In This Issue:
- SCOTUS Agrees to Decide Whether CFPB’s Funding Is Unconstitutional But Will Not Hear Case Until Next Term
- This Week’s Podcast Episode: The CFPB’s Proposals to Create Two Public Registries For Nonbanks: What You Need to Know, Part I
- HUD Announces 30 Basis Point Reduction in Annual FHA Mortgage Insurance Premium
- VA Reduces the Funding Fee for Certain VA Loans
- $167 Million Restitution and Penalty Award Ordered in CFPB V. Cashcall, Inc. Et Al.
- CFPB Issues Findings on “Suppression” of Actual Payment Data by Major Credit Card Issuers
- CFPB Finalizes Updates to Rules of Practice for Adjudication Proceedings
- Bank Industry Groups Heavily Criticize FinCEN’s Proposed Rule on Access to Beneficial Ownership Information
- NLRB Establishes New Restrictions on Severance Agreements
- Did You Know?
SCOTUS Agrees to Decide Whether CFPB’s Funding Is Unconstitutional But Will Not Hear Case Until Next Term
The U.S. Supreme Court has granted the certiorari petition filed by the CFPB seeking review of the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB. In that decision, the Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution and, as a remedy for the constitutional violation, vacated the CFPB’s payday lending rule (Rule). The Court was unwilling, however, to expedite the case and hear it this Term as requested by the CFPB and instead will hear the case next Term.
The Court also denied the cross-petition for certiorari filed by Community Financial Services Association (CFSA) asking the Court to review the alternative grounds for vacating the Rule that the Fifth Circuit rejected. The Court was also unwilling to add the alternative grounds to the CFPB’s petition as antecedent questions. CFSA had asked the Court to consider the alternative grounds as antecedent questions as an alternative to granting its cross-petition. A ruling by the Court in favor of CFSA on one of the alternative grounds might have allowed the Court to avoid reaching the constitutional issue.
The sole question presented by the CFPB’s petition is:
Whether the court of appeals erred in holding that the statute providing funding to the Consumer Financial Protection Bureau (CFPB), 12 U.S.C. 5497, violates the Appropriations Clause, U.S. Const. Art. I, § 9, Cl. 7, and in vacating a regulation promulgated at a time when the CFPB was receiving such funding.
Thus, by denying CFSA’s cross-petition and also rejecting CFSA’s request to consider the alternative grounds as antecedent questions to the CFPB’s petition, the Supreme Court is poised to decide the Appropriations Clause issue.
While the Court’s decision not to hear the case this Term means the Fifth Circuit decision will continue to be a cloud over all CFPB actions and could slow the pace of enforcement activity (particularly in pending cases where defendants can be expected to assert the Appropriations Clause issue as a defense), we do not expect it to impact the CFPB’s ongoing supervisory activity in any material way or deter Director Chopra from continuing to pursue his aggressive regulatory agenda.
- John L. Culhane, Jr., Richard J. Andreano, Jr., Michael R. Guerrero & Alan S. Kaplinsky
This Week’s Podcast Episode: The CFPB’s Proposals to Create Two Public Registries For Nonbanks: What You Need to Know, Part I
The CFPB recently issued two proposals that would require nonbanks to register with and submit information to the CFPB for publication in an online, publicly available database. The proposals represent an aggressive attempt by the CFPB to enhance its supervisory and enforcement authorities and carry significant potential implications for nonbanks that would be required to register.
In Part I of this two part episode, we look at the proposal that would require companies to register when, as a result of settlements or otherwise, they become subject to orders from local, state, or federal agencies and courts involving violations of consumer protection laws. After discussing the background and purpose of the registry and the Dodd-Frank Act authorities relied on by the CFPB for the proposal, we look at which nonbanks would be required to register, what is a “covered order” that would trigger registration, and the requirements for registration, recordkeeping, and annual attestation by an executive officer. We also look at state law requirements for licensed entities to disclose regulatory actions taken against them.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Richard Andreano, Michael Gordon, John Culhane, and Lisa Lanham, partners in the Group.
To listen to Part I, click here.
HUD Announces 30 Basis Point Reduction in Annual FHA Mortgage Insurance Premium
HUD recently announced a reduction to the annual mortgage insurance premium charged to borrowers with FHA-insured loans. HUD estimates that the reduction will save FHA borrowers on average $800 annually. HUD also released Mortgagee Letter 2023-05 addressing the premium reduction, and a Factsheet addressing other steps that HUD has taken to make homeownership more affordable.
