February 15, 2024 – Read the below newsletter for the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. In this issue we discuss key provisions of CFPB’s groundbreaking proposal on personal financial data, including the entities, data, and financial products and services that would be covered, the obligations that would be imposed on covered entities, and exceptions to the proposal’s requirements.
In This Issue:
- Ballard Spahr to Hold February 20 Webinar on TCPA Developments Impacting Consent and Lead Generation
- Ballard Spahr to Hold March 5 Webinar on Proposed Rules on Overdraft and NSF Fees
- This Week’s Podcast Episode: Navigating the Consumer Financial Protection Bureau’s Proposed Personal Financial Data Rule
- Podcast Recording: On Crafting Effective and Enforceable Non-Compete Agreements
- “True Lender Act” Bill Proposed in Maryland
- Trade Groups File Lawsuit in Texas Federal Court Challenging Final OCC/FDIC/Federal Reserve Community Reinvestment Act Rules
- CFPB Recaps 2023 Enforcement Activity and Highlights Plans to Expand Enforcement Capacity in 2024
- Former Comptrollers of the Currency File Amicus Brief in SCOTUS Case Disagreeing With Justice Dept. On Scope of National Bank Preemption
- Credit Unions Should Expect Increased Supervision From NCUA on Overdraft/NSF Fees, Vendor Risk, And Fair Lending
- South Dakota Regulator Requires BSA/AML Compliance for Money Lender Licensees and Non-Residential Mortgage Lenders
- Looking Ahead
Ballard Spahr to Hold February 20 Webinar on TCPA Developments Impacting Consent and Lead Generation
New FCC rules under the Telephone Consumer Protection Act will mean big changes for businesses, particularly comparison shopping websites, lead generators, and other companies that regularly contact consumers via phone or text message. On February 20, 2024, from 1:00 p.m. to 2:00 p.m. ET, Ballard Spahr will hold a webinar in which members of the firm’s Telephone Consumer Protection Act Industry Group will discuss:
- The so-called “lead generator loophole” and the FCC’s efforts to close it.
- How the new rule impacts existing TCPA consents.
- What will count as “clear and conspicuous disclosure” to be contacted under the new rules.
- When these new rules will take effect and what companies should do now to prepare for them.
- What will the litigation impact of this decision be?
To register, click here.
Ballard Spahr to Hold March 5 Webinar on Proposed Rules on Overdraft and NSF Fees
In January 2024, the Consumer Financial Protection Bureau proposed two new rules: one restricting overdraft fees and the other prohibiting nonsufficient funds fees on certain declined transactions. The proposals are the CFPB’s latest moves in furtherance of the Biden Administration’s “junk fees” agenda. They represent a particularly aggressive use by the CFPB of its regulatory authorities with potentially significant implications.
On March 5, 2024, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar on the proposed rules. Our special guest will be David Pommerehn, Senior Vice President and Associate General Counsel at the Consumer Bankers Association.
To register, click here.
In October 2023, the CFPB issued a groundbreaking proposal on personal financial data. This episode, which repurposes a webinar, begins with a review of the background of the rulemaking. We then discuss key provisions of the proposal, including the entities, data, and financial products and services that would be covered, the obligations that would be imposed on covered entities, and exceptions to the proposal’s requirements. We also look at the compliance timeline, practical takeaways, and the proposal’s operational impact on covered entities. We conclude with a discussion of the CFPB’s advisory opinion dealing with consumer requests for information.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion joined by Ronald Vaske, a partner in the Group, Kristen Larson, Of Counsel in the Group, and Gregory Szewczyk, a Ballard Spahr partner and Practice Leader of the firm’s Privacy and Data Security Group.
To listen to the episode, click here.
Podcast Recording: On Crafting Effective and Enforceable Non-Compete Agreements
Non-compete agreements and other restrictive covenants have drawn intense scrutiny from the federal government, as well as in several states, causing businesses to consider the enforceability of their agreements and how to protect their businesses. Jay Zweig recently sat down with Matt Crossman of the AccelPro Employment Law podcast to discuss the keys to effectively drafting and enforcing these agreements.
Click the link below to listen in on their insightful conversation.
