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9th Circuit affirms no jurisdiction without exhaustion of administrative remedies
On December 27, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a TILA case brought by a consumer against his mortgage lender, citing lack of subject matter jurisdiction under the provisions of FIRREA that require claims involving a bank that is in receivership to be presented to the FDIC before the borrower files suit. In 2009 the consumer filed an adversary proceeding in bankruptcy court against his lender for rescission of his mortgage loan under TILA. The consumer claimed that the lender’s notice of right to cancel was defective when the loan was signed, resulting in an extended rescission period under TILA, but his suit was dismissed for lack of jurisdiction. Once again, in 2012, the district court dismissed the consumer’s TILA suit after finding that the consumer had not exhausted his administrative remedies with the FDIC before filing suit.
On appeal, the three-judge panel rejected the consumer’s claim that his lender was not placed into receivership until after his loan was sold, and therefore he did not have to exhaust his administrative remedies before filing suit. The panel subscribed to the Fourth Circuit’s interpretation of the exhaustion requirement, stating that “even where an asset never passes through the FDIC’s receivership estate, the FDIC should assess the claim first.” According to the opinion, the FIRREA requirement that the consumer exhaust his remedies with the FDIC applied to this action because the panel determined that (i) the consumer’s claim was “susceptible of resolution under the FIRREA claims process”; (ii) the consumer’s claim was related to an act or omission of the lender; and (iii) the FDIC, which “was not required to have possessed the loan before determining a claim” had been appointed as receiver for that lender, stripping the appellate court of subject matter jurisdiction until after the FDIC determined his claim.
Agencies release annual CRA asset-size threshold adjustments
On December 31, the Federal Reserve Board, the OCC, and the FDIC announced the joint annual adjustments to CRA asset-size thresholds used to define small and intermediate small banks and small and intermediate small savings associations. A “small” bank or savings association is defined as an institution that, as of December 31 of either of the prior two calendar years, had less than $1.305 billion in assets. An “intermediate small” bank or savings association is defined as an institution that, as of December 31 of both of the prior two calendar years, had at least $326 million in assets, and as of December 31 of either of the past two calendar years, had less than $1.305 billion in assets. This joint final rule became effective on January 1.
FDIC releases November enforcement actions
On December 27, the FDIC announced a list of administrative enforcement actions taken against banks and individuals in November. The 14 orders include “two consent orders; one civil money penalty; one order terminating consent order; one supervisory prompt corrective directive action; five section 19 orders (prohibiting persons who have been convicted of any criminal offense involving dishonesty, breach of trust, or money laundering from serving as institution-affiliated parties with respect to an insured depository institution); two removal and prohibition orders; and two orders terminating prompt supervisory corrective action directives.” In one action, the FDIC issued a consent order against an Illinois-based bank related to alleged weaknesses in its Bank Secrecy Act (BSA) compliance program. Among other things, the bank is ordered to (i) implement a revised, written BSA compliance program to address BSA and FinCEN regulation provisions, such as suspicious activity reporting, customer due diligence, and beneficial ownership; (ii) update its Customer Due Diligence Program to assure the reasonable detection of suspicious activity; (iii) implement a process for account transaction monitoring; (iv) retain qualified BSA management to ensure compliance with applicable laws and regulations; (v) implement a comprehensive BSA training program for appropriate personnel; (vi) address automated clearing house (ACH) activity and update policies and procedures to monitor credit risk associated with ACH transactions; and (vii) refrain from entering into any new lines of business prior to conducting appropriate due diligence.
FDIC issues brokered-deposits proposal
On December 12, the FDIC issued a notice of proposed rulemaking (NPRM) requesting comments on revisions to the agency’s brokered deposit regulations implementing Section 29 of the FDI Act, and also issued an associated factsheet. The regulations were originally implemented in the late 1980s, and the FDIC more recently issued guidance in the form of FAQs in 2016. The FDIC’s NPRM follows an advanced notice of proposed rulemaking issued last December (previously covered by InfoBytes here), that requested feedback on ways in which the agency could improve its brokered deposit regulation. According to the FDIC, the NPRM would modernize and establish a new framework to ensure the “classification of a deposit as brokered appropriately reflects changes in the banking system, including banks’ use of new technologies to engage and interact with their customers.” Among other things, the NPRM would: (i) revise the “facilitation” prong of the deposit broker definition so that it applies to persons who engage in specified activities; (ii) revise two exceptions under Section 29—the first would allow a wholly owned operating subsidiary to be eligible for the insured depository institution exception to the “deposit broker” definition in certain circumstances, while the second would amend the “primary purpose exception” for agents or nominees whose primary purposes are not the placement of funds with insured depository institutions for customers (the FDIC plans to establish an application process for third parties who want to take advantage of the primary purpose exception); and (iii) continue to consider an agent’s placement of brokered CDs as deposit brokering, and continue to be report such deposits as brokered. Chair McWilliams provided remarks (linked here) about brokered deposit regulation at a Brookings Institution event the day before the NPRM was adopted.
Board member Martin Gruenberg voted against the NPRM, stating that the proposal would “significantly weaken” the rule and would narrow the scope of deposits that are considered brokered “without adequate justification and expose the banking system to significantly increased risk.”
