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02.28.2023 | Legal Update

Headlines

1. Federal Guidance Warns of Liquidity Risks Arising from Crypto-Asset-Related Deposits
2. CFPB Issues RESPA Interpretation on Digital Mortgage Comparison-Shopping Platforms
3. FDIC Provides Supervisory Guidance on Recent Changes to HMDA Reporting Requirements
4. CFPB Proposes Rule to Curb Excessive Credit Card Late Fees
5. Other Developments: Call Reports and Bank Mergers

1. Federal Guidance Warns of Liquidity Risks Arising from Crypto-Asset-Related Deposits

The federal banking agencies have issued joint guidance to banking organizations highlighting potentially heightened liquidity risks associated with crypto-assets and crypto-asset sector participants and some effective practices to manage those risks. According to the joint guidance released on February 23, certain sources of funding from crypto-asset-related businesses may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows. For example, the stability of deposits placed by crypto-asset-related businesses may depend on the behavior of the end customer or crypto-asset sector dynamics. The joint guidance warns that such deposits may be susceptible to large and rapid inflows and outflows resulting from crypto-asset end customers’ reactions to crypto-asset-sector-related market events, media reports, and uncertainty. The joint guidance also warns that deposits constituting stablecoin-related reserves may be unstable due to fluctuations in demand for stablecoins, the confidence of holders in the stablecoin, and the stablecoin issuer’s reserve management practices. Large and rapid outflows of such deposits may be caused by unanticipated stablecoin redemptions or dislocations in crypto-asset markets, among other factors, according to the joint guidance. Click here for a copy of the joint guidance.

Nutter Notes:  While the joint guidance states that the federal banking agencies are not announcing any new risk management principles, the guidance does provide examples of some risk management the agencies find to be effective to manage the types of liquidity risks associated with crypto-asset-related deposits. The guidance first recommends that banks understand the direct and indirect drivers of deposits from crypto-asset-related businesses and the extent to which those deposits are susceptible to unpredictable volatility. The joint guidance recommends that banks taking such deposits assess potential concentration or interconnectedness across deposits from crypto-asset-related businesses and the associated liquidity risks. The joint guidance also recommends that banks incorporate the liquidity risks or funding volatility associated with crypto-asset-related deposits into contingency funding planning. Such planning may include liquidity stress testing and other asset-liability governance and risk management processes, according to the guidance. Finally, the joint guidance advises banks to perform “robust due diligence and ongoing monitoring” of crypto-asset-related business depositors. Such due diligence should include assessing the representations made by those businesses to their end customers about such deposit accounts “that, if inaccurate, could lead to rapid outflows of such deposits,” according to the joint guidance.

2. CFPB Issues RESPA Interpretation on Digital Mortgage Comparison-Shopping Platforms

The CFPB has issued an advisory opinion that interprets how the anti-kickback provisions of Section 8 of the Real Estate Settlement Procedures Act (RESPA) apply to operators of and participants in certain digital technology platforms that enable consumers to comparison shop for mortgages and other real estate settlement services, including banks and other settlement service providers. The advisory opinion published on February 7 describes how a mortgage comparison-shopping platform would be in violation of Section 8 of RESPA if the platform operates on a pay-to-play basis by providing enhanced placement or otherwise steering consumers to platform participants based on compensation the platform operator receives from lenders or other participants rather than based on neutral criteria. Specifically, the advisory opinion explains that a mortgage comparison-shopping platform operator receives a prohibited referral fee in violation of Section 8 of RESPA when the following criteria are met: (1) the mortgage comparison-shopping platform non-neutrally uses or presents information about a settlement service provider participating on the platform; (2) that non-neutral use or presentation of information steers the consumer to use, or otherwise influences the selection of, that settlement service provider; and (3) the operator receives a payment or other thing of value that is, at least in part, for that referral activity. Any lender or other settlement service provider that pays such a prohibited referral fee would also be in criminal violation of Section 8 of RESPA under the CFPB’s interpretation. Click here for a copy of the CFPB’s advisory opinion.