The premium reduction applies to all Title II forward mortgages, except for mortgage loans insured under section 247 of the National Housing Act (Hawaiian Homelands), which do not require an annual mortgage insurance premium, and streamline refinance and simple refinance mortgage loans used to refinance a previous FHA-insured loan endorsed on or before May 31, 2009. The premium reduction is effective for mortgage loans endorsed on or after March 23, 2023. There were no changes to the amount of the FHA upfront mortgage insurance premium.
The HUD announcement of the premium reduction includes the following:
“This action supports the Biden-Harris Administration’s goals of making homeownership more accessible and affordable for the nation’s working families, particularly households of color for whom FHA-insured mortgages have been a cornerstone for access to homeownership. This action will help address historic disparities in homeownership, where homebuyers of color have been underrepresented.”
VA Reduces the Funding Fee for Certain VA Loans
In Circular 26-23-06, the U.S. Department of Veterans Affairs (VA) announced reduced funding fees for purchase, construction and cash-out refinance loans guaranteed by the VA that are closed on or after April 7, 2023. The current funding fee amounts for loans closed prior to April 7, 2023, are set forth in Exhibit A to the Circular. The funding fee amounts for loans closed on or after April 7, 2023, are set forth in Exhibit B to the Circular. The funding fee amounts for an interest rate reduction refinance loan (IRRRL) (which is the VA’s version of a streamlined refinance loan), a manufactured home loan (for homes not permanently affixed to the property), a loan assumption, and a Native American direct loan (non-IRRRL) remain the same.
$167 Million Restitution and Penalty Award Ordered in CFPB V. Cashcall, Inc. Et Al.
A judge in the U.S. District Court for the Central District of California recently ordered the defendants in CashCall, Inc. (which included CashCall Inc.’s CEO Paul Reddman) to pay $134 million in restitution and $33 million in civil penalties. The decision comes after the Ninth Circuit affirmed the district court’s 2016 award of summary judgment to the CFPB, finding the defendants had violated the CFPA. Specifically, the district court held that the defendants had engaged in deceptive practices by making unsecured high-interest loans to consumers through a tribal lending program in an effort to avoid state usury and licensing laws. The district court held, and the Ninth Circuit agreed, that the attempts to make the loans subject to the law of the Tribe was invalid at inception because “the Tribe had no substantial relationship to the transactions,” thereby subjecting the loans to the laws of the consumer’s resident state. The Ninth Circuit also affirmed the district court’s ruling that CashCall’s CEO was individually liable under the CFPA because he participated directly in and had the ability to control the corporate defendants’ conduct.
On remand from the Ninth Circuit, the district court was instructed to: (1) impose a tier-two civil penalty award (rejecting the initially assessed $10 million tier-one penalty) for every day after the point at which it determined the defendants’ violation was at least reckless; and (2) reconsider the availability of restitution. Accordingly, the district court performed the same exercise it had when assessing a tier-one penalty (applying the maximum available for each day of violation) by using the maximum tier-two per diem amounts from the date identified and calculated a civil penalty of $33,276,264. The district court also held that an award of restitution was appropriate and sufficiently calculable by the evidence the CFPB provided, but declined to award the $197 million in restitution requested by the CFPB. In so doing, the district court did not allow restitution as to interest and fees for any consumer “who paid CashCall less than the consumer received in principal,” characterizing such restitution as a “windfall” that would “overcompensate them for their loss.” Over the defendants’ objection, the district court adopted the CFPB’s calculation of restitution, absent such “windfall” interest and fees, and awarded $134,058,600 in restitution.
The defendants also unsuccessfully tried to raise the argument, previously rejected by the Ninth Circuit as untimely raised, that the CFPB’s enforcement action should be enjoined because the agency’s funding contravenes the Constitution’s separation of powers by violating the Appropriations Clause, encouraging the district court to follow the Fifth Circuit’s ruling in Community Financial Services Association of America, Limited v. Consumer Financial Protection Bureau. The district court denied the defendants’ request, holding that the Ninth Circuit determined that the constitutional challenge “can be and has been forfeited,” and the law of the case doctrine precluded the district court’s review of the issue. Notwithstanding this determination, the district court went on to posit that, if properly presented with the issue, it would reject the Fifth Circuit’s ruling as inconsistent with “’every other court to consider’ the validity of the CFPB’s statutory funding provisions.”
