Nutter Bank Report, June 2017

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1. Supreme Court: Bank That Buys Debt for Its Own Account Is Not Debt Collector
2. OCC Issues New Guidance on Risk Management for Third-Party Relationships
3. Federal Reserve Amends Regulation CC for Electronic Check Collection
4. Treasury Report Recommends Far-Reaching Changes to Regulation
5. Other Developments: Prepaid Cards and Real Estate Appraisers

1. Supreme Court: Bank That Buys Debt for Its Own Account Is Not Debt Collector

The U.S. Supreme Court recently held that a bank that collects on debts it has bought and holds “for its own account” is not a debt collector under the Fair Debt Collection Practices Act (“FDCPA”). The case decided on June 12 involved a bank that had purchased auto loans already in default from the original lender and then sought to collect on the defaulted loans in ways the plaintiffs claimed violated the FDCPA. The lower courts held that the bank did not qualify as a debt collector because it didn’t regularly seek to collect debts “owed . . . another” but sought instead only to collect debts that it purchased and owned. However, courts in other circuits faced with the same question have taken the opposite view. The Supreme Court resolved the split in favor of banks and others who buy and hold debts for their own account, ruling that the FDCPA by “its plain terms” focuses “on third party collection agents working for a debt owner—not on a debt owner seeking to collect debts for itself.” Click here for a copy of the Court’s decision.

     Nutter Notes: The FDCPA authorizes private lawsuits and fines meant to deter the certain abusive  practices of “debt collector[s],” a term defined in the law as anyone who “regularly collects or attempts to collect . . . debts owed or due . . . another.” The plaintiffs in the lawsuit—the borrowers—advanced a number of arguments to try to convince the court that the definition of debt collector under the FDCPA did apply to a company that buys debts from another and collects for its own account. For example, the plaintiffs argued that the word “owed” is the past participle of the verb “to owe,” and that therefore the debt collector definition must exclude a loan originator but include a debt purchaser who is collecting a debt that was once owed to the originator. However, the Court pointed out that past participles like “owed” are routinely used as adjectives to describe the present state, and that Congress also used the word “owed” to refer to present debt relationships in other provisions of the FDCPA.

2. OCC Issues New Guidance on Risk Management for Third-Party Relationships

The OCC has released answers to frequently asked questions (“FAQs”) to supplement the guidance provided in OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” issued October 30, 2013. The FAQs published on June 7 address questions about the application of the 2013 guidance, including how national banks and federal savings associations can reduce oversight costs for lower-risk relationships, and how banks should structure their third-party risk management process. The FAQs clarify that while the OCC expects banks to perform due diligence and ongoing monitoring for all third-party relationships, the level of due diligence and monitoring may differ for each relationship consistent with the level of risk and complexity posed by the relationship. For critical activities, the OCC stated that it expects due diligence and ongoing monitoring to be robust, comprehensive, and appropriately documented. For activities that bank management determines to be low risk, the OCC stated that management should follow policies and procedures established by the board of directors for due diligence and ongoing monitoring. Click here for a copy of the FAQs.

     Nutter Notes: OCC Bulletin 2013-29 defines a third-party relationship as any business arrangement between a bank and another entity, by contract or otherwise. The FAQs clarify that third-party relationships include activities that involve outsourced products and services; use of outside consultants, networking arrangements, merchant payment processing services, services provided by affiliates and subsidiaries; joint ventures; and other business arrangements in which a bank has an ongoing third-party relationship or may have responsibility for the associated records. The FAQs also point out that, if a financial technology (fintech) company performs services or delivers products on behalf of a bank or group of banks, that relationship meets the definition of a third-party relationship and the OCC expects each bank’s management to include the fintech company in the bank’s third-party risk management process. The FAQs also clarify that, if a group of banks is using the same service provider to secure or obtain like products or services, the banks may collaborate to meet some of their risk management obligations, such as performing due diligence, contract negotiation and ongoing monitoring responsibilities described in OCC Bulletin 2013-29. The FAQs warn that any such collaborative activities among banks must comply with antitrust laws.

3. Federal Reserve Amends Regulation CC for Electronic Check Collection

The Federal Reserve has approved final amendments to the check collection and return provisions in Regulation CC (Availability of Funds and Collection of Checks) and has also requested public comment on an additional proposed amendment to Regulation CC’s liability provisions. The final amendments to Regulation CC announced on May 31 create a framework for electronic check collection. The amendments apply Regulation CC’s existing check warranties for paper checks to checks that are collected electronically, and apply new warranties and indemnities to checks collected and returned electronically and to electronically-created items. The amendments also add new indemnities for electronically-created items, which are check-like items created in electronic form that never existed in paper form. The amendments become effective July 1, 2018. Click here for the text of the final amendments.