AccelPro: On Crafting Effective and Enforceable Non-Compete Agreements
Ballard Spahr’s labor and employment lawyers regularly advise local and national employers on non-compete agreements, provisions regarding the non-solicitation of customers and employees, and confidentiality agreements. These agreements arise in the context of businesses protecting their legitimate proprietary interests and also when companies consider hiring employees who may be subject to these agreements with their prior employer. In addition to employment matters, restrictive covenants further arise in mergers and acquisitions, trade secret protection litigation, and may also have antitrust enforcement implications.
Brian D. Pedrow & Jay A. Zweig
“True Lender Act” Bill Proposed in Maryland
Maryland has joined the ranks of states considering legislation that would codify elements of “true lender” theory in an effort to impose federally preempted state licensing requirements and rate caps on loans to Maryland residents.
House Bill 254 (HB 254), introduced on January 10, 2024 in the Maryland House of Delegates, would add Subtitle 15 – the “True Lender Act” – to Title 12 (Credit Regulations) of the Maryland Commercial Law. Like bills recently adopted in several states, and introduced in other states and jurisdictions including Florida, Washington state, and the District of Columbia, Maryland HB 254 includes broad “anti-evasion” language, and seeks to recharacterize non-bank entities that facilitate, acquire, or otherwise are involved with exempt loans as “true lenders”, thus subjecting the loans to Maryland law, based on enumerated factors or catch-all “totality of the circumstances” language.
The “anti-evasion” language to be added in proposed new Section 12-1502(a) would provide:
(a) a person may not engage in any device, subterfuge, or pretense to evade the requirements of this title, including by:
(1) making a loan or an extension of credit that is purported to be:
(i) a personal property sale and leaseback transaction; or
(ii) a cash rebate for a pretextual installment sale of goods or services; or
(2) making or offering, or assisting or arranging for a debtor to obtain, a loan or an extension of credit with a greater rate of interest, consideration, or charge than is authorized by this title through any method.
Under proposed Section 12-1502 (b), a loan that violates Section, 12-1502(a) would be void and unenforceable.
HB 254 also would add “true lender” language in new Section 12-1503:
(a) a person is a lender subject to the requirements of this title notwithstanding a claim by the person to be acting as an agent, as a service provider, or in another capacity for a covered lender, if:
(1) the person holds, acquires, or maintains, directly or indirectly, the predominant economic interest in the loan or extension of credit;
(2) the person markets, brokers, arranges, or facilitates the loan or extension of credit and holds the right, requirement, or first right of refusal to purchase the loan or extension of credit or a receivable or interest in the loan or extension of credit; or
(3) the totality of the circumstances indicates that the person is the lender and the transaction is structured to evade the requirements of this title.
(b) for purposes of subsection (a)(3) of this section, circumstances that weigh in favor of a determination that a person is a lender include those in which the person:
(1) indemnifies, insures, or protects a covered lender for any costs or risks related to the loan or extension of credit;
(2) predominantly designs, controls, or operates the loan or credit program;
(3) holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspect of the loan or credit program; or
(4) purports to act in the state as an agent or a service provider or in another capacity for a covered lender while acting directly as a lender in other states.
On January 23, 2024, the Maryland House Committee on Economic Matters heard testimony on HB 254. Those in favor of the bill used the predictable catch phrases and inflammatory language typically invoked by “true lender” theory proponents, claiming the legislation would “close loopholes” in order to protect Maryland residents from “predatory actors” and “rent-a-bank schemes”. A fintech industry representative explained the legislators should not support HB 254’s broad-brush approach, which would eliminate Maryland consumers’ access to reasonably priced products offered through numerous bank – fintechs partnerships that conform to safe and responsible lending practices.
Even without the benefit of “anti-evasion” and “true lender” recharacterization statutes, Maryland’s financial regulators have asserted, and Maryland courts have held, that Maryland’s laws require licensing of non-bank partners that facilitate loans by out-of-state, state-chartered banks. It is to be anticipated that if it becomes law, Maryland will aggressively enforce its True Lender Act.
If enacted as currently proposed, the Maryland True Lender Act would take effect October 1, 2024.
