Bank Regulatory News and Trends

This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

In this edition:

• AML overhaul becomes law.
• Pandemic relief package winds down Fed’s emergency powers.
• PPP reopens as SBA and Treasury issue new guidance.
• New SBA leader announced.
• States sue OCC to stop “true lender” rule.
• Waller confirmed to Fed Board, Shelton re-nominated in new year.
• CSBS files new lawsuit to block OCC approval of Figure charter application.
• New York commercial financing disclosure requirement becomes law.
• FinCEN and bank regulatory agencies clarify BSA due diligence expectations for charities and nonprofits.
• OCC proposes CRA performance standards rule.
• OCC issues interpretive letter on preemption standards and requirements.
• CFPB issues final policy on advisory opinions and announces two new advisory opinions.

AML overhaul becomes law. The Anti-Money Laundering Act of 2020 (ALMA 2020) mandates the most sweeping changes to US anti-money laundering (AML) law since the USA PATRIOT Act of 2001. It was enacted on January 1 as part of the fiscal year 2021 National Defense Authorization Act. In an effort to improve financial accountability, increase transparency and prevent illicit money flows, AMLA 2020 establishes new beneficial ownership reporting requirements for legal entity customers. By clarifying and streamlining Bank Secrecy Act (BSA) and AML obligations, the new law also imposes additional regulatory requirements such as requiring financial institutions to integrate a set of national anti-money laundering/countering the financing of terrorism (CFT) priorities, to be established by the Treasury Department, into their compliance programs. Awards for whistleblowers would be increased and protections expanded. Responding to developments in the financial services industry in recent years, AMLA 2020 modernizes the statutory definition of “financial institutions” to include entities that provide services involving “value that substitutes for currency,” such as stored value and virtual currency instruments, consistent with existing Financial Crimes Enforcement Network (FinCEN) regulations. It also calls for better coordination and cooperation among international, federal, state and tribal AML law enforcement agencies.

Some of the major impact elements for financial institutions:

• The concept of “reporting companies” – those subject to AMLA 2020’s beneficial ownership reporting requirements – is generally consistent with the “legal entity customer” definition under the Customer Due Diligence (CDD) Rule. A reporting company is defined as “a corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”
• Among the more than 20 exclusions are entities that already disclose ownership information such as publicly traded companies, broker/dealers, registered investment companies and registered investment advisers, insurance companies and money services businesses, with ongoing review of the relevant exemptions list.
• FinCEN must issue regulations to implement beneficial ownership filing requirements within one year after enactment. Newly formed or registered reporting companies would be required to report beneficial ownership information immediately, while reporting companies already in existence or registered would be required to report after a two-year period, with updates within a year.
• Banks will be able to request the information from FinCEN, but it will not be public.
• While still subject to confidentiality requirements, banks will be able to share Suspicious Activity Reports (SARs) with affiliates, even if overseas.
• Allows for noncomplex SARs to be filed automatically, including potentially for structured transactions.
• Substantially increases the whistleblower program for disclosure of AML violations, including for employees whose duty it is to disclose.
• Boosts FinCEN’s authority to regulate virtual currency, though the full impact will not be known until implementing regulations are proposed by FinCEN.

Passage of the AMLA 2020 flew under the radar to a certain extent because of its inclusion in the massive defense bill, but its enactment will have meaningful impact on the financial services industry.

• Inclusion of the AML provisions in the NDAA was negotiated by key lawmakers, including House Financial Services Committee Chair Maxine Waters (D-CA) and Senate Banking Committee Chair Mike Crapo (R-ID). Waters, Crapo and Banking Committee Ranking Member – and incoming Chair – Senator Sherrod Brown (D-OH) all issued statements hailing the new measures.
• The new provisions were welcomed by consumer advocacy and other watchdog groups. In a January 1 statement, the Financial Accountability and Corporate Transparency (FACT) Coalition praised the crackdown on anonymous shell companies, describing them as “the biggest weakness in our anti-money laundering safeguards.”
• Opponents of the disclosure requirements fear they will become a regulatory burden. The National Federation of Independent Business (NFIB) said in its December 16 statement, “Last week in some less-than-transparent legislative maneuvering, the US House and Senate passed the so-called Corporate Transparency Act buried in the [NDAA] Conference Report. With its passage, America’s smallest businesses will be saddled with millions of new paperwork hours in the coming years.”
• President Trump had vetoed the $740 billion defense policy bill on December 23 – though for reasons unrelated to the AML provisions. The House overrode the president’s veto on December 28 and the Senate followed suit in an unusual New Year’s Day session.

