rramirez@sml.texas.gov

512-475-0788

Utah Department of Financial Institutions Paul Allred

pallred@utah.gov

801-538-8837

Vermont Department of Financial Regulation Steven Knudson

steven.knudson@vermont.gov Karla.Nuissl@vermont.gov

802-828-4891 802-828-2963

Karla Nuissl

Washington Department of Financial Institutions Lucinda Fazio

lucinda.fazio@dfi.wa.gov barbara.penttila@dfi.wa.gov joseph.vincent@dfi.wa.gov isaac.williamson@dfi.wa.gov

360-902-8800 360-902-0522 360-902-0516 360-902-8755

Barbara Penttila Joseph Vincent Isaac Williamson

Wisconsin Department of Financial Institutions Amesia Xiong

Amesia.Xiong@dfi.wisconsin.gov

608-266-8830

Wyoming Division of Banking Albert Forkner

albert.forkner@wyo.gov

307-777-7797 307-777-8614

Cecil Alice Johnstone

cecilalice.johnstone@wyo.gov

Speakers American Bankers Association Thomas Pinder

tpinder@aba.com

202-663-5123

Center for Responsible Lending Diane Standaert

diane.standaert@responsiblelending.org

202-349-1850

Covington & Burling LLP Ashley Simonsen

asimonsen@cov.com

424-332-4782

Creighton University School of Law Edward Morse

morse@creighton.edu

402-280-3091

Digital Asset Trade Association Alanna Gombert

alanna@metax.io

Federal Deposit Insurance Corporation Mark Flanigan

mflanigan@fdic.gov

202-898-7426

Frank C. Bucaro & Associates Frank Bucaro, CSP, CPAE

frank@frankbucaro.com

630-483-2276

National Conference of State Legislatures Karmen Hanson

karmen.hanson@ncsl.org

303-364-7700

CSBS Staff Jim Cooper Chuck Cross Margaret Liu Tom McVey Mary Pfaff Todd Scharf Mike Stevens

jcooper@csbs.org ccross@csbs.org mliu@csbs.org tmcvey@csbs.org smonnet@csbs.org mpfaff@csbs.org tscharf@csbs.org mstevens@csbs.org tthompson@csbs.org mtownsley@csbs.org

202-808-3557 202-728-5745 202-728-5749 304-549-9584 202-549-2017 202-728-5748 202-802-9558 202-728-5701 202-759-9401 202-728-5738

Sebastien Monnet

Tarcy Thompson Michael Townsley

Day One Presentations

CSBS Policy Briefing

Community Bank Leverage Ratio in S. 2155 • Qualifying Community Bank (QCB) for banks under $10 billion • QCB that meets a tangible leverage ratio between 8% and 10% will be exempt from current risk-based capital standards. – Disqualified based on

• Off-Balance Sheet exposures • Trading Assets and Liabilities • Notional value of derivative exposures • QCB will be deemed “Well Capitalized” • Requires consultation with State Regulators

Confidential / Sensitive / Pre‐Decisional – For Discussion Purposes Only

Implementation Issues related to S. 2155 • Home Mortgage Disclosure Act • Short-form Call Report • Appraisal Relief • TRID • QM Status for loan in portfolio for banks under $10 billion • Reciprocal Deposits • Volcker Rule exemption for Banks under $10 billion • 18 month examination cycle from $1billion to $3 billion • Fed small bank holding company policy $1 billion to $3 billion

Confidential / Sensitive / Pre‐Decisional – For Discussion Purposes Only

We can rebuild it . . . Better, stronger, faster than before!

People Are Policy

Agency/Committee

Leadership

Term Expires

Treasury

Steven Mnuchin Jelena McWillaims

Pleasure of President

FDIC OCC

6 /5/2023

Joseph Otting

11/27/2022

CFPB

Mick Mulvaney Kathy Kraninger Mike Crapo (R‐ID)

Acting Nominated Thru 2018 Thru 2018

Senate Banking

House Financial Services Jeb Hensarling (R‐TX)

Federal Reserve Board Chair Jerome Powell  (Term as Chair ends 2/5/2022)  (1/31/2028)

Richard Clarida Nominated for Vice Chair (4 years) Nominated for term expiring 1/31/22 Michelle Bowman Nominated for term expiring 1/31/20 Vacancy for term expiring 1/31/2024

Randal Quarles  (1/31/18) Vice Chairman for Supervision (10/5/2020) Nominated for term to 1/31/2032