Mindy Harris, John L. Culhane, Jr., John D. Socknat & Ronald K. Vaske
Several national and Texas banking and business trade groups have filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the final regulations (Final Rules) implementing the Community Reinvestment Act of 1977 (CRA) that were jointly adopted in October 2023 by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve Board (Agencies). The national trade groups include the American Bankers Association, Independent Community Bankers of America, and U.S. Chamber of Commerce.
Although the Final Rules are effective April 1, 2024, the compliance date for the majority of the Final Rules’ provisions is January 1, 2026. Despite the delayed compliance date, the trade groups are expected to seek a preliminary injunction that enjoins the Agencies from implementing and enforcing the Final Rules while the lawsuit is pending. In their preliminary injunction motion, the trade groups will likely allege, as they do in the complaint, that given the complexity of the Final Rules and the changes they require, banks cannot wait until 2025 or 2026 to make those changes and must act now. They note that the OCC has acknowledged an estimated industry compliance cost of $90 million for the first twelve months after publication of the Final Rules in the Federal Register (which occurred on February 1, 2024).
In the complaint, the trade groups make the following principal claims:
- The Final Rules violate the Administrative Procedure Act (APA) because they exceed the Agencies’ statutory authority under the CRA which is limited to assessing a bank’s “record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of such institution.” The Final Rules exceed this authority as follows:
- The Final Rules add “Retail Lending Assessment Areas” and “Outside Retail Lending Areas” that have no connection to a bank’s physical deposit-taking presence. As a result, the Final Rules impermissibly assess banks on their responsiveness to credit needs outside of their geographic deposit-taking footprint. The CRA uses “community” in the ordinary sense, meaning as a delineation of a local geographic area around a bank’s deposit-taking facilities, like a branch or ATM that takes deposits. In the Final Rules, the Agencies interpret “community” to encompass large areas where banks have no deposit-taking footprint.
- The “Retail Services and Products Test” in the Final Rules assesses banks on products or services such as digital delivery systems and deposit products with certain low-cost or other features. As a result, the Final Rules impermissibly assess banks on products or services that are not “credit.” The CRA instructs the Agencies to assess a bank’s record of meeting the “credit needs” of its entire community. Congress knew the difference between deposit needs and credit needs and its choice to focus on credit needs cabins the Agencies’ authority.
- The Final Rules violate the APA because they are arbitrary and capricious as a result of:
- Failing to give banks reasonable notice of the areas and products that will be assessed and the market benchmarks against which their performance will be evaluated; Failing to conduct an adequate cost benefit analysis; and
- Failing to consider the real world consequences of the Final Rules such as the extent to which the cumulative effect of heightened performance measures and the construction of Retail Lending Assessment Areas and Outside Retail Lending Areas could result in the reduction of product and service offerings in certain markets.
In the complaint, the Agencies allege that under the APA, “no deference is owed when an agency acts in contravention of a statute.” They also allege that the CRA “has been politically significant since it was enacted in 1977” and, based on the U.S. Supreme Court’s 2022 decision in West Virginia v. EPA, argue that the Agencies’ assertion of authority in the Final Rules “implicates major questions.” Accordingly, quoting language in West Virginia, they argue the Agencies must show “more than a merely plausible textual basis” for the Final Rules and “must point to clear congressional authorization for the power [they] claim[].’”
The level of deference, if any, to which the Final Rules are entitled is likely to be impacted by the U.S. Supreme Court’s decision in the two cases currently before it regarding Chevron deference. The question presented is whether the Court should overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. That decision established what became known as “Chevron deference,” which requires courts to accept an agency’s interpretation of federal law when a statute is silent or ambiguous and the agency’s interpretation is found to be reasonable. The Supreme Court heard oral argument in the two cases on January 17, 2024. (On February 15, 2024, we will host a special webinar roundtable featuring Professor Kent Barnett, two other renowned administrative law professors and Carter Phillips, a leading Supreme Court practitioner, who will share their observations and reactions to the oral arguments, insights based on questions posed by the Supreme Court justices during the arguments, and further predictions of the outcome and implications for the future of regulatory regimes and agency authority. For more information and to register for the webinar, click here.)
