The FDIC and the Federal Reserve Board of Governors issued a joint advisory to make financial institutions aware of a 2018 amendment to the Fair Credit Reporting Act that provides that a financial institution may, but is not required, to offer a loan rehabilitation program (Section 602 Program) to private education loan borrowers whose credit reports contain a reported default on a private education loan.

The amendment was contained in Section 602 of the Economic, Growth, Regulatory Relief and Consumer Protection Act which was enacted on May 24, 2018.  Section 602 amended FCRA Section 623 to allow financial institutions to offer a 602 Program.  The advisory addresses the requirements for a Section 602 Program, including the need for a financial institution that intends to offer a Section 602 Program to submit a written request for approval to its appropriate federal banking agency.

The advisory states that if a borrower meets the requirements of a financial institution’s Section 602 Program that satisfies the statutory requirements for such a program, the institution can remove a reported default from the borrower’s credit report and the institution will be shielded (i.e. have a safe harbor) from potential FCRA claims related to the removal.


Last July, the OCC announced its decision to accept applications for special purpose national bank (SPNB) charters from fintech companies.  At that time we observed that, while not discussed in the materials released by the OCC, it appeared that a fintech company holding an SPNB charter would be required to be a member of the Federal Reserve System and be subject to oversight as a member bank.  As a Federal Reserve member, an SPNB would have access to the Federal Reserve discount window and other Federal Reserve services.

According to a Reuters article published today, Federal Reserve officials have expressed reservations about allowing such access to fintech companies.  Reuters reports that “many Fed officials fear that these firms lack robust risk-management controls and consumer protections that banks have in place.”  The article quotes the President of the St. Louis Fed as having expressed concern that “fintech will be the source of the next crisis.” The Atlanta Fed President is quoted as having said that “almost none of [the fintech entrepreneurs he has talked to] has risk at the top of what they’re thinking about, and that makes me nervous.”

Despite its reported reservations about the SPNB charter, the Federal Reserve has acknowledged the increasing role played by fintech in shaping financial and banking landscapes and indicated that it is interested in developing policy solutions that would result in greater efficiencies and benefits to all parties.  To that end, the Philadelphia Fed sponsored a conference last November on “Fintech and the New Financial Landscape.”  At the conference, Ballard Spahr partner Scott Pearson was a member of a panel that discussed “The Roles of Alternative Data in Expanding Credit Access and Bank/Fintech Partnership.”




On November 20, the Federal Reserve Board (FRB) and CFPB jointly proposed amendments to Reg. CC, which implements the Expedited Funds Availability Act (EFA Act), and also reopened for public comment various amendments that the FRB had proposed in March of 2011. This new proposal is in addition to the amendments to Reg. CC’s liability provisions that the FRB approved in September, which involved provisions that remain within the FRB’s sole rulemaking authority. In contrast, this more recent proposal relates to EFA Act sections for which the FRB and CFPB have joint rulemaking authority.

First, the FRB/CFPB Reg. CC proposal sets forth a methodology for adjusting a variety of dollar amounts in the EFA Act every five years by the aggregate annual percentage increase in the Consumer Price Index for Wage Earners and Clerical Workers rounded to the nearest multiple of $25. This would implement a statutory requirement under the EFA Act, which was introduced by section 1086(f) of the Dodd-Frank Act, and the proposed effective dates are April 1, 2020 for the first set of adjustments, April 1, 2025 for the next set, and then April 1 every fifth year thereafter. The change would affect various dollar amounts, including the minimum amount of deposited funds that banks must make available for withdrawal by opening of business on the next day, the amount of funds deposited by certain checks in a new account that are subject to next-day availability, and the civil liability amounts for failing to comply with the EFA Act, among others.

Second, the proposal seeks to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) amendments to the EFA Act, which include extending coverage to American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam. The EGRRCPA amendments subject banks in these jurisdictions to the EFA Act’s requirements related to funds availability, payment of interest, and disclosures. Among other things, the proposed amendments would treat each of these jurisdictions as “states” for purposes of Reg. CC.

Finally, the proposed amendments would make various other technical changes to Reg. CC, including a clarification in the regulation that the FRB and CFPB have joint rulemaking authority under certain provisions of the EFA Act.

