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02.29.2024 | Legal Update

Headlines

1. DOJ Continues to Bring Enforcement Actions Against Banks for Discriminatory Lending
2. FFIEC Issues Guidance on Valuation Discrimination and Bias in Residential Lending
3. Federal Banking Agencies Announce Initiative to Reduce Regulatory Burdens
4. Acting Comptroller Hsu Warns of “Blurring of the Line Between Banking and Commerce”
5. Other Developments: Overdraft Class Action and Beneficial Ownership

1. DOJ Continues to Bring Enforcement Actions Against Banks for Discriminatory Lending

The U.S. Department of Justice (DOJ) and state authorities have agreed to a consent order with a large national bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by affecting predominantly Black and Hispanic neighborhoods. The February 5 announcement of the enforcement action is the latest in the DOJ’s Combatting Redlining Initiative, which was launched in 2021 to address persistent discrimination against communities of color. The DOJ’s complaint in this case alleged that the bank failed to provide mortgage lending services to predominantly Black and Hispanic neighborhoods, and discouraged people seeking credit in those communities from obtaining home loans. The DOJ argued that a pattern in the location of the bank’s branch offices was evidence of the bank’s violation of anti-discrimination laws, among other things. According to the DOJ, the bank’s redlining practices included “locating and maintaining nearly all its branch locations and mortgage loan officers outside of majority-Black and Hispanic neighborhoods” in the relevant geographic area. Click here for more information about the DOJ’s Combatting Redlining Initiative.

Nutter Notes:  According to the DOJ’s complaint, “redlining occurs when lenders deny or discourage applications or avoid providing loans and other credit services in neighborhoods based on the race, color, or national origin of the residents of those neighborhoods.” Such discriminatory practices are prohibited under the Fair Housing Act, the Equal Credit Opportunity Act, and various other state and federal laws. For example, the Fair Housing Act prohibits discriminatory housing practices on the basis of race, color, religion, sex, disability, familial status, or national origin. Federal authorities may base discrimination claims on disparate impact in situations in which a housing practice (including home mortgage lending) “actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns” on members of a protected class. A lender can be liable under the disparate impact standard even if the home mortgage lending practice in question was not motivated by discriminatory intent.

2. FFIEC Issues Guidance on Valuation Discrimination and Bias in Residential Lending

The FFIEC has issued a statement of principles related to valuation discrimination and bias for federal bank regulators to consider in their consumer compliance and safety and soundness examinations. The principles released on February 12 are meant to aid the agencies that supervise banks and credit unions in assessing whether their supervised institutions’ compliance and risk management practices “are appropriate to identify and mitigate discrimination or bias in their residential property valuation practices.” According to the new guidance, consumer compliance examination procedures will include consideration of whether an institution’s compliance management system is commensurate with the institution’s risk profile. For safety and soundness purposes, examiners will consider whether an institution’s risk management practices for valuations “are appropriate to identify and address valuation discrimination or bias and promote credible valuations.” Click here for a copy of the new guidance.

Nutter Notes:  The safety and soundness examination principles described in the new guidance cover a broad range of topics, including consumer protection issues, risk assessment, and governance. For example, examiners will assess an institution’s policies, processes, staff organization and resources, control systems, and management information systems for residential real estate collateral valuations, and the institution’s ability to identify and resolve incidences of potential valuation discrimination or bias, according to the statement of principles. Examiners will also consider the institution’s third-party risk management, valuation review function, credit risk review function, and training program in connection with assessments of residential real estate collateral valuation programs.

3. Federal Banking Agencies Announce Initiative to Reduce Regulatory Burdens

The federal banking agencies have announced the first of a series of four planned requests for public input to reduce regulatory burden. According to the February 6 announcement, the agencies have divided their regulations into 12 categories and are initially soliciting comments on those categorized as Applications and Reporting, Powers and Activities, and International Operations. For example, the request for comment asks interested parties to consider a number of questions pertaining to regulations governing merger transactions and change in bank control, financial reporting requirements, notices and applications to engage in new activities, Community Reinvestment Act compliance, and capital adequacy. The agencies have requested public comments to identify outdated, unnecessary, or unduly burdensome requirements imposed on insured depository institutions and their holding companies. The agencies plan to request comment on the regulations in other categories over the next two years. Public comments on the first series of topics are due by May 6, 2024. Click here for a copy of the request for comments.

