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FDIC approves final brokered deposits rule, clarifies fintech partnerships
On December 15, the FDIC approved a final rule, which creates a new framework for brokered deposits by, among other things, establishing bright-line standards for determining the definition of a “deposit broker,” as well as a methodology for “analyzing whether deposits made through deposit arrangements qualify as brokered deposits, including those between insured depository institutions (IDIs) and third parties, such as financial technology companies.” Also released are two fact sheets on brokered deposits and interest rate restrictions (see here and here). The final rule follows a notice of proposed rulemaking issued last December (covered by InfoBytes here), which sought feedback on ways the agency could improve its brokered deposit regulation to ensure the “classification of a deposit as brokered appropriately reflects changes in the banking system, including banks’ use of new technologies to engage and interact with their customers.” The final rule also establishes a series of exceptions that will allow banks and their partners to determine whether they can avoid restrictions on brokered deposits, and will establish a process for entities to apply for a “primary purpose exception” if its relationship with an outside entity supplying deposits does not meet one of the final rule’s “designated exceptions.” Further, the FDIC noted that brokered deposit restrictions will not apply to banks that enter into exclusive deposit placement arrangements, such as those seen often between fintech companies and a partner bank, because, according to a statement released by FDIC Chairman Jelena McWilliams, “[e]ntities who place deposits with only one bank are less likely to present the types of funding stability risks that may arise when deposit brokers place deposits at a range of banks.” Further, the final rule amends the methodology for calculating the interest rate restrictions applicable to less than well capitalized IDIs, and changes the methodology for calculating the national rate and national rate cap for specific deposit products.
Acting Comptroller of the Currency Brian P. Brooks issued a statement in support of the final rule: “These improvements to the brokered-deposit rule help promote greater access to financial services by supporting fintech and bank partnerships and allowing a wider array of services to be available in the market, especially for unbanked and underbanked Americans for whom the easier user interface of fintech apps is a gateway to the mainstream financial system.”
Agencies provide no-action relief to facilitate transfers of certain legacy swaps
On December 11, the Federal Reserve Board and the OCC issued a joint statement addressing the ability of a covered swap entity to service cross-border clients. (See also OCC Bulletin 2020-108.) As previously covered by InfoBytes, the Fed, OCC, FDIC, FHFA, and Farm Credit Administration adopted an interim final rule (IFR) in 2019 to amend the Swap Margin Rule to assist covered swap entities preparing for the United Kingdom’s withdrawal from the European Union. The IFR addresses the situation where the withdrawal occurs without a negotiated agreement and entities located in the UK transfer existing swap portfolios that face counterparties located in the EU over to affiliates located in the US or the EU. Specifically, the IFR provides that certain swaps under this situation will not lose their “legacy” status—will not trigger the application of the Swap Margin Rule—if carried out in accordance with the conditions of the rule. The OCC notes that the absence of an agreement between the UK and the EU that addresses passporting rights (defined in the joint statement as the “EU’s system of cross-border authorizations to engage in regulated financial entities) would result in UK entities losing the ability to continue servicing their EU clients when the transition period expires.
The joint statement explains that the Fed and OCC “will not recommend that their respective agencies take action if a covered swap entity is a party to a legacy swap that was amended under [certain] conditions.” The no-action relief is applicable to the transfer of legacy swaps completed by the later of January 1, 2022, or one year after the expiration of EU passporting rights, unless amended, extended, terminated, or superseded, and is intended “to provide certainty to covered swap entities currently operating in the affected jurisdictions as to the legacy status of transferred swaps in light of the uncertainty regarding whether the EU will agree to a free trade agreement granting UK companies passporting rights related to financial services.”
OCC fines bank $250 million for inadequate fiduciary controls
On November 24, the OCC assessed a $250 million civil money penalty against a national bank for allegedly failing to maintain adequate internal controls for its fiduciary activities. According to the consent order, the bank—which neither admits nor denies the agency’s findings—allegedly had deficient risk-management practices and lacked appropriate checks for avoiding conflicts of interest. The OCC states that the bank has since remediated the alleged deficiencies leading to this action.
OCC releases 2021 fees and assessments schedule
On December 1, the OCC issued Bulletin 2020-106, which informs all national banks, federal savings associations, and federal branches and agencies of foreign banks of the agency’s 2021 fees and assessment rates. For 2021, the OCC is reducing the rates in all fee schedules by 3 percent, which “reflects cost savings in the OCC’s operations and projections of the OCC’s revenues and expenses.” Additionally, the OCC notes that for the 2021 assessment year, among other things, (i) there will be no inflation adjustment to assessment rates; (ii) new entrants to the federal banking system will be assessed on a prorated basis using call report information as of December 31 or June 30, depending on the entrance date; and (iii) the hourly fee for special examinations and investigations will increase from $140 to $150. The bulletin takes effect January 1, 2021.
OCC publishes Volcker Rule quantitative measurement instructions
On November 30, the OCC released instructions and technical specifications for preparing and submitting quantitative measurements relating to Section 13 of the Bank Holding Act, commonly known as the Volcker Rule. As previously covered by InfoBytes, in 2019, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule amending the regulations implementing the Volcker Rule. Under the amendments, “banking entities with significant trading assets and liabilities” are required to “submit certain quantitative measurements on a quarterly basis and in accordance with the XML schema posted on the OCC’s ‘Volcker Rule Implementation’ web page.” The compliance date for the final rule is January 1, 2021.
