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Nutter Bank Report, May 2017

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| Legal Update

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

1. Supreme Court Rules That Cities Can Sue Lenders Under the Fair Housing Act
2. New York Joins CSBS in Suing the OCC Over Fintech Charter Proposal
3. Massachusetts Pregnant Workers Protection Bill Moves Toward Enactment
4. OCC Issues Updated Guidance on Exam Treatment of Violations of Laws and Regulations
5. Other Developments: Maximum Dishonored Check Fee and Comptroller’s Licensing Manual

1. Supreme Court Rules That Cities Can Sue Lenders Under the Fair Housing Act

The U.S. Supreme Court has issued a decision that reaffirms the standing of municipalities to sue lenders, including banks, for certain discriminatory mortgage lending practices that violate the federal Fair Housing Act (“FHA”). The Court’s May 1 decision arose from lawsuits brought by the City of Miami under the FHA against two banks claiming that the banks’ discriminatory lending practices harmed the city by causing a disproportionate number of foreclosures and vacancies in majority-minority neighborhoods in the city, which impaired the city’s racial desegregation efforts, reduced the city’s property-tax revenues, and increased demand for police, fire, and other municipal services. The city’s lawsuit alleged that the banks intentionally targeted predatory lending practices towards African-American and Latino neighborhoods and residents, made loans to minority borrowers on worse terms than equally creditworthy nonminority borrowers, and induced defaults by refusing to refinance or modify loans to minority borrowers on fair terms. The banks argued that the city did not have standing to sue under the FHA because the harms claimed by the city do not fall within the “zone of interests” that the FHA protects. The FHA permits any person who “claims to have been injured by a discriminatory housing practice” to bring a housing discrimination lawsuit. The Court’s decision stated that this provision of the FHA “reflects a congressional intent to confer standing broadly,” and held that the city’s claimed injuries are within the FHA’s zone of interests. Click here for a copy of the Court’s decision.

    Nutter Notes: Despite the Court’s ruling in favor of the city on the issue of standing, the Court’s ruling on the issue of proximate cause may make it more difficult in the future for cities to sue lenders for FHA violations. The banks in the case had argued that the city’s complaints did not show a sufficient causal connection, or “proximate cause,” between the harms to the city and the banks’ alleged discriminatory lending practices. The trial court, which originally dismissed the city’s complaints, agreed that the banks’ allegedly discriminatory lending practices did not proximately cause the city to lose property tax revenue and spend more on municipal services. The court of appeals reversed, holding that the city’s claim that its financial injuries were foreseeable results of the banks’ conduct was sufficient to show a causal connection between the harms to the city and the banks’ alleged discriminatory lending practices. However, the Supreme Court held that “foreseeability alone is not sufficient to establish proximate cause under the FHA,” and that they city must prove “some direct relation between the injury asserted and the injurious conduct alleged.” The Court did not define what constitutes a “direct relation,” and stated that the lower courts should define the standards of proximate cause for municipal claims under the FHA.

2. New York Joins CSBS in Suing the OCC Over Fintech Charter Proposal

New York’s Department of Financial Services (“DFS”) joined other state bank regulators, through the Conference of State Bank Supervisors (“CSBS”), in filing a lawsuit against the OCC to block its fintech charter proposal. The DFS’s May 12 complaint, like the CSBS’s lawsuit, claims that the OCC’s decision to grant special purpose national bank charters to financial technology companies exceeds the chartering authority granted by Congress. The CSBS complaint, filed last month, similarly claims that the National Bank Act authorizes the OCC “only to charter institutions to carry on either the ‘business of banking’ or certain special purposes expressly authorized by Congress,” and that the “business of banking” requires that an institution be engaged in receiving deposits. Although the OCC has not specifically defined what constitutes a fintech company, the OCC’s proposal specifically states that such businesses would not be engaged in deposit-taking. Both the DFS and the CSBS argue that state regulators are better equipped to regulate nonbank financial service companies doing business in their states. Click here for a copy of New York’s complaint.

    Nutter Notes: Both the CSBS and New York’s DFS have argued that the OCC fintech charter proposal will discourage innovation in financial services. The DFS said that the OCC’s creation of a special purpose national bank charter for fintech companies “will stifle rather than encourage innovation,” by providing a platform for “large, dominant firms to control the development of technology solutions in the financial services industry, thereby harming existing community banks and small businesses seeking to serve local communities.” Among the concerns expressed by the DFS is that fintech companies chartered by the OCC would enjoy federal preemption of certain state consumer protection laws. The CSBS also said the OCC’s proposal “threatens state sovereignty and strong state consumer protection laws.” The CSBS announced a related initiative on May 10, referred to as “Vision 2020,” to “modernize state regulation of non-banks, including financial technology firms,” to achieve more efficient supervision and establish uniform state standards for non-bank financial services providers, including fintechs.

