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Nutter Bank Report: October 2024
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1. CFPB Finalizes Open Banking Rule for Consumer Data
2. OCC Issues Supervisory Guidance for Managing Refinance Risk in Commercial Loans
3. CFPB Warns of Illegal Practices in Auto Financing and Loan Servicing Practices
4. OCC Issues Final Recovery Planning Guidelines for Large Depository Institutions
5. Other Developments: Consumer Protection Dollar Thresholds and Deposit Insurance Fund
1. CFPB Finalizes Open Banking Rule for Consumer Data
The CFPB has approved a final rule that requires banks and certain other financial services providers to share a consumer’s personal financial data with another provider at the consumer’s request. The CFPB’s Personal Financial Data Rights Rule released on October 22 also defines obligations for third parties that access consumers’ data, including privacy and data security protections. The Personal Financial Data Rights Rule requires banks and other covered financial services providers to implement and maintain a “developer interface” through which another financial institution may request consumer data and make it available in an electronic form usable by that financial institution. Before a financial institution may request a consumer’s data from another financial institution under the final rule, the requesting institution must obtain the consumer’s authorization after delivering certain disclosures to the consumer. Banks and other financial institutions that qualify as small businesses under applicable Small Business Administration (SBA) standards (currently, total assets of $850 million or less) are exempt from the developer interface requirement. The Personal Financial Data Rights Rule will become effective 60 days after it is published in the Federal Register, which is expected shortly. Compliance deadlines for banks under the final rule will depend on the size of each bank, with those with $250 billion in total assets in either 2023 or 2024 required to comply by April 1, 2026, and those with less than $1.5 billion in total assets required to comply by April 1, 2030. Click for a copy of the final rule.
Nutter Notes: Banks and other financial services providers covered by the Personal Financial Data Rights Rule also will be required to make a consumer’s personal financial data available to that consumer upon their request. Banks’ total assets in excess of the SBA’s small business size threshold will be required to maintain a consumer interface through which banks can receive requests from consumers and makes their data available in an electronic form usable by them. The final rule implements Section 1033 of the Consumer Financial Protection Act of 2010 (CFPA), which requires banks and other covered financial services providers to make available to a consumer, upon request, data concerning the financial product(s) or service(s) that the consumer obtained from the financial institution in an electronic form usable by consumer, subject to certain exceptions and subject to rules prescribed by the CFPB. For a third party service provider to access a consumer’s data under the final rule, the third party must: (1) provide the consumer with an authorization disclosure explaining certain key terms of the data access; (2) provide a statement to the consumer certifying that the third party agrees to certain obligations set forth in the final rule; and (3) obtain the consumer’s express informed consent to access the data by obtaining an authorization disclosure that is signed by the consumer either electronically or in writing. Such third parties are required to limit their collection, use, and retention of a consumer’s data to what is reasonably necessary to provide the consumer’s requested product or service.
2. OCC Issues Supervisory Guidance for Managing Refinance Risk in Commercial Loans
The OCC has published a regulatory bulletin to provide national banks and federal savings associations with guidance for managing credit risk associated with the risk that commercial borrowers will not be able to refinance existing debt at a future date under reasonable terms and prevailing market conditions. The regulatory bulletin released on October 3 warns that this type of refinance risk increases in rising interest rate environments and “can be amplified by large volumes of loans set to mature in underperforming markets.” According to the guidance, refinance risk primarily affects loans in which the principal balance will remain unpaid until maturity and those in which borrowers rely on “recurring debt to finance their capital structure or business operations.” Examples of the types of loans most affected by refinance risk include interest-only loans, commercial real estate loans, leveraged loans, and revolving working capital lines. While the OCC’s guidance only applies to national banks and federal savings associations, it may be instructive of the supervisory expectations of FDIC and Federal Reserve examiners for state chartered banks. Click to access the OCC’s guidance on managing refinance risk.
Nutter Notes: The OCC’s regulatory bulletin warns that a concentration of the types of loans most affected by refinance risk could increase the cost and complexity of problem loan resolutions when borrowers are under stress. The guidance also cautions that a bank’s capital or liquidity could be constrained, its earnings threatened, or strategic initiatives hindered, if a significant volume or amount of the bank’s loans refinance during adverse economic conditions. The OCC’s guidance advises banks to develop and implement processes to identify, measure, monitor, and control refinance risk at both the transaction and portfolio levels. The guidance advises that a bank’s transaction-level credit risk management practices should include assessing refinance risk at underwriting, during ongoing monitoring, and near maturity. The guidance suggests that a common method to assess refinance risk at the transaction and portfolio level is multivariable stress testing.
