BCLP Banking Blog

Main Content

FinCEN Provides Relief to CDD Obligations for Existing Customers

April 5, 2018

Authored by:


The Financial Crimes Enforcement Network (FinCEN) published long-awaited additional Frequently Asked Questions on April 3, 2018 (the “Guidance”) relating to its Customer Due Diligence (CDD) Rule, which FinCEN promulgated pursuant to the Bank Secrecy Act (the “CDD Rule”).  This comes at a time when most covered institutions are in the final stages of implementing plans to comply with the CDD Rule by its May 11, 2018 compliance applicability date.  FinCEN previously published technical amendments to the Rule on September 29, 2017 and an initial set of FAQs on July 19, 2016.  While such Guidance does not have the weight of authority of statute or regulation, it has traditionally helped to form the basis for examination and enforcement expectations.  Here we will focus on themes in the new Guidance relating to application of the rule to existing customers.

As a reminder, the CDD Rule was originally published on May 11, 2016 after years of public hearings and comment periods.  The rule sets forth CDD as a “fifth pillar” of a BSA/AML compliance program in addition to those established by the Bank Secrecy Act itself:  system of internal controls, the appointment of a responsible officer, training, and independent testing.  CDD entails upfront due diligence and ongoing monitoring, and this rule establishes the collection of Beneficial Ownership information as a required element of CDD for legal entity customers.  In releasing the CDD Rule, FinCEN emphasized that CDD is not technically a new requirement but has always been an expected part of a BSA/AML program that results in effective suspicious activity monitoring and risk mitigation.

Read More

CFPB Issues Balloon Mortgage and Other Small Creditor Ability-to-Repay Relief

On May 29, 2013, the Consumer Financial Protection Bureau (CFPB) issued a final rule amending the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules it issued on January 10, 2013.  Within this final rule are two new categories of small creditor QMs.  The first, for small creditor portfolio loans, was adopted exactly as proposed alongside the January ATR rule and permits small creditors in all markets to make portfolio loans that are QMs even though the borrower’s DTI ratio exceeds the general QM 43% cap.  As a reminder, small creditors for these purposes are those with less than $2 billion in assets at the end of the preceding calendar year that, together with their affiliates, made 500 or fewer covered first-lien mortgages during that year.

The second new QM is a welcome even if only temporary category of balloon mortgages.  Unlike the small creditor portfolio QM, this interim QM was not an express part of the so-called “concurrent proposal” issued in January.  This is simply but significantly a QM that meets all of the existing rural balloon-payment QM requirements except the controversial limitation that the creditor operate primarily in “rural” or “underserved” areas. 

As written, the new balloon QM category expires two years after the ATR rules take effect on January 10, 2014.  The CFPB characterizes this two-year window as a “transition period” useful for two purposes:  (1) it will give the CFPB time to consider whether its definitions of “rural” and “underserved” are in fact too narrow for the needs of the rural balloon-payment QM rule and (2) it will give creditors time to “facilitate small creditors’ conversion to adjustable-rate mortgage products or other alternatives to balloon-payment loans.”  The CFPB took pains to argue that Congress “made a clear policy choice” not to extend QM status to balloon mortgages outside of rural and underserved areas, and the agency reiterated its belief that adjustable-rate mortgages pose less risk to consumers than balloons:  “The Bureau believes that balloon-payment mortgages are particularly risky for consumers because the consumer must rely on the creditors’ nonbinding assurances that the loan will be refinanced before the balloon payment becomes due.  Even a creditor with the best of intentions may find itself unable to refinance a loan when a balloon payment becomes due.”  For these reasons, creditors may expect future CFPB scrutiny intended to bury, not save, balloon mortgages.   

Read More

The CFPB’s New Mortgage Rules: Themes and Responses

One can’t fault the CFPB’s production level in the past two weeks.  Since January 10, the Bureau has issued seven distinct final rules – the lion’s share of what it considers “a single, comprehensive undertaking” to implement Dodd-Frank mortgage reforms.  By our count, this work includes over 3,100 pages of rulemaking text not to mention the press releases and the various summary materials and social media campaigns.  Final rules were issued on the following:

As a reminder, we’ll provide an overview of these rules and a focused analysis of the Ability to Repay and Qualified Mortgage Rules during a free webinar on Tuesday, January 22, at 3 pm Eastern, and future webinars will unpack the rest of these new requirements.  Still to come in 2013 are the Bureau’s final rules on TILA-RESPA disclosure integration. 

