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  • OFAC FAQ clarifies Russia-related investment prohibitions

    Financial Crimes

    On February 8, OFAC published Russia-related FAQ 1113 to clarify whether new investment prohibitions in Executive Order (E.O.) 14066, E.O. 14068, or E.O. 14071 prohibit U.S. persons, including U.S. financial institutions, from transferring securities issued by non-blocked Russian entities from a decedent’s estate to a beneficiary. OFAC explained that securities may be transferred “provided such transfers (i) are part of the ordinary course administration of the decedent’s estate, (ii) do not involve an exchange for value, and (iii) have no other sanctions nexus (including the involvement of blocked persons).” OFAC noted, however, that blocked securities in a decedent’s estate must remain blocked and that transferring blocked securities would require a specific license from OFAC.  

    Financial Crimes Of Interest to Non-US Persons OFAC Department of Treasury OFAC Sanctions OFAC Designations Russia

  • OFAC announces sanctions tied to Central America drug trafficking

    Financial Crimes

    On February 8, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Order 13581, against an individual based in Honduras and another individual based in Nicaragua for their involvement in drug trafficking, violence, murder, extortion, and money laundering. “Treasury’s sanctions against MS-13 aim to interrupt its use of the financial system to launder illicit proceeds,” Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said in the announcement. As a result of the sanctions, all property and interests in property belonging to the sanctioned individuals subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons unless authorized by a general or specific license issued by OFAC, OFAC warned.

    Financial Crimes Of Interest to Non-US Persons OFAC OFAC Designations OFAC Sanctions SDN List Honduras Nicaragua Department of Treasury

  • Treasury reports on risks to financial firms adopting cloud services

    Federal Issues

    On February 8, the U.S. Treasury Department launched the interagency Cloud Services Steering Committee in an effort to improve regulatory and private sector cooperation and develop best practices for cloud-adoption frameworks and contracts. As part of the announcement, Treasury released a first-of-its-kind report discussing potential benefits and challenges associated with the adoption of cloud services technology by financial services firms. While recognizing that cloud-based technologies can improves access and reliability for local communities and help community banks compete with financial technology firms, Treasury found that financial services firms that rely on these technologies need more visibility, staff support, and cybersecurity incident response engagement from cloud service providers (CSPs).

    The report identified several significant challenges resulting from the use of cloud-based technologies in the financial sector. These include: (i) insufficient transparency to support due diligence and monitoring by financial institutions (financial institutions must fully understand the risks associated with cloud services in order to implement appropriate protections for consumers); (ii) gaps in human capital and tools to securely deploy cloud services (CSPs should engage experts and improve tools and frameworks to ensure financial institutions are able to implement resilient, secure platforms for customers); (iii) exposure to potential operational incidents (financial institutions have expressed concerns that cyber vulnerabilities originating at a CSP could have a cascading impact); (iv) potential impact of market concentration in cloud service offerings on the financial sector’s resilience (the current market relies on a small number of CSPs that likely exists across banking, securities, and insurance markets); (v) dynamics in contract negotiations given market concentration (the small number of CSPs could affect financial institutions’ bargaining power); and (vi) international landscape and regulatory fragmentation (regulatory conflicts could result from the patchwork of global regulatory and supervisory approaches to cloud technology).

    The report, which received extensive input from U.S. regulators, private sector stakeholders, trade associations, and think tanks, does not impose any requirements, nor does it endorse or discourage firms from using a specific provider or cloud service. It does, however, recommend that Treasury and the broader financial regulatory community further evaluate the financial risks associated with having a limited number of CSPs offer cloud services.

    Federal Issues Department of Treasury Privacy, Cyber Risk & Data Security Cloud Technology Risk Management

  • CFPB reports drop in overdraft/NSF revenue from pre-pandemic levels

    Federal Issues

    On February 7, the CFPB published a “Data Spotlight” reporting that bank overdraft/non-sufficient fund (NSF) fee revenue has declined significantly compared to pre-pandemic levels. According to the Bureau, recent analysis found that overdraft/NSF fee revenue (i) was 43 percent lower in the third quarter of 2022 than in the third quarter of 2019 (representing a suggested decrease of $5.1 billion in fees on an annualized basis); (ii) was 33 percent lower over the first three quarters of 2022 when compared to the same period in 2019; and (iii) has declined each quarter since the fourth quarter of 2021. The report presented snapshots of overdraft/NSF fee revenue by quarter between Q1 2019 and Q3 2022, and discussed changes in banks’ consumer deposit account revenue from other listed fees. The Bureau observed that there has been a lack of correlating increases in other listed checking account fees, which may suggest that banks are not replacing overdraft/NSF fee revenue with other checking account fees such as periodic maintenance fees and ATM fees. The Bureau noted that it will continue to monitor overdraft/NSF fees and said it is considering related rulemaking activities. The agency announced it also intends to track other listed account fees to determine whether and to what extent these fees may be creating barriers to account access.

