THE PAYMENTS INSTITUTE July 20-23, 2014 Emory Conference Center Hotel, Emory University, Atlanta, Georgia Regulation E: Dodd-Frank Provisions Duncan Douglass Partner, Alston & Bird LLP
AGENDA Dodd-Frank Title X: Creation of the CFPB Introduction to the CFPB and its Structure CFPB Authority CFPB Activities and Priorities Dodd-Frank Section 1073 Regulation of Remittance Transfers Final Remittance Transfer Rule Requirements Supplemental Rule Provisions and Amendments Practical Implications of Requirements 2
Bureau of Consumer Financial Protection The New Consumer Protection Watchdog 3
CFPB Overview Bureau of Consumer Financial Protection (CFPB) is the new superagency empowered to administer all federal consumer financial protection laws, with authority over financial products or services for use by consumers primarily for personal, family, or household purposes Consumer financial product or service generally includes an extension of credit, deposit-taking activity, funds transmission, check cashing, data processing services and providing certain financial advice authority extends to covered persons anyone who engages in offering or providing a consumer financial product or service CFPB assumed its authority on July 21, 2011 (the designated transfer date ) CFPB now has authority with respect to federal consumer protection statutes (TILA, EFTA, FCRA, FDCPA, RESPA, HMDA) Richard Cordray is the first Director of the CFPB 4
CFPB Structure 5
Oversight and Funding of the CFPB The CFPB is subject to limited oversight The Financial Stability Oversight Council (FSOC), which is the new safety and soundness super-watchdog, has authority to overturn CFPB rulemaking upon a finding that a regulation threatens the safety and soundness of the U.S. financial system upon a 2/3 vote of its members The CFPB receives its funding out of the Federal Reserve Board (FRB) budget CFPB is entitled to up to 12% of the FRB s budget (based on the FRB s 2013 budget, indexed for inflation going forward). CFPB is entitled to a maximum transfer of $608.4 million from the FRB for 2014. In 2014, the CFPB s budget is $497 million CFPB funding is not subject to review by congressional appropriations committees 6
CFPB Rulemaking Authority CFPB has broad rulemaking authority applies generally to all persons engaging in covered activities (including banks and nonbanks) Includes catchall authority to proscribe unfair, deceptive or abusive acts and practices pertaining to consumer financial products or services Dodd-Frank Act gives CFPB authority to define as abusive any act or practice that materially interferes with the ability of a consumer to understand a term or condition or takes unreasonable advantage of the consumer CFPB rules do not preempt more restrictive state laws 7
CFPB Supervisory and Enforcement Authority The CFPB s supervision and enforcement authorities are more limited than its rulemaking authority Large depository institutions with assets greater than $10 billion Specified non-banks (payday lenders, mortgage service providers, private student lenders) Certain non-depository providers that are Larger Participants in designated markets as well as nonbanks designated by CFPB (regardless of market) deemed to pose risk to consumers due to offering of covered products/services Enforcement authority is non-exclusive State attorneys general may enforce CFPB regulations (including against federally-chartered financial institutions) 8
CFPB Activities to Date CFPB assumed responsibility for federal consumer protection laws on July 21, 2011 (the designated transfer date ). Since then it has: Issued final Remittance Transfer Rules (Regulation E) Issued an ANPR on Prepaid Cards (Regulation E) Issued a report on Overdraft Protection Programs, including the possible need for additional regulatory intervention Initiated its non-bank supervision/examination program (designating larger participants in certain markets and establishing rules for designating other non-bank covered persons for regulation) Issued Fair lending/mortgage-related rules (Regulation Z, etc.) 9
CFPB Priorities Stage of Rulemaking Title Prerule Stage Home Mortgage Disclosure Act (Regulation C) Prerule Stage Payday Loans and Deposit Advance Products Prerule Stage Debt Collection Rule Prerule Stage Overdraft Proposed Rule Stage Requirements for Prepaid Cards (Regulation E) Proposed Rule Stage Annual Privacy Notice Proposed Rule Stage Further Amendments to 2013 Mortgage Rules (Regulations X and Z) Proposed Rule Stage Proposed Rule Stage Proposed Rule Stage Final Rule Stage Final Rule Stage Final Rule Stage Final Rule Stage Amendments to FIRREA Concerning Appraisals Extension of the Temporary Exception for Certain Disclosures Under the Remittance Transfer Rule Defining Larger Participants in a Market for Auto Lending Restatement of Federal Consumer Financial Law Regulations Defining Larger Participants of the International Money Transfer Market Rules of Practice for Issuance of Temporary Cease-and-Desist Orders Consumer Financial Civil Penalty Fund 10
How Will the CFPB Pursue Consumer Protection? Much strong talk has come from CFPB leadership about the importance of enforcement, leading to concerns about a shoot-first, ask questions later approach to supervision and enforcement Raj Date When enforcement is the right tool to use, I assure you we will not hesitate to use it Richard Cordray Enforcement, of course, will still have an important role at the Consumer Bureau. If people are ignoring or evading consumer protections laws and seeking to gain an unfair advantage over their law-abiding competitors then litigation is an essential tool, and we will use it judiciously. Enforcement without adequate warning can paralyze markets and innovation 11