Please read our White Collar Alert to learn more.

Pandemic relief package winds down Fed’s emergency powers. The massive fiscal year 2021 Omnibus Appropriations and Coronavirus Relief package signed into law by President Trump on December 27 terminates most of the Federal Reserve emergency lending authorities granted last year in response to the coronavirus disease 2019 (COVID-19) pandemic. The $900 billion relief bill requires the Fed to bring an end to facilities that were established using funding provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted at the end of March. The CARES Act appropriated $454 billion in economic stabilization funding for the Treasury to provide loans, loan guarantees and other investments in programs or facilities established by the Fed. The Fed created a number of programs and facilities under the emergency lending authority provided for in Section 13(3) of the Federal Reserve Act, some of which rely on a backstop provided by the Treasury. The new law rescinds most of the remaining funds that were appropriated in the CARES Act but are unused. Obligations incurred by Treasury before January 1 are not affected. As of the first of the year, the Fed cannot make any new investments, loans or loan guarantees, or extensions of credit through programs and facilities established using CARES Act funding. These include:

• The Primary Market Corporate Credit Facility
• The Secondary Market Corporate Credit Facility
• The Main Street Lending Program
• The Municipal Liquidity Facility and
• The Term Asset-Backed Securities Loan Facility.

The Fed cannot modify the terms and conditions of any program or facility established under 13(3) with CARES Act funding, including by authorizing transfer of funds to a new program or facility. The Fed may, however, modify or restructure loans or extensions of credit made or purchased through these facilities in certain circumstances, including where the modification is necessary to minimize costs to taxpayers that could arise from a default of the loan. The new law will not impact facilities established by the Fed outside the CARES Act framework, which have been extended until March 31, including:

• The Primary Dealer Credit Facility
• The Paycheck Protection Program Liquidity Facility
• The Commercial Paper Funding Facility and
• The Money Market Mutual Fund Liquidity Facility.

A dispute between Senate Democrats and Republicans over authority for the Fed to extend or restart these programs nearly derailed negotiations over the COVID-19 relief bill in December. While they have criticized many of the emergency lending programs as ineffective or underutilized, Democrats welcomed the prospect that President-elect Biden’s Treasury Secretary designee Janet Yellen could work to modify the programs to extend support to businesses and municipalities. Senator Patrick Toomey (R-PA) and other Republicans have argued that the Fed’s emergency lending powers are primarily intended to help markets function, and that many of the loans under programs such as Main Street and Municipal Liquidity should be made by private lenders.

PPP reopens as SBA and Treasury issue new guidance. The Small Business Administration and the Treasury Department have announced the reopening of the Paycheck Protection Program and have issued updated guidance intended to enhance the program’s effectiveness and accessibility. SBA and Treasury on January 6 published new guidance on the restart of the PPP Loans through March 31, 2021, and the second draw of the PPP loans. According to a January 8 joint announcement from the two agencies, only community financial institutions that focus on underserved and minority businesses and borrowers in distressed areas will be able to make first-draw PPP loans on January 11 and second-draw PPP loans on January 13. The PPP will open to all participating lenders shortly thereafter. SBA issued specific guidelines for minority, veteran and women employers, as well as broader guidelines for how the new program will work based on revisions that Congress made last month as part of the Omnibus Appropriations and Coronavirus Relief package, including changes to eligibility requirements. The updated guidance also covers the new process by which PPP borrowers with no more than 300 workers will be able to obtain second loans if they can demonstrate a 25-percent decline in gross receipts from any three-month period in 2020 versus a similar quarter in 2019. More details on the new guidance can be found at the following links:

• PPP Guidance from SBA Administrator Carranza on Accessing Capital for Minority, Underserved, Veteran, and Women-owned Business Concerns
• Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid Act and

• Interim Final Rule on Second Draw PPP Loans.

