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Nutter Bank Report: August 2019

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08.30.2019 | Legal Update

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  1. Federal Reserve Announces Plan for Real-Time Payment and Settlement Service
  2. FDIC and OCC Approve Amendments Intended to Simplify and Clarify the Volcker Rule
  3. HUD Proposes to Raise the Bar on Disparate Impact Housing Discrimination Claims
  4. CFPB Updates Compliance Guidance on Loan Estimate Requirements under TRID Rule
  5. Other Developments: Interest Rate Restrictions, Appraisal Management Companies, and Management Interlocks

1. Federal Reserve Announces Plan for Real-Time Payment and Settlement Service

The Federal Reserve has announced that the Federal Reserve Banks will develop a new real-time gross settlement service with integrated clearing functionality that will be available to all banks around the clock to support faster electronic payments. The new service announced on August 5, called the FedNow‚Ą† Service, will support end-to-end faster payment services provided by banks and will provide infrastructure to promote “ubiquitous, safe, and efficient faster payments,” according to the Federal Reserve. The Federal Reserve has requested comments from the public on how the new service might be designed to most effectively support all payment system stakeholders and the functioning of the broader U.S. payment system. The Federal Reserve said that it expects the FedNow Service to be available in 2023 or 2024. In addition, the Federal Reserve announced that it intends to consider expanded hours for the Fedwire® Funds Service and the National Settlement Service, subject to the outcome of additional analysis of relevant operational, risk, and policy considerations. Comments on the FedNow Service proposal are due by November 7, 2019. Click here for a copy of the Federal Register notice.

Nutter Notes: According to the Federal Reserve, the FedNow Service will process individual payments within seconds, 24 hours a day, 7 days a week, 365 days a year. FedNow will be designed to support credit transfers, where a sender initiates a payment to an intended receiver for a variety of uses, including person-to-person payments, bill payments, and smaller-value business-to-business payments (the service would support values initially limited to $25,000 per transaction). FedNow will settle interbank obligations through debit and credit entries to balances in banks’ master accounts at the Federal Reserve Banks. FedNow will include functionality for messages containing information required to complete end-to-end payments, such as account information for the sender and receiver. Additional descriptive information related to a payment could also be included, such as remittance or invoice information, and may allow for other message types. Notably, the Federal Reserve is proposing that all settlements through the FedNow Service will be final, meaning that settlement cannot be cancelled or revoked once a transaction is processed. Use of FedNow will require participating banks to make the funds from individual payments available to their customers immediately after receiving notification of settlement from FedNow.  

2. FDIC and OCC Approve Amendments Intended to Simplify and Clarify the Volcker Rule

The FDIC and the OCC have approved an interagency final rule that would amend the regulations implementing the prohibitions and restrictions applicable to banking organizations on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), commonly known as the “Volcker Rule.” Under the final rule approved on August 20, the amendments would tailor Volcker Rule compliance requirements based on the size of an organization’s trading assets and liabilities, with the most stringent requirements applied to banking organizations with the most trading activity. Specifically, the amendments will establish three categories of banking organizations based on each organization’s level of trading activity: those with “significant” trading assets and liabilities (consolidated trading assets and liabilities equal to or exceeding $20 billion), those with “moderate” trading assets and liabilities (consolidated trading assets and liabilities of $1 billion or more, but less than $20 billion), and those with “limited” trading assets and liabilities (less than $1 billion in consolidated trading assets and liabilities). The amendments will not become effective unless and until they have been approved by the Federal Reserve, the SEC, and the CFTC. Assuming approval by the other agencies, the amendments will become effective on January 1, 2020. However, banking organizations will not be required to comply with the amendments until January 1, 2021 to give the organizations time to adjust their compliance programs. Click here for a copy of the amendments.

