Legal Alert

Mortgage Banking Update - April 18, 2024

April 18, 2024

April 18 – Read the newsletter below for the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. In this issue we discuss proposed rules on overdraft and nonsufficient funds bank fees, a Texas court’s injunction against enforcement of the Community Reinvestment Act, a university’s settlement of claims that its ads understated actual program costs, and much more. 

In This Issue:


This Week’s Podcast Episode: The Consumer Financial Protection Bureau’s Use of Unfairness to Regulate Discriminatory Conduct – A Discussion of the Consumer and Industry Perspectives

Our special guest is Jeff Sovern, Professor at the University of Maryland Francis King Carey School of Law. In March 2022, the CFPB announced that it had revised its exam manual to instruct its examiners to apply the “unfairness” standard under the Consumer Financial Protection Act to conduct considered to be discriminatory, whether or not it is covered by federal laws that expressly prohibit discrimination. The changes were subsequently vacated by a federal district court in a lawsuit brought by several trade groups challenging the changes and the Fifth Circuit has stayed the CFPB’s appeal from that decision pending the U.S. Supreme Court’s decision in CFSA v. CFPB. In this episode, we first review the background of the exam manual changes, the industry response, and the district court’s decision. We then take a close look at the key arguments both in support of and against upholding the decision. We conclude with a discussion of the use of disparate impact in applying the unfairness standard to discriminatory conduct and the appropriateness of the CFPB’s use of changes to its exam manual to announce its new interpretation of the standard.

Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, Alan Kaplinsky, leads the discussion, joined by CFS Partner Richard Andreano, leader of the firm’s Mortgage Banking Group.

To listen to the episode, click here.

Professor Sovern’s recent research paper, “Is Discrimination Unfair?” is available here.

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This Week’s Podcast Episode: A Close Look at the Consumer Financial Protection Bureau’s Proposed Rules on Overdraft and Nonsufficient Funds Fees

Our special guest is David Pommerehn, SVP, General Counsel, Head of Regulatory Affairs at the Consumer Bankers Association. In January 2024, the CFPB proposed two new rules: one restricting overdraft fees and the other prohibiting NSF fees on certain declined transactions. The proposals are among the CFPB’s latest moves in furtherance of the Biden Administration’s “junk fees” agenda. In this episode, which repurposes a recent webinar, we discuss the key provisions of each proposal and entities covered, the CFPB’s justification for each proposal, the legal authority relied on by the CFPB for each proposal, business practices impacted by the proposals, and potential legal challenges.

Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, Alan Kaplinsky, moderates the discussion, joined by CFS Group Partner John Culhane and Of Counsel Kristen Larson.

To listen to the episode, click here.

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Texas Federal Court Enjoins Enforcement of CRA Final Rules Against Plaintiffs

On February 5, 2024, several national and Texas banking and business trade groups (Plaintiffs) filed a lawsuit 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). Four days after filing the complaint, Plaintiffs filed a motion for a preliminary injunction. The Agencies filed a brief in opposition to Plaintiffs’ motion and the Plaintiffs filed a reply brief. On March 29, 2024, the U.S. District Court for the Northern District of Texas granted the Plaintiffs’ motion for preliminary injunction and enjoined the Agencies from enforcing the Final Rules against Plaintiffs pending the resolution of the lawsuit. The court also extended the effective date of the Final Rule’s implementation by one day for each day the injunction remains in place.

The CRA states, in part:

In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall — (1) assess the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution[.]

In reliance on the CRA statutory text, facts pled, and briefs, the court found that the Plaintiffs have associational standing and meet the standard for issuance of the preliminary injunction, which require the Plaintiffs to show: “(1) a substantial likelihood of prevailing on the merits; (2) a substantial threat of irreparable injury if the injunction is not granted; (3) the threatened injury outweighs any harm that will result to the non-movant if the injunction is granted; and (4) the injunction will not disserve the public interest.”

Associational Standing

The court cited to precedent that provides “association[s] may bring suit on behalf of its members when (1) those members would otherwise have standing to sue; (2) the interests it seeks to protect are germane to the organization’s purpose; and (3) neither the claim asserted nor the relief requested requires the participation of individual members.” The court rejected the Agencies’ arguments that Plaintiffs had not identified members by name and had not alleged that the challenged activity affects all members and found that Plaintiffs have associational standing.

Substantial Likelihood of Prevailing on Merits

The court determined that Plaintiffs have a substantial likelihood of prevailing on the merits for the following reasons:

  • The court determined that the Agencies’ interpretation of “entire community” is inconsistent with the ordinary meaning of the term “community” and the totality of the CRA’s text that focus on geographic areas surrounding a bank’s physical deposit taking facilities.
  • The court agreed with the Plaintiffs’ argument that the CRA does not authorize the Agencies to consider deposit products in determining whether a bank is “meeting the credit needs of its entire community.”
  • The Major Questions Doctrine favors Plaintiffs as evidenced by the Agencies’ past practices if limiting their authority under CRA to areas surrounding deposit taking facilities and Congress’s failed attempts to pass the Community Reinvestment Modernization Act, which if passed would have shifted the CRA assessment areas from the areas surrounding deposit taking facilities to areas where banks make loans.

