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  • Agencies finalize three pandemic-related rules

    Federal Issues

    On August 26, the Federal Reserve Board, FDIC, and OCC finalized three rules that were temporarily issued in March and April to assist financial institutions during the Covid-19 pandemic. Highlights of the three rules include:

    • Community Bank Leverage Ratio (CBLR). The agencies adopted, without change, two interim final rules issued in April (covered by InfoBytes here) that temporarily lower the CBLR threshold and provide a gradual transition back to the prior level in order to enable qualifying community banking organizations to support lending during the Covid-19 pandemic. Effective October 1, the final rule, among other things, lowers the leverage ratio to eight percent through 2020 and increases the ratio to 8.5 percent in 2021 and nine percent in 2022.
    • Current Expected Credit Losses (CECL). The agencies adopted, without substantial change, an interim final rule issued in March (covered by InfoBytes here), which provides an additional two years to the three-year transition period that is already available to “mitigate the estimated cumulative regulatory capital effects” of CECL. The final rule expands the pool of eligible institutions to include any institution adopting CECL in 2020 and is effective upon publication in the Federal Register.
    • Capital distributions. The agencies adopted, without change, an interim final rule issued in March revising the definition of “eligible retained income” to allow for a more gradual application of any automatic limitations on capital distributions if an institution’s capital levels decline below certain levels. Additionally, the final rule includes the adoption of a Federal Reserve-only interim final rule (covered by InfoBytes here), similarly revising the definition of “eligible retained income” for purposes of the total loss-absorbing capacity rule. The final rule is effective January 1, 2021.

    Federal Issues Agency Rule-Making & Guidance FDIC OCC CECL Federal Reserve Capital Covid-19

  • State AGs challenge FDIC’s “valid-when-made” rule

    Courts

    On August 20, eight state attorneys general—from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia—filed an action in the U.S. District Court for the Northern District of California challenging the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies that, under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan (details on the effect of the rule can be found in Buckley’s Special Alert on the issuance of the OCC’s similar rule).

    In the complaint—which follows a similar action filed in July by three of the same attorneys general against the OCC for issuing a final rule designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision (previously covered here)—the attorneys general argue, among other things, that the FDIC does not have the power to issue the rule, asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” but not regulations that would apply to non-banks. Moreover, the attorneys general assert that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling “rent-a-bank” schemes.” Finally, the complaint states that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans, and thus that Madden is likely to have been beneficial rather than harmful.” The complaint requests the court to declare that the FDIC violated the Administrative Procedures Act in issuing the rule and hold the rule unlawful.

    Courts OCC Madden Interest Rate FDIC State Issues State Attorney General

  • OCC approves bank to use host state interest rate for credit cards

    Federal Issues

    Recently, the OCC released Interpretive Letter 1171, which concludes that an interstate national bank may charge interest on credit cards consistent with the law of the state where the non-ministerial function of loan approval for credit cards occurs. According to the letter, after merging with an affiliate bank in another state, the core of the bank’s credit card business is now conducted from a branch in a state different than the state where the bank is headquartered. The credit card business operations include: (i) development of the bank’s credit risk policy; (ii) decision-making about credit approval communication content; and (iii) establishment of individual transaction credit risk rules.

    In the letter, the OCC notes that under an adopted framework interpreting 12 U.S.C. § 85 (known as “Section 85”), “an interstate national bank must or may elect to charge [interest] based on where a loan is ‘made.’” The letter states that “a loan is made where the three non-ministerial functions associated with making a loan occur”: (i) approving the loan; (ii) extending the credit; and (iii) disbursing the loan proceeds. Citing to Interpretive Letter 822, which was issued in March 1998, the OCC concluded that the bank may charge interest based on the law of the state where the affiliate bank is located if (i) “all three non-ministerial functions occur” in that state; or (ii) “at least one non-ministerial function occurs in [that state] and the bank’s credit card lending has a clear nexus to [that state].”

    Upon review, the OCC determined that the bank’s non-ministerial function of loan approval occurs in the state where its affiliate bank was located, because all of the credit decisions are based on the bank’s credit risk policy which was established in that state. Additionally, the OCC reasoned that there is a “clear nexus” between the bank’s credit card operations and that state because the bank established several credit card lending activities that occur in that state. Thus, the OCC concluded the bank is authorized to charge interest on credit cards consistent with that state’s law.

