Bank Regulatory News and Trends

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

In this edition:

• First ILC approval in four years granted by FDIC.
• FinCEN issues proposed rule to update and reinforce financial institutions’ AML/CFT obligations.
• Regulators seek stakeholder input on bank-fintech arrangements.
• “The CFPB is here to stay,” says Director Rohit Chopra.
• CFPB proposal would treat paycheck or “earned wage advance” products as consumer loans.
• New FDIC chair nominee could get a Senate vote in September.
• CFPB rolls out rule deeming Buy Now, Pay Later lenders credit card providers.
• Two more states adopt commercial financing disclosure requirements.

First ILC approval in four years granted by FDIC. The Federal Deposit Insurance Corp. (FDIC) approved a deposit insurance application to create Thrivent Bank, a newly chartered industrial bank to be headquartered in Salt Lake City, Utah. The FDIC board also approved a companion application to merge Thrivent Federal Credit Union into Thrivent Bank. This marks the first time since 2020 that FDIC granted insurance to an industrial loan company (ILC). The Deposit Insurance Approval Order and the Merger Approval Order were announced on June 21, 2024. As a condition of approval, Thrivent must launch the bank within 12 months. The merger also requires approval of the National Credit Union Administration.

• In the past few years, several financial services firms have submitted but subsequently withdrawn ILC applications. A bipartisan group of 18 US senators, in a March 13, 2024 letter to the FDIC, urged the agency to give “fair consideration” to ILC applications. “We strongly oppose regulatory actions, both formal and informal, that might target lawful ILC charter applications and are concerned about the delays in the FDIC’s review and final decisions on pending applications,” the senators wrote in the letter spearheaded by Senator Mitt Romney (R-UT), whose state of Utah is home to 15 industrial banks that employ 6,000 people.

FinCEN issues proposed rule to update and reinforce financial institutions’ AML/CFT obligations. The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking on June 28, 2024, intended to strengthen and modernize financial institutions' anti-money laundering and countering the financing of terrorism (AML/CFT) programs pursuant to a part of the Anti-Money Laundering Act of 2020. The proposed rule would require financial institutions to establish, implement, and maintain effective, risk-based, and “reasonably designed” AML/CFT programs with certain minimum components, including a mandatory risk assessment process consistent with their risk profiles. It would also require financial institutions to review government-wide AML/CFT priorities and incorporate them into risk-based programs and provide for technical changes to program requirements. FinCEN’s proposal was prepared in consultation with other key banking regulators, including the Federal Reserve, FDIC, Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA).

• Comments on the June 2024 notice of proposed rulemaking are due by September 3, 2024.

Relatedly, on July 19, 2024, the Federal Reserve, FDIC, OCC, and NCUA announced the publication of updates to their respective regulations requiring supervised institutions to establish, implement, and maintain effective, risk-based, and reasonably designed AML/CFT programs. The agencies noted that these regulatory “amendments are intended to align with changes concurrently proposed by [FinCEN], most of which result from the Anti-Money Laundering Act of 2020.”

• The agencies’ 23-page notice of proposed rulemaking was published in the Federal Register on August 9, 2024.
• Comments are due by October 8, 2024.

Regulators seek stakeholder input on bank-fintech arrangements. The three main federal banking regulatory agencies – the Federal Reserve, the FDIC, and the OCC – jointly issued a Request for Information (RFI) on banks’ partnerships with financial technology companies involving banking products and services distributed to consumers and businesses. The RFI, announced on July 25, 2024, and slated for publication in the Federal Register in the near future, solicits input on the nature of bank-fintech arrangements, effective risk management practices regarding these relationships, and whether enhancements to existing supervisory guidance may be necessary. This RFI release follows recent enforcement actions by the agencies against banks for insufficient monitoring, governance, and risk controls surrounding bank partnership arrangements. The agencies emphasize that the RFI is not intended to impose any obligations or define any rights, nor is it an interpretation of any regulation or statute. Comments will be due 60 days after the RFI is published in the Federal Register.

• In a related development, the agencies at the same time issued a joint statement on banks’ arrangements with third parties to deliver bank deposit products and services to end users. The statement highlights certain risks that may be elevated in the delivery of deposit products and services through a third party. It also discusses examples of effective risk management practices that the agencies have observed and lists existing agency resources, including guidance, interagency statements, and other issuances for banks to consider.

