Federal Financial Regulatory Agencies Approve Final Rule Clarifying the Role of Supervisory Guidance
By Andrew B Samuel and Sumeet Sanjeev Shroff, Davis Polk & Wardwell LLP
In January 2021, federal banking supervisors approved final rules to codify the Interagency Statement Clarifying the Role of Supervisory Guidance (the “Interagency Statement”), a version of which was originally issued in 2018 by the Board of Governors of the Federal Reserve System (“Fed”), Consumer Financial Protection Bureau (“CFPB”), Federal Deposit Insurance Corporation (“FDIC”), Office of the Comptroller of the Currency (“OCC”) and National Credit Union Administration (“NCUA”). The CFPB, FDIC, OCC and NCUA each have approved, and the Fed is expected to approve, substantially identical versions of the proposal to adopt the Interagency Statement with certain clarifying edits.
As described by the OCC in its final rule release, the Interagency Statement reiterates well-established law by stating that, unlike a law or regulation, supervisory guidance does not have the force and effect of law. Supervisory guidance includes, among other things, advisories, bulletins, policy statements and frequently asked questions, none of which create binding legal obligations for the public. Supervisory guidance is issued by an agency to “advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power.” See Chrysler v. Brown, 441 U.S. 281, 302 (1979). By incorporating the Interagency Statement into a final rule, each of the financial regulatory agencies confirms that the Interagency Statement is binding on it.
The final rule clarifies the 2018 version of the Interagency Statement in two key ways. First, it makes clear that supervisory criticism (e.g., Matters Requiring Attention) and enforcement actions cannot be based on a “violation” of or “non-compliance” with supervisory guidance. Second, the final rule makes clear that supervisory criticisms should continue to be as specific as possible. The final rule explains that supervisory criticisms should center on practices, operations, financial conditions or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.
Practical Implications of FinCEN SAR FAQs
By Aaron Kouhoupt and Ross Benson, McGlinchey Stafford, PLLC
On January 19, 2021, the Financial Crimes Enforcement Network (“FinCEN”) released updated Frequently Asked Questions (“FAQs”) to provide clarification for financial institutions reviewing customer account activity and the filing of a Suspicious Activity Report (“SAR”).
The FAQs stress the importance of considering all relevant customer activity when deciding to file a SAR. This is particularly important when a financial institution receives a grand jury subpoena, law enforcement inquiry or negative news about a customer. Though these things may not automatically trigger a SAR filing, they should factor into the review of the customer’s risk profile and overall activity.
A financial institution must also apply this holistic review when deciding whether to honor a law enforcement request to keep an account open despite the presence of suspicious or illegal activity. In these cases, the FAQs clarify that financial institutions should not be criticized for closing or maintaining the accounts so long as the decision is well documented and supported by the customer’s overall risk profile. The FAQs take the same position with respect to an institution's decisions to close an account as a result of numerous SAR filings on the same customer.
This comprehensive approach must continue through the completion of the SAR itself. When completing the SAR narrative, a financial institution need only duplicate earlier SAR data fields if doing so is necessary to provide a complete and accurate picture of the activity involved. If a financial institution runs against the narrative’s character limitations, it may include certain information, such as the transaction record, as a single, comma-separated value (“CSV”) attachment that does not exceed one (1) megabyte of data.
As a result of FinCEN’s FAQs, financial institutions should review their SAR procedures to ensure they take a holistic and comprehensive approach to reviewing, documenting and reporting relevant information.
States Sue OCC Over True Lender Rule
By Catherine M. Brennan, Hudson Gook, LLP
The states of New York, California, Colorado, Massachusetts, Minnesota, New Jersey, and North Carolina, as well as the District of Columbia, sued the Office of the Comptroller of the Currency over its "true lender" rule, which establishes when a national bank or federal savings association is the "true lender" on a loan made in the context of a partnership between a bank and a third party. The OCC's final rule specifies that a bank makes a loan and is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan. The rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan. The rule also clarifies that as the true lender of a loan, the bank retains the compliance obligations associated with the origination of that loan, thus negating concern regarding harmful rent-a-charter arrangements. The rule took effect December 29, 2020. In the lawsuit, filed in the U.S. District Court for the Southern District of Columbia, the states allege that the OCC exceeded its authority in issuing the rule and ask the court to set the rule aside.
Kraninger Tenders Resignation on Inauguration Day; Biden Names Dave Ueijo as Acting Director
By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP
On January 20, 2021, at the request of President Biden, Kathleen L. Kraninger resigned as Director of the CFPB, a position she held since December 2018. In her resignation letter, Kraninger touted the accomplishments of the Bureau under her watch, including in the areas of consumer education, regulation, supervision, and enforcement, and "the maturation of the CFPB itself and its role within the financial services regulatory framework."
Also on January 20, 2021, President Biden announced that Dave Uejio will serve as Acting Director until a new CFPB Director—Rohit Chopra—is confirmed by the U.S. Senate. Uejio previously served as the Bureau’s chief strategy officer, and as chief of staff to former Director Richard Cordray. While it is difficult to predict how long Uejio will serve as Acting Director, the combination of other Senate confirmations, the impeachment trial, and the level of scrutiny Republican Senators may combine to extend his tenure.
