Is the Bank Open? Federal Agencies Clarify Regulatory Requirements for Banking Hemp

Is the Bank Open? Federal Agencies Clarify Regulatory Requirements for Banking HempOn December 3, several federal agencies issued guidance (Guidance) that, by its terms, “provide[s] clarity” regarding “the regulatory requirements under the Bank Secrecy Act (BSA) for banks providing services to hemp-related businesses.” Hemp proponents hope this additional clarity will encourage hesitant financial institutions to begin serving the hemp industry.

The key takeaway from the Guidance – which was issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network (FinCEN), and the Office of the Comptroller of the Currency – is that banks are not required to file with FinCEN a “Suspicious Activity Report” (SAR) regarding a customer “solely because [the customer is] engaged in the growth or cultivation of hemp in accordance with applicable laws[.]” This distinguishes banking hemp (i.e., cannabis containing less than 0.3% THC) from banking marijuana (i.e., cannabis containing more than 0.3% THC) – a bank must file a marijuana-specific SAR for each marijuana-related customer under FinCEN’s 2014 guidance. This onerous regulatory requirement (which we analyzed here) has dissuaded many financial institutions from serving marijuana-related businesses.

In the Guidance’s statement that banks are not required to file a SAR “solely because [the customer is] engaged” in a hemp-related business, “solely” is the operative word. The Guidance emphasizes that banks should follow their “standard SAR procedures” to determine whether there is sufficient “indicia of suspicious activity” surrounding a hemp customer to warrant a SAR. Such “standard SAR procedures” are governed by the BSA and its implementing regulations, which require banks to conduct “risk-based customer due diligence” to inform their SAR-filing decisions. Despite hemp’s legalization under the 2018 Farm Bill, hemp businesses will remain higher-risk customers for financial institutions given the complex regulatory requirements for growing hemp and the fine line between federally-legal hemp and federally-illegal marijuana. Consequently, banks that serve the hemp industry must ensure their BSA/anti-money laundering compliance programs include robust procedures for conducting enhanced due diligence on hemp customers to determine whether a SAR is warranted. While crafting these hemp-specific procedures could be costly, the reward to banks willing to engage the underserved hemp industry could be well worth the cost.

The Guidance states that FinCEN will issue more comprehensive guidance regarding hemp banking after it has further evaluated the U.S. Department of Agriculture’s interim final rule, which established the regulatory framework for hemp production. Once FinCEN’s guidance is published, we will analyze it in detail.

First Circuit Holds that Parents’ Tuition Payments for Adult Children Are Fraudulent Transfers

First Circuit Holds that Parents’ Tuition Payments for Adult Children Are Fraudulent Transfers Recently, the First Circuit held that a parent’s tuition payments on behalf of an adult child do not benefit the parent’s bankruptcy estate, and a Chapter 7 trustee may therefore claw the payments back as fraudulent transfers.

The concept underlying fraudulent transfer law is that, if a person cannot pay his debts in due course, it is fraudulent to transfer his assets to another person with a motive to avoid paying his debts. This concept is extended to “constructive fraud” where the insolvent party transfers his assets — without a bad motive — but nonetheless fails to receive reasonably equivalent value in return for the transfer.

In Degiacomo v. Sacred Heart University, Inc. (In re Steven and Lori Palladino), the debtors paid more than $64,000 to Sacred Heart University for their daughter’s tuition. In 2014, the debtors were convicted of fraud for orchestrating a multimillion-dollar Ponzi scheme. The debtors and their business filed for relief under Chapter 7 of the Bankruptcy Code. The Chapter 7 trustee filed an adversary complaint the following year, alleging the tuition payments to Sacred Heart were fraudulent transfers, and seeking clawback of the tuition payments. The parties moved for summary judgment, and the bankruptcy court ruled in favor of Sacred Heart. The bankruptcy court ruled that the debtors believed they would benefit from having a self-sufficient daughter, and such benefit was reasonably equivalent value for the tuition payments.

On direct appeal, the First Circuit reversed the bankruptcy court’s ruling. The First Circuit noted that, although there is currently a divide among courts as to whether tuition payments made on behalf of an adult child may be clawed back as fraudulent transfers, the recent trend has favored trustees. The First Circuit considered whether the debtors received value — particularly in a form that is recognized under the Bankruptcy Code — as a result of paying their adult daughter’s tuition. Finding that the debtors did not receive any value for the tuition payments, and in fact did not have any legal responsibility to pay for their adult daughter’s tuition, the First Circuit held that the tuition payments were fraudulent transfers. Mere intangible, emotional, and non-economic benefits are not the type of value that can withstand a fraudulent transfer claim.

