This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
- Community Reinvestment Act
revisions proposed by FDIC and OCC, but Fed not on board.
The FDIC and the OCC on December 12 announced a proposal to
modernize their regulations under the Community Reinvestment Act
(CRA), the first substantive regulatory update since 1995. But the
third agency with authority to issue regulations to implement the
CRA, the Federal Reserve, was notably absent from last
month’s joint announcement, and a member of the Fed’s
Board of Governors has offered an alternative approach for
overhauling the 1977 law that was designed to encourage banks to
lend more in low- and moderate-income (LMI) neighborhoods. The
FDIC-OCC joint Notice of Proposed Rulemaking represents an
extensive revision to how the agencies implement the CRA in an
effort to increase banking activity in communities where there is a
critical need for access to financial services, credit, responsible
lending and infrastructure investment. The main goals of the
revised regulations include:
- clarifying which activities qualify for CRA credit and
- updating where activities count for CRA credit
- addressing changes in the banking industry, such as the rise of digital banking
- creating a more objective method for measuring CRA performance
- and providing for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting.
The proposal would expand the definition of banks’ “assessment areas” to include additional areas where deposits are received – beyond the current definition that requires banks to direct their CRA activities within the immediate area of their physical location, including corporate offices and branches – to further encourage lending to LMI borrowers in underserved communities, such as rural areas and tribal lands far removed from urban centers where bank branches are concentrated. It would also tailor the reporting requirements for smaller banks, allowing those with $500 million or less in total assets to opt in to the new framework or choose to remain under the existing performance standards, as noted in an FDIC Fact Sheet. “The proposal would also recognize the evolution of the banking system – including the emergence of digital banks – by requiring banks to add assessment areas where they have significant concentrations of retail domestic deposits,” FDIC Chair Jelena Williams said in a December 12 statement. “This proposal, which recognizes that banks may now receive large portions of their deposits from outside their traditional assessment areas, conforms with the CRA's intent to ensure that banks help meet credit needs where they collect deposits, which they cannot do with specificity under the current framework.”
- A dissent from the Fed. As noted above, the Federal Reserve did not join the other two banking regulators in proposing the changes to the CRA. Fed Chair Jerome Powell indicated last month that he hoped to ultimately reach an agreement with the other agencies to avoid the confusion that would result from having two separate regulatory regimes applicable to different banks, depending on their primary federal regulator. In a January 8 speech to the Urban Institute, Fed Governor Lael Brainard outlined a different vision for “strengthening the [CRA] by staying true to its core purpose.” Brainard said the FDIC-OCC proposal puts too much emphasis on the dollar value of what a bank has invested in poorer areas to determine its CRA grade, calling instead for greater input from local stakeholders. “For example, the services and leadership provided by a small bank located in a rural community may be vital to the success of that community, even if the dollar value of those services is small compared with a branch in a large city,” Brainard said. “Because of this concern, we are inclined to propose a set of qualitative standards to evaluate retail services within the retail test, and a separate set of qualitative standards to assess community development services within the community development test.” Brainard, the lone remaining Democrat on the Fed Board, has frequently cast the sole vote against some key recent Fed actions, but she is seen as the Fed’s point person on revising the CRA. Former FDIC Chair Martin Gruenberg, the only Democratic appointee currently serving on the FDIC Board, cast the sole vote against the proposed rule, which he called “a deeply misconceived proposal that would fundamentally undermine and weaken the [CRA]” in a December 12 statement
- Congressional Democrats also disagree. House Financial Services Committee Chair Maxine Waters (D-CA) led a delegation of Democratic committee members to the FDIC’s December 12 meeting in a demonstration of opposition to the CRA revisions, and a signal to regulators of the committee’s oversight role. The trip to the FDIC was a follow-up to a December 11 letter signed by all 34 House Committee Democrats, along with all 12 Senate Banking Committee Democrats led by Ranking Member Sherrod Brown (D-OH), which called on regulators to include a public comment period of at least 120 days for any proposal reforming CRA. “The CRA is an important law that prevents redlining and ensures that banks are meeting the credit and banking needs of low- and moderate-income communities where they are chartered,” Waters said in a December 12 statement. “We are concerned that the changes that the FDIC and OCC are considering to modify how the CRA is implemented will make it easier for banks to pass their CRA exams, weakening their obligation to responsibly serve communities across the country. It is critical that the banking regulators do not jam through their proposal without giving the public ample time to weigh in, or without coordinating with the Federal Reserve.”
- Comments on the agencies’ CRA proposal are currently due by March 9.
