- This Week’s Podcast Episode: Universal Injunctions, Associational Standing, and Forum Shopping – Their Effects on Legal Challenges to Regulations
- HUD, Fannie Mae, and Freddie Mac Delay Implementation of Reconsideration of Value Guidance
- National Flood Insurance Program to Expire on September 30
- Kentucky Court Grants a Stay of Case Pending a Decision in the Texas Small Business Lending Lawsuit
- VA Announces Change Regarding Temporary Variance Allowing Veterans to Pay Broker Commissions
- Financial Regulators Propose Standards to Promote Interoperability of Data
- Regulators Outline Risks That Third-Party Servicers Pose to Banks
- Banking Regulators Seek Comment on Third-Party Relationships With Financial Institutions
- FDIC Urges Financial Institutions to Complete Voluntary Diversity Self-Assessments
- FinCEN Highlights Differences in CDD Rule and CTA Reporting of BOI
- HUD Charges Appraiser, Appraisal Management Company, and Lender With Race Discrimination
- Acting Comptroller Hsu Pressured to Repeal Preemption Regs by Conference of State Bank Supervisors and Consortium of Consumer Groups
- 10th Circuit Sets Briefing Schedule in Appeal from Preliminary Injunction Granted to Trade Groups With Respect to Colorado Opt-Out Statute
- Update on DOL’s Final Rule Increasing Compensation Thresholds for FLSA Overtime Exemptions
- DOJ Unveils Corporate Whistleblower Awards Pilot Program – With Implications for Financial Institutions and AML/CFT Compliance Personnel
- Looking Ahead
Special guest Professor Alan Trammell of Washington and Lee University School of Law joins us today for a deep dive into universal injunctions and the related topics of associational standing and judicial forum shopping, and how these elements come into play in litigation challenging regulations and other government policies and actions.
Recent developments in litigation critical to the consumer financial services industry have brought universal injunctions into the spotlight. We begin today’s episode by providing a working definition of a universal injunction, some historical background, and examples that illustrate the benefits, effects and power of this sweeping remedy. We then turn to an in-depth discussion of objections raised by detractors; real-world concerns that may flow from universal injunctions, including a “one and done problem” cited by Professor Trammell; and various circumstances where Professor Trammell argues universal injunctions are and are not appropriate.
We also cover associational standing and its interaction with universal injunction: whether and when a trade association should have standing to bring an action seeking relief for its members, and how and when the outcome of the action might expand into a universal injunction that also would benefit non-members. Our next areas of focus are forum shopping and judge shopping, particularly in the context of such litigation brought by an association.
We then turn to speculation as to whether and how the U.S. Supreme Court may proceed to bring some uniformity to how the courts are dealing with these issues. Our episode concludes with comments on recent input on these topics from sources such as Congress and the Judicial Conference of the United States.
Former practice leader and current Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, Alan Kaplinsky, hosts this week’s episode. To listen to this episode, click here.
HUD, Fannie Mae, and Freddie Mac Delay Implementation of Reconsideration of Value Guidance
As previously reported, the U.S. Department of Housing and Urban Development (HUD) in connection with single-family residential mortgage loans insured by the Federal Housing Administration (FHA), and Fannie Mae and Freddie Mac in connection with single-family residential mortgage loans, announced Reconsideration of Value (ROV) guidance for appraisals to help address appraisal bias. The HUD guidance applies to FHA insured mortgage loans under the Title II forward mortgage loan and reverse mortgage loan programs.
HUD/FHA
Originally the HUD ROV guidance could be implemented immediately and had to be implemented for FHA case numbers assigned on or after September 2, 2024. In Mortgage Letter 2024-16, HUD provides that the guidance still may be implemented immediately but must be implemented for FHA case numbers assigned on or after October 31, 2024. HUD advises that:
“FHA has carefully considered industry feedback received since [Mortgagee Letter] publication and recognizes the challenges for Mortgagees to operationalize this important policy update properly and effectively within the original 120-Day time frame. Therefore, FHA is providing additional time beyond the previously announced effective date to ensure Mortgagees have sufficient time for implementation.”
Fannie Mae/Freddie Mac
Originally, the Fannie Mae and Freddie Mac guidance could be implemented immediately and had to be implemented for loans with applications dated on or after August 29, 2024. In a Selling Notice and a Bulletin 2024-F, Fannie Mae and Freddie Mac, respectively, provide that lenders now must implement the ROV policy for loans with applications dated on or after Oct. 31, 2024, and Fannie Mae specifically notes that the guidance still may be implemented immediately.
Fannie Mae advises that:
“Feedback gathered after the ROV announcement revealed more time was needed for lenders to meet all the elements outlined in our policy. As the formalization is unique to the industry, in coordination with Freddie Mac and HUD, we have extended the implementation date by 60 days to provide more time for lenders to develop and deploy the requirements of the ROV policy.”
Fannie Mae also advised that frequently asked questions (FAQs) will be published later in August 2024.
National Flood Insurance Program to Expire on September 30
The National Flood Insurance Program’s authorization to issue new flood insurance contracts will expire on September 30 unless Congress votes to extend it.
Congress has been unable to enact a long-term extension of parts of the program. Traditionally, an extension of the authorization to write new insurance contracts has been included in short-term and end-of-year appropriations measures.
Unfortunately Congress has not enacted any of the FY25 spending measures and the House and Senate have left for their traditional August recess. They will return after Labor Day and will have to tackle them immediately. If not, large parts of the federal government could shut down.
The need to act on appropriations may make it hard for Congress to focus on the NFIP, even though the authorization for parts of the NFIP will expire at the same time. If that occurs, the Congressional Research Service said that flood insurance contracts entered into before the expiration would continue until the end of their policy term of one year. In addition, the authority for the NFIP to borrow funds from the U.S. Treasury will be reduced from $30.425 billion to $1 billion.
Congress could solve the problem by enacting a long-term NFIP reauthorization. Many members have introduced legislation to do that and hearings have been held, but Congress has not acted on any of the long-term bills. Since the end of FY2017, 30 short-term NFIP reauthorizations have been enacted, according to CRS.
Any expiration of the NFIP to issue new contracts would have serious consequences for the real estate market, according to CRS.
