January 2022 in Brief: Business Regulation & Regulated Industries

Banking Law

Final Rule Simplifying Trust and Mortgage Servicing Account Deposit Insurance Approved by FDIC

By Emily J. Honsa Hicks, Old Republic National Title Insurance

In response to a disproportionately large number of questions surrounding deposit insurance as it applies to trusts, on January 21, 2022, the Federal Deposit Insurance Corporation (FDIC) approved a final rule designed to simplify deposit insurance for trusts and mortgage servicing accounts. The FDIC asserted that the final rule is more consistent and comprehensible for both bankers and depositors, and that only a small minority of trust depositors will be affected by the rule. It will be effective on April 1, 2024.

The rule aims to create this consistency and simplicity by establishing a category for “trust accounts,” employing the same calculation to determine the maximum amount of deposit insurance for revocable and irrevocable trusts. When effective, the maximum for both types of trusts will be determined by multiplying the standard maximum insurance amount by the number of trust beneficiaries (up to 5—or up to $1.25 million insured trust deposits per owner, per institution). The FDIC anticipates that these changes will also allow them to make faster determinations of deposit insurance coverage for trusts in the event of a failure of a depository institution.

Additionally, the final rule contains revisions designed to establish consistency in the treatment of deposit insurance for mortgage servicing account balances, including both principal and interest advances in the calculation of deposit insurance. Currently, mortgage servicer advances to lenders on behalf of borrowers are not covered to the extent as other deposits in a principal and interest payment mortgage servicing account. Under the final rule, such advances of principal and interest advances will be insured in a manner consistent with payments made directly by mortgagors; that is, up to $250,000 per mortgagor.

Federal Reserve Board Updates FAQs for Several Regulations

By Christopher Greenidge, McGlinchey Stafford, PLLC

On December 30, 2021, the Federal Reserve Board (Fed) published updates to its FAQs for Regulations H, O, W, and Y, as well as FAQs related to covered savings associations. These FAQs are staff interpretations and have not been approved by the Board.

Regulation H FAQs (State Bank Membership in Federal Reserve System)

The Fed adds five new questions which cover (i) branch closing procedures; (ii) main office relocation; (iii) acquisitions of debt obligations; and (iv) public welfare investments.

Regulation O FAQs (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks)

The Fed revises a question regarding the offering of discounts on loan origination fees to insiders.

Regulation W FAQs (Transactions Between Member Banks and Their Affiliates)

Thirty-four new questions are added under Subparts B, C, D, and E. These questions cover different topics including (i) a bank’s extension of credit to affiliates and nonaffiliates; (ii) material adverse change clauses in lines of credit; (iii) the provision of revolving credit facilities or loan commitments to nonaffiliates; (iv) asset purchases from affiliates; (v) liabilities of affiliates; and (vi) exemptions.

Regulation Y FAQs (Bank Holding Companies and Change in Bank Control)

New questions are added under Subparts A, E, G, and I. These questions address (i) the definition of “bank holding company”; (ii) exceptions to tying restrictions; (iii) factors considered in acting on bank acquisition proposals; (iv) transactions requiring prior notice; (v) appraisal standards for federally related transactions; and (vi) engaging in activities that are complementary to financial activities.

Covered Savings Associations

The Fed establishes a new set of FAQs that address covered savings associations (CSAs) and companies that control a CSA pursuant to section 5A of the Home Owners’ Loan Act. Topics covered include (i) the scope of section 5A; (ii) membership in the Federal Reserve System; (iii) filling requirements; (iv) requirements applicable to a CSA or a company that controls a CSA; (v) mutual CSAs and mutual holding companies that control a CSA; (vi) transactions involving a CSA or a company that controls a CSA; and (vii) termination of an election to operate as a CSA.

Consumer Finance

CFPB Publishes Report on Diversity and Inclusion in Financial Services Industry

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On January 19, 2022, the Consumer Financial Protection Bureau published a report on diversity and inclusion within the financial services industry. Drawing from publicly available diversity and inclusion data collected from websites and annual reports of financial services entities, the report noted that 44% of the sampled entities had no publicly available diversity and inclusion information, while 22% had levels of information the Bureau categorized as “high information availability.” The Bureau’s press release states that this data will “allow the CFPB to set reasonable standards for the kinds of diversity and inclusion programming that can be expected of large, mid-size, and small institutions.”

The Bureau made a number of best practices recommendations, including development of value and leadership statements, publication of diversity and inclusion metrics, consideration of diversity and inclusion in recruitment efforts, designating a diversity and inclusion leader, and considering diversity of suppliers.

