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Regulators encourage financial institutions to work with borrowers impacted by government shutdown; FHA also issues shutdown guidance
On January 11, the Federal Reserve Board, CSBS, CFPB, FDIC, NCUA, and OCC (together, the “Agencies”) released a joint statement (see also FDIC FIL-1-2019) to encourage financial institutions to work with consumers impacted by the federal government shutdown. According to the Agencies, borrowers may face temporary hardships when making payments on mortgages, student loans, auto loans, business loans, or credit cards. FDIC FIL-1-2019 states that prudent workout arrangements, such as extending new credit, waiving fees, easing limits on credit cards, allowing deferred or skipped payments, modifying existing loan terms, and delaying delinquency notice submissions to credit bureaus, will not be subject to examiner criticism provided the efforts are “consistent with safe-and-sound lending practices.”
Separately, on January 8, Federal Housing Administration (FHA) Commissioner Brian Montgomery issued a letter regarding the shutdown reminding FHA-approved lenders and mortgagees of their ongoing obligation to offer special forbearance to borrowers experiencing loss of income and to evaluate borrowers for available loss mitigation options to prevent foreclosures. In addition, FHA also encourages mortgagees and lenders to waive late fees and suspend credit reporting on affected borrowers.
On January 8, the Federal Reserve Board (Board) issued a notice of proposed rulemaking (NPR) that would revise company-run stress test and supervisory stress test requirements to conform with Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Similar to the previously issued NPRs by the FDIC and the OCC (covered by InfoBytes here), the proposed rule will, among other things, change the minimum threshold for applicability from $10 billion to $250 billion in consolidated assets and revise the frequency of required company-run stress tests for most state member banks from annual to biannual. However, the proposed rule notes that certain state member banks will still be required to conduct annual stress tests, such as (i) those that are subsidiaries of global systemically important bank holding companies; (ii) bank holding companies that have $700 billion or more in total assets; or (iii) cross-jurisdictional activity of $75 billion or more. Furthermore, the proposed rule will remove the “adverse” stress testing scenario—which the Board states has provided “limited incremental information”—and require stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios. Comments on the NPR must be received by February 19.
In December, the Government Accountability Office (GAO) issued a report entitled “Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data,” which addresses emerging issues in fintech lending due to rapid growth in loan volume and increasing partnerships between banks and fintech lenders. The report also addresses fintech lenders’ use of alternative data to supplement traditional data used in making credit decisions or to detect fraud. The report notes that many banks and fintech lenders welcome additional guidance to ease the regulatory uncertainty surrounding the use of alternative data, including compliance with fair lending and consumer protection laws. The report’s findings cover the following topics:
- Growth of fintech lending. GAO’s analysis discusses the growth of fintech lending and several possible driving factors, such as financial innovation; consumer and business demand; lower interest rates on outstanding debt; increased investor base; and competitive advantages resulting from differences in regulatory requirements when compared to traditional state- or federally chartered banks.
- Partnerships with federally regulated banks. The report addresses two broad categories of business models: bank partnership and direct lender. GAO reports that the most common structure is the bank partnership model, where fintech lenders evaluate loan applicants through technology-based credit models, which incorporate partner banks’ underwriting criteria and are originated using the bank’s charter as opposed to state lending licenses. The fintech lender may then purchase the loans from the banks and either hold the loan in portfolio, or sell in the secondary market.
- Regulatory concerns. GAO reports that the most significant regulatory challenges facing fintech lenders relate to (i) compliance with varying state regulations; (ii) litigation-related concerns including the “valid when made” doctrine and “true lender” issues; (iii) ability to obtain industrial loan company charters; and (iv) emerging federal initiatives such as the OCC’s special-purpose national bank charter, fragmented coordination among federal regulators, and the CFPB’s “no-action letter” policy.
- Consumer protection issues. The report identifies several consumer protection concerns related to fintech lending, including issues related to transparency in small business lending; data accuracy and privacy, particularly with respect to the use of alternative data in underwriting; and the potential for high-cost loans due to lack of competitive pressure.
- Use of alternative data. The report discusses fintech lenders’ practice of using alternative data, such as on-time rent payments or a borrower’s alma mater and degree, to supplement traditional data when making credit decisions. GAO notes that while there are potential benefits to using alternative data—including expansion of credit access, improved pricing of products, faster credit decisions, and fraud prevention—there are also a number of identified risks, such as fair lending issues, transparency, data reliability, performance during economic downturns, and cybersecurity concerns.
The GAO concludes by recommending the CFPB, Federal Reserve Board, FDIC, and the OCC communicate in writing with fintech lenders and their bank partners about the appropriate use of alternative data in the underwriting process. According to the report, all four agencies indicated their intent to take action to address the recommendations and outlined efforts to monitor the use of alternative data.
