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OCC releases FAQs on proposal to rescind 2020 CRA rule
On October 26, the OCC issued responses to frequently asked questions on its notice of proposed rulemaking (NPRM) to rescind its 2020 Community Reinvestment Act Rule (2020 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 InfoBytes, the OCC noted it intends to align the agency’s CRA rules with current Federal Reserve Board and FDIC rules, “thereby facilitat[ing] the on-going interagency work to modernize the CRA regulatory framework and create consistency for all insured depository institutions.” The FAQs discuss the rulemaking process and provide a general timeline on the transition from the 2020 Rule. The FAQs also answer questions concerning: (i) CRA bank-type determinations; (ii) qualifying activity determinations; (iii) the qualifying activity confirmation request system; (iv) the transition period for tracking activities that qualify under the 2020 Rule but would not qualify should the 1995 rules be reinstated; (v) examination administration; (vii) assessment areas; (vii) targeted geographic areas; (viii) strategic plans; and (ix) submitting public comments.
FDIC finalizes rule amending real estate lending
On October 22, the FDIC adopted a final rule amending the Interagency Guidelines for Real Estate Lending Policies to include consideration of the capital framework established in the community bank leverage ratio (CBLR) rule into the method of calculating the ratio of loans in excess of the supervisory loan-to-value limits (LTV limits), which applies to all FDIC-supervised financial institutions. As previously covered by InfoBytes, the FDIC issued the proposed rule to amend the Interagency Guidelines for Real Estate Lending Policies in June by proposing to establish supervisory LTV criteria for certain real estate lending transaction types and allowing exceptions to the supervisory LTV limits. Among other things, the final rule: (i) “revises the Appendix so that all FDIC-supervised institutions calculate the ratio of loans in excess of the supervisory LTV limits using tier 1 capital plus the appropriate allowance for credit losses in the denominator, regardless of an institution’s CBLR election status”; and (ii) “provides a consistent approach for calculating the ratio of loans in excess of the supervisory LTV limits at all FDIC-supervised institutions,” and “would approximate the historical methodology . . . for calculating the ratio of loans in excess of the supervisory LTV limits.” The final rule is effective 30 days after publication in the Federal Register.
Agencies seek to update uniform rules for administrative enforcement proceedings
Recently, the FDIC, OCC, Federal Reserve Board, and NCUA issued a notice of proposed rulemaking (NPRM) to modernize the agencies’ Uniform Rules of Practice and Procedure (Uniform Rules) applicable to formal administrative enforcement proceedings. The amendments would recognize the use of electronic communications and technology in all aspects of administrative hearings to increase the efficiency and fairness of administrative adjudications. Among other things, the NPRM would (i) allow electronic signatures and filings; (ii) permit depositions to be held by remote means; (iii) modernize language and definitions; and (iv) extend certain filing time limits. Amended provisions also address the authority of administrative law judges, adjudicatory proceedings, good faith certifications, ex parte communications, and expenses. The agencies also propose to modify their specific rules of administrative practice and procedure (known as the Local Rules) applicable to enforcement actions brought by each agency. FDIC staff released a memo recommending its board approve and authorize the NPRM, pointing out that the rules have not been substantively updated in 25 years and do not account for technological advances.
Agencies release statement on LIBOR transition
On October 20, the CFPB, Federal Reserve Board, FDIC, NCUA, and OCC, in conjunction with the state bank and state credit union regulators, (collectively, “agencies”) released a joint statement regarding the transition away from LIBOR. As previously covered by InfoBytes, the Fed, FDIC, and OCC issued a joint statement encouraging banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable, but by December 31, 2021 at the latest. The agencies' October 20 joint statement provides supervisory considerations for institutions when choosing an alternative reference rate, such as, among other things: (i) the meaning of new LIBOR contracts; (ii) understanding how the chosen reference rate is constructed and the fragilities associated with it; and (iii) expectations for fallback language. In addition, the agencies noted that supervised institutions should “develop and implement a transition plan for communicating with consumers, clients, and counterparties; and ensure systems and operational capabilities will be ready for transition to a replacement reference rate after LIBOR’s discontinuation.”
States, consumer advocates urge agencies to explicitly disavow rent-a-bank schemes
On October 18, consumer advocates and several state attorneys general and financial regulators responded to a request for comments issued by the OCC, Federal Reserve Board, and the FDIC on proposed interagency guidance designed to aid banking organizations in managing risks related to third-party relationships, including relationships with fintech-focused entities. (See letters here and here.) As previously covered by InfoBytes, the proposed guidance addressed key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Consumer advocates and the states, however, expressed concerns that the agencies’ proposed guidance does not “highlight the significant risks associated with high-cost lending involving third-party relationships,” and does not include measures to prevent banks from entering into nonbank lending partnerships (e.g. “rent-a-bank schemes”).
According to the consumer advocates’ letter, the agencies’ guidance “should unequivocally declare that it is inappropriate for a bank to rent out its charter to enable attempted avoidance of state consumer protection laws, in particular interest rate and fee caps, or state oversight through licensing regimes.” The consumer advocates stated that they are aware of six FDIC-supervised banks involved in rent-a-bank schemes with nonbank lenders making allegedly illegal high-cost loans, and urged the FDIC to take immediate, “overdue” action to put an end to them. Among other things, the consumer advocates said the new guidance should explicitly specify: (i) that a bank’s involvement in lending that exceeds state interest rate limits with a nonbank is a “critical activity”; (ii) that lending partnerships involving loans exceeding a fee-inclusive 36 percent annual percentage rate (APR) “pose especially high risks”; and (iii) that in instances where a loan exceeds the Military Lending Act’s 36 percent APR, the federal banking supervisor will directly examine the third-party partner and charge the bank for the cost of the examination.
The states wrote in their letter that “experience teaches us that, in the absence of an explicit disavowal of rent-a-bank schemes, the [p]roposed [g]uidance invites continued abuse of banks’ interest exportation rights, to the considerable detriment of state regulation, consumer protection, and banks’ safety and soundness.” The states strongly encouraged the agencies to “explicitly disavow rent-a-bank schemes.”
ARRC recommends firms reduce use of LIBOR before year end
On October 14, the Alternative Reference Rates Committee (ARRC) recommended that all market participants take proactive action now to reduce their use of U.S. dollar LIBOR to promote a smooth end to new LIBOR contracts by year end. ARRC referred to a joint statement issued last November by the Federal Reserve Board, FDIC, and OCC encouraging banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable, but by December 31, 2021 at the latest. (Covered by InfoBytes here.) According to the agencies, entering into contracts after this date will create safety and soundness risks given consumer protection, litigation, and reputation risks at stake. ARRC recommended that firms adopt its selected alternative, the Secured Overnight Financing Rate, which is consistent with steps that several firms have already taken to ensure they are in the position to meet the supervisory guidance. This includes “setting targets for reductions in new LIBOR activity, limiting the range of LIBOR offerings, and implementing internal escalation exceptions processes around new LIBOR contracts for narrow cases in line with supervisory guidance.”
FDIC announces deposit insurance seminars
On October 7, the FDIC announced that it will conduct four identical seminars for bank employees and bank officers regarding FDIC deposit insurance coverage between October 21 and December 14. According to the FDIC, the seminars will: (i) provide an overview of FDIC-deposit insurance rules; (ii) cover topics such as the general principles of coverage, ownership categories, and requirements; (iii) provide information on additional deposit insurance resources; and (iv) include coverage examples and a live Q&A session. Registration will be required, but the seminars are free. Seminar participants must register at least two business days prior to the event, which can be accessed here.