CFPB Issues Findings on “Suppression” of Actual Payment Data by Major Credit Card Issuers
In May 2022, the CFPB sent letters to the chief executive officers of six major credit card issuers regarding their companies’ payment furnishing practices. On February 16, the CFPB published a blog post about its key findings based on the issuers’ responses to those letters and released the letter it sent to the issuers summarizing its key findings.
The CFPB’s inquiry followed its publication of a report in 2020 about research showing a decline in the share of credit card tradelines containing actual payment data since 2012. “Actual payment” is the amount a borrower repays each month on a credit card account as opposed to the minimum payment or full balance. According to the CFPB, the decline in actual payment data was the result of an effort by the largest card issuers “to deliberately suppress” such information. The CFPB considers actual payment data to be valuable information that can help lenders offer and price credit competitively because consumers who repay their balances in full are generally less risky than those who do not. It has asserted that adding such data would increase the credit scores of millions of consumers by 20 points or more, with lower score consumers benefitting the most frequently from significant increases. The CFPB’s 2020 letters to the card issuers included a series of questions regarding the companies’ practices in furnishing actual payment data, including the companies’ rationales for furnishing or not furnishing actual payment data.
The CFPB’s key findings based on the issuers’ responses were:
- While the CFPB’s analysis did not seek to investigate whether entities explicitly colluded, the responses indicated that after one large issuer stopped reporting actual payment data, the other large issuers stopped reporting shortly thereafter. After this change, the share of furnished credit card accounts with actual payment information fell by more than half from 88 percent in late 2013 to only 40 percent by 2015.
- No issuer specified that it would restart reporting actual payment information and some issuers explicitly stated they did not intend to do so.
- The issuers’ responses suggest that they stopped reporting actual payment data “in an attempt to make it harder for competitors to offer their more profitable and less risky customers better rates, products, or services.”
The CFPB concludes its blog post by stating that it “will continue to monitor and address credit card company practices that impede effective market competition, like actual payment data suppression” and “will also brief the appropriate financial regulators and law enforcement agencies on our findings.” In its 2020 report, the CFPB noted the FCRA requirements concerning furnishing accurate information and for furnishers to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information. It did not, however, directly suggest in the report that the FCRA requires financial institutions that furnish to consumer reporting agencies to include actual payment data nor has it made that suggestion in its new blog post. While the Interagency Guidelines on accuracy and integrity of information furnished to consumer reporting agencies expressly require issuers to report credit limits, they do not expressly require issuers to report actual payment information. See 12 C.F.R. pt. 1022, App. E.
Instead, the CFPB does appear to be suggesting that “suppression” of actual payment data could face scrutiny as a potential UDAAP violation. More specifically, the CFPB states in the blog post that, “[b]y suppressing actual payment data, the largest credit card companies are making it harder for people to shop for credit and save money” and are not meeting consumers’ reasonable expectations “that their positive credit behaviors—like paying credit card bills in full each month—will be reflected in their consumer credit reports and the credit offers they receive.”
CFPB Finalizes Updates to Rules of Practice for Adjudication Proceedings
The CFPB has finalized a procedural rule that updates its Rules of Practice for Adjudication Proceedings (Rules of Practice). The procedural rule was issued in February 2022 and became effective on February 22, 2022, the date of its publication in the Federal Register. According to the CFPB, because the procedural rule was a rule of agency organization, procedure, and practice, it was exempt from Administrative Procedure Act (APA) notice-and-comment requirements. Nevertheless, the CFPB invited comments on the procedural rule.
The CFPB did not make any changes to the procedural rule in the final rule just issued. The updates to the CFPB’s Rules of Practice made by the procedural rule include the following:
- Bifurcation. New Rule 204(c) allows the Director to order that proceedings be divided into two or more stages if the Director determines that it would promote efficiency in the proceeding or for other good cause. For example, the Director could divide a proceeding into two stages, with the Director issuing a decision at the conclusion of the first stage on whether there has been a violation of law and a final decision and order at the conclusion of the second stage that would include any remedies.
- Availability of documents for inspection and copying. Rule 206 is amended to clarify certain categories of documents that the Bureau can withhold or redact. The amendments are based on recent amendments to the SEC’s rules of practice. As amended, Rule 206 makes clear that the Office of Enforcement does not have to produce a document that reflects only settlement negotiations between the Office and a person or entity who is not a current respondent in the proceeding. The amended rule also allows the Office to redact from documents it produces any information it is not obligated to produce and sensitive personal information about anyone other than the respondent.
