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Nutter Bank Report, August 2014

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The Nutter Bank Report is a monthly electronic publication of the firm’s Banking and Financial Services Group and contains regulatory and legal updates with expert commentary from our banking attorneys.

1. Banking Agencies Issue Guidance on Unfair and Deceptive Consumer Credit Practices
2. OCC Releases Risk Management Guidance on Consumer Debt Sale Arrangements
3. FinCEN Proposes New Beneficial Ownership Customer Due Diligence Requirements
4. CFPB Extends Remittance Transfer Disclosure Exception to 2020
5. Other Developments: Reverse Mortgages and Semiannual Assessments

1. Banking Agencies Issue Guidance on Unfair and Deceptive Consumer Credit Practices

The federal banking agencies and the CFPB have issued guidance to insured depository institutions advising them that the repeal of the banking agencies’ consumer credit practices rules does not indicate that the unfair or deceptive practices described in the repealed rules are now permissible. The new interagency guidance released on August 22 explains that the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) repealed the rulemaking authority granted to some of the banking agencies under the Federal Trade Commission (“FTC”) Act, and required the agencies that had issued rules prohibiting certain unfair and deceptive consumer credit practices under the FTC Act to repeal those rules. However, according to the guidance, the credit practices described in the repealed rules could still constitute violations of Section 5 of the FTC Act, which prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.” The credit practices described in the repealed rules also could constitute violations of Sections 1031 and 1036 of the Dodd-Frank Act, according to the guidance. Section 1031 of the Dodd-Frank Act empowers the CFPB to take action against unfair, deceptive or abusive acts or practices involving consumer financial products and services, and Section 1036 generally prohibits covered businesses, including insured depository institutions, from engaging in any deceptive or abusive act or practice.

    Nutter Notes: The FTC Act authorizes the FTC to adopt rules that specifically define the types of acts or practices that are unfair or deceptive, including requirements for the purpose of preventing such acts or practices. The FTC has exercised this rulemaking authority to issue its Credit Practices Rule. However, the Credit Practices Rule is only applicable to creditors that are within the FTC’s jurisdiction, and not to insured depository institutions. The FTC Act also granted similar rulemaking authority to certain federal banking agencies, which subsequently issued rules that were substantially similar to the FTC’s Credit Practices Rule. The practices prohibited by the banking agencies’ rules included misrepresenting the nature or extent of cosigner liability, pyramiding late fees and unfair credit contract provisions, such as confessions of judgment and waivers of exemptions. The guidance emphasizes that, despite the repeal of the banking agencies’ rules, the prohibited credit practices described in those rules reflect extensive findings by the agencies identifying unfair or deceptive practices. Depending on the facts and circumstances, if an insured depository institution engages in practices described in the repealed rules, its primary federal regulator may bring an enforcement action against it for a violation of Section 5 of the FTC Act or Sections 1031 or 1036 of the Dodd-Frank Act. The agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct, according to the guidance.

2. OCC Releases Risk Management Guidance on Consumer Debt Sale Arrangements

The OCC has published guidance for national banks and federal savings associations on the application of consumer protection requirements and other rules when selling certain consumer debt to third parties (debt buyers) that intend to collect on the underlying obligations. According to OCC Bulletin 2014-37 issued on August 4, OCC-regulated banks should develop and implement appropriate internal policies and procedures to govern debt sale arrangements consistently before entering into transactions with debt buyers. Such procedures should include appropriate due diligence when selecting debt buyers, providing accurate and comprehensive information at the time of sale regarding each debt sold, and ensuring compliance with applicable consumer protection laws and regulations. The OCC said that it recognizes that debt sale arrangements benefit banks by “turning nonperforming assets into immediate cash proceeds and reducing the use of internal resources to collect delinquent accounts,” but that banks must consider and manage significant risks associated with debt sale arrangements, including operational, compliance, reputation and strategic risks. Among the OCC’s supervisory concerns with debt sale arrangements are whether banks understand debt buyers’ collection practices and whether customer information is transferred to debt buyers in violation of the banks’ internal privacy policies and applicable laws and regulations.

    Nutter Notes: The OCC’s guidance on consumer debt sale arrangements also describes the OCC’s expectations for the structure of contracts between banks and the debt buyers. According to the guidance, contracts with debt buyers should clearly delineate the obligations of the parties for confidentiality and information security, and responsibility for compliance with applicable consumer protection laws. Federal consumer protection laws applicable to debt sales include the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Title V of the Gramm-Leach Bliley Act, the Equal Credit Opportunity Act and the FTC Act. According to the guidance, the OCC expects that contracts with debt buyers include a termination plan to ensure that customer information is returned to the bank or destroyed, minimum service-level agreements to promote fair and consistent treatment of customers, and provisions obligating the debt buyer to maintain the accuracy of consumer information provided by banks. Debt sale contracts should also address the extent to which the debt buyer can resell debt, according to the guidance. The guidance advises that any such debt sale contract should obligate the initial debt buyer to conduct thorough due diligence on the proposed purchaser and to pass on all account information and documentation in its possession to a subsequent buyer. The guidance also says that the OCC expects banks to ensure that contracts with debt buyers do not include compensation provisions that provide incentives for debt buyers to act improperly.

