InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FFIEC updates BSA/AML examination manual
On June 21, the Federal Financial Institutions Examinations Council (FFIEC) published updated versions of four sections of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual (Manual), which provides examiners with instructions for assessing a bank or credit union’s BSA/AML compliance program and compliance with BSA regulatory requirements. The revisions can be identified by a 2021 date label on the FFIEC BSA/AML InfoBase and include the following updated sections: International Transportation of Currency or Monetary Instruments Reporting, Purchase and Sale of Monetary Instruments Recordkeeping, Reports of Foreign Financial Accounts, and Special Measures. The FFIEC notes that the “updates should not be interpreted as new instructions or as a new or increased focus on certain areas,” but are intended to “offer further transparency into the examination process and support risk-focused examination work.” In addition, the Manual itself does not establish requirements for financial institutions as these requirements are found in applicable statutes and regulations. (See also FDIC FIL-12-2021 and OCC Bulletin 2021-10.) As previously covered by InfoBytes, in February the FFIEC updated the following sections of the Manual: Assessing Compliance with Bank Secrecy Act Regulatory Requirements, Customer Identification Program, Currency Transaction Reporting, and Transactions of Exempt Persons.
CFPB resumes MLA exams
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.
FDIC provides updates on real estate lending standards and MDIs
On June 15, the FDIC Board of Directors met in open session to discuss Real Estate Lending Standards and Minority Depository Institutions (MDIs), among other things. According to FIL-41-2021, the FDIC issued a proposed rule to amend the Interagency Guidelines for Real Estate Lending Policies “to conform the method for calculating the ratio of loans in excess of the supervisory loan-to-value (LTV) limits with the capital framework established in the community bank leverage ratio (CBLR) rule.” The proposed amendments would provide a consistent approach for calculating the ratio of loans in excess of the supervisory LTV limits at all FDIC-supervised institutions by, among other things, establishing supervisory LTV criteria for certain real estate lending transaction types and allowing exceptions to the supervisory LTV limits. Comments on the proposed rule are due 30 days after publication in the Federal Register.
During the meeting, the FDIC Board of Directors also approved and released an updated Statement of Policy Regarding Minority Depository Institutions to enhance the agency’s efforts to preserve and promote MDIs. In August 2020, the FDIC approved a proposed statement of policy, which updated and clarified the agency’s policies and procedures related to MDIs (covered by InfoBytes here). The recently updated statement of policy replaces the 2002 Statement of Policy and includes, among other things:
- Clarification of the FDIC’s expectations for technical assistance and illustration of opportunities for engagement with members of FDIC staff;
- Outreach efforts by the FDIC including, among other things, the establishment of the MDI Subcommittee of the Advisory Committee on Community Banking and enhanced activities to promote collaboration with MDIs;
- Definitions of terms utilized in the MDI program, detailed reporting requirements, and specific methods used to measure the effectiveness of MDI program activities; and
- Clarification of considerations made by examination staff when evaluating performance and assigning ratings.
After considering the comment letters, the FDIC revised the proposed statement of policy to identify, specifically, “state bankers associations as collaboration partners, along with other trade associations that support MDIs in the development of education and training events and other initiatives for MDIs.”
Securities regulators’ training aims to stop financial exploitation of seniors
On June 15, the SEC, North American Securities Administrators Association (NASAA), and FINRA announced the release of a training program, “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors,” to assist securities firms in implementing the training requirements established in the Senior Safe Act. As previously covered by InfoBytes, the Senior Safe Act was included as Section 303 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018. The Act addresses barriers financial professionals face in reporting suspected senior financial exploitation or abuse to authorities. The training program may be utilized by firms to instruct associated persons on how to detect, prevent, and report financial exploitation of senior and vulnerable adult investors. The program also acts as a resource for firms enforcing the requirements of the Senior Safe Act and certain state training requirements relating to senior investment protection.
Agencies call for "robust" alternate reference rates
On June 11, the Treasury Department, OCC, SEC, and the FDIC released separate statements following the meeting of the Financial Stability Oversight Council concerning the LIBOR transition. Acting Comptroller of the Currency Michael Hsu said it is “imperative that banks continue careful planning” for the transition away from LIBOR to an alternate reference rate, such as the Secured Overnight Financing Rate (SOFR), the Alternate Reference Rates Committee’s (ARRC) preferred LIBOR alternative. As previously covered by InfoBytes, the ARRC released the SOFR “Starter Kit” in August 2020, which includes three factsheets that are the result of a series of educational panel discussions held by ARRC. The various panel discussions were designed to educate on “the history of LIBOR; the development and strengths of SOFR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR.” SEC Chairman Gary Gensler also expressed support for SOFR, calling it a “preferable” alternate rate. In addition, Gensler shared his concerns regarding the Bloomberg Short-Term Bank Yield Index (BSBY), which some commercial banks are advocating as a replacement for LIBOR. Gensler said the BSBY is based upon unsecured, term, bank-to-bank lending, which is like LIBOR. Treasury Secretary Janet Yellen encouraged market participants to “act promptly to support the switch in derivatives from LIBOR to SOFR.” She noted that “[w]hile important progress is being made in some segments of the market, other segments, including business loans, are well behind where they should be at this stage in the transition.” FDIC Chairman Jelena McWilliams pointed out that the “FDIC continues to focus on the LIBOR transition and to assess institutions’ practices and plans to adopt a replacement rate and address legacy contracts before December 31 of this year.” However, she disclosed that “the FDIC does not endorse any particular alternative reference rate.”