- CRA annual adjustments for smaller institutions announced. The three agencies were, however, on the same page on another, more routine CRA matter: adjusting the asset-size thresholds used to define “small bank” or “small savings association” and “intermediate small bank” or “intermediate small savings association.” As required by CRA regulations, the adjustment to the threshold amount is based on the annual percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Financial institutions are evaluated under different CRA examination procedures based on their asset-size classification, and those meeting the small and intermediate-small thresholds are not subject to the reporting requirements applicable to large banks and savings associations unless they choose to be evaluated as a large institution. As a result of the 1.62 percent increase in the CPI-W for the period ending in November 2019, the definition of “small bank” or “small savings association” will now mean an institution with assets of less than $1.305 billion. “Intermediate small bank” or “intermediate small savings association” is now defined as one with assets between $326 million and $1.305 billion. The asset-size threshold adjustments, announced on December 31 and described in detail in a Joint Final Rule; Technical Amendment by the Fed, FDIC and OCC, went into effect January 1. In addition, the agencies have posted a list of the current and historical asset-size thresholds on the website of the Federal Financial Institutions Examination Council.
- OCC appeals Manhattan federal court decision that it lacks authority to grant fintech charters. The OCC has filed an appeal to a decision by the US District Court for the Southern District of New York that found that OCC lacks the authority to grant special-purpose national bank charters to non-depository fintech companies. US District Judge Victor Marrero ruled in October in favor of a challenge to OCC’s fintech charters brought by the New York Department of Financial Services (NYDFS). OCC announced in 2018 that it would begin accepting applications for the national charters from financial technology companies that don’t take deposits, allowing firms to bypass the current state-by-state regulatory regime. The New York state financial services regulator and the Conference of State Bank Supervisors (CSBS) both challenged the legal validity of the OCC charters in separate lawsuits. In a ruling last September, Judge Dabney Friedrich of the US District Court for the District of Columbia dismissed the CSBS suit, stating that it “continues to lack standing and its claims remain unripe,” since OCC had not received any applications, let alone issued any charters. But Judge Marrero agreed with NYDFS, stating that the National Banking Act’s “’business of banking’ clause, read in the light of its plain language, history, and legislative context, unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from the OCC.” OCC filed its appeal on December 19. The case is Lacewell v. Office of the Comptroller of the Currency et al., case number 1:18-cv-08377, in the US District Court for the Southern District of New York.
- FDIC issues proposed rule on brokered deposit restrictions. The FDIC has published and is inviting public comment on a proposed rule to modernize its regulations governing brokered deposits that apply to less than well capitalized insured depository institutions. FDIC’s Notice of Proposed Rulemaking, announced on December 12 and summarized in an agency Fact Sheet, is an attempt to respond to industry concerns that the current framework does not fully address technological and practical changes in the banking industry since the enactment of Section 29 of the Federal Deposit Insurance Act, which restricts the acceptance of deposits by insured depository institutions from a deposit broker. The proposed rule would create a new framework for analyzing certain provisions of the “deposit broker” definition, including “facilitating” and “primary purpose.” It would also establish an application and reporting process with respect to the primary purpose exception. The application process would be available to insured depository institutions and third parties that wish to utilize the exception. “This is not just an esoteric rule about back-office operations,” FDIC Chair Jelena McWilliams said in a December 12 statement. “It has a real impact on how banks deliver products and services to consumers, including the more than 20 million unbanked Americans who could have greater access to banking services.”
- Regulators find no deficiencies in major banks’ living wills. The Fed and the FDIC announced on December 17 that they did not find any “deficiencies” in the most recent living wills of the eight largest and most complex US banks. But they did determine that the living wills, officially known as resolution plans, of six of those banks had “shortcomings.” Deficiencies are defined by the agencies as “weaknesses that could result in additional prudential requirements if not corrected,” while shortcomings raise questions about the feasibility of a bank’s plan but are less severe. The plans or wills describe a bank’s strategy for rapid and orderly resolution under bankruptcy in the event of material financial distress or failure. The firms will receive feedback letters, which will be publicly available on the Fed Board's website.
- FSOC finalizes interpretive guidance on non-bank financial company determinations using activities-based approach. The Financial Stability Oversight Council (FSOC) on December 4 approved final interpretive guidance describing its approach to identify and address potential risks to financial stability from non-bank financial companies considered to be systemically important financial institutions (SIFIs). The Council intends to use an “activities-based approach” and promises enhanced “analytical rigor and transparency in the processes the Council intends to follow if it were to consider making a determination to subject a nonbank financial company to supervision by the Board of Governors of the Federal Reserve System.” The new guidance – which completely replaces the 2012 interpretive guidance – will identify and mitigate potential financial stability risks by monitoring markets and market developments and collaborating with federal and state financial regulators. The new analytical framework will include cost-benefit analyses and condense the prior three-stage process for a determination into two stages. The final guidance also includes procedures intended to clarify the post-designation “off-ramp,” meaning that if a company adequately addresses the potential risks identified in writing by the Council at the time of the final determination and in subsequent reevaluations, the Council should generally be expected to rescind its determination or designation. FSOC, chaired by the Treasury Secretary, was established under Dodd-Frank with broad authorities to identify and monitor excessive risks to the US financial system arising from the distress or failure of large, interconnected bank holding companies or non-bank financial companies.