Substantial Threat of Irreparable Injury

The court considered the Agencies’ statement in the Notice of Supplemental Rulemaking regarding the substantial compliance costs. The Agencies stated:

Were the [Rule] to require full compliance within the first 12 months of the transition period, the OCC estimates that expenditures to comply with mandates during those twelve months would not exceed approximately $91.8 million (approximately $7.9 million associated with increased data collection, recordkeeping or reporting; $82 million for large banks to collect, maintain, and report annually geographic data on deposits; and $1.9 million for banks’ strategic plan submissions).

Based on Fifth Circuit precedent which holds that “nonrecoverable costs of complying with a putatively invalid regulation typically constitute irreparable harm,” the court found that the Plaintiffs’ immediate compliance costs to implement the Final Rules constitute irreparable harm.

The court found that the two remaining factors for injunctive relief—balance of equities and the public interest—support injunctive relief.

Limited Scope Injunction

The injunctive relief granted by the court only expressly prevents the Agencies from enforcing the Final Rules against Plaintiffs—the Texas Bankers Association, Amarillo Chamber of Commerce, American Bankers Association, Chamber of Commerce of the United States of America, Longview Chamber of Commerce, Independent Community Bankers of America, and Independent Bankers Association of Texas. The order entered by the court does not expressly state that it applies to Plaintiffs’ members. We believe that this was an unintentional mistake by the court, which should be corrected. However, we believe that the court did intend to limit the beneficiaries of the injunctive relief to just the members of the Plaintiffs. As a result, this could potentially create uncertainty and confusion in the banking industry, with banks unsure of whether or how to proceed with compliance efforts in the interim. This may lead other financial institutions and associations to seek joinder as occurred in the case challenging the CFPB’s small business lending rule when the Texas district court did not initially issue a nationwide preliminary injunction. That preliminary injunction was later expanded on a nationwide basis to all financial institutions. That is precisely what the court needs to do here.

The Federal Reserve Board, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency on March 21, 2024 issued an Interim Final Rule extending the applicability date of the facility-based assessment areas and public file provisions of the Final Rules from April 1, 2024, to January 1, 2026. However, even if ultimately unsuccessful, the Plaintiffs’ challenge to the Final Rules may render all current implementation dates difficult to achieve and force further push back of compliance deadlines.

Consumer Finance Monitor Podcast Episodes

We have released two Consumer Finance Monitor podcast episodes focused on the Final Rules: “Community Reinvestment Act Reform: a Close Look at the Final Rule” and “A Look at the Joint Community Reinvestment Act Proposal Issued by the OCC, FDIC, and Federal Reserve Board.” Click here and here to listen to the episodes.

Kristen E. Larson, Scott A. Coleman & Sarah B. Dannecker

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Third Circuit Holds Securitized Trusts Are Covered Persons Under CFPA

On March 19, the U.S. Court of Appeals for the Third Circuit issued an opinion in CFPB v. National Collegiate Master Student Loan Trust et al. (the Trusts). The issue before the Third Circuit was whether certain Trusts are “covered persons” subject to the Consumer Financial Protection Act (CFPA) and whether the CFPB was required to ratify the underlying action. The court held that the Trusts were “covered persons” subject to the CFPA and that the CFPB did not have to ratify the action.


As a refresher, this case stems from a 2017 CFPB enforcement action against the Trusts related to collections lawsuits against borrowers. This enforcement action was among the CFPB lawsuits ratified by former CFPB Director Kathy Kraninger following the U.S. Supreme Court’s decision in Selia Law, which held that the Director was unconstitutionally insulated from removal by the President (i.e., only removable for cause). The ratification of the enforcement action occurred more than three years after it was initially filed, allowing the CFPB to refile. The Trusts moved to dismiss arguing that the enforcement action was invalid as they were not “covered persons” under the CFPA. In CFPB v. National Collegiate Master Student Loan Trust et al., the district court rejected the Trusts’ arguments that they were not “covered persons” under the CFPA and that because the enforcement action was filed by an unconstitutionally structured CFPB, it was void when filed and could not stop the statute of limitations from running. The district court certified two questions to the Third Circuit for interlocutory appeal: whether the Trusts are “covered persons” and whether the filing of the enforcement action by an unconstitutionally structured CFPB made the filing invalid, thereby requiring the Bureau to ratify the lawsuit before the statute of limitations ran out.

Are the Trusts Covered Persons?

The court determined that the Trusts “engaged” in consumer financial products or services, and, are therefore “covered persons” under the CFPA.

The Trusts were formed for the purpose of acquiring and servicing portfolios of over 800,000 private student loans. Each Trust entered into a Trust Agreement governed by Delaware law. Each Trust then entered into Administration Agreements whereby an administrator contracted with third parties through various Servicing Agreements. Servicers promised to provide services including communications with borrowers, and provide procedures for delinquency and default.

In connection with the initial question, the court reviewed the underlying Trust Agreements and highlighted that the language of the agreements indicated that the purpose of the Trusts is to “engage” in acquiring a pool of student loans, and engage in activities that are necessary to accomplish that purpose. The court highlighted that through the Administration Agreements, the Trusts involved themselves in consumer financial products or services. The court highlighted that the Trusts further involved themselves in agreements for the servicing of loans though the Servicing Agreements. Lastly, the court noted that the Trusts had the power to engage in other activities required in connection with conservation of trust property. When lawsuits are brought against borrowers, the Servicing Agreements allow collectors to act for the benefit of the Trusts; therefore, the Trusts take part in collecting debts.

Must the CFPB Ratify the Action?

Next, the court determined that ratification was not necessary. The Trusts argued that ratification was necessary, as the underlying suit was initiated by the CFPB when the Director was improperly insulated (i.e., only removable for cause), and that ratification did not occur within the statute of limitations. The court held that the Trusts were not harmed by the unconstitutional limitation on the President’s authority to remove the Director, and decided not to remand this question to the district court.

Broader Implications for Securitization Trusts

This case may have broader implications given the court’s interpretation of “engaging” in consumer financial services and products within the definition of a “covered person.” The court held that the CFPA expressly contemplated that a trust could be a “covered person,” so long as the entity engaged in a consumer financial product or service. The holding expands the CFPB’s regulatory and enforcement powers to Trusts, which solely engage in consumer financial services through contractual delegation to third parties. This decision further indicates that a passive securitization trust is subject to the CFPB’s enforcement authority.

Kaley Schafer & Kristen E. Larson

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Walden University Agrees to Proposed Settlement to Resolve Reverse Redlining Claims

On March 28, 2024, four former Walden University students (Plaintiffs) filed a proposed settlement both individually and on behalf of a putative class of current and former Walden University (Walden) students with the Federal District Court for the District of Maryland to resolve allegations first raised against Walden in a complaint more than two years ago. The complaint alleged that Walden violated Title VI of the Civil Rights Act of 1964, the Equal Credit Opportunity Act (ECOA), and three Minnesota consumer protection statutes by targeting Black and female prospective students for its Doctor of Business Administration (DBA) program while hiding the program’s true cost. According to Plaintiffs’ allegations, Walden advertised that its DBA program could be completed with a certain number of credits, but then required students to complete additional credits (at additional cost) after they had enrolled and invested their time and money into the program. The complaint survived a motion to dismiss in November of 2022. The proposed settlement would require Walden to pay $28.5 million into a settlement fund and to provide disclosures about and make changes to its DBA program.

The theory under which Plaintiffs brought these claims is that Walden is a creditor because of the role it plays in arranging the extension and continuation of federal student loans, and that the alleged discrimination (i.e. the reverse redlining) in how it advertised its DBA program was tied to these credit transactions. Given that the loans in question were federal student loans, unlike cases involving private loans the complaint does not allege any discrimination in the pricing or underwriting of the loans, nor even in the way the loans were offered to applicants and prospective applicants. It only alleges discrimination in the way Walden recruited Black and female students into its DBA program.

This theory, which would represent a significant extension of ECOA (even beyond what the CFPB has thus far failed to achieve in Townstone), is reminiscent of the plaintiffs’ theory in Roberson v. Health Career Institute LLC, an ongoing case in federal court in Florida that prompted the Consumer Financial Protection Bureau (CFPB) to file a Statement of Interest supporting the merits of the plaintiffs’ claim. In fact, the CFPB cited with approval the court’s order denying Walden’s motion to dismiss in its Statement of Interest as support for its view that “ECOA violations are not necessarily restricted to consideration of the four corners of the paper bearing a student borrower’s signature” and that unfair, predatory, and discriminatory allegations related to a degree program that was largely funded by loans constituted allegations of discrimination with respect to an “aspect of a credit transaction.”

Reverse redlining differs from most fair lending theories in that it is not based on exclusion, but over-inclusion in a predatory loan product (or here, over-inclusion in an alleged predatory educational program that was funded by a non-discriminatory loan product). This results in what seems like praiseworthy statements being used to instead condemn Walden. For example, the complaint states that Walden’s doctoral student population was 41% Black and 77% female, more than seven times and 1.7 times the percentage of doctoral recipients nationwide who are Black and female respectively. The complaint also states that Walden conferred more doctoral degrees to Black candidates than any other institution over the five year period from 2016 to 2020. There is a genuine risk that a rise in reverse redlining claims could lead to fewer opportunities for individuals in protected classes.

As we await the Seventh Circuit’s decision in Townstone, this proposed settlement, which will likely conclude the dispute between Plaintiffs and Walden University, represents an important footnote in the battle over the reach of ECOA.

John A. Kimble, John L. Culhane, Jr. & Richard J. Andreano, Jr.

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CFPB Publishes Consumer Response Annual Report

The CFPB published its Consumer Response Annual Report for 2023, which discusses the consumer complaints received by the CFPB in that year and how companies responded to those complaints. The CFPB monitors consumers’ complaints and companies’ responses in order to glean information about the types of challenges consumers are experiencing with financial products and services. As a part of its monitoring, the CFPB reviews a sample of complaints and company responses to ensure the responses are accurate, timely, and complete. The CFPB also monitors for patterns and trends in the types of complaints submitted by consumers and the companies who are the subject of complaints for purposes of prioritizing CFPB action. In 2023, the CFPB sent more than 1.3 million complaints to more than 3,400 companies for review and response. Of these, 79% related to credit and consumer reporting, 7% related to debt collection, 4% related to credit cards, 4% related to checking and savings accounts, and 2% related to mortgages. A smaller percentage of complaints were related to a variety of other product types, including money transfer services, auto loans, and student loans.

Credit and Consumer Reports. According to the report, the vast majority of complaints (1.1 million complaints) were related to credit and consumer reporting issues, with over 1 million of them directed to the three nationwide consumer reporting agencies (CRAs). In 2023, the most common complaint was about incorrect information on a credit report. Consumers complained about inaccurate information pertaining to account balances, account opening dates, payment dates, bankruptcies, payment statuses, inquiries, and personal information. Some consumers complained about the need to follow up with CRAs multiple times in order to address issues, such as fixing inaccurate information, or resolving matters that were not properly investigated.

The CFPB noted an increase in consumer complaints about identity theft. Consumers complained about credit bureaus reporting new accounts and credit inquiries appearing on their credit reports that they did not initiate and did not recognize. Consumers reported having difficulties removing the inaccurate information, even after providing additional evidence, such as police reports or FTC documentation regarding the identity theft claim. According to the CFPB, CRAs had inconsistent approaches to responding to these complaints, including removing some, but not all, inaccurate information, blocking some of the disputed accounts, denying the requests entirely, or requesting more proof for identity theft claims. The CFPB states that consumers described frustration with the time and cost associated with contacting CRAs and data furnishers to have inaccurate information removed. Consumers also reported difficulties in receiving information from CRA representatives when they attempted to gain a better understanding of how their credit score is calculated, and how inaccurate information affects the score. Last year, we blogged about another CFPB report on the complaints submitted to the CFPB regarding the three nationwide CRAs, which echo many of the same issues discussed in this year’s report.

Debt Collection. The CFPB reports receiving approximately 109,900 debt collection complaints, regarding both first-party and third-party collectors. Of the debt collection complaints, the common issue described by consumers was that they did not owe the debt, which the CFPB states has been the predominant issue reported by consumers since the Bureau began accepting debt collection complaints in 2013. In many of these instances, consumers requested that debt collectors validate debts that had been disputed. Consumers also complained of harassing or abusive communications from debt collectors, which included high frequency of calls and receiving calls outside of permitted hours. The Bureau reports that older consumers and servicemembers both submitted a higher number of complaints regarding mortgage debt, claiming that the debt was not owed or that it was discharged in bankruptcy. The company responses to these complaints often included an explanation that the debts were valid. We have blogged on a variety of debt collection issues recently, as debt collection complaints continue to draw the attention of both federal and state regulators.

Credit Card. According to the report, the CFPB received approximately 70,000 credit card complaints. The most commonly reported issue concerned inaccurate or unauthorized purchases shown on credit card statements, which the CFPB notes is a complaint category that has increased over the past few years. Some consumers claim that after reporting unauthorized transactions and being told to expect a permanent or temporary credit to their account, they never received the credit. Some consumers report being instructed by card companies to contact merchants directly for resolution. When attempting to address card statement issues, consumers reported that they experienced “extended hold times and unhelpful representatives, received incomplete and incorrect information, and had calls disconnected […] and having to make multiple calls to resolve issues.” Other credit card issues included not receiving promotion benefits or the closing of credit card accounts without notification.

Checking and Savings Accounts. The common issue regarding checking and savings accounts reported by consumers was difficulties in managing an account. Many consumers complained about unauthorized transactions posted on their accounts, often involving peer-to-peer platforms. Additionally, consumers experienced difficulties, such as long wait times and disconnected calls, when contacting companies to resolve issues. Companies often apologized for the inconveniences and customer service issues. According to the CFPB’s report, consumers complained about being charged overdraft fees on transactions that were not paid or were unauthorized, and that companies changed the posting order of transactions leading to increased overdrafts. Companies often explained to consumers that overdraft fees are based on account activity, but companies sometimes refunded overdraft fees as a “courtesy.”

Mortgage. The majority of mortgage complaints were about conventional mortgages, specifically trouble during the payment process. Many consumers complained about forbearance and loss mitigation processes, claiming they received confusing or conflicting information about deferral options and that companies failed to comply with Homeowner Assistance Fund plans. Consumers also complained about having a hard time reaching servicers, and that phone calls and emails went unanswered. Consumers complained about late and other fees, negative credit reporting, loss mitigation delays, and foreclosure threats when resuming payments after filing for bankruptcy or ending a forbearance period. Companies indicated a variety of reasons for these issues, such as consumers making late payments, submission of incomplete loss mitigation applications, and mortgage servicer system errors causing incorrect fees to be charged, but that were refunded.

Money Transfer Services and Virtual Currency. The most prevalent issues for this category of complaints was fraud related to digital wallets and virtual currencies. Consumers reported frequently being deceived into transferring dollars or virtual currencies to unknown people. Many times, the companies involved reminded consumers that these transactions are irreversible. Consumers also complained about account access issues, accounts being frozen for suspicious activity, and account blocks for failure to verify identity. Consumers also reported delays or non-receipt of transfers, both domestically and internationally.

Auto Loans and Leases. A small percentage of complaints relate to auto loans and leases. Servicing and payment issues played the largest role in auto loan and lease complaints. Consumers complained that payments were applied incorrectly, they were charged unwarranted late fees, they did not receive adequate GAP coverage after paying for it, vehicles were repossessed after consumers had caught up on late payments, and in some cases, vehicles were repossessed despite consumers being current on their loans. Complaints also asserted that servicers failed to comply with protections under the Servicemember Civil Relief Act. The CFPB notes that it generally does not send vehicle loan or lease complaints to vehicle dealerships for response, unless the dealer retains motor vehicle installment sales contracts.

Student Loans. Consumers complained that dealing with servicers of federal student loans was extremely difficult. Consumers reported long wait times to access a representative, receiving incorrect and incomplete information about their repayment plans, delays in refunds for payments made during the COVID-19 payment pause, and delays in processing applications for certain income-driven and loan forgiveness repayment plans. Consumers also complained about payments being marked as “processing” but never being posted to their accounts, or payments being applied incorrectly, leading to unnecessary interest accrual and affecting payment schedules.

Other. In addition to the issues discussed above, the report covers consumer complaints for personal loans, prepaid cards, credit management, payday loans, title loans, and deposit advances. While there are differences in the number of complaints per product type, the percentages regarding complaints resolved with monetary relief, resolved with non-monetary relief, closed with an explanation provided or closed with an administrative response when action could not be taken, in general appear to be about the same across complaint types. The CFPB indicated that companies overwhelmingly met the timeliness expectations for responding to complaints, with about 99.6% of complaints being met with a timely response. Generally, companies responded with relief or with an explanation to consumers about issues the consumer may have misunderstood regarding their financial product or service. The Bureau encourages companies to use complaint information to gain knowledge about their business, potential risks, and consumer needs.

Loran Kilson

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Recent FDIC Consent Orders Show Increased Scrutiny of Bank Relationships With Fintech Partners

In February 2024, the Federal Deposit Insurance Corporation (FDIC) entered into consent orders with two banks who partner with fintechs to offer “banking as a service” (BaaS) related to safety and soundness, compliance with applicable laws, and third party oversight. BaaS refers to arrangements in which banks integrate their banking products and services into the services of non-bank third-party distributors and the distributors deliver the integrated banking services directly to the customer. A common example of BaaS is banks’ delivery of lending services through fintech partners’ digital platforms. BaaS has gained popularity in recent years as the bank partner can generally roll out banking services to customers at a much faster pace and for lower costs than traditional banking products and services.

In June 2023, the FDIC, Federal Reserve Board, and Office of the Comptroller of the Currency released 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. The guidance explained that supervisory reviews will evaluate risks and the effectiveness of risk management to determine whether activities are conducted in a safe and sound manner and in compliance with applicable laws and regulations. At that time, we noted that we expected increased regulatory attention to bank/fintech partnership programs like the BaaS relationships addressed here. While these FDIC consent orders did not specifically cite to the interagency guidance, we suspect the guidance was used to support the third party oversight criticisms in the supervisory examinations of the two banks.

February 1, 2024, Consent Order (FDIC-23-0110b)

The first consent order raised safety and soundness concerns related to the bank’s compliance with the Bank Secrecy Act (BSA) and third party oversight. The consent order requires the bank to implement a revised written Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) program, which is reasonably designed to, among other things to comply with 12 C.F.R. § 326.8 (the FDIC’s implementing BSA regulation). The consent order specifically requires the bank to ensure that its AML/CFT Program meets the following minimum requirements:

  • Is commensurate with the bank’s money laundering/terrorist financing (ML/TF), and other illicit financial activity risk profile (ML/TF Risk Profile);
  • Addresses the deficiencies and weaknesses identified in the Report of Examination;
  • Includes the appropriate assessment and oversight, both initial and ongoing, of any entity or party that has entered into a business relationship or arrangement with the bank (Third Party) wherein any AML/CFT regulatory requirement or obligation of the bank is outsourced to the Third Party with satisfactory documentation of such assessment and oversight;
  • Includes procedures for monitoring the performance of, and the bank’s adherence to, the AML/CFT Program with processes for documenting, tracking, and reporting on such performance and adherence to the Board;
  • Includes procedures for periodically reviewing and revising the AML/CFT Program to ensure that it is reasonably designed to monitor the bank’s BSA compliance; and
  • Satisfies the requirements of the consent order.

The bank must take the following actions to correct deficiencies and violations of laws related to AML/CFT and Customer Identification Program (CIP):

  • Review its AML/CFT resources and ensure staffing and systems are adequate based on the “Bank’s size and growth plans, complexity and organizational structure, geographic locations, customers, products and services offered, systems, the AML/CFT Risk Assessment, the Money Laundering/Terrorist Financing Risk Profile, and the deficiencies and weaknesses identified in the 2023 Report;”
  • Revise its policies, procedures, processes, and systems for the identification, monitoring, and reporting of suspicious activity;
  • Develop and implements a comprehensive AML/CFT training program;
  • Revise its policies and procedures for third party risk management;
  • Require Prepaid Third-Party Program Managers to collect all required CIP information, including the full first name of customers at account opening, and test for compliance during the CIP testing process;
  • Require Prepaid Third-Party Program Managers to develop procedures for responding to circumstances in which the bank cannot verify the identity of a customer, including timely resolution of identified deficiencies and outline circumstances and timeframes in which accounts must be closed when deficiencies are identified; and
  • Perform a four-year lookback to ensure CIP information has been obtained and verified.

February 27, 2024, Consent Order (FDIC-23-0038b)

The second consent order with the FDIC raises similar safety and soundness concerns related to the bank’s oversight of third party relationships and BSA compliance. The order also includes violations of Regulation E and Regulation DD. The bank is required to enhance its AML/CFT Program, Compliance Management System (CMS), and Third Party Relationship Program (TPR Program). Specifically, the bank must ensure that its CMS has (i) appropriate staffing of officers with experience and expertise to comply with applicable laws; (ii) systems and procedures to monitor and test the effectiveness of policies, procedures, and processes to comply with applicable laws; (iii) an independent and effective quality assurance internal audit function appropriate for the size of the bank and the nature, complexity, and scope and risk of the bank and its activities; (iv) appropriate committee governance and meetings; and (v) assessment of consumer compliance risk. The bank must also adopt an interest rate risk action plan. The bank must take corrective action to correct unsound banking practices and violations of applicable laws and review data and systems to create an action plan to address any deficiencies or weaknesses identified.

For its TPR Program, the bank must perform a risk assessment on its relationships to identify any deficiencies, weaknesses, issues, and/or concerns related to due diligence; written agreements; oversight, monitoring and testing; and data systems and reporting and execute an action plan to address each identified concern from the risk assessment.

For its AML/CFT Program, the bank must implement similar program requirements as those set forth above for the first consent order. Additionally, the bank must revise its customer due diligence procedures and perform independent testing of its AML/CFT Program.

The bank is required to perform a two-year lookback for its transaction and suspicious activity report and a four-year lookback for its handling of Regulation E disputes.

The bank also is required to submit its Funds Management Program and Strategic Plan to the FDIC Regional Director for review, comment, and non-objection.

Additionally, each bank must share its respective consent order with its shareholders.

“True Lender” Laws

Bank/fintech partnership programs have also faced challenges as many states are proposing and enacting “true lender” laws. Generally, these “true lender” laws provide that a bank’s non-bank partner is the actual lender when the non-bank holds or acquires the predominant economic interest in the loans, and/or markets, arranges, or facilitates the loans; and/or provide that the loan is deemed to be made by the non-bank if “the totality of the circumstances” indicates that the non-bank is the lender and the transaction is structured to evade the requirements of the statute. These laws are intended to defeat interest rate and fee exportation and support imposition of state licensing requirements.

Ballard Spahr attorneys are experienced in helping banks and fintechs risk assess their BaaS relationships and prepare for supervisory examinations.

Kristen E. Larson & Kaley Schafer

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FDIC Chairman Gruenberg Issues Remarks at National Community Reinvestment Coalition on FDIC’s Economic Inclusion Strategy

FDIC’s Chairman Martin J. Gruenberg recently gave remarks at the National Community Reinvestment Coalition on the FDIC’s economic inclusion strategy.

FDIC Commitment to Economic Inclusion

Chairman Gruenberg began by outlining the importance of federally insured bank accounts to the ability of individuals and families to participate in and fully benefit from economic opportunities. Having a banking relationship provides households with the ability to securely and conveniently receive and hold funds, including through direct deposit.

Chairman Gruenberg observed that unbanked consumers—those without an insured account—are not always assured of protections, may incur costly fees associated with non-bank services, may have difficulty accessing credit or only find available credit on unfavorable terms, and miss important opportunities enjoyed by those in the banking system. Chairman Gruenberg stressed that a banking relationship allows consumers to gain access to savings accounts, establish credit, acquire key assets like a car, and make longer-term investments such as in homeownership or entrepreneurial pursuits. He noted that the fact that 99% of households with a home loan have a bank account is evidence that a banking relationship is an important step toward achieving financial stability and security.

Understanding the Challenge

Citing to the FDIC’s responsibility as tasked by Congress to conduct relevant research on the size of the unbanked market and develop strategies for promoting economic inclusion, Chairman Gruenberg outlined the results of the FDIC’s National Survey of Unbanked and Underbanked Households. According to Chairman Gruenberg, the surveys identified important challenges and provided an authoritative set of data to guide economic inclusion efforts. Specifically, in 2011, the survey found that 8.2% of households were unbanked (lacking a checking or savings account at a federally insured institution) and that 20.1% of households were underbanked (meaning they had an account but used non-bank products and services to meet basic financial needs). The survey also assisted in providing a line of sight into the reasons households give for not holding a bank account, including not having enough money to meet the minimum balance requirements, concerns about high and unpredictable fees, and a lack of trust in banks.

FDIC Economic Inclusion Efforts

To address these challenges, Chairman Gruenberg reiterated the FDIC’s established economic inclusion strategic plan in 2010. Among other initiatives, the plan specifically called for the development of a prototype of safe transaction accounts and emphasized the importance of “affordable, easy to understand products” that were “not subject to unfair or unforeseen fees.”

The 2012 FDIC report of its Model Safe Accounts Pilot detailed the positive experiences of financial institutions and consumers in a trial of products patterned off an FDIC model safe account template. Chairman Gruenberg discussed the factors that have been critical to the success of these accounts, including that the accounts were simple to understand, simple to use, and removed key risks of fees that many consumers cited as barriers.

A New FDIC Economic Inclusion Strategic Plan

Most importantly, Chairman Gruenberg addressed the FDIC’s new economic inclusion strategic plan to guide efforts to expand and support customers’ participation in the banking system. He indicated that the plan seeks to help households use a banking relationship to establish financial stability and a more secure financial future, as well as expand on previous plans by specifically addressing the opportunity for the banking system to do more to contribute to the development of strong communities.

Chairman Gruenberg noted the small dollar loan programs being developed by some banks, which typically provide established accountholders with the opportunity to borrow small amounts of money at affordable rates and to repay them over a reasonable timeframe. According to Chairman Gruenberg, the FDIC’s new plan seeks to help households achieve financial stability through the establishment of positive credit histories and the use of consumer credit from banks along with insured savings accounts.

Perhaps the biggest change, as noted by Chairman Gruenberg, is the plan’s call for the FDIC to take steps to encourage bank lending, investments, and services that support strong and healthy communities, including low and moderate income neighborhoods and other underserved communities. This would include community development lending and related investments with a broad range of objectives, including affordable housing, improved employment opportunities, and enhancing the resilience of communities to growing risks arising from climate change. While the FDIC has long sought to support banks’ community development efforts, the explicit connection to its economic inclusion work is new.

Economic Inclusion and CRA

Chairman Gruenberg concluded with his observations of some of the ways in which the FDIC’s newly adopted Community Reinvestment Act rule would provide banks with the opportunity to receive credit for their efforts to expand economic inclusion. According to Chairman Gruenberg, the rule specifically recognizes that consumers should have access to products and services that are affordable and responsive to their needs and will help expand recognition of a variety of community development activities such as bank activities with and in support of community development financial institutions, minority depository institutions, and women’s depository institutions.

Notably, these remarks come after a recent lawsuit challenging the Community Reinvestment Act of 1977 filed by several national and Texas banking and business trade groups. The trade groups filed a motion for preliminary injunction which was granted, enjoining the agencies from enforcing the final rules pending the resolution of the lawsuit. The U.S. District Court for the Northern District of Texas also extended the effective date of the final rule’s implementation by one day for each day the injunction remains in place.

Erik L. Johnson

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OSHA Finalizes ‘Walk around Rule,’ Making It Easier for Union Representatives to Join Worksite Safety Inspections

On April 1, 2024, the Occupational Safety and Health Administration (“OSHA”) published its final rule – known informally as the “walk around rule” – which makes two changes to its Representatives of Employers and Employees regulation (29 C.F.R. § 1903.8(c)) to significantly expand who an employee can bring in to join a workplace safety inspection. First, the final rule allows workers to choose third-parties to represent them, instead of the current rule that generally limits such representation to other employees. This allows employees to bring union representatives into the facility in a non-union workplace and give them access they would not be entitled to through traditional union organizing efforts. Second, the regulation eliminates the requirement that non-employee third-parties must have workplace safety formal credentials, such as industrial hygienists. Instead, a Compliance Safety and Health Officer (CSHO) may allow a third-party representative to join the inspection if that person will aid the CSHO in conducting “an effective and thorough physical inspection” because of their “relevant knowledge, skills, or experience with hazards or conditions in the workplace or similar workplaces.” Once again, this change appears designed to expand access by union representatives to facilities where they do not represent the employees. According to the final rule, the representative will be permitted to walk around the work site with OSHA inspector, potentially giving them broad access to the facility.

These revisions to section 1903.8(c) do not change the CSHO’s “authority to determine whether good cause has been shown why an individual is reasonably necessary to the conduct of an effective and thorough physical inspection of the workplace.” The revisions also do not affect other provisions of section 1903.8, such as the CSHO’s authority to deny the right of accompaniment to any individual whose conduct interferes with a fair and orderly inspection or the employer’s right to limit entry of employee authorized representatives into areas of the workplace that contain trades secrets.

This rule change was supported by organized labor, which views the change as furthering worker rights and safety. Business groups, on the other hand, view it as a troubling infringement on their property rights and an attempt to limit restrictions on union access in organizing campaigns that have long been set by the National Labor Relations Board and the courts. OSHA’s final rule is scheduled to go into effect on May 31, 2024. However, this rule will likely be challenged in court, which could delay implementation.

Shannon D. Farmer & Gavin T. Carpenter

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Acting Comptroller Hsu Highlights Latest Efforts of OCC in Elevating Financial Fairness

On April 4, acting Comptroller of the Currency Michael J. Hsu provided his remarks for the second year in a row at the Just Economy Conference hosted by the National Community Reinvestment Coalition. He focused his remarks on the latest developments of the Office of the Comptroller of the Currency (OCC) in its continuing efforts to elevate fairness in the financial industry.

He began by providing an update on the OCC’s commitment to promoting safe, sound, and fair bank overdraft protection programs. He specifically cited the release of guidance by the OCC to assist banks in managing various risks associated with overdrafts. He noted two specific practices identified in the guidance – “authorize positive, settle negative” and representment—which could result in heightened risk exposure and further stated that the guidance “highlights sound risk management and pro-consumer practices that banks can employ to strengthen their overdraft protection programs.” He noted, however, that even with the progress made to date, gaps still remained in overdraft protection, such as the current inability of core processors to completely identify and address representment practices.

Comptroller Hsu further commented on the progress of the OCC in strengthening fair lending supervision. The OCC continues to deploy an enhanced-risk supervision process, using the fair lending risk assessment and Home Mortgage Disclosure Act data. He said the OCC has developed new methods to run screens on the data to identify potentially discriminatory conduct by OCC-supervised banks, such as redlining and the exclusion of communities of color from Community Reinvestment Act assessment areas. The OCC has also implemented a program to provide more advanced, real-time support to fair lending reviews.

He also provided an update on the work of Project REACh, which brings together leaders in banking, civil rights, community advocacy, business, and technology to identify and reduce barriers to financial inclusion for underserved and minority communities. He identified three areas on which Project REACh has focused:

  • Assisting credit invisibles, who are the consumers who cannot access credit because they lack a credit file and do not have a FICO score. As a part of Project REACh, several national banks have undertaken a pilot program to use alternative, non-FICO data to qualify consumers for first-time credit cards;
  • Revitalizing minority depository institutions (MDIs), in which it has enrolled the assistance of twenty-six banks to sign a pledge to support MDIs with over $500 million in financial support and technical assistance. The banks have also created an MDI Fintech Playbook and an online portal through which MDI employees can receive specialized training and information; and
  • Expanding access to affordable housing for low-and-moderate-income communities, including promoting home ownership on tribal lands. Project REACh has helped facilitate the launch of special purpose credit programs aimed at providing mortgage financing for minority communities as well as expanding the supply of affordable housing through accessory dwelling units.

He ended his remarks by addressing two emerging areas in elevating fairness: artificial intelligence and fraud. He advised that artificial intelligence has the potential to reduce bias and enable fair access to credit and banking services, but also has the same potential to perpetuate or exacerbate already-existing biases, discrimination, and unfairness in the data. The use of artificial intelligence has also contributed to the rise in consumer fraud, as sophisticated digital tools used by fraudsters has made it easier to generate deepfakes, clone voices, and otherwise defraud individuals and businesses. He noted, however, that “[t]o successfully fight AI-driven fraud will likely require AI-driven solutions.”

His full remarks can be found here.

Also see our previous blog about FDIC Chairman Gruenberg’s remarks to the National Community Reinvestment Coalition on the FDIC’s economic inclusion strategy, which can be found here.

Andrew Carobus

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Looking Ahead

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 – 2:30 PM PT

Speaker: Richard J. Andreano, Jr.

KEY UPDATES TRACK: Changes to State Reporting Requirements and State Licensing

May 6, 2024 – 4:00 PM PT

Speaker: John D. Socknat

EMERGING ISSUES TRACK: Labor Law – Best Practices for Compensation and Recruiting in a Changing Landscape

May 7, 2024 – 1:00 PM PT

Speaker: Meredith S. Dante

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