CFPB to Begin Examinations of In-House Lending Practices by Post-Secondary Schools

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On January 20, 2022, the Bureau announced the publication of an update to its Supervision and Examination Manual covering the supervision of post-secondary schools that extend private loans directly to students. In a statement, Director Rohit Chopra opined that “[s]chools that offer students loans to attend their classes have a lot of power over their students’ education and financial future. It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”

Under the new Education Loan Examination Procedures, examiners who are supervising institutions offering private education loans are instructed to “review the facts around certain actions only schools can take against their students,” such as placing enrollment restrictions, withholding transcripts, and imposing acceleration clauses when a student withdraws from a program. More generally, the procedures provide instruction to examiners to review advertising, marketing, and lead generation; customer application, qualification, loan origination, and disbursement; student loan servicing; borrower inquiries and complaints; collections, defaulted accounts, and credit reporting; and information sharing and privacy.

CFPB Publishes Blog Post Highlighting Discrimination Based on Religion

By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On January 14, 2022, the Bureau published a blog post emphasizing that it is “illegal to penalize borrowers for being religious” under the First Amendment, the Equal Credit Opportunity Act (“ECOA”), and other federal laws. The Bureau indicates that it “is concerned that some financial companies are unlawfully considering religion when making decisions on financial products,” and references examination findings involving lenders making illegal inquiries to religious institutions seeking a small business loan. The Bureau also expressed concern that artificial intelligence and “other algorithmic decision tools” might, through the use of geolocation data, lead “to an applicant getting penalized for attending religious services on a regular basis,” in violation of fair lending laws.

CFPB, Department of Justice Issue Statement to Landlord and Mortgage Servicers on Military Pandemic Consumer Protections

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On December 20, 2021, the CFPB and the U.S. Department of Justice issued two joint notification letters, to landlords and to mortgage servicers, respectively, regarding consumer protections for military servicemembers during the COVID-19 pandemic. The first letter, issued to landlords and property management companies, describes a number of protections available to servicemember renters and their dependents under the Servicemembers Civil Relief Act (SCRA). Among the provisions highlighted included the ability of servicemembers to terminate a lease early after entering military service or receiving qualifying military orders (including stop movement orders related to the COVID-19 pandemic), as well as the prohibition on evicting active-duty servicemembers or their dependents without first obtaining a court order.

The second letter, issued to mortgage servicers, described protections under the CARES Act and the SCRA. The letter noted that many servicemembers will soon be exiting COVID-19-related forbearance programs, and it warned servicers that “it is critical that you ensure that servicemember and veteran mortgage borrowers’ rights are diligently protected during the loss mitigation process, and that any issues identified are addressed expeditiously.” The two agencies noted servicemember-reported issues including incorrect reporting of mortgagors’ delinquency status in violation of CARES Act revisions to the Fair Credit Reporting Act, incorrect or confusing communications regarding COVID-19-related forbearances, and requiring lump sum payments for reinstatements.

California DFPI Submits Final Commercial Financing Disclosures Regulations for Approval

By Katherine C. Fisher, Hudson Cook, LLP

On December 30, 2021, the California Department of Financial Protection and Innovation (“DFPI”) submitted its final Commercial Financing Disclosures regulations to the state’s Office of Administrative Law (“OAL”). This is an important development in California’s effort to implement the law passed in 2018 that will require most non-bank providers of commercial financing to give cost disclosures, including disclosing an APR.

The OAL generally has 30 business days to review and approve the regulations. However, COVID-19- related extensions of time may apply, potentially giving the OAL 120 days. The OAL reviews regulations to determine whether the regulatory agency complied with California’s administrative regulations and rulemaking laws, including that the agency had authority to draft the rules and that the rules are clear. If the OAL approves the regulations, the OAL will then submit the regulations to California’s Secretary of State. According to the DFPI’s Initial Statement of Reasons, the regulations will likely become effective six months after they are submitted to the Secretary of State.

Parts of the disclosure regulations have been broadly criticized by the industry as unworkable, including the requirement to calculate and disclose an APR for factoring and merchant cash advance transactions that do not have a fixed repayment term. The most recent (and likely final) version of the Commercial Financing Disclosures regulations is available here.

New York DFS Issues Guidance Postponing Compliance Date of Commercial Finance Disclosure Law

By Katherine C. Fisher and Thomas P. Quinn, Jr., Hudson Cook, LLP

On December 31, 2021, the New York Department of Financial Services (“DFS”) released public guidance to providers of commercial finance regarding the Commercial Finance Disclosure Law (the “CFDL”). The guidance assures commercial finance providers that the requirements of the CFDL are not effective until the still-in-draft-form implementing regulations are finalized and take effect. Given the complicated nature of the CFDL and its regulations, and their implications for the industry, issuance of this guidance by the DFS is a welcome development.

Effective January 1, 2022, the CFDL requires providers of most commercial financing transactions in amounts of $2.5 million or less to give detailed cost disclosures to applicants. The CFDL was signed by then-governor Cuomo on December 23, 2020, and authorized the DFS to adopt regulations to implement the disclosures, including rules regarding:

• calculation of required disclosures including an “APR” disclosure for factoring and sales-based financing transactions;
• formatting of disclosures, which may include requirements or “approving adequate forms”; and
• defined terms.