Lael Brainard  (1/31/2026)

Marvin Goodfriend Nominated for term expiring 1/31/2030

Community Bank Research Conference: Driving a Better Policy Outcome

• National survey

– Closed July 15 th ‐ 478 banks  responded in 90 days

• 5 questions for 5 bankers • Community Bank Index • Academic research ‐ 27 Submissions • Case Study Competition – Eastern Kentucky University

www.communitybanking.org

Pinder 2018 Wrap Up

Tom Pinder, Deputy General Counsel tpinder@aba.com 202-663-5028

CSBS Seminar July 18, 2018

aba.com 1-800-BANKERS

The ALJ Conundrum

• The Supreme Court’s Lucia decision leaves unresolved more questions than it actually resolves.

Timeline Leading up to Lucia

• Summer 2014 – SEC Enforcement Director Andrew Ceresney said the SEC would use its administrative forum more often. The SEC increased its ALJs from three to five. • November 2014 – Southern District of New York Judge Rakoff criticizes the SEC’s administrative proceedings at a PLI conference, noting its recent 100 percent win rate versus only 61 percent in the courts. • 2015 - Wall Street Journal and other media report on alleged ALJ agency biased • The SEC won against 86% of defendants in contested cases in its own courts from October 2010 through September 2015, according to an updated analysis by The Wall Street Journal— significantly higher than the agency’s 70% win rate in federal court.

WSJ Articles

• Andrew Ceresney, the SEC enforcement chief, said at a legal event in Washington this month that this comparison doesn’t take into account summary judgments in federal court. • The SEC won on summary judgment against 51 defendants and lost against five in the two years through September, according to previously unpublished SEC data. The agency doesn’t have data for earlier years, the officials said. Adding the summary judgments to the trial wins would give the SEC an overall win rate in federal court for the two years of 82%. • Judge Brenda Murray explained to the brokers that the commissioners who run the SEC and approve all the civil charges filed by the agency don’t want its judges second-guessing them. • “So for me to say I am wiping it out,” Ms. Murray said at the hearing last year, “it looks like I am saying to these presidential appointee commissioners, I am reversing you. And they don’t like that.” • Alj Elliott said that “The SEC can’t fire us, decide our pay or grade our performance,“ he said. ”There’s nothing the SEC can do to influence us and they don’t try to."\\ This prompted the SEC, on Nov. 30, 2017, to issue an order “ratifying” the historic appointments of its five sitting ALJs. • Burgess v. FDIC , No. 17-60579 (5th Cir. 2017).

Supreme Court: SEC ALJs Unconstitutional

• In Lucia v. SEC , the Supreme Court held that SEC ALJs are “Officers” of the United States and their appointment by SEC staff violated the Appointments Clause of the US Constitution. • Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a "Department." • The Court looked to its decision in Freytag v. Commissioner , which concluded that US Tax Court special trial judges qualified as officers not employees. • The Supreme Court found the SEC ALJs to be "near-carbon copies" of the special trial judges examined in Freytag . In applying the Freytag test, the Court found that, like special trial judges, the SEC ALJs: • Occupy a continuing position established by law because SEC ALJs receive a career appointment. • Exercise significant authority and discretion • Issue decisions containing factual findings, legal conclusions, and remedies. • Because the ALJ in this case was not constitutionally appointed, but instead hired by agency staff, the Court reversed and remanded the case for a new hearing before a properly appointed official.

Public Company Accounting Oversight Board (PCAOB) • On June 28, 2010, the Supreme Court held in Free Enterprise Fund v. Public Company Accounting Oversight Board , that Sarbanes-Oxley's limitations on the SEC's authority to remove members of the PCAOB violate Article II of the Constitution. • The Court declined to issue an injunction preventing the PCAOB from continuing its operations (or to declare the entire statute unconstitutional), holding that the violation is remedied by the SEC receiving authority to remove members of the PCAOB at will.