- Subpoenas and depositions. Rule 209 previously permitted parties to take depositions only if the witness was unable to attend or testify at a hearing. Also reflecting SEC rules, amended Rule 209 permits discovery depositions in addition to depositions of unavailable witnesses. In addition, respondents and the Office of Enforcement can take depositions by oral examination pursuant to subpoenas and by written questions upon motion and pursuant to a deposition. If a proceeding involves a single respondent, the amended rule allows the respondent and the Office to each depose up to three persons. In proceedings with multiple respondents, respondents can collectively depose up to five persons and the Office of Enforcement can depose up to five persons. A party can move to take additional depositions pursuant to a motion filed no later than 28 days before the hearing date. To correspond with the new provisions on depositions in Rule 209, Rule 208, governing the issuance of subpoenas, is amended by defining the standards for issuing a subpoena requiring the deposition of a witness. The amendments also (1) provide a process for the hearing officer to request more information about the relevance or scope of the testimony sought and refuse to issue the subpoena or issue it only upon conditions, (2) add procedures governing the taking of depositions, and (3) address the relationship of subpoenas to the scheduling of the hearing.
- Rulings on dispositive motions. Rule 213 allows the Director, at any time, to direct that any matter be submitted to him or her for review. Based on a FTC procedure, the amendments add a specific procedure for the Director to exercise this discretion in the context of dispositive motions. As amended, Rule 213(a) provides that the Director will either rule on a dispositive motion, refer the motion to the hearing office, or rule on the motion in part and refer it in part. The amendments also address the timing of a ruling by the Director, oral argument on a dispositive motion, and the types of rulings that the Director or hearing officer can make on a dispositive motion.
- Issue exhaustion. New Rule 208 addresses issue exhaustion and applies to any argument to support a party’s case or defense, including any argument that could be a basis for setting aside a Bureau action. It provides that (1) unless a party has raised an argument before the hearing officer, it is not preserved for later consideration by the Director, (2) unless a party has raised an argument before the Director, it is not preserved for later consideration by a court, (3) an argument must be raised in a manner that complies with the Rules of Practice and that provides a fair opportunity to consider the argument, and (4) the Director has discretion to consider an unpreserved argument, including by considering it in the alternative, but an unpreserved argument that is considered in the alternative remains unpreserved.
In its blog post about the final rule, the CFPB states that it “rarely brings cases through administrative adjudication” and “still plans to bring the vast majority of its matters in district court.” This is not surprising, particularly in light of the legal cloud that the May 2022 Fifth Circuit panel decision in Jarkesy v. Securities and Exchange Commission has created for the use of administrative law judges (ALJ) by federal agencies. The Fifth Circuit denied the SEC’s request for a rehearing en banc and the deadline for the SEC to file a certiorari petition with the U.S. Supreme Court has been extended until March 20, 2023.
In Jarkesy, a divided 3-judge Fifth Circuit panel ruled that the proceedings suffered from three constitutional defects:
- The SEC’s use of an administrative court violated the petitioners’ Seventh Amendment right to a jury trial because the SEC’s fraud claims are analogous to traditional fraud claims at common law to which a right to a jury trial applies when civil penalties are sought.
- Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle to guide the SEC’s use of its discretion to decide whether to bring securities fraud enforcement cases either in district court or within the agency.
- The removal restrictions that apply to SEC administrative law judges are unconstitutional because they interfere with the President’s ability to “take Care that the Laws be faithfully executed” as required by Article II of the Constitution. The APA provides that ALJs may be removed by the agency in which the ALJ is employed “only for good cause established and determined by the Merit Systems Protection Board on the record after opportunity for hearing before the Board.”
These holdings have significant potential implications for the CFPB. First, to the extent the CFPB’s authority to challenge deceptive practices is rooted in common law fraud claims, the CFPB’s use of an ALJ in an enforcement action involving an alleged deceptive act or practice could be found to violate the respondent’s Seventh Amendment right to a jury trial. Second, because the Dodd-Frank Act gives the CFPB unfettered discretion to choose whether to bring an action before an ALJ or in federal district court, the CFPB’s use of an ALJ for any enforcement action could be challenged as an unconstitutional delegation of authority. Third, assuming an ALJ used by the CFPB would be subject to the same APA for-cause removal restriction as an SEC ALJ, the removal restriction could be the basis for a constitutional challenge to the CFPB’s use of an ALJ in any enforcement action.
