Nutter Bank Report: May 2021

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Headlines

  1. Court Rules that Debt Collector Violated FDCPA with Communication to Dunning Vendor
  2. OCC Issues Special Purpose National Bank Charter to Fintech Cryptocurrency Company
  3. FDIC Seeking Public Input on Regulation of Digital Asset Activities by Banks
  4. Senate Moves to Repeal the OCC’s True Lender Rule; House Vote Would Be Required
  5. Other Developments: Climate Change, Qualified Mortgages, and Community Reinvestment Act

1. Court Rules that Debt Collector Violated FDCPA with Communication to Dunning Vendor

A federal appellate court has recently ruled that a debt collector violated certain privacy requirements under the federal Fair Debt Collection Practices Act (“FDCPA”) when, without the consumer’s authorization, the debt collector electronically transmitted personal information concerning the consumer’s debt to the debt collector’s third-party vendor. The April 21 ruling issued by the United States Court of Appeals for the Eleventh Circuit involved a case in which the debt collector electronically transmitted data concerning a consumer’s debt, including his name, the outstanding balance, and the source of the debt, to a third-party letter vendor. The vendor then used the data to create, print, and mail a “dunning” letter to the consumer. The FDCPA prohibits a debt collector from, among other conditions, communicating with “any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector” in connection with the collection of any debt without the prior consent of the consumer. The court determined that the debt collector’s communication with its letter vendor of information necessary to generate a dunning letter on behalf of the debt collector violated the FDCPA’s prohibition against communication with third parties without the prior consent of the consumer. Click here for a copy of the court’s decision.

Nutter Notes: A bank that is collecting its own debt in its own name is not considered a debt collector under the FDCPA and would therefore not be subject to the specific privacy requirement that was at issue in this federal case. However, the federal banking agencies generally expect banks to avoid abusive collection practices and comply with the spirit of the FDCPA. In addition, the federal banking agencies generally expect banks to establish internal controls and ongoing monitoring to determine whether third-party debt collectors acting on a bank’s behalf are complying with the FDCPA and the CFPB’s Regulation F, which implements the FDCPA. The Massachusetts Division of Banks’ debt collection regulations contain privacy requirements similar to those in the FDCPA that can apply to a bank that is servicing a loan for a third-party creditor or collecting a debt owed to the bank by using a name other than the bank’s own name. It is unclear whether the federal court’s ruling on the FDCPA’s privacy requirements will be applied by courts to the Division of Banks’ debt collection regulations. The Massachusetts Attorney General’s debt collection regulations, which do apply to a bank that is collecting its own debt, contain somewhat similar privacy protections for consumer debtors, but generally apply only to a communication in person with a consumer about the collection of a debt in a public place or location where the conversation may be overheard by an unauthorized person.

2. OCC Issues Special Purpose National Bank Charter to Fintech Cryptocurrency Company

The OCC has issued a preliminary conditional approval of a special purpose national bank charter to a financial technology (“fintech”) company to provide a range of services associated with digital assets, including custody services for cryptocurrency. According to the OCC’s April 23 approval letter, the institution will be an uninsured national bank whose operations will be limited to those of a trust company and will not be permitted to accept deposits. In addition to custody services for cryptocurrency, the special purpose national bank will offer trading services to enable its business partners to buy and sell cryptocurrency, management services for U.S. dollar stablecoin reserves (stablecoins are cryptocurrencies that attempt to offer price stability and are backed by a reserve asset), and “know your customer” as a service. The fintech company is already conducting these activities through a New York-chartered limited liability trust company, according to the OCC’s approval. The special purpose national bank and the New York trust company will become affiliates under the same parent company. Unlike the New York trust company, the special purpose national bank charter will allow the fintech company to operate in all 50 states without the need to be licensed in each state. Click here for a copy of the OCC’s approval letter.

Nutter Notes: On May 20, Senator Sherrod Brown, the chairman of the Senate Banking Committee, wrote a letter urging the OCC to reconsider issuing special purpose national bank charters to firms specializing in digital and cryptocurrency activities. The OCC previously issued two other conditional approvals that permitted state-chartered trust companies to convert to uninsured national bank charters. The OCC’s most recent approval appears to be the first de novo special purpose national bank charter the OCC has issued to a cryptocurrency fintech company. Senator Brown requested that the OCC halt the approval of any additional charters to firms that specialize in digital and cryptocurrency activities while the OCC reviews its supervision and licensing standards, citing concerns about the OCC’s ability to regulate the businesses and the reviews conducted by the OCC prior to approving the charters. In each case, the OCC has required the newly chartered entity to enter into an operating agreement with the OCC under which the newly chartered entity must adhere to certain minimum capital and liquidity requirements, among other conditions. The OCC’s approvals also prohibit the newly chartered entities from engaging in activities that would cause them to be considered banks under the Bank Holding Company Act, but at the same time has required their parent companies to enter into written agreements with the OCC under which the parent companies would be obligated to provide capital and liquidity support to the newly chartered entities, if and when necessary.

3. FDIC Seeking Public Input on Regulation of Digital Asset Activities by Banks

The FDIC has issued a request for public comments about activities related to digital assets, including cryptocurrencies, currently and potentially engaged in by insured depository institutions. The information request announced on May 17 seeks information about risk and compliance management issues implicated in current and potential activities involving digital assets engaged in by banks and their affiliates. Specifically, the FDIC would like to know the types of specific products or services related to digital assets that banks are currently offering or considering offering to consumers, and the extent to which services involving digital assets will have a direct balance sheet impact. The FDIC is also requesting information about the extent to which banks’ existing risk and compliance management frameworks are designed to “identify, measure, monitor, and control risks” related to various digital asset activities, and whether the FDIC should take into account any unique aspects of digital asset activities for supervisory purposes, among other things. Public comments in response to the information request are due by July 16, 2021. Click here for a copy of the FDIC’s information request.