3. CFPB Warns of Illegal Practices in Auto Financing and Loan Servicing Practices
The CFPB has issued a report detailing illegal conduct the agency has observed in auto financing, including lenders repossessing consumers’ cars even though borrowers had made timely payments or received loan extensions. The CFPB’s findings reported on October 7 in the CFPB’s Supervisory Highlights also include loan servicers failing to adhere to disclosed payment-allocation methodology for post-maturity loans and failing to timely provide consumers with title after loans are fully repaid. The report also describes lenders providing inaccurate disclosures, misapplying loan payments, and putting incorrect information on consumers’ credit reports. Examples of the misallocation of borrowers’ auto loan payments include applying payments to late fees first, rather than to the loan principal and interest, which resulted in borrowers having to pay erroneous late fees. Click for a copy of the edition of Supervisory Highlights.
Nutter Notes: The October 7 edition of Supervisory Highlights reported Truth in Lending violations involving inaccurate disclosures about prepayment penalties. According to the report, the CFPB found that some lenders’ delivered Truth in Lending disclosure statements to borrowers stating that borrowers may be penalized for repaying earlier, whereas the associated retail installment sales contracts stated that there was no finance charge if the loan is paid early. The CFPB also reported that it found that some loan servicers erroneously repossessed consumers’ vehicles when consumers had made payments or obtained extensions that should have prevented repossessions, and when consumers had obtained loan modifications sufficient to prevent repossession. Such practices violate federal law prohibiting unfair, deceptive, or abusive acts or practices, such as the Consumer Financial Protection Act and Section 5 of the Federal Trade Commission Act. While these practices generally were employed by non-bank third-party loan servicers, the federal banking agencies generally expect banks to oversee compliance by third-party service providers, including their auto loan servicers.
4. OCC Issues Final Recovery Planning Guidelines for Large Depository Institutions
The OCC has finalized revisions to its recovery planning guidelines for national banks and federal savings associations, including expanding the application of the guidelines to institutions with at least $100 billion in total assets. The revised recovery planning guidelines released on October 21 establishes a testing standard for recovery plans and clarifies the role of non-financial risk in recovery planning. The testing standard provides that a covered bank should test its recovery plan to validate its effectiveness at least annually and following any significant change to the plan made in response to a material event. The revised guidelines will become effective on January 1, 2025. A national bank or federal savings association with average total assets of at least $100 billion but less than $250 billion as of January 1, 2025, will be required to comply with the guidelines within 12 months from January 1, 2025, except that the bank should be in compliance with the testing standards within 24 months from January 1, 2025. Click for a copy of the revised guidelines.
Nutter Notes: The revised guidelines suggest that covered banks may perform testing of their recovery plans “by simulating severe financial and non-financial stress scenarios (e.g., the scenarios used to develop the plan) to confirm that the plan is likely to work as intended.” According to the revised guidelines, the testing should enable the bank’s management and board to verify that the bank has identified credible options that it is prepared to carry out during a period of severe stress. The OCC first issued its guidelines establishing standards for recovery planning for large institutions in September 2016. The 2016 guidelines applied to banks with total assets of $50 billion or more, and the OCC raised the threshold in 2018 to banks with total consolidated assets of $250 billion or more. The March 2023 failure of OCC supervised banks with average total assets between $100 billion and $250 billion caused the agency to propose expanding the application of the recovery planning requirements.
5. Other Developments: Consumer Protection Dollar Thresholds and Deposit Insurance Fund
- Agencies Announce Dollar Thresholds for Applicability of Certain Federal Consumer Protection Rules
The Federal Reserve and the CFPB announced on October 4 that federal Truth in Lending and consumer leasing rules generally will apply to consumer credit transactions and consumer leases of $71,900 or less in 2025. The Federal Reserve, the OCC, and the CFPB announced on the same day that the 2025 threshold for higher-priced mortgage loans that are subject to special appraisal requirements will increase from $32,400 to $33,500. The threshold amounts will be effective on January 1, 2025.
Nutter Notes: The increases to the relevant thresholds were based on inflation measured at the 3.4% annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers as of June 1, 2024. Click for a copy of the announcements for consumer credit and lease transactions, and click for a copy of the announcements for appraisal requirements for higher-priced mortgage loans.
- FDIC Releases Report on Deposit Insurance Fund Restoration Plan
The FDIC reported on October 17 that the Deposit Insurance Fund (Fund) reserve ratio increased by 6 basis points—from 1.15% as of December 31, 2023, to 1.21% as of June 30, 2024—due to growth in the Fund’s balance and slower-than-average insured deposit growth. According to the report, the FDIC staff projects that the reserve ratio will reach the statutory minimum of 1.35% ahead of the statutory deadline of September 30, 2028.
Nutter Notes: The Federal Deposit Insurance Act requires the FDIC to adopt a restoration plan when the Fund’s reserve ratio falls below 1.35%. On September 15, 2020, the FDIC established the Restoration Plan to restore the Fund’s reserve ratio to at least 1.35% by the statutory deadline after unexpected deposit growth during the first half of 2020 caused the DIF reserve ratio to decline below the statutory minimum. Click for a copy of the FDIC’s report.
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 Matthew D. Hanaghan Kate Henry
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