On December 27, the OCC released Bulletin 2018-48, which announces an update to the “Student Lending” booklet of the Comptroller’s Handbook to include information about the rehabilitation programs for private education loans authorized under Section 602 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), signed into law in May 2018. Section 602 amends the Fair Credit Reporting Act to give student loan borrowers the option to request the removal of student loan default information from their credit report, if, among other things, (i) the lender offers a Section 602 rehabilitation program that has been approved by the bank’s appropriate federal regulator; (ii) the borrower meets the bank’s program criteria, including a demonstrated willingness and ability to repay the loan; and (iii) the borrower has not previously removed a default on the same loan. Although the Act does not require lenders to offer a Section 602 rehabilitation program, those that do are entitled to a safe harbor from claims of inaccurate reporting for removing a default.
The Bulletin also details the process for obtaining regulatory approval for a Section 602 rehabilitation program. The Bulletin notes that banks intending to establish a Section 602 program must seek written approval from their supervisory office concerning the proposed program, and that the office will review the program to ensure it is consistent with the Act’s minimum requirements, other applicable laws and regulations, and safe and sound banking principles. The OCC will provide feedback or notify the bank of its decision within 120 days of the request.
CFPB releases annual adjustments to HMDA, TILA, and FCRA; agencies release CRA asset-size threshold adjustments
On December 31, the CFPB published final rules adjusting both the asset-size thresholds under HMDA (Regulation C) and TILA (Regulation Z), and the maximum amount consumer reporting agencies may charge consumers for providing the consumer the consumer’s credit file under FCRA. All rules take effect on January 1, 2019.
Under HMDA, institutions with assets below certain dollar thresholds are exempt from the collection and reporting requirements. The final rule increases the asset-size exemption threshold for banks, savings associations, and credit unions from $45 million to $46 million, thereby exempting institutions with assets of $46 million or less as of December 31, 2018, from collecting and reporting HMDA data in 2019.
TILA exempts certain entities from the requirement to establish escrow accounts when originating higher-priced mortgage loans (HPMLs), including entities with assets below the asset-size threshold established by the CFPB. The final rule increases this asset-size exemption threshold from $2.112 billion to $2.167 billion, thereby exempting creditors with assets of $2.167 billion or less as of December 31, 2018, from the requirement to establish escrow accounts for HPMLs in 2019.
Lastly, the FCRA permits consumer reporting agencies to impose a reasonable charge on a consumer when disclosing the consumer’s credit file in certain circumstances. Where the annual adjustment to this maximum charge had historically been announced via regulatory notice, the Bureau is now codifying the maximum charge in Regulation V. For 2019, the Bureau increased the maximum amount consumer reporting agencies may charge for making a file disclosure to a consumer from $12.00 to $12.50.
Separately, on December 20, the Federal Reserve Board, the OCC, and the FDIC (collectively, the “Agencies”) jointly announced the adjusted asset-size thresholds used to define “small” and “intermediate small” banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, 2019, a “small” bank or savings association will be defined as an institution that, as of December 31 of either of the past two calendar years, had assets of less than $1.284 billion. An “intermediate small” bank or savings association will be defined as an institution with assets of at least $321 million as of December 31 of both of the past two calendar years, but less than $1.284 billion in assets as of December 31 of either of the past two calendar years. The Agencies published the annual adjustments in the Federal Register on December 27.
FDIC, OCC issue notices of proposed rulemaking to raise asset threshold and reduce scope of stress testing requirements
On December 18, the FDIC issued a notice of proposed rulemaking (NPR) that would revise stress testing requirements for FDIC-supervised institutions, consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). In particular, the proposed rule will (i) change the minimum threshold for applicability from $10 billion to $250 billion; (ii) revise the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduce the number of required stress testing scenarios from three to two. Among other things, the FDIC proposes that, in general, FDIC-supervised institutions that are covered banks as of December 31, 2019, will “be required to conduct, report, and publish a stress test once every two years, beginning on January 1, 2020, and continuing every even-numbered year thereafter.” The proposed rule will also add a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. However, the proposed rule notes that certain covered banks will still be required to conduct annual stress tests, such as covered banks that are subsidiaries of global systemically important bank holding companies or bank holding companies that have $700 billion or more in total assets or cross-jurisdictional activity of $75 billion or more, under rules proposed by the Federal Reserve Board. Furthermore, the proposed rule will remove the “adverse” scenario—which the FDIC states has provided “limited incremental information”—and require stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios.
Separately the same day, the OCC also issued a NPR to amend the agency’s stress testing rule for covered financial institutions to be consistent with Section 401, which incorporates the revisions described in the FDIC’s NPR.
Comments on both NPRs are due by February 19, 2019.