The new lawsuit has been assigned to Judge Matthew J. Kacsmaryk, who is known to be very conservative. It is not surprising that the trade groups chose a Texas federal district court as the venue for the lawsuit. The Fifth Circuit is widely viewed as a favorable forum for lawsuits challenging federal agency actions, particularly given the recent success that trade groups have had in the Fifth Circuit in challenging regulations issued by the CFPB. Most notably, in CFSA v. CFPB, the U.S. Court of Appeals for the Fifth Circuit ruled that the CFPB’s funding mechanism is unconstitutional and, on that basis, invalidated the CFPB’s payday loan rule. That decision is currently being reviewed by the U.S. Supreme Court which heard oral argument in October 2023. A lawsuit challenging the validity of the CFPB’s final small business lending rule is currently pending in the U.S. District Court for the Southern District of Texas. In October 2023, that court issued an order that preliminarily enjoins the CFPB from implementing and enforcing the Rule on a nationwide basis against all entities covered by the Rule.
Our blog posts discussing the provisions of the Final Rules can be found here, here, and here. To listen to an episode of our Consumer Finance Monitor Podcast in which we discuss the Final Rules, click here.
John L. Culhane, Jr., Scott A. Coleman & Richard J. Andreano, Jr.
CFPB Recaps 2023 Enforcement Activity and Highlights Plans to Expand Enforcement Capacity in 2024
In a blog post published earlier this week titled “The CFPB’s enforcement work in 2023 and what lies ahead,” the CFPB discussed its 2023 enforcement activity and highlighted its plans to expand its enforcement capacity in 2024.
The CFPB indicated that in 2023, it filed 29 enforcement actions and resolved through final orders 6 previously-filed lawsuits. Orders in these matters required the respondents to pay approximately $3.07 billion in consumer redress and approximately $498 million in civil money penalties. The CFPB’s blog post includes brief descriptions of key 2023 enforcement actions. (Our blog posts about several of these matters can be found here, here, here, here, and here.)
The CFPB also highlighted its plans to significantly expand its enforcement capacity in 2024. The additional staff members that the CFPB plans to hire include enforcement attorneys as well as non-attorneys such as analysts, paralegals, e-litigation support specialists, and economists. The new staff members will be located in the CFPB’s Washington, D.C. headquarters and in its San Francisco, New York, Chicago, and Atlanta regional offices. The CFPB also promoted an information session that it held yesterday for potential applicants to learn more about the Office of Enforcement’s work and job opportunities.
The scope of national bank preemption is currently before the U.S. Supreme Court in Cantero v. Bank of America, N.A. A New York statute requires the payment of interest on mortgage escrow accounts and the question before the Supreme Court is whether the National Bank Act (NBA) preempts application of the New York statute to national banks. Reversing the district court, the Second Circuit ruled that the New York statute is preempted by the NBA. The Second Circuit concluded that in determining the NBA’s preemptive scope, the relevant “question is not how much a state law impacts a national bank, but rather whether it purports to ‘control’ the exercise of its powers.”
Four former Comptrollers of the Currency are among the amici (OCC Amici) who recently filed an amicus brief with the Supreme Court in support of Bank of America. The other OCC Amici include five former Acting Comptrollers and other former OCC senior leaders and legal staff members. The OCC Amici state that their “collective decades of OCC experience spanned Administrations of both political parties.” In their brief, the OCC Amici reject the narrow interpretation of NBA preemption advanced by the Justice Department in its amicus brief.
In its amicus brief, the Justice Department took issue with the OCC’s “different and broader view of NBA preemption.” The Justice Department pointed to the language in 12 U.S.C. Sec. 25b (Dodd-Frank Section 1044) which provides that a state consumer financial law is preempted if “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank…, the State consumer financial law prevents or significantly interferes with the exercise by a national bank of its powers.” According to the Justice Department, this language requires a court to make a practical, case-by-case assessment of the degree to which a state law will impede the exercise of those powers. The Justice Department argued that the Second Circuit’s conclusion that a state law is preempted if it attempts to “control” a national bank’s exercise of its powers “runs counter to the ordinary meaning of the term ‘significantly interferes with;’ it is inconsistent with Congress’s evident expectation that preemption determinations will rest on practical degree-of-interference assessments; and it does not account for this Court’s many decisions holding that the NBA did not preempt various state laws regulating national banks’ banking activities.”
