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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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New Mortgage Servicing Rules for “Successors in Interest”

Effective as of April 19, 2018, successors in interest to property secured by mortgage loans that are covered by the Real Estate Settlement Procedures Act (“RESPA”) and Truth In Lending Act (“TILA”) now have certain rights under those acts.

These amendments are part of the Consumer Financial Protection Bureau’s 2016 Mortgage Servicing Rule amendments to RESPA and TILA.  The CFPB issued the new rules because “it had received reports of servicers either refusing to speak to a successor in interest or demanding documents to prove the successor in interest’s claim to the property that either did not exist or were not reasonably available.”  81 Fed. Reg. 72,160 at 72,165. The rules are therefore designed to make it easier for potential successors in interest to communicate with servicers and establish that they are successors in interest.

At the outset, the new rules define a “successor in interest” as anyone who obtains an ownership interest in a property secured by a mortgage loan, provided that the transfer occurs under one of the scenarios listed in the new rule.  The scenarios range from a transfer resulting from the death of the borrower to a transfer from the borrower to a spouse or child.  The person does not have to assume the loan in order to be a successor in interest.

The amendments create several potential pitfalls for servicers because certain obligations are triggered when a servicer receives actual or inquiry notice that someone might be a successor in interest.  As discussed below, the amendments require servicers to “promptly” communicate with anyone who may be a successor in interest.  Servicers must also only request documents “reasonably” required to confirm whether that person is in fact a successor in interest.  And a “confirmed” successor in interest now has the same rights as the original borrower under RESPA and TILA mortgage servicing rules.

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FinCEN Provides Relief to CDD Obligations for Existing Customers

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.

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Senate-passed Regulatory Reform Offers Real Benefits to Depository Institutions under $10 Billion in Assets

On March 14, 2018, the Senate passed, 67-31, the Economic Growth, Regulatory Relief and Consumer Protection Act, or S. 2155.  While it may lack a catchy name, its substance is of potentially great importance to community banks.

The following summary focuses on the impact of the bill for depository institutions with less than $10 billion in consolidated assets.  The bill would also have some significant impacts on larger institutions, which could, in turn, affect smaller banks… either as a result of competition or, perhaps more likely, through a re-ignition of larger bank merger and acquisition activity.  However, we thought it was useful to focus on the over 5,000 banks in the United States that have less than $10 billion in assets.

Community Bank Leverage Ratio

Section 201 of the bill requires the federal banking regulators to promulgate new regulations which would provide a “community bank leverage ratio” for depository institutions with consolidated assets of less than $10 billion.

The bill calls for the regulators to adopt a threshold for the community bank leverage ratio of between 8% and 10%.  Institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be well-capitalized.  However, the bill does provide that the regulators will retain the flexibility to determine that a depository institution (or class of depository institutions) may not qualify for the “community bank leverage ratio” test based on the institution’s risk profile.

The bill provides that the community bank leverage ratio will be calculated based on the ratio of the institution’s tangible equity capital divided by the average total consolidated assets.  For institutions meeting this community bank leverage ratio, risk-weighting analysis and compliance would become irrelevant from a capital compliance perspective.

Volcker Rule Relief

Section 203 of the bill provides an exemption from the Volcker Rule for institutions that are less than $10 billion and whose total trading assets and liabilities are not more than 5% of total consolidated assets.  The exemption provides complete relief from the Volcker Rule by exempting such depository institutions from the definition of “banking entity” for purposes of the Volcker Rule.

Accordingly, depository institutions with less than $10 billion in assets (unless they have significant trading assets and liabilities) will not be subject to either the proprietary trading or covered fund prohibitions of the Volcker Rule.

While few such institutions historically undertook proprietary trading, the relief from the compliance burdens is still a welcome one.  It will also re-open the ability depository institutions (and their holding companies) to invest in private equity funds, including fintech funds.  While such investments would still need to be confirmed to be permissible investments under the chartering authority of the institution (or done at a holding company level), these types of investments can be financially and strategically attractive.

Expansion of Small Bank Holding Company Policy Statement

Section 207 of the bill calls upon the federal banking regulators to, within 180 days of passage, raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

Institutions qualifying for treatment under the Policy Statement are not subject to consolidated capital requirements at the holding company level; instead, regulatory capital ratios only apply at the subsidiary bank level. This rule allows small bank holding companies to use non-equity funding, such as holding company loans or subordinated debt, to finance growth.

