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Nutter Bank Report: June 2021

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  1. Fed Issues Proposed Rule for New Instant Electronic Payment Service: FedNow
  2. EEOC Updates Guidance to Employers on Requiring COVID-19 Vaccinations
  3. New FDIC Policy Statement Aimed at Assisting Minority Depository Institutions
  4. CFPB Updates Guidance for Banks on Fraudulent Electronic Funds Transfers
  5. Other Developments: Remote Notarization, Reserve Balances, and CBLR

1. Fed Issues Proposed Rule for New Instant Electronic Payment Service: FedNow

The Federal Reserve has issued a proposed rule that would govern funds transfers over the Federal Reserve’s new 24x7x365 service that will support instant payments in the United States, known as FedNow. The proposed rule announced on June 1 would amend the Federal Reserve’s Regulation J and its official commentary to establish a new subpart C that would set out the legal rights and obligations of the Federal Reserve Banks and FedNow service participants, including a requirement that the beneficiary’s bank must make funds available to the beneficiary of a FedNow transfer immediately after the beneficiary’s bank has accepted the payment order over the FedNow service. The proposed rule would also expand and clarify the applicability of Article 4A of the Uniform Commercial Code (“UCC”)—the uniform state law governing funds transfers—to funds transfers made with the FedNow service, subject to certain modifications for consumer funds transfers covered by the Electronic Fund Transfer Act (“EFTA”). Under the proposed rule, the FedNow service will also allow participating banks to choose to settle payments over the service in the master account of a correspondent bank. The FedNow services are expected to be available in 2023. Public comments on the proposed rule are due by August 10, 2021. Click here for a copy of the proposed rule.

Nutter Notes: As described above, the proposed rule would incorporate Article 4A of the UCC and apply it to funds transfers made using the FedNow service. Article 4A of the UCC does not apply to a funds transfer that is covered by the EFTA, which governs electronic funds transfers involving consumers. Unlike the existing FedWire Funds Service, which is governed by subpart B of Regulation J, the FedNow service will support funds transfers initiated by consumer senders to consumer beneficiaries that could be subject to the EFTA (and its implementing rule, the CFPB’s Regulation E). The proposed amendments to Regulation J provide that if a FedNow transfer is subject to the EFTA, the funds transfer continues to also be governed by the new subpart C of Regulation J (including the provisions of Article 4A of the UCC that are incorporated into Regulation J), except that, in the event of an inconsistency between the provisions of subpart C of Regulation J and the EFTA, the EFTA controls. An example given in the official commentary of the proposed rule deals with a hypothetical funds transfer initiated from a consumer’s account at a bank where the bank executes that payment order by sending a conforming payment order to a Reserve Bank through the FedNow service. Under the proposed rule, if that transfer is subject to the EFTA, and the consumer subsequently reports the transfer as an unauthorized electronic fund transfer to its bank and exercises the right to obtain reimbursement under the terms of the EFTA, the bank would be required to comply with the EFTA and reimburse the consumer even if the bank does not have a right to reverse the payment order under Article 4A of the UCC.

2. EEOC Updates Guidance to Employers on Requiring COVID-19 Vaccinations

The U.S. Equal Employment Opportunity Commission (“EEOC”) has updated its guidance to employers, including banks, in the form of answers to frequently asked questions (“FAQs”) related to the COVID-19 pandemic to address questions about COVID-19 vaccines. Among other issues, the FAQs that were updated on May 28 clarify what sorts of incentives employers may and may not offer to their employees to receive a vaccination under federal employment laws. According to the updated FAQs, federal employment laws generally do not prevent an employer from requiring all employees physically entering a workplace to be vaccinated for COVID-19 or offer incentives to employees who receive COVID-19 vaccines, as long as employers comply with the reasonable accommodation provisions of the Americans with Disabilities Act (“ADA”) and Title VII of the Civil Rights Act of 1964. The FAQs point out that in some circumstances, the ADA and Title VII require an employer to provide reasonable accommodations for employees who, because of a disability or a sincerely held religious belief, practice, or observance, do not get vaccinated for COVID-19, unless providing an accommodation would pose an undue hardship on the operation of the employer’s business. Click here to access the EEOC’s updated COVID-19 FAQs.

Nutter Notes: The updated COVID-19 FAQs clarify that an employer may offer an incentive to employees to voluntarily receive a vaccination administered by the employer if the incentive (which may include both rewards and penalties) “is not so substantial as to be coercive.” The FAQs explain that, because an employer-provided vaccination program would require employees to answer pre-vaccination screening questions, a substantial incentive could make employees feel pressured to disclose protected medical information as part of the pre-vaccination screening. However, this incentive limitation does not apply to an employer that offers an incentive to employees to voluntarily provide documentation or other confirmation that the employees have received a COVID-19 vaccination from another source, such as their private physician or a vaccination clinic that is not operated by the employer or an agent of the employer. According to the updated FAQs, employers may also offer an incentive to employees to provide documentation or other confirmation that employees’ family members have been vaccinated as long as the vaccines are administered by a third party not acting on the employer’s behalf (while in contrast, employers cannot offer incentives to an employee in exchange for an employee’s family members’ receipt of a vaccine from the employer).

3. New FDIC Policy Statement Aimed at Assisting Minority Depository Institutions

The FDIC has adopted a new policy statement regarding efforts to preserve and promote Minority Depository Institutions (“MDIs”). The new policy statement issued on June 15 describes the FDIC’s MDI program terms for technical assistance, training, education, and outreach. The new policy statement also explains how the FDIC applies examination standards in assessing the performance of MDIs. According to the new policy statement, the FDIC has designated a national director for the FDIC’s MDI program at the FDIC’s headquarters in Washington, D.C., and a regional coordinator in each FDIC Regional Office. The national director is tasked with ensuring that appropriate personnel are involved in the FDIC’s MDI program and that resources are made available with regard to MDI program initiatives, according to the new policy statement. The new policy statement directs examiners to recognize the distinctive characteristics and differences in core objectives of each financial institution, including MDIs, and “to consider those unique factors when evaluating an institution’s financial condition and risk management practices.” Click here for a copy of the new policy statement regarding MDIs.

Nutter Notes: Section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) defines the term “minority depository institution” as any depository institution where 51% or more of the stock is owned by one or more “socially and economically disadvantaged individuals.” The FDIC maintains a list of federally insured MDIs. To ensure that all MDIs are able to participate in the MDI program, the new MDI policy statement provides that banks that are not already identified as MDIs can request to be designated as such by certifying that they meet the FIRREA definition. Among other factors, the new MDI policy statement emphasizes that examiners must consider the unique characteristics of an MDI when performing an examination. The new policy statement cites as an example that many MDIs were established to serve an otherwise under-served market, and that high profitability may not be as essential to the organizers and shareholders of the MDI as achieving goals related to community development, improving consumer services, and promoting banking services to unbanked or underbanked segments of the MDI’s service area. According to the policy statement, the Uniform Financial Rating System allows for consideration of such characteristics by considering not only the level of a bank’s earnings, but also the trend and stability of earnings, the ability to provide for adequate capital, the quality and sources of earnings, and the adequacy of budgeting systems.

4. CFPB Updates Guidance for Banks on Fraudulent Electronic Funds Transfers

The CFPB has updated its guidance on compliance with the EFTA and its implementing rule, Regulation E, in the form of answers to frequently asked questions (“Reg. E FAQs”) to clarify the obligations that banks have for unauthorized transfers and to resolve errors, including situations in which a consumer is fraudulently induced to provide account information. The June 24 updates to the Reg. E FAQs explain that when a third party fraudulently induces a consumer into sharing account access information that is used to initiate an electronic funds transfer from the consumer’s account, the transfer qualifies as an “unauthorized electronic fund transfer” under Regulation E even though the transfer was initiated by a person who was “furnished the access device to the consumer’s account by the consumer.” The updated Reg. E FAQs also clarify that a bank may not consider a consumer’s negligence when determining liability for unauthorized electronic funds transfers under Regulation E. In addition, the updated FAQs remind banks that, under the EFTA, a consumer cannot waive the protections granted by the EFTA. Therefore, a bank’s agreement with a consumer that purports to waive Regulation E liability protections if the consumer has shared account information with a third party would violate the EFTA. Click here for a copy of the updated Reg. E FAQs.

