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Nutter Bank Report, March 2018
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- Lawsuits Challenging Overdraft Fees Continue Against Depository Institutions
- Broad Regulatory Relief Bill Passes Senate and Is Sent to House for Consideration
- FFIEC Issues Revised Guidance on New HMDA Reporting Requirements
- CFPB Amends Mortgage Servicing Rules Related to a Consumer’s Bankruptcy
- Other Developments: DOL Fiduciary Rule and CRE Appraisals
1. Lawsuits Challenging Overdraft Fees Continue Against Depository Institutions
Depository institutions continue to face class action lawsuits claiming that they have unfairly charged overdraft fees to consumers. On March 7, a federal trial court judge in New Hampshire ruled that a class action lawsuit can proceed against a depository institution for assessing overdraft charges on the basis of negative “available” balances in consumers’ accounts in circumstances where the actual balances or ledger balances in the accounts were sufficient to cover the transactions. The ruling came in response to a motion by the depository institution to dismiss claims that the institution breached its overdraft protection contract and violated the Electronic Fund Transfers Act (“EFTA”) on the grounds that it did not promise to use the actual balance for its overdraft service and that it properly explained its overdraft policy. The court ruled that the claims for violations of the EFTA were made too late under the applicable limitations period, but that the lawsuit could proceed on the breach of contract claims where the opt-in form for overdraft protection did not specify that “enough money” in an account means the available balance rather than the actual balance. Click here for a copy of the court’s decision and here for a copy of the FDIC’s current supervisory guidance on overdraft payment programs.
Nutter Notes: Class action lawsuits have been brought against banks and other depository institutions alleging several different types of unfair practices related to fees charged for the payment of overdrafts. A number of class actions have been brought for so-called “high-to-low” transaction processing or similar claims that processing transactions out of chronological order unfairly manipulates account balances to maximize the number of overdrafts and therefore the amount of overdraft fees charged to accountholders. Another common claim in overdraft class actions is failure to properly disclose how consumers may opt in or opt out of overdraft protection services. For example, overdraft fees may not be charged for ATM and most debit card transactions if the consumer accountholder has not agreed in advance to opt in for an overdraft payment service. Breach of contract claims such as those in the case described above are also common in overdraft class action lawsuits. Breach of contract claims may relate to failure to describe what transactions can trigger an overdraft and when transactions are considered to be cleared in addition to failure to explain how account balances are calculated for purposes of determining whether an account is overdrawn. These issues with overdraft payment programs can also result in examination criticism and regulatory enforcement action.
2. Broad Regulatory Relief Bill Passes Senate and Is Sent to House for Consideration
The U.S. Senate has approved a broad regulatory relief bill with bipartisan support that would roll back a number of requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and provide a number of reforms for smaller banking organizations. The bill, the Economic Growth, Regulatory Relief, and Consumer Protection Act, approved by a bipartisan vote of 67-31 in the Senate on March 14, if approved by the House of Representatives and signed by the President, would raise the ceiling on eligibility to qualify for the Federal Reserve’s Small Bank Holding Company Policy Statement from $1 billion to $3 billion in total assets. The bill would also simplify capital calculations for banks with less than $10 billion in assets and create a safe harbor from Truth in Lending ability-to-repay requirements for home mortgage loans held in portfolio by banks with less than $10 billion in assets by designating such mortgage loans as “Qualified Mortgages” subject to certain documentation and product limitations. In addition, the bill would exempt banks with less than $10 billion in assets and total trading assets and trading liabilities that are not more than 5% of total consolidated assets from the Volcker Rule, which generally prohibits banking organizations from engaging in proprietary trading and from having certain interests in or relationships with a hedge fund or private equity fund. Click here for a copy of the current text of the bill.
Nutter Notes: The House of Representatives has separately advanced other bills that contain some of the reforms included in the broader Senate bill, such as the increase in the asset threshold of the Small Bank Holding Company Policy Statement and exemption for smaller banks from the Volcker Rule, which suggests that such provisions are likely to remain in the House version of the bill if the House votes to approve it. If the asset threshold of the Small Bank Holding Company Policy Statement is increased, bank holding companies and savings and loan holding companies with less than $3 billion in total consolidated assets that satisfy the other requirements of the Policy Statement would not be subject to the regulatory capital requirements imposed by the Dodd-Frank Act but, rather, the pre-Dodd-Frank Act capital requirements which permitted, among other things, a bank holding company’s Tier 1 capital to be comprised of trust preferred and certain other hybrid securities, subject to certain limitations. Qualifying small bank holding companies may currently issue trust preferred securities and other qualifying hybrid securities and count them as Tier 1 capital, subject to certain limitations. The qualifying small bank holding company exemption from the Dodd-Frank Act capital requirements does not apply to any depository institution subsidiary of either a small bank holding company or a small savings and loan holding company.
3. FFIEC Issues Revised Guidance on New HMDA Reporting Requirements
The Federal Financial Institutions Examination Council (“FFIEC”) has revised its guide to Home Mortgage Disclosure Act (“HMDA”) reporting to reflect the new reporting requirements in the CFPB’s 2015 final rule amending Regulation C, including the CFPB’s further amendments adopted in 2017. The FFIEC’s revised HMDA guide released on March 5 provides a summary of key HMDA provisions and information about HMDA’s data collection, reporting, and disclosure requirements for HMDA submissions due on March 1, 2019. Financial institutions subject to HMDA reporting requirements, which includes banks with total assets in excess of $44 million, are required to collect data regarding loan originations, applications, loan purchases, and other information required under the CFPB’s new rule beginning on January 1, 2018 for reporting in 2019. Smaller institutions should keep in mind that the CFPB’s new rule temporarily increases the origination volume threshold for collecting and reporting data with respect to open-end lines of credit from 100 to 500 for the 2018 and 2019 calendar years, so that institutions originating fewer than 500 open-end lines of credit in either of the two preceding years will not be required to begin collecting such data until January 1, 2020. Click here for a copy of the FFIEC’s revised HMDA guide.
Nutter Notes: The federal banking agencies announced last year that, to evaluate institutions’ compliance with new HMDA reporting requirements, examiners will focus on certain key HMDA data fields during transaction testing pursuant to HMDA for data collected on or after January 1, 2018. In connection with the release of the FFIEC’s revised HMDA guide, the OCC announced that its examiners will use the revised guide in conjunction with existing OCC guidance on HMDA reporting when validating the accuracy of data collected in 2018 and reported in 2019 for national banks and federal savings associations. The OCC also announced that it will not be publishing additional examination procedures at this time. On December 21, 2017, the FDIC issued a “Statement on Institutions’ Good Faith Compliance Efforts,” in which the FDIC said that examinations of 2018 HMDA data will be diagnostic in nature to help institutions identify compliance weaknesses and will credit good faith compliance efforts in recognition of the significant systems and operational challenges required to implement the new HMDA reporting requirements.
4. CFPB Amends Mortgage Servicing Rules Related to a Consumer’s Bankruptcy
The CFPB has adopted a final rule amending Regulation Z, which implements the Truth in Lending Act, to provide home mortgage loan servicers with more latitude in providing periodic statements to consumers who are entering or exiting bankruptcy, as required by the CFPB’s 2016 mortgage servicing rule. The final rule adopted on March 6 changes mortgage servicing requirements relating to the timing for servicers to transition to providing modified or unmodified periodic statements and coupon books in connection with a consumer’s bankruptcy. Under Regulation Z, a mortgage servicer generally refers to the person, including a bank, responsible for the servicing of a home mortgage loan, including the person who makes or holds such a loan if that person also services the loan. The new final rule provides a single-statement exemption for servicers to make the transition, superseding the single-billing-cycle exemption provided under the 2016 mortgage servicing rule. The final rule becomes effective on April 19, 2018, which is the same date that the other sections of the 2016 mortgage servicing rule relating to bankruptcy-specific periodic statements and coupon books become effective. Click here for a copy of the final rule.
Nutter Notes: The Truth in Lending Act requires that mortgage servicers provide periodic statements to borrowers and the CFPB has developed sample forms for servicers to use. The CFPB’s 2016 mortgage servicing rule requires that servicers send modified periodic statements or coupon books to certain consumers in bankruptcy starting on April 19, 2018. The 2016 rule also addressed the timing for servicers to transition to providing or ceasing to provide modified periodic statements to consumers entering or exiting bankruptcy that some mortgage servicers reportedly found to be confusing. Specifically, the 2016 rule includes a single-billing-cycle exemption from the requirement to provide a periodic statement or coupon book in certain circumstances after one of several specific triggering events occurs, resulting in a servicer needing to transition to or from providing bankruptcy-specific disclosures. The single-billing-cycle exemption applies only if the payment due date for the billing cycle is no more than 14 days after the triggering event. The CFPB agreed that certain aspects of the timing of this transition could create unintended challenges and be subject to different legal interpretations. The final rule adopted by the CFPB replaces the single-billing-cycle exemption with a single-statement exemption for the next periodic statement or coupon book that a servicer would otherwise have to provide, regardless of when in the billing cycle the triggering event occurs.
5. Other Developments: DOL Fiduciary Rule and CRE Appraisals
- Federal Appeals Court Strikes Down DOL Fiduciary Rule
A three-judge panel of the United States Court of Appeals for the Fifth Circuit ruled on March 15 that the 2016 rule adopted by the U.S. Department of Labor (“DOL”) that expanded the statutory term “fiduciary” (the “Fiduciary Rule”) was not authorized under the Employee Retirement Income Security Act of 1974. The court vacated the Fiduciary Rule in its entirety, along with its related new and revised prohibited transaction exemptions, including the Best Interest Contract Exemption (known as the BIC Exemption). The BIC Exemption applies to investment advisers, including banks, that make investment recommendations to retail “Retirement Investors,” including employee benefit plan participants and beneficiaries, IRA owners, and non-institutional (i.e., retail) fiduciaries.
Nutter Notes: The Fifth Circuit decision results in a split among the federal appeals courts about whether the DOL Fiduciary Rule is valid, with the Tenth Circuit Court of Appeals having upheld the Fiduciary Rule in its entirety. The U.S. Supreme Court can resolve the split or the DOL could appeal the decision of the three-judge panel to the full Fifth Circuit. Until the issue is resolved, the DOL may not be able to enforce the Fiduciary Rule. The DOL has not yet announced how it will respond to the Fifth Circuit decision. Click here for a copy of the Fifth Circuit’s decision.
- FDIC Adopts Regulatory Relief from CRE Appraisal Requirements
The Board of Directors of the FDIC voted to adopt a rule on March 20 that would increase the threshold level at or below which appraisals are not required for commercial real estate (“CRE”) transactions from $250,000 to $500,000. The rule is still under consideration by the OCC and the Federal Reserve, and will not become effective unless and until those agencies also vote to adopt it.
Nutter Notes: The rule defines a CRE transaction as a real estate-related financial transaction that is not secured by a single l-to-4 family residential property. For CRE transactions exempted from the appraisal requirement as a result of the revised threshold, institutions would be required to obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices. Click here for a copy of the rule.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
| Thomas J. Curry tcurry@nutter.com Tel: (617) 439-2087 | Kenneth Ehrlich kehrlich@nutter.com Tel: (617) 439-2989 | Michael K. Krebs Tel: (617) 439-2288 |
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