New U.S. AML Legislation – Five Provisions for Foreign Banks to Watch

On January 1, 2021, the United States Congress enacted the Anti-Money Laundering Act of 2020 (the “AMLA”), as part of the National Defense Authorization Act (the “Act”).  The AMLA includes extensive and fundamental reforms to anti-money laundering (“AML”) laws in the United States, including the Bank Secrecy Act (“BSA”).

In a previous client alert, we covered the principal AML reforms adopted by the Act, including new beneficial ownership disclosure rules and modernized AML program requirements.  In a follow-up client alert, we consider five provisions of the Act that have attracted less attention, but may significantly impact foreign banks with correspondent relationships in the United States, or with U.S. branches or agencies.

Click here to read Covington’s client alert, New U.S. AML Legislation – Five Provisions for Foreign Banks to Watch.

OCC Releases New Interpretation of Preemption Procedures

On December 18, 2020, the OCC released a new interpretation of the statutory standards and requirements for federal preemption of state consumer financial laws that were enacted as part of the Dodd-Frank Act. Section 1044 of Dodd-Frank, codified at 12 U.S.C. § 25b, contains both substantive and procedural preemption provisions.  The OCC’s Interpretive Letter 1173 (“IL 1173”) focuses primarily on the procedural provisions; it explains the scope of these provisions based on a close reading of the text of section 25b.

Section 25b was enacted against a background of intense and vocal criticism by state attorneys general, consumer advocates, and some members of Congress about the expansive position the OCC took on national bank preemption, especially as it applied to state consumer financial laws. (The statute defines “state consumer financial law” to mean a state law that regulates the “manner, content, or terms and conditions” of a financial transaction or a related consumer account.)

In section 25b, Congress sought to clarify the bases for preemption by codifying three substantive legal grounds that could support the preemption of a state consumer financial law:

  • The law has a discriminatory effect on a national bank;
  • The law is preempted under the standards contained in the Supreme Court’s 1996 Barnett decision, which held generally that states may not prevent or significantly interfere with the exercise of national bank powers (the Barnett standard); and “preemption determinations” under the Barnett standard may be made by a court or by the OCC acting by regulation or order; or
  • The state law is preempted by a federal law other than the National Bank Act.

Congress also sought to require more transparency and accountability around the OCC’s preemption decisions. The statute therefore imposes certain procedural requirements that apply when the OCC decides that a state consumer financial law is preempted. These include a requirement that a “preemption determination” be made on a “case-by-case basis.” “Case-by-case basis” is statutorily defined to mean “a determination . . . concerning the impact of a particular State consumer financial law on any national bank that is subject to that law, or the law of any other State with substantively equivalent terms.” The statute provides further that if the OCC makes a determination that the law of another state with “substantively equivalent terms” is preempted, it must first consult with the CFPB.

In IL 1173, the OCC explains how these requirements apply. The OCC begins by noting that, in the statutory text articulating the three substantive preemption standards, the phrase “preemption determination” appears only in connection with the second statutory category — preemption under the Barnett standard. Then it construes the word “determination” to mean an “affirmative conclusion” that federal law preempts a state consumer law. From these predicates, the OCC concludes that:

