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The Nutter Bank Report is a monthly publication of the firm's Banking and Financial Services Group.

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1. CFPB Fines Mortgage Lender for Violating the RESPA Anti-Kickback Rule
2. Customer Cannot Recover Against Bank for Fraudulent Checks After One Year
3. FDIC Inspector General Reports Deficiencies in Banks’ Contracts with TSPs
4. OCC and Federal Reserve Issue Guidance on Swap Margin Rule
5. Other Developments: Trustee Process and Executive Orders

1. CFPB Fines Mortgage Lender for Violating the RESPA Anti-Kickback Rule

The Consumer Financial Protection Bureau (“CFPB”) has taken enforcement action in the form of a consent order against a mortgage lender, including levying $3.5 million in civil money penalties, for the alleged payment of kickbacks in return for the referral of mortgage business in violation of the Real Estate Settlement Procedures Act (“RESPA”) and its implementing rule known as Regulation X. The CFPB also announced on January 31 that it has taken enforcement actions against two real estate brokers and a mortgage servicer that allegedly took illegal kickbacks from the mortgage lender, which will include consumer relief payments, repayment of the alleged kickbacks and civil money penalties. The CFPB alleged that the mortgage lender “used a variety of schemes to pay kickbacks for referrals of mortgage business” in violation of RESPA, such as establishing marketing services agreements with referral sources to disguise payments for referrals as payments for advertising or promotional services. Click here for a copy of the CFPB’s consent order.

     Nutter Notes: The CFPB alleged that the mortgage lender maintained various marketing agreements with over 100 real estate brokers that “served primarily as vehicles to deliver payments for referrals of mortgage business.” A key to the CFPB’s findings was that the mortgage lender allegedly tracked the number of referrals made by each real estate broker and adjusted the payments under the marketing agreement to the brokers accordingly. The CFPB also found that the mortgage lender had a number of informal joint marketing arrangements that allegedly disguised illegal kickbacks for the referral of mortgage business. The CFPB alleged the mortgage lender paid real estate brokers to require any person who sought to buy a property listed with the brokers to obtain prequalification with the mortgage lender, even if the prospective purchaser had prequalified for a mortgage loan with another lender. Section 8(a) of RESPA prohibits any person from making payments or kickbacks to any other person in return for referring a consumer to a particular real estate settlement service provider.

2. Customer Cannot Recover Against Bank for Fraudulent Checks After One Year

A federal court in Massachusetts has held that the so-called One-Year Rule under Article 4 of the Massachusetts Uniform Commercial Code (“UCC”) bars a commercial accountholder from recovering from its bank funds fraudulently taken from the business entity’s account by unauthorized checks. The court’s opinion, which became available earlier this month, involved a bank that had paid nearly 100 checks written on a corporation’s account that the corporation claimed were signed by unauthorized persons who were then associated with the corporation. The bank had provided monthly account statements showing each of the fraudulent checks, but the corporation did not notify the bank of the unauthorized account activity for more than one year after most of the checks had been paid. Although the corporation notified the bank of the fraudulent activity within one year after 21 of the checks had been paid, the court held that the UCC’s so-called Repeater Rule under Article 4 bars claims against a bank for subsequent fraudulent checks signed by the same person unless the accountholder notifies the bank of the fraud within 30 days of the original fraudulent check. In this case, each of the remaining 21 checks had been signed by a person who had signed an earlier fraudulent check that was covered by the One-Year Rule.

     Nutter Notes: The One-Year Rule under Article 4 of the UCC requires that a customer report any unauthorized signatures or endorsements on checks written on his or her account to the bank within one year of the unauthorized account activity. If one year has passed since an unauthorized check has been paid and the bank has provided regular account statements to the customer reporting that account activity, then the customer is “precluded from asserting against the bank the unauthorized signature.” The One-Year Rule applies regardless of whether there was a lack of care by the bank in processing the fraudulent check, and whether or not the accountholder knew or should have known of the fraud. However, under the Repeater Rule, the customer can recover against the bank if the customer can prove that the bank “failed to exercise ordinary care” in processing the check. If the customer claims that the bank failed to exercise ordinary care, the customer bears the burden of both pleading and proving that fact. The court held in this case that the corporation did not adequately plead that the bank “failed to act with the ordinary care normally exhibited by banks in its position,” and therefore could not take advantage of this exception to the Repeater Rule.

3. FDIC Inspector General Reports Deficiencies in Banks’ Contracts with TSPs

The FDIC Inspector General’s office recently reported, in connection with its review of banks’ practices in engaging technology service providers (“TSPs”), that it did not find sufficient evidence that most of the 19 banks it reviewed had performed risk assessments or contract due diligence to fully consider and assess “the potential impact and risk that TSPs may have on the [banks’] ability to manage [their] business continuity planning and incident response and reporting operations.” The report issued on February 14 also found that, generally, banks’ contracts with TSPs “did not clearly address TSP responsibilities and lacked specific contract provisions to protect [bank] interests or preserve [bank] rights.” Other criticisms of banks’ contracts with TSPs leveled by the report include insufficient definition of key terms related to business continuity and incident response, and failure to reflect more recent FDIC and FFIEC guidance on cybersecurity. The report recommends that the FDIC’s Division of Risk Management Supervision emphasize to banks the importance of considering and assessing the risks that TSPs present, ensuring that TSP contracts include detailed provisions that address bank-identified risks and protect bank interests, and ensuring that such contracts define key contract terms that are important to clarify bank and TSP rights and responsibilities. Click here for a copy of the Inspector General’s report.

     Nutter Notes: According to the report, the Inspector General’s review of TSP contracts was undertaken to evaluate how clearly FDIC-supervised banks’ contracts with TSPs address the TSP’s responsibilities for business continuity planning, and reporting and responding to data security breaches. The Inspector General’s office reviewed 48 contracts between 19 banks and their TSPs collected by FDIC examiners. The report noted that the FDIC and the FFIEC have taken a number steps over the past two years to provide insured depository institutions with business continuity, cybersecurity, and vendor management guidance. The report also concedes that some of the contract deficiencies it identified could be attributable to banks needing more time to incorporate the more recent FDIC and FFIEC guidance into TSP contract language and vendor due diligence policies and procedures. According to the report, the FDIC’s Division of Risk Management Supervision does not expect banks to renegotiate current TSP contracts in response to recently issued guidance alone, but does encourage banks to “discuss business continuity and incident response concepts, guidance, and expectations with their service providers.” The report also warns that banks should not attempt to transfer their own responsibilities for continuity and information security to TSPs.

4. OCC and Federal Reserve Issue Guidance on Swap Margin Rule

The Federal Reserve and the OCC have issued examination guidance on compliance with the swap margin rule, which establishes margin requirements for swaps not cleared through a clearinghouse. The guidance released on February 23 explains that the Federal Reserve and the OCC expect banks and bank holding companies they regulate that are registered with the Commodity Futures Trading Commission as swap dealers (known as “covered swap entities”) to prioritize their compliance efforts for the March 1, 2017 variation margin deadline according to the size and risk of their swap counterparties. Examiners will expect a covered swap entity to comply with the variation margin requirements of the swap margin rule with respect to swap entities and financial end user counterparties that present significant exposures as of March 1, 2017. With respect to other counterparties, examiners will focus on a covered swap entity’s good faith efforts to comply with the variation margin requirements as soon as possible, and in any case no later than September 1, 2017, according to the guidance. Click here for a copy of the OCC’s examination guidance, and here for a copy of the Federal Reserve’s examination guidance.

     Nutter Notes: The federal banking agencies adopted rules jointly under Sections 731 and 764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (known as “swap entities”) that are prudentially regulated by one of the agencies that establish initial and variation margin requirements on all swaps that are not cleared by a registered derivatives clearing organization or a registered clearing agency. The final rules establishing initial and variation margin requirements were published in November 2015. The effective date for the final rule was April 1, 2016, but the phase-in of the minimum margin requirements did not begin until September 1, 2016. Under the final rule, only swap market counterparties with more than $3 trillion in outstanding swap activity were required to implement both the initial and variation margin requirements for non-cleared swap trades between those largest swap counterparties by September 1, 2016. On March 1, 2017, the phase-in schedule will begin to require all firms that qualify as covered swap entities, regardless of their volume of outstanding swap activity, to comply with the swap margin rule’s requirements for non-cleared swaps.

5. Other Developments: Trustee Process and Executive Orders

• Massachusetts Court Interprets Trustee Process Exemption for Joint Accounts

A Massachusetts court recently held that a $2,500 per person exemption from attachment by trustee process applies for each owner of a joint bank account under Massachusetts law. The January 26 decision interprets Section 28A of Chapter 246 of the General Laws of Massachusetts, which exempts $2,500 “of any natural person” in a bank account from attachment by trustee process.

     Nutter Notes: The case involved a home health care business that won a judgment against one of two owners of a joint bank account. Both of the accountholders were natural persons, so the court concluded that the defendant debtor was entitled to a $2,500 exemption and the other joint accountholder was entitled to an additional $2,500 exemption.

• Executive Orders Issued on DOL Fiduciary Rule, Dodd-Frank Act

President Trump issued a directive on February 3 to the U.S. Department of Labor (“DOL”) to perform a review of the DOL’s conflict of interest rule that defines who is a fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”) as a result of providing investment advice. The directive effectively halts the implementation of the DOL’s new fiduciary rule while the agency undertakes the mandatory review to “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”

     Nutter Notes: The President also signed an executive order on February 3 ordering the Secretary of the Treasury to review the regulation of the U.S. financial system to determine which laws and regulations are inconsistent with certain “core principles” of financial services regulation set forth in the executive order. While the order does not name the Dodd-Frank Act, it has been widely reported that the executive order is aimed at rolling back certain Dodd-Frank Act reforms.

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 Bridget L. Vellucci. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.