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Nutter Bank Report, May 2016

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The Nutter Bank Report is a monthly publication of the firm's Banking and Financial Services Group.

1. FinCEN Rule Requires Banks to Identify Beneficial Owners of Business Entity Customers
2. Federal Banking Agencies Issue New Guidance on Reconciling Credit Discrepancies
3. CFPB Publishes Annotated LE and CD Disclosures Showing Truth in Lending Authorities
4. FFIEC Issues New Guidance on Risk Management for Mobile Financial Services
5. Other Developments: Promotional Raffles, DRI Fees and Arbitration Clauses 

1. FinCEN Rule Requires Banks to Identify Beneficial Owners of Business Entity Customers

The Financial Crimes Enforcement Network (“FinCEN”) has published a final rule amending the know-your-customer regulations under the Bank Secrecy Act (“BSA”), which includes a new requirement that banks and other covered financial institutions must identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions. The final rule published on May 11 will require covered financial institutions to comply with the beneficial ownership requirements either by obtaining the required information on a standard certification form that is provided as an appendix to the final rule, or by any other means that comply with the substantive requirements of the final rule. For purposes of the final rule, the term beneficial owner includes each person, if any, who directly or indirectly owns 25% or more of the equity interests of a legal entity customer, and any person with significant responsibility for controlling, managing or directing the legal entity customer, including executive officers and senior managers (such as a CEO, CFO, COO, Managing Member, General Partner, President, Vice President or Treasurer) or any other person who regularly performs similar functions. The final rule allows a financial institution to rely on the beneficial ownership information supplied by the customer as long as the institution has no knowledge of facts that would reasonably call into question the reliability of that information. The identification and verification procedures for beneficial owners are similar to those for individual customers under a financial institution’s customer identification program (“CIP”), except that for beneficial owners, the institution may rely on copies of identity documents. Covered financial institutions must comply with the beneficial ownership rules by May 11, 2018. Click here for a copy of the new rule.

    Nutter Notes: FinCEN’s new rule also amends the anti-money laundering (“AML”) component of the BSA regulations to explicitly include risk-based procedures for conducting ongoing customer due diligence, which include understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile. According to FinCEN, a customer risk profile is the information gathered about a customer at account opening that is used to develop a baseline against which customer activity is assessed for suspicious activity reporting. For example, such information may include the type of customer or type of account, service or product. The customer risk profile may, but is not required to, include a system of risk ratings or categories of customers. Under the final rule, customer due diligence requirements also include ongoing monitoring to identify and report suspicious transactions and, on a risk basis, maintaining and updating customer information. For the purposes of the customer risk profile, such information includes beneficial ownership information of legal entity customers. The final rule also requires an institution to update its customer risk profile, including beneficial ownership information, when the institution discovers information (including a change in beneficial ownership) about the customer in the course of its normal monitoring that is relevant to assessing or reevaluating the risk posed by the customer. According to FinCEN, examples of such information include a significant and unexplained change in the customer’s activity, such as executing cross-border wire transfers for no apparent reason, or a significant change in the volume of activity without explanation.

2. Federal Banking Agencies Issue New Guidance on Reconciling Credit Discrepancies

The federal banking agencies have issued new joint guidance on supervisory expectations for customer account deposit reconciliation practices. The new guidance issued on May 18 applies to situations in which a customer has made a deposit to an account, and the amount that the bank credits to that account differs from the total of the item(s) the customer deposited, commonly referred to as a “credit discrepancy.” According to the new guidance, the agencies expect banks to adopt deposit reconciliation policies and practices that are designed to avoid or reconcile credit discrepancies, or designed to resolve credit discrepancies so that customers are not disadvantaged. Examiners expect banks to effectively manage their deposit reconciliation practices to comply with Regulation CC and other applicable laws or regulations and to prevent potential harm to customers, according to the guidance. The guidance also warns that information provided to customers about a bank’s deposit reconciliation practices should be accurate, and that examiners expect banks to implement effective compliance management systems that include appropriate policies, procedures, internal controls, training, oversight and review processes to ensure compliance with applicable laws and regulations, and fair treatment of customers. Click here for a copy of the new guidance.

    Nutter Notes: According to the deposit reconciliation guidance, the federal banking agencies are concerned that, in some instances, banks do not research or correct all variances between the dollar value of items deposited to a customer’s account and the dollar amount that is credited to that account, resulting in the customer not receiving the full amount of the actual deposit. The agencies believe that technological and other processes exist that generally allow banks to fully reconcile discrepancies in deposit accounts, according to the new guidance. However, the agencies acknowledge in the new guidance that under limited circumstances, it may not be possible to reconcile all items, such as when an item is damaged to the point that its true amount cannot be determined. The guidance notes that failure to comply with the funds availability requirements in the Expedited Funds Availability Act and Regulation CC may subject a bank to civil liability and enforcement action by the appropriate federal banking agency. In addition, a bank’s deposit reconciliation practices for transaction and non-transaction accounts may violate Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices, or Sections 1031 and 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which prohibit unfair, deceptive or abusive acts or practices, if such deposit reconciliation practices result in credit discrepancies.