In addition to the legal cloud that Jarkesy creates for the CFPB’s use of administrative proceedings, the Fifth Circuit panel decision in Community Financial Services Association v. CFPB, holding that the CFPB’s funding mechanism is unconstitutional, creates a legal cloud for enforcement actions brought by the CFPB in federal district court as well as for its use of administrative proceedings. The legal cloud created by the CFSA decision can be expected to continue until the U.S. Supreme Court rules on the case next Term, having granted the CFPB’s certiorari petition in the case.
Bank Industry Groups Heavily Criticize FinCEN’s Proposed Rule on Access to Beneficial Ownership Information
On February 14, 2023, both the American Bankers Association (ABA) and the Bank Policy Institute (BPI) submitted comments to the Financial Crimes Enforcement Network (FinCEN) on FinCEN’s notice of proposed rulemaking (NPRM) relating to access to beneficial ownership information (BOI) reported to FinCEN under the Corporate Transparency Act (CTA). While both organizations had similar comments, mainly being that the proposed limits on FIs’ ability to use BOI retrieved from the database contradicts the CTA’s objective, the ABA recommended that FinCEN entirely withdraw the NPRM. Below, we break down each organization’s comments and strong critiques regarding the NPRM.
The CTA mandates that covered entities—which includes most domestic legal entities and most foreign organizations registered to do business in the United States—report BOI and company applicant information to a database run by FinCEN upon the entities’ creation or registration in the United States. As the NPRM indicates, five broad categories of recipients will have access to the database under certain circumstances and requirements:
- Federal, state, local, and Tribal government agencies;
- Foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities;
- Financial institutions (FIs) using BOI to facilitate compliance with their own Customer Due Diligence (CDD) Rule requirements and which have received the reporting company’s prior consent;
- Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing FIs for compliance with the CDD Rule; and
- U.S. Department of Treasury, which will have “relatively unique access” to BOI tied to an officer or employee’s official duties requiring BOI inspection or disclosure, including for tax administration.
Both organizations warn that FIs’ limited ability to search for and use BOI from the database under the proposed terms of the NPRM would be inefficient because it would result in further costs of compliance to ensure that BOI database information is separated from BOI obtained directly from customers. Both comments also recommend that FIs should be able to share BOI retrieved from the database with other FI personnel. And both comments request FinCEN to explicitly state that FIs are not affirmatively required to access the database.
The ABA’s View: “Fatally Flawed”
The ABA – along with 51 state banking associations – found the NPRM to be “fatally flawed” and stresses that it would not meet the CTA’s objective of combatting illicit finance through the database while reducing the regulatory burdens on both small businesses and regulated entities. The ABA’s overall recommendation is for FinCEN to “withdraw the current proposal” and engage with the financial services industry at large to develop an entirely new proposal.
The ABA argues that the NPRM creates a framework in which banks’ access to the database would be so limited “that it will effectively be useless.” One primary problem in the view of the ABA is that FinCEN has proposed that banks will not be permitted to run open-ended queries in the BOI database or receive multiple search results. Rather, banks would be required to submit identifying information specific to a reporting company and receive in return an electronic transcript with that entity’s BOI. Further, banks will not be able to run searches specific to individuals who may be beneficial owners of multiple entities. According to the ABA, the NPRM compounds these limitations by further precluding FIs from using BOI more broadly to fulfill other Bank Secrecy Act (BSA) regulatory requirements beyond just the CDD Rule, such as monitoring transactions, maintaining a Customer Identification Program (CIP), and identifying and reporting suspicious activity. The ABA also notes that FIs should be able to use the BOI data base to perform OFAC screening and compliance.
According to the ABA (and BPI), a key concern is that there is no assurance that the BOI present in the database will be reliable – because FinCEN has stated that it will not verify the accuracy of the BOI reported to FinCEN by entities under the CTA. Thus, as ABA explains, the NPRM would not enhance banks’ general CDD Rule compliance, but rather would impose further costs and create an inefficient allocation of resources across FIs’ AML compliance programs. As the ABA notes, the CDD Rule “simply requires banks to identify and verify the identity of the beneficial owners of their legal entity customers – it does not require banks to verify that those individuals are, in fact, beneficial owners.” The ABA is clearly concerned that FinCEN will impose such a verification obligation upon FIs: “if FinCEN is contemplating changing the amended CDD Rule to require banks to verify the status of the beneficial owners provided by their customers, i.e., whether they are, in fact, the customer’s beneficial owners, we would be strongly opposed to it.”
