InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
OCC, Fed, and Treasury issue statements on climate change
On November 3, the OCC, the Federal Reserve, and the U.S. Treasury Department released statements expressing support for the Network for Greening the Financial System (NGFS) Glasgow Declaration. OCC acting Comptroller Michael J. Hsu noted in a statement that the OCC is developing “high-level climate risk management supervisory expectations for large banks” and expects to issue the framework guidance for comment “by the end of the year.” Hsu also noted that the OCC will implement recommendations of the FSOC Climate Change Report, which was released in response to President Biden’s May executive order, and directed financial regulators to take steps to mitigate climate-related risk related to the financial system (covered by InfoBytes here). In a statement by Treasury Secretary Yellen, she discussed the importance of tackling climate change, stating that it is “the greatest economic opportunity of our time,” and noted the U.S. is “calling on the multilateral development banks to increase their efforts.” The Fed noted in a statement that it is committed to understanding and addressing climate change and, furthermore, “will address climate-related risks in an analytically rigorous, transparent, and collaborative way through our domestic work with other federal agencies including the Financial Stability Oversight Council; our international engagement through the Financial Stability Board, the Basel Committee on Banking Supervision, and the NGFS; and through our broad and transparent engagement with the private sector.”
OCC says synthetic banking providers require supervision
On November 3, acting Comptroller of the Currency Michael J. Hsu spoke before the American Fintech Council’s Fintech Policy Summit 2021 and warned that “[t]he rebundling of banking services by fintechs and the fragmented supervision of universal crypto firms pose significant medium- to long-term risks to consumers, businesses, and financial stability.” Hsu also noted that large “universal” cryptocurrency firms interested in offering a wide range of financial services should “embrace comprehensive, consolidated supervision” like that given to banks. “Crypto firms today are regulated at most only partially and selectively, with no single regulator having a comprehensive view of the firm as a whole,” Hsu stated, adding “[t]his warrants greater attention as crypto firms, especially the universals, get bigger, engage in a wider range of activities and risk-taking, and deepen their interconnectedness within the crypto ecosystem and with traditional finance.” Warning that these “synthetic banking providers” (SBPs) could create a “run risk” and regulatory arbitrage, Hsu stressed the importance of removing “the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by holding SBPs to banking standards.” He further warned that customers’ needs must be met in a way that is reliable, consistently safe, sound, and fair, and discussed several reasons why more SBPs have not sought to become banks, including that “regulators have been unpredictable with regards to chartering new banks and approving fintech acquisitions of banks.” Establishing a clear, shared approach to the bank regulatory perimeter related to emerging technologies can address this challenge, he advised.
Hsu also announced that the OCC concluded its review of recent bank charter applications and cryptocurrency-related interpretive letters and stated that the agency will communicate its determinations and feedback to bank charter applicants in the coming weeks. Findings from a “crypto sprint” done in conjunction with the FDIC and Federal Reserve will also be communicated shortly. “The content of these communications—on the chartering decisions, interpretive letters, and the crypto sprint—will be broadly aligned with the vision for the bank regulatory perimeter laid out here today,” Hsu stated.Biden Administration releases stablecoin recommendations
On November 1, the U.S. Treasury Department announced that the President’s Working Group on Financial Markets (PWG), with the FDIC and the OCC (collectively, “agencies”), released a report on stablecoins, which are a kind of digital asset intended to maintain a stable value relative to the U.S. dollar. The report noted that stablecoins may be more widely used in the future as a means of payment, which Secretary of the Treasury Janet L. Yellen said could increase “risks to users and the broader system.” Additionally, Secretary Yellen considers current stablecoin oversight to be “inconsistent and fragmented.” Among other things, the report discussed gaps in regulatory authority to reduce these risks. The report recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight and to “increase transparency into key aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and in stressed market conditions.” According to the announcement, “[s]uch legislation would complement existing authorities with respect to market integrity, investor protection, and illicit finance, and would address key concerns,” including: (i) risks to stablecoin users and stablecoin runs; (ii) payment system risk; and (iii) systemic risk and concentration of economic power.
While Congress examines legislation on stablecoin, the report recommended that the Financial Stability Oversight Council consider steps for addressing risks, such as “the designation of certain activities conducted within stablecoin arrangements as, or as likely to become, systemically important payment, clearing, and settlement (PCS) activities,” which would be subject to an examination and enforcement framework. The report also recommended that stablecoin issuers “comply with activities restrictions that limit affiliation with commercial entities,” to maintain the separation of banking and commerce. Additionally, the report discussed that, in addition to existing AML/CFT regulations, stablecoin arrangements and activities may implicate the jurisdiction of the SEC and/or CFTC. Therefore, to prevent misuse of stablecoins and other digital assets, the announcement noted that Treasury “will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards and pursue more resources to support supervision of domestic AML/CFT regulations.”
The same day, Treasury released a fact sheet on the PWG report, which clarified, among other things, the purpose of the report, risks posed by stablecoins, and the agencies’ recommendations. In a statement released by OCC acting Comptroller of the Currency Michael J. Hsu, he emphasized his support for the recommendations highlighted in the report pointing out that, “[s]tablecoins need federal prudential supervision to grow and evolve safely.” In a statement released by CFPB Director Rohit Chopra, he noted that though the CFPB was not a member of the PWG, the Bureau “will be taking several steps related to this market,” such as the CFPB’s orders to six large U.S. technology companies seeking information and data on their payment system business practices (covered by InfoBytes here), among other things.