Implications of Lucia

• Lucia did not overturn all prior decisions issued by SEC ALJs. • Instead, the Supreme Court held that only parties who made timely constitutional challenges could request new hearings, which must be overseen by a different ALJ. • The Supreme Court expressly declined to decide: • The validity of a 2017 SEC order ratifying prior ALJ appointments, which sought to cure any violation of the Appointments Clause • See Order re: Pending Administrative Proceedings, Securities & Exchange Commission, SEC Release No. 10440 (Nov. 30, 2017) • The constitutionality of statutes protecting ALJs from removal except for good cause

What Does Lucia Mean for Federal Banking Agencies? • It appears that the Fed, OCC, FDIC, and NCUA do not have their own ALJs, but instead use the same ALJs who are hired by the Office of Financial Institution Adjudication (OFIA). • Two ALJs for OFIA are Judges Misrendino and McNeil. • OCC regulations describe the OFIA as "the executive body charged with overseeing the administration of administrative enforcement proceedings for the [four agencies]." • In Burgess v. FDIC (2017), the Fifth Circuit ruled that a bank official seeking to stay a FDIC order pending review showed a likelihood of success on the merits of his argument that the FDIC ALJ was an "Officer" whose appointment violated the Appointments Clause. • Assuming banking agencies’ ALJs are considered “Officers" under the Appointments Clause, the validity of their appointments depend on: • how ALJs are hired by the OFIA (i.e. are they hired by OFIA or other agency staff or by one or more agency heads), and • if ALJs hired by the OFIA are hired by one or more agency heads, whether those agencies qualify as "Departments" for purposes of the Appointments Clause. • For example, the OCC might not qualify as a Department because it is housed in the Treasury Department. • If the banking agencies’ ALJs were unconstitutionally appointed, it would raise the question of how the agencies must deal with past decisions issued by those ALJs.

SEC ALJ Cameron Elliot

• Cameron Elliot was appointed in 2011

• Previously, Elliot was an ALJ for the Social Security Administration

• He was previously an attorney at the law firm of Darby & Darby P.C. in New York, where he handled intellectual property litigation. • Prior to his private-sector work, Mr. Elliot spent eight years at the U.S. Department of Justice, starting in 1998 as a trial attorney in Washington, D.C., where he was responsible for civil litigation in patent and copyright cases. • From November 2001 until September 2006, Mr. Elliot was an Assistant U.S. Attorney, first in the Southern District of Florida and then in the Eastern District of New York. • Elliot graduated from Harvard Law School in 1996 and clerked for Judge Edward Reed in the U.S. District Court in Nevada from July 1996 to August 1998. • Elliot holds a Bachelor of Science degree in physics and applied physics from Yale College, where he graduated magna cum laude in 1987. He then served for six years as a submarine officer in the U.S. Navy and Naval Reserve.

Ninth Circuit: National Banks are Subject to California’s Mortgage Escrow Interest Law • In Lusnak v. Bank of America, N.A . (“BofA”) , the Ninth Circuit held that the National Bank Act (“NBA”), interpreted in light of the Dodd-Frank Act and the case law it codified, does not preempt a California law requiring banks to pay interest earned on residential mortgage escrow accounts. • According to the Ninth Circuit, the Dodd-Frank Act addressed NBA preemption by: • Endorsing the standard provided in Barnett Bank of Marion County, N.A. v. Nelson permitting a state to regulate a national bank if it does not prevent or significantly interfere with the bank's exercise of its powers. • Requiring the OCC to follow specific preemption determination procedures. • Confirming that the OCC's preemption determinations are subject to only Skidmore deference • The court concluded that Congress, in passing the Dodd-Frank Act, explicitly recognized the viability of state escrow interest laws and, by extension, did not deem their existence prohibitively disruptive to national banks. To support its holding, the court: • Noted that the Dodd-Frank Act amended existing federal statutes to permit the payment of escrow interest if required by applicable state law. • Cited legislative history revealing Congress's concern over the abuse of escrow accounts by mortgage lenders and servicers. • Determined that the OCC regulation in question erroneously interpreted the Barnett Bank standard and was entitled to little or no deference under Skidmore. • The Ninth Circuit observed that approximately 13 states have escrow interest laws similar to California's.

Supreme Court: AmEx Anti-Steering Provisions Not Anticompetitive

• In. Ohio v. American Express Co. , the Supreme Court held that AmEx’s anti-steering contract provisions, which forbid merchants that accept AmEx cards from steering customers towards using other cards with lower rates, do not violate Section 1 of the Sherman Act. • Antitrust Treatment of Two-Sided Platform Markets • The Court defined two-sided platform markets as those that offer different products or services to two different groups who both depend on the platform to connect them. • The majority found that platform markets must be analyzed differently than traditional markets under the Sherman Act, with effectively a higher standard of evidence that requires a showing of harm on both sides of the platform. • Relevant Market • The Court defined the relevant market as including both sides of the two-sided platform for credit card services. For this platform to succeed, both consumers and merchants must participate in the transaction. • Anticompetitive Effects • The Court held that the plaintiffs failed to show that the anti-steering provisions caused anticompetitive effects in the credit card transaction market • For the plaintiffs to have successfully proven anticompetitive effects, the Court held that they had to show the contract provisions either: • Increased the cost of credit card transactions above competitive level • Reduced the number of credit card transactions • Stifled competition in the two-sided credit card market.