    Federal Issues CFPB Overdraft Consumer Finance NSF Fees

  • Barr says AI should not create racial disparities in lending

    On February 7, Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, delivered remarks during the “Banking on Financial Inclusion” conference, where he warned financial institutions to make sure that using artificial intelligence (AI) and algorithms does not create racial disparities in lending decisions. Banks “should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” Barr said, pointing to findings that show “significant and troubling disparities in lending outcomes for Black individuals and businesses relative to others.” He commented that “[w]hile research suggests that progress has been made in addressing racial discrimination in mortgage lending, regulators continue to find evidence of redlining and pricing discrimination in mortgage lending at individual institutions.” Studies have also found persistent discrimination in other markets, including auto lending and lending to Black-owned businesses. Barr further commented that despite significant progress over the past 25 years in expanding access to banking services, a recent FDIC survey found that the unbanked rate for Black households was 11.3 percent as compared to 2.1 percent for White households.

    Barr suggested several measures for addressing these issues and eradicating discrimination. Banks should actively analyze data to identify where racial disparities occur, conduct on-the-ground testing to identify discriminatory practices, and review AI or other algorithms used in making lending decisions, Barr advised. Banks should also devote resources to stamp out unfair, abusive, or illegal practices, and find opportunities to support and invest in low- and moderate-income (LMI) communities, small businesses, and community infrastructure. Meanwhile, regulators have a clear responsibility to use their supervisory and enforcement tools to make sure banks resolve consumer protection weaknesses, Barr said, adding that regulators should also ensure that rules provide appropriate incentives for banks to invest in LMI communities and lend to such households.

    Bank Regulatory Federal Issues Federal Reserve Supervision Discrimination Artificial Intelligence Algorithms Consumer Finance Fair Lending

  • OCC revises guidance on branch closings

    On February 7, the OCC released an updated version of the “Branch Closings” booklet of the Comptroller’s Licensing Manual. According to OCC Bulletin 2023-6, the revised licensing booklet, which outlines policies and procedures for filings and customer notices relating to the closing of national bank and federal savings association branches, removes references to outdated guidance, provides current references, and makes other minor modifications and corrections throughout.

    Bank Regulatory Federal Issues OCC Licensing Comptroller's Licensing Manual

  • 11th Circuit advances TILA suit weighing agency theory of liability

    Courts

    On February 6, the U.S. Court of Appeals for the Eleventh Circuit reversed a district court’s finding of summary judgment in favor of a financing company concerning alleged violations of TILA. The plaintiff agreed to purchase air conditioning repairs by taking out a loan with a company that finances home-improvement loans for heating and air conditioning products. According to the plaintiff, the repair company lied about the price of the loan and prevented him from viewing the loan paperwork. The plaintiff sued the defendants for violations of TILA and various state consumer protection laws, claiming he was not provided certain required disclosures and maintaining that had he received the disclosures he would not have accepted the loan. The plaintiff eventually decided to cancel the order before the work was commenced and was told he would have to contact the financing company to cancel the loan. The plaintiff was not released from the unpaid loan for work that never happened, and the negative payment history was reported to the credit bureaus.

    The financing company argued that the plaintiff’s injuries are not traceable to the disclosure paperwork because the repair company never showed him the paperwork. The plaintiff countered that the repair company was not independent of the financing company because it was acting as the financing company’s agency. Under the “agency theory of liability,” the plaintiff argued that the financing company is liable under TILA for the repair company’s failure to provide the required disclosures. The district court ruled, however that the plaintiff lacked standing based on the finding that his injuries were not traceable to the financing company’s TILA violation, and that the plaintiff had not alleged that the repair company was acting as the financing company’s agent to provide the required disclosures.

    On appeal, the 11th Circuit concluded that the plaintiff had standing to raise his agency-based TILA claim against the financing company. As a threshold matter, the appellate court first recognized that the plaintiff suffered a concrete injury (e.g., time spent disputing his debt; the impact on his credit; money spent sending documents to his attorney; and feelings of anxiousness), noting that injury and traceability were separate analyses. With respect to traceability, the appellate court next reviewed whether there was “a causal connection” between the plaintiff’s injuries and the challenged action of the financing company. The 11th Circuit accepted one theory of traceability—a theory of agency. “TILA liability attaches not only to the provision of incorrect disclosures, but also to the failure to provide any disclosures at all,” the appellate court explained, stating that in this case, the plaintiff argued that the repair company was acting as an agent of the financing company for the purpose of providing the disclosures. While expressing no opinion on the merits of the claim, the 11th Circuit concluded that the plaintiff had adequately pled that the financing company contracted with the repair company “who at all times acted as its agent” and that the financing company “is vicariously liable for the harms and losses” caused by the repair company’s misconduct by virtue of this agency relationship.