3. CFPB Publishes Annotated LE and CD Disclosures Showing Truth in Lending Authorities

The CFPB has issued new versions of its loan estimate and closing disclosure documents under the TILA-RESPA Integrated Disclosure (“TRID”) rule that are annotated to show citations to the disclosure provisions of Chapter 2 of the Truth in Lending Act (“TILA”) referenced in the preamble to the TRID final rule. The annotated versions of the TRID loan estimate and closing disclosure documents released during the week of May 13 provide important information about which disclosures on those forms may become the source of civil liability under TILA. In particular, Section 130 of TILA provides for certain automatic statutory damages in addition to actual damages that borrowers may recover in individual or class action claims based on failure to comply with TILA disclosure requirements. Click here and here for the annotated versions of the loan estimate and closing disclosure, respectively.

    Nutter Notes: The TRID rule incorporates both Real Estate Settlement Procedures Act (“RESPA”) and TILA disclosure requirements. Because the nature of liability for failure to comply with TRID disclosure requirements varies depending on whether the authority for the disclosure is based on RESPA or TILA, the CFPB’s preamble to the TRID final rule discussed the sections of TILA, RESPA and the Dodd-Frank Act that provide authority for the various TRID disclosure requirements. However, there appear to be discrepancies between the authorities cited in the preamble to the TRID final rule and the annotated disclosure forms. For example, the annotated disclosures provide that both the Adjustable Payment (“AP”) and Adjustable Interest Rate (“AIR”) Tables were adopted based on a particular section of TILA. However, the preamble to the TRID final rule indicates that the AP Table was adopted based on that section of TILA, but that the AIR Table was adopted based on general rulemaking authority. The new annotated loan estimate and closing disclosure documents do not include citations to other laws or rules that the CFPB relied on in adopting the TRID disclosure forms, such as RESPA and certain provisions of the Dodd-Frank Act. However, the CFPB has previously released annotated versions of the loan estimate and closing disclosure documents that show citations to the TRID final rule to indicate the sources of the disclosure requirements, as well as completed sample disclosure forms to provide guidance on the use of the TRID forms.

4. FFIEC Issues New Guidance on Risk Management for Mobile Financial Services

The Federal Financial Institutions Examination Council (“FFIEC”) has released a new Appendix E, titled Mobile Financial Services, to the Retail Payment Systems booklet of the FFIEC Information Technology Examination Handbook (the “IT Handbook”). The new appendix issued on May 3 provides guidance on supervisory expectations for a bank’s oversight, administration and risk management of information technology practices associated with activities and devices for mobile financial services. According to the new appendix, the federal banking agencies view mobile financial services as the products and services that a bank provides to its customers through mobile devices, such as short message service (SMS)/text messaging, mobile-enabled websites and browsers, mobile applications, and wireless payment technologies. According to the FFIEC, the new appendix focuses on risks associated with mobile financial services and emphasizes an enterprise-wide risk management approach to the effective management and mitigation of those risks. The FFIEC also cautioned that the risks and controls addressed in the new appendix are not exhaustive. Click here for a copy of the new mobile financial services appendix to the IT Handbook.

    Nutter Notes: According to the FFIEC, mobile financial services can pose elevated risks for banks related to device security, authentication, data security, mobile malware, data transmission security, compliance and third-party vendor management. In the FFIEC’s view, these risks arise because customers are often less likely to activate security controls, virus protection or personal firewall functionality on their mobile devices. According to the new appendix, federal bank examiners expect management to identify the risks associated with the types of mobile financial services being offered by the bank, and incorporate the identification of those risks into the bank’s existing risk management process. The identification process should include risks at the institution and those associated with the use of mobile devices where the customer implements and manages the security settings, according to the new appendix. The new appendix cautions that a bank’s management should identify the associated risks before implementing any new mobile product or service, particularly in the areas of strategic, operational, compliance and reputation risks.

5. Other Developments: Promotional Raffles, DRI Fees and Arbitration Clauses

  • Massachusetts Lawmakers Consider a Bill to Allow Savings Account Raffles

The Massachusetts legislature is currently considering a bill, S. 495, that would amend the banking laws to permit banks to conduct savings promotion raffles in which the only consideration required for a chance of winning a prize is the deposit of a minimum specified amount of money in a savings account.

    Nutter Notes: The bill was reported favorably out of the Senate Committee on Financial Services last month, and has been referred to the Senate Ways and Means Committee for further consideration. The bill is sponsored by Senator Benjamin B. Downing and is supported by the Massachusetts Bankers Association. Click here for more information about the bill.

  • DOB Sets New Maximum Allowable Deposit Return Item (DRI) Fee

The Massachusetts Division of Banks on May 3 set a new maximum allowable fee that Massachusetts-chartered banks and credit unions may assess on consumers for processing dishonored checks or DRIs at $7.17 per DRI. The maximum DRI fee is based on deposit return item cost data independently obtained from a sample of state-chartered banks and credit unions, according to the Division.

    Nutter Notes: The new maximum DRI fee becomes effective as of June 1 and remains effective until June 1, 2017, or until such time as the Division issues its 2017 DRI fee decision. Click here for a copy of the 2016 DRI fee decision.

  • CFPB Proposes Ban on Mandatory Arbitration in Contracts with Consumers

The CFPB on May 5 proposed a new rule that would prohibit banks and other financial service providers from including mandatory arbitration clauses in contracts with consumers for certain financial products and services, including deposit accounts and credit cards. Comments on the proposed rule are due by August 22.

    Nutter Notes: The proposed rule also would require a bank or other financial service provider that is involved in an arbitration based on an existing arbitration clause in a consumer financial product or service contract to submit certain records related to the arbitration proceedings to the CFPB. Click here for a copy of the proposed rule.

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. 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 Bridget L. Vellucci. 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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