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FinCEN Grants Permanent Relief for Autorenewals

Exercising “exceptive” relief authority, FinCEN has extended permanent relief from the beneficial ownership requirements of its new Customer Due Diligence (CDD) rule to existing autorenewing CDs and safe deposit boxes, as well as existing autorenewing commercial lines of credit and credit cards that do not require underwriting review and approval.  FinCEN reasoned that these products pose such a low risk for money laundering and terrorist financing activity that the benefits of requiring the collection of this information does not outweigh the impacts of compliance on financial institutions and their customers.  Specifically, institutions need not treat rollovers or renewals of such products as “new accounts” requiring the collection of the beneficial ownership elements of the CDD rule, whether or not the initial accounts were established prior to the rule’s May 11, 2018 effective date.

FinCEN previously issued temporary relief to autorenewing CDs and loan products established prior to May 11, 2018, and in a second release extended this relief through September 9, 2018.  The new release both extends this treatment indefinitely and expands it to include certain safe deposit box rentals, such that the exception applies now to any of the following occurring on or after May 11, 2018:

  • A rollover of a CD, defined as a deposit account that has a specified maturity date, prior to which funds cannot be withdrawn without the imposition of a penalty, and which does not permit the customer to add funds;
  • A renewal, modification, or extension of a loan (e.g., setting a later payoff date) that does not require underwriting review and approval;
  • A renewal, modification, or extension of a commercial line of credit or credit card account (e.g., setting a later payoff date) that does not require underwriting review and approval; and
  • A renewal of a safe deposit box rental (e.g., upon the automatic deduction of the rental fee as agreed-upon between a bank and its customer).

FinCEN is careful in this September 7, 2018, release to explain that it does not relieve institutions of the obligation to collect and verify the identity of beneficial owners of legal entity customers where the initial account opening of such accounts occurs on or after May 11, 2018.  It does mean, however, that institutions need not collect beneficial ownership information for certain older accounts of the types described above (those opened prior to May 11, 2018) solely because they are rolled over or renewed.

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A Litigator’s KISS Takeaways from CFPB’s Summer 2018 Supervisory Highlights

KISS. An acronym first utilized in military equipment design in the 1960’s, “Keep it Simple Stupid.” Litigators rely on KISS in formulating trial themes and presentations to juries. Simple messages resonate. In that vein, I offer three KISS takeaways from the Bureau of Consumer Financial Protection’s Supervisory Highlights, Issue 17, Summer 2018.

KISS #1: Details Matter. 

On two key levels: (a) your business compliance operations and consumer interactions, and (b) in the Bureau’s supervision and examination conclusions. Taking these in reverse order, the Bureau’s Introduction (p. 2) provides important guardrails:

[L]egal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations. A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different facts and circumstances.

This is critical to your supervision and examination preparedness and your interactions with the Bureau.  If the Bureau spots a concern, consider providing a fulsome explanation of the analysis that went into the policy formulation, how your organization believed it was operating in good faith under applicable laws and believed that the practice would not harm or mislead consumers, what steps your organization has done in monitoring and addressing any consumer concerns regarding the policy or practice. This may sound basic, but the Bureau’s statement matters and can be referenced. The Bureau should, in my view, consider such information in assessing whether any violation has occurred, whether any consumers actually were harmed and whether any remediation is necessary. Sometimes the conclusion may be that the practice presents a risk of potential confusion or harm and simply should be modified going forward. Present your best case; the Bureau appears to be open to considering all the facts and circumstances.

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Two Key EGRRCPA Provisions Now Effective

As of the end of August 2018, two key provisions of The Economic Growth, Regulatory Relief, and Consumer Protection Act (aka the Crapo bill, S.2155, or increasingly, EGRRCPA) have become effective: the increase in the small bank holding company policy statement threshold and the increase in the expanded examination cycle threshold.  Before looking at those provisions, I have to acknowledge the fabulous Wall Street Journal story by Ryan Tracy, “Can You Say EGRRCPA? Tongue-Twister Banking Law Confuses Washington.”  Personally, I’m now leaning towards “egg-rah-sip-uh.”

On July 6, 2018, the federal banking agencies released an Interagency statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act that provided guidance as to which provisions were immediately effective versus which provisions would require further regulatory action.  Included in this guidance was confirmation that the banking regulators would immediately implement EGRRCPA’s changes to the Volcker Rule, freeing most institutions with total assets of less than $10 billion from the constraints of the Volcker Rule.  The regulators noted that they “will not enforce the final rule implementing section 13 of the BHC Act in a manner inconsistent with the amendments made by EGRRCPA to section 13 of the BHC Act.”