“By law or regulation, federal agencies, federally regulated lending institutions, and government-sponsored enterprises must require certain property owners to purchase flood insurance as a condition of any mortgage that these entities make, guarantee, or purchase,” CRS said. Property owners are required to purchase flood insurance if their property is identified as being in a Special Flood Hazard Area and is in a community that participates in the NFIP.
They may have to turn to private insurers to do so. As previously reported rules of the Farm Credit Administration, FDIC, Federal Reserve Board, National Credit Union Administration, and Comptroller of the Currency authorize their regulated entities to use private flood insurance, and rules of the Department of Housing and Urban Development authorize the use of private flood insurance with mortgage loans insured by the Federal Housing Administration. Fannie Mae and Freddie Mac also permit the use of private flood insurance that meets their requirements. Although the private insurance market is growing, most property is insured through the NFIP.
In past NFIP lapses, borrowers were not able to purchase flood insurance to close, renew or increase loans secured by property that required flood insurance. The CRS estimated that during a lapse in June 2010, each day more than 1,400 home sale closings were canceled or delayed. That represents more than 40,000 sales each month.
Richard J. Andreano, Jr. and Reid F. Herlihy
Kentucky Court Grants a Stay of Case Pending a Decision in the Texas Small Business Lending Lawsuit
On August 7, 2024, the U.S. District Court for the Eastern District of Kentucky granted the CFPB’s motion to stay the small business lending rule litigation before the court until resolution of the similar case pending in the Southern District of Texas.
In 2023, a group of Kentucky banks and the Kentucky Bankers Association brought suit against the CFPB challenging the Small Business Lending Rule, which amends Regulation B and creates data collection and reporting requirements pertaining to credit extended to small businesses. The Kentucky banks claimed that the rule was invalid because (1) the CFPB’s funding is unconstitutional, (2) the CFPB exceeded its authority in adding data points for collection, (3) the CFPB acted arbitrarily and capriciously, (4) the costs and benefits analysis was unreasonable, and (5) the rule violates the First Amendment to the U.S. Constitution. Based on the U.S. Supreme Court’s pending consideration at the time of whether the CFPB’s funding structure is constitutional, in September 2023, the court granted a preliminary injunction to enjoin the CFPB from enforcing the rule. The litigation was stayed pending the Supreme Court’s ruling on the constitutionality of the CFPB’s funding structure.
In April 2023, a Texas bank and the Texas Bankers Association filed a similar complaint in the Southern District of Texas. That complaint included substantially the same arguments challenging the small business lending rule, other than the First Amendment claim. The American Bankers Association was added as a plaintiff shortly after the initial filing. In December 2023, a trade group whose members include non-banks that provide sales-based financing to businesses, filed suit in a Florida federal district court also challenging the small business lending rule. The Florida case is unique in that the core argument is that sales-based financing does not constitute “credit” within ECOA and Regulation B. However, these plaintiffs made some of the same arguments challenging the validity of the rule.
On May 16, 2024, the Supreme Court held that the CFPB’s funding mechanism comported with the Appropriations Clause of the Constitution, which resolved the constitutional challenge. With the constitutional challenge resolved, the Kentucky, Texas, and Florida courts have the remaining challenges to consider. In the Florida litigation, the plaintiffs and CFPB have filed a motion for summary judgment and cross-motion for summary judgment. Similarly, in the Texas litigation, the plaintiffs have filed a motion for summary judgment and the CFPB has filed its response and a cross-motion for summary judgment. The Kentucky court held that because its case and the Texas case are nearly identical, and the suit in Texas was filed first, the Kentucky court should apply the first-to-file rule, and stay its case until the Texas court proceeds to final judgment.
VA Announces Change Regarding Temporary Variance Allowing Veterans to Pay Broker Commissions
Previously, in connection with the home loan program of the Department of Veterans Affairs (VA) we reported on the VA’s adoption of a temporary local variance allowing veterans to pay the commission of the real estate broker or agent assisting them (a buyer-broker). We also reported on a related enhancement made to the Issue Guaranty screen in VA’s WebLGY system.
Originally, the VA advised that the total amount paid by the veteran is to be disclosed in lines 1 through 3 of section H (Other) on the Closing Disclosure. We noted that lenders will need to be mindful of the TILA/RESPA Integrated Disclosure (TRID) rule requirement to disclose charges on the Closing Disclosure for which there is no dedicated line in alphabetical order. Apparently, the VA is now aware of the alphabetical order disclosure requirement, as it has revised the guidance by issuing Circular 26-24-14, Change 1 to provide that the amount must be disclosed in section H (Other) on the Closing Disclosure, without specifying any particular line for the disclosure.
Financial Regulators Propose Standards to Promote Interoperability of Data
On August 2, 2024, the CFPB, the OCC, the Federal Reserve Board, the FDIC, the NCUA, the FHFA, the CFTC, the SEC, and the Treasury Department proposed a joint rule intended to establish standards to promote the ability of each of the agencies to exchange and use the data that the other agencies collect (referred to as the “interoperability” of financial data across the agencies).
Congress required the agencies to adopt the joint rule when it enacted the Financial Data Transparency Act of 2022 (the Act). The agencies will include standards for the collection of certain data in individual rulemakings in the future.
Specifically, to the extent possible, the proposed data standards will:
- Render data fully searchable and machine-readable;
- Enable high quality data through outlines or other means, with accompanying metadata documented in machine-readable forms. The meaning of the data should be clearly defined as required by any regulatory information collection requirements;
- Ensure that a data element or data asset that exists to satisfy an underlying regulatory information collection requirement is consistently identified as such in associated machine-readable metadata; and
- Be nonproprietary or available under an open license.
“Under the proposal, any data transmission or schema and taxonomy format that, to the extent practicable, has these properties would be consistent with this proposed joint standard,” the agencies said.
In addition, the agencies also requested public comment related to data standards, data transmission formats, and schemas and taxonomies that the agencies may include in an update of the rule.