What’s Next?

As student loan debt increases, we can expect to see more cases where parents have made payments on their adult children’s loans or tuition. Should those parents file for bankruptcy, the First Circuit’s recent decision may support claims to recover student loan payments as fraudulent transfers. The courts remain divided on these issues, but we can anticipate more litigation in the future.

Notably, the First Circuit acknowledged that, if the debtors’ daughter had been a minor, the outcome could have been different. Because debtors have legal responsibilities to provide for their minor children, under certain circumstances, school tuition payments may not be considered as fraudulent transfers. However, courts are divided on this issue as well.

Georgia Publishes 11th-Hour Temporary Authority Rule Effective November 24, 2019

Georgia Publishes 11th-Hour Temporary Authority RuleIt has been almost 18 months since the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act or (as most people in the industry refer to it) the “Temporary Authority Act.” Section 106 of the act allows qualified applicants for mortgage loan originator (MLO) licenses to utilize temporary authority to continue to originate as a mortgage loan originator prior to being licensed by a state regulator. This situation would occur when an MLO is moving from employment with a federally regulated bank or bank affiliate to employment with a state-regulated independent mortgage banker or when a state licensed MLO is seeking licensure in an additional state. The act granting this temporary authority is set to go into effect November 24, 2019.  Since the passage of the act earlier this year, many states are adjusting to this new temporary authority protocol and are creating their own rules and processes. However, the Georgia Department of Banking and Finance published a notice of proposed rulemaking on November 18, 2019, leaving only six days prior to the effective date of the act for the industry to review and react to the proposed rules.

The department has proposed several additional state requirements for MLOs seeking to utilize temporary authority in Georgia prior to being licensed. These additional requirements include additional steps with regard to loan disclosures, advertising, loan transaction journal entry, and record keeping requirements. The new proposed rules also include additional signature requirements and additional notice to the department if using temporary authority in Georgia.

In this blog we summarize the new rules that will apply (if they are finalized) to mortgage companies or mortgage brokers operating in the state of Georgia that choose to employ MLOs that utilize temporary authority.

New Georgia Disclosure Requirements

The proposed rule includes an additional disclosure to the customer indicating that the loan originator is not licensed and may not ultimately be granted a license. The exact language that must be used is the following:

“The Georgia Department of Banking and Finance requires that we inform you that the mortgage loan originator responsible for your loan is not currently licensed by the Georgia Department of Banking and Finance. The mortgage loan originator has applied for a mortgage loan originator license with the Georgia Department of Banking and Finance. Federal law (12 U.S.C. § 5117) authorizes certain mortgage loan originators to operate on a temporary basis in the state of Georgia while their application is pending. The Georgia Department of Banking and Finance may grant or deny the license. Further, the Georgia Department of Banking and Finance may take administrative action against the mortgage loan originator that may prevent such individual from acting as a mortgage loan originator before your loan closes.”

The language must appear on the loan documentation in 10-point bold-face type. The disclosure must be signed by the consumer and must be maintained by the company.

New Georgia Advertising Requirements

The proposed rules require any advertisement to “clearly and conspicuously” indicate that the MLO is originating under the temporary authority but is currently unlicensed and has submitted an MLO application to the department. Additionally, the advertisement must include the phrase, “Department may grant or deny the license application.”

New Georgia Transaction Journal Requirements

Under the proposed rules, Georgia mortgage companies must identify when any MLO utilized temporary authority at any point in the origination process. The transaction journal should also notate the outcome of MLO’s application as either “approved, withdrawn, or denied.”

New Georgia MLO Signature Requirements

Additionally, the proposed rules state that any MLO who utilizes temporary authority must indicate “TAO,” (temporary authority to operate) or a substantially similar notification next to any signature on a loan document, including any that relates to the negotiation of terms or the offering of a loan.

New Georgia Department Notification Requirements

Finally, the last additional requirement states that any MLO who wishes to utilize temporary authority must submit proof of enrollment in a class that would satisfy department education requirements. The MLO must also provide notification of registration to take the national MLO test. Both notifications must be submitted within 30 days of the application submission on the NMLS. We note that any MLO that utilizes temporary authority that is already licensed in another state would already have taken the national test and completed many education requirements.