Cynical Way to View the New World of Consumer Protection Regulation..... 12
Regulation of Remittance Transfers 13
Introduction Section 1073 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) amended the Electronic Fund Transfer Act ( EFTA ) by adding a new section regarding Remittance Transfers. New Section 919 of the EFTA: Requires disclosure of certain information prior to and at the time of the transfer; Creates new consumer protections, including the right to cancel a transfer and the right to a refund in certain circumstances; Establishes a new error resolution scheme to which remittance transfer providers must adhere; and Establishes standards of liability for remittance transfer providers and their agents. 14
Introduction (continued) A comprehensive remittance transfer rule was first proposed by the Board of Governors of the Federal Reserve System. Once the CFPB officially came into existence and assumed authority, rulemaking responsibility for Section 1073 transferred to the CFPB. The CPFB issued a final remittance transfer rule on February 7, 2012 ( Original Final Rule ), which was to become effective February 7, 2013, but the CFPB issued a temporary delay on December 31, 2012. On August 20, 2012, the CFPB finalized supplemental rules on certain remittance transfer requirements ( Supplemental Rule Provisions ). 15
Introduction (continued) On April 30, 2013, the CFPB amended certain particularly problematic provisions of the Original Final Rule and set a new effective date of October 28, 2013 (the 2013 Final Rule ) (together, the Original Final Rule, Supplemental Rule Provisions and the 2013 Final Rule are the Final Rule ). On January 23, 2014, the CFPB proposed a rule to expand the scope of its non-depository supervisory coverage to include larger participants in the market for international money transfers (i.e., nonbank remittance transfer providers). On April 15, 2014, the CFPB issued a proposal to amend the Final Rule to extend the temporary exception and to make clarifications to the rule and commentary ( April 2014 Proposal ). 16
Cast of Characters Remittance Transfer (aka the transaction itself): the electronic transfer of funds requested by a sender to a designated recipient that is sent by a remittance transfer provider. Remittance Transfer Provider (aka the institution at which the consumer initiates the transfer): any person that provides remittance transfers for a consumer in the normal course of its business, regardless of whether the consumer holds an account with such person. Sender (aka the consumer): a consumer in a state who primarily for personal, family, or household purposes requests a remittance transfer provider to send a remittance transfer to a designated recipient. Designated Recipient (aka the person to whom funds are sent): any person specified by the sender as the authorized recipient of a remittance transfer to be received at a location in a foreign country. 17
Final Rule Scope Prior to Section 1073 and its implementing rules, the term remittance transfer was traditionally understood to consist of: (1) a cross-border (2) person-to-person payment (3) of relatively low value (4) for family or household purposes. Section 1073 and the Final Rule define the term remittance transfer far more broadly to include the vast majority of electronic funds transfers (including wire and ACH transactions) sent by U.S. consumers to consumers and businesses in foreign countries, and the term is not limited by rule or statute to remittance transfers as traditionally understood. The Final Rule broadly applies to: Funds transfers whether or not they are electronic funds transfers within the meaning of EFTA; All remittance transfer providers regardless of whether the sender maintains an account with the provider; and All remittance transfers initiated in the U.S. by a consumer to be sent outside of the U.S. (regardless of whether the recipient is a business or natural person). Two types of transactions are excluded from the term remittance transfer: small value transfers of $15 or less; and transfers made for the purpose of purchasing or selling securities or commodities. 18
Final Rule Required Disclosures The Final Rule requires remittance transfer providers to give senders detailed disclosures about the transfer both before and at the time of the transfer. Pre-Payment Disclosure: A provider must give a sender a written prepayment disclosure when the sender requests the transfer, but prior to payment for the transfer. Receipt Disclosure: A provider must also give the sender a written receipt when payment is made for the transfer. Combined Disclosure: A provider may give the sender (at the time the pre-payment disclosure is required) a single, combined disclosure containing the information that must be included on both the prepayment disclosure and receipt. 19
Final Rule Required Disclosures (continued) Pre-Payment Disclosure The prepayment disclosure must contain, as applicable: the transfer amount (in the currency in which the transfer is funded); fees and taxes imposed or collected by the provider; the total amount of the transaction (in the currency in which the transfer is funded); the exchange rate; the transfer amount (in the currency in which the funds will be received by the designated recipient); covered third-party fees (i.e., those imposed on the transfer by a person other than fees imposed by the recipient s institution (unless recipient institution has an agreement with the provider)); and the total amount that will be received by the designated recipient (in the currency in which the funds will be received) (together with a disclosure, if appropriate, that such amount may be reduced by non-covered third party fees and taxes) The prepayment disclosure must be provided to the sender when the sender requests the remittance transfer, but prior to payment for the transfer. 20