As noted above, the FRB and CFPB are also reopening for public comment amendments that that the FRB proposed in 2011. That proposal included changes aimed at encouraging banks to clear and return checks electronically, new provisions governing electronic items cleared through the check-collection system, a shorter safe harbor period for exception holds on deposited funds, and new model disclosure forms. Last week’s announcement states that “there may have been important changes in markets, technology, or industry practice since the public submitted comments seven years ago in response to the Board’s 2011 Funds Availability Proposal,” and notes that now the FRB and CFPB have “assumed joint rulemaking authority with respect to some of those proposed amendments.” Previously submitted comments will remain part of the rulemaking docket.

The American Bankers Association and the Bank Policy Institute have sent a letter to the Board of Governors of the Federal Reserve System (Fed) to petition the Fed to engage in rulemaking to clarify the Fed’s September 2018 “Interagency Statement Clarifying the Role of Supervisory Guidance” (the “Interagency Statement”).  The Interagency Statement was issued jointly by the Fed, FDIC, NCUA, OCC and CFPB with the stated purpose of “explain[ing] the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.”

The letter states that the petition is made pursuant to section 553(e) of the Administrative Procedure Act.  That provision provides that each agency “shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule.”  An agency must provide the grounds for the denial of a petition and a denial can be appealed to a court.

In their letter, the trade groups express concern that the Interagency Statement “may leave room for examiners to continue to base examination criticisms on matters not based in law.”  An example given is that “some examiners may continue to retain existing [matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs)] based on agency guidance, on the theory that the Interagency Statement is not retroactive.”  They state that there is also “a concern that examiners might defeat the purpose of the Statement by replacing guidance-based examination criticisms with MRAs and MRIAs grounded in generic and conclusory assertions about ‘safety and soundness’ (as opposed to those that identify specific, demonstrably unsafe and unsound practices-the actual legal standard).

Finally, they observe that “the Interagency Statement’s general reference to a ‘criticism’ or ‘citation’ has engendered some confusion about whether MRAs, MRIAs, and other adverse supervisory actions are covered by the Statement.” (The Statement provided that ‘[e]xaminers will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance.  Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.”)

To address these concerns, the trade groups petition the Fed to take the following two specific rulemaking actions:

  • To propose and adopt, through notice and comment rulemaking, the content of the Agency Statement “as a formal expression and acknowledgment of the proper legal status of the guidance.”
  • To include in such a rulemaking “a clear statement that MRAs, MRIAs, examination rating downgrades, MOUs, and any other formal examination mandate or sanction will be based only on a violation of a statute, regulation or order—that is, that they are the types of ‘criticisms’ or ‘citations’ at which the guidance is directed.”  For this purpose, a “violation of a statute” would include the identification of a demonstrably unsafe and unsound practice pursuant to 12 U.S.C. Section 1818(b)(1) but would not include a generic or conclusory reference to “safety and soundness.”  (The groups call this “a critical distinction,” observing that “[i]t is essential that any examination criticisms adhere to the relevant legal standard: the statutory bar on ‘unsafe and unsound’ conduct, as interpreted and binding on the agencies under governing case law.”)

Earlier this month, the Federal Reserve invited comment on actions it can take “to promote ubiquitous, safe, and efficient faster payments in the United States by facilitating real-time interbank settlement of faster payments.”  Comments are due by December 14, 2018.

More specifically, the Fed is seeking comment on two potential actions.  One action is the Fed’s development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year.  The second action is the creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks.

According to a Federal Reserve Board Governor, there is a growing gap between the transaction capabilities in the digital economy for payments that are fast, convenient, and accessible to all and the underlying settlement capabilities.  There is a growing demand for payments to be as instantaneous as the apps on smartphones, but these payments currently rely on a patchwork of systems that can result in inefficiencies and delays, as well as uneven access.  Faster payments would allow consumers and businesses to send and immediately receive payments at any time of the day and on any day of the year, and provide funds recipients the ability to use the funds anywhere they choose.  In many circumstances, the underlying infrastructure cannot ensure that a fast payment is fully complete before the recipient seeks to use the funds.