On December 18, the FDIC, the Federal Reserve Board, the OCC, the SEC, and the CFTC (collectively, the Agencies) issued a notice of proposed rulemaking to amend regulations implementing Section 13 of the Bank Holding Company Act (known as, the “Volcker Rule”) to be consistent with Sections 203 and 204 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). (Previously covered by InfoBytes here.) Consistent with Section 203 of the Act, the proposal would exempt community banks from the restrictions of the Volcker Rule if they, and every entity that controls them, have (i) total consolidated assets equal to or less than $10 billion; and (ii) total trading assets and liabilities that are equal to or less than five percent of their total consolidated assets.
The proposal also, consistent with Section 204 of the Act, would permit a hedge fund or private equity fund organized and offered by a banking entity to share a name with a banking entity that is its investment advisor, if (i) the advisor is not an insured depository institution, does not control a depository institution, and is not treated as a bank holding company under the International Banking Act; (ii) the advisor does not share a name with any such entities; and (iii) the shared name does not include "bank."
Comments will be due 60 days after publication in the Federal Register.
On December 7, the Federal Reserve Board, the FDIC, and the OCC issued guidance regarding the HMDA key data fields that Federal Reserve examiners use to evaluate the accuracy of HMDA data collected since January 1 pursuant to the CFPB’s October 2015 and August 2017 amendments and the May 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) exemptions (all of which have been previously covered by InfoBytes here, here, and here).
The guidance cites to the October 2017 list of 37 key data fields identified by the agencies and notes that “[o]nce examiners have selected a random sample of entries from an institution’s HMDA Loan Application Register (HMDA LAR) and have received the corresponding loan files, they would verify the accuracy of the applicable HMDA key data fields in the entries in the HMDA LAR sample(s) against information in the loan files.” Additionally, for institutions eligible for the partial exemption granted by the Act, and covered by the Bureau’s August interpretive and procedural rule (InfoBytes coverage here), the guidance notes that these institutions are responsible for collecting, recording, and reporting only 21 of the 37 designated HMDA key data fields, as the exemption covers the other 16 fields.
The Federal Financial Institutions Examination Council members are currently developing a set of revised interagency HMDA examination procedures regarding HMDA requirements relating to data collected from January 1, 2018 onward.
Agencies encourage financial institutions to explore innovative industry approaches to BSA/AML compliance
On December 3, the Financial Crimes Enforcement Network (FinCEN) released a joint statement along with federal banking agencies—the Federal Reserve Board, FDIC, NCUA, and OCC (together, the “agencies”)—to encourage banks and credit unions to explore innovative approaches such as artificial intelligence, digital identity technologies, and internal financial intelligence units to combat money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system. According to the agencies, private sector innovation and the adoption of new technologies can enhance the effectiveness and efficiency of Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. Moreover, new innovations and technologies can also enhance transaction monitoring systems. Specifically, the agencies urged banks to test innovative programs to explore the use of artificial intelligence. However, the agencies emphasized that while feedback on innovative programs may be provided, the “pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful. Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.” The joint statement further specifies that the agencies will be willing to grant exceptive relief from BSA regulatory requirements to facilitate pilot programs, “provided that banks maintain the overall effectiveness of their BSA/AML compliance programs.” However, banks that maintain effective compliance programs but choose not to innovate will not be penalized or criticized.
According to Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker, “[a]s money launderers and other illicit actors constantly evolve their tactics, we want the compliance community to likewise adapt their efforts to counter these threats,” pointing to the recent use of innovative technologies to identify and report illicit financial activity related to both Iran and North Korea.
As previously covered by InfoBytes, earlier in October the agencies provided guidance on resource sharing between banks and credit unions in order to more efficiently and effectively manage their BSA/AML obligations.
On December 3, the OCC released its Semiannual Risk Perspective for Fall 2018, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations. The report focuses on risks to the federal banking system based on five areas: the operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions. Overall, loans and bank profitability grew in 2018 as the U.S. economy continued to grow. Moreover, recent examination findings indicate incremental improvements in banks’ general risk management practices. Specific risk areas of concern noted by the OCC include: (i) the origination quality of new loans and potential embedded risks from previously successive years of relaxed underwriting standards; (ii) an increasingly complex operating environment, including the continually evolving threat to cybersecurity; (iii) elevated money-laundering risks; and (iv) rising market interest rates, including certain risks associated with heightened competition for deposits.
The report also notes that outstanding enforcement actions continue to decline since peaking in 2010, which, according to the OCC, reflects an overall improvement in, among other things, banks’ risk management practices. The leading cause of current enforcement actions continues to be compliance or operational failures.
- Buckley Webcast: Tips for this year’s FHA annual recertification and what the shutdown means
- Jessica L. Pollet to discuss "Your career is impacting your life..." at the Ark Group Women Legal Conference
- Melissa Klimkiewicz to discuss "RESPA-compliant marketing" at NEXT
- Daniel P. Stipano to provide "Update on AML/SAR reporting and enforcement" at an Mortgage Bankers Association webinar
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Jon David D. Langlois to discuss "Successors in interest updates" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference