Nutter Bank Report: July 2021

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1. CFPB Amends Mortgage Rule to Protect Borrowers Affected by COVID-19
2. FinCEN’s Anti-Money Laundering Priorities Signal Future BSA/AML Rule Changes
3. Banking Agencies Propose New Guidance on Third-Party Vendor Risk Management
4. OCC Announces Move to Rescind 2020 Amendments to CRA Regulation
5. Other Developments: Refinanced Mortgages and Deposit Return Items

1. CFPB Amends Mortgage Rule to Protect Borrowers Affected by COVID-19

The CFPB issued a final rule to amend its Regulation X—which implements the Real Estate Settlement Procedures Act—to assist home mortgage loan borrowers affected by the COVID-19 pandemic by establishing temporary measures that will require mortgage loan servicers, including banks, to give borrowers an opportunity to be reviewed for loss mitigation before a servicer can initiate foreclosure proceedings on certain mortgage loans. The amendments adopted on June 28 generally apply only if the borrower is more than 120 days delinquent on or after March 1, 2020, and the applicable statute of limitations on foreclosure expires on or after January 1, 2022. Under the amended rule, a mortgage loan servicer may proceed with foreclosure only if the borrower has submitted a completed loss mitigation application and the loss mitigation requirements under § 1024.41(f)(2) of Regulation X permit the servicer to make the first notice or filing to initiate foreclosure, the mortgaged property is abandoned under state or municipal law, or the servicer has made certain outreach efforts and the borrower is unresponsive. These requirements will become effective on August 31, 2021 and will expire on January 1, 2022. Click here for a copy of the final rule.

Nutter Notes: In addition to the temporary procedural safeguards for foreclosures described above, the CFPB’s final rule permits mortgage loan servicers to offer certain streamlined loan modification options to borrowers with COVID-19-related hardships based on an evaluation of an incomplete loss mitigation application. According to the final rule, a loan modification based on an incomplete loss mitigation application may not cause the borrower’s monthly principal and interest payment to increase, and may not extend the term of the home mortgage loan by more than 480 months from the date of the loan modification. If the loan modification allows the borrower to delay certain payments, the final rule prohibits such delayed payments from accruing interest if the payments are delayed until the mortgage loan is refinanced, the mortgaged property is sold, the loan modification matures or, for a mortgage loan insured by the Federal Housing Administration, the mortgage insurance terminates. The final rule also requires that the borrower’s acceptance of the loan modification offer must end any preexisting delinquency on the loan or the loan modification must be designed to end any such delinquency if the borrower satisfies the servicer’s requirements for completing a trial loan modification plan and accepting a permanent loan modification. Finally, the final rule prohibits the loan servicer from charging any fee in connection with the loan modification and requires the loan servicer to waive all existing late charges, penalties, or similar fees that were incurred on or after March 1, 2020, when the borrower accepts the loan modification.

2. FinCEN’s Anti-Money Laundering Priorities Signal Future BSA/AML Rule Changes

The federal financial regulatory agencies have issued guidance in the form of an interagency statement to provide clarity regarding the implementation of Anti-Money Laundering/Countering the Financing of Terrorism National Priorities (AML/CFT Priorities) published by FinCEN. The Anti-Money Laundering Act of 2020 (AML Act) required the Secretary of the Treasury, in consultation with the U.S. Attorney General, federal functional regulators, relevant state financial regulators, and relevant national security agencies, to establish and make public the AML/CFT Priorities. Accordingly, FinCEN published the AML/CFT Priorities on June 30, which consists of the following national policy priorities: (1) corruption; (2) cybercrime, including relevant cybersecurity and virtual currency considerations; (3) foreign and domestic terrorist financing; (4) fraud; (5) transnational criminal organization activity; (6) drug trafficking organization activity; (7) human trafficking and human smuggling; and (8) proliferation financing. The AML Act requires that FinCEN (in consultation with federal functional regulators and relevant state financial regulators) must promulgate regulations to carry out the AML/CFT Priorities within 180 days of publishing the priorities. According to the interagency statement, the federal banking agencies are planning to amend their Bank Secrecy Act/anti-money laundering (BSA/AML) regulations to address how the AML/CFT Priorities will be incorporated into BSA/AML requirements. The interagency statement clarifies that federal bank examiners will not expect banks to incorporate the AML/CFT Priorities into their risk-based BSA/AML programs until such amendments to the BSA regulations have been finalized. Click here for a copy of the interagency statement and click here for a copy of the AML/CFT Priorities.

Nutter Notes: According to FinCEN, the AML/CFT Priorities are intended to assist banks and other regulated financial institutions in their efforts to meet their BSA/AML obligations. The interagency statement clarifies that FinCEN’s publication of the AML/CFT Priorities does not create an immediate change to BSA/AML requirements for banks. According to FinCEN, the AML/CFT Priorities reflect longstanding and continuing concerns previously identified by FinCEN and other U.S. government officials. FinCEN explained that the AML/CFT Priorities include “predicate crimes that generate illicit proceeds that illicit actors may launder through the financial system.” Therefore, FinCEN views money laundering as being linked to all of the AML/CFT Priorities. The AML Act requires that FinCEN update the AML/CFT Priorities at least once every four years in consultation with the federal banking agencies and other government agencies listed above to account for new and emerging threats to the U.S. financial system and national security. Banks can expect corresponding amendments to the federal banking agencies’ BSA/AML regulations following each such future update to the AML/CFT Priorities.

3. Banking Agencies Propose New Guidance on Third-Party Vendor Risk Management

The federal banking agencies have released proposed guidance to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology (fintech) companies. According to the agencies, the proposed guidance published on July 13 offers a framework of risk management principles for banking organizations to consider in developing risk management policies and procedures for third-party vendor relationships, including due diligence and vendor selection, contract negotiation, oversight, monitoring, and termination. The proposed guidance emphasizes that the use of a third-party vendor does not diminish the responsibilities of a banking organization’s board of directors to provide oversight of senior management or the responsibilities of senior management to perform the activity in which the vendor is engaged in compliance with safety and soundness considerations and all applicable laws and regulations. The proposed guidance is intended to take into account the level of risk, complexity, and size of each banking organization and the nature of the relevant third-party vendor relationship. If adopted by the federal banking agencies, the proposed guidance would replace each agency’s existing guidance on third-party vendor risk management. Public comments on the proposed guidance are due by September 17, 2021. Click here for a copy of the proposed guidance.

Nutter Notes: The proposed guidance suggests that examiners expect banking organizations to “engage in more comprehensive and rigorous oversight and management of third-party relationships that support ‘critical activities’.” According to the proposed guidance, critical activities are significant bank functions—meaning any business line and associated operations, services, functions, and support, the failure of which would result in a material loss of revenue, profit, or value of the organization. Critical activities also include those that could cause a banking organization to face significant risk if the vendor fails to perform, could have significant customer impacts, require significant investments to implement the vendor relationship and manage associated risks, or could have a major impact on bank operations if the vendor must be replaced or the outsourced activity must be brought in-house. The proposed guidance provides insights into supervisory expectations for a banking organization’s third-party vendor risk management functions. For example, the proposed guidance explains that the federal banking agencies may use their examination authority to evaluate the functions or operations performed by a vendor on behalf of a banking organization, including evaluations of safety and soundness risks to the banking organization posed by the vendor relationship, the financial and operational viability of the vendor, the vendor’s ability to perform its contractual obligations, and the vendor’s ability to comply with applicable laws and regulations.

4. OCC Announces Move to Rescind 2020 Amendments to CRA Regulation

The OCC has announced that it plans to propose rescinding the amendments to its Community Reinvestment Act (CRA) regulation that were adopted on May 20, 2020. An interagency statement issued by the federal banking agencies on July 20 also announced that the OCC will join the FDIC and the Federal Reserve in a joint CRA rulemaking to “strengthen and modernize” regulations implementing the CRA. In May 2020, the OCC unilaterally amended its CRA regulation to clarify and expand the activities that qualify for CRA credit and modernize its CRA rules governing the establishment of geographic assessment areas. The 2020 final rule updated how national banks and federal savings associations may define their CRA assessment areas by retaining immediate geographies around branches and establishing additional assessment areas that do not rely on branch networks to serve their customers. The 2020 final rule also clarified the ways in which CRA credit may be granted for certain financing activities by providing examples of the types of financing activities that have been approved historically to ensure that they benefit and support low- and moderate-income individuals or communities. Click here for a copy of the OCC’s announcement and click here for a copy of the interagency statement on joint CRA rulemaking.

Nutter Notes: The OCC’s 2020 CRA rule attempted to modernize the CRA regime by accounting for the fact that many national banks and federal savings associations collect significant deposits from areas far outside their brick-and-mortar branch footprint through various digital platforms. The 2020 final rule provides that a national bank or federal savings association that collects 50% or more of its retail deposits from outside of its branch footprint must delineate additional assessment areas in those areas from which it draws 5% or more of retail deposits. The 2020 final rule also provides for the evaluation of CRA performance more objectively through quantitative measures that assess the volume and value of qualifying CRA activity. The 2020 final rule became effective on October 1, 2020, but compliance with certain requirements of the final rule will not be mandatory until January 1, 2023 or January 1, 2024, depending on the size and type of bank. If the OCC ultimately rescinds its 2020 final rule, it would bring the OCC’s CRA rule back into alignment with the FDIC’s and Federal Reserve’s current CRA rules.

5. Other Developments: Refinanced Mortgages and Deposit Return Items

  • FHFA Ends 50-Basis Point Fee on Fannie Mae and Freddie Mac Refinances

The Federal Housing Finance Agency (FHFA) announced on July 16 that it has directed Fannie Mae and Freddie Mac (GSEs) to stop charging the 50-basis point “adverse market refinance fee” on refinanced mortgages effective as of August 1, 2021. Mortgage lenders, including banks, will not be required to pay the GSEs that fee when they deliver refinanced mortgages on or after August 1.

Nutter Notes: According to the FHFA, the adverse market refinance fee was meant to cover losses projected as a result of the COVID-19 pandemic, but the FHFA’s and the GSEs’ COVID‑19 policies successfully reduced the impact of the pandemic. The FHFA reported that “[t]he vast majority of [GSE] borrowers have successfully exited COVID-19 forbearance.” Click here for a copy of the FHFA’s announcement of the elimination of the fee.

  • Massachusetts Division of Banks Lowers Maximum Deposit Return Item Fee

The Massachusetts Division of Banks issued its annual determination of the maximum allowable fee that banks may charge for deposit return items (DRI), lowering the DRI fee from $7.99 per item to $7.11 per item. The new DRI fee announced on June 28 will be in effect from August 1, 2021 to July 31, 2022, or until the Division issues its 2022 DRI fee decision.

Nutter Notes: The DRI fee is the maximum allowable fee that Massachusetts state-chartered banks can charge to certain consumer deposit accounts (those established for personal, family, or household purposes) for processing dishonored checks, drafts, or money orders. Click here for a copy of the Division’s decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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