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08.31.2022 | Legal Update

Headlines

1. New FDIC Guidance Highlights Risks from Multiple NSF Fees for Re-presented Items
2. Fed Provides Advice to Banks Engaging in Crypto-Asset-Related Activities
3. Federal Banking Agencies Propose Policy Statement for Commercial Loan Workouts
4. Division of Banks Requires Third-Party Credit Card Servicers to Register as Loan Servicers
5. Other Developments: Consumer Data and Instant Payments

1. New FDIC Guidance Highlights Risks from Multiple NSF Fees for Re-presented Items

The FDIC has published new supervisory guidance on consumer compliance risks associated with the assessment of multiple non-sufficient funds (NSF) fees on the re-presentment of the same unpaid check or Automated Clearinghouse transaction. The guidance released on August 18 suggests that banks consider declining to charge more than one NSF fee for the same transaction, regardless of whether the item is re-presented, or eliminating NSF fees altogether, among other possible risk mitigation strategies. According to the guidance, charging multiple NSF fees for the same unpaid transaction implicates consumer compliance risks, third-party risks, and litigation risks. For example, charging of multiple NSF fees may violate Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices, depending on the facts and circumstances of the specific transactions. According to the guidance, a bank’s failure to disclose material information about how re-presentment can affect NSF fees has the potential to mislead customers and may be considered deceptive under Section 5 of the FTC Act. If a bank charges multiple NSF fees as a result of re-presentment in a short period of time without sufficient notice or opportunity for the customer to bring their account to a positive balance, the bank’s NSF fee practices may be considered unfair under Section 5 of the FTC Act, according to the guidelines. Click here for a copy of new supervisory guidance.

Nutter Notes:  The FDIC’s supervisory guidance indicates that examiners will expect banks to oversee their third-party vendors, including core processors, to identify and control risks arising from third-party payment processing relationships to the same extent as if the activity was performed within the bank. The guidance suggests that banks will be expected to identify and track re-presented items, and determine when NSF fees are assessed. The guidance encourages banks to review and understand the risks presented from their core processing system settings related to multiple NSF fees, and review policies, practices, and monitoring activities related to re-presentment. The guidance recommends that banks make appropriate changes and clarifications to applicable customer disclosures to clearly and conspicuously explain when and how NSF fees will be charged. The guidance also recommends that banks review customer notification or alert practices related to NSF transactions and the timing of charges to ensure customers are provided an opportunity to avoid multiple fees for re-presented items.

2. Fed Provides Advice to Banks Engaging in Crypto-Asset-Related Activities

The Federal Reserve has issued a new supervisory letter outlining the steps the agency expects banks to take before engaging in activities related to crypto-assets, and summarizing certain risks associated with those activities. The supervisory letter released on August 16 indicates that Federal Reserve-supervised banks will be expected to assess whether any such crypto-asset activities are legally permissible and determine whether any regulatory notices or applications are required prior to engaging in such activities. Regulatory regimes that may be implicated by crypto-activities include the Bank Holding Company Act, the Home Owners’ Loan Act, the Federal Reserve Act, the Federal Deposit Insurance Act, and their respective implementing regulations according to the supervisory letter. The letter encourages Federal Reserve-supervised banks to consult with their lead supervisory point of contact at the Federal Reserve to resolve any questions about the permissibility of any crypto-asset related activity or the applicability of any regulatory filing requirements. Click here for a copy of the supervisory letter.

Nutter Notes:  Among the risks related to crypto-asset activities highlighted in the Federal Reserve’s supervisory are: technology and operations risks, such as those associated with cybersecurity and governance of the underlying network and any related arrangements; anti-money laundering and illicit financing risks, as some crypto-assets make it difficult to identify and track ownership; and consumer protection risks, such as those related to price volatility, misinformation, fraud, and theft or loss of assets. In a related development, the FDIC issued an advisory to banks on July 29 warning that some crypto-asset companies have represented to their customers that their products are eligible for FDIC deposit insurance coverage, which may lead customers to believe, mistakenly, that their money or investments are safe. The advisory indicates that the FDIC expects FDIC-insured banks doing business with crypto-asset companies to confirm and monitor that those companies do not misrepresent the availability of deposit insurance. Click here for a copy of the FDIC’s advisory.

3. Federal Banking Agencies Propose Policy Statement for Commercial Loan Workouts

The federal banking agencies and the NCUA, in consultation with state bank and credit union regulators, have requested public comments on a proposed policy statement for prudent commercial real estate loan accommodations and workouts. The proposed policy statement released on August 2 would update and expand on existing guidance, including the 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts, by incorporating recent policy guidance on loan accommodations and accounting developments for estimating loan losses. The proposed policy statement would emphasize the need for banks to work prudently and constructively with creditworthy borrowers during times of financial stress and provide new guidance on short-term loan accommodations. Specifically, the proposed policy statement would identify short-term loan accommodations as a tool that can be used to mitigate adverse effects on CRE borrowers and would encourage banks to work with such borrowers who are or may become unable to meet their contractual payment obligations during periods of financial stress before a loan reaches a workout scenario. According to the proposed policy statement, such short-term accommodations and are often in the best interests of both banks and CRE borrowers because they may mitigate long-term adverse effects on borrowers by allowing them to address the issues affecting repayment capacity. Comments on the proposed policy statement are due by October 3. Click here for a copy of the proposed policy statement.

