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06.28.2024 | Legal Update

Headlines

1. Agencies Impose Quality Control Standards on Automated Residential Real Estate Valuations
2. CFPB Issues Warning Against the Use of Unlawful and Unenforceable Contract Terms
3. FDIC Approves Deposit Insurance Application for New State Industrial Bank
4. FFIEC Issues Updated HMDA Reporting Guide
5. Other Developments: Open Banking and Small Business Lending

1. Agencies Impose Quality Control Standards on Automated Residential Real Estate Valuations

The FDIC and the OCC have approved 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 June 20 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. 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 requires that such quality control standards be designed to ensure a high level of confidence in the estimates produced by an AVM, protect against the manipulation of data, and seek to avoid conflicts of interest. The quality control standards also must be designed to require random sample testing and reviews and comply with applicable nondiscrimination laws. The Federal Reserve, NCUA, CFPB, and FHFA are expected to adopt the final rule in the near future. The rule will become effective 12 months after it is published in the Federal Register. Click here for a copy of the final rule.

Nutter Notes:  While the final rule will require quality control standards for AVMs used in a broad array of credit decisions, the rule will not apply to the use of AVMs in the monitoring of the quality or performance of mortgages or mortgage-backed securities, reviews of the quality of already completed determinations of the value of collateral, or the development of an appraisal by a certified or licensed appraiser. The final rule will also apply to secondary market issuers, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), when using AVMs to determine whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer or structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securities. The final rule is largely the same as the AVM rule proposed by the agencies last year.

2. CFPB Issues Warning Against the Use of Unlawful and Unenforceable Contract Terms

The CFPB has issued guidance advising against the use of unlawful or unenforceable terms and conditions in contracts for consumer financial products or services, including improper terms for bank deposit accounts. The CFPB’s guidance published on June 4 warns banks and other financial service providers that including unlawful or even unenforceable terms in contracts for consumer financial products and services may violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (CFPA). The guidance provides several examples of the types of unlawful or unenforceable contract terms that have been found to violate the CFPA. In one case, the CFPB determined that a bank engaged in a deceptive practice when it claimed that its deposit account agreement contained terms that waived consumers’ right to hold the bank liable for improperly responding to garnishment orders when, in fact, this right could not be waived under applicable law. Enforcement actions brought by federal regulators for violations of the CFPA’s prohibitions against deceptive acts or practices can include restitution to affected consumers and civil money penalties. Click here to access the CFPB’s guidance.

Nutter Notes: The CFPB’s guidance clarifies that banks and other providers of consumer financial products and services may violate the CFPA’s prohibition on deceptive acts or practices “if they include terms, including waiver provisions, in their consumer contracts that are rendered unlawful or unenforceable by federal or state law.” Under the CFPA, a representation or omission may be considered deceptive if it is likely to mislead a reasonable consumer and it is material. The guidance explains that a representation is “material” if it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.” The CFPB takes the position that when a contract states that a consumer has agreed not to exercise a legal right, it is likely to affect the consumer’s willingness to attempt to exercise that right in a dispute with the financial services provider. According to the guidance, such contract terms may be considered presumptively material where the waiver is unlawful or unenforceable.

3. FDIC Approves Deposit Insurance Application for New State Industrial Bank

The FDIC announced that it has approved for the first time in several years a federal deposit insurance application for a new Utah industrial bank. A statement by FDIC Chairman Martin Gruenberg accompanying the June 21 announcement noted that the industrial bank’s parent company will not be regulated by the Federal Reserve as a bank holding company. Congress exempted FDIC-insured industrial banks and industrial loan companies (together referred to as “ILCs”) meeting certain requirements from the definition of a bank under the Bank Holding Company Act (BHCA). As a result, companies that control ILCs are not bank holding companies subject to the BHCA’s activities restrictions or Federal Reserve supervision and regulation. The exception in the BHCA for ILCs allows a commercial business to own or control an FDIC-insured depository institution. FDIC regulations establish certain conditions and commitments that apply when an ILC is a subsidiary of a company that is not subject to consolidated supervision by the Federal Reserve (a “covered parent company”). For example, the regulations require a covered parent company to enter into written agreements with the FDIC and with its subsidiary ILC that, among other things, require the covered parent company to provide capital and liquidity support to the ILC. The covered parent company’s mandatory commitments to the FDIC also include certain recordkeeping and reporting requirements. The regulations also require a covered parent company to consent to examination by the FDIC of the covered parent company and each of its subsidiaries, including subsidiaries other than ILCs. Click here for a copy of the FDIC’s announcement.

