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HMDA Data for Small Business Loans?

The CFPB Meets with Tennessee’s bankers: concerns about “regulation by enforcement.”

By Kavita Shelat

The conference room was filled to capacity.  Bank presidents, chief compliance officers and lending executives sat in a U-shape, facing the two speakers.  A fissure of tension hung in the room and the audience looked wary.

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Keep It Simple

By Larry Russell

One of the more perplexing fundamental challenges facing the investment portfolio manager in a community bank at this time is the ongoing administration of the portfolio in light of the changing sizes in the balances of deposits and loans. Of course, the community bank relies on core deposits, and to earn them, must be competitive in its offerings within the footprint of the institution. Likewise, the bank prospers on loan demand and, again, must offer competitive structures and pricing to retain and grow its list of borrowers.

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How Exceptions Impact Compliance

By Alan Wooldridge

Document tracking may not be the first thing you think of when considering your institution’s compliance priorities. Overlooking a single document, however, could have significantly negative consequences for your bank. Here are a few examples of how your bank’s exception management can impact compliance.

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Bank Websites Come Under Scrutiny for ADA Violations

Barriers can occur online, and the DOJ is expected to publish new rules addressing accessibility.

By Steven Eisen and David Gevertz

An increasing number of companies in the banking industry are reporting receiving demand letters from law firms alleging website violations under Title III of the Americans with Disabilities Act. These letters claim that the institution’s website contains accessibility barriers, including failure to provide text content, inability of the user to resize text, lack of functionality through the keyboard interface, inability to program the default human language of each web page, and absence of labels or instructions when the website content requires user input.

Legal Background

Title III requires places of public accommodation to provide “auxiliary aids and services” to customers who have a hearing, vision or speech disability unless taking such steps would: (1) fundamentally alter the nature of the good, service, facility, privilege, advantage or accommodation being offered; or (2) result in an undue burden.

The Department of Justice and courts interpreting Title III have extended its requirements to the websites of places of public accommodation. Some courts have distinguished between entities that have physical offices open to the public and companies with an online-only presence. For example, the Ninth Circuit refused to extend Title III to exclusively online companies, interpreting “place of public accommodation” to require “some connection between the good or service complained of and an actual physical place.” However, the First Circuit and other district courts disagree with this interpretation, noting that “places of public accommodation” are not limited to “actual physical structures.”

What This Means for Banks

In 2010, the DOJ released an Advance Notice of Proposed Rulemaking on website accessibility, at which time it solicited comments on costs and alternatives to making websites accessible to individuals with disabilities. Since then, the DOJ has stated that it does not anticipate publishing proposed Title III website accessibility regulations until 2018, leaving companies open to heightened litigation risks.

Enter the Worldwide Web Consortium, an international organization that develops protocols and guidelines to assist web developers in creating accessible website content for disabled users. The consortium developed the Web Content Accessibility Guidelines 2.0 – known as WCAG 2.0 — and it is widely expected that WCAG 2.0 will form the basis for the 2018 proposed DOJ regulations. In the interim, WCAG 2.0 Level A and AA proposals are viewed by several legal observers as the standard by which websites are judged to comply with Title III. The courts, by contrast, have yet to weigh in on this issue.

Twelve Ways to Comply

WCAG 2.0 offers 12 guidelines for websites seeking compliance with Title III. These guidelines require websites to:

  1. Provide text alternatives for non-text content;
  2. Provide captions and other alternatives for multimedia;
  3. Create content that can be presented in different ways, including by assistive technologies, without losing meaning;
  4. Make it easier for users to see and hear content;
  5. Make all functionality available from a keyboard;
  6. Give users enough time to read and use content;
  7. Do not use content that causes seizures;
  8. Help users navigate and find content;
  9. Make text readable and understandable;
  10. Make content appear and operate in predictable ways;
  11. Help users avoid and correct mistakes; and
  12. Maximize compatibility with current and future user tools.

Companies in all industries, but especially banks, should consult with their counsel and IT professionals to determine whether they should modify their websites now to address the above factors. While it may be tempting to wait until the DOJ publishes new rules addressing this issue, delays in modifying deficient websites could result in heightened litigation risks, especially for companies in industries being targeted by plaintiff law firms and/or consumer activists.

 

Steven Eisen and David Gevertz are shareholders with the Baker Donelson law firm. They can be reached at sjeisen@bakerdonelson.com and dgevertz@bakerdonelson.com.

Navigating the SAR Privilege

By Seth Kean

 In recent years, plaintiffs have increasingly sought discovery from banks relating to their anti-money laundering and Bank Secrecy Act programs, particularly in cases involving alleged customer misconduct. This development, which parallels increased focus by regulators on AML and BSA compliance, means that banks must take even greater care to avoid inadvertent disclosures of material protected by suspicious activity report confidentiality. This task is complicated by the fact that the line between privileged SAR material and non-privileged material, particularly material that is not a SAR and does not reference a SAR but is also not an account statement or other transactional document, is not always clear.

A federal appellate court underscored this point in 2015 when it referred to the scope of the SAR privilege as an “evolving area of the law.” In the absence of further regulatory guidance, the scope of the SAR privilege may continue to evolve in court decisions, but two points merit mention from recent decisions: first, there appears to be a consensus that material reflecting an evaluation or analysis of whether to file a SAR is privileged; and second, courts are divided as to whether material generated as part of an investigation is categorically privileged.