Entities that will need to report data to the government under the standards will need to obtain an appropriate legal entity identifier, if they do not currently have such an identifier. The agencies propose to establish the International Organization for Standardization (ISO) 17442-1:2020, Financial Services – Legal Entity Identifier (LEI) as the legal entity identifier. The LEI is a global, 20-character, alphanumeric, identifier standard that uniquely and unambiguously identifies a legal entity, which is documented by the ISO32. Information on the LEI is available in the preamble to the proposal.
Comments on the proposed rule are due 60 days after it is published in the Federal Register. Under the Act, the final rule must be issued no later than December 23, 2024.
John L. Culhane, Jr., Kristen E. Larson, and Richard J. Andreano, Jr.
Regulators Outline Risks That Third-Party Servicers Pose to Banks
Banking regulators have issued a joint statement outlining the potential risks that financial institutions face in arrangements with third parties to deliver bank deposit products and services and examples of risk management practices to manage such potential risks.
The joint statement does not establish new expectations for financial institutions, the regulators said. “This statement reemphasizes existing guidance; it does not alter existing legal or regulatory requirements or establish new supervisory expectations,” the FDIC, OCC and Federal Reserve Board, said in releasing the statement.
The banking agencies issued guidance for risk management with third-party relationships in June, 2023. In May, the regulators issued a guide to third-party risk management at community banks.
In addition to the list of potential risks, the agencies published a request for information and comment on the relationships banks have with fintechs.
“The agencies support responsible innovation and support banks in pursuing third-party arrangements in a manner consistent with safe and sound practices and in compliance with applicable laws and regulations, including, but not limited to, those designed to protect consumers (such as fair lending laws and prohibitions against unfair, deceptive, or abusive acts or practices) and those addressing financial crimes (such as fraud and money laundering),” the agencies said.
As they have in the past, the agencies warned that “a bank’s use of third parties to perform certain activities does not diminish its responsibility to comply with all applicable laws and regulations.”
Potential Risks
Operational and Compliance
- Significant operations performed by a third party: Those operations may place a heavy reliance on third parties to manage a bank’s deposit operations and can reduce a bank’s existing controls over the deposit function.
- Fragmented operations: Fragmented operational functions for deposit products among several third parties may make it more difficult for the bank to assess risks and assess if all third parties can perform assigned functions as intended.
- Lack of access to records: A lack of access by a bank to the deposit and transaction system of record and other crucial information maintained by the third party can impair the bank’s ability to determine its deposit obligations.
- Third parties performing compliance functions: Reliance on third parties to perform regulatory compliance tasks may increase the risk of the bank failing to meet its regulatory requirements.
- Insufficient risk management to meet consumer protection obligations: Insufficient oversight of these arrangements may impact a bank’s compliance with consumer protection laws and regulations.
- Lack of contracts: Multiple levels of third-party and subcontractor relationships, in which the bank does not have direct contracts with third parties, may pose challenges to the bank’s ability to identify and monitor various risks.
- Lack of experience with new methods: Arrangements leveraging new methods of facilitating deposit products may result in inadequate risk and compliance management practices.
- Weak audit coverage: Lack of sufficient audit scope and coverage, follow-up processes, and remediation may result in inadequate oversight.
Growth
- Misaligned incentives: A third party’s incentives may not align with those of the bank, such as when a third party may have the incentive to promote growth in a manner that is not aligned with the bank’s regulatory obligations.
- Operational capabilities lag growth: Rapid growth as a result of these arrangements may result in risk management and operational processes struggling to keep pace.
- Financial risks from funding concentrations: Arrangements may result in a significant increase in funding concentrations, which may make it more challenging for the bank to manage and mitigate liquidity and funding risks.
- Inability to manage emerging liquidity risks: Arrangements where a significant proportion of a bank’s deposits or revenue are associated with a third party may pose liquidity risks; as a result, the bank may be reluctant to make decisions necessary to manage those risks, including, if necessary, to terminate the arrangement.
- Pressure on capital levels: Arrangements may result in material and rapid balance sheet growth without commensurate capital formation.
End User Confusion and Misrepresentation of Deposit Insurance Coverage
- Potentially misleading statements and marketing: Third-party arrangements for the delivery of deposit services can pose risks of end-user confusion related to deposit insurance.
- Regulatory violations: Inaccurate or misleading information regarding the extent or manner under which deposit insurance coverage is available could constitute a violation under 12 C.F.R. Part 328, Subpart B.
The agencies have observed examples of effective risk management practices that a bank may consider when managing third-party arrangements for the delivery of deposit products and services
Those include:
Governance and Third-Party Risk Management
- Developing and maintaining appropriate policies that provide details about organizational structures, lines of reporting and authorities, expertise and staffing, internal controls, and audit functions to ensure that risks are understood and mitigated.
- Developing appropriate risk assessments that identify risks specific to features of each arrangement.
- Conducting and documenting due diligence that allows the bank to determine if it can rely on third parties to perform the various necessary roles to deliver deposit products and services on the bank’s behalf.
- Entering into contracts and agreements that clearly define roles and responsibilities of banks and third parties and enable banks to manage the risks of the arrangements effectively.
- Assessing potential risks when the bank does not have a direct contractual relationship with all parties with significant roles to determine whether and how such risks can be sufficiently mitigated.
- Establishing effective monitoring processes, commensurate with the risk of each activity and relationship.
Managing Operational and Compliance Implications
- Maintaining a clear understanding of any management information system (MIS) that will be used to support the activity, including any obligations and contractual reporting requirements when the deposit and transaction system of record is managed through the third party or through a subcontractor to another party.
- Developing and maintaining risk-based contingency plans, which address potential operational disruption or business failure at the third party that may disrupt end users’ access to funds, including contractual provisions that facilitate the bank’s contingency plans.
- Implementing internal controls to mitigate risks inherent in deposit functions.
- Establishing adequate policies and oversight to help ensure the bank complies with applicable laws and regulations, including consumer protection requirements.
Managing Growth, Liquidity, and Capital Implications
- Establishing appropriate concentration limits, diversification strategies, liquidity risk management strategies, and exit strategies, as well as maintaining capital adequacy.
- Performing appropriate analysis to determine whether parties involved in the placement of deposits meet the definition of a deposit broker under 12 U.S.C. § 1831f and implementing regulations, 12 C.F.R. § 337.6, and appropriately reporting any such deposits as brokered deposits in the Call Report.