Unfortunately, two of the more significant areas of regulatory relief for community banks, the respective increases in thresholds for the small bank holding company policy statement and the expanded examination cycle were not granted such immediate effectiveness.  While EGRRCPA required the Federal Reserve to act on the expansion of the policy statement within 180 days, anyone familiar with the deadlines set forth in the Dodd-Frank Act for regulatory action would not be holding their breath.

Small Bank Holding Company Policy Statement Expansion.  On August 30, 2018, the Federal Reserve published an interim final rule implementing the revisions to the small bank holding company policy statement.  The Federal Reserve’s small bank holding company policy statement generally exempts such institutions from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.  The small bank holding company policy statement was first implemented in 1980, with a $150 million asset threshold.  In 2006, it was increased to $500 million, and in 2015, it was increased to $1 billion.  Section 207 of EGRRCPA called for the Federal Reserve to increase the threshold to $3 billion, and the interim final rule implements this change.

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OCC Provides a Path for FinTech Charters

On July 31, 2018, the OCC announced that it had finalized parameters for its new limited-purpose financial technology national bank charter and is ready to begin taking applications.  This release follows several years of formal deliberation on the topic and coincided with the release of a 222-page U.S. Treasury report on innovation.  Industry reactions have been wide-ranging – will this level the playing field or usher in a FinTech “apocalypse“?

Highlights of the OCC notice include:

  • Designation of the charter type as a national bank.  Like its other special-purpose charters, including the non-depository trust company or the credit card bank, the FinTech charter will be a “national association” in the National Bank Act sense of the term.  As the saying goes, membership will have its privileges (and burdens):  capital requirements, examinations, and federal preemption of certain state laws.
  • Eligibility for qualified applicants that plan to conduct activities “within the business of banking.”  Pursuant to existing OCC regulations, a limited-purpose national bank not engaging in fiduciary activities “must conduct at least one of the following three core banking functions:  receiving deposits; paying checks; or lending money.”  In its FinTech charter announcement, the OCC notes that it “views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways.  For example, facilitating payments electronically may be considered the modern equivalent of paying checks.”
  • A requirement for a commitment to “financial inclusion.”  We will see how this element is administered.  In theory it provides a non-depository parallel to the Community Reinvestment Act (“CRA”).
  • Publication and comment period.  Just as for other types of national banks, applications will feature newspaper publication requirements and will be generally subject to public review and comment.

The OCC stated that its decision to open the door for this new form of national bank “is consistent with bi-partisan government efforts at federal and state levels to promote economic opportunity and support innovation that can improve financial services to consumers, businesses, and communities.”  Comptroller Otting added:

Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition.  It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.

Treasury’s report is consistent with these themes, noting, “A forward-looking approach to federal charters could be effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models” and that the OCC should proceed with “thoughtful consideration” of FinTech charter applications.  Treasury also calls out specifically the need for updating regulations that relate to data aggregation, for addressing those which have become “outdated” in light of technological advances (e.g., in the mortgage lending and servicing space, according to Treasury), and for a regulatory approach that enables “responsible experimentation” in the financial sector.

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FinCEN Extends Temporary Beneficial Ownership Rule Relief for Older Autorenewing Products

The temporary exception that FinCEN extended to autorenewing CDs and loans established prior to the May 11, 2018 compliance effective date of its beneficial ownership requirements was scheduled to expire on August 9, 2018.  On August 8, FinCEN published a short release in which it announced the extension of this relief through September 8, 2018.  FinCEN noted that it was providing this extension in order to further consider the issues raised by the application of these aspects of its Customer Due Diligence (CDD) rules to such products.

As a reminder, this exception only applies to CDs and loans that (i) automatically rollover or renew and (ii) were established prior to May 11, 2018.  Such accounts or loans established subsequent to this date (and older accounts that are renewed on new or modified terms) are fully subject to the CDD rules, and all accounts are subject to its general due diligence and monitoring requirements.  In particular, institutions should continue to collect or update beneficial ownership information as other “risk events” warrant for particular customers–including those whose autorenewing CDs or loans or other accounts were established prior to May 11, 2018.  FinCEN has given as an example of such risk or “trigger” events an unexplained spike in cross-border wire transfers.  Moreover, as we noted previously, OFAC’s strict liability framework continues to apply to any U.S. person that does business with a sanctioned party, so institutions that do not collect beneficial ownership information may be exposed to this type of risk.