Dissent

• Writing for the dissent and joined by Justices Ginsburg, Sotomayor, and Kagen, Justice Breyer argued that: • The market definition should be two separate, complementary markets subject to the traditional rule-of-reason framework. The dissent argued that there was no sound reason to treat two-sided platform markets differently under the antitrust laws. • Market definition is not necessary where a plaintiff has direct evidence of anticompetitive harm, because the direct evidence itself proves market power. • The majority ignored the plaintiffs' evidence of anticompetitive effects, particularly with respect to Discover, and overlooked the detailed factual findings of the trial court. • The majority incorrectly relied on evidence of overall increasing output to disregard the plaintiffs' evidence that net prices had increased due to AmEx’s anti-steering provisions. The relevant economic question is instead whether output is higher or lower than it would have been absent the anti-steering provisions, which courts cannot expect plaintiffs to prove. • The majority's definition of two-sided platform markets is not meaningful and could include everything from farmers' markets to internet retailers.

ABA Challenges NCUA’s Field of Membership Rule

• Federal Credit Union Act limits membership in community common-bond credit unions to persons or organizations within a “well-defined local community, neighborhood, or rural district.” 12 U.S.C. §1759(b)(3). • Congress expressly delegated to the NCUA the power to define this term. 12 U.S.C. §1759(g). • 2016: NCUA broadens definitions of “local community” and “rural district.” • ABA files lawsuit challenging four aspects of new rule.

Core-Based Statistical Areas Without the Core

• Prior rule: A “local community” is any portion of a Core-Based Statistical Area that contains less than 2.5 million people. • New rule: Same as prior rule, but the “local community” need not include the “core.” • Court’s ruling : Upheld NCUA’s new interpretation as a “barely reasonable” one. • Commuting patterns to “core” establish “some traces of the social, economic, and geographic commonalities of a local community.” • Court not troubled by potential for redlining, because NCUA believes credit unions are adequately serving low-income areas.

Combined Statistical Areas

• A Combined Statistical Area is a collection of adjacent Core-Based Statistical Areas that share substantial employment interchange. • New rule: A “local community” is any portion of a Combined Statistical Area that contains less than 2.5 million people. • Court’s ruling : Invalidated NCUA’s new interpretation. • A “local community” is a generally small area. • Combined Statistical Areas “stretch across vast regions that include multiple separate urban centers with suburban and rural communities.” • Residents in Combined Statistical Areas “may have no common bond at all beyond regional proximity.”

Adjacent Areas • New rule: A “local community” may include areas adjacent to a portion of a single political district, Core-Based Statistical Area, or Combined Statistical Area that a credit union demonstrates shares common interests or interactions with areas they already serve. • Court’s ruling : Upheld NCUA’s new interpretation from facial attack. • NCUA did not presumptively declare any particular “adjacent area” to be part of a “local community” • Credit unions must make case-by-case showing to NCUA that an “adjacent area” belongs to a local community. • Door open for individual challenges to particular expansions.

Rural Districts • Old rule: A “rural district” is any area composed of 250,000 or less people and that does not exceed 3 percent of the state where most of the district is located, provided (i) the population density does not exceed 100 persons per square mile, or (ii) most of the area’s population resides in rural areas. • New rule: Same as prior rule, except that the “rural district” can now include up to 1 million people and the 3% cap is removed. • Court’s ruling : Invalidated NCUA’s new interpretation. • “Rural districts” are small, non-urban areas. • NCUA’s definition problematic because it permits “rural districts” to serve areas that (i) are larger than entire states or (ii) primarily encompass urban centers.