    Federal Issues OCC Interest Rate

  • Federal agencies and CSBS to hold webinar on PPP

    Federal Issues

    On August 20, the FDIC, Federal Reserve Board, OCC, NCUA, and the Conference of State Bank Supervisors  announced that a webinar will be held with SBA officials discussing the loan forgiveness process and recent changes in the Paycheck Protection Program on Thursday, August 27 from 11:00 a.m. to 12:00 p.m. (EDT). Participants must preregister for the webinar and are encouraged to email questions in advance to asktheregulators@stls.frb.org. An archive of the webinar materials will be available here, a few hours after the webinar ends.

    Federal Issues CSBS SBA FDIC FRB OCC NCUA

  • OCC defends fintech charter authority in NYDFS challenge

    Courts

    On August 13, the OCC filed its reply brief in its appeal of a district court’s 2019 final judgment, which set aside the OCC’s regulation that would allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October, the U.S. District Court for the Southern District of New York entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State. 

    As discussed in its opening brief filed in April appealing the final judgment (covered by InfoBytes here), the OCC reiterated that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term “business of banking,” and that the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York. Following NYDFS’s opening brief filed last month (covered by InfoBytes here), the OCC argued, among other things, that the case is not ripe and NYDFS lacks standing because its alleged injuries are speculative and “rely on a series of events that have not occurred: OCC receiving and approving an SPNB charter application from a non-depository fintech that intends to conduct business in New York, and then does so in a manner that causes the harms [NYDFS] identifies.”

    The OCC further argued that NYDFS “cannot show the statutory term ‘business of banking’ is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter.” Highlighting the evolution of the “business of banking” over the last 160 years, the OCC contended that the National Bank Act does not contain a requirement “that an applicant for a national bank charter accept deposits if it can present the OCC with a viable business model that does not require it,” and that its regulation interpreting the ambiguous phrase “business of banking” is reasonable as it is consistent with U.S. Supreme Court case law. Lastly, the OCC argued that NYDFS’s claim that it is entitled to nationwide relief afforded under the Administrative Procedure Act (APA) is inconsistent with another 2nd Circuit decision, “as well as principles of equity and the APA’s text and history.” The OCC stated that even if the appellate court were to conclude that NYDFS’s claims are justiciable, the regulations should be set aside only with respect to non-depository fintech applicants with a nexus to New York.

    Courts Appellate Second Circuit Fintech Charter OCC NYDFS National Bank Act

  • District court applies OCC’s valid-when-made final rule but raises true lender question

    Courts

    On August 12, the U.S. District Court for the District of Colorado reversed in part a bankruptcy court judgment, concluding that the OCC’s valid-when-made rule applied but that discovery was needed to determine whether a nonbank entity was the true lender. According to the opinion, a debtor corporation commenced an adversary proceeding against a creditor in their bankruptcy, alleging, among other things, that the interest rate of the underlying debt’s promissory note is usurious under Colorado law. The promissory note was executed between a Wisconsin state-charted bank and a Colorado-based corporation, with an interest rate of nearly 121 percent. The note included a choice of law provision dictating that federal law and Wisconsin law govern. A deed of trust, dictating that Colorado law (the property’s location) governs, was pledged as security on the promissory note and incorporated by referencing the terms of the note. Subsequently, the Wisconsin bank assigned its rights under the note and deed of trust to a nonbank entity registered in New York with a principal place of business in New Jersey. The bankruptcy court denied the debtor’s claims, concluding that the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) applied, which dictated the application of Wisconsin law, making the interest rate valid.

    On appeal, the district court applied the OCC’s valid-when-made rule (which was finalized in June and covered by a Buckley Special Alert), concluding that “a promissory note with an interest rate that was valid when made under DIDMCA § 1831d remains valid upon assignment to a non-bank.” However, the district court noted that DIDMCA § 1831d does not apply to promissory notes “with a nonbank true lender” and the parties did not “conduct discovery on the factual question of whether [the nonbank entity] was the true lender.” Thus, the court reversed and remanded to the Bankruptcy Court to determine whether the nonbank entity was the true lender.

