On September 9, the Federal Reserve Board and the CFPB announced an increase in the dollar thresholds in Regulation Z and Regulation M for exempt consumer credit and lease transactions. Transactions at or below the thresholds are subject to the protections of the regulations. Based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers as of June 1, 2014, TILA and Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $54,600 or less beginning January 1, 2015—an increase of $1,100 from 2014. Private education loans and loans secured by real property, used or expected to be used as a principal dwelling, remain subject to TILA regardless of the amount of the loan.
On September 12, the CFPB finalized a rule that allows it to supervise larger participants in the international money transfer market. In particular, this rule, which finalizes the proposed rule the CFPB issued in January 2014, allows the CFPB to supervise nonbank international money transfer providers that provide more than $1 million in international transfers annually, for compliance with the Remittance Rule under the Electronic Fund Transfer Act. The final rule will be effective December 1, 2014.
The CFPB will seek to ensure that these providers comply with a number of specific consumer-protection provisions, including the following:
- Disclosures: The CFPB will examine providers to determine that consumers receive the Remittance Rule-required disclosures in English as well as in any other language the provider uses to advertise, solicit, or market its services, or in any language in which the transaction was conducted. These disclosures inform consumers of the exchange rate, fees, the amount of money that will be delivered abroad, and the date the funds will be available.
- Option to Cancel: The CFPB will examine transfer providers to ensure that consumers receive at least thirty minutes to cancel the transfer if it has not yet been received, and that consumers receive a refund regardless of the reason for the cancellation.
- Correction of Errors: The CFPB will insist that remittance transfer providers properly investigate certain errors, and, if a consumer reports an error within 180 days, the CFPB will examine providers to determine that they have investigated and corrected certain types of errors. The CFPB will also examine providers to ensure that they are held accountable for the actions of any agents they use.
The CFPB used the authority granted to it in the Dodd-Frank Act to supervise “larger participants” in consumer financial markets, and this is the Bureau’s fourth larger participant rule. The CFPB indicates that it will use the same examination procedures for nonbank providers as it does for bank remittance providers, and the CFPB intends to coordinate with state examiners in its supervision.
The CFPB estimates that nonbank international money transfer providers transfer $50 billion each year, and 150 million individual international money transactions occur each year through these institutions, with seven million U.S. households transferring funds abroad each year through a nonbank.
On September 8, the OCC, the FDIC, and the Federal Reserve Board released proposed revisions to the Interagency Questions and Answers Regarding Community Reinvestment. Specifically, the agencies propose to revise three questions and answers that address alternative systems for delivering retail banking service and provide additional examples of innovative or flexible lending practices. In addition, the proposal would revise three questions and answers addressing community development-related issues and add four new questions and answers – two of which address community development services, and two of which provide general guidance on responsiveness and innovativeness. Comments on the proposal are due by November 10, 2014.
On September 3, the OCC, the FDIC, and the Federal Reserve Board released a final rule establishing a minimum liquidity requirement for large and internationally active banking organizations. The rule will require banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, and such banking organizations’ subsidiary depository institutions that have assets of $10 billion or more, to hold high quality, liquid assets (HQLA) that can be converted easily into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the institution’s HQLA to its projected net cash outflow is its “liquidity coverage ratio,” or LCR. The Federal Reserve Board also is adopting a modified LCR for bank holding companies and savings and loan holding companies that do not meet these thresholds, but that have $50 billion or more in total assets. Bank holding companies and savings and loan holding companies with substantial insurance or commercial operations are not covered by the final rule. Relative to the proposal issued in October 2013, the final rule includes changes to the range of corporate debt and equity securities included in HQLA, a phasing-in of daily calculation requirements, a revised approach to address maturity mismatch during a 30-day period, and changes in the stress period, calculation frequency, and implementation timeline for the bank holding companies and savings and loan companies subject to the modified LCR. Covered U.S. firms will be required to be fully compliant with the rule by January 1, 2017. Specifically, covered institutions will be required to maintain a minimum LCR of 80% beginning January 1, 2015. From January 1, 2016, through December 31, 2016, the minimum LCR would be 90%. Beginning on January 1, 2017, and thereafter, all covered institutions would be required to maintain an LCR of 100%.
On September 3, the OCC, the FDIC, and the Federal Reserve Board released a final rule that modifies the definition of the denominator of the supplementary leverage ratio in a manner consistent with recent changes agreed to by the Basel Committee. The revisions to the supplementary leverage ratio apply to all banking organizations subject to the advanced approaches risk-based capital rule. The final rule modifies the methodology for including off-balance sheet items, including credit derivatives, repo-style transactions, and lines of credit, in the denominator of the supplementary leverage ratio. The final rule also requires institutions to calculate total leverage exposure using daily averages for on-balance sheet items and the average of three month-end calculations for off-balance sheet items. Certain public disclosures required by the final rule must be made starting in the first quarter of 2015, and the minimum supplementary leverage ratio requirement using the final rule’s denominator calculations is effective January 1, 2018.
On September 9, OFAC released an enforcement action against a CFTC-registered Introducing Broker and Commodity Trading Advisor that operates an electronic trading platform that allows customers to automatically place currency foreign exchange (FX) trades with broker-dealers. The company agreed to pay $200,000 to settle potential civil liability for apparent violations of Iran, Syria, and Sudan sanctions rules. According to OFAC, over “a number of years” the company maintained accounts for over 400 persons in Iran, Sudan, and Syria, and exported services to these customers by placing FX trades via its platform. The company also (i) originated eight funds transfers totaling $10,264.36 destined for two individuals located in Iran; and (ii) failed to screen or otherwise monitor its customer base for OFAC compliance purposes at the time of the apparent violations. OFAC determined that the company did not voluntarily self-disclose the apparent violations, and that the apparent violations constitute a non-egregious case. The base penalty for the apparent violations was $844,090,000. The lower settlement amount reflects OFAC’s consideration of the matter’s facts and circumstances, including the following mitigating factors: (i) the company is small with limited business operations; (ii) the company has taken remedial action in response to the apparent violations; (iii) the company has not received a penalty notice or Finding of Violation in the five years preceding the earliest date of the transactions giving rise to the apparent violations; and (iv) the company substantially cooperated with OFAC’s investigation.
On September 11, in FIN-2014-A008, FinCEN advised financial institutions on how to detect and report suspicious financial activity that may be related to human smuggling and/or trafficking. The advisory describes the differences between human smuggling and trafficking, and describes how each is conducted. FinCEN suggests that financial institutions consider evaluating indicators of potential human smuggling or trafficking activity in combination with other red flags and factors, such as expected transaction activity, before making determinations of suspiciousness. Additionally, FinCEN states that in making a determination of suspiciousness, financial institutions are encouraged to use previous FinCEN advisories and guidance as a reference when evaluating potential suspicious activity, including a May 2014 advisory on the use and structure of funnel accounts. The advisory also attached two appendices that provide examples of human smuggling and trafficking red flags. FinCEN advises institutions that in evaluating whether certain transactions are suspicious and/or related to human smuggling or trafficking, they should share information with one another as appropriate, under Section 314(b) of the USA PATRIOT Act. If a financial institution knows, suspects, or has reason to suspect that a transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction, the financial institution should file a SAR with the terms “Advisory Human Smuggling” and/or Advisory Human Trafficking” in the narrative and the Suspicious Activity Information. The narrative should also include an explanation of why the institution knows, suspects, or has reason to suspect that the activity is suspicious. The advisory further notes that a potential victim of human smuggling or trafficking should not be reported as the subject of the SAR, but rather to provide all available information on the victim in the narrative portion of the SAR.
On September 9, the U.S. District Court for the Southern District of New York dismissed an industry group’s challenge to a New York City ordinance that requires banks doing business with the city to report certain information about their banking and lending activities. New York Bankers Assoc. v. New York, No. 13-7212, 2014 WL 4435427 (S.D.N.Y. Sept. 9, 2014). In May 2012, the New York City Council approved, over the Mayor’s veto, an ordinance that establishes a Community Investment Advisory Board (CIAB) with authority to collect certain information from the city’s depository banks regarding each bank’s efforts to, among other things, (i) meet small business credit needs; (ii) conduct consumer outreach and other steps to provide mortgage assistance and foreclosure prevention; and (iii) offer financial products for low and moderate-income individuals throughout the city. The ordinance also directs the CIAB to (i) perform an assessment on whether such banks are meeting the credit, financial, and banking services needs throughout the city; and (ii) publish the assessment and the information collected from each such bank. The results of these evaluations may be considered in connection with a bank’s application for designation or redesignation as a depository bank. The court dismissed for lack of standing the industry group’s argument that the ordinance conflicts with and is preempted by federal and state laws that exclusively regulate federal and state chartered depository institutions by granting the CIAB regulatory powers that are not relevant to the quality and pricing of the services that banks provide to the city. The court explained that at the time the suit was filed, the group could not establish imminent harm, or that injuries were subject to substantial risk of occurrence, and as such were too speculative to support Article III standing. The court noted, however, that the group “brings serious substantive claims” and may have standing based events that have occurred since filing, or that may occur in the future.
On August 4, 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published a Notice of Proposed Rulemaking (“NPRM”) that would amend existing Bank Secrecy Act (“BSA”) regulations intended to clarify and strengthen customer due diligence (“CDD”) obligations for banks, securities broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities (collectively, “covered financial institutions”).
In drafting the modifications, FinCEN clearly took into consideration comments responding to its February 2012 Advance Notice of Proposed Rulemaking (“ANPRM”), as the current proposal appears narrower and somewhat less burdensome on financial institutions. Comments on the proposed rulemaking are due October 3, 2014.
Overview: Under the NPRM, covered financial institutions would be obligated to collect information on the natural persons behind legal entity customers (beneficial owners) and the proposed rule would make CDD an explicit requirement. If adopted the NPRM would amend FinCEN’s AML program rule (the four pillars) by making CDD a fifth pillar.