Comments on the NPRM are due within 60 days of publication in the Federal Register.
Agencies release 2018 CRA data
On December 16, the three federal banking agency members of the Federal Financial Institutions Examination Council (FFIEC) with Community Reinvestment Act (CRA) responsibility—the Federal Reserve Board, the FDIC, and the OCC—announced the release of the 2018 small business, small farm, and community development CRA data. The analysis contains information from 700 lenders about originations and purchases of small loans (loans with original amounts of $1 million or less) in 2018, a 2.2 percent decrease from the 718 lenders that reported data in 2017. According to the analysis, the total number of originated loans increased by approximately 8 percent from 2017, with the dollar amount of originations increasing by roughly 5 percent; however, the analysis notes that the majority of this growth is attributable to one bank’s increase in originations. The analysis further notes that 615 banks reported community development lending activity totaling nearly $103 billion in 2018, an increase from $96 billion in 2017.
Special Alert: OCC and FDIC issue CRA modernization proposal
On December 12, the OCC and the FDIC jointly issued a notice of proposed rulemaking (NPR) to modernize the regulatory framework implementing the Community Reinvestment Act. The NPR generally focuses on expanding and delineating the activities that qualify for CRA consideration, providing benchmarks to determine what levels of activity are necessary to obtain a particular CRA rating, establishing additional assessment areas based on the location of a bank’s deposits, and increasing clarity, consistency, and transparency in reporting.
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Click here to read the full special alert.
If you have any questions regarding the CRA or other related issues, please visit our Fair Lending practice page or contact a Buckley attorney with whom you have worked in the past.FDIC posts enforcement actions manual
On December 2, the FDIC announced the release of its full enforcement manual (manual). According to Financial Institution Letter (see FIL-76-2019), the manual, which was posted to the FDIC website, is meant to “support the work of field office, regional office, and Washington office staff involved in processing and monitoring enforcement actions.” The letter states that the manual was released to promote “greater transparency” to FDIC-insured institutions and other concerned parties as to the agency’s enforcement policies and procedures. Additionally, the letter cautions that the manual “does not interpret any law or regulation” nor does it “establish supervisory requirements” or “industry guidance.”
Senate Democrats criticize OCC and FDIC fintech proposals
On November 21, six Democratic Senators wrote to OCC Comptroller Joseph Otting and FDIC Chairman Jelena Williams to strongly oppose recent proposed rules by the agencies (see OCC notice here and FDIC notice here). As previously covered by a Buckley Special Alert, the OCC and FDIC proposed rules reassert the “valid-when-made doctrine,” which states that loan interest that is permissible when the loan is made to a bank remains permissible after the loan is transferred to a nonbank. In the letter, the Senators suggest that the proposed rules enable non-bank lenders to avoid state interest rate limits. According to the letter, the proposed rules would encourage “payday and other non-bank lenders to launder their loans through banks so that they can charge whatever interest rate federally-regulated banks may charge.” Additionally, the letter urges both agencies to consider their past declarations against “rent-a-bank” schemes, and contends that the agencies should not attempt to address Madden v. Midland Funding, LLC, which rejected the valid-when-made doctrine, through rulemaking, but should instead leave such lawmaking to Congress.
Regulators issue joint statement on using alternative data in underwriting
On December 3, the Federal Reserve, the CFPB, the FDIC, the NCUA, and the OCC (agencies) issued an Interagency Statement on alternative data use in credit underwriting, highlighting applicable consumer protection laws and noting risks and benefits. (See press release here). According to the statement, alternative data use in underwriting may “lower the cost of credit” and expand credit access, a point previously raised by the CFPB and covered in InfoBytes. Specifically, the potential benefits include: (i) increased “speed and accuracy of credit decisions”; (ii) lender ability to “evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system”; and (iii) consumer ability “to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity.” “Alternative data” refers to information not usually found in traditional credit reports or typically provided by customers, including for example, automated “cash flow evaluation” which evaluates a borrower’s capacity to meet payment obligations and is derived from a consumer’s bank account records. The statement indicates that this approach can improve the “measurement of income and expenses” of consumers with steady income over time from multiple sources, rather than a single job. The statement also recognizes that the way in which entities use alternative data—for example, implementing a “Second Look” program, where alternative data is only used for applicants that would otherwise be denied credit—can increase credit access. The statement points out that use of alternative data may increase potential risks, and that those practices must comply with applicable consumer protection laws, including “fair lending laws, prohibitions against unfair, deceptive, or abusive acts or practices, and the Fair Credit Reporting Act.” Therefore, the agencies encourage entities to incorporate appropriate “robust compliance management” when using alternative data in order to protect consumer information.
Special Alert: Banks no longer required to file SARs for hemp-related businesses
Federal and state banking regulators confirmed in a December 3 joint statement that banks are no longer required to file a suspicious activity report on customers solely because they are “engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.”
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Click here to read the full special alert.
For questions about the alert and related issues, please visit our Bank Secrecy Act/Anti-Money Laundering practice page, or contact a Buckley attorney with whom you have worked in the past.