3. Massachusetts Pregnant Workers Protection Bill Moves Toward Enactment

The Massachusetts House of Representatives has unanimously voted to approve the Massachusetts Pregnant Workers Fairness Act, a bill that would guarantee more rights for pregnant workers in the Commonwealth. The bill approved on May 10 would prohibit employers in Massachusetts, including banks, from firing or discriminating against employees because they are pregnant or nursing in much the same way that federal and state law prohibits employers from discriminating on other protected bases, such as religion, gender, race, or ethnicity. The bill would also require employers to make reasonable accommodations for pregnant or nursing employees. The bill is expected to be approved by the Senate, with a majority of the Senators signed on as co-sponsors, and Governor Baker has stated publicly that he expects he would sign it into law. Click here for the text of the bill and legislative status.

    Nutter Notes: Current law protecting persons with disabilities do not cover women with healthy pregnancies or women who are nursing. The bill would require employers to make reasonable accommodations for pregnant women or nursing mothers, upon request, unless doing so would impose undue hardship on the business similar to the standards that apply to employees with disabilities. The bill would also protect any employee who requests an accommodation for pregnancy or nursing from adverse action. The bill would prohibit an employer from firing, denying employment to, or demoting a woman who requests a pregnancy-related accommodation. Under the bill, an employer would not be able to force an employee to accept a particular accommodation or require the employee to take a leave of absence as long as the employee is able to perform the essential functions of her job.

4. OCC Issues Updated Guidance on Exam Treatment of Violations of Laws and Regulations

The OCC has updated its policies and procedures governing violations of laws and regulations by national banks and federal savings associations. A May 23 OCC Bulletin announced that the updated policies and procedures are reflected in contemporaneous updates to the “Bank Supervision Process,” “Community Bank Supervision,” “Federal Branches and Agencies,” and “Large Bank Supervision” booklets and other sections of the Comptroller’s Handbook and in other internal OCC guidance. The updated policies and procedures direct OCC examiners to communicate violations to supervised institutions using a consistent format consisting of legal citation and description, a summary of relevant statutory or regulatory requirements, facts supporting the violation and root causes, corrective actions required, and board and management’s commitments to corrective action. The updated policies and procedures also emphasize the importance of timely and thorough follow-up and tracking of management’s corrective actions and related milestones. This policy will become effective on July 1, 2017. Click here for a copy of the OCC Bulletin.

    Nutter Notes: Specifically, the OCC’s updated policy requires that examiners communicate all substantive violations to the bank in a report of examination (“ROE”) or supervisory letter, including substantive self-identified violations in certain circumstances. Examiners will be required to communicate less substantive OCC-identified violations in a separate written document if the examiners decide not to include them in an ROE or supervisory letter. The updated policy gives examiners discretion to determine whether less substantive, self-identified violations may be communicated separately. The OCC stated that it expects the bank’s board and management to take timely and effective correction of all violations regardless of how they are communicated. According to the updated policy, if management fails to correct a violation previously communicated in a separate written document by the OCC, the examiner should include the violation in the next ROE or supervisory letter. The updated policy also requires examiners to identify violations as “New,” “Self-identified,” or “Repeat,” as applicable.

5. Other Developments: Maximum Dishonored Check Fee and Comptroller’s Licensing Manual 

  • Division of Banks Increases Maximum Dishonored Check Fee

The Massachusetts Division of Banks on May 24 issued its annual decision establishing the maximum dishonored check fee that Massachusetts banks may assess to consumers, raising the maximum fee slightly from $7.17 to $7.23, effective as of July 1, 2017.

    Nutter Notes: The maximum dishonored check fee will be effective until June 30, 2018, or until such time as the Division issues its 2018 decision establishing a new maximum dishonored check fee. Click here for a copy of the Division’s decision. 

  • OCC Issues Two Revised Booklets of the Comptroller’s Licensing Manual

The OCC on May 8 published revised Fiduciary Powers and Public Notice and Comments booklets of the Comptroller’s Licensing Manual, replacing previously issued booklets of the same titles. The Fiduciary Powers booklet provides an overview of policies and decision criteria that the OCC considers when reviewing applications from banks seeking to exercise fiduciary powers.

    Nutter Notes: The Public Notice and Comments booklet provides requirements and procedures that banks must follow when public notice is required and comments are received. Click here for a copy of the revised Fiduciary Powers booklet and here for a copy of the revised Public Notice and Comments booklet.

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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