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New York FY 2024 budget proposes to end unfair overdraft practices
On February 1, the New York governor released the state’s FY 2024 budget proposal, which includes measures for ending certain bank overdraft and insufficient fee practices. Specifically, the proposed legislation would amend section 9-y of the banking law to grant authority to the NYDFS superintendent to promulgate regulations related to (i) supervised banking organizations’ transaction processing practices; (ii) the charges (including overdraft and insufficient funds fees) that banks may impose in connection with dishonored transactions; and (iii) associated disclosures provided to consumers regarding how transactions are processed and any associated fees. In an accompanying budget briefing book, the governor said the proposed measures are part of “nation-leading legislation that comprehensively addresses abusive bank fee practices, which tend to disproportionally harm low- and moderate-income New Yorkers.” Proposed actions include “stopping the opportunistic sequencing of transactions in a way designed to maximize fees charged to consumers, ending other unfair overdraft and non-sufficient funds fee practices, and ensuring clear disclosures and alerts of any permissible bank processing charges.”
Agencies remind banks of HMDA reporting changes on closed-end mortgages
On February 1, the OCC reminded banks and OCC examiners that the loan origination threshold for reporting HMDA data on closed-end mortgages has changed due to a court decision issued last year, which addressed challenges made by a group of consumer fair housing associations to changes made in 2020 by the CFPB that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA (covered by InfoBytes here.) Due to a court order vacating the 2020 HMDA Final Rule as to the loan volume reporting threshold for closed-end mortgage loans, the OCC explained that the loan origination threshold for reporting HMDA data on closed-end mortgage loans reverted to the threshold established by the 2015 HMDA Final Rule.
According to Bulletin 2023-5, the threshold for reporting HMDA data is now 25 closed-end mortgage loans originated in each of the two preceding calendar years rather than the 100-loan threshold set by the 2020 HMDA Final Rule. “Banks that originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years (referred to collectively as affected banks) may need to make adjustments to policies and procedures to comply with reporting obligations,” the OCC said. The agency added that it does not plan to assess penalties for failures to report closed-end mortgage loan data on reportable transactions conducted in 2022, 2021 or 2020 for affected banks that meet other coverage requirements under Regulation C.
The FDIC and Federal Reserve Board also issued similar guidance (see FIL-06-2023 and CA 23-1).
NYDFS finalizes commercial financing disclosures
On February 1, NYDFS adopted a final regulation (23 NYCRR 600) outlining disclosure requirements for commercial financing transactions in the state. Under the state’s Commercial Finance Disclosure Law (CFDL)—which was enacted at the end of December 2020—providers of commercial financing, which include persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
The final regulation took into consideration comments received on revised proposed regulations published in 2021 and 2022 (covered by InfoBytes here and here), and provides specific instructions for providers on how to comply with the CFDL. Among other things, the final regulation:
- Outlines detailed definitions for terms used within the CFDL and in the regulation;
- Clarifies the definition of “finance charge” with respect to commercial financing transactions, and explains how the finance charge and annual percentage rate should be calculated;
- Describes allowed tolerances and specifies occurrences where providers or financers will not assume liability for disclosure errors or inadvertent disclosures;
- Lays out formatting and content requirements for disclosures required by the CFDL for the following types of financing: (i) sales-based financing; (ii) closed-end financing; (iii) open-end financing; (iv) factoring transaction financing; (v) lease financing; (vi) general asset-based financing; and (vii) all other commercial financing transactions that do not fall within the aforementioned categories;
- Clarifies specific itemization disclosure requirements for when the amount financed is greater than the recipient funds;
- Outlines signature requirements;
- Describes how the CFDL’s disclosure threshold of $2,500,000 is calculated;
- Explains how providers should calculate required disclosures for commercial financing transactions with multiple payment options/balances payable on demand;
- Details certain duties of financers and brokers involved in commercial financing;
- Prescribes a process under which certain providers that use the opt-in method of calculating an estimated annual percentage rates will report data to the superintendent; and
- Specifies provisions related to the assignment of commercial financing agreements.
23 NYCRR 600 will take effect upon publication of the Notice of Adoption in the State Register. The compliance date is six months after the Notice of Adoption is published.
FDIC issues December enforcement actions
On January 27, the FDIC released a list of administrative enforcement actions taken against banks and individuals in December. The FDIC made public nine orders, including “one order to pay civil money penalty, two consent orders, one combined personal consent order and order to pay, two Section 19 orders, four prohibition orders, and seven orders of termination of insurance.”
The actions included a civil money order against a Georgia-based bank related to violations of the Flood Disaster Protection Act. The FDIC determined that the bank had engaged in a pattern or practice of violations because it “made, increased, extended, or renewed loans secured by a building or mobile home located in a special flood hazard area or to be located in a special flood hazard area without providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral.”
Additionally, the FDIC issued a consent order against a Texas-based bank alleging the bank engaged in “unsafe or unsound banking practices or violations of law or regulation relating to, among other things, weaknesses in board and management oversight of the information technology function.” The bank neither admitted nor denied the allegations but agreed, among other things, that it would develop a staffing analysis plan “to ensure sufficient resources are available with the knowledge [and] prerequisite skills commensurate with the risk profile and complexity of the Bank’s information technology [] function.”
Fed says limits on banking activities will apply regardless of insurance status
On January 27, the Federal Reserve Board issued a policy statement providing guidelines on how the agency evaluates requests from supervised uninsured and insured banks seeking to engage in novel activities, such as those involving crypto assets. Recognizing that in recent years the Fed has received numerous inquiries, notifications, and proposals from banks seeking to engage in new or unprecedented activities, the Fed clarified that when evaluating such inquiries, uninsured and insured banks supervised by the Fed would be subject to the same limitations that are currently imposed on OCC-supervised national banks, including crypto-asset-related activities. According to a board memo published the same day, the Fed said it “will presumptively exercise its authority to limit state member banks to engaging as principal in only those activities that are permissible for national banks—in each case, subject to the terms, conditions, and limitations placed on national banks with respect to the activity—unless those activities are permissible for state banks by federal law.” This “equal treatment” is intended to “promote a level playing field and limit regulatory arbitrage,” the Fed said.