Implications of Court’s Decision

• Latest in a string of significant ABA victories against NCUA • NCUA v. First National Bank & Trust (U.S. 1999)

• ABA v. NCUA (D. Utah 2004) • ABA v. NCUA (M.D. Pa. 2008)). • NCUA’s instructions to credit unions:

• No new applications will be granted under invalidated rule. • Approval of credit unions’ expanded charters under invalidated rule will be withdrawn. • Credit unions should not accept new members only eligible for membership under invalidated rule. • Credit unions not required to de-list members who joined under invalidated rule. • NCUA appealed on May 29, 2018; ABA cross-appealed on June 13, 2018 • Rulemaking implications • No impact on multiple common-bond credit unions

NCUA’s New Final Rule • NCUA finalizes new round of loosened credit union membership limits (June 21, 2018) • Final rule allows federal credit unions to use a “narrative” to apply for expansion of a community charter rather than relying on statistical benchmarks. • Final rule requires a public hearing when FCUs apply to include a statistical area larger than 2.5 million people in its field of membership • However, NCUA imposed strict limits on who may participate: • only up to six entities may apply in writing within 10 days to oppose the expansion • each will be limited to a 30-minute presentation. • A seventh entity may be permitted to make a presentation, but only at the discretion of NCUA staff.

DC Circuit Clarifies Opinion Work Product Protection • In FTC v. Boehringer Inglehein Pharmaceuticals, Inc. (2018), the DC Circuit held that a party asserting opinion work product bears the burden of showing how disclosure would reveal the attorney’s legal impressions and thought processes. • The court clarified that general or routine document requests reveal nothing about an attorney’s mental impressions, and therefore do not qualify for opinion work product protection. • Where it appears that the attorney's opinion is obvious or non-legal, the party claiming the privilege must show specifically how the disclosure would reveal the attorney's legal impressions and thought processes. • Because the district court failed to demand such a showing, the DC Circuit remanded the case to the district court for further consideration.

CSBS Legal Conference  Panel on Legal Issues and De Novo Banks (Wednesday, July 18, 2:30 pm MDT)  Discussion Outline 

Legal Nuts and Bolts  I.

High Level Process Overview   Two key elements to forming a de novo bank  a. Obtain permission from chartering authority from the state   b. Obtain FDIC insurance from the FDIC  c. (If forming a holding company, must also get HoCo approval from the Fed) 

II.

Statutory Criteria  a. Overview   b. Potential Hurdles  

i. Convenience and needs  ii. Economic support and reasonable chance for success – Camp v. Pitts, 411 U.S.  138 (1973)  iii. ___ ‐ (Texas case – see if lower court provides factual context)  iv. Character and fitness  1. Breach of fiduciary duty  2. Other “hypothetical examples”  Legal Challenges to Chartering Decisions   a. Consider whether the legal avenue challenge is based on is appropriate.    i. Administrative Procedures Act  1. Have the exhausted their administrative remedies  ii. Tort claims act – maybe not the right vehicle  See Magellsen v. FDIC, 341 F. Supp.  1031 (D. Mont. 1972)  b. How your state’s administrative law applies to your agency’s decision – especially if the  decision is challenged  i. Applicant challenges denial  ii. Third party challenges the application (State Banking Bd. V. Allied Bank, 748  S.W.2d 447 (Texas 1988))  c. Administrative law standard of review  i. Iowa – 2 types of challenges to agency action  1. Contested case proceeding (evidentiary hearing)  2. Other agency action  ii. The applicable standard of review is different depending on what type of  challenge it is   1. Contested case proceeding (very deferential to the agency)  2. Other agency action (several different potential tests – boil down to  arbitrary and capricious)  iii. You need to figure out what kind of challenge it is

Additional Legal Considerations  III.

1. What does your statute say  2. Note – if it provides the potential for a “hearing” if challenged, that is  not necessarily a contested case hearing.   See Camp v. Pitts, 411 U.S.  138 (1973) 

IV. Practical Considerations   a. Importance of pre‐filing/pre‐application meetings  b. Include enough support for each of the factors to meet the applicable standard of  review (more important if the decision is likely to be challenged  V. Policy Issues  a. Various bank charter options  b. Fintech business models and bank charters

Preemption of State Interest Rate Limitations: Current Challenges Involving Marketplace Lenders Conference of State Bank Supervisors – Legal Seminar July 18, 2018

Ashley Simonsen

Legal Framework

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Marketplace Lending and Preemption