Addressing Misrepresentations of Deposit Insurance Coverage
- Establishing policies and procedures and developing prudent risk management practices for certain deposit-related arrangements to ensure compliance with 12 C.F.R. Part 328, Subpart B, which prohibits misrepresentation of deposit insurance.
- Ensuring such policies and procedures include, as appropriate, provisions related to monitoring and evaluating activities of persons that facilitate access to the bank’s deposit-related services or products to other parties, as required under Part 328.
John L. Culhane, Jr., Ronald K. Vaske, and Joseph Schuster
Banking Regulators Seek Comment on Third-Party Relationships With Financial Institutions
The federal banking regulators are seeking comment to better understand the relationship between financial institutions and third parties that work for them.
The OCC, Federal Reserve, and FDIC “seek public comment to build on their understanding of these arrangements, including with respect to roles, risks, costs, and revenue allocation,” the agencies said. “The agencies also seek additional information and stakeholder perspectives relevant to the implications of such arrangements, including for banks’ risk management, safety and soundness, and compliance with applicable laws and regulations.”
Bank-fintech relationships may enable banks to leverage newer technology to offer innovative products to meet evolving customer expectations, the agencies said. At the same time, those relationships may introduce potential risks, the agencies said, adding that the failure of banks to manage them may present consumer protection, safety and soundness and compliance concerns.
The agencies are seeking information about how fintechs support increased access to financial services and products. They also are asking stakeholders about the range of practices for managing heightened risks.
In addition to the request for comment, the agencies issued a lengthy statement outlining the risks that third-party and fintechs pose.
Comments are due 60 days after the Request for Information is published in the Federal Register.
Ronald K. Vaske, John L. Culhane, Jr., and Joseph Schuster
FDIC Urges Financial Institutions to Complete Voluntary Diversity Self-Assessments
The FDIC is urging financial institutions it supervises to voluntarily submit self-assessments of their diversity policies and practices to the agency by Oct. 31, 2024.
The agency said that the self-assessment is not an examination requirement and that the results are not shared with examiners. The results also have no impact on an institution’s safety and soundness, its consumer compliance ratings or its Community Reinvestment Act performance evaluation, the agency said.
The FDIC analyzes diversity self-assessment information detailed in the Interagency Statement pursuant to Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. With regard to the assessment of the diversity policies and practices of regulated entities, Section 342 provides that nothing regarding the development of standards for such assessments may be construed to mandate any requirement on or otherwise affect the lending policies and practices of any regulated entity, or to require any specific action based on the findings of the assessment.
The standards cover:
- Organizational commitment to diversity and inclusion;
- Workforce profile and employment practices;
- Supplier diversity;
- Practices to promote transparency of organizational diversity and inclusion; and
- Entities’ self-assessment.
The FDIC provides users with a guide, a video, and other resources intended to help institutions assess and identify ways to strengthen their diversity policies and practices in line with their size and unique characteristics.
The FDIC said it will treat all information gathered as confidential commercial information to the extent permitted by law, though in drafting self-assessments, covered entities should keep in mind that requests for disclosure of data or information will be processed in accordance with applicable law, including the Freedom of Information Act.
The diversity self-assessment form is fully automated and accessible online through the secure FDICconnect portal.
Ballard Spahr’s Diversity, Equity, and Inclusion Counseling Team will continue to monitor regulatory and legislative updates in this area. The team consists of Ballard Spahr lawyers from several practice groups who regularly advise financial institutions and other organizations on conducting gap assessments and developing strategic plans to address diversity, equity, and inclusion.
Dee Spagnuolo and Brian D. Pedrow
FinCEN Highlights Differences in CDD Rule and CTA Reporting of BOI
Thereby Highlighting Need for Future Changes to Banks’ CDD Rule Systems
The Financial Crimes Enforcement Network (FinCEN) has published a two-page reference guide (Guide) comparing the requirements for reporting beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA) with the current requirements for covered entity customers to report BOI to their financial institutions (FIs) under the Bank Secrecy Act’s Customer Due Diligence (CDD) Rule.
Entitled “Notice to Customers: Beneficial Ownership Information Reference Guide,” the Guide is styled as a reference tool for business customers of banks who also are covered by the CTA. It is predominated by a chart, which we set forth at the end of this blog post, setting forth the differences in what information needs to be reported under the different reporting regimes. But, as we discuss, the Guide also serves as a reminder to FIs — intentionally or not — that they soon will be required to revamp their long-standing CDD Rule compliance systems.
The Guide observes, very generally, that the CTA and the CDD Rule have different definitions of a “beneficial owner” subject to reporting. Although the Guide notes that the CDD Rule only requires the reporting of a single individual under the “control prong” of its “beneficial owner” definition (whereas there is no limit under the CTA regarding how many individuals may need to be reported under its control prong), the simplified Guide does not delve into just how much broader and more complicated the CTA is, vs. the CDD Rule, when defining “control.” The Guide also does not discuss the two reporting regimes’ differences in application, such as the fact that the CTA contains a major exemption to reporting (companies with more than 20 full-time employees in the U.S. which have filed a Federal income tax or information return in the U.S. in the previous year showing more than $5,000,000 in gross receipts or sales, and which have an operating presence at a physical office in the U.S.) that the CDD Rule lacks.
The Guide attempts to explain why these two similar reporting regimes exist simultaneously:
The CTA’s requirement that entities report information to FinCEN enables FinCEN to supply that information to law enforcement and other government agencies, as well as certain financial institutions. Agencies and institutions authorized to receive this information may then use it for a [sic] several specified purposes, most significantly combatting money laundering and other illicit activities that involve shell companies. Beneficial ownership collection requirements for financial institutions [under the CDD Rule], in contrast, are primarily intended to ensure that financial institutions know their customers and thus can prevent their institutions from being used to facilitate illicit activity.