Interbank settlements can be performed on a deferred basis or in real-time.  Most settlement arrangements for faster payments currently settle funds between banks on a deferred basis, a buildup of obligations results, presenting risks to the financial system in times of stress.  A 24/7 payment-by-payment interbank settlement in real-time, referred to as “real-time gross settlement,” offers clear benefits in minimizing risk and maximizing efficiency.  It would provide banks with access to a settlement system that settles each payment as soon as it is sent.  It would also provide important benefits to households and small business owners who face cash flow constraints.

While membership in a payment system can offer benefits to participating financial institutions such as meeting customer desires for faster, more convenient, or cross-border payment methods, it can also entail risks.  The OCC issued a 2017 interpretive letter that required a bank seeking to enter into membership in a payment system to submit a written notice to its examiner-in-charge providing relevant information regarding the proposed membership and engage in on going monitoring to ensure its involvement can be conducted in a safe and sound manner.

In addition to the Fed’s request for comment, there were two other recent noteworthy payments-related developments.  Last month, the Fed published final amendments to Regulation CC (Availability of Funds and Collections of Checks) to update the liability provisions of Reg. CC to address the nearly-complete conversion of the nation’s check collection system from a paper to an electronic environment. The amendments are effective on January 1, 2019.

Also last month, the National Automated Clearing House Association (NACHA) announced that its members has approved the following three new rules to expand the capabilities of Same Day ACH for all financial institutions and their customers:

  • Effective September 18, 2020, same-day ACH transactions can be submitted to the ACH Network for an additional two hours every business day.
  • Effective March 20, 2020, the same-day ACH per-transaction dollar limit is increased to $100,000.
  • Effective September 20, 2019, the speed of funds availability for certain same-day and next-day ACH credits is increased by making funds from same-day ACH credits processed in the existing first window available by 1:30 p.m. local time and funds from certain other ACH credits available by 9 a.m. local time by the receiving bank.

Last Wednesday the Federal Reserve published approved final amendments to Regulation CC (Availability of Funds and Collections of Checks) which update the liability provisions of Reg. CC to address the nearly-complete conversion of the nation’s check collection system from a paper to an electronic environment.

Historically, when banks disputed which party should be responsible for the liability arising from an unauthorized check, the risks were split in two.  The paying bank (the bank that would pay on a check associated with an account it held) was responsible for forged checks; it would have a signature specimen from its customers, and be able to examine the signature of a presented check against the specimen signature; it would also know if the entire check was forged, since it was the bank’s check.  If the signatures didn’t match, or the check wasn’t an original check from the paying bank, yet the paying bank paid and there was a subsequent loss by the customer, the paying bank would be responsible for that loss, because it was in the best place to detect the forgery.

The depositary bank (the bank holding the account where check funds would be deposited) was responsible for altered checks; it was deemed to be in the best place to determine whether, for example, the amount of the check had been changed from $100 to $10,000.  This division of risk is old, originally established in 18th Century English law (in the case of Price v. Neal, 97 Eng. Rep. 871 (1762)), and enshrined in the U.S. under UCC Articles 3-407 and 3-417.  It also assumes the presentment and receipt of paper checks.

Virtually all checks presented in 2018 within the US are not presented in paper form.  Instead, an image of the check is taken, the original check is destroyed, and the depositary bank presents this check image (a truncated check) to the paying bank.  Notwithstanding the dramatic increase in settlement speed and dramatic reduction in processing costs, electronic images of checks create a potential problem in the event of a bank dispute over whether a check has been forged or altered.  The original check is destroyed, making it impossible to examine the original check to determine whether the check was altered, or whether it was a forgery.  Regulation CC currently does not provide any presumptions as to whether a check is altered or forged.

The new amendment provides this guidance, adding a new presumption of liability for substitute and electronic checks.  If there is a dispute between the paying bank and the depositary bank as to whether a substitute or electronic check is an altered or a forgery (now described as “derived from an original check that was issued with an unauthorized signature of the drawer”), the presumption is that the substitute/electronic check contains an alteration.  This generally shifts liability on fraudulent checks to depositary banks; this presumption may be overcome if a preponderance of the evidence proves the substitute or electronic check does not contain an alternation, or that it was a forgery.  The presumption does not apply if there is an original check to examine.