Nutter Notes: The proposed policy statement addresses supervisory expectations with respect to a bank’s handling of loan accommodations and loan workouts on matters including risk management, classification of loans, regulatory reporting, and accounting considerations. While focused on CRE loans, the agencies indicated that the proposed policy statement also includes general principles that are relevant to a bank’s commercial loans that are collateralized by other business assets (such as furniture, fixtures, or equipment). The proposed policy statement would reaffirm certain key principles from the 2009 policy statement, including the supervisory principle that banks implementing prudent CRE loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for such arrangements even if they result in modified loans that have weaknesses resulting in adverse credit classification. The proposed policy statement would also reaffirm the supervisory principle that “modified loans to borrowers who have the ability to repay their debts according to reasonably established terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.”

4. Division of Banks Requires Third-Party Credit Card Servicers to Register as Loan Servicers

A recently issued legal opinion by the Massachusetts Division of Banks advises that a non-bank financial services company (such as a fintech company) must obtain a loan servicer registration with the Division under Massachusetts law to engage in credit card servicing in Massachusetts for cards issued by a bank. The legal opinion dated August 19 interprets the Massachusetts third-party loan servicer registration requirement under Chapter 93, Section 24A of the General Laws of Massachusetts. According to the legal opinion, a non-bank financial services company proposed to service credit cards issued by a bank but branded with the name of the financial services company. The card-issuing bank would remain the lender of record for each credit card account, and would retain enforcement rights with respect to each account according to the legal opinion. The financial services company proposed to conduct marketing activities and servicing-related activities, including accepting credit card applications from consumers via a mobile application, collecting payments, and resolving customer service issues. The Division’s legal opinion concluded that such activities constitute loan servicing of the type requiring registration with the Division under Massachusetts law. Click here for a copy of the legal opinion.

Nutter Notes: While the Division’s legal opinion on third-party loan servicer registration requirements does not apply directly to banks, the Division and the federal banking agencies generally expect banks to oversee their service providers by ensuring that third-party service providers operate in compliance with applicable laws and regulations. According to the legal opinion, the financial services company in this case questioned whether open-end credit accounts, including credit cards, qualify as “loans” for purposes of the third-party loan servicer registration requirement under Massachusetts law. According to the opinion, neither the law nor the Division’s implementing regulations at 209 CMR 18.00 define what constitutes a loan. Citing the way that loans have been defined in other statutes and by the Massachusetts Supreme Judicial Court, the Division’s legal opinion concluded that the term “loan” includes open-end credit card accounts for purposes of the third-party loan servicer registration requirement.

5. Other Developments: Consumer Data and Instant Payments

CFPB Warns Financial Institutions That Insufficient Data Security May Lead to UDAAP Violations

The CFPB explained its view in a consumer financial protection circular issued on August 11 that financial companies, including banks, may be liable for violations of federal consumer financial protection law when they fail to safeguard consumer data. According to the guidance, “[i]nadequate security for the sensitive consumer information collected, processed, maintained, or stored by the company can constitute an unfair practice in violation of” the federal Consumer Financial Protection Act (CFPA). 

Nutter Notes:  The CFPB’s guidance explains that the CFPA defines an unfair act or practice as “an act or practice: (1) that causes or is likely to cause substantial injury to consumers, (2) which is not reasonably avoidable by consumers, and (3) is not outweighed by countervailing benefits to consumers or competition.” According to the guidance, inadequate data security measures can cause significant harm to consumers who become victims of identity theft as a result. Click here for a copy of the consumer financial protection circular.

Fed Announces FedNow Instant Payment Service to Launch Mid-Year in 2023

The Federal Reserve has updated the timing of the launch of the FedNow Service, which is now expected to become available between May and July of 2023. Financial institutions, including banks, that participate in the FedNow Service will be able to offer businesses and consumers the ability to send and receive instant payments electronically at any time of day, and recipients will have full access to funds immediately, according to the Federal Reserve.

Nutter Notes:  The Federal Reserve’s announcement also indicated that the FedNow Pilot Program, with more than 120 participants, is preparing to enter technical testing for the service starting in September. According to the announcement, pilot program participants will complete a certification process to ensure operational and messaging readiness before the service is launched. Click here for a copy of the announcement.

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Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989	Matthew D. Hanaghan mhanaghan@nutter.com Tel: (617) 439-2583	Michael K. Krebs mkrebs@nutter.com Tel: (617) 439-2288

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