FIs may obtain BOI from FinCEN’s CTA database in order to facilitate compliance with “customer due diligence requirements.” As FinCEN has explained in the Federal Register, “[t]he [final] regulation now specifies that the clause ‘customer due diligence requirements under applicable law’ includes ‘any legal requirement or prohibition designed to counter money laundering or the financing of terrorism, or to safeguard the national security of the United States, to comply with which it is reasonably necessary for a financial institution to obtain or verify beneficial ownership information of a legal entity customer.’” Thus, FIs are not confined to requesting and using CTA BOI only for “pure” CDD Rule compliance. Instead, FIs will be able to access CTA BOI more broadly, such as for the purposes of maintaining their BSA/AML compliance program; compliance with sanctions screening; potential filing of Suspicious Activity Reports; and conducting enhanced due diligence.
The Anti-Money Laundering Act requires FinCEN to issue regulations to attempt to align, i.e., revise, the CDD Rule with the CTA BOI reporting rules. FinCEN’s Spring 2024 Rulemaking Agenda indicates that the proposed regulations will be issued in October. The forthcoming proposed CDD Rule alignment regulations will need to address several important questions and potential challenges facing FIs, including the following:
- They should provide that FIs are not required to access the BOI database – particularly because FinCEN’s BOI reporting form will allow reporting companies to not provide key information. Even if the CDD Rule revision so states, however, it may become the case as a practical matter that regulators nonetheless expect FIs to access the CTA database as part of their overall BSA/AML compliance.
- They should provide a clear and practical mechanism for FIs to address situations in which BOI collected under the CDD Rule does not match BOI obtained through the CTA – particularly because FinCEN has indicated that it will not verify the accuracy of BOI collected under the CTA.
- Assuming that the proposed regulations change the current exceptions to CDD Rule reporting (because exceptions to reporting under the CTA and the CDD Rule are currently different), they should explain clearly how FIs can effectively adjust their current CDD Rule reporting systems, which have been in place for years, and provide sufficient time to do so.
- They should state that FIs may rely on BOI obtained from the CTA database, just like FIs may rely upon BOI obtained from customers under the current CDD Rule.
Here is the comparison chart provided in the Guide. As noted, it is styled as a reference for business owners. But it also serves as a dispiriting reminder to FIs of how they are likely going to be obligated to alter their long-standing systems for collecting and using CDD Rule BOI, once FinCEN issues final regulations changing the CDD Rule to match CTA reporting requirements.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.
Peter D. Hardy, Kaley N. Schafer, and Siana Danch
HUD Charges Appraiser, Appraisal Management Company, and Lender With Race Discrimination
The Department of Housing and Urban Development (HUD) recently charged multiple entities with housing discrimination based on an asserted biased appraisal and denial of a mortgage refinance loan application based on the appraisal. Charges were brought against the appraisal company, Maverick Appraisal Group; the appraisal management company, Solidifi U.S. Inc.; the lender, Rocket Mortgage, LLC; and the individual appraiser. The loan applicant initially filed a complaint with the Colorado Civil Rights Division, which later agreed to HUD investigating the matter.
In the charge, HUD alleged that in 2021, Rocket Mortgage denied a borrower’s application to refinance a mortgage based on what HUD considers to be a discriminatory appraisal report, in violation of the Fair Housing Act. According to the factual allegations, the applicant, a Black woman, applied to refinance a mortgage on a duplex in a predominantly white neighborhood in Denver, CO. In order to process her application, Rocket Mortgage ordered an appraisal of the property from Solidifi. Solidifi, in turn, selected Mr. Mykhailyna of Maverick Appraisal Group to conduct the appraisal and provided him with Rocket Mortgage and Solidifi’s extensive guidelines and instructions for the appraisal. HUD concluded that the appraiser reached an “insupportably low” value for the borrower’s duplex based on the following asserted factors, among others:
- Property values in the area were generally increasing around the time of the subject appraisal, which was the only appraisal of the subject property out of seven conducted over nine years that indicated a drop in the property’s value ($640,000 in 2021, compared to $860,000 in 2020 and $750,000 in 2018).
- In selecting comparables, the appraiser chose properties only to the east of the subject property, in areas with higher concentrations of Black residents, ignoring several closer duplexes to the west in a more predominantly White area that had higher sales prices, and the appraiser had used comparables in that area when appraising a home in the same area as the subject property for a White owner.
- The appraiser failed to account for positive adjustments that would have come from including a more detailed description of the basement and the consideration of recent renovations that were made to the property.
- In conducting appraisals for White property owners in the same neighborhood, the appraiser made area adjustments reflecting a more favorable view of the neighborhood, and he described the area’s access to amenities more favorably.
According to HUD, after reviewing the appraisal report, the applicant spoke with representatives at Rocket Mortgage about her concerns that the report might be discriminatory. HUD also claims that Rocket Mortgage then informed the applicant that she could proceed with her loan application using the appraised value or she could have her loan application cancelled or denied and her discrimination complaint referred to Rocket Mortgage’s Client Relations Department. Ultimately, the application was “cancelled” and “denied,” and the applicant was unable to refinance her mortgage for a lower interest rate or more favorable terms.
In the announcement regarding this charge, Diane M. Shelley, HUD’s Principal Deputy Assistant Secretary for Fair Housing and Equal Opportunity stated, “HUD will continue to vigorously enforce the Fair Housing Act against those who seek to limit the financial returns associated with homeownership because of race or any other protected characteristic.” Due to the official charge from HUD, the case will be assigned to an administrative law judge, unless any party elects to have the case heard in federal district court. Potentially, a decision on the matter may provide guidance to the industry regarding appraisal bias claims.
Loran Kilson and Richard J. Andreano, Jr.
On July 19, we blogged about comments Acting Comptroller Hsu made before the Exchequer Club on July 17 particularly his decision to review prior OCC preemption determinations in light of the U.S. Supreme Court’s recent opinion in Cantero v. Bank of America reversing the Second Circuit’s holding that a New York State law which requires the payment of 2 percent interest on mortgage escrow accounts is preempted because such law exercises control over a federal power, regardless of the magnitude of its effects. Cantero, 144 S. Ct. at 1296. According to the Supreme Court, the Second Circuit’s approach did not comply with the Dodd-Frank Act because, instead of conducting a “nuanced comparative analysis,” the Second Circuit “relied on a line of cases going back to McCulloch v. Maryland to distill a categorical test that would preempt virtually all state laws that regulate national banks, at least other than generally applicable laws such as contract or property laws.” Id at 1301.