Additionally, the ABA explains that the prohibition on a FI sharing BOI to components of the same FI located outside of the United States contradicts the information-sharing goals of the Anti-Money Laundering Act of 2020 (“AMLA”). Many FIs outsource certain CDD Rule and CIP compliance functions to components or agents located abroad.
For next steps, the ABA recommends that FinCEN engage with key stakeholders, like banks and small businesses, to “develop a new proposal that would establish a more efficient and effective regulatory framework for both banks and reporting companies.” To that end, the ABA recommends that any new proposal:
- Allow banks to use BOI more broadly to discharge their responsibilities under the BSA;
- Allow banks to share BOI with bank personnel across their enterprises, including abroad;
- Clarify that banks are not required to access the database, particularly given the current differences between BOI collected under the CDD Rule and BOI collected under the CTA, and because FinCEN’s proposed BOI reporting form for the CTA allows reporting companies to often forgo providing key information;
- Consider modern technological solutions that would provide a secure and efficient means of accessing the database;
- Include a safe harbor from liability for FIs that use BOI obtained from the database; and
- Amend the existing CDD Rule to provide that banks are not required to collect and maintain BOI for all legal entity customers, or that banks can do so on a risk basis.
Although BPI does not argue, like the ABA, that the entire NPRM should be scrapped and re-written, it shares many of the ABA’s concerns.
First, BPI believes that the final rule should expressly state that FIs have no affirmative requirement to access BOI in the database. BPI estimates that, considering the burden of the proposed rule, FinCEN expressly assumes that FIs will seek to access BOI in every instance where a “legal entity customer” qualifying as a “reporting company” opens a new account. In BPI’s view, providing in the final rule’s text that FIs have no affirmative duty to access the database would clarify any confusion. “Further, FinCEN should instead expressly permit, and encourage, institutions to determine on the basis of risk when to access the registry and how to use the information obtained.”
FIs’ Limited Ability to Use Database Information
Next, and like the ABA, BPI suggests to FinCEN that the NPRM’s scope of permitted use and sharing of BOI from the database is too limited for FIs. According to BPI, the NPRM would “substantially limit inter-affiliate sharing of registry information and would prevent institutions from sharing this information with personnel, branches or affiliates abroad, thereby requiring the information be separated from, and not used in, numerous enterprise-wide illicit finance risk management processes.”
For example, the CTA requires that registry information be used for CDD activities, without limiting the specific CDD activities for which the information could be used. Under the NPRM, however, FIs could only use registry information to “identify and verify beneficial owners of legal entity customers.” BPI notes that FIs’ CDD programs extend well beyond identifying and verifying beneficial owners of legal entity customers. These programs include activities like “performing customer risk rating; monitoring transactions; conducting sanctions screening; [and] identifying politically exposed persons and undertaking PEP screening.” According to BPI, under the NPRM’s narrow interpretation of the CDD activities that may be performed with registry information, it is unclear how access to the database would “enable financial institutions to meaningfully improve their illicit finance risk management activities.”
BPI further argues that these limitations contradict the CTA in general. The CTA permits FIs to access BOI in the registry “to facilitate . . . compliance . . . with [CDD] requirements under applicable law.” BPI notes that the CTA does not define “applicable law” and that the CTA’s legislative history supports Congress’s intention that BOI be available to FIs for purposes of facilitating compliance with all contours of CDD programs, not just identifying and verifying beneficial owners of legal entity customers. Thus, BPI proposed that FinCEN should interpret the CDD activities that FIs may undertake registry information “as broadly as possible.”
Significant Burdens: Dual Reporting
In addition, BPI believes that implementation of the NPRM’s restrictions on use of registry information would impose “significant burdens on financial institutions and reporting companies.” As BPI explains, complying with these proposed limitations on use and sharing of BOI from the database, which do not apply to BOI obtained from a customer, would result in FIs spending “vastly more to develop and implement new systems.” Specifically, one BPI member estimates costs between $1 million and $3 million to develop new systems and to prevent current systems from absorbing BOI retrieved from the database.
If FinCEN declines to broaden the extent to which FIs may use and share BOI, BPI suggests that FinCEN should expressly permit FIs “to use and share registry BOI more broadly with the consent of the applicable customer.” In BPI’s view, the persons who have the most interest in the security and confidentiality of registry information are reporting companies and the individuals whose personal information is actually reported. Thus, reporting companies and the relevant individuals (who can dictate how their information is used) should be permitted to decide how the BOI is used after it is reported to FinCEN.
