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07.31.2024 | Legal Update

Headlines

1. Federal Regulators Release Risk Management Guidance on Bank-Fintech Arrangements
2. Federal Agencies Publish Guidance on Reconsiderations of Value for Home Mortgages
3. CFPB Proposes Truth in Lending Interpretation to Cover Earned Wage Access Products
4. FDIC Issues Proposed Amendments to its Brokered Deposit Rule
5. Other Developments: Automated Residential Real Estate Valuations and Fair Hiring

1. Federal Regulators Release Risk Management Guidance on Bank-Fintech Arrangements

The federal banking agencies have published joint guidance for banks about risks posed by fintech companies and other third parties to deliver bank deposit products and services. The joint guidance issued on July 30 emphasizes that a bank’s use of third parties to perform certain activities, such as intermediate platform providers, processors, middleware providers, aggregation layers, and program managers, does not diminish the bank’s responsibility for ensuring regulatory compliance. The joint guidance highlights examples of risk management practices banks should consider to mitigate risks associated with third-party arrangements to deliver bank deposit products and services. The examples include the development and maintenance of appropriate written policies and procedures that specify organizational structures, lines of reporting and authorities, expertise and staffing, internal controls, and audit functions to ensure that risks are understood and mitigated. The agencies also clarified that the joint guidance emphasizes existing supervisory expectations, but does not alter existing legal or regulatory requirements or establish new supervisory expectations. Click here for a copy of the joint guidance.

Nutter Notes: In a related development, the federal banking agencies have requested additional information and public input on the nature of arrangements between banks and fintech companies, including with respect to deposit, payments, and lending products and services. The request issued on July 30 solicits comments on effective risk management practices and whether additional supervisory guidance may be helpful in addressing risks associated with such arrangements. Among the questions posed by the agencies’ request are whether there any benefits of bank-fintech arrangements that the agencies have not considered and what benefits a bank might receive by using an intermediate platform provider. The agencies also requested information about the range of practices regarding banks’ use of data to monitor risk, ensure compliance with regulatory responsibilities and obligations, or otherwise manage bank-fintech arrangements. Public comments in response to the agencies’ request for information will be due within 60 days after the request is published in the Federal Register, which is expected shortly. Click here for a copy of the agencies’ request for information.

2. Federal Agencies Publish Guidance on Reconsiderations of Value for Home Mortgages

The federal banking agencies along with the CFPB and the NCUA have issued interagency guidance addressing reconsiderations of value (ROVs) for residential real estate transactions. The interagency guidance released on July 18 recommends policies and procedures that banks and other financial institutions should consider to allow consumers to provide financial institutions with information that may not have been considered during an appraisal in connection with a home mortgage loan application or in cases where deficiencies were identified in the original appraisal. The interagency guidance explains that ROVs are requests from a financial institution to an appraiser or other preparer of a valuation report to reassess the value of residential real estate. According to the interagency guidance, deficiencies in valuations may be identified through a financial institution’s valuation review processes or from consumer-provided information, and may be a basis for a financial institution to question the credibility of the appraisal or valuation report. Click here for a copy of the interagency guidance.

Nutter Notes: The interagency guidance offers examples of ROV policies and procedures that a financial institution may implement to help institutions identify, address, and mitigate the risk of discrimination impacting residential real estate valuations. One such suggestion is that a financial institution may consider ROVs as a possible resolution for consumer complaints or inquiries related to residential property valuations. The interagency guidance explains that, if a consumer complaint includes allegations of discrimination, the institution may consider processing an ROV in addition to initiating its process for responding to an allegation of discrimination. The interagency guidance also describes the risks related to deficient residential real estate valuations, and explains how financial institutions may incorporate ROV processes into risk management functions. For example, the interagency guidance recommends that a financial institution establish a process that provides for the identification, management, analysis, escalation, and resolution of valuation-related complaints across all relevant lines of business, from various channels of communication (e.g., phone calls, in-person interactions, emails, social media, regulators, and third-party service providers).

3. CFPB Proposes Truth in Lending Interpretation to Cover Earned Wage Access Products

The CFPB has proposed an interpretive rule that would clarify how Truth in Lending disclosure requirements would apply to certain paycheck advance products often offered by banks and other financial institutions through employers, which are sometimes referred to as earned wage access products. The proposed interpretation released on July 18 would apply to financial products that involve both: “(1) the provision of funds to the consumer in an amount that is based, by estimate or otherwise, on the wages that the consumer has accrued in a given pay cycle; and (2) repayment to the third-party provider via some automatic means, like a scheduled payroll deduction or a preauthorized account debit, at or after the end of the pay cycle.” Under the proposed interpretation, earned wage access products that meet the criteria above would be considered extensions of credit to a consumer that are subject to the disclosure and other substantive requirements imposed by the federal Truth in Lending Act and its implementing rule, Regulation Z. The proposed interpretation would clarify the application of Regulation Z’s finance charge disclosure requirements to a variety of potential costs incurred by consumers in connection with earned wage access products, whether direct or indirect, even if such costs are not required for the extension of credit. Click here for a copy of the proposed interpretation.