Bureau Adopts Exemption to Regulation Z Escrow Requirement for Smaller Institutions
By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP
On January 19, 2021, the CFPB issued a final rule that exempts certain insured depository institutions and insured credit unions from Regulation Z’s requirement to establish escrow accounts for certain higher-priced mortgage loans. Congress directed the Bureau to adopt such an exemption when it enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018.
Specifically, the exemption from the escrow requirement applies to any loan made by an insured depository institution or insured credit union that is secured by a first lien on the principal dwelling of the consumer if: (i) the institution has assets of $10 billion or less; (ii) the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling in the preceding calendar year; and (iii) certain existing escrow exemption criteria are met. The final rule takes effect upon publication in the Federal Register.
CFPB Issues Winter 2021 Edition of Supervisory Highlights
By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP
On January 19, 2021, the Bureau published the Winter 2021 edition of its Supervisory Highlights report, which describes themes and trends observed by the Bureau in the course of its recent supervisory work. This latest issue focuses on the Bureau’s “prioritized assessment” supervisory work conducted in response to the COVID-19 pandemic. This effort, which replaced the Bureau’s planned examination work, involved directing targeted information requests at a broad group of supervised entities that operate in markets posing elevated risk of consumer harm due to pandemic-related issues. The purposes of this work was not to identify violations of federal consumer financial law, but rather to spot and assess risks, and communicate those risks to supervised entities so they could be addressed, thus preventing consumer harm.
The report describes specific observations across a number of areas, including mortgage servicing, auto loan servicing, student loan servicing, credit card account management, consumer reporting and furnishing, debt collection, deposits, prepaid accounts, and small business lending.
Federal Court Dismisses Washington State Consumer Protection Law Claims Against Two Lead Generators
By Catherine M. Brennan, Hudson Cook, LLC
On January 12, 2021, the U.S. District Court for the Western District of Washington issued two rulings in Sanh v. Opportunity Financial, LLC. The rulings granted motions to dismiss by Opportunity Financial, LLC, and RISE Credit Service of Texas, LLC. The plaintiff alleged that Opportunity and RISE violated the Washington Consumer Protection Act when they solicited her for loans from FinWise Bank, a federally chartered bank, at interest rates above Washington's usury limit. The plaintiff asserted two claims under the CPA: first, that the defendants violated the CPA per se by violating state usury law, and second, that their failure to disclose interest rates properly was an unfair or deceptive act or practice under the CPA.
With respect to the usury claim, the defendants argued that because FinWise was a federally insured, state-chartered bank, the Depository Institutions Deregulation and Monetary Control Act allowed FinWise to export rate authority from its home state, effectively preempting Washington's usury laws. The plaintiff argued that preemption was not available because the defendants, rather than FinWise, were the true lenders. The court noted that the plaintiff had not alleged facts to support her claim that the defendants were the true lenders. Rather, the plaintiff alleged that the defendants were lead generators and received compensation per successful loan referral. As a result, the plaintiff did not allege facts to support her claim that the defendants violated Washington's usury law, and her per se CPA claim failed.
With respect to the claim of unfairness or deception, the plaintiff argued that any advertisement for a loan that did not disclose an interest rate, or that disclosed too high an interest rate, was deceptive. The court disagreed. As the court explained, a loan advertisement that does not disclose an interest rate is not misleading because a reasonable consumer will not assume a certain interest rate. Additionally, the plaintiff did not explain how a loan advertisement specifying a certain interest rate, such as 160%, was deceptive. As a result, the plaintiff's CPA claim for unfairness or deception also failed.
DOL Issues Final Rule on Independent Contractor Status
By Charles E. Stoecker, McGlinchey Stafford, PLLC
On January 7, 2021, the U.S. Department of Labor (DOL) issued a final rule that clarifies how employers should determine who is an independent contractor and who is an employee for purposes of the Fair Labor Standards Act (FLSA).
Independent contractors are not subject to the FLSA’s minimum wage and overtime requirements. The DOL’s final rule sets forth an “economic reality” test designed to determine whether the worker is in business for him or herself (and thus an independent contractor not covered by the FLSA) or economically dependent on another (and thus an employee covered by the FLSA).
Under the final rule there are five factors which makeup the “economic reality” test to determine whether a worker is considered an employee under the FLSA. The factors which are given the most weight are the first two:
- the nature and degree of the worker’s control over the work; and
- the worker’s opportunity for profit or loss.
If applying two factors results in different classifications, the DOL looks at the remaining three factors of the “economic reality” test:
- the amount of skill required by the worker;
- the degree of permanence of the employer-worker relationship; and
- whether the work is part of an integrated unit of production.
This final rule brings clarity to an area of law that has not always been consistently articulated by courts or the DOL, and provides employers with more opportunity to classify works as independent contractors. This final rule is likely to have the greatest impact on industries such as the gig-economy. However, while this final rule is scheduled to go into effect on March 8, 2021, the Biden administration is not in favor of this rule and could potentially delay its implementation.