Nutter Notes: The agencies increased the threshold for banking organizations in the “significant” trading assets and liabilities compliance category from $10 billion in gross trading assets and liabilities under the July 2018 proposed rule to $20 billion under the final rule based on comments the agencies received on the proposed rule. The final rule also includes modifications to the calculation of trading assets and liabilities for purposes of determining which compliance category a banking organization falls into by excluding certain financial instruments that banking organizations are permitted to trade without limit under the Volcker Rule. The amendments will also clarify that banking organizations that trade within internal risk limits set under the conditions added to the regulations by these amendments are engaged in permissible market making or underwriting activity, limit the impact of the regulations on the foreign activities of foreign banking organizations, and simplify the trading activity information that banking organizations are required to provide to the agencies.

3. HUD Proposes to Raise the Bar on Disparate Impact Housing Discrimination Claims

The U.S. Department of Housing and Urban Development (“HUD”) has published a proposed rule that would amend HUD’s interpretation of the disparate impact standard under the Fair Housing Act (“FHA”) in a way that would raise the burden of proof for parties claiming discrimination. The proposed rule released on August 16 also would establish new defenses for lenders (including banks), landlords, and others accused of discrimination based on automated decision-making systems. Under the new burden-shifting framework in the proposed rule, a plaintiff would need to plead facts supporting five specific elements in order to bring a claim that a lending (or other housing) policy or practice has a discriminatory effect. The first proposed element would require a plaintiff to plead that the challenged policy or practice is “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.” The second proposed element would be “a robust causal link between the challenged policy or practice and a disparate impact on members of a protected class.” The third proposed element would require the plaintiff to explain how the challenged policy or practice has a harmful impact on members of a protected class. The fourth proposed element would require the plaintiff to show that the disparity is “significant”—that “the statistical disparity identified is material and caused by the challenged policy or practice, rather than attributable to chance.” The fifth proposed element would require that the plaintiff show that his or her injury is directly caused by the challenged policy or practice. Public comments on the proposed rule are due by October 18, 2019. Click here for a copy of the proposed rule.

Nutter Notes: The FHA prohibits discrimination in the financing, sale, or rental of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. HUD and the courts have interpreted the FHA to prohibit practices by lenders, landlords, and others that have an unjustified discriminatory effect—a disparate impact—on a protected class, even where there is no discriminatory intent. In response to requests for a safe harbor from disparate impact claims for decisions based on algorithmic models used to assess factors such as risk or creditworthiness, HUD’s proposed rule includes three new defenses to allegations of discrimination based on automated decision-making systems. The first defense would exonerate a defendant who can demonstrate that the automated decision-making system is not the actual cause of the disparate impact alleged by the plaintiff. The second proposed defense would exonerate a defendant who can show that use of the automated decision-making system is standard in the industry, being used for its intended purpose, and is the responsibility of a third party and not the defendant. The third proposed defense would allow defendants to show that an automated decision-making system is not the actual cause of the disparate impact based on the testimony of a qualified expert.

4. CFPB Updates Compliance Guidance on Loan Estimate Requirements under TRID Rule

The CFPB has updated its guidance on compliance with the TILA/RESPA Integrated Disclosure (TRID) Rule in the form of answers to frequently asked questions (FAQs) to add guidance on topics related to delivery of mortgage loan estimates. The new FAQs added on July 31 address, among other things, when a creditor, including a bank, is required to deliver a loan estimate to a consumer, and whether creditors may require additional information from a consumer who has submitted a mortgage loan application in order to receive a loan estimate. According to the FAQs, the submission of six specified items of information by a consumer constitutes an application under the TRID Rule, which triggers the requirement to deliver a loan estimate to the consumer. Those six pieces of information are (1) the consumer’s name, (2) the consumer’s income, (3) the consumer’s Social Security number to obtain a credit report, (4) the property address, (5) an estimate of the value of the property, and (6) the mortgage loan amount sought. The FAQs also clarify that, while a creditor may request additional information (beyond the six pieces of information that constitute an application under the TRID Rule) it deems necessary in connection with a request for a mortgage loan, a creditor may not require consumers to provide additional information in order to receive a loan estimate. Click here for a copy of the updated FAQs.

