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Community coalitions file complaint to block OCC CRA final rule
On June 25, two community coalitions filed a complaint in the U.S. District Court for the Northern District of California asking the court to block the OCC’s final rule to modernize the regulatory framework implementing the Community Reinvestment Act (CRA). The complaint claims that the OCC failed to provide for meaningful public input on key revisions to the agency’s final rule, and argues that the May 20 rule (covered by a Buckley Special Alert) failed to consider the impact of the Covid-19 pandemic and is in violation of the Administrative Procedures Act. Notably, neither the FDIC nor the Federal Reserve Board joined in promulgating the final rule, the complaint notes. Among other things, the complaint argues that the final rule “guts the [CRA] and eviscerates the backing it provides to the [low- and moderate-income (LMI)] communities and communities of color that have long suffered from discrimination by financial institutions,” and will dilute benefits for these communities. The complaint also alleges that the final rule “will allow banks to claim credit for massive projects that they undoubtedly would have financed anyway; whose benefit to LMI people is questionable and speculative; and that are so costly that they will allow banks to fill up their CRA credits without making real investments in LMI communities as the CRA intended.” Additional arguments include that the final rule limits the coalitions’ ability to advocate for greater access to credit for LMI communities, issue evidence-based reports on banks’ CRA activity, and negotiate CRA funding increases with banks for specific communities. The complaint further alleges that the final rule includes definitions of “CRA deserts”—areas where banking services are not available—that were not part of the proposal, and fails to provide supporting data for many of the provisions. The coalitions seek injunctive and declaratory relief that would block the final rule from taking effect.
FDIC adds flood insurance penalty information to enforcement manual
On June 18, the FDIC announced an update to its “Formal and Informal Enforcement Actions Manual,” regarding the assessment of mandatory civil money penalties for certain pattern and practice violations of the National Flood Insurance Act (Act). The Act requires the FDIC to assess a penalty of up to $2,000 (adjusted annually for inflation) for each violation per loan against an insured depository institution. The FDIC will use the following two-step process to calculate the mandatory penalties for violations: (i) determine the base penalty, which takes into account the type and repeat nature of the violations; and (ii) apply the Institution Asset Size Factor, which takes into account the institution’s asset size based on the last Call Report. The manual also describes the difference between “Tier 1” violations and “Tier 2” violations and the base penalty for each.
Financial regulators issue examiner guidance on Covid-19
On June 23, the federal financial institution regulatory agencies (Federal Reserve Board, OCC, FDIC, and NCUA), in conjunction with the state bank and credit union regulators, issued interagency examiner guidance for assessing the safety and soundness of financial institutions in light of the Covid-19 pandemic. The joint guidance states that due to the “unique, evolving, and potentially long-term nature of the issues confronting institutions” from the Covid-19 pandemic, examiners will “exercise appropriate flexibility in their supervisory response.” The guidance acknowledges that Covid-19 can have an adverse impact on the financial condition and operational capabilities of financial institutions that have appropriate governance and risk management systems in place.
Among other things, the guidance notes that examiners will (i) “continue to assign supervisory ratings in accordance with the interagency CAMELS and ROCA rating systems”; and (ii) “assess the reasonableness of management’s actions in response to the pandemic given the institution’s business strategy and operational capacity.” The guidance also provides details on things such as capital adequacy and asset quality for examiners to consider when assigning composite and component CAMELS and ROCA ratings.
FDIC and OCC mitigate Covid-19 assessment effects
On June 22, the FDIC and the OCC released separate rules aimed at mitigating the assessment effects of participation in Covid-19 programs. Specifically, the FDIC issued a final rule to limit the deposit insurance effects of participation in the Paycheck Protection Program (PPP), the Paycheck Protection Program Liquidity Facility (PPPLF), and Money Market Mutual Fund Liquidity Facility (MMLF). Among other things, the final rule (i) removes the effect of PPP lending and borrowings under the PPPLF in calculating risk measures for an insured depository institution’s assessment rate; (ii) provides an offset to the total assessment amount for the increase in assessment base due to participation in the PPP and MMLF; and (iii) removes the effect of PPP and MMLF participation when classifying institutions as small, large, or highly complex for assessment purposes. The final rule is applicable as of April 1.
Under the OCC’s interim final rule (see also Bulletin 2020-63), the assessments due on September 30 for covered banks will be based on the December 31, 2019 Call Report for each institution, rather than the June 30 Call Report, in order to lower the assessments for supervised banks. However, if an institution’s June 30 Call Report is lower than the December 31, 2019 report, the OCC will use the lower of the two options. The interim final rule expires after the September 30 assessment collection.