On July 19, the Americans for Financial Reform Education Fund, the Center for Responsible Lending, Consumer Federation of America, Consumer Reports, National Association of Consumer Advocates, the National Consumer Law Center and Public Citizen (collectively, the Consumer Groups), in response to the Acting Comptroller’s speech, wrote a letter.
In their letter, the Consumer Groups demanded that the OCC “conduct a [case-by-case] nuanced assessment of those [state consumer financial] laws” and determine which ones “prevent or significantly interfere with the powers of national banks or federal savings associations.” The OCC must also “conduct the five-year review of any regulations and other determinations that remain on the books. The current preemption regulations impermissibly draw categorical lines. The OCC might prefer “a clearer preemption line… But Congress expressly incorporated Barnett Bank into the U.S. Code [,and] … Barnett Bank did not draw a bright line.” Instead, the OCC must “carefully account for and navigate [the Supreme] Court’s prior bank preemption cases” and “may find a state law preempted ‘only if,’ ‘in accordance with the legal standard’ from Barnett Bank, the law ‘prevents or significantly interferes with the exercise by the national bank of its powers.’”“ Cantero, 144 S. Ct. at 1301
On July 26, 2024, the Conference of State Bank Supervisors wrote a similar letter to the Acting Comptroller.
This may be one of the few times that we have agreed with the Consumer Groups about any policy interpretation. As we have stated in other blogs, the same preemption issue in pending before the Second, First, and Ninth Circuits. As things stand now, none of those courts will defer to the OCC’s preemption regulations because they are clearly not in accordance with Cantero, Barnett Bank and Dodd-Frank. If, however, the OCC conducts a “nuanced “ review of its preemption regulations in accordance with Cantero, Barnett Bank and Dodd-Frank, the circuit courts and the U.S. Supreme Court may give them Skidmore deference. We think that the end result of having the OCC conduct its review in advance of the three circuits deciding the preemption cases before them is likely to be more satisfactory to the industry than having the three courts decide the cases without the expert guidance from the OCC. We hope that the parties will jointly seek stays from the circuit courts and that the courts will grant stays pending the outcome of the OCC review.
Alan S. Kaplinsky, Joseph Schuster, and John L. Culhane, Jr.
We are following very closely this appeal to the 10th Circuit of the preliminary injunction issued by the Federal District Court for the District of Colorado to the plaintiffs (three trade groups) enjoining the Colorado Attorney General and UCCC Administrator from enforcing the new Colorado opt-out statute against out-of-state, state banks who made loans from out-of-state to Colorado residents. (In the district court, we filed an amicus brief supporting the plaintiffs on behalf of the American Bankers Association and Consumer Bankers Association. At present, the statute applies only to state banks located in Colorado that make loans to residents of Colorado or elsewhere.
(By way of a refresher, Section 525 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) empowers states to opt-out of Section 521 of DIDMCA with respect to “loans made” in the opt-out state. Section 521 of DIDMCA confers on state chartered, FDIC-insured banks the same usury authority that national banks have enjoyed under Section 85 of the National Bank Act, which, because of the 1978 U.S. Supreme Court opinion in Marquette National Bank v. First of Omaha Services Corp., includes the right to charge borrowers throughout the country the same interest which is allowed by the state where the national bank is located. This is called the right to export interest. Colorado enacted a statute last year which purported to thwart this exportation right.)
On August 6, 2024, the 10th Circuit set the following briefing schedule: “Appellant’s brief and appendix must be filed on or before September 16, 2024. Appellee may file a response brief within 30 days after service of appellant’s brief. If a response brief is filed, Appellant may file a reply brief within 21 days after service of appellee’s brief.”
In the district court, Colorado filed a motion asking the Court to stay the preliminary injunction pending the outcome of the appeal. It has not been decided yet by the district court, but the Court will surely deny the motion since it requires a showing that the movant is likely to prevail on the merits of the appeal. Colorado needed to first seek a stay from the district court in order to seek a stay of the injunction from the 10th Circuit, where it will also have to persuade the Court that it is likely to prevail on the merits.
The outcome of this case is of extraordinary importance to state banks engaged in interstate lending by themselves or partnered with non-bank fintech companies. A win for Colorado is likely to spawn a number of similar statutes throughout the country.
Alan S. Kaplinsky, Burt M. Rublin, Ronald K. Vaske, Richard J. Andreano, Jr., and Mindy Harris
Update on DOL’s Final Rule Increasing Compensation Thresholds for FLSA Overtime Exemptions
As we previously reported, the Department of Labor (DOL) published its final rule, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees,” on April 23, 2024, which raised the salary thresholds for “white-collar” and highly compensated employees, rendering millions of employees eligible for overtime. The final rule phased in the new thresholds beginning July 1, 2024. As we predicted, the final rule has faced legal challenges and scrutiny, with the focus of those challenges in Texas federal court. However, with only one exception, the final rule remains in effect for all employers.
Recap of the Final Rule
The Fair Labor Standards Act (FLSA) requires employers to pay workers overtime at a rate of 1.5 times the employee’s regular rate of pay for all hours worked in excess of 40 per week. Section 13(a)(1) of the FLSA carves out an exemption to overtime pay for employees who are “in a bona fide executive, administrative, or professional capacity” (EAP), which generally applies to “white-collar” employees. However, in order to qualify for the EAP exemption: (1) the employee must be paid a predetermined and fixed salary not subject to reduction (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties defined by the regulations (the duties test).
The new rule significantly increases the annual salary threshold (previously $35,568) in a phased approach:
- Effective July 1, 2024, the salary threshold increased to $43,888 annually/$844 per week.
- Effective January 1, 2025, the salary threshold will increase to $58,656 annually/$1,128 per week.
The final rule also increases the annual earnings threshold for the highly compensated employee (HCE) exemption (previously $107,432) to $151,164 for full-time salaried workers. The HCE exemption does not require a duties test analysis because the high compensation serves as a strong indicator of exempt status. The DOL will increase the HCE threshold in two phases:
- Effective July 1, 2024, the HCE threshold increased to $132,964 annually.