Nutter Notes: The anti-kickback provisions contained in Section 8(a) of RESPA make it a crime to give or accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. According to the CFPB’s advisory opinion, by “non-neutrally” presenting information to consumers, the operator of a mortgage comparison-shopping platform “impedes the consumer’s ability to engage in meaningful comparison of options and, instead, preferences certain options over others or presents options for reasons other than presenting them based on neutral criteria such as APR, objective consumer satisfaction information, or factors the consumer selects for themselves to rank or sort the settlement service providers on the platform.” The advisory opinion concludes that, in such circumstances, the payment to the operator of the platform for such preferences or presentation of options is not only for legitimately compensable services, but is instead and prohibited referral payment, at least in part. The advisory opinion also explains that, when the operator of the platform receives a higher fee for including one settlement service provider than it receives for including other settlement service providers participating on the same platform, that may be evidence of an illegal referral fee arrangement. The advisory opinion provides illustrative examples of how the CFPB’s interpretation would be applied to find that certain payments to mortgage comparison-shopping platform operators violate Section 8 of RESPA.

3. FDIC Provides Supervisory Guidance on Recent Changes to HMDA Reporting Requirements

The FDIC has issued guidance on its supervisory approach for enforcing compliance with recent changes to the Home Mortgage Disclosure Act (HMDA) reporting threshold for closed-end mortgage loans under the CFPB’s Regulation C, which implements HMDA. The supervisory guidance issued on February 3 addresses the CFPB’s response to a September 23, 2022 federal court order that vacated the CFPB’s 2020 amendments to Regulation C regarding the loan volume reporting threshold requirements for closed-end mortgage loans. The CFPB issued a statement on December 6, 2022, clarifying that, as a result of the court’s decision, the threshold for reporting closed-end mortgage loan data under HMDA is now 25 loans in each of the two preceding calendar years, which was the threshold established by the CFPB’s 2015 amendments to Regulation C, rather than the 100-loan threshold set by the CFPB’s subsequent 2020 amendments to Regulation C. The FDIC’s supervisory guidance clarifies that, for closed-end mortgage loan data, FDIC-supervised banks that are subject to Regulation C’s other coverage requirements, and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years, but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years, the FDIC does not intend to initiate enforcement actions or cite HMDA violations for failures to report closed-end mortgage loan data for 2022, 2021, or 2020. Both the Federal Reserve and the OCC have issued substantially the same supervisory guidance to banks that they supervise. Click here for a copy of the FDIC’s supervisory guidance, click here for a copy of the Federal Reserve’s supervisory guidance, and click here for a copy of the OCC’s supervisory guidance.

Nutter Notes:  In May 2020, the CFPB published a final rule amending Regulation C to, among other things, increase from 25 to 100 the threshold for reporting data about closed-end mortgage loans, so that institutions originating fewer than 100 closed-end mortgage loans in either of the 2 preceding calendar years would not have to report such data effective as of July 1, 2020. A group of consumer advocacy groups lead by the National Community Reinvestment Coalition brought a lawsuit challenging the validity of the CFPB’s 2020 amendments to Regulation C. In September 2022, the U.S. District Court for the District of Columbia vacated the portion of the 2020 amendments that increased the threshold for reporting data about closed-end mortgage loans from 25 to 100 loans. The federal banking agencies and the CFPB indicated that they recognize that financial institutions affected by this change may need time to implement or adjust policies, procedures, systems, and operations to comply with reporting requirements. The supervisory approach to HMDA reporting compliance announced by the federal banking agencies is consistent with the supervisory approach that the CFPB announced for those financial institutions in its jurisdiction in response to the court’s decision.