We note that the department has broad authority under the federal SAFE Act and state statutes to make rules and procedures associated with the temporary authority granted in the Temporary Authority Act. However, many have sensed a real hesitation from Georgia to embrace this new MLO status. This appears to be reflected in the new proposed rules, in the timing of the rules, and even in some of the comments shared. We believe this hesitation is most reflected in the following proposed rule:

Permitting unlicensed persons to engage in mortgage loan originator activities. Any licensee or registrant who employs a person who does not hold a mortgage loan originator’s license or does not satisfy the temporary authority to operate requirements set forth in 12 U.S.C. § 5117 but engages in licensed mortgage loan originator activities as set forth in O.C.G.A. § 7-1-1000(22) shall be subject to a fine of one thousand dollars ($1,000) per occurrence and the licensee or registrant shall be subject to suspension or revocation. Licensees are responsible for the actions of their employees.”

As such, Bradley plans on monitoring the roll out of temporary authority next week but will be paying particular attention as to how Georgia administers the temporary authority process.

Uncertainties Surround Rising Agricultural Debt and Default Rates in the U.S.

Uncertainties Surround Rising Agricultural Debt and Default Rates in the U.S.The United States and China reached the first phase of a trade deal on October 11th, postponing the next round of tariffs that President Trump planned to impose on Chinese goods the following week. Under the trade deal, which is still being negotiated, China agreed to buy billions of dollars’ worth of American agricultural products annually. China’s agreement to purchase U.S. agricultural products was likely at the center of negotiations for this trade deal because there has been a decline in U.S. farm revenues over the past few years. The decrease in farm revenues is troubling for many reasons, one of which is that, in this year alone, farmers are expected to hold over $400 billion in debt.

Of the over $370 billion in total farm debt in 2018, the USDA’s Farm Service Agency (FSA) provided roughly 2.6% of that debt through direct loans and 4% to 5% in loan guarantees. The Farm Credit System (FCS), a federal government-sponsored enterprise, provided 41% of the total 2018 farm debt. Commercial banks were lenders of  42% of the total agriculture loan debt in 2018. During the first quarter of 2019, agriculture loans held by FDIC-insured institutions totaled $184 billion — with community banks holding 69% ($127 billion) of total agriculture loans. At the beginning of this year, the U.S. saw the delinquency rate for FSA loans reach its highest level since 2011 — this was also true for farm loans held by community banks. Indeed, in 2019, FDIC-insured banks have seen a rise to 2.39% of agricultural loans that are at least 30-days past due, which is the highest delinquency rate since 2012.

Farming has always been an unpredictable and risky business, especially since farmers are beholden to Mother Nature, fluctuating consumer demands, and foreign trade policies. In light of these common adversities, farmers and financial institutions are closely watching these factors to determine if this new year may continue to see farm revenue decline, debt held by farmers grow, and default rates for farm loans increase.

5th Circuit Joins the Growing Crowd Holding that Private Student Loans May be Dischargeable in Bankruptcy

Student Loan Servicers' Fight over Federal Preemption of State Regulation of May End Up in the Supreme CourtThe Fifth Circuit’s recent decision in Crocker v. Navient Solutions is a stark reminder to for-profit student lenders and servicers that bankruptcy caselaw continues to evolve relating to discharge. In Crocker, the Fifth Circuit joined the trend of cases holding that private student loans are dischargeable in bankruptcy. More specifically, the court affirmed a bankruptcy decision by the Southern District of Texas that private educational loans are not statutorily excepted from discharge, absent undue hardship (in other words, it held that such loans can be discharged like other debt).

The case involved two individual chapter 7 bankruptcy filings in different jurisdictions. The first filing involved a debtor who obtained a $15,000 loan from Navient Solutions, a for-profit public corporation lender not part of any governmental loan program. The second filing was by a debtor who had obtained an $11,000 loan from Navient to attend technical school. In both cases, the bankruptcy courts issued standard discharge orders and closed the cases. After the discharges, Navient continued collection efforts on the loans, which prompted one of the debtors to file an adversary proceeding, later filing an amended complaint joining the second debtor as an additional plaintiff and seeking to certify a nationwide class, which had the potential to exponentially increase both the number of plaintiffs in the case as well as Navient’s potential liability. The bankruptcy court denied Navient’s motion for summary judgment, determining that the particular category of loans was not exempt from discharge under 11 U.S.C. § 523(a)(8). Two issues were addressed on appeal: 1) whether the bankruptcy court had jurisdiction to enforce the discharge injunction from another court (ultimately concluding it did not), and 2) whether these loans are within the category of loans that are non-dischargeable under the Bankruptcy Code.