Final Rule Required Disclosures (continued) The written receipt must contain: Receipt Disclosure the information that must be included in the prepayment disclosure; the date the funds will be available to the designated recipient; the name of (and, if provided, contact information for) the designated recipient; a statement about the sender s error resolution and cancellation rights; the name of and contact information for the remittance transfer provider; and a statement that the sender may contact the state agency that licenses or charters the remittance transfer provider and the CPFB, along with relevant contact information. The receipt must be provided to the sender when payment is made for the remittance transfer (although different timing/delivery rules apply to transfers conducted entirely by phone where the sender has an account with the provider). 21
Final Rule Required Disclosures (continued) Disclosure Challenges The Original Final Rule required the provider to disclose, in the prepayment disclosure and the receipt disclosure: All fees (including non-covered fees (i.e., those imposed by the recipient s financial institution)) that may be applied to reduce the amount of funds received by the recipient All taxes (including foreign taxes imposed by third parties) that may reduce the amount of funds received by the recipient. A provider that sends an open network transfer often has limited control over and information regarding the transaction the funds are transferred from the sending institution to a recipient institution through a network of intermediary institutions. These intermediaries may impose lifting fees on the transaction. The CFPB acknowledged that it was aware that a number of providers likely do not currently possess or have easy access to the information needed to satisfy the new disclosure requirements for every transaction and for these providers, as well as their operating partners, compliance may require modification of current systems, protocols, and contracts. A number of these issues were addressed through the changes under the 2013 Final Rule, but some disclosure challenges linger. 22
Final Rule Required Disclosures (continued) Estimates and Exceptions The Final Rule provides two limited exceptions that permit certain providers to disclose estimates rather than exact amounts: a temporary exception for insured depository institutions and a permanent exception for transfers to certain countries. Temporary Exception: The temporary exception permits a provider to disclose estimates of certain information if three conditions are satisfied: a provider cannot determine exact amounts for reasons beyond its control (such as when the exchange rate is set by a person with which the insured institution has no correspondent relationship after the insured institution sends the remittance transfer); a provider is an insured institution; and the remittance transfer is sent from the sender s account with the insured institution. The following information may be estimated under the temporary exemption: the exchange rate, the transfer amount, covered third-party fees, and the total to be received by the designated recipient. The temporary exception is scheduled to expire on July 21, 2015, The Dodd-Frank Act authorizes the CPFB to extend the exception by 5 years, which it proposed to do in the April 2014 Proposal. 23
Final Rule Required Disclosures (continued) Estimates and Exceptions (continued) Permanent Exception: The permanent exception permits providers to disclose estimates (rather than exact amounts) of certain items when the provider cannot determine the exact amounts at the time the disclosure is required because either: the laws of the recipient country do not permit such a determination, or the method by which transactions are made in the recipient country does not permit such determination. The CPFB has interpreted the method exception to apply only to remittances sent via international ACH on terms negotiated by the U.S. government and the government of a recipient country where the exchange rate is set by the recipient country s central bank after the transfer is sent. The CPFB published a safe harbor list of countries that qualify for the permanent exception on September 26, 2012. For BOTH the Temporary and Permanent Exceptions: A provider that qualifies for either the temporary or permanent exception must comply with certain specified approaches for calculating estimates. 24
Final Rule Cancellation The Final Rule generally provides consumers the right to cancel a transfer within 30 minutes of making payment for the transfer. For transfers scheduled at least 3 business days in advance, the cancellation period is 3 business days prior to the scheduled transfer date. If the following two conditions are satisfied, a provider is required to refund to the sender the total amount provided by the sender in connection with the remittance transfer: the sender s oral or written request to cancel enables the provider to identify the sender and the particular transfer to be cancelled; and the transferred funds have not been picked up by or deposited into the account of the designated recipient. Providers must make this refund at no additional cost to the sender and must do so within 3 business days of receiving the request. 25
