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OCC seeks input on LCR and NSFR reporting and recordkeeping requirements
On April 16, the OCC released a request for comment on proposed revisions to its “Reporting and Recordkeeping Requirements Associated with Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring” to account for three new recordkeeping requirements to be included in 12 CFR part 50, which applies to large national banks and Federal savings associations. The notice outlined steps that such institutions should take to ensure they properly document compliance with the “liquidity coverage ratio” (LCR), which is designed to “promote the short-term resilience” of a bank’s liquidity risk profile, and the “net stable funding ratio” (NSFR), which is designed to reduce disruptions to a bank’s funding sources. The revised reporting obligations require covered institutions to self-report when LCR falls below the minimum threshold or when there is an NSFR shortfall and, in some cases, to submit a liquidity or remediation plan, including estimated time frame for resuming compliance with LCR or NSFR requirements. The recordkeeping revisions require covered entities to, among other things, establish and maintain written policies and procedures for a number of processes, including monitoring changes in relevant laws related to master netting agreements, determine the composition of its eligible high-quality liquid assets (HQLA), and ensure consistent treatment for determining eligible HQLA. Comments must be received by June 17.
FDIC wins dismissal as defendant in NSF fee challenge
On April 8, the U.S. District Court for the District of Minnesota granted the FDIC’s motion to dismiss in a case brought by a trade association and a commercial bank challenging the FDIC’s guidance related to insufficient fund fees (NSF fees). Specifically, the plaintiffs challenged the FDIC’s Financial Institution Letter 32 (FIL 32) as a “legislative rule promulgated without adherence to essential administrative procedures,” and asked the court to permanently enjoin FIL 32 and declare it invalid. As previously covered by InfoBytes, FIL 32 warned financial institutions against charging customers multiple NSF fees on the same unpaid transaction – something the FDIC stated could be an “unsafe or unsound practice.” The plaintiffs alleged four violations of the Administrative Procedure Act: (i) the FDIC allegedly implemented FIL 32 without the APA’s required notice and comment period; (ii) FIL 32 was an arbitrary and capricious agency action; (iii) the FDIC exceeded its statutory authority by attempting to define an unfair or deceptive act or practice under the FTC Act; and (iv) the FDIC violated its own regulations in releasing FIL 32 since “those regulations prohibit enforcement actions based on supervisory guidance.” The FDIC moved to dismiss all counts, arguing that FIL 32 was not arbitrary and capricious, and that the FDIC acted within its authority. The court agreed that FIL 32 was not a final agency action, that the plaintiffs lacked standing and dismissed the case without prejudice.
FDIC releases comprehensive report on international, systemically important banks
On April 10, the FDIC released a report on the FDIC’s plans and readiness to step in as a receiver for a financial company under Title II of the Dodd-Frank Act. The FDIC Chairman said this report was the “most detailed description to date of the FDIC’s preparedness to use its Title II resolution authority.”
The report provided background on resolution-related authorities under Dodd-Frank, highlighted key measures that provided readiness of resolution under Title II authority, reviewed strategic decision-making for the use of such authority, and explained how the Commission expects to undertake a Title II resolution of a Global Systematically Important U.S. Bank (GSIB) using a Single Point of Entry (SPOE) resolution strategy. FDIC Chairman Martin Gruenberg said that such a resolution “will be a challenging process under any circumstance, with a number of steps that need to be taken quickly and in close coordination with a range of stakeholders.”
Under the SPOE resolution strategy, the FDIC would place only the holding company of the GSIB into receivership. The FDIC then would establish a bridge financial company under its control and would transfer the operating subsidiaries to the bridge institution. The bridge institution and its subsidiaries would remain operating while the FDIC performed its receivership duties, including the claims process. The final stage of GSIB receivership would be the implementation of a restructuring and wind-down plan that would aim to maintain value, address the causes of the failure, and transition operations. Chairman Gruenberg also noted that orderly resolution of a GSIB has not been executed before, “so there will be questions on whether it can be done.”
FDIC’s Gruenberg speaks on plans for economic inclusion
On April 4, Federal Deposit Insurance Corp. Chairman, Martin J. Gruenberg, delivered a speech on the FDIC’s economic inclusion strategy. The speech highlighted the FDIC’s commitment to economic inclusion, efforts to understand the size and characteristics of the unbanked market, and past FDIC economic inclusion efforts.
