Federal Reserve Issues Cease and Desist Order over Bank’s Deposit-Gathering Practice

On June 13, the Federal Reserve issued a cease and desist order to a California-based savings and loan holding company and its wholly-owned, Indiana-based federal savings bank subsidiary. According to the Federal Reserve, between January 8, 2008 and March 5, 2010, the federal savings bank operated a deposit-gathering program (Program) pursuant to which it placed customer funds into deposit accounts at unaffiliated banks (Participating Banks) that had different maturities and different interest rates than those selected by customers under the Program. The Federal Reserve contends that the bank’s deposit-gathering practice was unsafe and unsound, and that the bank “was subject to liquidity risk because customers may have demanded the return of many or all of their deposits before the maturity dates negotiated by [the bank] with the Participating Banks, and/or [the bank] obtained less in interest from deposits at Participating Banks than it owed to customers for the deposit accounts they had selected.” Pursuant to the Federal Reserve’s cease and desist order, the savings and loan holding company and the federal savings bank must: (i) receive written approval from, and (ii) submit a business plan to the Federal Reserve (or the appropriate federal banking agency) prior to engaging in any deposit-gathering program.

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FFIEC Issues Cybersecurity Statement, Comments on Recent Attacks on Interbank Messaging and Payment Networks

On June 7, the FFIEC issued a statement on behalf of its members (the OCC, Federal Reserve, FDIC, NCUA, CFPB, and State Liaison Committee) advising financial institutions to “actively manage the risks associated with interbank messaging and wholesale payment networks.” According to the statement, recent cyber attacks against interbank networks and wholesale payment systems have demonstrated the ability to: (i) bypass information security controls and compromise a financial institution’s wholesale payment origination environment; (ii) “obtain and use valid operator credentials with the authority to create, approve, and submit messages”; (iii) make use of sophisticated understanding of funds transfer operations and operational controls; (iv) disable security logging and reporting by using highly customized malware, as well as conceal and delay detection of fraudulent transactions with the use of other operational controls; and (v) quickly transfer stolen funds across multiple jurisdictions. Read more…

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CFPB, Federal Banking Agencies, and NCUA Issue Interagency Guidance Regarding Deposit Reconciliation Practices

On May 18, the CFPB, the Federal Reserve, the OCC, the FDIC, and the NCUA issued interagency guidance on supervisory expectations regarding customer account deposit reconciliation practices. According to the guidance, banks create a “credit discrepancy” if they credit a customer a different amount than the total of the items the customer tried to deposit into an account. In further explaining what constitutes a credit discrepancy, the guidance states, “the customer may deposit $110 to an account, but may indicate on the deposit slip that only $100 has been tendered. In this case, the financial institution may credit $100 to the customer’s account as indicated on the deposit slip without reconciling the $10 discrepancy.” According to the guidance, some financial institutions fail to correct the inconsistencies between the dollar value of items deposited to the customer’s account and the amount actually credited to that same account. This is a potential violation of (i) the Expedited Funds Availability Act’s, as implemented by Regulation CC, requirement to make deposited funds available for withdrawal within prescribed time limits; (ii) the FTC Act’s ban of unfair or deceptive acts or practices; and (iii) the Dodd-Frank Act’s prohibition of unfair, deceptive, or abusive acts or practices. In addition to reminding financial institutions of their obligations to comply with the aforementioned applicable laws, the guidance stresses that financial institutions are expected to “adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”

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ABA Seeks Interagency Guidance Related to Force-Place Flood Insurance Premiums

On April 22, the American Bankers Association (ABA) sent a letter to the OCC, the Federal Reserve, and the FDIC regarding force-place flood insurance (also known as lender-placed insurance). The ABA probed the question of whether or not the advancement of a lender-placed flood insurance premium constitutes an “increase” to the designated loan – a statutory “tripwire” under the Flood Disaster Protection Act (FDPA). According to the letter, “increasing reports” from ABA members suggest that examiners are taking the position that “advancing a flood insurance premium in order to force-place flood insurance increases a loan balance and therefore constitutes a MIRE event [(making, increasing, renewing, or extending a designated loan)].” The letter summarizes FDPA requirements, noting that, if examiners are in fact considering the advancement of a premium to force-place flood insurance as an increase to a designated loan, such an “interpretation is new to the industry and is inconsistent with industry practice and contractual obligations under standard mortgage loan agreements.” According to the ABA, this new approach would result in increased borrower confusion and expense: “[i]ndeed, if adding the flood insurance premium to the loan is considered to increase the loan amount, following that logic through, the payment of a force-placed hazard insurance premium, taxes, or even a late fee would also ‘increase’ the loan—and result in a MIRE event as it is wholly inconsistent to treat these protective advances differently. Accordingly, a delinquent borrower could experience a ‘MIRE event’ as frequently as monthly with each late payment. Clearly, this was not Congress’s intent.” The ABA urged the banking agencies to release interagency guidance to address concerns related to the advancement of flood insurance premiums as a potential MIRE event.

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Federal Reserve Announces Off-Site Electronic Loan File Review Process

On April 19, the Federal Reserve issued a letter announcing a new off-site loan file review program available to banking institutions with less than $50 billion in total assets. According to the letter, recent technological advancements, i.e. secure data transmission and electronic file imaging, allow the Federal Reserve to collect and review loan file information off-site “without compromising the effectiveness of the examination process.” To determine if the off-site loan review program is appropriate for an institution, the Federal Reserve will consider the following: (i) if the institution uses a secure transmission method to submit the loan file data; (ii) if the institution can provide loan data and imaged documents that are legible, easily viewable, and properly organized; and (iii) if the loan files are sufficiently comprehensive, allowing examiners to reach a conclusion regarding the appropriate rating of a credit without requesting additional information. Regarding adjustments to the examination process of an off-site loan review, the letter cautions that examiners will need to allocate sufficient time before an examination begins to ensure loan file data was successfully transmitted to the Reserve Bank, and communicate with institutional management throughout the examination process. Finally, the letter discusses the scope of the off-site examination process verses that of an on-site examination process, noting that (i) certain portions of examination work will remain off-site regardless of whether the institution is participating in the new off-site program; and (ii) at examiners’ discretion, Reserve Banks “may hold either off-site or on-site discussions with the institution’s management regarding preliminary loan review findings such as the appropriateness of individual credit ratings assigned by [a state member bank or foreign banking organization] and the completeness of credit file documentation.”

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