Ability to Rely on Database Information that is Already Reliable
Separately, BPI argues that FIs should be expressly permitted to rely on BOI that they obtain from the database, just as the CDD Rule allows FIs to rely on the BOI certifications from their customers in the absence of known facts that call into question a certification’s reliability. According to BPI, permitting this reliance would reduce the need for institutions to require their legal entity customers to provide them with information directly, which would promote the CTA’s objective to reduce burdens on reporting companies. Moreover, like the ABA, BPI recommends that FIs should not be required to verify BOI they obtain from the registry, and that FinCEN should already ensure, in the first instance, that the registry is “accurate, complete, and highly useful.”
Lastly, BPI recommends general enhancements around accessing the registry, like simplifying and clarifying requirements around accessing registry information, handling judicial process, obtaining customer consent, and enabling automated FI institution access to the registry.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.
NLRB Establishes New Restrictions on Severance Agreements
The National Labor Relations Board (NLRB) has ruled that an employer violates Section 8(a)(1) of the National Labor Relations Act when the employer uses employee severance agreements with provisions restricting employees’ exercise of their NLRA rights. In McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023), the Board reversed its prior decisions in Baylor University Medical Center, 369 NLRB No. 43 (2020) and IGT d/b/a Inter-national Game Technology,370 NLRB No. 50 (2020).
In McLaren, a hospital offered a severance agreement to 11 bargaining unit employees it permanently furloughed following the onset of COVID-19. The agreement broadly prohibited them from making statements that could disparage or harm the image of the hospital, its parent and affiliated entities and their officers, directors, employees, agents and representatives, and further prohibited them from disclosing the terms of the agreement to any third person, subject to limited exceptions. The agreement also provided for penalties against the employees if they breached the non-disparagement and confidentiality terms.
In the NLRB’s prior decisions, Baylor and IGT, which now are overturned, the Board had found such non-disparagement and confidentiality provisions to be lawful, and concluded that the severance agreement was lawful and that the proffer of the agreement to the furloughed employees was lawful. In Baylor, the Board had held that the employer did not violate the Act by the “mere proffer” of a severance agreement with similar restrictive language, reasoning that the agreement was not mandatory, pertained exclusively to post-employment activities and, therefore, had no impact on terms and conditions of employment. The Board also relied on the fact that there was no allegation that anyone offered the agreement had been unlawfully discharged or that the agreement was proffered under circumstances that would tend to infringe on Section 7 rights. In IGT, the Board had dismissed an allegation that the employer maintained an unlawful nondisparagement provision in the severance agreement it offered to separated employees since the agreement was “entirely voluntary, does not affect pay or benefits that were established as terms of employment, and has not been proffered coercively.”
McLaren overrules both Baylor and IGT, and returns to the principle that a severance agreement is unlawful if its terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights, and that an employer’s mere proffer of such an agreement is unlawful. The NLRB held that “[a]greements that contain broad proscriptions on employee exercise of Section 7 rights have long been held unlawful because they purport to create an enforceable legal obligation to forfeit those rights. Proffers of such agreements to employee have also been held to be unlawfully coercive.” The decision criticizes Baylor, explaining that the holding there failed to consider the specific language in the challenged provisions and focused merely on the circumstances in which the agreement was presented. In doing so, the Board affirmed that Section 7 rights are not limited to discussions with coworkers, but that the Act affords protection for employees who engage in communications with a wide range of third parties.
This ruling is an opportune time for employers to review their standard severance agreements with counsel. Ballard Spahr regularly works with both unionized and non-unionized employers in preparing severance agreements so that they are compliant not only with the latest NLRB guidance but also with the other array of employment and other applicable state and federal laws.
- Brian D. Pedrow & Gustavo Cardona
Did You Know?
