BPInsights: Jun 1, 2024

Correcting the Record on the Electronic Fund Transfer Act

The American Bankers Association, Bank Policy Institute, New York Bankers Association and The Clearing House Association responded this week to CFPB General Counsel Seth Frotman’s blog post regarding the state of New York’s lawsuit against Citibank over alleged wire transfer scams that affected some bank customers. A key question at the heart of the case is what law applies when a scammer steals money from a customer’s bank account via a wire transfer. In a departure from its prior guidance, the CFPB now contends that the Electronic Fund Transfer Act – the federal law that provides certain consumer protections to specific types of electronic payments – applies in the New York v. Citibank case because the bank-linked wire transfer capabilities to its online banking platform and a fraudster initiated an unauthorized wire transfer online. This is not what the law says. The EFTA expressly does not apply to wire transfers, which are governed instead by Article 4A of the Uniform Commercial Code (UCC).

“Banks are dedicated to protecting consumers from fraud and scams, as demonstrated by the extensive consumer education campaigns they conduct and the significant investments they have made to ensure strong cybersecurity safeguards. They also investigate and report scammers to law enforcement, while working closely with their customers to remedy the situation. The CFPB has the law wrong here: Wire transfers are excluded from the Electronic Fund Transfer Act. The CFPB cannot reinterpret a statute and reverse decades of settled law in an amicus brief and then use a blog post to suggest that its position is the law. The Bureau is supposed to be educating consumers, not confusing them.” – ABA, BPI, NYBA and TCH wrote in a joint statement.

  • The case: New York sued Citibank, alleging that the bank responded inadequately to customers’ reports that scammers stole money by initiating wire transfers from the customers’ online bank accounts. The question is whether a scam transaction conducted via wire transfer is governed by the EFTA.
  • The reality: It is well-settled law that the Electronic Fund Transfer Act does not apply because wire transfers are explicitly excluded from the EFTA’s coverage. Congress has declined to expand EFTA’s coverage to the wire transfers of the sort at issue in the NYAG’s complaint. Those wire transfers are instead governed by a different legal framework – Article 4A of the UCC.
  • The ultimate costs: As ABA, BPI, NYBA and TCH noted in their amicus brief in this case, applying this law more broadly to wire transfers would impose costs on customers by forcing financial institutions to become insurers against all unauthorized online wire transfers. That would mean higher costs and less convenience for consumers when they wish to make payments.

Five Key Things

1. SCOTUS Cantero Bank Preemption Case Reiterates Earlier Precedent

The U.S. Supreme Court on Thursday vacated a Second Circuit decision in the Cantero v. Bank of America case and directed the lower court to redo its analysis of national bank preemption. The lawsuit accused Bank of America of failing to comply with a New York state law requiring interest payments on mortgage escrow accounts. Bank of America, which BPI supported in an amicus brief in the case, argued that the New York requirement did not apply because the state law interferes with their powers under the National Bank Act. The Second Circuit ruled in favor of Bank of America, finding that national bank preemption superseded the New York law and therefore the bank did not have to comply with it.

  • What the Supreme Court Said: In a unanimous opinion led by Justice Brett Kavanaugh, the Supreme Court held that the Second Circuit failed to apply the preemption standard properly, and that it needed to take a deeper dive into how the state law interfered with the bank’s national banking powers. “In analyzing the New York interest-on-escrow law at issue here, the Court of Appeals did not conduct that kind of nuanced comparative analysis,” Kavanaugh wrote.
  • Key Quote: “A court applying [the national bank preemption] standard must make a practical assessment of the nature and degree of the interference caused by a state law. If the state law prevents or significantly interferes with the national bank’s exercise of its powers, the law is preempted.”
  • Bigger Picture: The principle of national bank preemption is critical to avoid a patchwork of conflicting state laws that make banking less efficient across state borders.

Key Takeaways: 
The Cantero decision appears to preserve the status quo in terms of the standard generally applied by the OCC and the courts even while vacating and remanding the Second Circuit’s decision that was in favor of Bank of America.  The Court clearly rejects the plaintiff borrowers’ very narrow view of the preemption standard (i.e., discovery and evidence must show that the state law at issue imposes a very high degree of burden on a bank in order to be preempted). Instead, the Court directs judges to engage in a “nuanced comparative analysis” rooted in longstanding Supreme Court precedent.

