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Federal regulators discuss Covid-19 responses and priorities
On May 19, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions.” Committee Chairwoman Maxine Waters (D-CA) opened the hearing by expressing her concerns about the “harmful deregulatory actions” taken by the previous administration’s appointees to “roll back key Dodd-Frank reforms and other consumer protections.” She noted, however, that she was pleased that the Senate is moving forward to reverse the OCC’s true lender rule and commented that she has asked House leadership to address the related Congressional Review Act resolution as soon as possible.
Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts, noting that the Fed has “worked to align [the Fed’s] emergency actions with other relief efforts as the economic situation improves” and is maintaining or extending some measures to promote continued access to credit. When Congresswoman Velazquez inquired how government programs like the Paycheck Protection Program helped to stabilize businesses and improve the overall economy, Quarles answered, “We would have experienced a much deeper and more durable economic contraction, and would have had more lasting economic scarring with closed businesses and defaulting obligations [] had those programs not been put in place.”
OCC Comptroller Michael Hsu discussed the agency’s increasing coordination with other federal and state regulators on fintech policy, in addition to OCC efforts to strengthen Community Reinvestment Act (CRA) regulations and address climate change. The OCC has been encouraging innovation, Hsu said, but added that his “broader concern is that these initiatives were not done in full coordination with all stakeholders. Nor do they appear to have been part of a broader strategy related to the regulatory perimeter.” In his written testimony, Hsu emphasized his concerns with providing charters to fintechs, noting that in doing so, it would “convey the benefits of banking without its responsibilities,” but also “that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators.” Hsu expressed in his oral statement the importance of finding “a way to consider how fintechs and payment platforms fit into the banking system” and emphasized that it must be done in coordination with the FDIC, Fed, and the states. He also explained that “the regulatory community is taking a fragmented agency-by-agency approach to the technology-driven changes taking place today. At the OCC, the focus has been on encouraging responsible innovation. For instance, we updated the framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking.” When Congressman Bill Huizenga (R-MI) asked how the OCC planned to address the “true lender” rule, which would soften the regulations for national banks to sell loans to third parties, Hsu stated that the OCC originally intended to review the rule, but that after the Senate passed S.J.Res. 15 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the rule (covered by InfoBytes here), the agency decided to leave it up to congressional deliberation and will monitor it instead.
FDIC Chairman Jelena McWilliams discussed, among other things, the FDIC’s policy of granting industrial loan company charters. As previously covered by Infobytes, the agency approved a final rule in December 2020 establishing certain conditions and supervisory standards for the parent companies of industrial banks and ILCs. McWilliams defended the FDIC’s new rule during the hearing, stating it “ensures that the parent company serves as a source of financial strength for the ILC while providing clarity about the FDIC's supervisory expectations of both the ILC and its parent company.”
NCUA Chairman Todd Harper also outlined agency measures taken in response to the pandemic. Among other things, Harper noted that the NCUA is supporting low-income credit unions through the Community Development Revolving Loan Fund and that the agency is working to strengthen its Consumer Financial Protection Program (CFPP) to ensure fair and equitable access to credit. During the hearing, Harper stated, “there is an increased emphasis on fair lending compliance, and agency staff are studying methods for improving consumer financial protection supervision for the largest credit unions not primarily supervised by the CFPP.”
FDIC announces Tennessee disaster relief
On May 14, the FDIC issued FIL-33-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Tennessee affected by severe storms, tornadoes, 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.
FDIC chairman addresses the importance of innovation
On May 11, FDIC Chairman Jelena McWilliams spoke at the Federalist Society Conference about the Dodd-Frank Act in a post Covid-19 environment and the future of financial regulation. Among other topics, McWilliams emphasized the importance of promoting innovation through inclusion, resilience, amplification, and protecting the future of the banking sector. McWilliams pointed out that “alternative data and AI can be especially important for small businesses, such as sole proprietorships and smaller companies owned by women and minorities, which often do not have a long credit history” and that “these novel measures of creditworthiness, like income streams, can provide critical access to capital” that otherwise may not be possible to access. McWilliams also discussed an interagency request for information announced by the FDIC and other regulators in March (covered by InfoBytes here), which seeks input on financial institutions’ use of AI and asks whether additional regulatory clarity may be helpful. McWilliams also added that rapid prototyping helps initiate effective reporting of more granular data for banks. Additionally, McWilliams addressed agency’s efforts to expand fintech partnerships through several initiatives intended to facilitate cooperation between fintech groups and banks to promote accessibility to new customers and offer new products. Concerning the ability to confront the direct cost of developing and deploying technology at any one institution, McWilliams added that “there are things that we can do to foster innovation across all banks and to reduce the regulatory cost of innovation.”
FDIC fines Oregon-based bank for unfair and deceptive collection practices
On May 10, the FDIC announced that an Oregon-based bank has agreed to settle allegations of unfair and deceptive practices in violation of Section 5 of the FTC Act related to a wholly owned subsidiary’s debt collection practices for commercial equipment financing. According to the FDIC, the subsidiary unfairly and deceptively charged various undisclosed collection fees—such as collection call and letter fees and third-party collection fees—to borrowers with past due accounts. The FDIC additionally claimed that some of the subsidiary’s collection practices were also unfair and deceptive, including (i) placing excessive and sequential collection calls to borrowers even after requests were made to stop the calls; (ii) disclosing borrowers’ debt information to third parties; and (iii) telling borrowers that their commercial debt would be reported as delinquent to the consumer reporting agencies (CRAs), even though its policy and practice was to not report such delinquencies to the CRAs. Under the terms of the settlement order, the bank, which does not admit nor deny the violations, will voluntarily pay an approximately $1.8 million civil money penalty.