On August 28, the OCC issued Bulletin 2014-43, which announces the issuance of a revised “Electronic Fund Transfer Act” booklet of the Comptroller’s Handbook. This booklet replaces the similarly titled booked issued in October 2011, and provides updated guidance to examiners and bankers relevant to recent changes made to Regulation E regarding remittance transfers. Specific updates address: (i) the transfer of rulemaking authority for the EFTA from the Board of Governors of the Federal Reserve System to the CFPB; (ii) Dodd-Frank’s amendments to the EFTA, which create a new system of consumer protections for remittance transfers; and (iii) the issuance of the CFPB’s final rule that restructures Regulation E and provides specific requirements for remittance service providers in new subpart B.
On September 2, the OCC published its final guidelines to purportedly strengthen the governance and risk management practices of large financial institutions. The guidelines provide that covered institutions should establish and adhere to a written risk governance framework to manage and control risk-taking activities. The guidelines also provide minimum standards for the institutions’ boards of directors to oversee the risk governance framework. The covered institutions include insured national banks, insured federal savings associations, and insured federal branches of foreign banks with $50 billion or more in average total consolidated assets. The guidelines also apply to OCC-regulated institutions with less than $50 billion in average total consolidated assets if the institution’s parent company controls at least one other covered institution. The size of the covered institution’s average total consolidated assets determines when that institution is expected to begin complying with the new guidelines following publication in the Federal Register, with the largest institutions (and their qualifying subsidiaries) being expected to comply sooner (or even immediately) than smaller ones.
AABD Makes Suggestions to Regulatory Agencies Regarding The Burdens Placed On America’s Bank Directors
On September 2, David Baris, President of the American Association of Bank Directors (AABD) and a Partner at BuckleySandler LLP, and Richard Whiting, Executive Director of the AABD, submitted a comment letter to the Nation’s federal bank regulatory agencies in connection with the OCC, the Board of Governors of the Federal Reserve System, and the FDIC’s (the Agencies) request for public comment on their review of “regulations to identify outdated, unnecessary or unduly burdensome regulations for insured depository institutions.” In 2006, the Agencies completed a similar review and the AABD determined it was an “unsatisfactory and flawed process,” and wants to ensure that the same mistakes are not made during this review. Specifically, the AABD urged that during this review, the Agencies should “review regulatory guidance in light of the practical effect of such guidance on the behavior of both bank board of directors and the Agencies.” On behalf of the AABD, Baris stated in a press release that the current laws, regulations and guidance “create a huge and counterproductive impact on bank directors that causes them to divert their attention away from the essential job of being a bank director – that is meeting their duty of care and loyalty by overseeing the institution.” In an effort to address the effects of the “current regulatory system on the Nation’s bank board of directors,” the AABD’s letter included the following recommendations to the Agencies: (i) review current regulations and written guidance to determine their effect on bank directors; (ii) incorporate into their current procedures a requirement that “future regulatory actions consider the impact of proposed rules and guidance on bank directors and not add new burdens unless the benefits of the proposed action clearly outweighs the burdens place[d] on bank directors”; (iii) identify, consolidate, and clarify the provisions that place burdens on bank directors; and (iv) implement rules that allow the board of directors to “delegate management duties to management and rely reasonably on management.”
On August 22, the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) issued interagency guidance regarding unfair or deceptive credit practices (UDAPs). The guidance clarifies that “the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible.” Notwithstanding the repeal of these rules, the agencies preserve supervisory and enforcement authority regarding UDAPs. Consequently, the guidance cautions that “depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.” The guidance also explains that the FTC Rule remains in effect for creditors within the FTC’s jurisdiction, and can be enforced by the CFPB against creditors that fall under the CFPB’s enforcement authority.
On August 18, in a speech to the Association of Military Banks of America, Deputy Comptroller for Compliance Policy Grovetta Gardineer described the OCC’s increasing supervisory and enforcement focus on SCRA compliance. Ms. Gardineer explained that given the significant risks presented by a bank’s failure to comply with the SCRA, the OCC has “stepped up its focus on compliance” and “now requires . . . examiners to include evaluation of SCRA compliance during every supervisory cycle”—even though this closer scrutiny is not required by statute. Ms. Gardineer also highlighted the OCC’s concern regarding potential unfair and deceptive practices associated with overdraft and other administrative fees, especially when “poorly worded disclosures about fees” are contained in “page after page of legal notices and disclaimers.” And while Ms. Gardineer stated that the OCC itself is willing to take enforcement actions where necessary, she also stressed the importance of coordination between regulators to more effectively implement rules and help create a “culture that encourages . . . financial readiness” among servicemembers.
On August 20, FinCEN announced an action against a casino employee who admitted to violating the Bank Secrecy Act by willfully causing the casino to fail to file certain reports. FinCEN asserted based in part on information obtained from an undercover investigation that the employee helped high-end gamblers avoid detection of large cash transactions by agreeing not to file either Currency Transaction Reports or Suspicious Activity Reports as required under the BSA. FinCEN ordered the employee to pay a $5,000 civil money penalty, and immediately and permanently barred him from participating in the conduct of the affairs of any financial institution located in the U.S. or that does business within the U.S.