HUD restores AFFH definitions and certifications
On June 10, HUD published an interim final rule (IFR) to restore certain definitions and certifications to its regulations implementing the Fair Housing Act’s requirement to affirmatively further fair housing (AFFH). The IFR also reinstates a process where HUD will provide technical assistance and other support to funding recipients engaged in fair housing planning. The IFR essentially repeals HUD’s 2020 final rule (covered by a Buckley Special Alert), which was intended to align its disparate impact regulation, adopted in 2013, with the U.S. Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. As previously covered by InfoBytes, earlier in January, President Biden directed HUD to examine the effects of the final rule while emphasizing that HUD has a “statutory duty to ensure compliance with the Fair Housing Act,” and on April 12, the Office of Management and Budget posted notices (covered by InfoBytes here) announcing a pending proposed rule to reinstate HUD’s Discriminatory Effects Standard related to the 2020 final rule.
Among other things, the IFR “restores the understanding of the AFFH obligation for certain [funding recipients] to the previously established understanding by reinstating legally supportable definitions that are consistent with a meaningful AFFH requirement and certifications that incorporate these definitions.” The IFR also notes that HUD will provide technical assistance and support prior to the IFR’s July 31 effective date, due to a requirement that HUD funding recipients certify compliance with their AFFH duties on an annual basis, as well as HUD’s statutory obligation to ensure that it follows the Fair Housing Act’s AFFH requirements. HUD further recognizes that the 2020 final rule “did not interpret the AFFH mandate in a manner consistent with statutory requirements, HUD’s prior interpretations, or judicial precedent,” adding that the agency also failed to “provide sufficient justification for this substantial departure.”
HUD also announced that it will separately restore guidance and resources for funding recipients to use when conducting fair housing planning until the agency finalizes a new regulation to implement the statutory mandate to AFFH. Comments on the IFR are due July 12.
FCC signs robocall enforcement MOU with Australia
On June 3, the FCC announced that it entered into a memorandum of understanding (MOU) with the Australian Communications and Media Authority (ACMA) on providing mutual assistance in the enforcement of laws on certain unlawful communications, such as robocall, robotexts, and “spoofing.” FCC Acting Chairwoman Rosenworcel noted that “[r]obocall scams are a global problem that require global commitment and cooperation” and that coordinating with ACMA can aid in removing scammers off of networks to protect consumers and businesses. ACMA Chair Nerida O’Loughlin noted that the agreement strengthens the existing relationship between the ACMA and the FCC in the regulation of unsolicited communications. According to the MOU, the FCC and ACMA understand that it is in their common public interest to, among other things: (i) “cooperate with respect to the enforcement against Covered Violations, including sharing complaints and other relevant information and providing investigative assistance”; (ii) enable “research and education related to unlawful robocalls and caller ID spoofing or overstamping”; (iii) “facilitate mutual exchange of knowledge and expertise through training programs and staff exchanges”: (iv) encourage awareness of economic and legal conditions and theories related to the enforcement of applicable laws as identified in Annex 1 to the MOU; and (v) update each other regarding developments related to the MOU in their respective countries in a timely manner.
CFPB releases mortgage servicing FAQs
On June 2, the CFPB released new FAQs regarding the Mortgage Servicing Rule and Regulation X and Regulation Z relating to escrow account guidance and analysis. General highlights from the FAQs are listed below:
- Regulation X provides that (i) an escrow account is any account established or controlled by a servicer for a borrower to pay taxes or other charges associated with a federally related mortgage loan, including charges that the servicer and borrower agreed to have the servicer collect and pay; and (ii) the computation year for an escrow account is a 12-month period that the servicer establishes for the account, starting with the borrower’s first payment date and including each subsequent 12-month period, unless the servicer issues a short year statement.
- Servicers must send the borrower an annual escrow account statement “within 30 days of the completion of the escrow account computation year.”
- Disbursement date is defined as “the date the servicer pays an escrow item from the escrow account.”
- “The initial escrow statement is the first disclosure statement that the servicer delivers to the borrower concerning the borrower’s escrow account,” and must include: (i) “the amount of the monthly mortgage payment”; (ii) “the portion of the monthly payment going into the escrow account”; (iii) “itemized anticipated disbursements to be paid from the escrow account”; (iv) “anticipated disbursement dates”; (v) “the amount the servicer elects as a cushion”; and (vi) “trial running balance for the account.”