It’s a reasonable allocation of risk; the depositary bank is receiving, imaging and destroying the check, and then presenting the image to the paying bank.  If there is a later dispute over the fraudulent nature of the check, then the party that destroyed the original check, and was in the best place to preserve the check as evidence, should bear the risk associated with evidentiary questions.

The amendment goes into effect January 1, 2019.

Creditors currently using the London Inter-Bank Offered Rate (LIBOR) as the index for variable-rate consumer loans should note that the Federal Reserve Bank of New York is now publishing a new index named the Secured Overnight Financing Rate (SOFR).

SOFR is intended to take the place of LIBOR when LIBOR is discontinued (as the United Kingdom’s Financial Conduct Authority has indicated will occur at the end of 2021). Creditors currently using LIBOR are advised to consult with counsel as to how best to proceed.

On Tuesday the Federal Reserve published proposed amendments to Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) which are intended to clarify and simplify certain provisions of Regulation J that no longer aligned with Regulation CC (Availability of Funds and Collections of Checks) following its amendments, after it was amended in 2017.

The proposed Regulation J amendments align the regulation with the distinction made in the Regulation CC amendments, and established in Article 3 of the UCC, between checks (which by definition must be reduced to writing) and electronically-created items, or ECIs.  Under the proposed amendments, the Reserve Banks would require senders of ECIs to provide certain warranties and indemnities, in an effort to shift liability to the sending parties who are in a position to know whether they are sending an electronic check (which enjoys standard check warranties) or an electronically created item (which does not).

The proposed amendments additionally smooth out some bumpiness financial institutions may have experienced in moving Fedwire payments to the ISO 20022 financial messaging standard.  ISO 20022 is the global financial messaging standard for SWIFT (the Society for Worldwide Interbank Financial Telecommunication), and its adoption for Fedwires is necessary for “straight through processing” of a payer instruction from a non-US bank to a US bank. Put another way, unified financial messaging standards don’t require translation, and are therefore faster.  Concerns were raised that certain terms used in the ISO 20022 standards (such as “agent”, “creditor”, and “debtor”) would create certain legal obligations. The proposed amendments clarify that usage of any term in the financial messaging standard does not confer or connote any specific legal status, or responsibilities.

The Federal Reserve Board announced that it had issued a Consent Order against Mid America Bank and Trust Company (Bank) for alleged deceptive marketing practices in violation of section 5 of the FTC Act related to balance transfer credit cards issued by the Bank to consumers through independent service organizations (ISO).  The Consent Order requires the Bank to pay approximately $5 million in restitution to nearly 21,000 consumers.

The Bank had acquired portfolios of balance transfer credit cards from other financial institutions.  It had also entered into agreements with ISOs to issue new credit cards in the Bank’s name that consumers could use to pay charged-off or past-due debts purchased by the ISOs.  The new cards were marketed and issued under the same programs used for the cards in two of the portfolios acquired by the Bank.  According to the Consent Order, the Bank engaged in the following deceptive practices in connection with the new cards by failing to do the following in solicitation or welcome letters:

  • Explain that the assessment of finance charges and fees would limit the amount of available new credit even if the consumer made payments on the account.  As a result, consumers could have reasonably believed that by continuing to make timely payments, they would receive credit equal to the amount paid when, in fact, they did not due to the assessment of finance charges and fees.
  • Accurately disclose that participating in the card program would restart the statute of limitations for out-of-statute debt.

The Fed also claimed that in connection with one of the portfolios, the Bank had engaged in deceptive practices because it had stopped reporting cardholder payments to consumer reporting agencies but did not disclose to consumers that it would not report.  It appears the Fed found this to be deceptive because when the cards were issued, the issuing bank had told consumers that reporting to CRAs would be a way for the consumer to build positive payment records.

The restitution payments required by the Consent Order are different for each card program.  For example, for the program involving the statute of limitations disclosure issue, the Bank must refund all payments made by consumers with closed accounts and cancel or waive certain charged off amounts and forgive certain amounts owed by consumers with active accounts.  For the other programs, the Bank must refund or credit certain fees and interest.