Nutter Notes: The FDIC’s information request describes the digital asset activities that are of interest to the agency as technology solutions, including those involving closed and open payment systems, and token-based systems for banking activities other than payments (such as lending), acting as nodes in networks like those used in distributed ledgers, and custodial activities, such as providing safekeeping for digital assets, secondary lending, and acting as a qualified custodian on behalf of investment advisors. The FDIC is also gathering information about banks’ asset-based activities, including investments, collateral, margin lending and liquidity facilities involving digital assets, and liability-based activities, including deposit services and those involving deposits serving as digital asset reserves. The FDIC would like input from the public about any other digital asset activity involving banks that it has not considered. The FDIC intends to use the information it gathers to consider new rulemaking involving digital asset activities of banks, and clarifying or expanding existing supervisory guidance to address digital asset activities.

4. Senate Moves to Repeal the OCC’s True Lender Rule; House Vote Would Be Required

The U.S. Senate has voted to approve a resolution to repeal the OCC’s recently adopted “true lender” rule under the Congressional Review Act. The resolution, approved by a 52 to 47 vote in the Senate on May 11, would need to be approved by a simple majority vote in the U.S. House of Representatives next and then signed by President Biden in order to repeal the OCC’s true lender rule. The true lender rule, adopted on October 27, 2020, determines when a national bank or federal savings association is the “true lender” in a lending relationship when a third party is involved in a partnership with the bank in order to make the loan. Under the true lender rule, a bank makes a loan—and is therefore the true lender—if, as of the date of origination, the bank is named as the lender in the loan agreement or funds the loan. The true lender rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement and another bank funds that loan, the bank that is named as the lender in the loan agreement is the true lender. Click here to access the text of the Senate’s resolution calling for repeal of the true lender rule.

Nutter Notes: Under the true lender rule, the true lender of a loan retains the compliance obligations associated with the origination of that loan. The true lender rule followed the OCC’s adoption of its final rule on the “valid when made” doctrine. Both the true lender rule and the valid when made rule were intended to provide clarity and legal certainty to participants in bank partnerships or third-party arrangements in the wake of federal and state litigation. Consumer advocates have been critical of the true lender rule under the theory that it and the earlier valid when made rule may lend themselves to abuse by non-bank lenders, such as fintech companies, entering into “rent a charter” arrangements with national banks and federal savings associations. The OCC noted in its statement accompanying the true lender rule that rent a charter schemes are designed to enable a non-bank lender to evade state and local laws, including some state consumer protection laws. The OCC’s statement accompanying the true lender rule discounted concerns over potential abuse, stating that when a bank makes a loan, “statutes and regulations, enforceable guidelines, guidance, and enforcement authority provide robust and effective safeguards against predatory lending.” The OCC also cited its role as a prudential regulator of the lending activities of national banks and federal savings associations, and the applicability of the OCC’s third-party risk management guidance to bank partnership relationships.

5. Other Developments: Climate Change, Qualified Mortgages and Community Reinvestment Act

  • Federal Banking Agencies Ordered to Consider Climate-Related Financial Risks

President Biden issued an executive order on May 20 directing federal financial regulators, including the federal banking agencies, to assess the climate-related financial risks to the financial stability of the government and of the U.S. financial system. The executive order also requires the agencies to consider whether to incorporate climate-related financial risks into their regulatory and supervisory activities, and to consider whether to monitor climate change risks of banks.

Nutter Notes: The executive order also announced the administration’s climate-related financial risk strategy, including the administration’s intention to develop a strategy addressing the “financing needs associated with achieving net-zero greenhouse gas emissions for the U.S. economy by no later than 2050,” among other goals. Click here for a copy of the executive order.

  • CFPB Delays Mandatory Compliance Date for General Qualified Mortgage Final Rule

The CFPB on April 27 announced that it had formally delayed the mandatory compliance date of its General Qualified Mortgage final rule under Regulation Z, which implements the Truth in Lending Act, from July 1, 2021 to October 1, 2022. According to the CFPB, the compliance deadline was delayed to help ensure access to mortgage credit and preserve flexibility for consumers affected by the COVID-19 public health emergency and its economic effects.

Nutter Notes: The CFPB’s General Qualified Mortgage final rule, adopted in December 2020, amended Regulation Z by replacing the original General Qualified Mortgage loan definition based on the debt to total monthly income ratio with a definition that includes limits based on loan pricing, among other changes. Under Regulation Z, when a lender makes a home mortgage loan that meets the General Qualified Mortgage loan definition, the lender is protected from certain liabilities for compliance with requirements that the lender must make a reasonable, good faith determination of a consumer’s ability to repay the loan. Click here for a copy of the final rule delaying the compliance deadline.

  • OCC to Consider Repealing Recently Adopted CRA Modernization Rule

The OCC announced on May 18 that it will reconsider the final rule adopted in June 2020 to modernize the agency’s regulations under the Community Reinvestment Act (“CRA”). The OCC announced that, while its reconsideration is ongoing, the OCC will not object to national banks and federal thrifts suspending their preparations to comply with certain provisions of the June 2020 rule that have a compliance date of January 1, 2023, or January 1, 2024.

Nutter Notes: The OCC said that it would continue to implement the provisions of the June 2020 CRA rule that have a compliance date of October 1, 2020. The June 2020 CRA rule clarified and expanded the activities that qualify for CRA credit and revised the rules governing the establishment of geographic assessment areas, among other changes. Click here for a copy of the OCC’s announcement.

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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