Final Rule Error Resolution A provider must investigate and remedy an error if it receives adequate notice of the error no later than 180 days after the disclosed date of funds availability. The Final Rule defines error to include: An incorrect amount paid by a sender in connection with a remittance transfer; A computational or bookkeeping error made by the provider relating to a transfer; The failure to make available to a designated recipient the amount of currency stated in the receipt (unless (i) the disclosure stated an estimate and the difference results from the application of the actual amounts rather than estimated amounts or (ii) the failure resulted from extraordinary circumstances outside the provider s control that could not have been reasonably anticipated); The failure to make funds available to a recipient by the date of availability stated in the receipt (unless the failure resulted from (i) extraordinary circumstances outside the provider s control that could not have been reasonably anticipated, (ii) delays related to fraud, BSA, OFAC or other similar screening, (iii) the transfer being made with fraudulent intent by the sender or any person acting in concert with the sender), or (iv) the incorrect account number/recipient institution identifier exception applies; or The sender s request for documentation required by the disclosure provisions of the Final Rule or for additional information or clarification concerning a transfer, including a request to determine whether an error exists. 26
Final Rule Error Resolution (continued) The 2013 Final Rule created an exception to what constitutes a remittance transfer error, substantially reducing the risk to remittance transfer providers. An error will not be deemed to exist where the sender provides either an incorrect recipient account number or an incorrect identifier for the recipient institution (e.g., routing number, IBAN, BIC, etc.), subject to the following: Provider must demonstrate that the sender provided incorrect information; If sender provided incorrect recipient institution identifier, provider must have used reasonably available means to verify that the recipient institution identifier provided by the sender corresponded to the recipient institution name provided by the sender before sending the transfer; Provider must have provided notice to the sender, before the sender made payment, that sender could lose transfer amount if sender provides incorrect recipient account or financial institution identifier; The incorrect information provided by the sender must result in the deposit of the transfer amount into the wrong account; and Provider must have used reasonable efforts to recover the transfer amount. 27
Final Rule Error Resolution (continued) The provider must investigate and determine whether an error occurred within 90 days of receiving a notice of error and report the results to the sender, including notice of any remedies available, within 3 business days after completing its investigation. A provider is also required to correct the error as designated by the sender in accordance with the remedy provisions contained in the Final Rule. These remedies include: refunding to the sender the amount of funds provided by the sender in connection with a transfer that was not properly transmitted (or the amount appropriate to resolve the error); or making available to the designated recipient, without additional cost to the sender or designated recipient, the amount appropriate to resolve the error. This means that in some circumstances a provider may be required to resend the transfer at no additional cost to the sender or the designated recipient. 28
Final Rule Error Resolution (continued) If the error resulted from incorrect or insufficient information provided by the sender, the provider must refund the amount of funds provided by the sender in connection with the remittance transfer that was not properly transmitted, or the amount appropriate to resolve the error. A provider is permitted to agree to the sender s request that the funds be applied towards a new remittance transfer, rather than refunded, if the provider has not yet processed a refund. New disclosures must be provided for this new transfer. The provider may deduct from the amount refunded or applied towards a new transfer any fees actually imposed on or taxes actually collected on the remittance transfer by someone other than the provider as part of the first unsuccessful remittance transfer attempt. 29
Interplay Between the Final Rule and UCC 4A UCC Article 4A contains a well-established legal framework that determines the respective rights and obligations of the parties to a wire transfer. However, Article 4A-108 provides that Article 4A does not apply to a funds transfer, any part of which is governed by the Electronic Fund Transfer Act. Section 1073 of the Dodd-Frank Act amended the EFTA to create the new remittance transfer regime. Thus, because international wire transfers initiated by consumers will now be governed in part by the EFTA (as a result of Section 1073), Article 4A will no longer apply to those transfers (and, accordingly, certain rights and obligations among parties to a wire transfer that is also a remittance transfer will be undefined). The CFPB stated that it believed that the best mechanisms for resolving this uncertainty rests with the states, which can amend their respective versions of UCC Article 4A, with the purveyors of rules applicable to specific wire transfer systems, which can bind direct participants in the system, and with participants in wire transfers who can incorporate UCC Article 4A into their contracts. 41 states and the District of Columbia have amended Article 4A of to provide that it applies to a funds transfer that is a remittance transfer under EFTA but not an EFT under EFTA (but EFTA controls when in conflict with UCC 4A) The Fed has made adjustments to Regulation J and The Clearing House has amended the CHIPS Rules 30