It is noteworthy that the Fed did not allege that the Bank failed to provide any required disclosures in connection with the new cards it issued, such as those required by the Truth in Lending Act.  The Consent Order thus illustrates the need for banks to not only review marketing disclosures for compliance with applicable requirements but to also consider whether additional disclosure is needed to address UDAP risk.

For example, in addition to making the restitution payments, the Consent Order requires the Bank to take certain remedial actions, such as disclosing clearly and prominently in any balance transfer credit card solicitation, and on the same page, any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.  Other federal and state regulators have raised similar UDAP concerns in connection with the marketing of other high fee credit card programs.




Earlier this week, the Federal Reserve issued a paper entitled “Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the Payments Improvement Journey”.  The paper is intended to provide payment industry stakeholders an update on the Fed’s efforts in the last couple years to help improve the speed, safety and efficiency of the U.S. payment system.

The paper supplements the Fed’s 2015 paper entitled “Strategies for Improving the U.S. Payment System”, which outlined the Fed’s overall strategic vision and plan for improving the U.S. payment system.  The 2015 paper called upon payment system stakeholders to collaborate with the Fed on how best to achieve the Fed’s desired outcomes for improving the U.S. Payment System in the following five areas:  (1) speed, (2) security, (3) efficiency, (4) international payments and (5) collaboration.

The paper published yesterday describes efforts made by the Fed and participating payment system stakeholders since 2015 with respect to each of these 5 goals, along with new tactics the Fed plans to employ in furtherance of these goals.  Progress has been made in several areas to identify industry needs, challenges and potential solutions.  In a nutshell, the U.S. payments industry is in need of interoperable, easily accessible, secure, efficient, cost-effective and compliant solutions that will enable domestic and cross-border payments to be completed and settled in real time, on a 24x7x365 basis.  Finding solutions that address this need to the satisfaction of all payment industry stakeholders undoubtedly presents an extremely challenging task for the Fed.  The Fed’s Faster Payment Task Force has analyzed over 20 proposals for potential payment solutions in the last 2 years, including solutions that rely on application programming interface (API), digital currency and blockchain (distributed ledger technologies).  However, the Fed and participating stakeholders are still navigating their way through a host of complex challenges that will need to be resolved in order to achieve the Fed’s desired outcomes by their stated goal of 2020.

For payment system stakeholders, many questions remain unanswered, including:

  1. What role will the Fed play in bringing a solution to market? In the latest paper, the Fed indicated that they intend to actively engage with industry stakeholders to determine how best to enhance Federal Reserve settlement services to support real-time settlement of payment transactions on a 24x7x365 basis.  The Fed also intends, before year end, to explore and assess the need, if any, for the Federal Reserve to act as a service provider in supporting faster payments, beyond its current role as a provider of settlement services.  Although the Fed is arguably best positioned to act as the primary operator of this solution, to date, the Fed has not made any sort of commitment to serve in this capacity.
  2. What sort of payment rules and standards will apply? Payments in the U.S. are already subject to a cumbersome patchwork of various rules and regulations depending on the payment type.  Nevertheless, in July 2015, the Consumer Financial Protection Bureau issued some guiding principles to ensure that any new faster payment systems are secure, transparent, accessible and affordable to consumers and provide robust protections with respect to fraud and error resolution.  It remains to be seen whether the CFPB or the Fed will impose an additional subset of requirements for faster payments, but imposing an additional layer of rules and regulations to support faster payments will no doubt impede adoption and increase service costs.
  3. What will a faster payment solution cost? For faster payment solutions to succeed, adoption by both providers and end users is critical.  Obviously, the cost for accessing a faster payment solution is a key consideration for both providers and end users and it remains to be seen whether a faster payment solution can be offered in a cost-effective manner.
  4. Who will benefit from the solution and who will be left behind?  Interoperability of competing payments solutions will also be critical for broad adoption of a faster payments solution.  This appears to be top of mind for the Fed, but it remains to be seen whether certain payment providers will be disadvantaged or replaced by a faster payments solution.

The Fed and participating stakeholders have made progress on several fronts to assist in bringing a faster payments solution to the U.S. by 2020, but several looming challenges remain.  Nevertheless, the Fed appears to be pushing forward with several new tactics to assist in addressing these challenges so hopefully the Fed and participating stakeholders will be able to stay on pace for their 2020 goal.