A couple of themes dominate this wave of rules.  First, it’s an understatement to say that Dodd-Frank and these Bureau regulations institutionalize the GSEs and tight prevailing credit standards.  Is anyone surprised that these rules effectively kill no-doc and NINJA loans?  The rules effectively draw a box around the only mortgage loans most creditors are willing to make now anyway.  This convergence may limit the Fair Lending and CRA implications of the rules themselves, as there is less room than ever for discretion and exception.  Other themes include the Bureau’s efforts to accommodate the realities of rural markets and smaller creditors and servicers as well as its sensible preference for loans held in portfolio (i.e., skin in the game). 

On the other hand, the new Servicing standards are going to demand a high level of customer service and multi-party coordination.  We attended both the Baltimore and Atlanta release parties (a.k.a. Field Hearings) for the biggest of these new rules (including Servicing).  One take-home could not be missed:  in the wake of the financial crisis, the Bureau continues to emerge as a sounding board for the distressed mortgage borrower and an advocate for consumer rights both real and imagined.  Its public relations efforts this year on the mortgage front are undoubtedly going to lead to more complaints and more lawsuits against lenders. 

The good news is that the Bureau can’t compete with your own relationship with your customer base.  And the easiest complaints to resolve are those that are never filed.  So to avoid paying for the sins of crisis-era lenders and practices that are now long gone, take a lesson from the CFPB and stay ahead this year on customer service and your institution’s brand.  Reinforce the distinction between your organization and the abuses that gave rise to the Bureau, and you may actually benefit from its rules.

Read More

CFPB’s Final Rule on Escrow Requirements for Higher-Priced Mortgages Reinforces Its View of the Big Lender-Small Lender Divide

We previously covered the CFPB’s issuance of final rules on Ability-to-Repay and Qualified Mortgages together with the expansion of HOEPA coverage under the Dodd-Frank Act (DFA). Here we review the final escrow rules and suggest that they reveal a line the Bureau intends to consistently draw—under its exemption authority—between large and small mortgage lenders (at $2 billion). The Bureau’s final escrow rules take effect on June 1, 2013.

“Higher-priced mortgage loans” are a class of mortgages carrying APRs that are comparatively high but not high enough to trigger the full HOEPA protections implicated by “high-cost mortgages” (a.k.a. “HOEPA loans”). Under 2008 Federal Reserve amendments to Regulation Z, however, creditors must meet a number of requirements in conjunction with the origination of higher-priced mortgage loans, including the establishment and maintenance of escrow accounts for at least one year after origination. These escrow accounts set aside consumer funds on their behalf to pay property taxes, mortgage insurance premiums, and other mortgage-related insurance required by the creditor.

In its 2008 rulemaking, the Federal Reserve concluded that it was “unfair for a creditor to make a higher-priced loan without presenting the consumer a genuine opportunity to escrow.” The agency’s evidence suggested then that few subprime mortgage creditors provided for escrow accounts.

Congress liked these Fed rules enough to codify them, with certain differences, through Dodd-Frank.

Read More

A Big Month for Mortgages and the CFPB

January 2013 promises to be a big month for mortgages and the CFPB, as a variety of provisions of Title XIV of the Dodd-Frank Act take effect by operation of law on January 21, 2013 unless the Bureau issues final rules implementing them by then.  The Bureau has proven to be savvy in meeting its own Dodd-Frank deadlines.  We will soon find out if it is as savvy in establishing compliance deadlines for its new mortgage rules. 

Title XIV—Dodd-Frank’s “Mortgage Reform and Anti-Predatory Lending Act”—says that its provisions take effect 18 months following the designated transfer date of July 21, 2011 unless final implementing rules have been issued by the Bureau prior to that time.  It also provides that such rules must take effect not later than 12 months after they are issued.  So the industry has circled January 21, 2014 as a potential best-case scenario on compliance dates for the following important Title XIV content:

  • Ability to Repay & “Qualified Mortgages”
  • Certain New Mortgage Servicing Requirements
  • High-Cost Mortgage Scope and Restrictions
  • Loan Originator Compensation and Qualification
  • Appraisal Standards and Disclosures

We say “potential best-case” for a few reasons.  First, the Bureau may not publish corresponding final rules in time, so these provisions could take effect by operation of law on January 21, 2013.  No one really believes that will happen, but it is possible.  Proposed rules are pending as to each of these elements.

Read More

Board Oversight of the Compliance Function: Coaching Fundamentals

Despite all that has been made of Dodd-Frank, the new Consumer Financial Protection Bureau, and the increased focus on consumer compliance throughout the banking industry, we think that the fundamental formula for effective board oversight of the compliance function has not materially changed. We encourage directors to take stock to make sure their bank’s program is adequate. In this season of great contests on the gridiron, we would emphasize that blocking and tackling—and defense generally—remain the keys to success in this area. Be a good coach and make sure that these fundamentals are practiced at your bank.