Nutter Notes: Consistent with the EFTA’s anti-waiver provision for consumer protections, the CFPB’s updated Reg. E FAQs explain that a bank may not rely on private electronic funds transfer network rules to provide less consumer protection than the EFTA and Regulation E provide. The example given in the updated Reg. E FAQs is that some network rules require a consumer to provide notice of an error within 60 days of the date of the transaction. However, Regulation E allows a consumer to provide notice of an unauthorized transaction to his or her bank within 60 days after the bank sends the periodic statement showing the unauthorized transaction. In such cases, the bank must follow Regulation E’s requirements and resolve an error that has been timely reported under Regulation E’s timing requirements and not those of the private network. The updated Reg. E FAQs also clarify that a bank may not require a consumer to file a police report or first contact the merchant as a condition of initiating an error resolution investigation into an unauthorized transfer. Regulation E requires a bank to begin its investigation promptly upon receipt of an oral or written notice of an error.

5. Other Developments: Remote Notarization, Reserve Balances, and CBLR

  • Governor Baker Signs Emergency Law Extending Remote Notary Services

On June 16, Governor Charlie Baker signed a new emergency law, Chapter 20 of the Acts of 2021, which temporarily extends several pandemic-related policies that would otherwise expire in connection with the June 15 termination of the COVID-19 state of emergency. Among other things, the emergency law extends the temporary provisions allowing remote notarizations in Massachusetts until December 15, 2021. The law permitting remote notarizations otherwise would have expired on June 18, 2021.

Nutter Notes: The remote notarization law enables notaries to notarize documents by real-time video conference rather than in person. The notary and all signatories must be physically present in Massachusetts at the time of the videoconference, and the videoconference must be recorded, among other requirements. Click here to access the text of the emergency law.

  • Federal Reserve Changes Interest Rate Rule on Reserve Balances

The Federal Reserve approved a final rule on June 2 that amends the Federal Reserve’s Regulation D to eliminate references to an interest on required reserves rate and to an interest on excess reserves rate and replace them with a single interest on reserve balances (“IORB”) rate. The final rule also simplifies the formula used to calculate the amount of interest to be paid on such balances. The final rule becomes effective on July 29, 2021.

Nutter Notes: The final rule provides that, for balances maintained in a bank’s master account, interest is the amount equal to the IORB rate on a day multiplied by the total balances maintained on that day. The final rule sets the IORB rate initially at 0.10%. Click here for a copy of the final rule.

  • FDIC Proposes Change to Real Estate Lending Standards to Conform to CBLR Framework

The FDIC issued a proposed rule on June 15 that would amend the Interagency Guidelines for Real Estate Lending Policies to conform the method for calculating the ratio of loans in excess of a bank’s supervisory loan-to-value (“LTV”) limits with the community bank leverage ratio (“CBLR”) capital framework. According to the FDIC, the proposed amendment would provide a consistent approach for calculating the ratio of loans in excess of the supervisory LTV limits at all FDIC-supervised institutions. Public comments on the proposed rule are due by July 26, 2021.

Nutter Notes: A qualifying community bank that elects to use the CBLR framework is not required to calculate or report total capital as defined in the capital rules to include both tier 1 and tier 2 capital. Total capital is the denominator used in calculating the ratio of loans in excess of the supervisory LTV limits. Under the proposed amendment, all FDIC-supervised banks—including those that have elected to use the CBLR framework—would calculate the ratio of loans in excess of the supervisory LTV Limits using tier 1 capital plus an appropriate allowance for credit losses in the denominator. 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 Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry

Tel: (617) 439-2087

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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