    Courts OCC Bankruptcy Madden True Lender Interest Rate State Issues

  • Agencies clarify BSA/AML enforcement

    Federal Issues

    On August 13, the OCC, the Federal Reserve Board, the FDIC, and the NCUA (collectively, the “agencies”) issued a joint statement, which clarifies how the agencies apply the enforcement provisions of the Bank Secrecy Act (BSA) and related anti-money laundering (AML) laws and regulations. Specifically, the statement discusses the conditions that require the issuance of a mandatory cease and desist order under sections 8(s) and 206(q). According to the agencies, there are no new exceptions or standards created by document. Among other things, the statement:

    • Provides examples of when an agency shall issue a cease and desist order in accordance with sections 8(s)(3) and 206(q)(3) for “[f]ailure to establish and maintain a reasonably designed BSA/AML Compliance Program. The statement notes that an institution would be subject to a cease and desist order when the one component of their compliance program “fails with respect to either a high-risk area or multiple lines of business… even if the other components or pillars are satisfactory.”
    • Describes circumstances in which an agency may use its discretion to issue formal or informal enforcement actions related to unsafe or unsound BSA-related practices. The statement notes that the “form and content” of the enforcement action will depend on a variety factors, including “the capability and cooperation of the institution’s management.”
    • Describes how the agencies incorporate customer due diligence regulations and recordkeeping requirements as part of the internal controls pillar of an institutions BSA/AML compliance program.
    • Discusses the treatment of isolated or technical compliance program requirements that are generally not issues resulting in an enforcement action.

    Federal Issues Financial Crimes OCC Federal Reserve NCUA FDIC Bank Secrecy Act Anti-Money Laundering SARs Customer Due Diligence Enforcement

  • OCC amends 2020 assessment structure

    Federal Issues

    On August 7, the OCC released an amended fees and assessments structure for 2020 due to the Covid-19 pandemic. The announcement includes information on the OCC’s interim final rule (covered by InfoBytes here), which intended to lower assessments for supervised banks making assessments due on September 30 based on the December 31, 2019 Call Report for each institution, rather than the June 30 Call Report. Additionally, the OCC notes that for the 2020 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 is increasing from $110 to $140.

    Federal Issues Covid-19 OCC Fees Assessments

  • CSBS: OCC’s proposed “non-branch” provisions undermine dual banking system

    Federal Issues

    On August 3, the Conference of State Bank Supervisors (CSBS) issued its comment letter to the OCC’s Notice of Proposed Rulemaking (NPR) on national bank and savings association activities concerning “non-branch” offices. Specifically, CSBS wrote that the “non-branch” provisions in the NPR make “far-reaching” revisions without legal authority, undermine the dual banking system, conflict with National Bank Act (NBA) preemption limits, and would allow national banks to operate branches without complying with related Community Reinvestment Act (CRA) obligations. Additionally, CSBS contended that the OCC’s rulemaking process is “truncated and flawed,” and afforded a particularly brief period for public comments during the Covid-19 pandemic.

    According to CSBS, the NPR, announced in June (covered by InfoBytes here), would “expand the scope of activities that may occur at non-branch offices purportedly without regard” to state restrictions.  These activities include: (i) performing loan approval and origination functions at a single, publicly accessible office; (ii) disbursing loan proceeds through an operating subsidiary; and (iii) establishing drop boxes and other unstaffed facilities. CSBS also contended that the NPR’s non-branch provisions would undermine Congressional intent and give national banks competitive advantages over state-charted banks. CSBS further argued that the non-branch provisions conflict with Congress’ clear intention that “NBA preemption does not apply to agents, affiliates or subsidiaries of national banks.” Finally, CSBS highlighted a distinction between the proposed non-branches (but de facto branches) and actual branch offices, arguing that the NPR creates a legal loophole allowing non-branch national banks to avoid CRA obligations associated with licensed branches.

    Federal Issues OCC CSBS Agency Rule-Making & Guidance Fintech National Bank Act CRA

  • OCC grants first national bank charter to fintech company

    Federal Issues

    On July 31, the OCC presented its first full-service national bank charter to a fintech company permitting the establishment of a new national bank. The new bank received conditional approval from the agency in 2018, as well as regulatory approval from both the FDIC and the Federal Reserve according to a press release issued by the company. According to the press release, the charter will allow the bank to offer FDIC-insured nationwide banking services, including traditional loan and deposit products, through mobile, online, and phone-based banking. The bank will be located in Utah but will have no branches, deposit-taking ATMs, or offices open to the public. Acting Comptroller of the Currency Brian P. Brooks issued a statement noting that the opening of the bank “represents the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”

    Federal Issues OCC Fintech Bank Charter

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