     Nutter Notes: In response to comments it received on the proposed amendments to Regulation CC for the framework for electronic check collection, the Federal Reserve has requested comments from the public on proposed amendments to Regulation CC’s existing liability provisions that would add a presumption that a substitute or electronic check was altered instead of forged in certain cases of doubt. Under the UCC, the depositary bank typically bears the loss related to an altered check, while the paying bank typically bears the loss related to a forged check. The proposal would amend Regulation CC to address situations where there is a dispute about whether a check has been altered or is a forgery, and the original paper check is not available for inspection. The proposed rule would adopt a presumption of alteration for any dispute over whether the dollar amount or the payee on a substitute check or electronic check has been altered or whether the substitute check or electronic check is derived from an original check that is a forgery. Comments on the proposed amendments are due by August 1.

4. Treasury Report Recommends Far-Reaching Changes to Regulation

The U.S. Treasury Department has released the first in a series of reports recommending changes to the system of financial regulation, including recommendations to Congress for legislative action, executive actions, and regulatory reforms that can be immediately undertaken. The report issued on June 12 is particularly critical of the CFPB, and recommends that the CFPB be restructured and that its approach to rulemaking and enforcement be altered. Specifically, the report recommends that Congress make the Director of the CFPB removable at will by the President or, alternatively, restructure the CFPB as an independent multi-member commission or board. The report also recommends that the CFPB be funded through the annual appropriations process rather than through the Federal Reserve System, and that the CFPB adopt regulatory reforms requiring adequate notice to regulated entities of CFPB interpretations of law before the CFPB takes enforcement actions. The report claims that the CFPB’s “unaccountable structure and unduly broad regulatory powers have led to regulatory abuses and excesses,” and that the CFPB’s “approach to enforcement and rulemaking has hindered consumer choice and access to credit, limited innovation, and imposed undue compliance burdens, particularly on small institutions.” Click here for a copy of the report.

     Nutter Notes: The Treasury’s report was made under Executive Order 13772, which instructs the Treasury Secretary to report to the President the extent to which the existing financial regulatory system promotes the administration’s “Core Principles” of financial regulation. The principles include empowering Americans to make independent financial decisions, save for retirement, build wealth, and prevent taxpayer-funded bailouts. The principles also include promoting American competitiveness, both at home and abroad, while making regulation efficient, effective, and appropriately tailored. The report recommends various changes to the regulatory capital regime, including exempting community banks with total assets under $10 billion from Basel III risk-based capital requirements, and possibly from the Collins Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The report also recommends raising the Small Bank Holding Company Policy Statement asset threshold from $1 billion to $2 billion.

5. Other Developments: Prepaid Cards and Real Estate Appraisers

  • CFPB Proposes Changes to Prepaid Cards Rule

The CFPB announced on June 12 that it is seeking comment on proposed updates to its prepaid cards rule that would adjust requirements for resolving errors on unregistered accounts and provide greater flexibility for credit cards linked to digital wallets. Comments on the proposed amendments are due within 45 days after publication in the Federal Register, which is expected shortly.

     Nutter Notes: Along with the proposed amendments, the CFPB released an updated version of its small entity compliance guide for the prepaid cards rule that reflects the effective date delay for the rule to April 1, 2018 and includes clarifications on several issues. Click here for a copy of the updated small entity compliance guide and here for a copy of the proposed amendments to the rule.

  • Federal Banking Agencies Issue Guidance on Shortages of Real Estate Appraisers 

The federal banking agencies have issued an advisory that provides guidance on two existing options that may help insured depository institutions and bank holding companies deal with shortages of qualified and licensed real estate appraisers: temporary practice permits that may be granted by state appraiser regulatory agencies and temporary waivers that may be granted with the approval of the Federal Financial Institutions Examination Council.

     Nutter Notes: Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) requires that appraisals for federally related transactions, including most residential first-mortgage loans, be performed by individuals who meet certain certification or licensing requirements. However, banks and other lenders have recently reported problems with the availability of qualified and licensed appraisers, particularly in rural areas. Click here for a copy of the advisory. 

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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