Diane Standaert Center for Responsible Lending

CSBS Legal Seminar July 2018

Overview of Presentation

1. Market Trends 2. Benefits and Risks 3. Interaction with State Laws 4. Recent Developments

Online Lending Ecosytem

Source:OrchardPlatform, https://www.orchardplatform.com/company/lendscape/

Market Trends: Size & Growth

Source: Orchard Platform (2017),  http://bit.ly/2x4pCBq

Marketplace lending is still relatively small  compared to market

Source:  Lending Club

Another Trend:  Securitization of Marketplace Loans

Delinquencies on Securitized Loans are Trending  Higher, Earlier 

Source:  PeerIQ, Marketplace Trends Report, May 2018, https://bit.ly/2NnFsP4

Marketplace Lending:  Potential Benefits 

• Ability to reach underserved communities • Allow borrowers to build credit • Ease of use and simplicity of digital platforms • Speed of approval process of loans and access  to funds • Lower cost of the loans for borrowers

Marketplace Lending:  Potential Risks

• Consumer privacy • Unsound underwriting practices • Predatory lending practices

• Evasion of state laws • Fair lending concerns

Interaction with State Laws

1. Laws limiting interest rates and other fees 2. Consumer finance, lender licensing or bonding,  and other consumer protection laws 3. Debt collection laws 4. State privacy laws 5. State fair lending laws 6. Debt management or debt relief laws 7. Credit repair laws 8. Choice of law provisions

High‐cost lenders have continue rent‐a‐bank schemes using FDIC‐supervised banks:

• CashCall made loans up to 99% in Maryland and West Virginia using First Bank of  Delaware and First Bank & Trust, but courts later shut them down.

• Elevate makes loans at 100% interest using Republic Bank & Trust in Kentucky,  ignoring the voter‐approved 36% or lower rate caps in Arkansas, Montana, South  Dakota and other states. • On Deck Capital makes small business loans with rates that go up to 99.7% APR,  originating loans through Celtic Bank in states where it cannot make the loans  directly.

State Usury Laws Remain Critical Protection

“Congress did not intend to authorize such arrangements when it created national banks  with the National Bank Act in 1864, which also gave national banks the right to preempt  state usury laws….[S]tate usury laws have long served an important consumer protection  function in America.” ‐ Bi‐Partisan AG coalition letter to Congress, July 2018, https://bit.ly/2NoMIu1 “The ability to export interest rates across states lines – like the benefit of deposit insurance  – is a privilege afforded only to banks, in part, because they must comply with a host of  “cradle‐to‐ grave” regulations... Non‐bank lenders do not have the same connection to the  federal safety net, and the regulatory structures and requirements for these lenders reflects  the decisions of the duly elected state legislatures about the credit needs of their  communities.” ‐ CSBS letter to Congress, May 2018, https://bit.ly/2Ltpan2 “The OCC views unfavorably an entity that partners with a bank with the sole goal of evading  a lower interest rate established under the law of the entity’s licensing state(s).” ‐ OCC Principles on Short‐Term, Small Dollar Installment Lending, May 2018 

Legal & Regulatory Developments

1. Madden v. Midland Funding (2d Cir. 2015) 2. OCC Fintech Charter and OCC Revised Small Dollar Guidance  3. Congressional Proposals Seek to Preempt State Law  • HR 3299 & S 1642 – overturns Madden ruling on “valid when made” • HR 4399 ‐ overturns True Lender case law 4. State‐level responses and developments • NY DFS Report on Online Lending:  https://on.ny.gov/2zxGpSQ • Enforcement actions, e.g. MA, NH, CA, and others • "Sandbox" bills, e.g. AZ, IL, and NY (2018) • Colorado AG Lawsuits

• State suits against Avant and Marlette Funding • Suits against state by WebBank & Cross River Bank

Additional Resources & Information

• U.S. Treasury Report (2016) – “Opportunities and Challenges in Online Marketplace  Lending”: http://bit.ly/27bRLDC • Congressional testimony of Adam Levitan on “Valid When Made” & “True Lender”:  https://bit.ly/2uuPrL • Letters from Civil and Consumer Groups: – Opposition to HR 3299, https://bit.ly/2z7gq2I and HR 4399, https://bit.ly/2Jv9n5q – Consumer and Civil Rights Letter Re: Bank Payday Lending (May 2018):  https://bit.ly/2NXCUbA – CRL Comments to the OCC on Fintech Charter  • Fintech and Civil Rights: – Panel Discussion (2017) – “Fintech: How Can Innovation Advance Civil Rights?” http://bit.ly/CRLfintech – Federal Trade Commission Report (2016) – “Big Data: A Tool for Inclusion or  Exclusion?”   http://bit.ly/1n52gG6 1. January 2017: http://bit.ly/2vdanoL 2. April 2017: http://bit.ly/2wlJBOH