“The CFPB is here to stay,” says Director Rohit Chopra. Following the US Supreme Court decision affirming the constitutionality of the Consumer Financial Protection Bureau (CFPB)’s funding structure, which bypasses the Congressional appropriations process, CFPB Director Rohit Chopra said the agency “is here to stay” and “will be firing on all cylinders.” On May 16, 2024, the Court found, in a 7-2 ruling, that the funding scheme does not violate the Appropriations Clause – reversing the Fifth Circuit’s contrary ruling from 2022. (For more information, please see DLA Piper publication: What is next for the CFPB after the Supreme Court’s decision affirming its constitutionality?) Chopra said in a press briefing the day after the ruling that while the case was pending before the high court, 14 CFPB enforcement actions were put on hold. According to published reports, the CFPB’s enforcement office is adding 75 staff members, swelling its ranks to 275 staffers.

• The battle over CFPB funding is not over yet. A group of Senate Banking Committee Republicans on June 12, 2024 introduced legislation – the Consumer Financial Protection Bureau Accountability Act (S. 4521) – to subject CFPB funding to the regular annual Congressional appropriations process. Similar legislation – the CFPB Transparency and Accountability Reform Act (H.R. 2798) – was approved by the House Financial Services Committee last year and is awaiting action by the full House.
  
  
• Meanwhile, the CFPB continues to be the subject of more legal wrangling. As reported in our April 2024 edition of Bank Regulatory News and Trends, a federal judge in Texas transferred to the District of Columbia a banking industry lawsuit over the bureau’s recently adopted limits on credit card late fees. A short time later, the Fifth Circuit Court of Appeals reversed the transfer. In the latest twist, on May 28, 2024, District Judge Mark Pittman ruled that the case against the CFPB was improperly filed in Texas, and re-transferred the case to Washington, DC.

CFPB proposal would treat paycheck or “earned wage advance” products as consumer loans. In a departure from prior CFPB guidance, the CFPB proposed an interpretative rule stating that many earned wage advance (EWA) products will be categorized as consumer loans subject to the Truth in Lending Act (TILA). These products, supported by many as an improved alternative to payday loans, allow workers to tap their earned wages before payday. The CFPB found average fees to employees for EWA products was $3.18. The CFPB says that the interpretative rule would “ensure that lenders understand their legal obligations to disclose the costs and fees of these credit products to workers.” The new guidance specifies that many EWA products, including both those provided through employer partnerships, as well as those marketed directly to employees, trigger TILA obligations.

Additionally, the proposal clarifies that optional fees, referred to as “tips,” and expedited delivery fees meet the TILA standard for being finance charges. Many of the requirements would not apply in cases where no fee to the employee is involved. EWA providers would be expected to provide workers with disclosures about the finance charges, which the CFPB said would both benefit borrowers and lead to a more competitive marketplace. Importantly, the decision also likely causes EWA providers to fall within the definition of a lender, and may require licensure under state laws that define lenders by reference to TILA.

• In conjunction with the new guidance, the CFPB also published a report examining employer-sponsored paycheck advance loans. Among other findings, the report indicates that workers using these employer-sponsored products take out an average of 27 such loans per year, and that the typical employer-sponsored loan carries an annual percentage rate (APR) over 100 percent. More than 7 million workers accessed about $22 billion in wages before payday in 2022, and the number of transactions increased more than 90 percent from 2021 to 2022, according to the CFPB analysis.
  
  
• Public comments on the proposed interpretative rule will be accepted until August 30, 2024.

New FDIC chair nominee could get a Senate vote in September. Senate Banking Committee Chair Sherrod Brown (D-OH) is seeking to schedule a September committee vote on President Joe Biden’s pick to take over as chair of the FDIC. On June 13, 2024, President Biden announced his nomination of Christy Goldsmith Romero to head up the FDIC. On May 20, 2024, current FDIC Chair Martin Gruenberg announced his intention to step down once a successor is confirmed by the Senate. Members of Congress from both parties had called for Gruenberg’s resignation in the wake of reports of a pattern of sexual harassment and a toxic workplace culture at the agency. Goldsmith Romero’s July 11, 2024, confirmation hearing before the Banking Committee seemed to suggest strong Democratic support for the nomination. Committee Republicans pressed her on how she plans to address the internal culture issues at the agency, as well as how she would handle developing new rules for banks given the Supreme Court’s June 2024 ruling overturning the Chevron precedent, removing the previous deference to federal regulators. If Goldsmith Romero’s nomination is favorably reported by the committee, the full Senate would then have to vote on it.