Small bank holding companies can also consider the use of leverage to fund share repurchases and otherwise provide liquidity to shareholders to satisfy shareholder needs and remain independent. One of the biggest drivers of sales of our clients is a lack of liquidity to offer shareholders who may want to make a different investment choice. Through an increased ability to add leverage, affected companies can consider passing this increased liquidity to shareholders through share repurchases or increased dividends.

Of course, each board should consider its practical ability to deploy the additional funding generated from taking on leverage, as interest costs can drain profitability if the proceeds from the debt are not deployed in a profitable manner. However, the ability to generate the same income at the bank level with a lower capital base at the holding company level should prove favorable even without additional growth.  This expansion of the small bank holding company policy statement would significantly increase the ability of community banks to obtain significant efficiencies of scale while still providing enhanced returns to its equity holders.

Institutions engaged in significant nonbanking activities, that conduct significant off-balance sheet activities, or have a material amount of debt or equity securities outstanding that are registered with the SEC would remain ineligible for treatment under the Policy Statement, and the regulators would be able to exclude any institution for supervisory purposes.

HVCRE Modifications

Section 214 of the bill would specify that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate (HVCRE) exposures unless they are for acquisition, development or construction (ADC), and it clarifies what constitutes ADC status. The HVCRE ADC treatment would not apply to one-to-four-family residences, agricultural land, community development investments or existing income-producing real estate secured by a mortgage, or to any loans made prior to Jan. 1, 2015.

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Modifications to the California Homeowner Bill of Rights

On January 1, 2018, certain provisions of the California Homeowner Bill of Rights (“HBOR”) expired.  But contrary to what many assumed, the January 1, 2018 expiration date did not apply to all of the HBOR’s provisions, and many provisions have been replaced by new regulations.  We’ve prepared the below summary of some of the substantial changes to the law and how they will affect HBOR litigation in the future.

  • The new HBOR removes many of the distinctions between servicers conducting more/less than 175 annual foreclosures.  In most but not all respects, all servicers are treated the same going forward.
  • Changes in the private right of action/relief.
    • The HBOR still has a private cause of action, but only for material violations of section 2923.5 (pre-NOD notice requirements), 2923.7 (single point of contact), 2924.11 (dual tracking), and 2924.17 (accuracy of NOD declaration; substantiate right to foreclose).
    • Injunctive relief is available prior to the recording of a trustee’s deed.  After a trustee’s deed is recorded, a servicer may be liable for actual economic damage and the greater of treble or actual damages for material violations that are intentional or reckless.  Attorney’s fees are still available if the borrower prevails.
    • However, mortgage servicers who have engaged in “multiple and repeated uncorrected violations” of section 2924.17 are no longer liable for a $7,500 penalty.
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CFPB’s Delay in Announcing Further Delay of the Prepaid Card Rule

The Consumer Financial Protection Bureau has issued a brief press announcement that the Prepaid Card Rule would be further revised and that the effective date for compliance will be further postponed from the current deadline in April 2018.

The announcement creates more worry than relief – it’s just a tease. The announcement did not say what changes would be made or when the new deadline will be. It only said that amendments to “certain aspects” of the rule would be coming “soon after the new year.”  No doubt the Bureau meant for this announcement to be helpful to someone, but it is not clear if anyone is actually helped.

Prepaid card issuers are scrambling to implement the systems changes and new business processes necessary to support the sweeping changes required by the rule. With this announcement, they must now wonder which of those efforts will turn out to be wasted, or perhaps need to be re-worked, and they can’t pause pursuing any specific implementation efforts until the actual amendments are published. Are they supposed to trust that the extra time to be allowed by the CFPB will be sufficient to accommodate this pivot?

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New Year, New You – What’s on Your Bank’s List of New Year’s Resolutions?

With the end of the year approaching, it is time to start looking forward to 2018 and putting together that list of New Year’s resolutions. This list of annual goals can be especially important for community banks because, let’s face it, times are a-changin’ and community banks cannot afford to ignore this, especially in the face of the ostensible juggernaut that is fintech. “New Year, New You” doesn’t have to be a mantra solely for individuals; it can also be a mantra for community banks who want to make 2018 a successful year. To get you started, we have provided some suggestions that may help you turn 2018 into a very positive year for your bank.

Don’t be Consciously Blind

With such a vast amount of information thrown at us every day, I think we are all guilty of becoming consciously blind. It’s true, all the information can overwhelm us, making us turn a blind eye and ignore what everyone has to say and assume if something really important happens, someone will tell us. As a banker, you cannot afford to do this. With the promulgation of new regulations and advances in technology, it is important for community banks to remain aware of the financial landscape and evolve. Whether this means meeting revised regulations or updating technology to meet your customer’s needs, make a resolution to stay abreast of information that may affect your bank.

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