New SBA leader announced. In a related development, President-elect Biden on January 8 announced his intention to nominate Isabel Guzman as Small Business Administrator. Guzman served as deputy chief of staff at the SBA during the Obama Administration. In 2019, she became the director of California’s Office of the Small Business Advocate, where she helped implement a grant program for businesses affected by the pandemic.

• In a January 8 statement, the American Bankers Association welcomed the reopening of the PPP and hailed Guzman’s nomination: “ABA will continue to encourage all banks to target PPP loans to businesses most in need when the portal eventually opens to all lenders.”

States sue OCC to stop “true lender” rule. A coalition of attorneys general from seven states and the District of Columbia have filed suit against the Office of the Comptroller of the Currency to block implementation of a rule determining when a national bank or federal savings association makes a loan and is the “true lender” in the context of a partnership between a bank and a third party, such as a marketplace lender. The AGs’ complaint, filed on January 5 in the US District Court for the Southern District of New York, seeks to prevent “an unlawful attempt by [OCC] to facilitate predatory lending by depriving the States of one of the most effective methods of deterring such conduct – state usury and usury-evasion laws.” The AGs bringing the case are from New York, California, Colorado, Massachusetts, Minnesota, New Jersey, North Carolina and Washington, DC. The states’ suit argues that, “in adopting the True Lender Rule, the OCC exceeded its statutory authority by offering an unreasonable interpretation of federal law, and acted in a manner contrary to centuries of case law, the OCC’s own prior interpretation of the law, and the plain statutory language of the federal statutes it purports to interpret.” In the text of the rule, the regulatory agency noted that these concerns were raised during the public comment period of the rulemaking process but maintained that “OCC has clear authority to reasonably interpret these statutes, which do not specifically address when a bank makes a loan.”  As we reported in the October 29 edition of Bank Regulatory News and Trends, under the OCC’s final rule, a bank makes a loan if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan. The rule states that rent-a-bank schemes “have absolutely no place in the federal banking system and are addressed by this rulemaking, which holds banks accountable for all loans they make, including those made in the context of marketplace lending partnerships or other loan sale arrangements.”

Waller confirmed to Fed Board, Shelton re-nominated in new year. The Senate on December 3 voted to confirm President Trump’s nomination of Christopher Waller to the Federal Reserve Board of Governors for a term that will run until 2030. The largely party-line 48-47 vote represented one of the lowest-ever levels of Senate support for a Fed Board nominee. Waller is the first Fed governor seated during a lame-duck session of Congress, though his nomination had been pending for most of the year. While Waller’s nomination was considered less controversial than some of the other names the president has floated for the Fed, and though he received some bipartisan support in the Banking Committee, Democrats were uniform in opposition to the nomination in the full Senate vote, joined by one Republican, Senator Rand Paul of Kentucky. Waller is the director of research at the Federal Reserve Bank of St. Louis, where he specializes in monetary and macroeconomic theory. He previously chaired the economics department at the University of Notre Dame. Five of the six current board members were nominated by Trump, and there is now one remaining vacancy on the seven-member Board of Governors.

• The 116^th Congress concluded with the president’s other nominee to the Fed Board, Judy Shelton, failing to win support. As we reported in the November 25 edition of Bank Regulatory News and Trends, Senate Republicans were unable to break a filibuster against Shelton’s nomination. Unconfirmed presidential nominations automatically expire at the end of a session of Congress. The January 3 White House announcement on Shelton’s re-nomination notes that she would be filling the remainder of the unexpired 14-year term of former Fed Chair and Biden Treasury Secretary designee Janet Yellen, which concludes in 2024. It is unlikely that Shelton’s nomination will receive further consideration.