Nutter Notes:  ILCs have operated in the U.S. under state charters for over a century, and many did not initially accept deposits. The Garn-St. Germain Depository Institutions Act of 1982 made all ILCs eligible for federal deposit insurance. All ILCs are considered state banks under the Federal Deposit Insurance Act. The exception in the BHCA for ILCs allows a commercial business to own or control an FDIC-insured depository institution. By contrast, bank holding companies and savings and loan holding companies are subject to consolidated supervision by the Federal Reserve and are generally prohibited from engaging in commercial activities (though bank holding companies may engage in certain activities that are considered financial in nature). As recently as 1986, a commercial company could acquire control of three types of depository institutions without becoming subject to the BHCA. Now, the ILC is the only type of depository institution that a commercial company may acquire. Chairman Gruenberg noted that the recently approved ILC will be a subsidiary of a “member-owned fraternal benefit society that operates as a not-for-profit financial services company under Section 501(c)(8) of the Internal Revenue Code.” The parent company’s common bond for purposes of its tax exemption is based on religious affiliation according to Chairman Gruenberg’s statement.

4. FFIEC Issues Updated HMDA Reporting Guide

The FFIEC has published a revised version of its Home Mortgage Disclosure Act (HMDA) reporting guide, which provides resources to help banks comply with HMDA and Regulation C. The revised guide released last month, A Guide to HMDA Reporting: Getting it Right!, reflects changes to the asset-size exemption threshold effective this year for reporting HMDA data on closed-end mortgage loans. The asset-size exemption threshold for HMDA data collection in 2024 is $56 million. Banks with assets at or below $56 million as of December 31, 2023, are exempt from collecting HMDA data for 2024. The guide reminds banks and other financial institutions that an institution’s covered loans and applications, excluding purchased loans, in calendar year 2023 will determine whether the quarterly reporting requirement under Regulation C will apply to the institution in 2024. The quarterly reporting requirement applies to a financial institution that reported at least 60,000 originated covered loans and applications (combined) during the preceding calendar year. Click here for a copy of the 2024 HMDA guide.

Nutter Notes: Banks are reminded that the annual reporting threshold under Regulation C was affected by a 2022 federal court ruling. 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 two preceding calendar years would not have to report such data. A cohort of consumer advocacy groups led by the National Community Reinvestment Coalition brought a lawsuit challenging the validity of the CFPB’s 2020 amendments to Regulation C. In 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 CFPB subsequently issued a technical amendment to Regulation C changing the threshold for reporting data about closed-end mortgage loans to 25 to reflect the court’s order.

5. Other Developments: Open Banking and Small Business Lending

• CFPB Approves New Rule to Recognize Open Banking Standards

The CFPB, as part of its initiative to accelerate the shift to open banking in the United States, issued a final rule on June 5 that outlines the qualifications to become a recognized industry standard setting body, which can issue standards that companies can use to help them comply with the CFPB’s upcoming Personal Financial Data Rights Rule. The final rule on standard setting organizations will become effective 30 days after it is published in the Federal Register, which is expected shortly. Click here for a copy of the final rule.

Nutter Notes:  As part of the proposed Personal Financial Data Rights Rule, the CFPB expects to allow companies to use technical standards developed by standard-setting organizations recognized by the CFPB. The proposed Personal Financial Data Rights Rule would require financial institutions, including banks, to share a consumer’s data at the consumer’s direction with other institutions offering competing products or services.

• CFPB Announces Extended Compliance Dates for Small Business Lending Data Collection Rule

The CFPB has extended the compliance deadlines for its rule governing the collection of small business lending data following a recent Supreme Court decision and the lifting of a stay that delayed implementation of the rule. Lenders, including banks, with the highest volume of small business loans (at least 2,500 covered originations) must begin collecting data by July 18, 2025; moderate volume lenders (at least 500 but less than 2,500 covered originations) by January 16, 2026; and the smallest volume lenders (less than 500 covered originations) by October 18, 2026. Click here for a copy of the announcement.

Nutter Notes:  The deadline for reporting small business lending data to the CFPB remains June 1 following the calendar year for which data are collected. Thus, high volume lenders will first submit data by June 1, 2026, while moderate and low volume lenders will first submit data by June 1, 2027.

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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

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