Nutter Notes: The updated FAQs on the TRID Rule also clarify that a creditor may not require a consumer to provide any documents to verify any of the six pieces of information that constitute an application under the TRID Rule in order to receive a loan estimate. The TRID Rule does not prohibit a creditor from requesting and collecting verifying documents it deems necessary in connection with a request for a mortgage loan, including a request for a pre-approval or a pre-qualification letter, as long as the delivery of the loan estimate is not conditioned on the provision of such verifying documents. In addition, the FAQs clarify that consumers may voluntarily submit additional information, such as verifying documents, prior to receiving a loan estimate. The FAQs also warn that, if a creditor represents to a consumer that the creditor will not provide a loan estimate without the consumer first submitting verifying documents or additional information beyond the six specified items of information that constitute an application under the TRID Rule, the CFPB or another supervisory agency may bring an enforcement action under the prohibitions against unfair, deceptive, or abusive acts or practices in the Dodd-Frank Act.

 5. Other Developments: Interest Rate Restrictions, Appraisal Management Companies, and Management Interlocks

  • FDIC Proposes Changes to Calculation of Interest Rate Restrictions for Less Than Well Capitalized Banks

The FDIC has proposed a new methodology for calculating certain interest rate restrictions—the national rate and the national rate cap—that apply to less than well capitalized insured depository institutions for specific deposit products. Under the proposed rule released on August 20, the national rate would be the weighted average of rates offered on a given deposit product by all reporting institutions weighted by domestic deposit share. The national rate cap for particular products would be set at the higher of the 95th percentile of rates paid by banks weighted by each bank’s share of total domestic deposits, or the proposed national rate (i.e., the weighted average) plus 75 basis points. Public comments on the proposed rule will be due within 60 days after it is published in the Federal Register, which is expected shortly.

Nutter Notes: The proposed rule follows from the FDIC’s December 2018 advanced notice of proposed rulemaking seeking comments on its brokered deposit rule and interest rate restrictions. Federal law restricts banks that are less than well capitalized from accepting brokered deposits without an FDIC waiver (if applicable) and from soliciting deposits by offering rates of interest on deposits that are significantly higher than the prevailing rates of interest on deposits offered by other banks having the same type of charter in the market area. According to the proposed rule, the FDIC expects to address issues related to brokered deposits in another proposed rule to be issued at a later date. Click here for a copy of the proposed rule on interest rate restrictions.

  • Massachusetts Enacts New Law to Register Appraisal Management Companies

Chapter 43 of the Acts of 2019, signed into law by Governor Baker on July 31, provides for the licensing and regulation of appraisal management companies (“AMCs”) in Massachusetts. The law established a nine-member Board of Real Estate Appraisers appointed by the governor, and satisfies certain federal requirements under the Dodd-Frank Act for the registration and supervision of AMCs. The Board of Real Estate Appraisers began accepting applications for the registration of AMCs on August 2.

Nutter Notes: Under federal regulations implementing provisions of the Dodd-Frank Act related to the registration and supervision of AMCs, any AMC operating in a state that did not establish a regulatory structure for AMCs before a certain deadline is barred from providing appraisal management services for federally related home mortgage loans unless the AMC is owned and controlled by a federally regulated depository institution. The deadline for states to establish a regulatory structure for AMCs was August 10, 2019. Click here to view the new law.

  •  FDIC Approves Rule to Ease Restrictions on Management Official Interlocks

The FDIC approved an interagency final rule on August 20 that would raise the asset threshold at which directors or other management officials of a bank or holding company are prohibited from serving at more than one bank or holding company. Federal law prohibits a management official of a bank or holding company with total assets exceeding $2.5 billion from also serving as a management official of an unaffiliated bank or holding company with total assets exceeding $1.5 billion. The law allows the federal banking agencies to adjust these thresholds by regulation. The final rule increases both major assets prohibition thresholds to $10 billion.

Nutter Notes: According to the FDIC, the increase in the thresholds accounts for changes in the U.S. banking market since Congress established the current thresholds in 1996. The final rule will not become effective unless and until it has been approved by the Federal Reserve and the OCC. Click here for a copy of the final rule approved by the FDIC.

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 ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry

tcurry@nutter.com

Tel: (617) 439-2087

Kenneth F. Ehrlich

kehrlich@nutter.com

Tel: (617) 439-2989

Michael K. Krebs

mkrebs@nutter.com

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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