When Chairman Gruenberg highlighted previous FDIC inclusion efforts, he noted that the unbanked rate fell from 8.2 to 4.5 percent during the decade ending in 2021, with even steeper decreases for some minority populations. He also announced a new economic inclusion strategic plan to expand customers’ participation in the banking system and help households achieve greater financial security. The plan would intend to help customers build credit, including through small-dollar lending programs with affordable rates, and calls for specific steps to encourage bank lending and investments in low- and moderate-income neighborhoods.
FDIC’s Consumer Compliance report outlines most frequently cited violations and observations
On March 28, the FDIC released its March 2024 version of the Consumer Compliance Supervisory Highlights from the previous year, a report that enhanced transparency regarding the FDIC’s consumer compliance supervisory activities. The FDIC reported 16 formal enforcement actions and another 16 informal enforcement actions to address consumer compliance examination findings. The report highlighted how the FDIC conducted almost 900 consumer compliance examinations. The top five most frequently cited violations of moderate severity (levels two and three out of five of supervisory concern), which represented 74 percent of the total violations, included, in order from most frequently cited to least: TILA, and its implementing regulation, Regulation Z; the Flood Disaster Protection Act (FDPA) and its implementing regulation, Part 339; EFTA, and its implementing regulation, Regulation E; TISA, and its implementing regulation, Regulation DD; and Section 5 of the FTC Act. The report noted how Section 5 of the FTC Act dropped from the second most frequently cited to the fifth.
The FDIC’s report outlined the most significant consumer compliance examination observations including the misuse of the FDIC’s logo, advertising of credit builder products, electronic fund transfer (EFT) error resolutions by third parties, mortgage broker relationships, and fair lending compliance. On the misuse of the FDIC’s logo, the FDIC found “a number of third parties” misrepresented the FDIC’s deposit insurance in violation of Section 18(a)(4) of the FDI Act. On substantiating claims in the advertising of credit builder products, the FDIC found that institutions collaborated with fintech companies on credit builder products and falsely advertised “these products would improve” one’s credit score, in violation of Section 5 of the FTC Act. On EFTs handled by third parties, the FDIC identified an issue with a security program in validating customer transactions in violation of Regulation E of EFTA. On payments for mortgage brokerage services, the FDIC found RESPA Section 8 violations involving mortgage broker relationships. On oversight of third parties, the FDIC identified issues with an institution that partnered with third-party lenders to offer unsecured consumer loans, finding the institution violated Section 39 of the FDI Act. Last and on fair lending, the FDIC found that most of the DOJ’s referral matters pertinent to discrimination related to redlining, automobile financing, and credit underwriting.
FDIC issues February enforcement action against New York bank for lack of effective third-party oversight
On March 29, the FDIC released its list of February 2024 enforcement actions, which included a consent order against a New York digital bank in which the FDIC alleged a lack of sufficient oversight of the bank’s third-party relationships. According to the consent order, the bank allegedly engaged in unsafe and unsound banking practices due to a lack of internal controls appropriate to the bank’s size and risk of its third-party relationships, and weaknesses in board oversight of asset growth and management, among other issues. The FDIC further alleged that the bank violated several laws including BSA, EFTA, and TISA.
The FDIC ordered the bank’s board to increase its oversight of the bank’s management and the bank’s financial condition commensurate with the size of the bank and the risk of its third-party relationships. Further, the FDIC ordered the board to correct or eliminate any unsafe banking practices or violations of the law. On data and systems, the FDIC ordered the bank to conduct a data and systems review and develop a written action plan to address any deficiencies or weaknesses. Notably for the bank’s third-party relationships, the FDIC ordered that the bank’s procedures, data, and systems include “clear lines of authority” responsible for monitoring bank procedures and effective risk assessments. Finally, among other things, the FDIC ordered the bank to implement look-back reviews and have its board review the bank’s program to ensure compliance with consumer-related laws.
FDIC OIG confirms board oversight and liquidity issues led to a bank’s failure
On March 25, the Office for the Inspector General (OIG) for the FDIC issued a report on a 2023 bank failure, finding that the bank’s failure netted a $14.8 million estimated loss to the Deposit Insurance Fund (“DIF”), but that the failure did not warrant a formal evaluation of the FDIC’s supervision of the failed bank in the form of an In-Depth Review. As defined by the FDIC, the DIF was created to ensure deposits, protect depositors, and resolve failed banks. Any DIF loss incurred under $50 million would require the OIG to review and determine if any unusual circumstances exist that may warrant an In-Depth Review; the OIG did not find any unusual circumstances here.
