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OCC supports national bank’s challenge to state law requirement that interest be paid on escrow accounts
On June 15, the OCC filed an amicus curiae brief in support of a defendant-appellant national bank in an appeal challenging a requirement under New York General Obligation Law § 5-601 that a defined interest rate be paid on mortgage escrow account balances. As previously covered by InfoBytes, the bank argued that the National Bank Act (NBA) preempts the state law, but the district court disagreed and issued a ruling in 2019 concluding that there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The district court also determined that, with respect to the OCC’s 2004 real estate lending preemption regulation (2004 regulation), there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). The district court further applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the bank’s power to administer mortgage escrow accounts, noting that it only “requires the [b]ank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”
In its amicus brief filed with the U.S. Court of Appeals for the Second Circuit, the OCC wrote that it “respectfully submits that the [appellate court] should reverse the decision of the [d]istrict [c]ourt and find that application of Section 5-601 to [the bank] is preempted by federal law,” adding that the 2019 ruling “upsets…settled legal principles” and “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the [NBA].” In addressing the district court’s application of Barnett, the OCC argued that the district court had incorrectly concluded that state laws cannot be preempted unless they “practical[ly] abrogat[e] or nullif[y] a national bank’s exercise of a federal banking power—a “stark contrast to the preemption standard set forth in Barnett and the OCC’s—as well as many other federal courts’—interpretation of that standard.” The OCC urged the appellate court to “conclude that a state law that requires a national bank to pay even a nominal rate of interest on a particular category of account impermissibly conflicts with a national bank’s power by disincentivizing the bank from continuing to offer the product. This is sufficient to trigger preemption under Barnett.”
The OCC further stated, among other things, that the district court also incorrectly disregarded the agency’s 2004 regulation, which the OCC said “specifically authorizes national banks to exercise their powers to make real estate loans ‘without regard to state law limitations concerning…[e]scrow accounts, impound accounts, and similar accounts….’” The agency further cautioned that the district court’s determination that the OCC’s 2004 regulation was not entitled to any level of deference was done in error and warned that “[i]f the OCC’s regulation regarding escrow accounts is rendered ineffective, this result could cause disruption within the banking industry by upsetting long-settled law regarding the applicability of state laws to national bank powers.”
On June 17, President Biden signed S. 475 establishing June 19, Juneteenth, as a federal holiday. The “Juneteenth National Independence Day Act” amends 5 U.S.C. § 6103(a) which codifies the legal public holidays. Because June 19 falls on a Saturday this year, the holiday will be observed on Friday, June 18.
The establishment of a new federal holiday mere hours before the first observance of that holiday poses novel compliance challenges for the mortgage industry. Notably, both TRID and TILA rescission requirements have important timing standards that reference federal holidays.
Under TRID, the Loan Estimate must be provided to the consumer at least seven business days prior to consummation, and the Closing Disclosure must be provided to the consumer at least three business days prior to consummation. For purposes of these requirements, “business day” is defined as “all calendar days except Sundays and legal public holidays” as specified in 5 U.S.C. § 6103(a). As the holiday occurs on a Saturday this year, Saturday, June 19 is not a “business day” for purposes of calculating either the 7-business day waiting period after delivery of the Loan Estimate or the 3-business-day waiting period after delivery of the Closing Disclosure. Commentary to Regulation Z also states that, for purposes of rescission and the provision of mortgage disclosures, when a federal holiday falls on a Saturday but is observed on the preceding Friday, the observed holiday is a business day.
Accordingly, for purposes of providing the Loan Estimate at least seven business days prior to closing and the Closing Disclosure at least three business days prior to closing, lenders may not count Saturday, June 19, as a business day, but must count Friday, June 18, as a business day. Absent clarification from the CFPB, lenders are advised to push closings back one day where they were previously counting Saturday (June 19) as a business day. For example, if a Closing Disclosure was received by the consumer on Thursday, June 17, closing may not occur until Tuesday, June 22.
A rescission period expires on midnight on the third business day after closing and uses the same definition of business days, which is “all calendar days except Sundays and legal public holidays.” As such, Saturday, June 19 this year is not a “business day” for purposes of the 3-business day rescission period and lenders should ensure that consumers are provided an extra day where the rescission period encompasses June 19, and are made aware of that extension. This raises unique funding and Notice of Right to Cancel disclosure related questions, the answers to which may depend on individual facts and circumstances. Absent further guidance from the CFPB, creditors may wish to delay closing by one day for those transactions where the three-day Closing Disclosure period is relevant, as well as consider providing updated Notices of Right to Cancel with a new rescission period taking into account both the new public holiday and when such new notice is sent.