The DFS released proposed regulations on October 20, 2021, and the public comment period ended on December 20, 2021. The DFS’s guidance states that it will release revised proposed regulations in early 2022.

The DFS’s guidance explains that despite the CFDL’s January 1, 2022, effective date, the DFS is continuing to develop rules to implement this “complex law.” To underscore the complexity of the issues addressed by the CFDL, the guidance notes that California’s financial regulator is still working on drafting implementing regulations for California’s commercial finance disclosure law that was passed in 2018.

Based on the DFS’s guidance, providers of commercial finance likely will not be required to comply with the CFDL until “the Department issues final implementing regulations and those regulations take effect.” This language may be alluding to the fact that the DFS proposed, in the October 20, 2021, proposed regulations published in the New York State Register, that the “compliance date” for the CFDL regulations be six months after the date of publication of the regulations’ Notice of Adoption in the New York State Register. As a result, it appears that the compliance date would be no sooner than mid-summer 2022.

New York Holds Strict Compliance Required for “Separate Envelope” for Pre-Foreclosure Notice

By Jenna Tersteegen, Maurice Wutscher LLP

In Bank of America v. Kessler, the New York Appellate Division, Second Department, affirmed a lower court’s order granting summary judgment in favor of a borrower in a foreclosure action due to the mortgagee’s failure to comply with the “separate envelope” requirement of New York’s Real Property Actions and Proceedings Law 1304(2) (RPAPL).

In so ruling, the Court held that strict compliance with the “separate envelope” provision of RPAPL 1304(2) is required in mortgage foreclosure actions.

The Appellate Court found that the language of the statute was clear, precise, and unambiguous. RPAPL 1304 “contains specific, mandatory language in keeping with the underlying purpose of [the Home Equity Theft Prevention Act] to afford greater protections to homeowners confronted with foreclosure” (Aurora Loan Servs., LLC v Weisblum, 85 AD3d 95, 103), and the language in RPAPL 1304(2) with regard to the manner of service of the required notices “in a separate envelope from any other mailing or notice” “is equally precise” (Aurora Loan Servs., LLC v Weisblum, 85 AD3d at 104).

As RPAPL 1304(2) requires that the notice must be sent “in a separate envelope from any other mailing or notice,” the Appellate Court held that the inclusion of any material in the separate envelope sent to the borrower under RPAPL 1304 that is not expressly delineated in the provisions constituted a violation of the separate envelope requirement.

Though RPAPL 1304 has been amended since its adoption, the “separate envelope” provision has consistently remained.

The mortgagee acknowledged that the envelope it sent to the borrower included other information in two notices. Thus, the Appellate Court held, the mortgagee failed to establish, prima facie, that it strictly complied with the requirements of RPAPL 1304 and the lower court properly denied the mortgagee’s motion for summary judgment.

Employment Law

Supreme Court Blocks Vaccine Mandate for Large Employers, Upholds Mandate for Healthcare Workers

By Andrew M. Albritton, McGlinchey Stafford, PLLC

In two per curiam opinions released on January 13, 2022, the Supreme Court released long-awaited guidance on two vaccine mandates issued by federal agencies.

The first, National Federation of Independent Business v. Department of Labor, involved the Emergency Temporary Standard (ETS) issued by the Occupational Safety and Health Administration (OSHA), which would have required employers with more than 100 employees to enact policies requiring employees to either be vaccinated or undergo weekly testing for COVID-19. The Court found in favor of the petitioners and stayed enforcement of the rule. The opinion issued the stay on the conclusion that such a rule goes grossly beyond OSHA’s authority to set workplace safety standards. The Court noted the ETS attempts to implement broad public health measures, rather than standards limited to the workplace.

Because of the holding, enforcement of the OSHA ETS, which began on January 10, 2022, is now stayed. The Court will rule on the substance of the rule at a later date.

The second, Biden v. Missouri, tackled the Department of Health and Human Services (DHHS) vaccine mandate for healthcare workers, which applies to employees of qualifying entities receiving Medicare and Medicaid funding (the Omnibus Rule). The Court sided with the Government, finding that the Secretary of Health and Human Services had long-established authority to “help prevent the development and transmission of communicable diseases” in healthcare environments; ultimately, the rule fits “neatly within” the agency’s statutory authority, and the Court found “no grounds for limiting the exercise of authorities the agency has long been recognized to have.”

Enforcement of the Omnibus Rule was on hold while challenges pended in half of U.S. states. It is not yet clear whether those states will be on the same timeline as the other 25, where the current rule is that employees must have at least one dose of a COVID-19 vaccine by January 27, 2022, and the second by February 28, 2022. However, qualifying healthcare entities in all 50 states must now prepare to comply.