The Fed reiterated that banks must be able to ensure that any activities they plan to engage in are permitted by law and conducted in a safe and sound manner. A bank should implement risk management processes, internal controls, and information systems that are “appropriate and adequate for the nature, scope, and risks of its activities,” the Fed noted. The Fed, however, explained that the policy statement does “not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws.”
The policy statement was issued the same day the Fed denied a request from a Wyoming-based digital asset firm to become a member of the Federal Reserve System. The Fed explained that the firm—a special purpose depository institution chartered by the state of Wyoming that “proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks…“ presented significant safety and soundness risks.” Additionally, the Fed determined that the digital asset firm’s risk management framework failed to sufficiently address heighted risk concerns, including its ability to mitigate money laundering and terrorism financing risks.
NYDFS gives custodial guidance on crypto insolvency
On January 23, NYDFS reiterated expectations for sound custody and disclosure practices for entities that are licensed or chartered to custody or temporarily hold, store, or maintain virtual currency assets on behalf of customers (virtual currency entities or “VCEs”). NYDFS explained that under the state’s virtual currency regulation (23 NYCRR Part 200), VCEs operating under the BitLicense and Limited Purpose Trust Charter are required to, among other things, “hold virtual currency in a manner that protects customer assets; maintain comprehensive books and records; properly disclose the material terms and conditions associated with their products and services, including custody services; and refrain from making any false, misleading or deceptive representations or omissions in their marketing materials.”
The regulatory guidance on insolvency clarifies standards and practices intended to ensure that VCEs are providing high levels of customer protection with respect to licensed asset custody. Specifically, the guidance addresses customer protection concerns regarding:
- The segregation of and separate accounting for customer virtual currency. VCEs “should separately account for, and segregate a customer’s virtual currency from, the corporate assets of the VCE Custodian and its affiliated entities, both on-chain and on the VCE Custodian’s internal ledger accounts.”
- VCEs limited interest in and use of customer virtual currency. VCEs that take possession of a customer’s assets should do so “only for the limited purpose of carrying out custody and safekeeping services” and must not “establish a debtor-creditor relationship with the customer.”
- Sub-custody arrangements. VCEs may choose, after conducting appropriate due diligence, to safekeep a customer’s virtual currency through a third-party sub-custody arrangement provided the arrangement is consistent with regulatory guidance and approved by NYDFS.
- Customer disclosures. VCEs are “expected to clearly disclose to each customer the general terms and conditions associated with its products, services and activities, including how the VCE Custodian segregates and accounts for the virtual currency held in custody, as well as the customer's retained property interest in the virtual currency.” Additionally, a customer agreement should be transparent about the parties’ intentions to enter into a custodial relationship as opposed to a debtor-creditor relationship.
FDIC announces Georgia disaster relief
On January 20, the FDIC issued FIL-05-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Georgia affected by severe storms, straight-line winds, and tornadoes on January 12. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and encouraged institutions to work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements and instructs institutions to contact the Atlanta Regional Office for consideration.
OCC revises Comptroller’s Licensing Manual
On January 19, the OCC announced an updated version of the “Branches and Relocations” booklet of the Comptroller’s Licensing Manual. According to Bulletin 2023-04, the revised booklet replaces booklet of the same title issued in October 2019. The revised booklet, among other things: (i) reflects recent updates to 12 CFR 5 and other regulations, as applicable; (ii) removes references to outdated guidance and provides current references; and (iii) makes other minor modifications and corrections throughout.
NYDFS issues check-cashing fee regulations
On January 18, NYDFS announced that it has adopted an updated check cashing regulation. As previously covered by InfoBytes, NYDFS issued a proposed check cashing regulation in June 2022, following an emergency regulation announced in February 2022, that halted annual increases on check-cashing fees and locked the current maximum fee set last February at 2.27 percent (covered by InfoBytes here). The regulation establishes a new fee methodology that evaluates the needs of licensees and consumers who use check cashing services. Two tiers of fees for licensed check cashers are recommended: (i) the maximum fee that a check casher may charge for a public assistance check issued by a federal or state government agency (including checks for Social Security, unemployment, retirement, veteran’s benefits, emergency relief, housing assistance, or tax refunds) is set at 1.5 percent; and (ii) the maximum fee a check casher is permitted to charge for all other checks, drafts, or money orders is $1 or 2.2 percent, whichever is greater. According to NYDFS Superintendent Adrienne Harris, “the existing fee methodology wasn’t just outdated, but inappropriate and punitive to consumers.” She further noted that “[c]heck cashers should not be entitled to automatic, annual fee increases.”
FDIC announces Alabama, California disaster relief
On January 18, the FDIC issued guidance (see FIL-03-2023 and FIL-04-2023) to provide regulatory relief to financial institutions and help facilitate recovery in areas of Alabama affected by severe storms, straight-line winds, and tornadoes occurring on January 12, and in areas of California affected by severe winter storms, flooding, and landslides occurring from December 27 and continuing. The FDIC wrote that in supervising impacted institutions, it will consider the unusual circumstances those institutions face. The guidance suggested that institutions work with borrowers impacted by the severe weather to extend repayment terms, restructure existing loans, or ease terms for new loans “in a manner consistent with sound banking practices.” The FDIC noted that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The agency will also consider relief from certain reporting and publishing requirements.