Nutter Notes: The proposed interpretation clarifies the CFPB’s position that certain consumer payments in connection with earned wage access products are finance charges that must be disclosed under Regulation Z even when they are not a condition of the extension of credit, because the creditor “exacts them in connection with the extension of credit.” Examples of such payments include so-called tips (and other similarly labeled payments, like gratuities) and expedited funds delivery fees. The proposed interpretation explains some earned wage access providers “solicit consumers for what they variously describe as ‘tips,’ ‘gratuities,’ ‘donations,’ ‘voluntary contributions,’ or the like.” According to the proposed interpretation, such tips or other payments solicited in connection with an earned wage access product that qualifies as an extension of credit would be considered a finance charge that is subject to the disclosure requirements under Regulation Z because “there is a clear and close connection between the ‘tip’ and the associated extension of credit.” Similarly, the proposed interpretation explains that an expedited funds delivery fee charged in connection with an earned wage access product constitutes a consumer cost that must be disclosed as part of the finance charge under Regulation Z.

4. FDIC Issues Proposed Amendments to its Brokered Deposit Rule

The FDIC has issued a proposal to amend its brokered deposit rule that is meant to “strengthen the safety and soundness of the banking system, help ensure uniform and consistent reporting of brokered deposits, and reduce operational challenges and reporting burdens” on banks. The proposed amendments released on July 30 would simplify the definition of “deposit broker,” eliminate the exception in the brokered deposit rule for an “exclusive deposit placement arrangement,” and revise the interpretation of the primary purpose exception to consider the third party’s intent in placing customer funds at a particular bank. For example, proposed amendments would remove the “matchmaking activities” prong in the “deposit broker” definition and replace it with a deposit allocation provision, such that a person engaged in proposing or determining deposit allocations at one or more banks (including through operating or using an algorithm, or other technology that is functionally similar) would be deemed to be a deposit broker. Public comments on the proposed amendments will be due within 60 days after the request is published in the Federal Register, which is expected shortly. Click here for a copy of the proposed amendments.

Nutter Notes: The proposed amendments would allow only banks to file notices and applications for primary purpose exceptions and would revise the 25% test designated business exception for a primary purpose exception to be available only to broker-dealers and investment advisers, and then only if less than 10% of the total assets that the broker-dealer or investment adviser has under management for its customers is placed at one or more banks. The primary purpose exception generally applies when the primary purpose of an agent’s business relationship with its customers is not the placement of funds with banks. The current brokered deposit rule identifies 14 designated business exceptions as meeting the primary purpose exception, including where, with respect to a particular business line, less than 25% of the total assets that the agent (or nominee) has under administration for its customers is placed at banks (25% test). The proposed amendments also would eliminate the enabling transactions designated business exception, and clarify when a bank that has lost its agent institution status can regain that status for purposes of the limited exception for reciprocal deposits.

5. Other Developments: Automated Residential Real Estate Valuations and Fair Hiring

• Federal Agencies Impose Quality Control Standards on Automated Residential Real Estate Valuations

The Federal Reserve, NCUA, CFPB, and FHFA have joined the FDIC and OCC to issue a final rule that is meant to ensure the credibility and integrity of automated valuation models (AVMs) used in valuing collateral for home mortgage loans. The final rule released on July 17 applies to AVMs used in decisions to originate, modify, terminate, or make other changes to home mortgage loans, and decisions about whether to extend new or additional credit or change the credit limit on a home equity line of credit.

Nutter Notes: The final rule will require banks and other home mortgage loan originators to adopt policies, practices, procedures, and control systems to ensure that AVMs adhere to certain quality control standards. The final rule on AVMs will become effective 12 months after it is published in the federal register, which is expected shortly. Click here for a copy of the final rule.

• FDIC Approves Rule Changes to Conform to Amendments to Section 19 of the Federal Deposit Insurance Act

The FDIC has adopted revisions to its regulations under Section 19 of the Federal Deposit Insurance Act to conform to changes in the law under the Fair Hiring in Banking Act, which became effective on December 23, 2022. The Section 19 regulations generally prohibit any person convicted of certain crimes from participating in banking without the prior written consent of the FDIC. The revisions adopted on July 30 include that certain older offenses are excluded from the scope of Section 19 based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration.

Nutter Notes: The revisions to the Section 19 regulations also make conforming changes to match the Fair Hiring in Banking Act’s exclusion of de minimis offenses—including “designated lesser offenses”—from the scope of Section 19, including relatively minor offenses that are specified either by statute or by the FDIC through regulations. Click here for the FDIC’s overview of key changes to Section 19.

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:

Michael K. Krebs mkrebs@nutter.com Tel: (617) 439-2288	Matthew D. Hanaghan mhanaghan@nutter.com Tel: (617) 439-2583	Kate Henry khenry@nutter.com Tel: (617) 439-2304

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.