Compliance Update — Insights and Highlights January 2023
The first meeting in 2023 of the Bankers Compliance Task Force supported by Jones Walker was held on January 18. The Bankers Compliance Task Force is a group of bankers from banks of all sizes who meet quarterly to discuss and receive training on current compliance topics as well as legal and regulatory trends.
The highlights of the meeting included an update from a Bank Secrecy Act (BSA) examiner with the Mississippi Department of Banking and Consumer Finance (MSDBCF), another guest speaker addressing her perspective on the impact of the Community Development Financial Institutions Fund’s (CDFI) proposed changes to the CDFI certification application, a general garnishment training, and a fair lending update.
The MSDBCF BSA examiner gave an update on the availability of medical marijuana in Mississippi and said that, as of early January, there were 58 growers in Mississippi, three licensed labs, six licensed transportation providers, 79 approved dispensaries, and 40 dispensary license applications in line for processing. Additionally, as of the same time frame, there were 903 licensed patients and 600 more in line for processing. Dispensaries are not yet operating in Mississippi as they are currently without product, so there is a bit of a holding pattern, but this is a good time for your bank, along with its board of directors, to decide the extent to which it will or will not ban marijuana-related businesses before operations are in full swing, likely in the very near future.
The burden of banking a marijuana-related business is high. Ongoing monitoring of each marijuana-related business will be required in addition to the bank’s current monitoring obligations pursuant to the BSA. Any bank doing business with a marijuana-related business will need to have policies, procedures, and processes in place to identify, monitor and assessthe risk of each customer. All bank employees who may be in a position to identify a marijuana-related business must be trained on how to do so and to whom to report this information so that all such customers are identified. Additionally, marijuana limited Suspicious Activity Reports (SARs) will have to be filed on an ongoing basis and marijuana priority and termination SARs will have to be filed if suspicious activity potentially in violation of state law or federal enforcement authority is suspected.
The most common BSA examination issues that were noted by the MSDBCF BSA examiner are (1) failure of banks to track and monitor findings from all previous examinations and independent reviews and (2) suspicious activity monitoring of monetary instruments. All recommendations and violations noted in an examination review report or independent review should be given immediate attention, tracked, and corrected, including conducting employee training in an effort to prevent repeat violations in the next examination.
Including outstanding monetary instruments in banks’ suspicious activity monitoring is also important. Monetary instruments outstanding for longer than six months should be tracked and monitored. It is a good idea to contact the customer. Often, an item remains outstanding because the customer simply forgot about the check. On the other hand, there are instances in which monetary instruments may be used to hide funds for purposes of tax evasion, pursuant to a divorce, or for another potentially suspicious or unlawful purpose. For that reason, it is important to monitor these items for suspicious activity. The examiner pointed out that while there are legitimate reasons for the name of the purchaser and payee on an instrument to be the same, this is a red flag, and the bank should look at such an instrument more closely to attempt to determine the purpose of the purchase and document that on its monetary instrument log.
Significant changes to the CDFI certification application have been proposed. The final rules are expected in April, after the current March recertification deadline, and could look very different from the proposed version. The guest speaker addressed only the potential impacts as proposed and focused the presentation on four of the seven criteria for certification: primary mission, target market, development services, and accountability. It was noted that the criteria would not change; rather, how a bank would qualify to meet each of the criteria would change. Changes to the requirements for an applicant to demonstrate a “primary mission of promoting community development” include providing evidence that the bank has a community development strategy and engages in responsible financing practices. The speaker also noted that significant changes to the target market criterion were proposed and the maps used have recently changed. Some of these changes include the removal of the continuity requirement and changes to the geographic boundaries from a countywide eligibility standard down to a census tract level. There are many other changes to focus on if the rule is finalized as proposed, so if your bank is a CDFI, pay close attention to any updates over the next few months.
A general overview of garnishments was provided as part of the general garnishment training, including a refresher on identifying protected federal benefits payments and an update on the handling of out-of-state garnishments by banks with a presence in multiple states in light of the Consumer Financial Protection Bureau’s (CFPB) May 2020 Consent Order (the Order) against Bank of America (BOA). In the Order, the CFPB faulted BOA for responding in the same manner to all garnishments issued from a court in a state in which the bank had a branch, despite the fact that the bank defined “account location” as the state in which the account was opened. The CFPB found issue with the bank’s consistent treatment of each garnishment, claiming that some customers may have missed out on beneficial exemptions of another state. In light of the Order, any bank with a presence in multiple states should consider including a specific definition of “account location” in its deposit agreement, send any garnishments that are received from another state for legal review prior to responding, and not just ignore these garnishments without a response, even if the account is located in another state. Now is the time for banks to review policies, procedures, and processes related to garnishment. Banks should appoint a designated recipient for any garnishment orders served on the bank so that one particular person or area can consistently respond to them and recognize irregularities. The bank should also consider creating and maintaining a garnishment log including the date and time the writ was received as well as the court (and state) from which the order was issued.
Fair Lending Highlights
Fair lending and redlining were ongoing hot topics during 2022. The focus does not seem to have changed as we have started the new year. In fact, the largest redlining settlement to date was reached between the Department of Justice (DOJ) and City National Bank in Los Angeles County in early January 2023. The DOJ alleged that City National avoided making mortgage loans to majority-Black and majority-Hispanic neighborhoods in 2017–2020. This settlement was similar to other recent redlining settlements. In its complaint, the DOJ found issue with the fact that City National had only three of its 57 branches in Los Angeles County in majority-Black or majority-Hispanic neighborhoods despite the fact that 55% of the tracts in the county were majority Black or majority Hispanic. The DOJ also claimed that City National failed to advertise in those areas and ignored multiple internal fair lending reports that noted the lack of lending to majority-Black and majority-Hispanic neighborhoods compared with its peers.
The bank was ordered to invest $29.5 million in a loan subsidy fund for the majority-Black and majority-Hispanic neighborhoods at issue, at least $500,000 each in advertising and consumer education in the neighborhoods, and $750,000 in community partnerships related to increasing access to residential mortgage credit. City National is also required to conduct a community credit needs assessment, open a new branch in a majority-Black or majority-Hispanic neighborhood, and hire a full-time community lending manager.
Start the new year by reviewing the delineation of your bank’s assessment area; branching strategies; loan originations, applications received, and denials by census tract; and marketing and community outreach activities.