CSBS files new lawsuit to block OCC approval of Figure charter application. The Conference of State Bank Supervisors has filed a second lawsuit opposing the Office of the Comptroller of the Currency’s creation of a specialty national bank charter for nonbank companies in general, this time specifically opposing a more traditional national bank charter application to establish Figure Bank, NA, headquartered in Reno, Nevada. The suit highlights the controversy over OCC’s so-called “fintech charters,” pitting state banking regulators against the OCC, the federal agency responsible for issuing charters to national banks and regulating their activities. Except, in this case, Figure Bank notes that it is not actually seeking a non-bank fintech charter, but rather a full-service bank charter which has heretofore been an understood and expected authority of the OCC under the National Bank Act. If approved as sought, Figure Bank would accept wholesale or non-retail/non-consumer deposits only and would not be insured by the FDIC.

• The CSBS argument: In a complaint filed in the US District Court for the District of Columbia on December 22, CSBS argued that “Figure’s assertions – and the OCC’s behind-the-scenes guidance to the company – that it is not applying for the Nonbank Charter are merely a thinly veiled effort to avoid the controversy surrounding the Nonbank Charter and to evade the scope of the Vullo Ruling.” That was a reference to the 2019 ruling of the US District Court for the Southern District of New York that OCC lacked authority to issue Nonbank Charters in a case brought by Maria Vullo, superintendent of the New York State Department of Financial Services, against OCC. The complaint states that the OCC has gone beyond its legal authority to charter institutions that conduct the “business of banking,” which requires an institution to receive deposits and obtain insurance from the FDIC. CSBS maintains that states do a better job of regulating fintechs than federal agencies. “Figure and the OCC have concluded that Figure Bank will be engaged in the banking business but will not be required to become FDIC-insured to commence business – thus, it is clear that Figure has applied for a Nonbank Charter,” the complaint states.
• Figure’s position: In a December 1, statement, Figure said, “We applied for an [OCC] national bank charter in November to expand on our blockchain applications. We believe blockchain can level the financial playing field for consumers (banked vs. underbanked), businesses (large vs. small) and financial institutions (large vs. small). The OCC charter provides a way for us to deliver sustainable, inclusive and impactful financial solutions on Provenance [a blockchain developed by Figure] that is not possible through our current state licensing.” The statement goes on to say, “without the OCC bank charter, we’ll need over 200 state licenses in 2021 to support Figure Lending and Figure Pay. The compliance costs of these licenses essentially negates the technology cost improvements, jeopardizing our ability to offer Figure Pay to everyone.”
• OCC’s fintech charter. In July 2018, OCC announced that it was accepting national bank charter applications from fintechs, but to date, no firms have received a charter. Notwithstanding the Vullo decision, acting Comptroller of the Currency Brian Brooks has said he still has the authority to approve charter applications from firms that don’t take deposits. By contrast, Figure Bank would be a full-service national bank with limited deposit functions, as opposed to the controversial fintech bank.
• Previous CSBS complaint: The complaint filed last month is a continuation of legal action initiated in 2017.

New York commercial financing disclosure requirement becomes law. New York Governor Andrew Cuomo on December 23 signed into law legislation requiring consumer-like disclosures for commercial financing transactions of $500,000 or less. As we reported in the September 9 edition of Bank Regulatory News and Trends, the New York state Legislature over the summer passed the measure – Assembly Bill A10118A and Senate Bill S5470B – known as the Truth in Lending Act. The new law defines “commercial financing” as “open-end financing, closed-end financing, sales-based financing, factoring transaction, or other form of financing, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.”  For purposes of determining whether a transaction is “commercial financing,” a provider can rely on “any statement of intended purposes by the recipient” and the provider “shall not be required to ascertain that the proceeds of a commercial financing are used in accordance with the recipient’s statement of intended purpose.” Banks and credit unions are exempt from the terms of the legislation, as are lenders regulated under the federal Farm Credit Act and those making no more than five commercial financial transactions in New York in a 12-month period. Bank loans and credits above $500,000 are also exempt. Civil penalties under the act, upon findings of a violation by the New York Superintendent of Financial Services, would be a maximum of $2,000 for each offense or $10,000 per violation “where such violation is willful.”

• California passed similar legislation in 2018 – the first state to adopt such a measure – but the law was to not take effect until implementing regulations were finalized, which still has not taken place.
• New York’s requirement becomes effective June 21, 2021, regardless of whether the implementing regulations are finalized before that date.