3. FinCEN Proposes New Beneficial Ownership Customer Due Diligence Requirements

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has issued a proposed rule that would amend existing Bank Secrecy Act (“BSA”) regulations to help prevent the use of anonymous companies to engage in or launder the proceeds of illegal activity through U.S. financial institutions. The proposed rule published in the Federal Register on August 4 would add a new due diligence requirement applicable to banks and other covered financial institutions requiring verification of the identities of the beneficial owners who own or control a business entity customer. The beneficial ownership due diligence requirements would apply to any individual who owns 25% or more of a business entity customer and any individual who controls the business entity. The proposed rule would require covered financial institutions to collect beneficial ownership information in a standardized format. The proposed rule would also clarify that customer due diligence procedures must cover the following four core elements: identifying and verifying the identity of customers, identifying and verifying the beneficial owners of business entity customers, understanding the nature and purpose of customer relationships, and conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions. Public comments on the proposed rule are due by October 3.

    Nutter Notes: The proposed rule would define a controlling person of a business entity customer as an individual with significant responsibility for controlling, managing, or directing a business entity customer, including an executive officer or senior manager (e.g., chief executive officer, chief financial officer, chief operating officer, managing member, general partner, president, vice president or treasurer) or any other individual who regularly performs similar functions. The beneficial ownership and control tests would be independent, meaning that a financial institution must identify each individual who owns 25% or more of the equity interests and at least one control person. FinCEN’s customer due diligence rules do not currently require covered financial institutions to collect beneficial owner information on the natural persons associated with business entity customers. FinCEN said that the proposed rule’s requirements that financial institutions understand the nature and purpose of customer relationships and conduct ongoing monitoring to maintain and update customer information would not necessarily require modifications to existing practice or customer onboarding procedures. FinCEN said that these amendments to the BSA rules are intended to clarify existing expectations for financial institutions to understand and monitor the customer relationship for purposes of identifying transactions in which the customer would not normally be expected to engage.

4. CFPB Extends Remittance Transfer Disclosure Exception to 2020

The CFPB has adopted a final rule amending the remittance transfer provisions of Regulation E (electronic funds transfers) to extend a temporary exception for consumer disclosures that allows banks to estimate third-party fees and exchange rates for which they cannot determine exact amounts when providing remittance transfers to account holders. The final rule issued on August 22 extends the expiration of that temporary exception from July 21, 2015 to July 21, 2020. The Dodd-Frank Act provides that a bank can only rely on this exception when it cannot determine the exact amounts of third-party fees and exchange rates for remittance transfers sent by consumers to recipients in other countries for reasons beyond the bank’s control. The CFPB said that if the temporary exception expired in July 2015, current market conditions would not allow banks to know the exact fees and exchange rates associated with certain remittance transfers. These banks reported to the CFPB that they would have been unable to send some transfers to certain parts of the world that they currently serve without the exception. Section 1073 of the Dodd-Frank Act generally requires the disclosure of the actual exchange rate and remitted amount to be received prior to and at the time of payment by the consumer, along with the disclosure of cancellation and refund rights.

    Nutter Notes: The final rule also includes several clarifications and technical corrections to the CFPB’s remittance transfer regulation. The final rule clarifies that U.S. military installations abroad are considered to be located in a state (i.e., within the U.S.) for purposes of the remittance transfer regulation. The final rule also clarifies that whether a remittance transfer from an account is for personal, family or household purposes may be determined by ascertaining the primary purpose of the account used for the transfer. The final rule clarifies that faxes are considered writings for purposes of satisfying certain provisions of the regulation that require remittance transfer providers to provide disclosures in writing, and that, in certain circumstances, a provider may provide oral disclosures after receiving a remittance inquiry from a consumer in writing. The final rule permits remittance transfer providers to include the CFPB’s new remittance-specific consumer web pages as the CFPB web site that providers must disclose on remittance transfer receipts. The final rule also clarifies two of the regulation’s error resolution provisions, namely what constitutes an error caused by delays related to fraud and related screenings, and the remedies for certain errors.

5. Other Developments: Reverse Mortgages and Semiannual Assessments 

  • Division of Banks Announces List of Approved Reverse Mortgage Counselors

The Division of Banks issued a notice on August 22 to remind approved reverse mortgage lenders in Massachusetts, including banks, of the requirement for in-person counseling for reverse mortgage applicants. The notice announced that a list of approved reverse mortgage counselors is available on the Massachusetts Executive Office of Elder Affairs’ web site.

    Nutter Notes: Massachusetts law requires in-person counseling for reverse mortgage applicants who at the time of application have a gross income of less than 50% of the area median income, and possess assets, excluding a primary residence, valued at less than $120,000. 

  • OCC Raises Semiannual Assessments for Larger Institutions

The OCC announced in OCC Bulletin 2014-39 issued on August 11 increases in semiannual assessments on national banks and federal savings associations with more than $40 billion in assets. The OCC raised the marginal assessment rate on bank assets in excess of $40 billion by 14.5%.

    Nutter Notes: The effective increase in the assessment amount for an individual bank depends on its total assets, with increases ranging from between 0.32% percent and 14.0% according to the OCC. The increase in assessments is effective for the assessment due on September 30, 2014.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2012 Chambers and Partners review says that a “broad platform” of legal expertise in the practice “helps clients manage challenges and balance risks while delivering strategic solutions,” while the 2013 Chamber and Partners review reports that Nutter’s bank clients describe Nutter banking lawyers as “proactive” in their thinking, “creative” in structuring agreements, and “forward-thinking in terms of making us aware of regulation and how it may impact us,” which the clients went on to describe as “indicative of a true partner.” The 2014 Chamber and Partners review describes Nutter banking lawyers as “great – very knowledgeable, very responsive and very nice.” Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich 
Tel: (617) 439-2989

Michael K. Krebs
Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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