FDIC updates brokered deposits FAQs
On October 5, the FDIC released an update to the Questions and Answers Related to the Brokered Deposits Rule document. The FDIC added an FAQ to expressly state that a broker-dealer that sweeps deposits to only one insured depository institution (IDI) does not need to file a notice to rely upon the 25 percent designated exception, because a third party that has an exclusive deposit placement arrangement with only one IDI does not meet the definition of “deposit broker.” The FAQs also specify that an individual “meets the first part of the ‘deposit broker’ definition when it is ‘engaged in the business of placing deposits’ on behalf of a third party (i.e., a depositor) at IDIs.” The FAQs further clarify that an individual “is ‘engaged in the business of placing deposits’ of third parties if that person, while engaged in business, receives third party funds and deposits those funds at more than one IDI.”
EU and U.S. release statement on Joint Financial Regulatory Forum
On September 29 and 30, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S. – EU Joint Financial Regulatory Forum to continue their ongoing financial regulatory dialogue. Matters discussed focused on six different themes: “(1) market developments and current assessment of financial stability risks, (2) sustainable finance, (3) multilateral and bilateral engagement in banking and insurance, (4) regulatory and supervisory cooperation in capital markets, (5) financial innovation, and (6) anti-money laundering and countering the financing of terrorism (AML/CFT).”
While acknowledging that both the EU and U.S. are experiencing “robust economic recoveries,” participants cautioned that the uncertainty around the Covid-19 pandemic and the economic outlook has not dissipated. “[C]ooperative international engagement to mitigate financial stability risks remains essential,” participants warned. Participants also explored issues concerning climate-related challenges for the financial sector and mandates for addressing climate-related financial risks, and touched upon the EU’s strategy for financing its transition to a sustainable economy. Regarding financial innovation, participants discussed potential central bank digital currencies and exchanged views on topics such as new types of digital payments, crypto-assets, and stablecoins, with all participants recognizing the “benefits of greater international supervisory cooperation” and “promot[ing] responsible innovation globally.” In addition, participants discussed progress made in strengthening their respective AML/CFT frameworks, “exchanged views on the opportunities and challenges arising from financial innovation in the AML/CFT area and explored potential areas for enhanced cooperation to combat money laundering and terrorist financing bilaterally and in the framework of [the Financial Action Task Force].”
Fed governor discusses community-bank supervision
On September 29, Federal Reserve Governor Michelle W. Bowman spoke at the Community Banking in the 21st Century Research and Policy Conference held in St. Louis, Missouri on creating a new model for the future of supervision in banking. Bowman stated that the Fed has “actively explored ways to reduce regulatory burden and provide greater transparency into the work of bank supervisors,” including a reassessment of disproportionate regulatory burdens on small institutions. Bowman noted there was a systematic movement to FDIC-insured deposits in state or nationally chartered banks during the Covid-19 pandemic. For example, total deposits at all FDIC-insured institutions increased by 22 percent in comparison to deposit data from 2019 to 2020, and small business lending increased significantly. Bowman pointed out that community banks played a large role in allocating credit through the Paycheck Protection Program during the pandemic. She also discussed ways the Fed has evolved since the start of the pandemic, such as utilizing technology that enabled the opportunity to remotely supervise the safety and soundness of institutions and adjusting supervisory practices, among other things.
For the future of supervision, Bowman announced an initiative to investigate the implications of banking evolutions for the Fed’s supervision function, which will ensure the Fed’s supervisory approaches “accommodate a much broader range of activities” while also ensuring it does not “create an unlevel playing field with unfair advantages, or unfair disadvantages, for some types of firms versus others.” Bowman said that when there is significant uncertainty around a new regulation, supervisory expectation, or practice, the Fed “will look beyond [its] traditional communications tools to find innovative ways to reduce that uncertainty.” She also shared some underlying principles, among other things, that she believes will guide future supervisory approaches, such as (i) committing to preserving the stability, integrity, functionality, and diversity of the banking system; (ii) maintaining consumer protection and ensuring banks can safely offer financial products and services; (iii) avoiding adding new burdens on banks; (iv) enhancing transparency around supervisory expectations for safety and soundness and consumer compliance matters; (v) providing timelier feedback to banks; and (vi) having the ability to adjust supervisory expectations effectively and efficiently to enable banks to be more flexible in serving different communities.