- Effective January 1, 2025, the HCE threshold will increase to $151,164 annually.
Legal Challenges in Texas Federal Court
On June 3, 2024, the state of Texas filed a lawsuit, State of Texas v. Dep’t of Labor, No. 4:24-cv-00499 (E.D. Tex.), seeking nationwide injunctive relief to block the final rule from taking effect on July 1, 2024. The court consolidated the lawsuit with another challenge filed by Texas business groups, Plano v. Chamber of Commerce, et al. v. Su, et al., No. 4:24-cv-468 (E.D. Tex.), and granted a limited injunction blocking the rule only as applied to the State of Texas in its capacity as an employer.
The court held that because “the EAP exemption requires that exemption status turn on duties – not salary – and the 2024 Rule’s changes make salary predominate over duties for millions of employees, the changes exceed the authority delegated by Congress to define and delimit the relevant terms. Therefore these changes to the minimum salary level are likely in excess of statutory jurisdiction.” Notably, this decision does not affect any other employer, and does not permit noncompliance with the final rule.
Interestingly, the Northern District of Texas also addressed a request for a nationwide injunction to block the rule from taking effect on July 1, 2024. In Flint Avenue, LLC v. Su, et al., No. 5:24-cv-00130 (N.D. Tex), the court denied a private employer’s request for an injunction because it did not making a showing of irreparable harm (the July 1 salary threshold increase would only affect one employee).
Chevron Deference
On June 28, 2024, days after the Texas court issued the preliminary injunction in State of Texas v. DOL, the U.S. Supreme Court issued its opinion in Loper Bright Enterprises v. Raimondo, upending the 40-year old precedent of “Chevron deference” under which courts deferred to agency interpretations of ambiguous statutory language. The Loper Bright decision expands the courts’ authority to independently interpret statutes without deference to the administrative agencies that enforce them. Given that the Texas federal court’s decision questioned the DOL’s statutory authority with respect to its final rule, it is likely that we will see further challenges to the final rule, and that Loper Bright may support a permanent injunction with broader implications.
Moving Forward
The July 1, 2024 threshold increases are currently in effect. While the state of Texas, as an employer, has secured a decision blocking implementation of the final rule as to it, the final rule is still in effect for all other employers. Employers should review current employee classifications to identify the impact on their workforce, adjust or redefine work duties, and reclassify employees as necessary. Employers should also make sure they are compliant with the July 1, 2024 increases, and prepare for the upcoming January 1, 2025 increases to take effect.
We continue to monitor the litigation on the overtime rule and will report on further developments.
Ballard Spahr’s Labor and Employment Group frequently advises employers on issues related to worker misclassification and the development of wage and hour policies. We also regularly defend employers in wage and hour litigation and DOL investigations. Please contact us if we can assist you with these matters.
Shannon D. Farmer and Katherine E. Rodriguez
On August 1, 2024, the Department of Justice launched its Corporate Whistleblower Awards Pilot Program (the Pilot Program). Under this 3-year initiative managed by DOJ’s Criminal Division, a whistleblower may be eligible for an award of up to $50 million if she provides DOJ with information about corporate misconduct in certain industries. As described in greater detail in the program guidance and below, the information must relate to at least one of four areas, including certain crimes relating to financial institutions, foreign corruption by companies, domestic corruption by companies and federal health care offenses involving private or other non-public health care benefit programs.
The Pilot Program has particular implications for financial institutions (FIs) and their anti-money laundering/countering the financing of terrorism (AML/CFT) compliance program personnel. Real-world application of the Pilot Program presumably will reveal the practical interplay (and possible tensions) between the Pilot Program and the relatively new whistleblower provisions under Bank Secrecy Act (BSA) created by the Anti-Money Laundering Act (AML Act), on which we have blogged frequently (see here, here, here, here, here and here).
Who is Eligible for an Award?
An individual, or group of individuals – not a corporation or other entity – is eligible to share in the net proceeds of a civil or criminal forfeiture if they provide DOJ with information in writing about corporate crime that results in a successful forfeiture exceeding $1,000,000.
The individual’s submission must be voluntary, meaning it must occur: (i) before DOJ requests or demands the information; (ii) where the individual has no preexisting obligation (such as a cooperation agreement) to provide the information; and (iii) where there is no government investigation or threat of imminent disclosure.
And to be eligible for an award, the whistleblower must not have “meaningfully participated” in the criminal conduct they are reporting, and they must be truthful and not withhold significant information.
Original Information
The individual must provide “original information” – information the individual knows from their own personal experiences or communications and not from publicly available sources. In addition, the information must not be known by DOJ, except where the information materially adds to the information DOJ already has.
The definition of “original information” is relevant to AML/CFT compliance personnel of FIs. The Pilot Program states that information is not ”original” if the individual “learned the information in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law[,]” as well as information provided by “an employee whose principal duties involve compliance or internal audit responsibilities . . . and the information relates to or is derived from these responsibilities or functions[.]” This language appears to apply to the vast majority of information that could be provided by AML/CFT compliance personnel, whose jobs focus on identifying illicit finance and potential violations of law (including misconduct by a FI insider) and addressing them, either by enhancing transaction monitoring of the account at issue, terminating the account, and/or filing Suspicious Activity Reports (SARs).
This language is very different than the whistleblower provisions of the AML Act, which explicitly invite without limitation internal compliance officers of FIs to use the information obtained through their compliance functions in order to pursue a whistleblower reward.
However, the Pilot Program provides that compliance personnel’s information still will be deemed to be “original” if the reporting individual has a “reasonable basis to believe” that (a) disclosing the information to DOJ “is necessary to prevent the relevant individual or entity from engaging in criminal conduct that is likely to harm national security, result in crimes of violence, result in imminent harm to patients in connection with health care, or cause imminent financial or physical harm to others;” or (b) the subject of the report is engaging in obstructive conduct.
Further, information learned as a result of a reporting individual’s internal compliance function still will be “original” if “at least 120 days have elapsed since they provided the information to the relevant entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or their supervisor, or since they received the information, if they received it under circumstances indicating that the entity’s audit committee, chief legal officer, chief compliance officer (or their equivalents), or their supervisor was already aware of the information.”