In November 2023, the FDIC was appointed as a receiver of a bank after its closure by the Iowa Division of Banking. The OIG noted that the bank failed after “significant deterioration” of the bank’s loan portfolio and operating losses stressed its liquidity as a result of bank board issues and management lax lending practices, as well as the failure to properly administer large commercial trucking relationships.
While conducting the bank review, the OIG considered four factors. First, the OIG considered the magnitude of the DIF loss in relation to the total assets of the failed bank. The OIG found the relative loss was 23 percent (noted as consistent in the last five years). Second, the OIG reviewed how effective the FDIC’s supervision addressed the issues. The OIG found the FDIC’s supervision “identified and effectively addressed” the issues that led to the bank’s failure. Third, the OIG considered any indicators of fraudulent activities that contributed to the DIF loss. The OIG found that while the examiners identified conflicts of interest in bank loans, they did not “significantly contribute” to the DIF loss. Last and fourth, the OIG reviewed any other relevant conditions contributing to the bank’s failure and found none.
FDIC opens comment period on proposed Statement of Policy regarding bank merger transactions, highlights “added scrutiny” for $100+ billion mergers
On March 21, the FDIC issued a request for comment on its proposed Statement of Policy (SOP) on bank merger transactions, which will aim to update, strengthen, and clarify the FDIC’s approach to bank merger evaluation. The proposed SOP does note that transactions in excess of $100 billion are more likely to present financial stability concerns and will be “subject to added scrutiny.” The new SOP will replace the FDIC’s current SOP on its responsibilities under the Bank Merger Act (BMA) or Section 18(c) of the FDI Act. Both the heads of the CFPB and OCC issued statements on this review, with the Acting Comptroller of the Currency offering his explicit support.
Broadly speaking, the proposed SOP aims to make the process more principles based, communicate the FDIC’s expectations in its evaluation of merger applications, and describe which merger transactions are under the FDIC’s domain. The proposed SOP will include separate discussions for each statutory factor as set forth in the BMA, including the effects on competition, financial resources, future prospects, CRA, financial and banking stability risk, and AML considerations. Further, this will not be an exhaustive list, as the FDIC will claim jurisdiction over any other elements that could present a risk to financial stability. Of note, the proposed SOP will not include any “bright lines or specific metrics” on what transaction would be considered anti-competitive, as the FDIC wishes to maintain its flexibility to appropriately evaluate the circumstances of each merger application.
This new comment period will begin after the FDIC reviewed 33 comment letters received during the previous comment period, about three-fourths of which were in favor of at least some changes to the FDIC’s merger review process. Six commenters were against such changes and two commenters were neither in favor of nor against the changes. The comments against argued that the current framework was “sound,” and any revisions could harm the sector by making the bank merger process more difficult and disproportionally impacting community, mid-size, and regional banks. Comments must be received by 60 days from the date of the SOP’s publication in the Federal Register.
Agencies extend applicability date of certain provisions of their Community Reinvestment Act final rule
On March 21, the FDIC, Fed, and OCC jointly issued an interim final rule to extend the applicability date of certain provisions of the Community Reinvestment Act (CRA) final rule and requested comments on the extension. As previously covered by InfoBytes, the final rule was intended to modernize how banks comply with the CRA, a law that encouraged banks to help meet the credit needs of low- and moderate-income communities.
Stated “[t]o promote clarity and consistency,” the agencies have postponed the applicability date of the facility-based assessment areas and public file provisions from April 1, 2024, to January 1, 2026. As a result, banks would not be required to modify their assessment areas or public files in response to the final rule until the new 2026 date. This extension would put these elements on the same timeline as other components of the 2023 CRA final rule that also would take effect on January 1, 2026, including the performance tests and geographic area provisions.
The agencies also made technical, non-substantive updates to the CRA final rule and related agency regulations that reference it. One of these technical adjustments specified that banks are not required to update their public CRA Notices until January 1, 2026. Public comments on the postponed implementation date must be received 45 days following the rule's publication in the Federal Register.
Senator Romney et al. pen letter confirming nonbank lending regulations, specifically on the ILC charter
On March 13, Senator Mitt Romney (R-UT) with 11 other senators penned a brief letter to the heads of the FDIC, OCC, and CFPB that supported the FDIC’s regulation of the industrial loan company (ILC) charter but expressed concerns about delay in processing ILC charter applications. According to the letter, ILCs provide “critical access to credit opportunities within the regulated banking sector.” The letter stated the senators “strongly oppose” regulatory actions against lawful ILC charter applications that may further delay FDIC review and decision-making.