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Fair Debt Collection – In Writing, and We Mean It

The Sixth Circuit Court of Appeals continues to contribute to the case law defining which violations of procedural statutes constitute an injury-in-fact under Spokeo, Inc. v. Robins, ––– U.S. ––––, 136 S.Ct. 1540, 1547, 194 L.Ed.2d 635 (2016).

In Macy v GC Services Limited Partnership, it holds that Plaintiffs alleged sufficient concrete harm to satisfy the injury-in-fact requirement for standing where the defendant debt collector’s letter omitted to inform the plaintiffs, credit card holders, that it was obligated to provide certain information only if Plaintiffs disputed their debts in writing. See 2018 WL 3614580 (6th Cir. July 30, 2018).

At issue was the Fair Debt Collection Practices Act’s requirements that a debt collector provide a consumer with a notice that contains:

(4) a statement that if the consumer notifies the debt collector in writing within [a] thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and (5) a statement that, upon the consumer’s written request within [a] thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.” 15 U.S.C. § 1692g(a) (emphases added).

The Defendant’s letter omitted to mention the writing requirement, instead simply stating, “if you do dispute all or any portion of this debt within 30 days of receiving this letter, we will obtain verification of the debt from our client and send it to you. Or, if within 30 days of receiving this letter you request the name and address of the original creditor, we will provide it to you in the event it differs from our client, Synchrony Bank.”

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FinCEN’s Temporary Relief for Autorenewable CDs and Loans

In a unique administrative ruling under delegated “exceptive” authority, on May 16, 2018 FinCEN issued relief from its new beneficial ownership requirements through at least August 9, 2018, for “certain financial products and services that automatically rollover or renew (i.e., certificate of deposit (CD) or loan accounts) and were established before the Beneficial Ownership Rule’s Applicability Date, May 11, 2018.”

FinCEN acknowledged in its notice that “some covered institutions have not treated such rollovers or renewals as new accounts and have established automatic processes to continue the banking relationship with the customer.”

The exception is effective retroactively from May 11, 2018 and expires on August 9, 2018.  FinCEN added that it was considering whether additional relief may be appropriate for such products and services established prior to May 11, 2018 and expected to rollover or renew thereafter.

We will explore how we got here, but first, some practical considerations:

  • Institutions that have already set into motion new systems, procedures, and communications to collect this info on renewable loans and CDs established prior to May 11 will need to decide whether to discontinue these measures, or alternatively to conclude there is now greater flexibility for handling customers that do not adhere to them – e.g., by failing to submit a completed ownership certification form.  The prevailing view among our clients seems to be the latter.
  • Institutions that were still rushing to implement such measures will need to decide whether to put these plans on hold or to continue to develop them as to loans and CDs established prior to May 11, 2018.  The preference within the industry in this regard appears to be a function of how far along these plans are into production, and the extent to which they constitute separate solutions specific to these existing account types.
  • Any discussions with examiners and auditors about any changes to implementation plans in light of this release should be direct and documented.  We would encourage institutions to think broadly and generously about the purpose of these rules and the BSA generally, and what risks to the bank (such as sanctions exposure or fraud) might be mitigated by the spirit if not the letter of FinCEN’s new rules.  OFAC’s strict liability framework for doing business with sanctioned parties is unaffected by the relief afforded by FinCEN’s May 16 notice.
  • Institutions should consider ways to continue socializing their views to FinCEN, through trade associations or otherwise, as this interim relief appears directly responsive to industry feedback such as that provided in an April 27 hearing held by the House Financial Services Committee (e.g., “. . . there is no reason to believe that an auto-renewal is evidence that a change in beneficial ownership might have occurred. The FAQ 12 guidance is further complicated by the fact that these products include contractual provisions requiring the financial institution to auto renew them without interruption.”)

Let’s revisit how this unfolded as a regulatory matter.

The supplemental FAQs issued by FinCEN on April 3, 2018 provided certain interpretations of its own final rules, originally published on May 11, 2016, including that it believed a bank established a “new account” each time an autorenewing loan or CD renewed (see FAQ 12).  FinCEN opined at that time on ways a bank could comply with the Beneficial Ownership certification requirements implicated by the opening of a “new account” for a legal entity customer in such cases, namely by (1) providing the required information and certification on FinCEN’s new form or its equivalent once and (2) agreeing at that time to notify the bank of any change in such information going forward.  FinCEN’s view then was that a customer’s agreement to notify a bank of any changes in its beneficial ownership information can be considered a “certification” of this information for purposes of subsequent rollovers of renewable products.