- State and international regulators call on firms to be ready for next year’s transition away from LIBOR. In separate reports released last month, two influential financial services oversight bodies issued warnings about the importance of making necessary preparations for the planned cessation of the LIBOR benchmark at the end of next year. The Financial Stability Board (FSB) on December 18 issued its fifth progress report on reforming major interest rate benchmarks, which emphasizes that the continued reliance of global financial markets on the London Interbank Offered Rate poses risks to financial stability, and calls for “significant and sustained efforts by the official sector and by financial and non-financial firms across many jurisdictions to transition away from LIBOR by end-2021.” FSB – an international body including all G-20 major economies, the EU, and many other regulatory and standard-setting organizations that monitors and makes recommendations about the global financial system – said that “regulated firms should expect increasing scrutiny of their transition efforts as the end of 2021 approaches,” due to risks arising from continued reliance on LIBOR. In a closely related development, the New York state Department of Financial Services (NYDFS) has given regulated institutions until February 7 to submit their plans to address the end of the interest rate benchmark and manage the risks of transitioning to an alternative reference rate. In a December 23 Industry Letter: Request for Assurance of Preparedness for LIBOR Transition, NYDFS said the plans should describe programs to address transition risks, processes for assessing adoption of alternative rates, procedures for communicating with customers and counterparties, development of operational readiness for the transition, and the governance framework to facilitate transition. The NYDFS letter notes that the Fed Board, the New York Fed and the US Treasury Department have created an alternative rate called the Secured Overnight Financing Rate (SOFR), first published in April 2018, which measures the cost of overnight borrowings through repo transactions collateralized with US Treasuries.
- FDIC announces rescission of policy statements. The FDIC on December 31 issued a financial institution letter (FIL) rescinding four statements of policy that the agency says are outdated, as part of a continuing effort to reduce regulatory burden. The FDIC identified the following four that are outdated and have been rescinded effective December 31.
- Applicability of the Glass-Steagall Act to Securities Activities of Subsidiaries of Insured Nonmember Banks
- Treatment of Collateralized Letters of Credit After Appointment of FDIC as Conservator or Receiver
- Treatment of Collateralized Put Obligations After Appointment of FDIC as Conservator or Receiver
- Contracting with Firms That Have Unresolved Audit Issues with FDIC.
- The statements of policy, and why they are now outdated, are spelled out in more detail in the December 23 Federal Register.
- New York proposes guidance on adoption and listing of virtual currency coins. The New York State Department of Financial Services (DFS) has proposed a regulatory framework to allow licensed virtual currency (VC) firms that have already received approval for coin listings to introduce new coins without additional permission. Under the DFS proposed guidance, issued December 11, “once a VC licensee’s coin-listing policy is approved by DFS, subsequently, the licensee will be able to self-certify to DFS that its proposed adoption or listing of new coins complies with the requirements of its DFS-approved company coin-listing policy, and provide written notice to DFS of its intent to offer and use any such new coins, including details of the usage and offering of such coins, prior to using or offering such coins. In such case, no prior DFS approval will be required, only a prior notice.” New York adopted its regulations on VC firms in 2015 and since then has granted two dozen licenses and charters. Under the proposed guidance there would be two processes by which the state would recognize a VC coin: a proposed DFS web-page that will contain a list of all coins that are permitted for the VC business activities of the licensees, without the prior approval of DFS; and a proposed model framework for a coin-listing or adoption policy that can be tailored to a VC licensee‘s specific business model and risk profile to create a firm-specific coin listing or adoption policy. DFS has invited public comment on the proposal. Comments should be submitted by January 27, 2020, to email@example.com (use “Proposed Coin Listing Policy Framework” in the subject line).
- Federal agencies announce review of residential mortgage credit risk retention rules. Six federal agencies have jointly issued notice that they will begin a review of certain aspects of the credit risk retention rules for residential mortgage-backed securities. The Notice of Commencement of Review, issued December 10, will review the definition of qualified residential mortgage, community-focused residential mortgage exemption, and exemption for qualifying three-to-four-unit residential mortgage loans. The credit risk retention rules were enacted as part of Dodd-Frank, which mandates periodic review of the rules. The agencies involved in the review are the Fed, FDIC, OCC, FHFA, SEC and HUD. Public comments are due February 3.
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