InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
OCC approves bank to surpass Section 23A thresholds
The OCC recently published redacted Interpretive Letter #1181, in which the OCC granted a national bank’s application for exemption from the quantitative limits under Section 23A to allow the bank to purchase an affiliate LLC that owns the premises on which the bank’s headquarters and main office are located. According to the letter, the affiliate transaction would exceed ten percent of the bank’s capital stock and surplus and would cause the aggregate amount of the bank's covered transactions with all affiliates beyond 20 percent of the bank’s capital stock and surplus. Exceeding either of these thresholds would requires an exemption, but the OCC believed a waiver was appropriate given the anticipated reduction in the bank's operating costs. Moreover, the OCC reasoned that the exemption would fortify the bank's financial standing, enhancing its ability to improve the services it provides to customers and communities. The FDIC agreed and determined that an exemption would not pose an unacceptable risk to the Deposit Insurance Fund. For these reasons, the OCC approved the exception and permitted the purchase to move forward.
OCC Acting Deputy Comptroller Murphy testifies on OCC’s Office of Financial Technology
On December 5, the Acting Deputy Comptroller of the OCC’s Office of Financial Technology, Donna Murphy, testified before the U.S. House Subcommittee on Digital Assets, Financial Technology and Inclusion. Her testimony focused on the OCC’s supervision and regulation of new and emerging fintech products.
Created in October 2022, the Office of Financial Technology regulates and supervises all aspects of fintech innovation in the federal banking system, including bank-fintech partnerships, artificial intelligence, and digital assets. Murphy testified that a strong risk management plan against third parties is essential. She referenced the joint guidance issued earlier this year by the OCC, Federal Reserve, and FDIC (previously covered by InfoBytes, here).
Murphy also discussed the use of artificial intelligence and algorithms in banking, highlighting the many ways they can strengthen safety and soundness, enhance consumer protection, improve compliance, address financial crime, and increase fairness and access to the banking system. However, Murphy highlighted the need for banks to focus on software design, testing, security, and data management when implementing artificial intelligence. Lastly, Murphy iterated the OCC’s commitment to reducing inequality in banking and increasing access to financial services for all.
OCC releases enforcement actions
On November 16, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included is a cease and desist order against an Indiana bank for allegedly engaging in unsafe or unsound practices, related to corporate governance and enterprise risk management, credit underwriting and administration, liquidity risk management, and interest rate risk management. The order requires the bank to, among other things, (i) provide quarterly reports detailing corrective action and efforts to comply with the order; (ii) develop a written strategic plan; (iii) maintain specified capital ratios; (iv) engage an independent third party to review board and management supervision; (v) submit a written concentration risk management program and a written liquidity risk management program; (vi) adopt a credit underwriting and administration program; (vii) submit and adopt a written adequate allowance for credit losses; and (viii) adopt a written credit derivatives program.
Regulators address concerns at Senate Banking Committee hearing, receive written concerns regarding Basel III
On November 14, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing where regulators, Fed Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, and acting Comptroller of Currency Michael Hsu, testified regarding the Basel III Endgame proposal. Gruenberg’s prepared remarks noted that Basel III reforms are a “continuation of the federal banking agencies’ efforts to revise the regulatory capital framework for our nation’s largest financial institutions, which were found to be undercapitalized and over-leveraged during the Global Financial Crisis of 2008.” The proposal would raise capital requirements for large banks (covered by InfoBytes here).
Concerning Basel III, Senator Tester (D-MO) mentioned he has “some concerns about the proposed changes and how its impact will be on workers’ and households’ and small businesses’ access to credit and overall vibrancy of our capital markets.” “These rules don’t affect any banks in Montana, but they do affect the big guys that affect Montana,” he noted.
Among other testimonies, Senator Warner (D-VA) expressed concerns regarding the timeline of the comment period and potential changes to the proposal. Specifically, Sen. Warner mentioned that comments may not be received until after the rule is close to finalization. Fed Vice Chair Barr noted that the regulators have yet to evaluate comments on the proposal, as most are expected to come through mid-January, and that depending on the substance of some comments, they are open to making appropriate changes to the proposal. Acting Comptroller of the Currency Hsu’s written testimony echoed Barr’s remarks, stating “[w]e will consider all comments, including alternative approaches.”
Moreover, on November 12, a group of Republican lawmakers of the committee also sent a letter to the OCC, FDIC, and the Fed. In the letter, the senators argued that the proposal would restrict billions of dollars in capital, resulting in costlier and more limited access to credit for millions of consumers, impacting affordable housing, mortgage lending, small business lending, and consumer access to credit cards and home equity lines. The proposal was also criticized for its potential to disadvantage U.S. companies globally and harm middle-market private entities and small businesses. Moreover, the letter suggested that the proposal could negatively impact pension funds, increase fees for risk hedging, and decrease returns for retirees.
Also on November 12, several banking industry groups sent a letter to the Fed, FDIC, and the OCC requesting them to issue a revised proposal. The letter alleges violations of the Administrative Procedures Act because the data used to inform the interagency proposal is not publicly available. The groups also argued that the proposed rule repeatedly utilizes non-public analyses based on the agencies’ “supervisory experience” to support different aspects of the rule. Regarding sensitive data, the groups say, “Nothing prevents the agencies from releasing such data and analyses in a manner that is anonymized or aggregated to the extent necessary to protect bank or other party confidentiality.” The senators also believe the proposal would impose “significant harm” throughout the economy “particularly in the face of current economic headwinds and tightening credit conditions.”
Agencies finalize 2024 HPML smaller loan exemption threshold
On November 13, the CFPB, OCC, and the Fed published final amendments to the official interpretations for regulations implementing Section 129H of TILA, which establishes special appraisal requirements for “higher-risk mortgages,” otherwise termed as “higher-priced mortgage loans” (HPMLs). The final rule increases TILA’s loan exemption threshold for the special appraisal requirements for HPMLs. Each year, the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold will increase from $31,000 to $32,400 effective January 1, 2024.
OCC releases commercial lending bulletin on venture loans
On November 1, the OCC issued a bulletin on “commercial loans to early-, expansion-, and late-stage companies,” which it referred to as “venture loans.” The OCC explained that although “venture lending supports new business formation and can improve access to capital for growth companies… new business ventures have a high probability of failure.” Accordingly, the bulletin, which “applies to all OCC-regulated banks, including community banks, that engage in or are considering engaging in venture lending,” provides guidance on the agency’s expectations for risk management and risk-rating of venture loans.
The bulletin expressly exempts “[f]ully monitored and controlled asset-based loans (ABL) to early-, expansion-, and late-stage companies,” from the guidance. In addition, the OCC does not categorize the following types of credit as venture loans:
- Loans to businesses that primarily rely on internal cash flow, rather than equity investments, for their growth;
- Loans made under government-backed lending support programs where federal, state, or local guarantees sufficiently reduce credit risk (e.g., SBA guarantees); and
- Loans made under special purpose credit programs (SPCP).
Agencies revise TCPA examination procedures
On November 2, the OCC published revisions to the interagency examination procedures for the Telephone Consumer Protection Act (TCPA), which are utilized by the FDIC, NCUA, and the OCC. The OCC also announced that it is rescinding the “‘Telephone Consumer Protection Act and Junk Fax Protection Act’ section of the ‘Other Consumer Protection Laws and Regulations’ booklet of the Comptroller’s Handbook” and explained that OCC examiners will rely on the new interagency procedures.
The revisions were made to reflect amendments to the TCPA that became effective on October 25, 2021. “The revised interagency examination procedures address:
- provisions governing how customers can revoke consent under the TCPA;
- special exemptions from the customer consent provisions of the TCPA for banks using automated communications to notify customers of potential account fraud; and
- safe harbors for callers that check a reassigned number database maintained by the Federal Communications Commission.”
The revised examination procedures booklet can be found here.
Request for GAO examination of agencies’ role in Basel III endgame proposal
The Chairman of the Financial Services Committee, Patrick McHenry (R-NC), and Representative Andy Barr (R-KY), Chairman of the Subcommittee on Financial Institutions and Monetary Policy, sent a letter to the U.S. Government Accountability Office (GAO) requesting the GAO to “examine the role U.S. federal banking agencies played in work at the Basel Committee on Banking Supervision to develop the recent Basel III Endgame proposal, which calls for massive increases in capital requirements for already well-capitalized U.S. financial institutions.”
As previously covered by InfoBytes, the federal banking agencies issued a notice of proposed rulemaking that would substantially revise the capital requirements of large U.S. banking organizations. According to the letter, Congress has very little insight into the basis of such policy changes that “would fundamentally change the policy of the U.S. banking system.”
The letter requests the GAO to evaluate each federal banking agency’s participation in the development of Basel III Endgame. GAO’s evaluation should include: (i) a summary of each material proposal submitted by a federal banking agency to the Basel Committee; and (ii) a summary of concerns raised by a federal banking agency with respect to a consultative document or other proposal considered by the Basel Committee.
Further, the letter requests the GAO prioritize each proposal or concern from the federal banking agencies related to:
- Any proposals or concerns from the federal banking agencies that did not receive a fulsome response by the Basel Committee.
- Any evidence or rationale supporting the requirement that a “corporate entity (or parent) must have securities outstanding on a recognized securities exchange for an exposure to that entity (or parent) to be eligible for the reduced risk weight for investment-grade corporate exposures;”
- The absence of a tailored approach to “high-fee revenue banks under the Basel III Endgame business-indicator approach to operational risk capital”;
- The calibration of the “scaling factor, multiplier, dampener, and other coefficients for that business-indicator approach”; and
- The calibration of the “correlation factors and the profit-and-loss attribution test thresholds for the models-based measure of market risk capital.”
Regulators release final principles for climate-related financial risk management
On October 25, the Fed, OCC, and FDIC issued final interagency guidance titled Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The principles are intended to help the largest institutions supervised by the Federal banking agencies, i.e., those with over $100 billion in assets, manage climate-related risk.
These climate-related risks include both physical and transition risks. Physical risks include “hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, etc.,” while transition risks “refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes… [towards] a lower carbon economy.”
These climate-related risks affect the values of assets of liabilities and damage property, leading to a loss of income, defaults, and liquidity risks. The agencies created these principles to direct board of directors and managers make sound business practices with making progress toward mitigating climate-related financial risks.
CFPB Director Rohit Chopra, a member of the FDIC Board of Directors, shared remarks on the final principles, noting that climate change poses a dual challenge to protect infrastructure and fortify the financial system. He also stressed the need for regulatory guidance to convey clear and practical rules. FDIC Chairman Gruenberg also shared a statement on the final principles, highlighting the FDIC’s focus on the financial aspects of climate change, clarifying its role in managing risks rather than setting climate policy and encouraging cooperation among federal banking agencies to ensure consistency in addressing climate-related financial risks.
Agencies extend comment period on proposed rules to strengthen large bank capital requirements
On October 20, the Fed issued a joint press release with the FDIC and the OCC announcing the extension of the comment period on proposed rules to expand large bank capital requirements. Earlier this year, the agencies announced the proposed rule which would implement the final components of the Basel III Agreement. The components would revise capital requirements for large banking organizations, among other things. (Covered by InfoBytes here.) Adding an additional six weeks (from the original 120-day comment period set to expire on November 30), the new comment period deadline is by January 16, 2024.