The Fifth Circuit agreed with the bankruptcy court that private educational loans are subject to discharge. Section 11 U.S.C. § 523(a)(8)(A)(ii) of the Bankruptcy Code provides:

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for –

(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii)  an obligation to repay funds received by an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual. (emphasis added)

The court began its analysis by noting that exceptions to discharge should be interpreted narrowly in favor of the debtor. The relevant statutory section ((A)(ii)) did not include the word “loan” in contrast to section (A)(i). Contrary to Navient’s assertions, the language in the relevant section “obligation to repay funds received by an educational benefit” should not be construed to apply to private student loans. Instead, the term “educational benefit” is more akin to the other terms in section (A)(ii), scholarship and stipend, which “signify granting, not borrowing.” The court further found that if section (A)(ii) included repaying private student loans as an “educational benefit,” section (A)(i) would be redundant and contrary to the canon against surplusage. Absent the narrower reading, “Congress could have just exempted from discharge any ‘obligation to repay funds received as an educational benefit’ and left it at that.” Finally, the court discussed the statutory history of section 523(a)(8) and concluded that the 2005 bankruptcy amendments did not make all private student loans non-dischargeable.

One issue the court felt it had to explain was the potential inconsistency of its conclusion with its recent statement in Thomas v. Dept. of Ed. that “Section 523(a)(8) as it stands today excepts virtually all student loans from discharge” unless undue hardship is shown. To harmonize Thomas and Crocker, the court reasoned that Crocker addressed a type of loan that, unlike the loan in Thomas, was not governed by Section 523(a)(8). The basis of the distinction between the two loans was, according to the court, that “an educational benefit” is limited to conditional payments with similarities to scholarships and stipends. In other words, in contrast to the Thomas debt, the Crocker debt, despite being obtained to pay expenses of education, did not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because repayment was unconditional. Therefore, in the court’s opinion, the Crocker debt was not subject to Section 523(a)(8) and therefore was dischargeable without creating any conflict between Thomas and Crocker.

Private student lenders should continue to monitor the increasing caselaw and developments regarding debtor’s ability to discharge certain private student loans (see e.g., Nypaver v. Nypaver, 581 B.R. 431 (W.D. Pa. 2018); McDaniel v. Navient Sols., LLC, 590 B.R. 537 (Bankr. D. Colo. 2018).

The Split Widens: Third Circuit Joins Minority View Regarding Whether Secured Creditor Has Affirmative Obligation to Return Collateral to Debtor Upon Bankruptcy Filing

The Split Widens: Third Circuit Joins Minority View Regarding Whether Secured Creditor Has Affirmative Obligation to Return Collateral to Debtor Upon Bankruptcy FilingThe circuit courts continue to wrestle over the duties imposed by the Bankruptcy Code’s automatic stay on creditors concerning turnover of a debtor’s impounded vehicle. Is a creditor required to automatically turn over the vehicle as soon as the bankruptcy petition is filed, or can it retain possession while awaiting an order of the bankruptcy court adjudicating turnover in an adversary proceeding? As we previously wrote, five circuits, including the Seventh Circuit in City of Chicago v. Robbin L. Fulton, have held that the automatic stay requires a creditor to immediately release an impounded vehicle when the owner files for bankruptcy.

On the other side of the split, the Tenth and D.C. Circuits have rejected this argument, and they have now been joined by the Third Circuit. On October 28, 2019, the Third Circuit in In re Denby-Petersen, held that a creditor in possession of collateral that was repossessed before a bankruptcy filing does not violate the automatic stay by retaining the collateral post-bankruptcy petition. Following her bankruptcy, the debtor demanded that the creditor release her Chevrolet Corvette, which had been repossessed pre-petition. The creditor refused to turn over the vehicle, and the debtor subsequently filed a motion demanding turnover. The bankruptcy court ordered turnover of the vehicle but denied awarding sanctions to the debtor. The Third Circuit agreed with the bankruptcy court’s decision. The court found that a post-petition affirmative act to exercise control over property of the estate is required to find a violation of the automatic stay. Under the facts, mere passive retention of the car post-bankruptcy filing did not constitute such a violation. Additionally, the court rejected the debtor’s argument that the Bankruptcy Code’s turnover provision was “self-effectuating” (i.e., automatic). The court articulated the following framework: (1) debtor files adversary proceeding in bankruptcy case requesting turnover, (2) bankruptcy court determines whether property is subject to turnover under applicable law, and (3) assuming it is subject to turnover, the court will issue an order compelling creditor to turn over property to the debtor.

What’s Next?

Earlier this year, the Supreme Court denied a petition for certiorari filed in Davis v. Tyson, which dealt with the same issue arising out of the Tenth Circuit. However, the Supreme Court now has another opportunity to resolve this entrenched circuit split. The City of Chicago filed a petition of certiorari in City of Chicago v. Fulton on September 17, 2019. We’ll continue to report on developments in this area.

HUD and DOJ Release Memorandum on the Application and Enforcement of FHA Violations Involving the False Claims Act

HUD and DOJ Release Memorandum on the Application and Enforcement of FHA Violations Involving the False Claims ActIn an effort to provide clarity and certainty to Federal Housing Administration (FHA) approved lenders, the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Justice (DOJ) jointly issued a memorandum of understanding (MOU) on October 28, 2019, describing broad guidelines about how HUD and DOJ will coordinate using the False Claims Act (FCA) to enforce alleged violations of FHA requirements. More specifically, the interagency MOU describes coordination efforts between the departments in civil FCA litigation.

The MOU reflects but one component of a broader initiative by HUD to encourage the re-entry of depositories and other well-capitalized financial institutions into the FHA lending space. HUD’s press release announcing the MOU noted that depository institutions represented approximately 14% of all FHA originations today, down from 45% in 2010. The MOU emphasizes that the FHA is a program in which all responsible lenders should participate, and states that the MOU “is intended to address concerns that uncertain and unanticipated FCA liabilities for regulatory defects led to many well-capitalized lenders, including many banks and credit unions statutorily required to help meet the credit needs of the communities in which they do business, to largely withdraw from FHA lending.

The MOU identifies two other initiatives HUD has recently undertaken to encourage the return of depositories to the FHA lending space by providing greater certainty about the enforcement of alleged violations of FHA requirements. First, HUD has streamlined its annual lender certification requirements by removing a representation made under penalty of perjury that the lender complied with all HUD regulations and requirements, a representation that arguably gave rise to independent FCA liability if the lender had violated any FHA requirement. Second, HUD evaluates lender performance through its Quality Assessment Methodology (commonly referred to as the “Defect Taxonomy”). HUD uses the data reported in the Defect Taxonomy to identify loan defects and then to categorize those defects into four tiers based on the defects’ severity. HUD is revising its guidance to better tie the Defect Taxonomy to applicable HUD remedies and violations.

As detailed in the MOU, HUD expects that FHA requirement violations will primarily be enforced through HUD administrative proceedings. In cases where the Defect Taxonomy identifies potential violations of FHA requirements with FCA implications, HUD will refer those matters to the Mortgagee Review Board (MRB), which has administrative authority to, among other things, exact civil money penalties and suspend or terminate an FHA lender’s approval. The MRB will then complete its own review of the referred violations and will refer those matters to the DOJ when the following conditions exist:

  1. A Tier 1 Defect Taxonomy or equivalent violation exists in at least 15 loans or equivalent violations exist in loans with an unpaid principal balance or claims of $2 million or more; and
  2. Aggravating factors warranting pursuit of FCA litigation, such as evidence that the violations are systemic or widespread.

In general, the MOU describes that HUD intends to refer FCA litigation to DOJ “only
where such action is the most appropriate method to protect the interests of FHA’s mortgage insurance programs, would deter fraud against the United States, and would generally serve the best interests of the United States.” In the cases where the MRB approves the referral of alleged FCA violations to the DOJ, HUD’s General Counsel will do so in writing. In cases where the MRB declines to refer potential FCA violations to the DOJ, the MRB may still exercise its discretion to pursue administrative actions or work with the DOJ to file a Program Fraud Civil Remedies Act complaint.