Montana Amends Mortgage Laws to Permit Remote Work
Pursuant to enrolled HB0030, effective July 1, 2023, mortgage business may be conducted at a remote work location without triggering branch licensure if the following conditions are met:
- the licensed mortgage entity's employees and independent contractors do not meet with the public at an unlicensed personal residence;
- no physical or electronic business records are maintained at the remote location;
- the licensed mortgage entity has written policies and procedures for working remotely and the entity supervises and enforces the policies and procedures;
- no signage or advertising of the entity or the mortgage loan originator is displayed at any remote work location the licensed mortgage entity maintains the computer system and customer information in accordance with the entity's information technology security plan and all state and federal laws;
- any device used to engage in mortgage business has appropriate security, encryption, and device management controls to ensure the security and confidentiality of customer information as required by rules and regulations adopted by the department;
- the licensed mortgage entity's employees and independent contractors take reasonable precautions to protect confidential information in accordance with state and federal laws;
- the NMLS record of a mortgage loan originator that works remotely designates a properly licensed location as the mortgage loan originator's official workstation and a designated manager as a supervisor; and
- the licensed mortgage entity annually reviews and certifies that the employees and independent contractors engaged in mortgage business at a remote location meet the requirements of this section. Upon request, a licensee shall provide written documentation of the licensee's review to the department.
Section 7(1). See also Section 8(9) (amending the definition of branch office to exclude a mortgage loan originator working from a remote location if the requirements of 32-9-122 and Section 7 are met). If the commissioner determines that the licensee does not provide reasonable and adequate supervision of the employee, the commissioner shall notify the licensee in writing and within 5 business days of receiving the notice the licensee shall terminate the employee's eligibility to work remotely as provided under this section. Section (7)(2).
Section 32-9-122 was amended to require a mortgage lender or broker to designate a licensed MLO with three years’ experience as the designated manager for the entity and making that individual responsible for the mortgage origination activity conducted by all MLOs, employees, independent contractors, and agents assigned to the entity and for the operation of the entity at all physical and remote locations. Section 11.
We note that HB0030 also:
- adopted prudential standards for nonbank mortgage servicers;
- defines “confidential supervisory information” which is not subject to public inspection, subpoena or discovery, and which is permitted to be shared with state federal regulatory agencies without loss of confidentiality protections or privilege provided by federal law, the Montana constitution or Montana law; and
- creates a reporting requirement for licensees upon a cybersecurity incident that affects the licensee's ability to do business or involves access or potential access to a customer's personal information.
- Lisa Lanham & Stacey L. Valerio
CA Issues New CRMLA Guidance on Work From Home
In a previous article, we described CA legislation authorizing remote work under the California Financing Law (CFL). In March 2020, CA issued some guidance under the California Residential Mortgage Lending Act (CRMLA) that was tied to the end of the State of Emergency. In recognition of the end of the COVID-19 State of Emergency on February 28, 2023, CA has issued new guidance regarding remote work under the CRMLA. It provides as follows:
- The CRMLA does not expressly prohibit employees of a licensee from working at a remote location, such as an employee’s home. A licensee may authorize an employee to perform limited functions at a remote location that is not considered a branch office, provided that the location does not have the indicia of a branch office and is not advertised to the public as a business location.
- In instances where a mortgage loan originator (MLO) or another employee is working remotely, a branch manager must continue to supervise the employee. In accordance with Rule 1950.122.6 of the CRMLA (Cal. Code of Regs., tit. 10, § 1950.122.6), the DFPI will continue to examine the supervisory activities of a branch manager to ensure that the branch manager is adequately supervising each MLO and employee regardless of whether they are working at a remote location or a branch office.
It identifies the following considerations for a licensee when determining whether a location is adequately supervised, or whether it has the indicia of a branch office:
- Only one employee or multiple employees who reside at the location and are members of the same immediate family work at the remote location.
- If confidential physical files are accessible at the remote location, and whether the remote location contains secure storage that protects confidential physical files.
- The MLO is assigned to a designated branch office, and such designated branch office is reflected on all communications to the public by the MLO.
- The employee’s communications with the public are subject to the licensee’s supervision or a designated communication person.
- Electronic mail is through the licensee’s electronic email system.
- All loan processing is reviewable at the main or branch office.
- Written supervisory procedures pertaining to supervision of loan origination and lending activities conducted remotely are maintained and enforced by the licensee.
- A list of the remote locations is maintained by the licensee.
- All records can be accessed by the DFPI at the main or branch office location.
- Written supervisory procedures contain specific provisions regarding cybersecurity and a virtual privacy network (VPN) or other secure system at the remote location, including:
- Multi-factor authentication,
- Back-up system and data recovery system, and
- Protocols in the event of a cybersecurity incident.
- Lisa Lanham & Stacey L. Valerio
As of March 1st, 2023, the Virginia Bureau of Financial Institutions will begin accepting electronic surety bonds via the NMLS system for both the Virginia Lender and Broker licenses, which respectively cover mortgage origination and brokering.
Subscribe to Ballard Spahr Mailing Lists
Copyright © 2023 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.