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Fed describes landscape of community banks and fintech partnerships
On September 9, the Federal Reserve Board published a paper describing the landscape of community banks and fintech partnerships. The paper, Community Bank Access to Innovation through Partnerships, is not guidance but is intended to promote and support “responsible innovation” through access and understanding to financial technology, as well as appropriate third-party risk management and compliance guardrails. The paper follows interagency guidance released last month by the Fed, OCC, and FDIC, which addressed several key due diligence topics for community banks considering relationships with prospective fintech companies, as well as interagency proposed guidance on third party risk management—signals of the regulators’ continued and increased focus on third-party relationships. (Covered by InfoBytes here and here.) The paper provides anecdotal observations shared with the Fed by outreach participants and discusses the benefits and risks of different broad partnership types (operational technology partnerships, customer-oriented partnerships, and front-end fintech partnerships), and key considerations for engaging in such partnerships. According to the report, outreach participants presented a general belief that “fintech partnerships were most effective when three elements were present: a commitment to innovation across the community bank; alignment of priorities and objectives of the community bank and its fintech partner; and a thoughtful approach to establishing technical connections between key parties, including the bank, fintech, and the bank’s core services provider.”
FDIC announces North Carolina disaster relief
On September 13, the FDIC issued FIL-65-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of North Carolina affected by remnants of Tropical Storm Fred. The FDIC acknowledged the unusual circumstances faced by institutions in affected areas, and suggested institutions take certain steps to meet the needs of their communities and keep the FDIC informed of business impacts. These steps include (i) working with borrowers to adjust or alter loan terms in a safe and sound manner; (ii) identifying potential community development activities to revitalize or stabilize the disaster area (which the FDIC noted may receive favorable CRA consideration); (iii) monitoring potentially impacted municipal securities and loans; (iv) notifying the FDIC of delays in meeting filing and publishing requirements, or in the event temporary banking facilities are needed; and (v) processing consumer requests under Regulation Z for a waiver or modification of the three-day rescission period for dwelling-secured loans in the event of a “bona fide personal financial emergency.”
OCC proposes rescinding its 2020 CRA rule
On September 8, the OCC announced in the Federal Register that it is soliciting comments on a proposal to rescind its 2020 Community Reinvestment Act Rule and to replace it with rules based largely on those adopted jointly by the Federal banking agencies in 1995, as amended. As previously covered by a Buckley Special Alert, the final rule, issued in May 2020, provides for at least a 27-month transition period for compliance based on a bank’s size and business model, among other things. According to the OCC, the proposal, “would align the OCC’s CRA rules with the current Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation rules and thereby facilitate the on-going interagency work to modernize the CRA regulatory framework and create consistency for all insured depository institutions.” Since many aspects of the CRA 2020 rule remain in transition and have not been implemented, the OCC anticipates that the proposed rule will have a limited impact on national banks and savings associations. According to Acting Comptroller Michael J. Hsu, the issuance “is an important step toward strengthening and modernizing the CRA,” and that the agency “is committed to working with the Federal Reserve and FDIC on a future joint rulemaking.” According to the OCC, the proposed rules would apply to all national banks and all federal and state savings associations. Comments are due by October 29.
Agencies provide guidance on Hurricane Ida and California wildfires
Recently, the FDIC, Federal Reserve Board, NCUA, OCC, and the Conference of State Bank Supervisors issued joint statements covering supervisory practices for financial institutions affected by Hurricane Ida and the California wildfires (see here and here). Among other things, the agencies informed institutions facing operational challenges that the regulators will expedite requests for temporary facilities, noting that in most cases, “a telephone notice to the primary federal and/or state regulator will suffice initially to start the approval process, with necessary written notification being submitted shortly thereafter.” The agencies also called on financial institutions to “work constructively” with affected borrowers, noting that “prudent efforts” to adjust or alter loan terms in affected areas “should not be subject to examiner criticism.” Institutions facing difficulties in complying with any publishing and reporting requirements should contact their primary federal and/or state regulator. Additionally, the agencies noted that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services that revitalize or stabilize federally designated disaster areas. Institutions are also encouraged to monitor municipal securities and loans impacted by Hurricane Ida and the California wildfires.
FDIC releases July enforcement actions
On August 27, the FDIC released a list of administrative enforcement actions and one Notice of Charges taken against banks and individuals in July. During the month, the FDIC issued nine orders consisting of “three Orders to Pay Civil Money Penalties, two Orders of Prohibition from Further Participation, three Section 19 Orders, and one Order Terminating Consent Order.” Among the orders is a civil money penalty imposed against a Kansas-based bank concerning alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank “made, increased, extended, renewed, sold, or transferred a loan secured by a building or mobile home located or to be located in a special flood hazard area without properly notifying the Administrator of FEMA or their designee.” The order requires the payment of a $9,500 civil money penalty.
The FDIC also imposed a civil money penalty against a Missouri-based bank related to alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank (i) “[m]ade, increased, extended or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance”; (ii) “[m]ade, increased, extended or renewed a loan secured by a building or mobile home located or to be located in a special flood hazard area without providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral”; and (iii) “[f]ailed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the term of the loan.” The order requires the payment of a $4,000 civil money penalty.
Agencies issue fintech guidance for community banks
On August 27, the FDIC, OCC, and Federal Reserve Board released a guide as part of its efforts to promote and support the adoption of new technologies by financial institutions. (See also FIL-59-2021 and OCC Bulletin 2021-40.) The Conducting Due Diligence on Financial Technology Companies: A Guide for Community Banks is intended to help community banks conduct due diligence when considering relationships with prospective fintech companies. Among other things, the guide addresses six key due diligence topics for community banks to consider, including (i) business experience, strategic goals, and qualifications; (ii) financial conditions and market information; (iii) legal and regulatory compliance; (iv) risk management policies, processes, and controls; (v) information security programs; and (vi) operational resilience, such as business continuity planning, incident response, service level agreements, and reliance on subcontractors. The guide also provides practical sources of information that may be useful when evaluating fintech companies. The agencies note that use of the guide, which is consistent with the FDIC’s Guidance for Managing Third-Party Risk, is voluntary and that the guide does not anticipate all types of fintech relationships and risks. Consistent with risk-based programs, a community bank may tailor how it uses the information “based on specific circumstances, the risks posed by each third-party relationship, and the related product, service, or activity. . . offered by the fintech company.”
FDIC announces Tennessee disaster relief
On August 26, the FDIC issued FIL-58-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Tennessee affected by severe storms and flooding. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements.
CSBS responds to Waters on state supervisory activities
On August 26, the Conference of State Bank Supervisors (CSBS) sent a letter to House Financial Services Committee Chairwoman Maxine Waters (D-CA) detailing information on CSBS' response to the Covid-19 pandemic related to supervisory efforts, policy initiatives, and mortgage servicing plans. The letter is in response to an August 5th letter from Chairwoman Waters to CSBS, CFPB, OCC, NCUA, FDIC, and Fed asking the agencies, among other things, to immediately update the “Joint Statement on Supervisory and Enforcement Practices Regarding the Mortgage Servicing Rules in Response to the COVID-19 Emergency and the CARES Act dated April 3, 2020,” and to take other steps to “provide vigorous oversight and encourage mortgage servicers to work with borrowers to avoid unnecessary foreclosures.”
The letter from the CSBS detailed the consumer protection and supervision efforts of state regulators during the Covid-19 pandemic, noting that they have “monitored the activities of mortgage originators and servicers … and have acted responsively and decisively with expanded examination approaches, new policy, and public guidance.” The letter expanded on these actions by setting forth its efforts in “three very broad categories”: networked supervision, direct supervision, and supervision policy. In the latter two categories, CSBS noted the steps it has taken during the pandemic to “remain vigilant to signs of unwarranted foreclosure activity or other consumer harm.” The letter also agreed that the “states’ dual mandate to protect consumers and ensure a healthy economic environment has been the appropriate approach” during Covid-19.
FDiTech launches tech sprint to test institutions' resilience
On August 16, the FDIC’s technology lab, FDiTech, announced a tech sprint, which challenges participants to “identify solutions that can be used by institutions of all sizes to measure and test their resilience to a major disruption.” The tech sprint, From Hurricanes to Ransomware: Measuring Resilience in the Banking World, is designed to review new measures, data, tools, or capabilities to calculate how well community banks, and the banking sector as a whole, can withstand a major disruption. According to the FDIC, “[r]ecognizing the evolving threat environment to bank operations, their need to strengthen resilience, and given the challenges that banks face in identifying criteria to determine their respective levels of tolerance for a disruption, the FDIC seeks solutions that improve sector-wide resilience by helping answer the question: ‘What would be the most helpful set of measures, data, tools, or other capabilities for financial institutions, particularly community banks, to use to determine and to test their operational resilience against a disruption?’” Registration will be required for stakeholders to participate, and additional information on how to participate is expected on the FDiTech website.
FDIC seeks input on off-site examinations
On August 13, the FDIC issued a notice and request for information (RFI) seeking comments from financial institutions regarding the agency’s supervisory approach to examinations during the Covid-19 pandemic, including on-site and off-site activities, use of technology, and communication methods. Specifically, the RFI seeks input on areas that worked well in the off-site examination context “to inform plans for future examinations, consistent with applicable law and the purpose of examinations.” Areas of interest include identifying (i) examination activities that worked best or were most effective during the off-site approach; (ii) new or emerging technologies that would support additional off-site examination activities (the FDIC noted that leveraging technology has improved efficiency and reduced burdens on financial institutions); and (iii) what improvements, if any, could be made to communication methods used during off-site examinations, including whether the FDIC should continue to use secure mail as an alternative to hardcopy mail to communicate supervisory correspondence. Comments are due October 12.