Although the above complications of the Pilot Program may bedevil potential whistleblowers and their attorneys seeking monetary awards, these nuances will not make much practical difference to a FI that has received a whistleblower complaint. As discussed below, the Pilot Program imposes a very short timeline on companies to self-report to DOJ potential misconduct which has come to light. A whistleblower’s information will constitute a possible threat to a company regardless of whether the whistleblower recovers.
What are the Eligible Subject Areas?
An individual’s information must pertain to one of the following subject matter areas:
- Violations by financial institutions, including money laundering, anti-money laundering compliance violations, registration of money transmitting businesses, and fraud against or non-compliance with financial institution regulators.
- Violations by or through companies and related to foreign corruption and bribery, including violations of the Foreign Corrupt Practices Act, the Foreign Extortion Prevention Act, and money laundering statutes.
- Violations committed by or through companies related to the payment of bribes or kickbacks to domestic public officials.
- Federal health care violations not covered by the Federal False Claims Act, 31 U.S.C. § 3729, et seq., including (i) crimes involving private or other non-public health care benefit programs, where the overwhelming majority of claims are submitted to private or other non-public health care benefit programs, and (ii) fraud against non-governmental entities in the health care industry, where the overwhelming majority of the actual or intended loss was to patients, investors, and other non-governmental entities.
How Much Can a Whistleblower Be Awarded?
A whistleblower may be eligible for an award of up to 30 percent of the first $100 million of the forfeited proceeds and up to 5 percent of any net proceeds forfeited between $100 million and $500 million. Thus, a whistleblower could be awarded as much as $50 million. However, owners and lienholders of the property and individual victims of the scheme will be compensated first, with the whistleblower award taken from whatever forfeiture assets remain.
The amount of the award is solely within DOJ’s discretion. DOJ may increase the award based on: (i) the importance of the information provided; (ii) the amount of assistance provided by the whistleblower; and (iii) whether the whistleblower reported the suspected criminal conduct through an internal compliance system.
DOJ may decrease the award if the whistleblower: (i) profited from the underlying criminal conduct; (ii) unreasonably delayed reporting the conduct; (iii) interfered with a company’s internal compliance and reporting systems by making false statements or withholding information; or (iv) had a supervisory role over the offices or personnel engaged in the conduct.
The Pilot Program’s focus on forfeiture is a critical difference between the AML Act’s whistleblower provisions, which entitles whistleblowers to an award of between 10 and 30 percent of the value of “monetary sanctions” above $1 million collected as a result of an enforcement action. Importantly, “monetary sanctions” do not include forfeiture under the AML Act. That is an odd limitation: historically, the vast majority of significant AML-related criminal enforcement actions have rested on forfeiture. For example, Danske Bank was sentenced to pay over $2 billion in forfeiture for its alleged AML-related failures. Thus, in this regard, the Pilot Program is a much more attractive vehicle to would-be AML/CFT whistleblowers than the AML Act itself.
Interplay With Other Whistleblower Programs
The Pilot Program states that an individual is not eligible if “[t]hey would be eligible for an award through another U.S. government or statutory whistleblower, qui tam, or similar program if they had reported the same scheme that they reported under this pilot program.” This language is potentially confusing because it appears to exclude many potential whistleblowers who also could report the same scheme under the AML Act, and/or to the SEC or to the IRS, whose whistleblower programs often will apply to much of the same conduct also covered by the Pilot Program.
This confusion is mitigated at least in part by a footnote in the Pilot Program, which states that if an individual is unsure of whether they may qualify for another whistleblower program or the Pilot Program, “they should submit information to both programs so that the [DOJ] can assess the information and determine whether the individual may qualify for the Pilot Program.” Companies therefore can expect that a whistleblower will report alleged misconduct to multiple agencies.
Takeaways
The purpose of the Pilot Program is to incentivize individuals to report corporate crime to DOJ and (although it is not a condition precedent for receiving an award) internally. The incentive to report to DOJ is obvious; but reporting internally could lead to a higher award from DOJ, provided the individual also reports their information to DOJ within 120 days of reporting it internally (even if the corporation reports the conduct to DOJ first).
At the same time it launched the Pilot Program, DOJ’s Criminal Division also temporarily amended its Corporate Enforcement and Voluntary Self-Disclosure Policy to provide that if a whistleblower makes both an internal report and a report to DOJ, the company will still qualify for a presumption of declination as long as it self-reports the conduct to DOJ within 120 days of receiving the whistleblower’s internal report.
This gives companies an enormous incentive to enhance their existing corporate compliance programs, including, or most importantly, by encouraging internal reporting of complaints. The benefit to the company of encouraging internal reporting is great – it provides the corporation with an opportunity to identify and remediate the conduct and make a voluntary self-disclosure to DOJ in order to qualify for a declination.
But as we know, doing all that within 120 days will be difficult. Companies should prepare by beginning to enhance their corporate compliance programs now, including by training compliance specialists on how to quickly and properly respond to complaints, and, by consulting with external counsel as soon as they learn that a complaint has legitimacy. By doing so, the company has the best chance of maintaining declination eligibility.
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.
Beth Moskow-Schnoll and Peter D. Hardy
MBA Human Resources Symposium 2024
September 18-19, 2024 | MBA Headquarters, Washington, D.C.
Fair Labor Standards Act and 2024: New Rules, New Headaches
September 18, 2024 – 9:15 AM ET
Speaker: Meredith S. Dante
The Loan Originator Compensation and Other Regulatory and Legal Developments
September 18, 2024 – 1:00 PM ET
Speaker: Richard J. Andreano, Jr.
MBA Compliance and Risk Management Conference
September 22-24, 2024 | Grand Hyatt, Washington, D.C.
Compliance Conversations Track: RESPA Section 8
September 22, 2024 – 2:15 PM ET
Speaker: Richard J. Andreano, Jr.
Trending Compliance Issues Track: Servicing Compliance Part 1 Loss Mitigation Updates
September 24, 2024 – 9:15 AM ET
Speaker: Reid F. Herlihy
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