OCC updates Retail Lending booklet
On October 28, the OCC issued Bulletin 2021-52 announcing the issuance of version 2.0 of the “Retail Lending” booklet of the Comptroller’s Handbook. The booklet rescinds OCC Bulletin 2017-15, “Retail Lending: New Comptroller's Handbook Booklet” (covered by InfoBytes here) and the “Retail Lending” booklet of the Comptroller’s Handbook, version 1.1. Among other things, the revised booklet: (i) reflects changes to laws and regulations since the last update of this booklet; (ii) reflects OCC issuances published and rescinded since the last update of this booklet; (iii) clarifies supervisory guidance, sound risk management practices, and legal language; and (iv) alters some content for clarity purposes.
OCC to focus supervisory efforts on non-SOFR rates after LIBOR ends
On October 26, acting Comptroller of the Currency Michael J. Hsu warned banks not to be complacent when transitioning away from LIBOR. Hsu reiterated that federal regulators will not allow new contracts that use LIBOR as a reference rate after December 31. Hsu stressed that banks must look outside of activities that directly involve LIBOR exposure, such as lending, derivatives activities, and market-making capacities, to screen for LIBOR exposure in other contexts, such as LIBOR-based loan participation interests or as part of an instrument for a bank’s investment or liquidity portfolio paying LIBOR-based income or otherwise reflecting LIBOR exposures. As previously covered by InfoBytes, the CFPB, Federal Reserve Board, FDIC, NCUA, and OCC recently released a joint statement providing supervisory considerations for institutions when choosing an alternative reference rate. Hsu addressed the use of these alternative reference rates and reminded banks that they are expected to be able to demonstrate that their replacement rate is robust and appropriately tailored to their risk profile. He further commented that because the Secured Overnight Financing Rate (SOFR) “provides a robust rate suitable for use in most products, with underlying transaction volumes that are unmatched by other alternatives,” the OCC will initially focus its supervisory efforts on non-SOFR rates.
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.
OCC consent order addresses risk management at mortgage servicer
On October 26, the OCC issued a consent order against a leading subservicer of mortgage loans for allegedly maintaining inadequate risk management controls related to its servicing and default servicing activities. According to the OCC, the bank’s “internal controls and risk management practices do not support the current risk profile and size of the [b]ank’s mortgage sub-servicing portfolio, which is an unsafe or unsound practice.” The OCC also asserted that the bank had previously been informed about the alleged risk management deficiencies and did not take timely corrective action. Under the terms of the consent order, the bank is required, among other things, to take comprehensive corrective measures, including developing and implementing internal controls that are “commensurate with the types and complexity of risks associated with all transactions the [b]ank executes.” The bank is also required to implement an effective default operations program for its loss mitigation, foreclosure, and claims activities to ensure compliance with applicable state and federal laws and GSE requirements. The order also requires the bank to receive a non-objection from OCC prior to onboarding new clients or before paying dividends to shareholders while the order is in effect. The order does not indicate any specific violations of consumer protection laws and does not contain a civil money penalty. The bank did not admit or deny the allegations.
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.
FSOC directs regulators to take measures to mitigate climate-related financial risks
On October 21, the Financial Stability Oversight Council (FSOC) released a new report in response to President Biden’s May executive order, which directed financial regulators to take steps to mitigate climate-related risk related to the financial system. The Report on Climate-Related Financial Risk (see also FSOC’s fact sheet) identified more than 30 specific recommendations for member agencies, including that members should: (i) expand capacity and efforts “to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability,” including through “investments in staffing, training, expertise, data, analytic and modeling methodologies, and monitoring”; (ii) promptly conduct an internal inventory of currently available data and develop plans for acquiring necessary additional data to fill climate-related data and methodological gaps; (iii) review existing public disclosure requirements and consider updating public reporting requirements in a way that would build on the work of the Task Force on Climate-Related Financial Disclosures; and (iv) continue to assess and mitigate climate-related risks to financial stability, including through scenario analysis, and evaluate whether revised or new regulations or guidance is necessary to clarify expectations for regulated or supervised institutions. The report also called for enhanced coordination across member agencies, and said a Climate-related Financial Risk Committee will be formed to “identify priority areas for assessing and mitigating climate-related risks to the financial system and serve as a coordinating body to share information, facilitate the development of common approaches and standards, and foster communication across FSOC members.” A Climate-related Financial Risk Advisory Committee will also be formed to help gather information and analysis from stakeholders on climate-related financial risks. Treasury Secretary Janet Yellen warned that FSOC has a responsibility under the Dodd-Frank Act “to respond to emerging threats to the stability of the United States financial system” and to “ensure the resilience of the financial system to the future impacts of climate change.”
OCC updates Payment Systems booklet
On October 21, the OCC issued Bulletin 2021-49 announcing the revision of the Payment Systems booklet of the Comptroller’s Handbook. The booklet rescinds the Payment Systems and Funds Transfer Activities booklet of the Comptroller’s Handbook (March 1990); the Office of Thrift Supervision Examination Handbook section 580, the Payments Systems Risk (January 1994); banking Circular 235, International Payments Systems Risks (May 10, 1989); and OCC Bulletin 1996-48, Stored Value Card Systems: Information for Bankers and Examiners (September 3, 1996). Among other things, the revised booklet: (i) provides information on payment systems, types of payments, risks associated with payment systems, and associated risk management practices; (ii) highlights the requirements of 12 CFR 7.1026 on payment systems memberships; and (iii) includes expanded examination procedures and “supplemental procedures for deeper review of certain payment activities.”