As the OCC Amici note in their brief, the OCC filed an amicus brief in Cantero when it was before the Second Circuit in which the OCC argued that the New York law was preempted based on the Barnett Bank preemption standard. They also note that “perhaps not surprisingly, no one from the OCC appears on the government’s brief—a conspicuous omission in light of longstanding practice.” (Because it has no independent right to litigate in the Supreme Court, the OCC could not file its own amicus brief in the Supreme Court as of right and would have needed the Justice Department’s permission to do so.)
According to the OCC Amici, the Justice Department “ask[s] this Court to break from the longstanding and consistent approach that the OCC has followed for decades [and] expressly ask[s] the Court to reach an outcome and adopt an analysis that the OCC rejected in the brief it filed below in this very case.” They assert that [a]dopting that brand-new approach, and breaking with the longstanding view of the key agency that regulates in the interest of preserving the national banking system, would inject significant uncertainty into a major line of business for many national banks. In the OCC Amici’s view, “what is at stake is whether national banks will be able to understand with reasonable certainty what their regulatory obligations are.”
The OCC Amici make the following principal arguments in support of affirming the Second Circuit’s decision:
- The OCC has consistently taken the position that under the Supreme Court’s cases culminating in Barnett Bank, state laws conflict with a federal power vested in national banks when they attempt to control or hinder the exercise of that power. Based on that standard, the OCC has consistently taken the position that states cannot regulate national banks’ escrow accounts, including by requiring that national banks pay interest on those accounts.
- The Justice Department’s parsing of the statutory preemption standard fails to treat Dodd-Frank as codifying the Supreme Court’s preemption cases and instead treats the statutory language as if it came without any past history or context. The authors of Dodd-Frank’s preemption language expressly confirmed that the Barnett Bank standard was the traditional conflict standard as explained by the Supreme Court in its holding in Barnett Bank, for which the phrase “prevent or significantly interfere” was just a short-hand.
- In its final post-Dodd-Frank rulemaking to implement Dodd-Frank’s reference to “the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank,” the OCC concluded that under the Barnett Bank standard, state escrow laws would impermissibly interfere with national banks’ lending power. Accordingly, the OCC retained the provision in its 2004 preemption regulations which provided that state escrow laws are preempted.
- The Justice Department’s conclusion that preemption analysis requires statute-by-statute and case-by-case fact finding leads to the type of disruptive uncertainty that the Dodd-Frank preemption provision sought to avoid. The Justice Department’s conclusion rests on an incorrect inference from the Dodd-Frank provision (12 U.S.C. Sec. 25b(c)) that requires substantial evidence for preemption determinations. That provision applies only to preemption determinations made by the OCC after Dodd-Frank’s adoption and the OCC’s preemption regulations, although revised after Dodd-Frank, pre-date Dodd-Frank. Congress’s adoption of the Barnett Bank standard in Dodd-Frank confirms that Congress intended that courts would continue to resolve preemption questions on the face of the relevant statutes, as such questions were resolved in Barnett Bank.
A number of banking and business trade groups filed amicus briefs in support of Bank of America, including the American Bankers Association, the Consumer Bankers Association, the Mortgage Bankers Association, and the Chamber of Commerce of the United States of America. All of the amicus briefs are available here. Oral argument is scheduled for February 27, 2024.
John L. Culhane, Jr., Ronald K. Vaske, Reid F. Herlihy & Alan S. Kaplinsky
On February 6, 2024, National Credit Union Administration (NCUA) Chairman Todd M. Harper spoke at a Brookings Institution event to outline his regulatory agenda and supervisory priorities for 2024. His prepared remarks addressed the 90th Anniversary of the Federal Credit Union Act, credit union performance in third quarter of 2023, risks posed by third party service providers, liquidity management, and consumer financial protection. The interview highlighted the NCUA’s planned supervision approach on practices relating to overdraft and nonsufficient funds fees, vendor risk management, and fair lending.