Supplemental Rule Provisions Safe Harbor for Certain Providers The Final Rule defines remittance transfer provider to mean any person that provides remittance transfers for a consumer in the normal course of its business, regardless of whether the consumer holds an account with such person. The Final Rule provides for a facts and circumstances test to determine if an entity provides remittance transfers in the normal course of business. In the Supplemental Rule Provisions, the CPFB established a safe harbor that, if satisfied, means a person does not provide remittance transfers in the normal course of business. Under the safe harbor, a person that has provided no more than 100 remittance transfers in the previous calendar year will not be deemed to be providing remittance transfers in the normal course of business for the current calendar year if the person also provides no more than 100 remittance transfers in the current calendar year. If a person that would have qualified for the safe harbor in a year makes more than 100 remittance transfers in the current calendar year, the person would be evaluated under the facts and circumstances test to determine whether that person is a remittance transfer provider for the transfers in excess of 100 for the rest of the year. If the person is deemed to be providing remittance transfers in the normal course of business, the person will have a reasonable period of time (not to exceed 6 months) to comply with the remittance transfer requirements 31
Supplemental Rule Provisions Transfers Scheduled In Advance A preauthorized remittance transfer is defined in the Final Rule as a remittance transfer authorized in advance to recur at substantially regular intervals. A provider may use estimates in disclosures (prepayment and receipt) for a one-time transfer or the first in a series of transfers if the transfer is scheduled at least 5 business days before the transfer date. Provider must provide/mail to the sender a receipt containing accurate disclosures within 1 business day after the transfer; or If transfer was from sender s account held by the provider, provider may provide accurate disclosures with next periodic statement or within 30 days after transfer date (if no periodic statement is provided). No prepayment disclosure is required for subsequent transfers in a series unless disclosures in most recent receipt are no longer accurate (subject to right to give estimates). 32
Larger Participants Proposal On January 23, 2014, the CFPB proposed a rule to expand the scope of its non-depository supervisory coverage to include larger participants in the market for international money transfers. The proposal would apply to nonbanks that provide at least one million international money transfers annually. The proposal would permit the CFPB to supervise such entities for compliance with the Final Rule and other applicable federal consumer financial laws, such as the prohibition on UDAAP and the privacy requirements of the Gramm-Leach-Bliley Act. If adopted, the proposal would be the CFPB s fourth rulemaking to establish supervisory authority over larger participants of markets for other consumer financial products or services. 33
April 2014 Proposal On April 15, 2014, the CFPB proposed to extend the temporary exception by 5 years from July 21, 2015, to July 21, 2020. The CFPB explained that it believed that most institutions are providing accurate disclosures when possible, but that for certain open network transfers, accurate fee and exchange rate information is not readily available and there is unlikely to be a solution that would permit accurate disclosures in all instances by July 21, 2015. The CFPB also proposed a number of clarifications to the rule and commentary, including with respect to transfers from non-consumer accounts; circumstances in which oral disclosures are permissible in response to an inquiry by mail, email or fax; and the remedy provisions that apply when a delay error occurs, but funds are ultimately delivered to the designated recipient before the remedy is determined. 34
Observations and Practical Considerations Compliance by the mandatory compliance date has required institutions to invest a significant amount of time and effort, and take a range of measures, including: Revisions to policies, procedures and practices to ensure overall compliance with the Final Rule, including adequate supervisory oversight and resource allocation, employee training, ongoing compliance monitoring, updates to compliance programs, and third party oversight (which may warrant changes to vendor management processes); Review of disclosures and disclosure practices, and incorporation of the new remittance transfer disclosures into that process; Review of and revisions to processes for disclosing exchange rates and estimating foreign currency amounts to be transferred; Establishment of new error resolution procedures to comply with the Final Rule s requirements; and Evaluating, and where necessary re-negotiating, agreements with third parties to ensure sufficient information flow to accomplish the disclosure obligations. 35
Questions? Duncan Douglass Alston & Bird LLP 1201 West Peachtree St. Atlanta, GA 30309 (404) 881-7768 Duncan.douglass@alston.com 36