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Reverse Mortgage Update: New York Law Mandates New Foreclosure Notices and Certificate of Merit

New York has signed into law an amendment redefining a reverse mortgage as a “home loan.” With this amendment, statutory pre-foreclosure ninety day notices (RPAPL 1304) and a “certificate of merit” (CPLR 3012-b) will be required in all New York reverse mortgage foreclosures. Additionally, New York’s foreclosure settlement conference law (CPLR 3408) now incorporates by reference the new “home loan” definition.

The legislation was signed by Gov. Andrew Cuomo on April 12, 2018 but “shall be deemed to have been in full force and effect on and after April 20, 2017.” However, the pre-foreclosure notice requirement specific to reverse mortgages has an effective date of May 12, 2018.

Under the new legislation, for actions commenced after May 12, 2018, lenders, assignees or servicers are required to provide a pre-foreclosure notice at least 90 days before commencing legal action against the borrower or borrowers at the property address and any other addresses of record. The language of the notice is set by statute.

Although the 90-day waiting period does not apply, or ceases to apply under certain circumstances (i.e. where a borrower no longer occupies the residence as a principal dwelling),the 90 Day Notice is a condition precedent which, if not strictly complied with, may subject a foreclosure action to dismissal. Further, the foreclosing party is required by statute to deliver the notices by first class and certified mail. Relevant case law makes clear that evidencing the proof of mailing may require tracking documentation for first class mail and certified receipts for notices sent by certified mail.

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Regulators Update BSA/AML Exam Manual Sections

Just in time for the effective date of FinCEN’s Customer Due Diligence (CDD) and Beneficial Ownership Rules, on May 11, 2018 the Federal Financial Institutions Examination Council (FFIEC) published updates to its Bank Secrecy Act/Anti-Money Laundering Examination ManualThe FFIEC is an interagency body comprised of representatives of the U.S. Federal Reserve Board, the FDIC, OCC, CFPB, NCUA, and state banking regulators.  The agencies’ changes (1) replace existing CDD sections of the manual and (2) add new Beneficial Ownership overview and exam procedures sections, in each case corresponding to the new CDD and Beneficial Ownership requirements.

The publication of this new content was announced through separate press releases by the FDIC, OCC, and NCUA.  The OCC’s release (OCC Bulletin 2018-12) makes the technical point that the new CDD content replaces pages 56-59 of the FFIEC manual, last updated in 2014, and the FDIC’s release (FIL-26-2018) adds that the new sections will be incorporated into the manual in its next update.  The FFIEC’s examination manual is used by the bank regulators in conducting supervisory BSA/AML exams and features step-by-step review procedures to be used by examiners, consistent with the FFIEC’s statutory purpose of establishing uniform forms and regulatory examination processes.

One doesn’t generally expect new substantive guidance or interpretation to emerge from the FFIEC examination procedures, but a review of this new content emphasizes the following:

(1) BSA/AML exams including scope periods on or after May 11, 2018 will feature scrutiny of new accounts opened on or after that date.  At this point, the CDD and Beneficial Ownership rules are live and in full effect, and institutions will be expected to adhere to them.  For example, the revised examiner’s guide specifies:  “3. On the basis of a risk assessment, prior examination reports, and a review of the bank’s audit findings, select a sample of new accounts opened for legal entity customers since May 11, 2018 to review for compliance with the Beneficial Ownership Rule.”  The transition and implementation period for this rule is officially over.

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GDPR Considerations for Community Banks

The May 25, 2018, compliance effective date of the EU’s General Data Protection Regulation (GDPR) is just weeks away, and many U.S.-based companies have at least by now taken stock of their EU customer base and operations, and developed a baseline set of compliance plans.  For many, that might only entail a data inventory and controls that would ensure that changes to the company’s business plan, advertising strategies, and physical footprint would be assessed for GDPR compliance in advance, just as with any other area of compliance.  However, for companies whose business relies upon the gathering and use of consumer data, the GDPR implementation process has been onerous.

In particular, as recent American Banker coverage has described, this compliance effort is hitting financial institutions of all sizes hard.  While the exact nature and magnitude of enforcement exposure is still unclear, U.S. banks should take a broad view of their overseas business – including where U.S. customers temporarily work or travel – in order to stay ahead of GDPR compliance issues.

For U.S.-based small businesses, including community banks, the conventional wisdom has focused on whether the institution solicits or services EU customers.  Unfortunately this approach may cause banks or other businesses to underestimate their potential exposure.

For purposes of the GDPR, compliance obligations for companies without a physical presence in the EU are generally only implicated if the company (1) offers goods and services in the EU or (2) monitors the behavior of EU customers (referred to affectionately as “data subjects” in the regulation).

Of particular concern for community banks is whether tourists, foreign work assignments, or overseas service members could cause the bank to become subject to GDPR obligations.

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