On June 18, CFPB acting Director Dave Uejio issued a statement recognizing that "some lenders did not have sufficient time after the Federal holiday declaration to consider whether and how to adjust closing timelines" and that "some lenders may delay closings to accommodate the reissuance of disclosures adjusted for the new Federal holiday." Uejio further noted that "TILA and TRID requirements generally protect creditors from liability for bona fide errors and permit redisclosure after closing to correct errors." He added that any guidance ultimately issued by the Bureau "would take into account the limited implementation period before the holiday and would be issued after consultation with the other FIRREA regulators and the Conference of State Bank Supervisors to ensure consistency of interpretation for all regulated entities."
On June 16, the CFPB issued an interpretive rule explaining the reversal of its prior determination that it lacked the authority to examine supervised financial institutions for compliance with the Military Lending Act (MLA). As previously covered by InfoBytes, in 2018, the Bureau discontinued MLA-related examination activities, contending the law does not explicitly prescribe the Bureau the authority to examine financial institutions for compliance with the MLA. In January 2019, the Bureau issued a statement from former Director Kathy Kraninger announcing that she had asked Congress to grant the agency “clear authority to supervise for compliance with the [MLA],” and in March 2019, Senate Democrats issued a letter urging the resumption of reviews for compliance with the MLA during routine lender examinations (covered by InfoBytes here and here).
The CFPB’s interpretive rule states that the Bureau has statutory authority to conduct MLA examinations “[b]ecause conduct that violates the MLA is associated with activities that are subject to TILA and the CFPA.” The Bureau also indicated it may “conduct examinations of very large banks and credit unions for purposes of detecting and assessing those ‘risks to consumers’ that are ‘associated’ with ‘activities subject to’ Federal consumer financial laws.” The interpretive rule states that the Bureau can use formal administrative adjudications, civil enforcement actions, and other authorities to enforce the MLA, which is “complemented by the Bureau’s use of the examination process to detect and assess risks to consumers arising from violations of the MLA.” The rule also points out that the Bureau “believes that the very harmful conduct that Congress sought to prevent in the MLA, which the Bureau has the authority to remedy through its other authorities (specifically enforcement action), sits within the core of this authority.” CFPB acting Director Dave Uejio further emphasizes in the Bureau’s press release that “[t]hrough our enforcement of the MLA, companies that harmed military borrowers have been ordered to pay millions of dollars in redress and civil penalties. To fulfill its purpose and protect military borrowers we must supervise financial institutions and hold them accountable for endangering consumers.” With the issuance of the interpretative rule, the Bureau will now resume MLA-related examination activities.
On June 15, the SEC announced charges against a real estate settlement services company for its role in allegedly failing to disclose controls and procedures related to a cybersecurity vulnerability that exposed sensitive customer information. According to the SEC’s order, an independent cybersecurity journalist warned the company in May 2019 of a vulnerability concerning its system for sharing document images that exposed over 800 million images dating back to 2003, including images containing sensitive personal data such as social security numbers and financial information. In response, the company allegedly issued a press release for inclusion in the cybersecurity journalist’s report published in May 2019 and furnished a Form 8-K to the Commission on May 28, 2019. However, according to the order, the company’s senior executives responsible for these kinds of releases “were not apprised of certain information that was relevant to their assessment of the company’s disclosure response to the vulnerability and the magnitude of the resulting risk.” Specifically, the order states that senior executives were not informed that the company’s information security personnel had identified a vulnerability several months earlier, in January 2019, but failed to remediate the vulnerability in accordance with the company’s policies. The order finds that the company “failed to maintain disclosure controls and procedures designed to ensure that all available, relevant information concerning the vulnerability was analyzed for disclosure in the company’s public reports filed with the Commission.” The SEC charged the company with violating Rule 13a-15(a) of the Exchange Act and ordered the company, who agreed to a cease-and-desist order, to pay a $487,616 penalty.
On June 14, the SEC announced whistleblower awards to two individuals totaling an initial combined payment of approximately $3 million for information and assistance provided in a successful enforcement action. According to the redacted order, the SEC awarded the first whistleblower for providing assistance early in the investigation and helping enforcement staff focus its resources and theories. The second whistleblower was rewarded for helping to uncover misappropriated funds and fraudulent transfers. The SEC noted that both whistleblowers provided ongoing assistance in the investigation, including participating in interviews and providing helpful documents involved in the investigations.
The SEC has awarded approximately $932 million to 172 individuals since issuing its first award in 2012.
On June 16, the FDIC’s technology lab, FDiTech, announced a tech sprint, which challenges participants to “explore new technologies and techniques that would help expand the capabilities of banks to meet the needs of unbanked individuals and households.” The tech sprint, Breaking Down Barriers: Reaching the Last Mile of Unbanked U.S. Households, invites banks, non-profit organizations, academic institutions, private sector companies, and others to identify data, tools, and other resources that may assist community banks meet the needs of the underbanked in a cost-effective manner. According to the FDIC, a recently published survey found that more than seven million U.S. households were unbanked with Black, Hispanic, American Indian or Alaska Native households having a higher likelihood of being unbanked. Registration will be required for stakeholders to participate, and additional information on how to participate is expected on the FDiTech website in early July.