Bank Regulatory Expectations

We start with the black-letter guidance and then read between the lines based on our experience and judgment. Each of the prudential bank regulators has outlined its expectations for board oversight of the compliance function. Although it’s stated in various ways, the basic recipe for the “compliance management system” is this:

  1. Compliance program documents and reporting
  2. Compliance audit
  3. Board and management oversight

Think of board oversight as “coaching” and the rest as blocking and tackling.

Read More

The Future of Unlimited Deposit Insurance Coverage for Noninterest-Bearing Transaction Accounts

The Dodd-Frank Wall Street Reform and Consumer Protection Act codified a form of the Transaction Account Guarantee (TAG) program initiated by the FDIC that extended unlimited deposit insurance coverage to certain no- or low-interest transaction accounts.  Under the Dodd-Frank version, which expires on December 31, 2012, there is no cap on FDIC insurance for “noninterest-bearing transaction accounts.”  As we have explained, qualifying accounts must meet the statutory definition and cannot have even the potential to be paid interest.  Congress modified this definition at the end of 2010 in order to extend coverage for IOLTA accounts (which may pay interest).

The industry is beginning to draw attention to the statutory expiration of this unlimited coverage.  As originally initiated by the FDIC in 2008, the program was intended to stabilize large deposits in a time of crisis within the financial system.  The Dodd-Frank extension of TAG was completely paid for by financial institutions under the general deposit insurance assessment framework.  Community banks have arguably benefitted the most from the unlimited coverage provisions because the corporate, non-profit, and government depositors holding most of the affected accounts may have more concerns (real or imagined) about the continued solvency of small banks than of big banks.  Without the guarantee, smaller banks may have to rely more on pricing in order to retain these depositors, potentially exposing the insurance fund to greater risk.

By one industry estimate, more than half of all TAG account balances (over $500 billion) are already held by just 19 banks over $100 billion in assets.  According to the FDIC, more than three-quarters ($191.2 billion) of Q4 2011 growth in domestic deposits was attributable to account balances subject to the guarantee.  The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances during this period.  As of December 31, 2011, the average institution with less than $1 billion in assets had 15 covered accounts worth an average of $713,000.  Although liquidity is generally less of a concern than it was in 2008, these large depositors are more likely to seek loans and otherwise bank with institutions holding their TAG-size accounts.

The questions, then, are whether the industry and its regulators are unified around this issue and whether legislators will have the stomach to extend the program in an environment where initiatives seens to benefit banks are politically sensitive.  The original FDIC manifestation was optional, with participating banks paying for the coverage.  Although the Dodd-Frank version is universal, again, banks have picked up the tab through the assessment process.  Nonetheless, it is always possible that an extension of the program will be marred as a boon to banks and a burden to taxpayers.

Notwithstanding the position of former Chairman Sheila Bair and some currently within the agency that the program should only be further extended by Congress, the FDIC stands at the center of the issue and could always extend the program administratively.  FDIC’s 2008 program was authorized under the FDI Act by a determination by the Secretary of the Treasury in consultation with the FDIC and the Federal Reserve that conditions of “systemic risk” justified an exception to the least-cost-resolution requirements of the Act.  It was extended by the FDIC in 2009 as a continued response to this finding, although at that time the agency also cited as “additional authority” more general statutory language relating to its mission.  We believe there is footing for a similar, transitional extension of the program under this broader authority.  In fact, when the FDIC extended the program in 2010 through the end of that year, it reserved the right to extend the program through 2011 without additional rulemaking.  This was ultimately not necessary in light of Dodd-Frank, and we think an additional regulatory extension is unlikely to occur here without significant advocacy for it.  The Independent Community Bankers of America and the American Bankers Association, for their part, have recently outlined their views on the issue.

Meanwhile, examiners are beginning to ask how banks are planning for the expiration of the program.  Many institutions are balancing this expiration with Dodd-Frank’s repeal of the prohibition on the payment of interest on business checking accounts (and by extension Regulation Q).  Challenging as this may be in a time of regulatory uncertainty, these considerations should also be evaluated along with Regulation D’s reserve requirements (where restructured accounts may become demand deposits).

Read More

TARP Exit Ramp for Community Banks: The SBLF

January 31, 2012


Only about 1 % of principal repayment to Treasury through 2011 under the TARP Capital Purchase Program (CPP) was the result of SBLF refinancing, according to latest Quarterly Report to Congress issued by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).  Though the lion’s share of Treasury’s $4 billion investment under the Small Business Lending Fund was used for this purpose, the figure constitutes only a fraction of the $186 billion in CPP principal repaid thus far.  About $20 billion in CPP securities remains outstanding.