  • An OCC decision that has only “indirect or incidental effects” on a state consumer financial law is not a “preemption determination,” presumably because that action does not state an “affirmative conclusion” that a state consumer financial law is preempted.
    • This likely means that an OCC opinion confirming that a national bank is authorized to exercise a particular power is not a “preemption determination,” although a consequence of that opinion may be that a state consumer financial law is preempted because, under the Barnett standard, it prevents or significantly interferes with a national bank’s exercise of the power. If, on the other hand, the OCC states expressly that a particular state law is preempted then, under the reasoning of IL 1173, that statement would be a “preemption determination.”
  • A “preemption determination” only occurs by application of the Barnett standard (not the other two statutory standards) to a state consumer financial law. Applications of the discrimination and “other federal law” standards therefore are not “preemption determinations.” Accordingly, the “case-by-case basis” and CFPB consultation requirements do not apply.
    • This means that the OCC could decide that an entire category of state consumer financial laws with discriminatory effects is preempted, rather than just a single law, and that the OCC could do so without prior consultation with the CFPB.
    • The same would hold true in cases where the OCC decides that state consumer financial laws are preempted by a federal law other than title 62 of the Revised Statutes. Title 62 comprises provisions, including the powers authorization clause in section 24(Seventh), that comprise the National Bank Act. It does not include provisions such as 12 U.S.C. § 371, which authorizes national banks to engage in real estate lending. Section 371 was originally enacted as part of the Federal Reserve Act and has never been codified in title 62 of the Revised Statutes. The OCC’s interpretation means that it could decide that an entire category of state consumer financial laws is preempted because that type of law prevents or significantly interferes with a national bank’s real estate lending powers, and that the OCC could do so without prior consultation with the CFPB.The OCC’s “indirect or incidental effects” interpretation is not amplified or explained in IL 1173.  If, however, the OCC’s opinions as to the scope of a national bank’s powers are not in themselves “preemption determinations,” that conclusion is consistent with the analysis in the Barnett decision, which considers first whether the power at issue is federally authorized for a national bank and, only if it is, considers whether the impact of the state statute on the exercise of that power triggers federal preemption.

Applying the reasoning of IL 1173, neither the OCC’s recent valid-when-made rule nor its true lender rule is a “preemption determination.” Both rules construe the scope of the authority of a national bank (or a federal savings association) under federal usury statutes to charge interest consistent with the law of the state of the bank’s location. The valid-when-made rule provides that interest that was permissible under those statutes when a loan was made continues to be permissible if the loan is sold or otherwise transferred. The true lender rule provides that a national bank (or federal savings association) “makes a loan” if it either is named as the lender in the loan documents or actually funds the loan. Under the interpretive positions described in IL 1173, neither rule is a “preemption determination” requiring application of the “case-by-case basis” or CFPB consultation requirements. This position is consistent with the positions the OCC already has taken in responding to commenters in both rulemakings.

In addition to construing the “case-by-case basis” and the CFPB consultation requirements, IL 1173 interprets the additional procedural requirements in section 25b. These include requirements that legal preemption conclusions be supported by substantial evidence and that the deference standard applicable to those conclusions is the Supreme Court’s Skidmore deference standard. A separate savings clause preserves Chevron deference for interpretations of the National Bank Act.   In addition, section 25b expressly excludes the national bank usury statute, 12 U.S.C. § 85, from the scope of coverage of both its substantive and procedural preemption provisions. Finally, section 25b requires the OCC to review its preemption conclusions every five years using a notice-and-comment process; issue a report to Congress with respect to that review; and publish quarterly a list of “preemption determinations.”

In IL 1173, the OCC construes the scope of section 25b’s procedural requirements as follows. The OCC’s conclusions in IL 1173 appear in italics; the statutory text is summarized immediately following.

  • The “substantial evidence requirement” applies only to preemption determinations under the Barnett standard. The statutory text of the substantial evidence requirement expressly references the provision describing preemption under the Barnett standard
  • The requirement for Skidmore deference applies to the OCC’s conclusion that any type of state law, not just a state consumer protection law, is preempted by either the National Bank Act or the provision at 12 U.S.C. § 371 that authorizes national banks to make real estate loans. The text of section 25b addressing Skidmore deference says that it applies with respect to “any determination . . . regarding preemption of a State law” under the National Bank Act or the real estate lending authorization.
  • Chevron deference applies to any interpretation by the OCC that a national bank power is authorized by the National Bank Act or the real estate lending authorization in § 371. The statutory text contains a “savings clause” providing that nothing in section 25b “shall affect” the deference that a court accords to the OCC in interpreting the National Bank Act or “other Federal laws.”
  • The authority of national banks under 12 U.S.C. § 85 to charge the interest permissible under the law of the state of their location is not subject to or affected by section 25b. The statutory text says that no provision of title 62 of the Revised Statutes, which contains the National Bank Act “shall be construed as altering or affecting the authority conferred by” section 85.
  • The review and reporting provisions apply with respect to any conclusion made by the OCC that a state consumer financial law is preempted, i.e., these provisions are not limited to determinations made under the Barnett standards. The statutory text refers to a determination that “a provision of Federal law” preempts a state consumer financial law.
  • The requirement that the OCC publish a list of preemption determinations applies only with respect to determinations made under the Barnett standard. The phrase “preemption determination” is used in only two places in section 25b — the first is in the provision identifying the Barnett standard as one of the three ways in which a state consumer financial law may be preempted; the second is in this requirement for publication of a list. The OCC’s construction is based on its reading of “preemption determination” to apply only to a decision that applies the Barnett standard.

Section 25b does not modify the pre-existing requirement, codified at 12 U.S.C. § 43, for the OCC to provide notice and an opportunity for public comment on any interpretation in which it concludes that a consumer protection, community reinvestment, fair lending, or interstate branching-related law is preempted.


OCC Proposes Rule Codifying Standards for Investment in Bank Premises

On January 4, 2021, the OCC issued a proposed rule codifying standards governing a national bank’s or federal savings association’s investment in real estate used, or to be used, as bank premises.  Specifically, the proposed rule would revise 12 C.F.R. § 7.1024 in order to create a more transparent and consistent set of principles for evaluating the acquisition and use of  national bank and federal savings association premises.

Continue Reading

CFPB’s Taskforce on Federal Consumer Financial Law Releases Report

On January 5, 2021, the CFPB’s (the “Bureau”) Taskforce on Federal Consumer Financial Law (the “Taskforce”) released a report (the “Report”) recommending how consumer protection in the financial marketplace may be improved.  Chartered by the Bureau in January of 2020, the Taskforce was charged with “examin[ing] the existing legal and regulatory environment facing consumers and financial services providers,” and “report[ing] its recommendations for ways to improve and strengthen consumer financial laws and regulations.” Continue Reading

BSA/AML Reform in the 2021 NDAA Becomes Law

On January 1, 2021, the Senate voted to override President Trump’s veto of the National Defense Authorization Act (the “NDAA” or “Act”), which includes over 200 pages of significant reforms to the Bank Secrecy Act (“BSA”) and other anti-money laundering (“AML”) laws that have been working their way through Congress for several years.  The Senate’s vote follows the House’s override on December 28, 2020, and the Act is now law.

The Act puts in place the most comprehensive set of BSA/AML reforms since the USA PATRIOT Act of 2001, including:

  • new beneficial ownership reporting requirements;
  • whistleblower and penalty enhancements; and
  • provisions emphasizing the importance of risk-based approaches to AML program requirements, and that would require Treasury to periodically publish on national AML and CTF priorities.

Click here to read an updated version of Covington’s December 11, 2020, client alert summarizing seven things to know about the reforms.

FDIC Issues Final Brokered Deposits Rule

On December 15, 2020, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) voted 3–1 to approve a final rule that significantly revises and clarifies the regulatory framework applicable to brokered deposits, under which less-than-well-capitalized insured depository institutions are generally prohibited from accepting funds obtained, directly or indirectly, from a deposit broker.  The final rule represents the culmination of a long process, including an advance notice of proposed rulemaking issued in December 2018 and a notice of proposed rulemaking issued in December 2019, to modernize the FDIC’s brokered deposit regulations, and adopts a number of significant changes relative to the proposal.  The final rule becomes effective April 1, 2021, but the full compliance date is delayed until January 1, 2022.

Click here to read our Six Things to Know about the FDIC’s final brokered deposits rule.

FinCEN Issues Guidance on 314(b) Information Sharing Among Financial Institutions

On December 10, the Financial Crimes Enforcement Network (FinCEN) issued new guidance interpreting section 314(b) of the USA PATRIOT Act and rescinding FinCEN’s previous guidance. Section 314(b) is intended to establish a safe harbor for financial institutions that voluntarily share (in accordance with the statute’s terms) information regarding possible terrorism and money laundering.  The new guidance, which is in the form of a Fact Sheet, appears aimed at providing further encouragement and assurance to financial institutions to participate in section 314(b). Continue Reading

BSA/AML Reform in the 2021 NDAA: Seven Things To Know

On December 8, 2020, the House passed the National Defense Authorization Act (the “NDAA” or “Act”), which includes over 200 pages of significant reforms to the Bank Secrecy Act (“BSA”) and other anti-money laundering (“AML”) laws that have been working their way through Congress for several years. Despite some remaining objections from President Trump and others, which are unrelated to the BSA/AML provisions of the bill, the Act passed the Senate on December 11, 2020, and may have sufficient support to override any veto. If enacted, the Act would put in place the most comprehensive set of BSA/AML reforms since the USA PATRIOT Act of 2001.

