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OCC proposes True Lender rule
On July 20, the OCC issued a proposed rule (see also Bulletin 2020-70) that addresses when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party in order to clarify uncertainties about the legal framework that applies. Specifically, the proposed rule amends 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan.” The OCC notes that the proposal intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.”
In response, the Conference of State Bank Supervisors (CSBS) issued a statement opposing the proposal, stating that “the true lender doctrine is and should remain a matter of state law.”
As previously covered by InfoBytes, the OCC and the FDIC recently issued final rules clarifying that whether interest on a loan is permissible under federal law is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan, effectively reversing the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision. At the time, both agencies chose not to address the “true lender” issue.
OCC releases recent enforcement actions
On July 16, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included among the actions is a June 23 consent order, which resolves OCC claims that a California-based bank violated a 2016 consent order concerning Bank Secrecy Act/anti-money laundering compliance program deficiencies. According to the OCC, the bank failed to timely comply with the 2016 consent order and is required to pay a $100,000 civil money penalty. The list also includes a July 25 civil money penalty order against a New York-based bank, which requires the payment of $43,000 for an alleged pattern or practice of violations of the Flood Disaster Protection Act and its implementing regulations.
Additionally, an Iowa-based bank and the OCC reached a formal agreement on June 16 for alleged unsafe or unsound practices related to, among other things, credit underwriting, credit administration, problem loan management, and real estate valuation practices. Among other conditions, the agreement requires the bank to (i) appoint a compliance committee to ensure adherence to the agreement’s provisions; (ii) establish a three-year strategic plan outlining goals and objectives related to the bank’s risk profile and liability structure; (iii) submit a commercial and retail credit underwriting and administration program to ensure the bank “analyzes credit and collateral information sufficient to identify, monitor, and report the [b]ank’s credit risk, properly account for loans, and assign accurate risk ratings in a timely manner”; (iv) implement programs providing for an annual review of loans, loan level stress testing, and problem loan management; (v) implement an exception tracking and reporting system; and (vi) establish an appraisal and evaluation program.
EU - U.S. forum studies implications of Covid-19 for financial stability
On July 17, the U.S. Treasury Department issued a joint statement on the EU - U.S. Financial Regulatory Forum, which met virtually on July 14 and 15 and included participants from Treasury, the Federal Reserve Board, CFTC, FDIC, SEC, and OCC. Forum participants discussed six key themes: (i) potential financial stability implications and economic responses to the Covid-19 pandemic; (ii) capital market supervisory and regulatory cooperation, including cross-border supervision; (iii) “multilateral and bilateral engagement in banking and insurance,” including “cross-border resolution of systemic banks” and Volcker Rule implementation; (iv) approaches to anti-money laundering/countering the financing of terrorism financing and remittances; (v) the regulation and supervision of digital finance and financial innovation, such as “digital operational resilience and developments in crypto-assets, so-called stablecoins, and central bank digital currencies”; and (vi) sustainable finance developments. EU and U.S. participants recognized the importance of communicating mutual supervisory and regulatory concerns to “support financial stability, investor protection, market integrity, and a level playing field.”
OCC launches Project REACh to help underserved populations access capital and credit
On July 10, the OCC launched an initiative to promote greater financial inclusion of underserved populations. Project REACh (Roundtable for Economic Access and Change) brings together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations who will identify and reduce barriers to accessing capital and credit. REACh program participants will focus on “inherent policy and structural issues at the national and local levels” to expand financial inclusion, and convened on July 10 to discuss which financial inclusion projects to address.
FFIEC addresses LIBOR transition
On July 1, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement highlighting several risks that will result from the anticipated cessation of LIBOR at the end of 2021. Institutions with LIBOR exposures should put in place appropriate risk management processes “commensurate with the size and complexity of their exposures” to identify and mitigate financial, legal, operational, and consumer protection risks related to the transition, the FFIEC warned. Among other things, the FFIEC noted that as part of the agencies’ examination activities, “supervisory staff will ask institutions about their planning for the LIBOR transition including the identification of exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.” Additionally, agencies will increase their supervisory focus on evaluating institutions’ preparedness for LIBOR’s discontinuation during 2020 and 2021, “particularly for institutions with significant LIBOR exposure or less-developed transition processes.” Key recommendations include (i) identifying and quantifying LIBOR exposure across all products; (ii) discontinuing the origination or purchase of LIBOR-indexed instruments to limit exposure; (iii) creating transition plans for consumer financial products in order to develop clear, timely consumer disclosures regarding any changes in terms; and (iv) developing strategic transition plans with milestones and key completion dates addressing areas such as third-party risk management.
The OCC also issued a bulletin expanding on the joint statement and providing guidance for regulated banks.
CFPB and OCC to host innovation office hours
On July 2, the CFPB and the OCC announced that they will host joint, virtual “Innovation Office Hours” on July 29-30, as part of the American Consumer Financial Innovation Network (covered by InfoBytes here). The office hours will be one-on-one meetings, of up to one hour, with representatives from the OCC and the CFPB’s Innovation Offices to discuss things such as fintech, new products or services, and bank partnerships. Those interested need to request a virtual session by July 17, and should include details on what they would like to discuss at the meeting.
OCC issues new UDAP/UDAAP Comptroller’s Handbook booklet
On June 29, the OCC issued a new Comptroller’s Handbook booklet, “Unfair or Deceptive Acts or Practices and Unfair, Deceptive, or Abusive Acts or Practices,” which covers details for examiners regarding UDAP violations under Section 5 of the FTC Act and UDAAP violations under sections 1031 and 1036 of the Dodd-Frank Act. The booklet includes, among other things, examination procedures for assessing the effectiveness of a bank’s compliance management systems in identifying and managing UDAP and UDAAP risks and red flags that examiners can use to identify acts or practices that may raise UDAP or UDAAP concerns. Specifically, Appendix A includes a detailed list of nine red flags that examiners can use to identify potential areas with higher risks, including items such as (i) customer complaints received by the OCC or the bank; (ii) whistleblower referrals; (iii) higher than average fee incomes; (iv) weak servicing and collection practices; and (v) inadequate oversight over incentive compensation programs. Additionally, Appendix B includes risk indicator charts for examiners to use when assessing the quantity and quality of a bank’s risk management for UDAP and UDAAP.
House approves resolution to reverse OCC’s CRA rule
On June 29, the U.S. House of Representatives approved resolution H.J. 90, along party lines, which would reverse the OCC’s final rule (covered by a Buckley Special Alert) to modernize the regulatory framework implementing the Community Reinvestment Act (CRA). As previously covered by InfoBytes, Chair of the House Financial Services Committee, Maxine Waters (D-CA) and Chair of the Subcommittee on Consumer Protection and Financial Institutions, Gregory Meeks (D-NY) introduced the resolution, with Waters criticizing the OCC’s decision to move forward with the rule “despite the Federal Reserve and the FDIC—the other regulatory agencies responsible for enforcing CRA—declining to join in the rulemaking.” While the resolution is unlikely to pass the Senate, the White House released a Statement of Administration Policy, which opposes the resolution and states that the President’s advisors will recommend he veto the action.
FDIC follows OCC, adopts final rule addressing Madden
On June 25, the FDIC issued a final rule clarifying that whether interest on a loan is permissible under the Federal Deposit Insurance Act is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. The FDIC’s final rule effectively reverses the Second Circuit’s 2015 Madden v. Midland Funding decision as applicable to state banks and follows the OCC’s issuance of a similar rule earlier this month for national charters. Specifically, the FDIC’s final rule states that, “[w]hether interest on a loan is permissible under section 27 of the Federal Deposit Insurance Act is determined as of the date the loan was made. . . [and] shall not be affected by a change in State law, a change in the relevant commercial paper rate after the loan was made, or the sale, assignment, or other transfer of the loan, in whole or in part.” Additionally, the FDIC rule mirrors the OCC in specifying that the rule does “not address the question of whether a State bank. . .is a real party in interest with respect to a loan or has an economic interest in the loan under state law, e.g. which entity is the ‘true lender.’” Details on the effect of these rules can be found in Buckley’s Special Alert on the OCC’s issuance.
Agencies finalize covered funds changes to Volcker Rule
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.