    Courts Appellate Eleventh Circuit TILA Disclosures Consumer Finance

  • NYDFS implements state CRA revisions

    State Issues

    On February 8, NYDFS announced the adoption of updates to the state’s Community Reinvestment Act (CRA) regulation. The final regulation implements amendments to Banking Law § 28-b, and allows the Department to obtain necessary data to evaluate how well regulated banking institutions are serving minority- and women-owned businesses in their communities. These findings will be integrated into institutions’ CRA ratings, NYDFS said. As previously covered by InfoBytes, NYDFS issued proposed revisions last October, announcing that the modifications are intended to minimize compliance burdens by making sure the regulation’s proposed language complements requirements in the CFPB’s proposed rulemaking for collecting data on credit access for small and minority- and women-owned businesses. The final regulation details how regulated institutions must collect and submit the necessary data to NYDFS while abiding by fair lending laws. Regulated institutions must inquire as to whether a business applying for a loan or credit is minority- or women-owned or both, and submit a report to the Department providing application details, such as the date of application, type of credit applied for and the amount, whether the application was approved or denied, and the size and location of the business. The final regulation also includes a form for regulated institutions to use to obtain the required data from business loan applications. NYDFS said it will publish a data submission template in the coming months for regulated institutions to use during CRA evaluations. The final regulation takes effect August 8, and provides for a compliance date six months following the publication of the Notice of Adoption in the State Register. Regulated institutions will also have an additional transition period of three months from the compliance date to comply with certain provisions.

    State Issues State Regulators NYDFS Bank Regulatory New York CRA Agency Rule-Making & Guidance Fair Lending

  • 8th Circuit affirms almost $20 million in damages and attorney’s fees in RMBS action

    Courts

    On February 2, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court order requiring a mortgage lender to pay $5.4 million in damages and $14 million in attorney’s fees for selling mortgages that did not meet agreed-upon contractual representations and warranties to a now-defunct company that packaged and resold the loans to residential mortgage-back securities (RMBS) trusts. The now-defunct company was sued by the RMBS trusts after loans underlying the securitizations began defaulting at a high rate during the 2008 financial crisis. A liquidating trust was established to oversee wind-down measures after the company filed for bankruptcy. The liquidating trust later began suing originators for indemnification over the allegedly defective mortgages. In 2020, the district court ruled in favor of the liquidating trust and entered judgment for $5.4 million in damages, $10.6 million in attorney’s fees, $3.5 million is costs, $2 million in prejudgment interest, and $520,212 in “post-award prejudgment interest.” The district court found, among other things, that the lender had breached its client contracts, and that in doing so, contributed to the now-defunct company’s “losses, damages, or liabilities within the scope of the contractual indemnity.” The court also found the liquidating trust’s damages methodology to be reasonable and nonspeculative. The lender appealed, disagreeing with how the underlying contracts were interpreted, as well as the allocation of multi-party damages and the post-trial award of fees, costs, and interest.

    On appeal, the 8th Circuit disagreed, concluding that the terms of the parties’ contract made the lender liable. The appellate court also rejected the lender’s contention that it should not be expected to pay the claims against the now-defunct company because they were extinguished in bankruptcy, and that the methodology used to calculate the damages was inaccurate. In awarding $5.4 million in indemnification damages, the appellate court held that the district court properly found that the expert’s “‘calculation of damages was reasonable and non-speculative,’ and that his methodology produced a reasonably certain measure of [the liquidating trust’s] indemnifiable damages.” The 8th Circuit further concluded that the fee award was fair and that the district court had accounted for the complexity of the case and the importance of conducting a detailed loan-by-loan analysis. The appellate court also accused the lender of relitigating already decided issues and driving up the costs. However, the 8th Circuit did order the district court to recalculate the post-judgment interest award using guidance under 28 U.S.C. § 1961(a) rather than the 10 percent prejudgment interest rate under Minnesota law.

    Courts Appellate Eighth Circuit Mortgages RMBS Settlement Attorney Fees Interest

  • Special Alert: CFPB’s RESPA advisory addresses online mortgage-comparison platforms

    Federal Issues

    The Consumer Financial Protection Bureau (CFPB) issued guidance yesterday making clear that those who operate or participate in online mortgage-comparison shopping platforms will be closely scrutinized for compliance with the prohibition on payments for referrals to mortgage lenders. “Companies operating these digital platforms appear to shoppers as if they provide objective lender comparisons, but may illegally refer people to only those lenders paying referral fees,” the agency said. Here’s what you need to know:

    What happened?

    The CFPB issued an Advisory Opinion on how the Real Estate Settlement Procedures Act (RESPA) applies to online mortgage-comparison platforms. The agency said platform operators violate RESPA “when they steer shoppers to lenders by using pay-to-play tactics rather than providing shoppers with comprehensive and objective information.” Specifically, the agency said operators receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value.

    Federal Issues Agency Rule-Making & Guidance CFPB Consumer Finance RESPA Digital Platform Competition Mortgages Referrals Section 8 Advisory Opinion

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