Click here to read Covington’s client alert providing seven things to know about the reforms.

The CFPB Issues Second No Action Letter to Facilitate the Use of Alternative Data and Machine Learning in Lending Decisions

On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) granted a no-action letter (“NAL” or “Letter”) to Upstart Network, Inc. (“Upstart”), a company that that has developed a model incorporating alternative data and machine learning for use in making credit underwriting and pricing decisions.  The NAL specifically addresses Upstart’s “automated model for making underwriting and pricing decisions with respect to applications by consumers for unsecured, closed-end loans.”  Under the terms of the NAL, the Bureau will not make supervisory findings or bring an enforcement action against Upstart under certain sections of the Equal Credit Opportunity Act and Regulation B or under the Bureau’s authority to prevent, unfair, deceptive, or abusive acts or practices (“UDAAPs”) concerning alleged discrimination on a prohibited basis arising from Upstart’s use of its model for making underwriting and pricing decisions on applications by consumers for unsecured, closed-end loans.  The CFPB updated its NAL Policy last year, and this Letter was issued consistent with those guidelines.  The NAL expires three years after the date of the Letter.  The NAL represents another step forward toward regulatory acceptance of the use of alternative data and machine learning models for credit underwriting.

Continue Reading

OCC Proposes “Fair Access” Requirements for Large Banks

On November 20, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a proposed rule that would impose on large national banks and federal savings associations (collectively, “banks”) a requirement to provide “fair access” to the financial products and services those institutions offer. The proposal is intended to preclude the banks it covers from making decisions about providing financial services based categorically on the type of a customer’s business or the customer’s geographic location. In support of the proposal, the OCC gives examples of nonprofit and for-profit organizations and businesses that it says banks have been encouraged or pressured to boycott, including family planning organizations, privately owned correctional facilities, gun manufacturers, independent ATM operators, agricultural businesses, and businesses conducting various activities in the energy sector of the U.S. economy.

The proposal would establish an affirmative obligation for a bank to make each of its products and services available to all individuals and lawful businesses in the geographic market it serves on “proportionally equal terms.” The text of the proposed regulation does not provide a definition of “proportionally equal terms.” A footnote in the preamble describes the standard as requiring, at a minimum, that a bank make pricing and denial decisions commensurate with “measurable risks based on quantitative and qualitative characteristics.” Elsewhere, the preamble indicates that pricing and denial decisions should be supported by quantitative, risk-based analysis and not made on the basis of personal beliefs on matters of substantive government policy or on assessments about future legal or political changes. The preamble suggests that the OCC would disfavor denial decisions based on a bank’s assessment of its reputation risk, but it does not indicate how considerations such as enhancement or preservation of shareholder value or customer relationships could affect a bank’s decisions.

In addition, the proposal would impose three prohibitions on the banks it covers. First, a bank would be prohibited from denying financial services to an individual or business except as justified by the potential customer’s “documented failure to meet quantitative, impartial risk-based standards established in advance.” Second, a bank would be prohibited from denying financial services if the denial impedes the customer from conducting business in a particular market or produces a benefit to an individual or business in which the bank has a financial interest. Third, a bank would not be permitted to act in coordination with others to deny a financial service to an individual or business.

A bank would be subject to the rule if it has the ability to affect markets by raising the price for financial services offered by that bank or its competitors, or by “significantly impeding” the business of one individual or legal entity to the advantage of another. A bank with $100 billion or more in assets would be presumed to satisfy this standard, but it could seek to rebut the presumption by submitting written argument to the OCC.  A bank with less than $100 billion in assets is presumed not to satisfy the standard.

The authority that the OCC specifically cites in support of the fair access proposal is 12 U.S.C. § 1, which was amended by the Dodd-Frank Act to describe the agency as “charged with” assuring fair access to financial services by the institutions and other persons subject to its jurisdiction, and 12 U.S.C. § 93a, which authorizes the OCC to prescribe rules to “carry out the responsibilities of the office.”  The comment period for the proposal closes on January 4, 2021.