Based on the Cantero decision, it is likely that courts (including the Second Circuit in the Cantero case) will consider whether a state law is preempted by analogizing the at-issue laws to laws addressed in the prior Supreme Court preemption cases.  This will involve lower courts trying to apply a “commonsense” analysis on a case-by-case basis of whether the degree of interference of the at-issue law bears a closer resemblance to the degree of interference of a state law that the Supreme Court has previously found to be preempted, or alternatively, a closer resemblance to the degree of interference of one of the laws that the Supreme Court has found not to be preempted.

2. Debunking False Claims About Credit Cards and Competition 

A recent criticism of the proposed Capital One acquisition of Discover Financial Services is that the deal would raise the concentration of the credit card market to a level that is potentially anti-competitive, if subprime borrowers were considered in a separate category. According to this view, subprime borrowers – those with lower credit scores and higher-risk credit profiles – would be more vulnerable to price increases through higher fees and interest rates because they would have fewer options available to them than borrowers presenting lower credit risk. A new BPI analysis examines the proposed merger’s impact on concentration in the subprime and prime segments of the credit card market.

What BPI found: BPI’s analysis provides a fuller picture of the subprime segment of the consumer credit card market compared to previous commentary on the issue and finds that it would remain competitive following this merger. The analysis more fully accounts for card issuers with a major presence in the subprime market and shows that even if subprime is considered a separate market (although there is little reason to think it should be) for evaluating the competitive effects of the proposed merger, concentration would not rise to a level that raises competitive concerns.

3. OCC’s Hsu Floats Expanding Recovery Planning Guidelines to Broader Range of Banks

Acting Comptroller Michael Hsu this week discussed recovery planning for banks in a speech for a Zurich conference. Hsu noted the importance of recovery planning for addressing systemic risk and put it in the context of the March 2023 bank failures. Recovery planning – contingency options to stabilize a distressed bank and boost confidence in it under stress, such as selling assets, increasing liquidity or raising capital – can enable regulators to avoid the dichotomy of two damaging paths forward, he said. “Having actionable recovery options effectively creates new tracks that a bank can switch to when it is in stress, enabling it to avoid disorderly failure and mitigating the trolley problem,” he said.

  • Next steps: Hsu suggested expanding the application of the OCC’s recovery planning guidelines to banks with at least $100 billion in assets. The guidelines currently apply to banks with at least $250 billion in assets. Hsu suggested that such planning “might have mitigated the failures of Silicon Valley Bank and Signature Bank” or at least made their resolutions less costly.

4. France’s Villeroy Calls for EU Basel Delays if U.S. Takes Longer to Implement

If the U.S. takes longer than Europe to implement the Basel capital rules – or if there are significant “differences in content” – then the EU should delay implementation of certain Basel provisions, Banque de France chief Francois Villeroy de Galhau said this week. “If, unfortunately, the delays and/or differences in content are too great, Europe could and should … postpone the entry into force … of certain provisions, in particular those concerning market risks,” Villeroy said. His remarks follow recent comments by French President Emmanuel Macron suggesting that European banks would be at a competitive disadvantage if the U.S. implements the rules more slowly.

5. ECB’s Schnabel: Central Banks Can Reduce Costs of Bond-Buying Programs by Taking ‘Targeted’ Approach

Senior European Central Bank official Isabel Schnabel highlighted the costs and benefits of central bank asset purchases in a speech this week. One key takeaway of her remarks: Asset purchases, such as the Fed’s quantitative easing, are best used as a scalpel, not a blunt cudgel. “Central banks can reduce the costs of asset purchases by using them in a more targeted and parsimonious manner, intervening forcefully when needed but stopping them faster,” she said. “Examples are the commercial paper purchases by the ECB in 2020 and the interventions by the Bank of England during the LDI crisis.”