Overdraft and NSF Fees
In connection with a focus on consumer financial protection, the NCUA will increase its supervisory efforts on overdraft and non-sufficient funds (NSF) fees. The prepared remarks stated: “NCUA examiners this year will continue an expanded review of credit union overdraft programs, including website advertising, balance calculation methods, and settlement processes. Problematic overdraft programs and non-sufficient funds alerts include fees that aren’t reasonable and proportional, rely on systems that authorize positive and settle negative, or impose multiple representment fees, often in one day.” In addition, the NCUA’s 2024 Supervisory Priorities list overdraft programs as an area of focus. More specifically, the NCUA plans to focus on “website advertising, balance calculation methods, and settlement processes” related to overdraft programs, as well as evaluating credit union adjustments to overdraft programs to address consumer compliance risk and potential consumer harm from unexpected overdraft fees.
The American Banker reported that during the interview, Harper said the NCUA will require credit unions with more than $1 billion in assets, which applies to over 400 credit unions, to separately report data on both overdraft and nonsufficient funds fees.
As we previously blogged, the CFPB has proposed rulemaking on overdraft credit and NSF fees and has been closely monitoring overdraft and NSF practices. The CFPB reported last October that among credit unions with over $10 billion in assets, 16 of 20 continue to charge NSF fees, including four of the five largest.
Vendor Risk Management
With respect to credit unions’ increased reliance on third party vendors, the NCUA raised concerns that the lack of visibility into these critical industry participants poses a systemic risk to the financial services system and our national security. The NCUA cited an example where a core processor experiencing intermittent system outages impacted several credit unions across 40 states, and the NCUA’s lack of authority impeded its ability to quickly respond. NCUA is again asking Congress to restore this authority.
As we previously blogged, last summer, the Federal Reserve, FDIC, and OCC issued final interagency guidance for their respective supervised banking organizations on managing risks associated with third-party relationships, including relationships with financial technology-focused entities such as bank/fintech sponsorship arrangements.
Fair Lending
American Banker reported that during the interview Harper addressed the issue of whether credit unions should remain exempt from the Community Reinvestment Act (CRA). Banking industry trade groups have called for Congress to make changes to this exemption, as credit unions have grown into regional and national financial institutions. Harper raised concerns that applying CRA to credit unions may cause difficulties for credit unions that are formed for employees whose salaries may be similar. According to the American Banker, Harper stated that the NCUA also plans to increase its supervision of fair lending activities and continue to refer cases to the Justice Department. This aligns with NCUA’s recently announced intention to increase the frequency of separate fair lending examinations. Fair lending is also a supervisory priority for the NCUA.
As we previously blogged, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a final rule amending their regulations implementing the CRA, which becomes effective April 1, 2024 with a compliance date for the compliance date for the majority of the rule’s provisions in January 1, 2026. Earlier this week, several national and Texas banking and business trade groups filed a lawsuit in Texas federal court challenging final OCC/FDIC/Federal Reserve Community Reinvestment Act rules.
Kristen E. Larson, Loran Kilson & Kaley Schafer
The South Dakota Division of Banking issued a Memorandum notifying all licensed money lenders and non-residential mortgage lenders of their Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) obligations under a 2020 Final Rule published by the Financial Crimes Enforcement Network (“FinCEN”). The final rule became effective in 2020, and the Memorandum requires licensees to comply by March 31, 2024.
Accordingly, all money lender and non-residential mortgage lender licensees must develop a BSA/AML compliance program that aligns with the Memorandum’s requirements, which are equivalent to that of a “bank” under FinCEN’s regulations. The compliance program must include a risk assessment, ongoing transaction monitoring, and filing of suspicious activity reports and currency transaction reports, among other requirements. In addition, licensees must register with FinCEN for BSA e-filing.
The statutory BSA/AML framework has always applied to “financial institutions.” The statutory definition is broad and includes entities such as banks, trust companies, pawnbrokers, and casinos. 31 U.S.C. § 3512(a)(2). Over time, FinCEN has promulgated regulations to bring certain financial institutions under the scope of the regulations as well as set certain limited exemptions. For example, pawnbrokers are included in the statutory definition of a financial institution but are exempt (for now) from having a BSA/AML compliance program. Likewise, the statutory term “financial institution” includes loan or finance companies, which FinCEN has interpreted to mean only non-bank residential mortgage loan originators. 31 C.F.R. § 1010.100(lll)(1).