• Goldsmith Romero has served as a commissioner at the Commodity Futures Trading Commission (CFTC) since March 2022. She previously served for 12 years at the Department of Treasury, including for a decade as the Special Inspector General for the Troubled Asset Relief Program. She has also taught at the Georgetown University and University of Virginia law schools, focusing on securities regulation, cryptocurrency regulation, and federal oversight.

CFPB rolls out rule deeming Buy Now, Pay Later lenders credit card providers. The CFPB issued an interpretative rule that determined Buy Now, Pay Later (BNPL) lenders are credit card providers. Under the rule, BNPL providers must afford consumers some of the same legal protections and rights that apply to conventional credit cards under TILA (interpreted in Regulation Z), including:

• Investigating disputes: BNPL providers must investigate disputes that consumers initiate, pause payment requirements during the investigation, and in some cases, issue credits.
• Refunding returned products or cancelled services: When consumers return products or cancel services for a refund, BNPL providers must credit the refunds to consumers’ accounts.
• Providing billing statements: Consumers must receive periodic billing statements like those received for conventional credit card accounts.

The interpretative rule is effective as of July 30, 2024, but the bureau may make revisions based on feedback from stakeholders.

• Responding to a rapidly expanding BNPL market, the CFPB in late 2021 launched an inquiry. A market report published by the bureau in September 2022 found that 13.7 percent of individual loans in 2021 had at least some portion of the order that involved a return or dispute – a 1.5 percent increase from the previous year. According to the report, from 2019 to 2021 the number of BNPL transactions originated in the US by the five providers surveyed grew by 970 percent, from 16.8 to 180 million, while the dollar volume of those transactions grew by 1,092 percent, from $2 billion to $24.2 billion.

Two more states adopt commercial financing disclosure requirements. Kansas and Missouri have joined the ranks of states that have enacted laws requiring a broad class of commercial financing providers to make disclosures similar to those mandated by the TILA regarding commercial financing transactions, including purchases of accounts receivable. Nine states in total now have similar laws and regulations on the books.

• The Kansas Commercial Financing Disclosure Act, which took effect July 1, 2024, applies to “commercial financing transactions” of $500,000 or less, defined to include any commercial loan, commercial open-end credit plan, lines of credit, and accounts receivable purchase transaction, with a business located in Kansas. A provider subject to the Kansas Act must disclose the following to the recipient of financing before, or at the time of, consummation:
  • Total amount of funds provided to the recipient
  • Total amount of funds disbursed to the recipient
  • Total of payments made to the provider
  • Total dollar cost of financing for the recipient
  • Manner, frequency, and amount of each payment (or estimates if these terms may vary, along with the provider’s methodology for calculating variable payments and circumstances where payments may vary), and
  • Prepayment costs or discounts.

• The Missouri law, Section 427.300 of the Missouri Senate Bill 1359, prescribes that several disclosures be made for commercial financing transactions. It applies to providers of commercial financing transactions and defines “provider” as a “person who consummates more than five commercial financings” to a business located in Missouri in any calendar year. “Commercial financing transactions” include any unsecured and secured commercial loan, accounts receivable purchase transaction, commercial open-end credit plan, or each to the extent the transaction is a business purpose transaction. The following entities and transactions are exempt from the Missouri law:
  
  • A depository institution or a subsidiary or affiliate
  • A service corporation to a depository institution that is owned and controlled by same and regulated by a federal banking agency
  • A lender regulated by the federal Farm Credit Act
  • Real estate-secured loans
  • A lease
  • A licensed money transmitter
  • Loans exceeding $500,000, and
  • Certain purchase money transactions.
    
    
• This law, which also contains a requirement that providers register with the applicable state agencies, takes effect August 28, 2024. The disclosure obligations go into effect on the earlier of (i) six months after the Missouri Division of Finance promulgates rules implementing the new law, or (ii) February 28, 2025.

California and New York were at the forefront of enacting disclosure laws. Utah, Virginia, Connecticut, Florida, and Georgia subsequently followed suit, with Utah and Virginia adopting registration requirements along the lines of the more recently enacted Missouri statute. For more information, see our past publications: State laws requiring commercial financing providers to provide disclosures and to register take effect, and More states set to require commercial financing disclosures.