  • Alternatives: Schnabel observed that central banks have alternatives to bond-buying in their toolkits, such as lending large amounts to commercial lenders at ultra-low rates, or adopting a more patient approach when inflation is below target and rates are close to their lowest possible levels.

In Case You Missed It

Tarullo Asks: Should the Link Between Stress Tests and Capital Requirements Be Broken?

Former Federal Reserve Governor Daniel Tarullo last week raised the question of whether the stress tests should continue to be used to set banks’ capital requirements, or whether they should instead be decoupled from that process.

  • Reasoning: Tarullo said that the stress test regime has become “a more routinized, predictable process” and asserted the “likelihood that inertial institutional pressures—both external and internal— will in practice limit the considerable conceptual advantage of using stress tests to set capital requirements.” Such pressures include the threat of litigation on the stress tests but also the tendency at any government agency toward “regularization.”
  • Advantages of stress tests: Stress testing drives more risk-sensitive capital requirements and improvements in banks’ capital planning and risk management, Tarullo said.
  • Status quo or change: Tarullo referred to one consequence of the status quo stress test system as “the potential for significant fluctuation in capital requirements for large banks, depending on the composition of the Board of Governors—especially the Chair and Vice Chair for Supervision. In the last few years, we have seen how, even with the effects of the inertial tendencies, the relative rigor and dynamism of the annual SCB exercise has varied with the change in leadership of the Fed’s bank regulation function. If this pattern is repeated, capital requirements will regularly rise and fall significantly depending on the occupant of the White House.” He criticized the notion of putting the stress tests out for notice and comment and providing details of the stress test models because it would likely result in lower capital requirements.
  • Tarullo’s view: Tarullo framed his paper as a prompt for a policy debate on how to use the stress tests going forward, rather than a full-throated recommendation. “Decoupling the stress test from ongoing, regular capital requirements would, in a sense, be an admission that the Fed cannot sustain an approach to capital regulation that is forward-looking, dynamic, and macroprudential,” Tarullo wrote. “Were I reasonably confident that the modestly more dynamic version of the status quo discussed earlier could be implemented and sustained, I would lean towards tepid endorsement of it. However, on the basis of stress testing practice over the last five years, I find myself—with considerable disappointment—approaching the conclusion that decoupling [is] now the best option.”

Jurisdiction Back-and-Forth Continues in CFPB Late Fee Case

The U.S. Court of Appeals for the Fifth Circuit once again halted the transfer of a lawsuit against the CFPB’s credit card late fee rule from the Texas federal court to one in Washington, D.C. A three-judge panel at the court said that the transfer would be stayed, or paused, until close of business on June 18. For the second time, Texas-based U.S. District Judge Mark Pittman attempted to send the case to D.C., but industry plaintiffs successfully sought to stop that transfer.

The Crypto Ledger

Here’s what’s new in crypto.

  • FTX executive sentenced: A former top executive at failed crypto exchange FTX was sentenced to prison time recently, following founder Sam Bankman-Fried’s sentencing to 25 years. Ryan Salame, who was the co-CEO of FTX’s Bahamas subsidiary, was sentenced to seven years in prison on charges of violating campaign finance laws and operating an illegal money transmitting business.
  • Gemini unlocks funds: Crypto exchange Gemini will return $2.2 billion to customers of its Earn program after halting withdrawals in November 2022. The move follows Gemini’s lending partner’s settlement with the New York attorney general.  
  • Treasury view: Brian Nelson, the U.S. Treasury Department’s Under Secretary for Terrorism and Financial Intelligence, said at a recent conference that Treasury is not trying to ban crypto “mixers” outright, but instead wants to “drive transparency.” Nelson was referring to FinCEN’s 2023 proposal to classify mixers as a primary money laundering concern and require virtual asset service providers to report any crypto transactions that involved mixing.

Regions Honored With Presidential Award for Supporting U.S. Exports

Regions Bank recently announced it had received the 2024 President’s “E” Award for Export Service, recognizing the bank’s work financing U.S. exports. Regions received the award at a ceremony at the U.S. Department of Commerce in Washington. The award serves as the highest recognition a person or U.S. entity can receive for making a significant contribution to the expansion of American exports.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.