Evaluative Versus Investigatory Material
Congress passed the Bank Secrecy Act to require banks to assist the government in monitoring for financial crimes. In 1992, the BSA was amended to require financial institutions to report known or suspected violations of federal law using a SAR, which is confidential.  Federal law prohibits a bank from disclosing a SAR or the fact that a SAR has been filed or has not been filed, but does not prevent the disclosure of transactional documents. The prohibition against revealing whether a SAR has been filed protects a variety of other material, including communications relating to a SAR filing.

The central issue in SAR-related discovery disputes is often how to evaluate documents that fall in a gray or middle area; that is, they are not SARs and do not contain express references to a SAR filing, and they are also not transactional documents. The Financial Crimes Enforcement Network has commented that the SAR privilege should extend “in appropriate circumstances to material prepared by the financial institution as part of its process to detect and report suspicious activity.” But as some courts have observed, this guidance is open ended and does not specify exactly when material should be protected.  Against this backdrop, some court decisions have drawn a distinction between evaluative material, which reflects an evaluation or analysis of whether certain activity requires a SAR filing, and investigatory material, which relates to or is generated as part of an investigation into potentially suspicious activity.

There appears to be a consensus that the SAR privilege protects reports, memoranda, and other documents that reflect or relate to evaluation of a potential SAR filing. For example, one court ruled that a “cover sheet” that attached various transactional documents was protected because of comments on the sheet. It also ruled that communications between banks were “covered by the SAR privilege as the comments on those documents, the regulatory authority cited in the communications and the evaluative content, as a whole, reflect material that could be considered as a report of an evaluative nature intended to comply with federal reporting requirements.” Thus, in considering whether AML-related material may be protected from disclosure in civil litigation, practitioners should consider whether the documents contain or reflect some type of analysis or evaluation, even if such analysis or evaluation is not memorialized in a formal memoranda or report.

On the other hand, courts have made conflicting rulings on whether documents relating to a bank’s investigation of potentially suspicious activity are categorically protected by the SAR privilege.   Some courts have ruled that material generated as part of an AML-related investigation is protected by the SAR privilege.  In Norton v. U.S. Bank, investors in what turned out to be a Ponzi scheme, filed suit against the bank where the schemers deposited investor funds, and sought documents “generated by the bank in internal investigations” relating to the accounts.  The court ruled that the “[SAR] privilege is not limited to documents that contain an explicit reference to a Suspicious Activity Report,” and that it includes “material prepared by [a] national bank as part of its process to detect and report suspicious activity.” Thus, the plaintiffs were not entitled to “information about internal investigations or monitoring of the [alleged schemer’s] accounts in particular, or internal methods of tracking unusual patterns in banking activity in general.”

The court in Wultz v. Bank of China reached a different conclusion.  Here, the bank argued that various investigatory documents sought by plaintiffs, who were family members of bombing victims, were protected by the SAR privilege because “they result from the implementation of [the defendant’s] policies and procedures for the filing of SARs.”  The court rejected this argument (and the reasoning of Norton) and concluded that documents generated by the bank’s investigatory process were not categorically protected from disclosure.  The court acknowledged, however, that the SAR privilege would likely protect evaluative documents and invited the bank to identify documents that would be protected under this approach.

Conclusion
In complying with SAR confidentiality, banks and their counsel must ensure that they do not inadvertently disclose a SAR or the fact that a SAR has been filed. In the absence of more definitive regulatory guidance, banks must also navigate the uncertainty for materials in the gray area between protected SAR material and non-privileged transactional material. Recent cases reflect that this uncertainty is greatest regarding documents relating to or generated as part of an internal bank investigation, but that do not explicitly reflect an analysis or evaluation of a potential SAR filing.  Some court decisions have ruled that material related to such an investigation is protected from discovery in civil litigation, but other courts have taken a narrower view.

 

Seth Kean is a New York-based partner in the financial industry group of the law firm ReedSmith LLP. For more information, visit www.reedsmith.com.

CFPB Updates Exam Procedures for Military Lending Act Rules

October 3 – Consumer Financial Protection Bureau has updated exam procedures that its examiners will use in identifying consumer harm and risks related to the Military Lending Act rule. These exam procedures provide guidance to industry on what the CFPB will be looking for during reviews covering the amended regulation. (more…)

Operation Choke Point Causing Complications for ATM Deployers

August 10 – Count independent ATM deployers — such as those found in convenience stores, airports and gas stations — among the players with a grievance toward Operation Choke Point, reports the ATM Industry Association in a recently released white paper. (more…)

FDIC Proposes New Guidance Over Marketplace Lending

August 9 – FDIC has proposed updates to its guidance regarding third-party lending. At least one industry observer is calling the proposals more “hurdles for bank partners of marketplace lenders.” (more…)

Goldman Sachs Fined 36.3 Million Dollars in Case Over Leaked Documents

August 5 – Goldman Sachs Group was ordered by the Federal Reserve Board to pay a $36.3 million civil money penalty for its unauthorized use and disclosure of confidential supervisory information and to implement an enhanced program to ensure the proper use of confidential supervisory information. (more…)

Regulators Urge Banks to Self-Assess Diversity Policies and Practices

August 3 – Federal banking agencies have provided information on how the financial institutions they regulate may begin to submit self-assessments of their diversity policies and practices as of year-end 2015, and issued Frequently Asked Questions about the process. (more…)

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