4. CFPB Proposes Rule to Curb Excessive Credit Card Late Fees

The CFPB has released a proposal to amend Regulation Z, which implements the Truth in Lending Act (TILA). The proposed amendments published on February 1 are intended to ensure that late fees charged by credit card issuers, including banks, are “reasonable and proportional” to the late payment as required under TILA. Specifically, the proposed amendments would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. The proposed amendments also would provide that the existing provision in Regulation Z that automatically adjusts certain fee safe harbor dollar amounts annually for inflation would not apply to the late fee safe harbor amount, and would provide that late fee amounts must not exceed 25% of the required monthly credit card payment. The CFPB indicated that the proposed amendments to Regulation Z stem from the CFPB’s preliminary determination that credit card late fee income “exceeds associated collection costs by a factor of five.” As a result, Regulation Z currently allows credit card issuers to charge late fees of up to $41, according to the agency. The CFPB stated that “a late fee of $8 would be sufficient for most issuers to cover collection costs incurred as a result of late payments.” Under the proposed amendments, credit card issuers could charge above the $8 safe harbor amount as long as they could prove that the higher fee is necessary to cover their reasonably incurred collection costs. Comments on the proposed rule are due by April 3, 2023. Click here for a copy of the proposed rule.

Nutter Notes:  The CFPB indicated that it is proposing to end the automatic inflation adjustment for the late fee safe harbor amount because it is not required by TILA and the CFPB believes that it does not necessarily reflect how collection costs change over time. The CFPB proposes instead to monitor market conditions and amend Regulation Z from time to time to adjust the late fee safe harbor amount as necessary. Regulation Z currently permits a credit card issuer to charge a late fee that is 100% of the minimum payment owed by the cardholder if the minimum payment amount is less than or equal to the late payment safe harbor amount. The CFPB proposes to limit any late fee charge to 25% of the minimum payment, which the CFPB indicated would “be more consistent with Congress’s intent to authorize only reasonable and proportional late fee amounts.” The CFPB’s proposal also requests comments from the public on other potential changes to Regulation Z, such as whether the CFPB’s proposed changes should apply to all credit card penalty fees, or whether the fee safe harbor provisions should be eliminated altogether. The CFPB is also requesting comments on whether consumers should be granted a 15-day grace period, after the due date, before late fees can be assessed, and whether credit card issuers should be required to offer autopay in order to make use of the fee safe harbor provisions.

5. Other Developments: Call Reports and Bank Mergers

• Federal Banking Agencies Propose Changes to Call Reports

The federal banking agencies through the FFIEC published on February 21 proposed changes to all three versions of the Call Report (forms FFIEC 031, FFIEC 041, and FFIEC 051). The proposed changes would eliminate and consolidate certain items in the Call Report forms resulting from a review of the Call Reports required by the Financial Services Regulatory Relief Act of 2006 and from the agencies’ evaluation of responses to a user survey. Comments on the proposed changes are due by April 24, 2023. Click here for a copy of the proposed changes.

Nutter Notes:  Among the changes the agencies are considering, they have proposed to remove an item related to negative amortization loans based on a decline in the volume of institutions reporting noncash income on negative amortization loans secured by 1–4 family residential properties “to a level no longer deemed necessary to collect.” The proposed changes to the Call Reports, if finalized, would take effect as of the June 30, 2023 report date. 

• OCC Chief Counsel Discussed the Need to Update the Framework for Analyzing Bank Mergers

In remarks delivered at the OCC’s Bank Merger Symposium on February 10, OCC Senior Deputy Comptroller and Chief Counsel Ben W. McDonough discussed the need to evaluate the regulatory framework for evaluating bank mergers. He suggested that, without reforms, there is an increased risk that mergers that “diminish competition, hurt communities, or present systemic risks” would be approved, while “a moratorium on mergers would lock in the status quo and inhibit growth and improvements that could help communities and increase competition.” Click here for a copy of Chief Counsel McDonough’s remarks to the symposium.

Nutter Notes:  Last year, the FDIC, OCC, and Federal Reserve each initiated reviews of various factors considered by the agencies when evaluating proposed bank merger transactions, including proposals to strengthen their respective Community Reinvestment Act rules. Separately, the U.S. Department of Justice is currently considered whether to update its bank merger guidelines, which provide a framework for evaluating the competitive effects of bank mergers.

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:

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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