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Special Alert: Fed finalizes rule for FedNow platform
The Federal Reserve Board recently issued a final rule for its FedNow instant-payments platform that offers more clarity on how the new service will work while essentially adopting the proposed rule. FedNow will stand alongside private sector initiatives and, like more modern payments systems, will feature credit payments to push funds rather than debit payments to pull funds, offering faster processing.
Highlights of the new rule and FedNow
- Not yet open for business. The Fed continues to target release of FedNow for sometime in 2023. It will implement the 24x7x365 real-time payments service in stages, each with additional features and enhancements.
- Not a consumer or business app or service. Depository institutions that are eligible to hold Reserve Bank accounts will be able to use FedNow, which will be administered by the 12 Reserve Banks. Consumers and businesses may not participate in FedNow directly, and therefore, could not send payment orders to a Reserve Bank through it. They would instead send instant payments through their depository institution accounts.
- Bank v. nonbank direct participation in FedNow. Eligible institutions include banks, savings associations, credit unions, U.S. branches and agencies of non-U.S. banks, Edge or agreement corporations, some systemically important financial market utilities, and government-sponsored entities (including Fannie Mae and Freddie Mac). We use the term “banks” throughout to simplify the discussion.
- Not yet open for business. The Fed continues to target release of FedNow for sometime in 2023. It will implement the 24x7x365 real-time payments service in stages, each with additional features and enhancements.
District Court says Reg. J does not preempt state law in wire transfer case
On October 5, a federal judge for the U.S. District Court for the Western District of Pennsylvania remanded a case back to state court, holding that the Federal Reserve’s regulation governing Fedwire transfers does not completely preempt state law claims. The elderly plaintiff alleged that bank employees helped her execute wire transfers totaling $4.3 million to an unknown scam artist, but never questioned whether she “intended, or knew, that the wire transfers were being made through a crypto currency bank to a crypto currency trust company.” The plaintiff sued the bank, claiming that it was negligent in not protecting her from the scheme, and that its advertising claims about keeping client information safe from scams were misleading and violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. While recognizing that the plaintiff only asserted state law claims, the bank removed the case to federal court on the ground that the Fedwire system used to make the transfers was governed by the Fed’s Regulation J, and thus state law was preempted.
The court ruled that, while the bank could invoke Regulation J as a defense, the regulation does not expressly provide a private right to seek redress in federal court, nor does the regulation itself allow the bank to remove the case to federal court. “[T]he court concludes that the more persuasive case law reflects that only Congress (not a federal agency in a regulation) can completely preempt a state law cause of action to create removal jurisdiction.” The plaintiff did not assert federal claims, and so “[t]he mere fact that [the bank] intends to assert Regulation J as a preemption defense does not create removal jurisdiction.” Furthermore, the court cited the Fed’s commentary to Regulation J, which said regulations “may pre-empt inconsistent provisions of state law” but do not affect state law where there was no conflict. Since there was no conflict between Regulation J and the Pennsylvania law, the federal regulation does not provide the exclusive cause of action, the court said.
Fed amends Reg. D, invites comments on FedNow transfers
On June 2, the Federal Reserve Board announced the approval of a final rule amending Regulation D, which eliminates “references to an interest on required reserves” rate and “to an interest on excess reserves” rate and replaces them with a reference to “a single interest on reserve balances” rate. The final rule also simplifies “the formula used to calculate the amount of interest paid on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks.” The final rule is effective July 29.
Earlier, on June 1, the Fed also issued a proposed rule, which would create a new, comprehensive set of rules for governing funds transfers over the FedNow Service. Specifically, the proposed rule would amend Regulation J by establishing a new subpart C to specify terms and conditions for the processing of funds transfers by Reserve Banks. It would also grant Reserve Banks the authority to issue operating circulars for the FedNow Service, and would include, among other things, a requirement that a beneficiary’s bank agree to “make funds available to the beneficiary immediately after it has accepted the payment order.” The Fed is also proposing changes and clarifications to subpart B, which governs the Fedwire Funds Services, “to reflect the fact that the Reserve Banks will be operating a second funds transfer service in addition to the Fedwire Funds Service.” As previously covered by InfoBytes, the Fed intends to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024. Comments on the proposed rule are due 60 days after publication in the Federal Register.
CFPB eases filing deadlines for certain ILSA and Regulation J reports
On April 27, the CFPB released guidance in order to provide “flexibility and reduce administrative burden” for land developers that are subject to the Interstate Land Sales Full Disclosure Act (ILSA). The Bureau explains that in light of the impacts of Covid-19, it will not take supervisory or enforcement action against land developers for delays in filing financial statements and annual reports of activity, as long as the developers make good faith efforts to submit filings “within a reasonable time.” The guidance notes that all other ILSA and Regulation J requirements must be timely met.