OCC counters CSBS’s arguments in fintech charter challenge
On April 29, the OCC responded to the Conference of State Bank Supervisors’ (CSBS) most recent challenge to the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). As previously covered by InfoBytes, CSBS filed a complaint last December opposing the OCC’s alleged impending approval of an SPNB for a financial services provider, arguing that the OCC is exceeding its chartering authority.
The OCC countered, however, that the same fatal flaws that pervaded CSBS’s prior challenges (covered by InfoBytes here), i.e., that its challenge is unripe and CSBS lacks standing, still remain. According to the OCC, the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB—the proposed bank would conduct a full range of services, including deposit taking. Further, the OCC stated, even it if was an application for a SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe. As to standing, the OCC asserted that any alleged injury to CSBS or its members is purely speculative. Finally, the OCC contended that CSBS’s challenge fails on the merits because the challenge relies on the premise that the company’s application must be for a SPNB, not a national bank, because the company is not going to apply for deposit insurance but there is no requirement in the National Bank Act, the Federal Deposit Insurance Act, or the Federal Reserve Act that requires all national banks to acquire FDIC insurance.
FDIC releases March enforcement actions
On April 30, the FDIC released a list of administrative enforcement actions taken against banks and individuals in March. During the month, the FDIC issued 10 orders consisting of “five Prohibition Orders, three Orders to Pay Civil Money Penalties, two Section 19 Applications, one Order to Correct Conditions, and one Order Terminating Consent Order.” Among the orders is a civil money penalty imposed against a Puerto Rico bank related to alleged violations of the Flood Disaster Protection Act for failing to “timely force place insurance in connection with loans secured by a dwelling located within a special flood hazard area” on 27 occasions. The order requires the payment of a $40,500 civil money penalty.
The FDIC also imposed a civil money penalty against a Tennessee bank related to alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claims that the bank (i) failed to obtain flood insurance at or before the origination, increase, renewal, or extension of loans in 61 instances; (ii) failed to maintain an adequate amount of flood insurance in 88 instances; (iii) failed to provide required lender-placed flood insurance notices to borrowers within 45-days of force placement in 10 instances; (iv) provided an incomplete lender-placed flood insurance notice to a borrower; and (v) failed to provide timely notice of special flood hazards and the availability of federal disaster relief assistance in 37 instances. The order requires the payment of a $172,500 civil money penalty.
FDIC announces Kentucky and Alabama disaster relief
On April 30, the FDIC issued FIL-31-2021 and FIL-32-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Kentucky and Alabama affected by severe storms. 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.
FDIC announces FDItech virtual ‘Office Hours’
On April 29, the FDIC’s technology lab, FDiTech, announced that it will host a series of virtual “office hours” to hear from a variety of stakeholders in the business of banking concerning current and evolving technological innovations. The office hours will be hour-long, one-on-one sessions that will provide insight into the contributions that innovation has made in reshaping banks and enabling regulators to manage their oversight efficiently. According to the FDIC, “FDiTech seeks to evaluate and promote the adoption of innovative and transformative technologies in the financial services sector and to improve the efficiency, effectiveness, and stability of U.S. banking operations, services, and products; to support access to financial institutions, products, and services; and to better serve consumers.” FDiTech’s goal is to contribute to the transformation of banking by supporting “the adoption of technological innovations through increased collaboration with market participants.” In the first series of office hour sessions, the FDIC and FDiTech are seeking participants’ outlook on artificial intelligence and machine learning related to: (i) automation of back office processes; (ii) Bank Secrecy Act/Anti-Money Laundering compliance; (iii) credit underwriting decisions; and (iv) cybersecurity.
FDiTech anticipates hosting approximately 15 one-hour sessions each quarter. Interested parties seeking to participate in these sessions must contact the FDIC by May 24.
FDIC proposal would prohibit misuse of its name or logo
On April 22, the FDIC proposed a rule implementing its authority to prohibit “making misrepresentations about deposit insurance or misusing the FDIC’s name or logo.” The proposed rule is intended to promote transparency on the FDIC’s processes for inspecting and enforcing potential breaches of prohibitions under the FDIC Act by “further clarify[ing] [] procedures for identifying, investigating, and where necessary taking formal and informal action to address potential violations of Section 18(a)(4).” Additionally, the proposed rule would establish a primary point of contact for the public to report or inquire about potential violations. The FDIC specified that the proposed rule is in response to the “increasing number of instances where financial services providers or other entities or individuals have misused the FDIC’s name or logo.”
Comments on the proposed rule will be accepted for 60 days after publication in the Federal Register.
Agencies issue MRMG; seek comments on BSA/AML compliance
On April 9, the Federal Reserve Board, FDIC, and OCC, in consultation with FinCEN and the NCUA, issued a joint statement on the use of risk management principles outlined in the agencies’ “Supervisory Guidance on Model Risk Management” (known as the “model risk management guidance” or MRMG) as it relates to financial institutions’ compliance with Bank Secrecy Act/anti-money laundering (BSA/AML) rules. While the joint statement is “intended to clarify how the MRMG may be a useful resource to guide a bank’s [model risk management] framework, whether formal or informal, and assist with BSA/AML compliance,” the agencies emphasized that the MRMG is nonbinding and does not alter existing BSA/AML legal or regulatory requirements or establish new supervisory expectations. In conjunction with the release of the joint statement, the agencies also issued a request for information (RFI) on the extent to which the principles discussed in the MRMG support compliance by financial institutions with BSA/AML and Office of Foreign Assets Control requirements. The agencies seek comments and information to better understand bank practices in these specific areas and to determine whether additional explanation or clarification may be helpful in increasing transparency, effectiveness, or efficiency. Comments on the RFI are due within 60 days of publication in the Federal Register.