Finally, the DOJ will confer with HUD when any party other than HUD — including qui tam relators, HUD’s Office of Inspector General, or litigation directly initiated by DOJ or a U.S. Attorney’s Office — refers a potential FCA violation to DOJ. In these cases, DOJ and HUD will work together during the investigation, litigation, and settlement phases of the matter. This includes DOJ’s consideration of HUD’s support or opposition to DOJ’s pursuit of the FCA litigation. For allegations reported to DOJ by a qui tam relator, DOJ will consider any recommended dismissal by HUD if HUD believes the alleged conduct does not rise to HUD’s FCA evaluation standards, the alleged conduct does not materially violate FHA requirements, or the FCA litigation would potentially interfere with HUD’s policies or the FHA program.

The MOU between HUD and DOJ provides needed clarity about when an approved FHA lender faces FCA liability. HUD provided this additional interagency guidance in hopes of creating a more predictable regulatory environment for lenders engaged in or considering FHA lending.  Any FHA lender who self-identifies or is alleged to have committed violations of FHA requirements should seek experienced counsel to consider its FCA liability in light of the MOU.

NCUA’s Appraisal Threshold Increase to $1 Million for Commercial Real Estate Loans Set to Go into Effect

NCUA’s Appraisal Threshold Increase to $1 Million for Commercial Real Estate Loans Set to Go into EffectThe National Credit Union Administration’s (NCUA) new appraisal threshold rule for commercial real estate loans will go into effect on October 22, 2019. Under the NCUA’s new appraisal rule, credit unions will not be required to obtain an appraisal for commercial real estate transactions less than $1 million. The new rule sharply increases the appraisal threshold, which the NCUA previously set at $250,000.

As a basis for the increase, the NCUA noted that the appraisal rule had not been updated since 2001. Since that time, the rising values of commercial properties have resulted in a higher proportion of commercial real estate transactions requiring an appraisal, leading to increased burden in time and cost for credit unions. The NCUA, however, stressed that the appraisal rule balances safety and soundness concerns with necessary reductions in regulatory burdens to address credit unions’ rising costs.

In conjunction with raising the transaction amount threshold, the new appraisal rule also eliminates the prior rule’s categorical exemption from the appraisal requirement altogether for commercial transactions that are partially or fully guaranteed by a U.S. government agency or a sponsored agency. In addressing this change, the NCUA noted that most U.S. government guaranty and insurance programs currently require appraisals so the elimination of the exemption should not materially increase the burden on credit unions.

The new rule also requires credit unions to use their own judgment, “consistent with safe and sound lending practices,” to determine whether a full appraisal by a state-certified appraiser should be obtained for a given transaction that falls below the $1 million threshold. Even if a transaction falls below the $1 million threshold and a full appraisal is not obtained, written estimates of value from an independent third party are still required in many cases. The new rule strengthens the independence requirement for written estimates, requiring the person giving the written estimate to be unbiased and independent of the loan production and collection process.

Credit unions and credit union trade organizations praised the new rule for its potential to reduce regulatory burdens, reduce member costs, and increase access to credit. The NCUA noted in the text to the new appraisal rule that banks, however, submitted comments criticizing the rule for creating an “imbalance in the commercial real estate market between credit unions and banks.”  Banks are subject to a $500,000 threshold for general commercial real estate transactions, under regulations issued by the OCC, Federal Reserve, and FDIC.

The new appraisal rule may give credit unions an advantage to continue to increase their presence in the business lending market. Credit unions, however, should be careful to create adequate policies and procedures to address situations where safety and soundness concerns require an appraisal for transactions that fall below the $1 million threshold. A recent report on fraud in small and mid-size business lending revealed that fraud in small business lending impacts credit unions at twice the rate of larger banks.

Navigating ADA Compliance Issues in an Online World

Navigating ADA Compliance Issues in an Online WorldThe landscape remains murky as to whether and how Title III of the Americans with Disabilities Act (ADA) applies to websites. As the financial services industry moves increasingly and inexorably from a “bricks and mortar” presence to a virtual environment, these issues are likely to only become more prominent. With differing authority from courts across the U.S. and minimal guidance from the Department of Justice and financial services regulators, financial services companies, particularly fintechs, must navigate these thorny issues to best mitigate risk and serve their customers.

A recent example is Domino’s Pizza’s petition for certiorari to the Supreme Court. The Ninth Circuit held that the ADA applied to Domino’s website and app because the ADA mandates that places of public accommodation, such as Domino’s, provide auxiliary aids and services to make visual materials available to individuals who are blind. Even though customers primarily accessed the website and app away from Domino’s physical restaurants, the court stated that the ADA applies to the services of a public accommodation, not services in a place of public accommodation. According to the Ninth Circuit, Domino’s website and mobile application “connect customers to the goods and services of Domino’s physical restaurants,” which are places of public accommodation. The court reasoned that there was a sufficient “nexus” between the website and app and its restaurants since customers could use the website and app to locate a nearby store and order pizzas for delivery or in-store pick-up. Given that nexus, the ADA applied to the website and app.