Nutter Notes: The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) requires the FFIEC and federal banking agencies to review their regulations every 10 years to identify any outdated or otherwise unnecessary regulatory requirements for their supervised institutions. The agencies’ request for comments identifies new regulations that have been adopted since the last EGRPRA review. According to their request for comments, the agencies are “especially concerned” about the impact of regulatory burdens on smaller depository institutions, and expect that the EGRPRA review will help the agencies identify regulatory changes to reduce impacts on smaller institutions.

4. Acting Comptroller Hsu Warns of “Blurring of the Line Between Banking and Commerce”

Acting Comptroller of the Currency Michael J. Hsu issued a warning that financial instability could result from the “blurring of the lines between banking and commerce in payments and private credit/equity.” In his remarks at Vanderbilt University on February 21, Acting Comptroller Hsu said that he believes that the greatest risks from mixing banking and commerce will be in these areas over the next decade. Specifically, he indicated that the lack of a comprehensive federal money transmitter regime in the area of regulating payments is a gap that “if filled could better balance innovation and financial stability.” Acting Comptroller Hsu pointed out that non-bank payment providers are subject to a “patchwork of varying state-by-state standards and practices” in the absence of federal money transmitter licensing standards and a comprehensive federal oversight regime, unlike the regimes in place in other peer countries to regulate those activities. Click here for a copy of Acting Comptroller Hsu’s remarks.

Nutter Notes:  Acting Comptroller Hsu explained his belief that the growth of private equity and private credit pose a threat to financial stability in terms of mixing banking and commerce. For example, he noted that bank exposures to risks assumed by private equity firms have increased through capital call facilities, among other connections. He also described how private equity firms have “expanded aggressively into private credit,” which “involves nonbanks originating loans at scale and holding on to them—an activity traditionally done by banks.” Acting Comptroller Hsu explained that the lack of federal regulatory oversight of the private equity market sector could introduce risks that threaten financial stability, and recommended a “trip wire” approach whereby the Financial Stability Oversight Council (FSOC) would establish a set of metrics and thresholds, which if exceeded would trigger the assessment of systemic risks and a potential FSOC response.

5. Other Developments: Overdraft Class Action and Beneficial Ownership

• Massachusetts Court Dismisses Overdraft Fee Class Action Lawsuit

A Massachusetts depository institution recently won a rare dismissal of a class action lawsuit claiming that the institution unfairly charged overdraft and non-sufficient funds (NSF) fees to consumers. In the February 22 decision, the Massachusetts court found that the institution’s posting of debits and deposits did not violate the terms of the deposit account agreement. The court also found that the timing of the imposition of overdraft and NSF fees was not unreasonable. The institution was represented by Nutter.

Nutter Notes:  Class action lawsuits have been brought against banks and other depository institutions alleging several different types of unfair practices related to fees charged for the payment of overdrafts. A number of class actions have been brought for so-called “authorize positive settle negative” transaction processing, multiple fees for representments, or other claims about processing transactions to purportedly maximize the number of overdrafts and therefore the amount of overdraft fees charged to accountholders. These issues with overdraft and NSF fees can also result in examination criticism and regulatory enforcement action.

• FinCEN Releases Guide to Compliance with the Beneficial Ownership Information Access and Safeguards Rule for Small Financial Institutions

FinCEN issued a compliance guide on February 21 to assist small banks and other financial institutions with accessing beneficial ownership information reported to FinCEN under the agency’s Beneficial Ownership Information Access and Safeguards Rule. The compliance guide provides details on how financial institutions should develop and implement administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of beneficial ownership information received from FinCEN. Click here for a copy of the compliance guide.

Nutter Notes:  Banks can access beneficial ownership information that is reported to FinCEN by certain businesses pursuant to the Corporate Transparency Act (CTA). FinCEN has issued two rules to implement the CTA. The first is a reporting rule that requires certain business entities organized under U.S. law or registered to do business in the U.S. to report to FinCEN information about themselves and their beneficial owners. The second rule governs access to the beneficial ownership information reported to FinCEN. Under the CTA, banks and other financial institutions that are subject to federal customer due diligence requirements may access FinCEN’s database of beneficial ownership information, the Beneficial Ownership Information Technology System.

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 Chambers.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:

Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989	Matthew D. Hanaghan mhanaghan@nutter.com Tel: (617) 439-2583	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.