- The annual escrow statement must include, among other things, “an account history that reflects the activity in the escrow account during the prior escrow account computation year and a projection of the activity in the account for the next escrow account computation year.”
- An escrow account analysis is the accounting a servicer conducts in the form of a trial running balance for an escrow account to: (i) “determine the appropriate target balances”; (ii) “compute the borrower’s monthly payments for the next escrow account computation year and any deposits needed to establish or maintain the account”; and (iii) “determine whether a shortage, surplus, or deficiency exists.”
- “If there is a shortage that is equal to or more than one month’s escrow account payment, the servicer may accept an unsolicited lump sum repayment to resolve the shortage. However, the servicer cannot require or provide the option of a lump sum payment on the annual escrow account statement. In addition, Regulation X does not govern whether borrowers can freely pay the servicer to satisfy an escrow account shortage. Therefore, “the acceptance of a voluntary, unsolicited payment made by the borrower to the servicer to satisfy an escrow account shortage is not a violation of Regulation X.”
- Servicers may inform borrowers that borrowers “may voluntarily provide a lump sum payment to satisfy an escrow shortage if they choose to” if “the communication is not in the annual escrow account statement itself and does not appear to indicate that a lump sum payment is something that the servicer requires but rather is an entirely voluntary option.”
CFPB amends Regulation Z HPML escrow exemption commentary
On June 3, the CFPB published correcting amendments to its Official Interpretations to Regulation Z (TILA) that were not part of the final rule published in February, which exempts certain insured depository institutions and credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs). As previously covered by InfoBytes, under the final rule, any loan made by an insured depository institution or credit union that is secured by a first lien on the principal dwelling of a consumer would be exempt from Regulation Z’s HPML escrow requirement if (i) the institution has assets of no more than $10 billion; (ii) “the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year”; and (iii) the institution meets certain existing HPML escrow exemption criteria.
The amendments add one comment to the CFPB’s commentary that was not incorporated into the Code of Federal Regulations “due to an omission in an amendatory instruction,” and revise a second comment that inadvertently did not appear in the final rule. The amendments to the commentary relate to (i) Regulation Z section 1026.35(b)(2)(vi)(B), which covers requirements for escrow exemptions for HPMLs; and (ii) Regulation Z section 1026.43(f)(1)(vi), which addresses the exemption associated with balloon-payment qualified mortgages made by certain creditors under the minimum standards for transactions secured by a dwelling. The corrections took effect June 3.
CFPB releases unauthorized EFTs and error resolution FAQs
On June 4, the CFPB released eight new FAQs regarding compliance with the Electronic Fund Transfer Act (EFTA) and Regulation E. Highlights from the FAQs are listed below:
- As explained by the commentary to Regulation E, unauthorized electronic funds transfers (EFTs) include transfers by a person who obtained an access device from a consumer through fraud or robbery. “Similarly, when a consumer is fraudulently induced into sharing account access information with a third party, and a third party uses that information to make an EFT from the consumer’s account, the transfer is an unauthorized EFT under Regulation E.”
- “If a third party fraudulently induces a consumer to share account access information,” subsequent EFTs initiated using that information are not excluded from the definition of an unauthorized EFT under the exclusion for transfers initiated by persons who “furnished the access device to the consumer’s account by the consumer.”
- Financial institutions cannot consider a consumer’s negligence when determining liability for unauthorized EFTs under Regulation E because it establishes “the conditions in which consumers may be held liable for unauthorized transfers, and its commentary expressly states that negligence by the consumer cannot be used as the basis for imposing greater liability than is permissible under Regulation E.”
- Financial institutions cannot rely on a consumer agreement that “includes a provision that modifies or waives certain protections granted by Regulation E, such as waiving Regulation E liability protections if a consumer has shared account information with a third party” when determining whether the EFT was unauthorized and what liability provisions apply. The EFTA “includes an anti-waiver provision stating that ‘[n]o writing or other agreement between a consumer and any other person may contain any provision which constitutes a waiver of any right conferred or cause of action created by [EFTA].’”
- Less protective rules do not change a financial institution’s Regulation E obligations, even if private network rules and other agreements provide additional consumer protections beyond Regulation E.
- “A financial institution must begin its investigation promptly upon receipt of an oral or written notice of error and may not delay initiating or completing an investigation pending receipt of information from the consumer.”
- “If a consumer has provided timely notice of an error under 12 CFR § 1005.11(b)(1) and the financial institution determines that the error was an unauthorized” EFT, Regulation E’s liability protections under Section 1005.6 would apply. “Depending on the circumstances regarding the unauthorized EFT and the timing of the reporting, a consumer may or may not have some liability for the unauthorized EFT.”