FDIC Quarterly Banking Profile reports strong loan growth but declining income
On June 16, the FDIC released the first quarter 2020 Quarterly Banking Profile for FDIC-insured institutions, reporting that the aggregate net income for FDIC-insured institutions totaled $18.5 billion in the first quarter of 2020, a decline of $42.2 billion (69.6 percent) from a year ago, reflecting deteriorating economic activity as a result of the Covid-19 pandemic. The FDIC emphasized, however, that total loan and lease balances rose 4.2 percent from the previous quarter, as “[a]lmost all major loan categories reported quarterly increases.” Over the past year, total loan and lease balances increased 8 percent—the highest annual growth rate since the first quarter of 2008, the FDIC reported. According to remarks provided by FDIC Chairman Jelena McWilliams, while several industry sectors and financial markets were adversely affected by the Covid-19 pandemic, “banks effectively supported individuals and businesses during this downturn through lending and other critical financial services.”
Federal agencies release host state loan-to-deposit ratios
On June 2, the FDIC, the Federal Reserve Board, and the OCC released the current host state loan-to-deposit ratios for each state or U.S. territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Act, banks are prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies are also subject to the same restriction. Determining compliance with Section 109 requires a comparison of a bank’s estimated statewide loan-to-deposit ratio to the yearly host state loan-to-deposit ratios. If a bank’s statewide ratio is less than one-half of the yearly published host state ratio, an additional review is required by the appropriate agency, which involves a determination of whether a bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.
FDIC releases April enforcement actions
On May 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in April. The FDIC issued 23 orders and 2 notices of changes, which “consisted of 12 Section 19 orders, 3 orders of prohibition, 1 order to pay, 3 consent orders, 1 order to cease and desist, 4 orders terminating consent orders, and 1 order terminating an order of restitution.” Among the actions is a cease and desist order and civil money penalty issued against a Louisiana-based bank for allegedly violating the Bank Secrecy Act, EFTA, RESPA, TILA, the National Flood Insurance Program, and HMDA. The order follows the issuance of a 2019 recommended decision on remand by an FDIC administrative law judge (ALJ), who also found that the bank failed to comply with a majority of the provisions outlined in a 2011 memorandum of understanding entered into with the FDIC two years prior to the filing of this action. Specifically, the recommended decision found that the bank, among other things, “violated the independence requirement of the FDIC’s rules and regulations pertaining to appraisals by allowing a lending officer originating loans to appraise the collateral underlying the loan,” and “allow[ing] a high ranking officer to repeatedly overdraw his bank account without being charged overdraft fees” in violation of Regulation O of the Federal Reserve Board. Other violations included that the bank failed to: (i) conduct independent property evaluations and appraisals; (ii) disclose unauthorized fees or investigate reports of erroneous charges; (iii) assess flood insurance needs or inform borrowers of force-placed flood insurance rules; (iv) file suspicious activity reports and currency transaction reports; (v) implement a “meaningful compliance program” to ensure the bank did not engage in foreign financial transactions with prohibited persons identified by the Office of Foreign Assets Control; and (v) “conduct proper compliance training or maintain an effective audit program for consumer compliance matters.” The FDIC’s order affirmed the ALJ’s recommended decision to subject the bank to an order to cease and desist and pay a $500,000 civil money penalty.
Additionally, the FDIC entered a consent order against an Illinois-based bank relating to alleged weaknesses in its Bank Secrecy Act compliance program.
Federal agencies issue FAQs covering CRA and Covid-19
On May 27, the Federal Reserve Board, the OCC, and the FDIC posted Community Reinvestment Act (CRA) FAQs related to Covid-19. The FAQs acknowledge that while Covid-19 affected states are categorized by the Federal Emergency Management Agency (FEMA) as Category B, which would normally not be considered designated disasters under the CRA, the agencies will grant consideration for activities that revitalize or stabilize affected areas by protecting public health and safety. The FAQs frequently cite to the joint statement on CRA consideration for activities in response to Covid-19, issued by the agencies in March (covered by InfoBytes here). Among other things, the FAQs discuss how Paycheck Protection Program and Main Street Lending Program loans may be eligible for CRA consideration and how bank examiners will consider affordable housing measures under the CRA.
FDIC updates FAQs for financial institutions affected by Covid-19
On May 20, the Federal Deposit Insurance Corporation (FDIC) updated its frequently asked questions issued to financial institutions affected by Covid-19 (previously covered here, here, and here). The updated FAQs provide guidance on Community Reinvestment Act requirements, including, among other things, (i) whether Covid-19-affected states and jurisdictions are considered CRA designated disaster areas, (ii) how activities undertaken in response to Covid-19 that are responsive to community needs will be considered in CRA examinations, and (iii) whether bank loans made under the Paycheck Protection Program or Main Street Lending Program are eligible for CRA consideration.
Prudential regulators outline principles on small-dollar lending
On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:
- Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
- Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
- Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
- Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
- Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.
As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.