The Memorandum states that FinCEN’s 2020 Final Rule applies to licensees as “non-bank financial institutions.”
FinCEN’s Final Rule
FinCEN’s final rule closed a regulatory gap and extended certain BSA/AML requirements to “banks” lacking a federal functional regulator. We previously blogged on the final rule here.
The preamble to the final rule indicates that the scope of the rulemaking covers “non-Federal state chartered banks.” 85 Fed. Reg. 57129, 57131. The final rule did not amend the term “bank,” which is defined in FinCEN’s regulations as:
- A commercial bank or trust company organized under the laws of any State or of the United States;
- A private bank;
- A savings and loan association or a building and loan association organized under the laws of any State or of the United States;
- An insured institution as defined in section 401 of the National Housing Act;
- A savings bank, industrial bank or other thrift institution;
- A credit union organized under the law of any State or of the United States;
- Any other organization (except a money services business) chartered under the banking laws of any state and subject to the supervision of the bank supervisory authorities of a State;
- A bank organized under foreign law;
- Any national banking association or corporation acting under the provisions of section 25(a) of the Act of Dec. 23, 1913, as added by the Act of Dec. 24, 1919, ch. 18, 41 Stat. 378, as amended (12 U.S.C. 611–32).
31 C.F.R. § 1010.100(d).
The Final Rule removed the language providing a limited exemption for entities under the supervision of a bank supervisory authority from the list of financial institutions that do not have to have a BSA/AML compliance program (i.e., a person described in 31 C.F.R. § 1010.100(t)(7)). 85 Fed. Reg. 57129, 57133. However, the definition of a “bank” does not include an entity under the supervision of a bank supervisory authority unless that entity is also chartered under the banking laws of the state.
It appears that the South Dakota is taking the stance that due to the removal of the exemption language, any licensee is a non-bank financial institution that must have a BSA/AML compliance program equivalent to that of a “bank.”
We will continue to monitor this issue for additional guidance from the regulator or FinCEN. We encourage you to reach out to the South Dakota Division of Banking for any questions.
John D. Socknat & Kaley Schafer
MBA’s Servicing Solutions Conference & Expo 2024
February 20-23, 2024 | Orlando, FL
INNOVATION & TECHNOLOGY TRACK: Cybersecurity in Servicing,
February 22, 2024 – 1:00PM ET
Speaker: Gregory Szewczyk
TCPA Update: Developments Impacting Consent and Lead Generation
A Ballard Spahr Webinar | February 20, 2024, 1:00 PM – 2:00 PM ET
Speakers: Alan S. Kaplinsky, Michael R. Guerrero, Daniel JT McKenna, Jenny N. Perkins, & Joel E. Tasca
The Federal Trade Commission: Looking Back At 2023 And Looking Ahead To 2024 And Beyond
A Ballard Spahr Webinar | February 28, 2024, 2:00 PM – 3:00 PM ET
Speakers: Alan S. Kaplinsky & John L. Culhane, Jr.
What Do The CFPB’s Proposed Rules On Overdraft And NSF Fees Mean For You?
A Ballard Spahr Webinar | March 5, 2024, 12:00 PM – 1:00 PM ET
Speakers: Alan S. Kaplinsky, John L. Culhane, Jr., & Kristen Larson
March 7-8, 2024 | The Houstonian, Houston, TX
March 8, 2024 – 9:15AM CT
Speaker: Richard J. Andreano, Jr.
MBA Legal Issues and Regulatory Compliance Conference
May 5-8, 2024 | Manchester Grand Hyatt, San Diego, CA
APPLIED COMPLIANCE TRACK: Loan Originator Compensation
May 6, 2024 – 2:30PM PT
Speaker: Richard J. Andreano, Jr.
KEY UPDATES TRACK: Changes to State Reporting Requirements and State Licensing
May 6, 2024 – 4:00PM PT
Speaker: John D. Socknat
May 7, 2024 – 1:00PM PT
Speaker: Meredith S. Dante
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