For more information or questions, contact:

Diane Standaert Director of State Policy, EVP Center for Responsible Lending 919‐313‐8550 dianes@responsiblelending.org

Day Two Presentations

CSBS LEGAL SEMINAR

Trust Me! Insights into Ethical  Leadership Grand Hyatt Hotel July 19,2018

Norman R. Augustine: Former CEO  of Lockheed Martin Corporation “I can think of no commitment more important  to a corporation or its survival than its  commitment to ethics. That means not only conducting our business  affairs within the letter of the law, but also in the  spirit of the law.”

“We are not disturbed by things, but  by the view we take of them…. When we meet with troubles, become  anxious or depressed, let us never blame anyone but…our opinion about things.” Epictetus ‐ 60 A.D.

Compliance is not Ethics

1.Compliance is the letter of the law Ethics is the spirit of the law.

2. Compliance is reactive. Ethics is only proactive.

Ethics Definition Ethics is a tough decision with the payout at the  end.

An unethical decision is an easy one with the  ayout upfront.

Ethics

• Focus on action not behavior. • Justify action not behavior.

• Acknowledge the gap between “ought” and  “is.”

Negative Ethics

 Tell us what not to do.  Prevent harm.  Imply the obligation to not do harm . -Marvin T. Brown

Positive Ethics  Give guidelines for what we should do.  Promote a good.  Imply a responsibility to do good.  Rely on the power of the organization to be  responsive, and to love the ability to respond. ‐Marvin T. Brown

People get in trouble at  work for four reasons

1. Abuse of power.

2. Abuse of knowledge.

3. Abuse of access.

4. Abuse of relationships.

Decision Making Process

REFLECTION

EXPERIENCE

DECISION

Three Psychological Persons

CHILD Go For It!

PARENT No! No! No!

ADULT Go Slow!

Five Emotions

1. Sad 2. Mad 3. Glad 4. Scared  5. Hurt

The Problem

Values We Profess

disconnect

Behavior We Demonstrate

Kolberg & Piaget

1. Punishment 2. Reward 3. “Good” 4. Rules and Regulations 5. Choice and Commitment 6. Internalization

Authoritarian Power

– Empowers oneself at the cost of the other. – Self serving as one uses fear to get  obedience. Must have power over others. – Commands, does not invite.  To command is  to settle for behavior change.  NO value  change or understanding.

Authoritative Power

– Empowers the other through service for the  other. – They are chosen by their peers, They don’t  force themselves, but gain our trust. – Invites, does not command.  To invite is to  recognize the value of the other.

You Must Consider:

 The Act  Circumstances

 Criteria for Judgment  Communal Wisdom

You Need to Ask:

How Will This Help Them…

1.  Feel like they belong?

2.  Feel significant?

3.  Develop a unique identity?

People Want  Two Things in Life

1. To belong

2. To receive recognition

Social Significance Question

How do I fit in here?

Issues of Respect 1 . My right to decide is being questioned. 2. My right to control is being jeopardized. 3. My judgment and my ideas are not being  considered here. 4. My prestige and my status are being  questioned.

Issues of Respect‐2

5. My feelings don’t count here. 6. I feel unfairly treated.

7. I feel defeated. 8. I feel powerless. 9. I feel inferior.

Moral Compass The moral compass is based on:

 An individual’s values, i.e. code of ethics,  mission statement, personal values.  Experience: what does it teach me? What  have I learned?  Desired outcome: setting the course.

Moral Obligations 1. Put people first in decision‐making.

2. Respect for individual human dignity.

3. Treat all fairly.

4. Be honest.

There are only four dilemmas for  humanity

1. Truth vs. Loyalty 2. Individual vs. Community 3. Short Term vs. Long Term 4. Justice vs. Mercy

Institute for Global Ethics

Just do it!!

“Just do it!”

1. Is it legal/ethical? 2. Is it good for the patient?

3. Is it consistent with our shared values 4. Are you willing to be held accountable?

If yes to all, then “Just do it.”

Being Accountable  Being accountable is more that just  being responsible…  …it means that  you have the privilege of  leading, not only by example, but by the  consent of your people.