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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.
Special Alert: OCC issues CRA final rule
On May 20, the Office of the Comptroller of the Currency announced a final rule to modernize the regulatory framework implementing the Community Reinvestment Act. The final rule marks the culmination of a three-year effort led by the Treasury Department to revamp the CRA and arrives exactly six weeks after the comment period on the notice of proposed rulemaking (NPR) closed on April 8, 2020.
Significantly, while the Federal Deposit Insurance Corporation joined the OCC in issuing the NPR, the FDIC did not join in promulgating the final rule. The Federal Reserve Board was not party to the NPR or the final rule. Accordingly, banks whose prudential regulator is the FDIC or the Federal Reserve will continue to be subject to the existing CRA regulations.
The OCC’s rule, while technically effective October 1, 2020, 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 interim, a performance evaluation conducted after October 1, 2020, and before January 1, 2023 or 2024, as applicable, would permit banks to rely on the current performance standards and tests or on the final rule.
Federal agencies allow supplementary leverage ratio flexibility
On May 15, the FDIC, Federal Reserve Board (Fed), and the OCC announced an interim final rule (IFR) that temporarily permits depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio (SLR) to provide flexibility during the Covid-19 pandemic. The exclusion would enable depository institutions to expand their balance sheets to provide additional credit to households and businesses. The SLR and the IFR apply to depository institution subsidiaries of U.S. systemically important bank holding companies and depository institutions subject to Category II or Category III capital standards. According to the FDIC’s Financial Institution Letter FIL-57-2020, if a depository institution elects to exclude U.S. Treasury securities and deposits from the SLR, it, among other things, (i) must notify its primary federal banking regulator within 30 days after the IFR is effective; (ii) may choose to reflect the exclusion as if the IFR has been in effect the entire second quarter of 2020; and (iii) must obtain approval from its primary federal banking regulator before making a distribution or creating an obligation to make a distribution, beginning in the third quarter of 2020 through March 2021, so long as the temporary exclusion is in effect. The IFR goes into effect upon publication the Federal Register and is effective through March 31, 2021.
See also OCC Bulletin 2020-52 and additional questions for feedback by the Fed.
Agencies finalize policy changes to CECL
On May 8, the FDIC, Federal Reserve Board, OCC, and NCUA finalized an interagency policy statement on allowances for credit losses and interagency guidance on credit risk review systems. As previously covered by InfoBytes, the proposed policy statement and interagency guidance were released in October 2019.
The final policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology. The CECL methodology determines allowances for credit losses applicable to financial assets measured at amortized cost, loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures. The policy statement also stipulates financial assets for which the CECL methodology is not applicable, and includes supervisory expectations for designing, documenting, and validating expected credit loss estimation processes. The final policy statement becomes applicable to an institution upon that institution’s adoption of a CECL methodology.
The interagency credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—updates the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The guidance “discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution's loan portfolio to its management and board of directors.” Furthermore, the guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
See also FDIC FIL-54-2020 and FIL-55-2020 and OCC 2020-49 Bulletin and 2020-50 Bulletin.
OCC issues guidance about health-related changes to annual meetings
On May 12, the Office of the Comptroller of the Currency issued guidance for national banks and federal savings associations that are considering changing the date, time, or location of their annual meetings as a result of stay-at-home orders or other health concerns. The OCC clarified that, for national banks, the requirement to hold an annual meeting is governed by state laws and the bank’s governing documents. OCC regulations require federal savings associations to hold annual meetings within 150 days after the end of the fiscal year and to incorporate the time frame for conducting the meeting into their bylaws. Although federal savings associations must receive OCC approval to amend their bylaws to incorporate a longer time frame, the OCC will deem such an amendment as approved and effective if it meets the conditions set out in the guidance. The OCC also strongly encourages all banks to use electronic methods for submitting licensing filings during the COVID-19 emergency.
Federal regulators discuss Covid-19 responses during Senate hearing
On May 12, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Oversight of the Financial Regulators,” which primarily focused on responses by the Federal Reserve Board (Fed), FDIC, OCC, and NCUA to the Covid-19 pandemic. Committee Chairman Mike Crapo (R-ID) opened the hearing by thanking the regulators for crafting regulatory responses to assist financial institutions in meeting the needs of affected borrowers, and encouraged the regulators to find ways to provide flexibility for financial institutions that lend to households and businesses. Crapo also stressed the importance of making sure the Fed’s Main Street Lending Program (covered by a Buckley Special Alert) and the Municipal Liquidity Facility (coved by InfoBytes here) are “up and running quickly,” and expressed continued concerns that the “inclusion of population thresholds for cities and states that were not a part of the CARES Act will still impede access to smaller and rural communities.” Ranking Member Sherrod Brown (D-OH) argued, however, that the regulators’ relief measures have not favored consumers.
Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts. When asked during the hearing when the Main Street Lending Program would be operational, he declined to give an exact date but emphasized it is the Fed’s “top priority,” and that he did not anticipate it will take months. When questioned about whether the Fed is taking measures to “ensure businesses are getting equitable access to the [lending] facilities,” Quarles stated that the Fed relies on banks to do the underwriting, but will supervise the banks to make sure the underwriting is done “safely and fairly.”
OCC Comptroller Joseph M. Otting also discussed a range of actions taken by the agency in response to the pandemic and outlined additional OCC priorities and objectives, including its proposal to modernize the Community Reinvestment Act (CRA). Senator Menendez (D-NJ) asked whether the OCC should revisit the proposed CRA rewrite, citing the inability of some small businesses—particularly minority-owned businesses—to obtain relief under the Payroll Protection Program (PPP). In response, Otting argued that the rewrite (done in conjunction with the FDIC—see InfoBytes CRA coverage here) should actually be accelerated “because it will drive more dollars into low and moderate income communities” impacted by the pandemic. However, several Democrats on the Committee disagreed and called for a separate hearing to discuss the CRA proposal.
FDIC Chairman Jelena McWilliams also addressed actions undertaken to maintain stability and to provide flexibility to both banks and consumers. Among other things, McWilliams stated that banks should rely on borrowers’ statements certifying that their economic need is legitimate when making PPP loans. “Our instruction to banks has been to make sure these loans are not being traditionally underwritten [and] to take a look at the certification that the borrower is providing,” McWilliams said during the hearing. She also emphasized that all banks must comply with fair lending laws when making PPP loans, whether or not specific guidance has been issued.
NCUA Chairman Rodney E. Hood also outlined agency measures in response to the pandemic. Among other things, Hood noted that the NCUA has issued guidance to support credit union industry participation in the PPP and approved several regulatory changes concerning the classification of PPP loans for regulatory capital and commercial underwriting purposes.
The following day, the House Subcommittee on Consumer Protection and Financial Institutions also held a roundtable with the federal regulators to discuss Covid-19 responses.
Fed, OCC, FDIC respond to Crapo’s PPP support letter
In April, Senator Mike Crapo (R-ID), Chairman of the Senate Banking Committee, received replies to an April 8 letter he sent to the Federal Reserve (Fed), OCC, NCUA, and FDIC, which urged the regulators to “strengthen the Paycheck Protection Program” (PPP) and requested that they provide recommendations to assist the market as well as lenders and borrowers affected by Covid-19.
The Fed highlighted how it has strengthened the PPP, stating it: (i) eased “leverage requirements for community banks”; (ii) “published rules delaying the impact on regulatory capital of new loan-loss accounting standards”; (iii) created a new lending facility for the PPP; (iv) jointly with the FDIC, and OCC, “issued an interim final rule to clarify that a zero percent risk weight applies to PPP loans and to neutralize the regulatory capital effects of participating in the new PPP lending facility, helping preserve the flow of credit to small businesses”; (v) “encouraged institutions to use their capital buffers for their primary purpose: to support safe and sound lending throughout the credit cycle”; and (vi) provided suggestions for “congressional action to improve regulatory flexibility.”
The OCC’s replied that it has taken the following actions, among others, to support the PPP: (i) “encouraged banks to work with customers affected by” the pandemic; (ii) “encouraged banks to use the [Fed’s] discount window”; (iii) encouraged use of capital and liquidity buffers by banks; (iv) issued a joint statement with five regulatory agencies promoting “responsible small-dollar loans to consumers and small businesses”; (v) jointly issued interim final rules regarding regulatory capital and deferral of real estate appraisals; and (vi) coordinated listening sessions on the PPP.
The FDIC stated it is working to provide “necessary flexibility to both banks and their customers.” The agency’s response also enumerated several other actions it has taken to promote the PPP, including that it: (i) created a PPP information page on their website; (ii) shared bank questions and concerns with the Small Business Administration (SBA); (iii) created bank frequently asked questions; (iv) issued a financial institution letter referencing resources from the SBA and the Treasury; (v) continues to “provid[e]…resources to our examination teams so they” can better answer questions from regulated institutions; and (vi) jointly with other regulatory agencies, issued guidance on current expected credit losses methodology and community bank leverage ratio. The FDIC also reported possible supplementary and tier 1 leverage ratio changes.
Regulators modify liquidity coverage rule for MMM and PPP participants
On May 5, the Federal Reserve Board, the OCC, and the FDIC announced an interim final rule that modifies the agencies’ Liquidity Coverage Ratio (LCR) rule to support participation in the Federal Reserve's Money Market Mutual Fund Liquidity Facility and the Paycheck Protection Program Liquidity Facility (previously covered by InfoBytes here and here). The LCR rule requires large banks to hold a certain amount of “high-quality liquid assets” in order to meet their short-term liquidity needs. The interim final rule modifies the agencies’ capital rules to neutralize the effects of participation. The rule is effective immediately and comments will be accepted within 30 days of publication in the Federal Register.
OCC and Federal Reserve issue joint response to question regarding market risk capital rule
On May 1, the OCC and the Federal Reserve Board issued a joint response to a public question about a capital implication under the market risk capital rule in light of current market conditions arising from the Covid-19 pandemic. The joint response notes that, in March and April of 2020, the agencies took supervisory action giving certain banks the option to apply the multiplication factor that applied as of December 31, 2019, rather than applying a higher multiplier based on the most recent exceptions.
4th Circuit: Disgorgement calculation lacks necessary casual connection between profits and violations
On April 27, the U.S. Court of Appeals for the Fourth Circuit held that a district court’s disgorgement calculation for a banker found in contempt of a consent order rested on “an erroneous legal interpretation of the terms of the underlying consent order” and “lacked the necessary causal connection” between profits and a violation. As previously covered by InfoBytes, the banker settled RESPA and state law allegations with the CFPB and the Maryland Attorney General concerning his participation in a mortgage-kickback scheme. The 2015 final judgment order banned the defendant from participating in the mortgage industry for two years but did not prohibit him “from acting solely as a personnel or human-resources manager for a mortgage business operated by a FDIC-insured banking institution. . . .” In 2018, the banker was held in civil contempt for violating the final judgment order, and the district court ordered the disgorgement of over half-a-million dollars of his contemptuous earnings. The banker appealed the contempt finding and disgorgement.
On appeal, the 4th Circuit first held that the district court properly found the banker in violation of the consent order, determining among other things that, while the final judgment order did not broadly prohibit his participation in the mortgage industry, there was sufficient evidence that he “continued to communicate impermissibly with third-party businesses engaged in settlement services” and that he failed to follow various reporting requirements, such as uploading the consent order to a national registry and notifying regulators of a change in residence and business activity. However, the 4th Circuit found that the district court erred in its approach to calculating disgorgement because it assumed that “managing the business was improper and set out identifying [the banker’s] profits from his business because any such profit was contemptuous income.” (Emphasis in the original.) Holding that the district court’s view relied on an overbroad interpretation of the consent order and lacked the causal connection between the banker’s profits and a violation, the 4th Circuit vacated the disgorgement order and remanded the case to the district court to reassess the disgorgement calculation based on the banker’s more limited conduct that did not comply with the order.