OCC finalizes regulatory requirements for covered institutions
On November 23, the OCC announced a final rule that updates and eliminates outdated regulatory requirements for national bank and federal savings association activities and operations. The final rule, originally proposed in June (covered by InfoBytes here), amends 12 CFR 7 to clarify and codify recent OCC interpretations related to the modern financial system. Among other things, the changes will (i) incorporate and streamline interpretations concerning permissible derivatives activities; (ii) codify interpretations which permit covered institutions to engage in certain tax equity finance transactions; (iii) “codify[] interpretations regarding national bank membership in payment systems and clarify[] that federal savings associations are subject to the same requirements as national banks; (iv) “expand[] the ability of national banks and federal savings associations to choose corporate governance provisions under state law; (v) clarify anti-takeover provisions; and (vi) codify National Bank Act interpretations concerning capital stock issuances and repurchases. The final rule takes effect April 1, 2021.
Agencies: Cease LIBOR-based contracts as soon as practicable
On November 30, the Federal Reserve Board, 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 statement notes that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks given the range of consumer protection, litigation, and reputation risks at stake. As previously covered by InfoBytes, the agencies announced that they do not intend to recommend a specific credit-sensitive rate for use in place of LIBOR. Instead, the agencies encourage banks to “either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation” for all new contracts prior to December 31, 2021, in order to “facilitate an orderly—and safe and sound—LIBOR transition.” Additionally, the statement recognizes certain instances in which it would be appropriate for banks for enter into LIBOR contracts after December 31, 2021, including novations of LIBOR transactions executed before January 1, 2022.
OCC proposes CRA performance standards
On November 24, the OCC released a notice of proposed rulemaking (and accompanying Bulletin 2020-103) covering evaluation measure benchmarks, retail lending distribution test thresholds, and community development (CD) minimums under the new general performance standards outlined in the Community Reinvestment Act’s (CRA) final rule issued earlier this year. As previously covered by a Buckley Special Alert, on May 20, the OCC announced the final rule to modernize the regulatory framework implementing the CRA. The final rule was technically effective on October 1, but provides for at least a 27-month transition period for compliance based on a bank’s size and business model. Large banks and wholesale and limited purpose banks will have until January 1, 2023 to comply, and small and intermediate banks that opt-in to the final rule’s performance standards will have until January 1, 2024. In the preamble to the final rule, the OCC noted a future proposal would provide details of the calibration process of the requirements for each of the three components (the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and CD minimums) of the objective performance standards. Highlights of the proposal include:
- Requirements for each of the three components such that the proportion of banks that would have received presumptive ratings of outstanding and satisfactory would be no greater than the historical proportion of banks that received the same ratings under the previous CRA regulations.
- The OCC would issue an information survey to institutions subject to the general performance standards to obtain bank-specific information and would use this information to calculate CRA evaluation measures and CD minimum calculations for each bank’s assessment areas, as well as a bank-level CRA evaluation measure and CD minimum calculation for each bank.
- For each major retail lending product line, the OCC proposes to calculate the numerator used in determining each bank’s retail lending distribution test ratios for each bank’s assessment areas. Each bank’s numerators under the borrower and geographic distribution tests would be divided by the applicable demographic and peer comparators to calculate each bank’s retail lending distribution test ratios for each bank’s assessment areas.
- The retail lending distribution tests would yield up to 18 different threshold values. The CRA evaluation measure would involve six different benchmark values (one at the bank level and one at the assessment area level for needs to improve, satisfactory, and outstanding presumptive ratings, respectively), while the CD minimum would involve two values, one at the bank level and one at the assessment area level.
- The OCC would consider a decline of 10 percent or greater in a bank’s performance on the general performance standards that could not be explained by market conditions or other performance context factors, as “precipitous,” which may warrant a downward adjustment in the OCC’s determination of the bank’s assigned rating.
Once the proposal is finalized, the OCC stated that it will take the necessary steps to publicize the specific benchmarks, thresholds, and minimums, and will periodically review and adjust these benchmarks, thresholds, and minimums, as necessary.
Comments on the proposal are due within 60 days of publication in the Federal Register.
OCC’s proposed rule would ensure fair access to financial services
On November 20, the OCC announced a notice of proposed rulemaking (NPRM), which seeks to ensure that national banks, federal savings associations, and federal branches and agencies of foreign bank organizations offer and provide fair access to financial services “based on the risk assessment of individual customers, rather than broad-based decisions affecting whole categories or classes of customers.” The NPRM implements language included in Title III of Dodd-Frank—“which charged the OCC with ‘assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction’”—and builds upon the principle of nondiscrimination. The NPRM would apply to the largest banks in the country and would prevent such banks from denying or limiting services in an effort to (i) prevent a person from entering or competing in a particular market; or (ii) disadvantage a person in order to benefit another person in which the bank has a financial interest. The OCC emphasizes in its press release that “a covered bank’s decision to deny services based on an objective assessment of the person’s creditworthiness, ability to pay, or other quantitative, impartial, risk-based reasons would not violate the bank’s obligation to provide fair access.” Comments on the NPRM are due by January 4, 2021.
OCC updates Comptroller’s Licensing Manual
On November 23, the OCC announced a new Comptroller’s Licensing Manual booklet, “Mutual to Stock Conversions,” which incorporates provisions of revised regulation 12 CFR Part 192. The new booklet, among other things, “provides an overview of policy considerations and decision criteria that the OCC considers when reviewing applications by federal savings associations to convert from a mutual to stock form of ownership under 12 CFR 192.” The new booklet also outlines requirements for covered institutions when filing conversion applications, as well as references and information resources for prospective filers.