The rest of the story is that the smaller CPP participants have been much slower to repay CPP obligations, and the SBLF was a major boost for those institutions.  In all, 137 institutions exited TARP by refinancing their outstanding CPP investment using SBLF funds.  Through December 31, 2011, 279 banks in all had exited the CPP program either by fully repaying CPP or by virtue of Treasury’s having sold the institution’s stock.  So roughly half of all exits from the CPP – the first investments under which took place in 2008 – occurred during the three months of SBLF infusion in 2011.  In contrast, by the middle of 2009, ten of the largest CPP participants had already repaid $68 billion worth of Treasury investment.

The average SBLF participant exiting the CPP program used $16 million in SBLF funds to refinance CPP obligations.  Compare that to the median CPP investment among the 707 recipients under that program – $10.3 million – and you can see how the SBLF closed out very little of Treasury’s overall CPP investment but was the single most successful community bank TARP exit strategy to date.

Meanwhile, Treasury continues to make its case that the SBLF has also increased small business lending among participants – $3.5 billion (September 30, 2011) over a $35.9 billion baseline (the average for the four quarters ending June 30, 2010) – or about $10 million per bank.  The average SBLF recipient (332 recipients in all) received $12 million.


Read More

The CFPB Publishes Its First Examination Manual

October 24, 2011

Authored by:


The CFPB published its Supervision and Examination Manual (the “Manual”) on October 13, 2011, designed to provide CFPB examiners with direction on how to determine if providers of consumer financial products are complying with consumer protection laws. The CFPB’s press release states that the Manual incorporates procedures already used by other federal regulators. The Manual does simply recite certain interagency procedures, such as for fair lending examinations. At the same time, the Manual addresses new Dodd-Frank concepts, such as unfair, deceptive and abusive acts or practices.

The CFPB will use the Manual initially to supervise the more than 100 large banks, thrifts, and credit unions that are subject to the CFPB’s examination authority pursuant to the Dodd-Frank Act (those with total assets over $10 billion, as well as their affiliates). The Bureau’s examiners will also ultimately use the Manual to supervise non-depository consumer financial service companies (e.g., mortgage lenders), with the stated goal of promoting “fair, transparent, and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.”

The CFPB Examination Framework and Philosophy

While only certain entities will be subject to CFPB examination, the Manual outlines an examination approach that is illustrative of the Bureau’s bend on matters over which it has rulemaking authority. This is particular true of its view of its authority over matters it considers unfair, deceptive or abusive acts or practices (UDAAP).

Like other bank regulators, the CFPB will prepare for examinations by gathering and reviewing a wide array of regulatory and public data about an institution:  state and/or prudential regulator reports of examination and correspondence, enforcement actions, state licensing and registration information, complaint data, call reports, HMDA LARs, HAMP data, fair lending analyses, SEC or other securities-related filings, the institution’s website and advertising, and, among other things, “newspaper articles, web postings, or blogs that raise examination related issues.” The CFPB will then contact the institution about the examination and prepare its customized Information Request.

Read More

Small Business Lending Fund Map and Review

October 21, 2011


New investment under the Small Business Lending Fund ended on September 27, 2011, in accordance with its enabling legislation.  In the end, 332 institutions received over $4 billion in SBLF funds, and Treasury closed 97 deals worth $1 billion in the program’s final week of investment.  We have previously noted that recipient institutions were generally well-capitalized with low levels of non-performing assets.  While Treasury has published a version, we have developed our own interactive map of SBLF recipients:

Phoenix-based Western Alliance Bancorporation received the largest single investment under the program ($141 million).  More recipients were based in California (29) than anywhere else.  Only four entities based in Georgia received funding.  As one of those, Appalachian Community Enterprises, Inc., is a Community Development Loan Fund (CDLF), only three Georgia headquartered banks (two state-chartered and one national charter) received funding under the SBLF.

Pennsylvania entities did well under the program (23 recipients).  Pennsylvania had 208 FDIC-insured institutions reporting a total of $202 billion in total assets as of June 30, 2011 (compared to 246 institutions and $265 billion in total assets in Georgia).  While 73 Georgia banks have been closed since late 2000, only six Pennsylvania institutions have been closed during this time.  Pennsylvania has generally not faced the real estate-related asset quality problems that continue to plague many states.  In Florida, however, where 59 banks have failed since 2000, seventeen entities received SBLF funding. 

In that light, it is not clear to us why only three Georgia headquartered banks received SBLF funds. Based on Commissioner Braswell’s letter to Treasury Secretary Geithner, it may not be clear to anyone other than the Treasury.

In testimony before the Senate Small Business Committee on October 18, 2011, Geithner maintained that the SBLF has been a success.  Geithner argued that there were two reasons only $4 billion of the allocated $30 billion fund was disbursed:  (1) banks applied for only one-third of the available funds and (2) one-half of those that applied were not eligible to receive funding.

Read More
The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.