The question presented in the petition for certiorari was: “Does Title III of the ADA require a website or mobile phone application that offers goods or services to the public to satisfy discrete accessibility requirements with respect to individuals with disabilities?” Domino’s urged the Supreme Court to grant certiorari to “stem a burdensome litigation epidemic.” The recent increase in litigation relating to ADA website compliance is fueled in part by the cross- jurisdictional uncertainty. Specifically, there is a split in the federal Court of Appeals over whether Title III imposes accessibility requirements on web-only businesses with no fixed location, as well as confusion over whether Title III imposes discrete accessibility requirements on websites maintained by businesses whose brick-and-mortar locations constitute ADA-covered public accommodations.

This cert denial may cause businesses to more carefully evaluate website accessibility concerns. However, even careful evaluation may result in an uptick in litigation due to the lack of clear federal standards for accessibility of websites and mobile apps. We will continue to report developments in this area.

Upcoming Webinar

If these are areas you would like to learn more about, we encourage you to join us for our “Navigating ADA Compliance Issues in an Online World?” webinar, which is scheduled for Tuesday, October 22, from 11:30 a.m. to 12:30 p.m. CT. This webinar will provide a case law update on these issues and offer practical tips to navigate compliance.

CFPB Issues Final HMDA Rule Offering Relief to Smaller Institutions and Credit Unions

CFPB Issues Final HMDA Rule Offering Relief to Smaller Institutions and Credit UnionsThe Consumer Financial Protection Bureau (CFPB) issued its long-awaited final rule amending the Home Mortgage Disclosure Act (HMDA) on Thursday, October 10. These changes promise to bring some measure of relief to smaller financial institutions and credit unions. Prior to this new rule, the CFPB did not require the collection and reporting of HMDA data for institutions originating less than 500 open-ended lines of credit until January 1, 2020. The new rule provides that this temporary collection and reporting threshold will be extended to January 1, 2022.

This rule follows a May 2019 advance notice of proposed rulemaking (ANPR) in which the CFPB would, along with extending the temporary reporting threshold for open-ended loans, temporarily raise the collection and reporting threshold for closed-end mortgage loans from 25 to 50 to 100 loans for 2018 and 2019. The ANPR would then ultimately lower the threshold to 200 open-end loans after January 1, 2022. While the final rule does not include the ANPR’s provisions related to closed-end loan collection and reporting requirements, it signals the CFPB’s intent to issue a separate rule addressing this issue.

Finally, the new rule implements certain exemptions for smaller financial institutions that were issued in 2018 pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). For instance, the rule specifies that some smaller insured depository institutions and credit unions have the option of reporting exempt data so long as all data fields within an exempt data point are reported. This clarification is designed to assist smaller institutions that may find it less burdensome to report all data points rather than institute policies and procedures to separate exempt and non-exempt data points before reporting.

To be sure, collection and reporting requirements under HMDA have increased both the costs and risks associated with consumer and some commercial lending. According to an October 15, 2019 joint comment to the CFPB by, among others, the American Bankers Association and the Mortgage Bankers associations, since 2008 the cost of originating mortgage loans for mid-sized banks has approximately doubled from approximately $4,800 to $9,000. Likewise, most institutions responding to the ABA’s annual Real Estate Lending Survey have reported higher compliance costs as a result of increased regulations. In a May 2019 statement, CFPB Director Kathleen Kraninger suggested that she was attuned to some of these concerns, stating that the proposed changes to HMDA collection and reporting requirements were designed to “provide much needed relief to smaller community banks and credit unions while still providing federal regulators and other stakeholders with the information [the CFPB] need[s] under the Home Mortgage Disclosure Act.”

We anticipate additional changes to Regulation C that will provide relief to small to medium-sized institutions. Nevertheless, HMDA’s collection and reporting requirements will continue to be a source of significant regulatory, litigation, and reputational risk. As such, all covered institutions should have in place easy-to-use policies and procedures, as well as training programs designed to guarantee accurate collection, reporting, and analysis of HMDA data.