FinCEN and bank regulatory agencies clarify BSA due diligence expectations for charities and nonprofits. Four federal financial institution regulatory agencies joined with the Financial Crimes Enforcement Network (FinCEN) in issuing a joint fact sheet providing clarity to banks and credit unions on how to apply a risk-based approach to charities and other non-profit organizations (NPOs). The fact sheet, issued November 19, highlights the importance of ensuring that legitimate charities have access to financial services and can transmit funds through legitimate and transparent channels, especially during the current COVID-19 pandemic. Banks are also reminded to apply a risk-based approach to customer due diligence (CDD) requirements when developing the risk profiles of charities and other non-profit customers, consistent with existing CDD and other Bank Secrecy Act/anti-money laundering (BSA/AML) compliance requirements. While such customers have often been viewed by the financial services industry as presenting inherently high risk from a money laundering perspective, the fact sheet notes that US government does not view the charitable sector as presenting a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing or evasion of sanctions.

OCC proposes CRA performance standards rule. The Office of the Comptroller of the Currency is inviting comment on a notice of proposed rulemaking regarding the Community Reinvestment Act’s general performance standards. The proposed rule, published in the Federal Register on December 4, provides the OCC’s proposed approach to determine the CRA evaluation measure benchmarks, retail lending distribution test thresholds and community development minimums under the general performance standards set forth in OCC’s final rule, published in June 2020, to modernize the CRA. The new proposal also explains how the OCC would assess significant declines in CRA activities and makes clarifying and technical amendments to the 2020 final rule. The deadline for submitting comments on the proposed rule is February 2.

OCC issues interpretive letter on preemption standards and requirements. The Office of the Comptroller of the Currency has issued an interpretation of section 25b of the National Bank Act, codifying preemption standards and establishing procedural requirements for certain preemption actions by the agency, pursuant to the 2010 Dodd-Frank Act. The interpretive letter, issued December 18, notes that federal preemption derives from the Supremacy Clause of the US Constitution and has been recognized as fundamental to the federal government and the operation of the federal banking system. OCC further notes that federal preemption permits national banks and federal savings associations, many of which operate across state lines, to operate under a uniform set of rules to support nationwide banking. The interpretive letter describes when the procedural requirements of section 25b apply, including when the OCC is required to consult with the Consumer Financial Protection Bureau, and describes the agency’s framework for complying with the standards and requirements for preemption determinations. It also lays out the legal standard for OCC to issue a preemption determination and the level of deference OCC concludes should be accorded to its preemption determinations. It addresses OCC’s authority to make preemption determinations by regulation or on a “case-by-case basis,” the substantial evidence standard, and the requirement to publish preemption determinations. The interpretation clarifies that the section 25b periodic review requirement applies to any OCC conclusion that a state consumer law is preempted, which is not limited to determinations made under the Barnett standard, based on the 1996 Barnett Bank of Marion County, N.A. v. Nelson Supreme Court case that ruled states could moderate national banks if doing so does not prevent or largely interfere with the national bank's ability to exercise its powers.

CFPB issues final policy on advisory opinions and announces two new advisory opinions. The Consumer Financial Protection Bureau, on November 30, issued its final Advisory Opinions Policy to publicly address regulatory uncertainty in the bureau’s existing regulations and provide guidance on outstanding regulatory uncertainty. The policy sets forth procedures to facilitate the submission by interested parties of requests that CFPB issue advisory opinions, in the form of interpretive rules, to resolve regulatory uncertainty. Under the final policy, entities seeking to comply with regulatory requirements can submit a request to the bureau where uncertainty exists, via email to advisoryopinion@cfpb.gov.

On the same day, CFPB also issued two new advisory opinions:

• An advisory opinion on Earned Wage Access Programs (EWA) to resolve regulatory uncertainty over the applicability of the definition of credit under Regulation Z (Truth in Lending) and encourage further innovation in the EWA space. For more information on the EWA advisory, please see this December 2 DLA Piper Financial Services Alert.
• An advisory opinion on Private Education Loans, clarifying that certain education loan products that refinance or consolidate a consumer’s pre-existing federal, or federal and private, education loans meet the definition of “private education loan” in subpart F of Regulation Z and are subject to the disclosure and other requirements of the regulation.