On June 1, the Department of Administration of the State of Montana certified to the Secretary of State a new rule covering provisions related to, among other things, the revocation and suspension of mortgage licenses, the reinstatement of expired or suspended licenses, and applications for initial licenses near year end. Specifically, the rule provides that (i) the department may “suspend or revoke a license for a violation of the Montana Mortgage Act, this subchapter, or for any other violation of state or federal law pertaining to licensees or residential mortgage loans”; (ii) a military member or reservist whose license expired or was suspended when the licensee was on active duty at the time of renewal may have a license reinstated provided the department receives (within 30 days of the licensee’s discharge from active duty) an acceptable sponsorship request through the Nationwide Multistate Licensing System & Registry (NMLS) from the licensee’s employing mortgage broker or mortgage lender, as well as a completed mortgage loan originator license renewal or reinstatement form submitted separate from the NMLS renewal process during the same timeframe; and (iii) applicants who are approved for licensure during the renewal period of November 1 through December 31, and who are requesting the issuance of a license immediately, must submit certain application materials within a specified timeframe or their application will be deemed abandoned.
The rule also amends provisions related to mortgage licensing examination fees, the submission of consumer complaints, information-sharing arrangements, mortgage loan origination disclosure forms, and the certification process for bona fide not-for-profit entities.
On June 3, the Nevada governor signed into law SB 453, a bill that revises provisions relating to certain persons licensed or certified by the Division of Financial Institutions of the Department of Business and Industry or the Commissioner of Financial Institutions (DFI). The amendments allow DFI to accept licensing applications through the Nationwide Multistate Licensing System & Registry (NMLS) for the following license types: (i) money transmitters; (ii) installment loans; (iii) uniform-debt-management; (iv) deferred deposit, high-interest, title loans, and check-cashing; (v) consumer litigation funding; (vi) private professional guardians; (vii) exchange facilitators; and (viii) collection agencies. Among other things, SB 453 authorizes the NMLS to accept license applications, fees, and renewals, conduct criminal background checks, and accept credit reports on behalf of DFI. SB 453 became effective upon passage and approval.
On June 10, the Texas Department of Banking issued Industry Notice 2021-03, which notifies supervised Texas state-charted banks that they “may provide customers with virtual currency custody services, as long as the bank has adequate protocols in place to effectively manage the risks and comply with applicable law.” The Department noted that Texas state-chartered banks have long provided customers with safekeeping and custody resources through secure storage of assets, which is a critical role in the banking business. “While custody and safekeeping of virtual currencies will necessarily differ from that associated with more traditional assets the [Department] believes that the authority to provide these services with respect to virtual currencies already exists pursuant to Texas Finance Code §32.001,” the notice provided. In addition, the type of virtual currency a bank chooses to utilize will depend on that bank’s expertise, risk appetite, and business model. The notice also pointed out that the Department determined that custody services may be offered by a Texas state-chartered bank in a capacity that is fiduciary or non-fiduciary. A non-fiduciary capacity will allow the bank to act “as a bailee, taking possession of the customer’s asset for safekeeping while legal title to that asset remains with the customer.” Alternatively, in its fiduciary capacity, the bank will have oversight to control virtual currency assets as it would any other type of asset held in such capacity. The notice warned, however, that if a bank is offering virtual currency services, bank management must conduct due diligence and carefully examine the risks involved in offering a new product or service through a methodical risk assessment process.
Last month, the Illinois Department of Financial and Professional Regulation (IDFPR) published proposed regulations in the state register to implement the Illinois Predatory Loan Prevention Act (Act). As previously covered by InfoBytes, the Act was signed into law in March and prohibits lenders from charging more than 36 percent APR on all non-commercial consumer loans under $40,000, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. Violations of the Act constitute a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and carry a potential fine up to $10,000. Additionally, any loan with an APR exceeding 36 percent will be considered null and void “and no person or entity shall have any right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.”
The IDFPR’s notice of proposed rules provides definitions and loan terms, including (i) general conditions; (ii) limits on the cost of a loan; (iii) how to calculate and compute the APR for the purposes of the Act; (iv) how to determine bona fide fees charged on credit card accounts, including outlining ineligible items, providing standards for assessing whether a bona fide fee is reasonable, and specifying bona fide fee safe harbors and “[i]ndicia of reasonableness for a participation fee”; and (iii) the effect of charging fees on bona fide fees.
Additionally, the IDFPR proposes several amendments related to rate cap disclosure notices. These specify that (i) all loan applications must include a separate rate cap disclosure signed by the consumer (disclosures must be provided in English and in the language in which the loan was negotiated); (ii) lenders must “prominently display” a rate cap disclosure in both English and Spanish in any physical location and on all websites, mobile device applications, or any other electronic mediums owned or maintained by the lender; and (iii) lenders must disclose the rate cap in any written loan solicitations or advertisements.
- APPROVED Webcast: CFL license transition to NMLS
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting