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Nutter Bank Report: January 2025
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- Federal Reserve Governor Addresses Capital Raising by Mutual Banking Institutions
- CFPB Sues National Bank for Allegedly Obscuring Higher Interest Savings Accounts
- FDIC Acting Chairman Previews Supervisory Priorities under the New Administration
- CFPB Proposes to Ban Contract Clauses that "Strip Away Fundamental Freedoms"
- Other Developments: NSF Fees and Digital Payment Privacy
1. Federal Reserve Governor Addresses Capital Raising by Mutual Banking Institutions
Governor Michelle Bowman discussed the unique challenges mutual banking institutions face raising capital and the need for regulatory flexibility in the process. Governor Bowman’s remarks at the New England CEO Summit on January 31 addressed both subordinated debt as an option for mutuals to raise capital, and the use of a less common form of capital instrument: mutual capital certificates. Governor Bowman noted that there is some ambiguity about whether mutual capital certificates qualify as tier 1 capital (subordinated debt is treated as tier 2 capital), and urged the federal banking agencies to clarify the regulatory capital treatment of the instruments. Governor Bowman also discussed the annual requirement for regulatory approval for a mutual holding company’s waiver of a dividend issued by its subsidiary bank or subsidiary holding company when a minority interest in the subsidiary of the mutual holding company is held by other investors. Governor Bowman recommended that the Federal Reserve reconsider the application and approval process for mutual holding company dividend waivers. Click for a copy of Governor Bowman's remarks.
Nutter Notes: Currently, Massachusetts mutual banks and mutual holding companies are not authorized to issue mutual capital certificates. Legislation would be required to amend Massachusetts law to authorize the instruments. However, the mutual banking statutes in some states already authorize mutuals organized in those states to issue mutual capital certificates to raise capital. Federal legislation has been introduced in Congress in the past that would authorize mutual institutions to issue mutual capital certificates and provide for qualification as tier 1 capital under certain circumstances, but no such bill has been introduced in the current Congress. Mutual holding companies that raise capital through either subordinated debt or mutual capital certificates can downstream the capital to their subsidiary banks as tier 1 capital for the bank, even though it only qualifies as tier 2 capital for the holding company.
2. CFPB Sues National Bank for Allegedly Obscuring Higher Interest Savings Accounts
The CFPB has sued a large national bank for more than $2 billion for allegedly obscuring higher interest savings accounts from its customers. According to the lawsuit filed on January 14, the CFPB alleges that the bank advertised its main savings account as having one of the country’s “highest” interest rates, but it did not raise the interest rate above 0.30% on this main account between the end of 2019 to mid-2024. During the same time period, according to the CFPB, the bank was offering a new “virtually identical” savings account that offered interest rates as high as 14 times the amount main savings account (up to 4.35% in January 2024) and allegedly engaged in efforts to obscure the new account from the original main account holders, resulting in over $2 billion in interest payments that main accountholders could have obtained by switching accounts. Among the specific allegations, the CFPB says that the bank intentionally excluded the main savings accountholders from all marketing of the new higher interest savings accounts, and prohibited its employees from proactively sharing the availability of the higher interest savings accounts with main savings accountholders. The complaint cites multiple UDAAP violations, and a violation of the Truth in Savings Act (and its implementing rules at Regulation DD) for misleading and inaccurate advertising. Click for more information about the lawsuit.
Nutter Notes: The CFPB’s lawsuit came just four days before the White House changed hands, reflecting just part of a flurry of activity from the agency in the final weeks of the previous administration. CFPB Director and Biden-appointee Rohit Chopra remains in place at the head of the CFPB and is expected to be replaced by President Trump as he continues to appoint new officials in the financial regulatory space. It is possible that the new CFPB Director may decline to continue to pursue this lawsuit, especially given its range of implications on the basic banking business model such as imposing a UDAAP-based duty on banks to ensure that accountholders are proactively offered accounts with the highest possible interest rates at the bank. Even if a newly appointed director were to end the lawsuit, banks should prepare for similar actions that could be brought by state attorneys general under state consumer protection laws, as well as the risk that similar claims could arise under a future administration’s CFPB director.
3. FDIC Acting Chairman Previews Supervisory Priorities under the New Administration
FDIC Acting Chairman Travis Hill has previewed changes in bank regulatory policy that will be considered under the new administration in recent public remarks. Acting Chairman Hill issued a statement on January 21 outlining the issues he expects the FDIC to focus on in the coming months, such as the adoption of a “more open-minded approach to innovation and technology adoption,” including a more transparent approach to fintech partnerships, digital assets, and tokenization. Acting Chairman Hill suggested that the FDIC would consider withdrawing “problematic proposals” from the previous administration, including proposals on brokered deposits and corporate governance. Acting Chairman Hill also urged the FDIC to improve supervisory processes to “focus more on core financial risks and less on process,” and enhance the FDIC’s readiness to for resolve large financial institution failures. Click for a copy of Acting Chairman Hill's statement.
Nutter Notes: Acting Chairman Hill’s statement echoes remarks he made to members of the American Bar Association on January 10, in which he criticized a bank regulatory culture that he views as too often focused on process rather than actual risks to safety and soundness. For example, Acting Chairman Hill suggested that some banks have experienced downgrades to their sensitivity to market risk ratings despite their relative resilience to interest rate shocks. Acting Chairman Hill said that he believes such downgrades are often attributable to factors such as inadequate documentation, inability to explain assumptions in models used by third-party service providers, and insufficient focus in bank board minutes. He suggested that adjustments to both exam manuals and the agency’s approach to implementation of the CAMELS rating system should be made to encourage better management of risks and less focus on process. Acting Chairman Hill also said that the FDIC would consider changing supervisory stances on new technologies to encourage more experimentation. Specifically, the FDIC may reinvigorate the FDiTech innovation lab to engage directly with the private sector. Click for a copy of Acting Chairman Hill's January 10 remarks.
4. CFPB Proposes to Ban Contract Clauses that "Strip Away Fundamental Freedoms"
The CFPB has released a proposed rule that would prohibit banks and other financial institutions from using a number of contract clauses in customer agreements for consumer financial products or services that limit fundamental freedoms in the view of the CFPB. The proposed rule released on January 13 would prohibit the use of clauses that waive provisions of law designed to benefit or protect consumers, and clauses that give the financial institution the right to amend a material term of the contract unilaterally, among others. The CFPB also proposed to ban contract clauses that restrict a consumer’s “right to exercise free speech, including a consumer’s right to share negative reviews about a financial firm’s products or services, as well as political speech with which the company’s management disagrees.” Comments on the proposed rule are due by April 1, 2025. Click for a copy of the proposed rule.
Nutter Notes: In addition to imposing new restrictions on consumer contracts, the CFPB’s proposed rule would codify existing prohibitions under the FTC’s Credit Practices Rule against using consumer contract terms to take a consumer’s property without judicial due process or oversight. According to the CFPB, these prohibitions include prohibitions against “confessions of judgment,” which force consumers to essentially plead guilty even if they have defenses. The FTC’s Credit Practices Rule also prohibits lenders from using in consumer contracts a waiver of exemption, an assignment of wages, or a security interest in household goods. The CFPB’s proposed rule also would codify restrictions under the FTC’s Credit Practices Rule that prohibit lenders from misrepresenting the nature or extent of cosigner liability to any person or obligating a cosigner unless the cosigner is informed prior to becoming obligated of the nature of the cosigner’s liability.
5. Other Developments: NSF Fees and Digital Payment Privacy
- CFPB Withdraws Proposed NSF Fee Rule
The CFPB announced on January 13 that it will withdraw a proposed rule it issued last January that would have prohibited banks and other financial institutions from charging consumers nonsufficient funds (NSF) fees on certain electronic payment and other transactions that are declined instantaneously or near-instantaneously. Click for a copy of the withdrawal announcement.
Nutter Notes: The CFPB’s proposal to ban NSF fees for instantaneously declined transactions was part of a broader effort to protect consumers from so-called junk fees. The CFPB’s final rule adopted last month that capped overdraft fees at $5 for banks and other depository institutions with more than $10 billion in assets was part of the same campaign.
- CFPB Requests Public Comment on Digital Payment Privacy and Consumer Protections
The CFPB announced on January 10 that it is seeking public comments on strengthening privacy protections and preventing harmful surveillance in digital payments, particularly those offered through large technology platforms. Specifically, the CFPB is requesting input on implementing existing financial privacy law and how to address intrusive data collection and personalized pricing. Click for a copy of the invitation for public comment.
Nutter Notes: The CFPB requested comment on a related proposed interpretive rule that would outline how the Electronic Fund Transfer Act applies to new types of digital payment mechanisms, including stablecoins and other digital currencies that are not widely used today in consumer transactions.
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 Chambers.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:
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Michael K. Krebs Tel: (617) 439-2288 |
Matthew D. Hanaghan Tel: (617) 439-2583 |
Daniel W. Hartman |
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Kate Henry Tel: (617) 439-2304 |
Timothy J. Rennie Tel: (617) 439-2141 |
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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.
