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On October 28, HUD and DOJ announced a long-awaited Memorandum of Understanding (MOU), which provides prudential guidance concerning the application of the False Claims Act to matters involving alleged noncompliance with FHA guidelines. The announcement was made by HUD Secretary Dr. Benjamin S. Carson at the Mortgage Bankers Association’s Annual Conference, and both agencies issued releases shortly after Carson’s comments. The intention, HUD noted, is to bring greater clarity to regulatory expectations within the FHA program and ease banks’ worries about facing future penalties for mortgage-lending errors.
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Click here to read the full special alert.
If you have any questions about the HUD/DOJ Memorandum of Understanding or other related issues, please visit our Mortgages or False Claims Act & FIRREA practice pages, or contact a Buckley attorney with whom you have worked in the past.
On October 22, the OCC published a final rule to clarify and streamline its other real estate owned (OREO) regulations for supervised national banks and to update the regulatory framework for OREO activities at federal savings associations. The final rule—which is being adopted substantially as proposed in the OCC’s notice of proposed rulemaking issued in April (covered by InfoBytes here)—is the first significant revision to OREO regulations in more than 20 years. As noted in the final rule, pursuant to the Dodd-Frank Act, the OCC now supervises federal savings associations. The framework adopted by the final rule is consistent with the Office of Thrift Supervision’s framework formerly in place, and “offers flexibility consistent with provisions in the Home Owners' Loan Act.”
Specifically, the final rule addresses (i) OREO holding periods; (ii) the methods for disposing of OREO; (iii) OREO appraisal requirements; and (iv) permissible OREO expenditures and notification requirements. The final rule also removes outdated capital rules for national banks and federal savings associations, which include provisions related to OREO, and makes conforming technical edits to other rules that reference those capital rules. The final rule takes effect December 1.
On October 9, the OCC responded to a letter written by 26 Republican members of the House Financial Services Committee urging the agency to update its interpretation of the definition of “interest” under the National Bank Act (NBA) to limit the impact of the U.S. Court of Appeals for the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC (covered by a Buckley Special Alert here). The representatives’ letter (covered by InfoBytes here) argued that Madden deviated from the longstanding valid-when-made doctrine—which provides that if a contract that is valid (not usurious) when it was made, it cannot be rendered usurious by later acts, including assignment—and has “caused significant uncertainty and disruption in many types of lending programs.” The representatives urged the OCC to prioritize a rulemaking to address the issue. In response, the OCC agreed with the letter’s concerns, and stated that “administrative solutions to mitigate the consequences of the Madden decision may be available.” The OCC noted that it has filed amicus briefs in the past, reiterating the view that Madden was wrongly decided, but did not elaborate any further on potential plans for a rulemaking to address the issue.
On October 17, the OCC, Federal Reserve Board, FDIC, and NCUA published a proposed interagency policy statement on allowances for credit losses and proposed interagency guidance on credit risk review systems.
The proposed policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology for determining allowances for credit losses applicable to financial assets measured at amortized costs. It will apply 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 proposed 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. Once finalized, the proposed policy would be effective at the time of each institution’s adoption of CECL.
The proposed credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—will update the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The proposed 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 proposed guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
Comments on both proposals are due December 16.
On October 15, the FDIC approved the final rule revising 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 final rule remains unchanged from the proposed rule, which was issued by the FDIC in December 2018 (previously covered by InfoBytes here). The final rule (i) changes the minimum threshold for applicability from $10 billion to $250 billion; (ii) revises the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduces the number of required stress testing scenarios from three to two. FDIC-supervised institutions that are covered institutions 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 final rule also adds a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. The final rule requires certain covered institutions to still conduct annual stress tests, but this is limited to covered institutions that are consolidated under holding companies required to conduct stress tests more frequently than once every other year. Lastly, the final rule removes the “adverse” scenario—which the FDIC states has provided “limited incremental information”—and requires stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios. The final rule is effective thirty days after it is published in the Federal Register.
As previously covered by InfoBytes, on October 4, the OCC issued its final rule incorporating the same revisions as the FDIC.
Federal Reserve finalizes capital and liquidity requirement rules for large firms; proposes changes to assessment fees
On October 10, the Federal Reserve Board approved final rules, consistent with changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, to establish a framework that revises the criteria for determining the applicability of regulatory capital and liquidity requirement for large U.S. banking organizations and U.S. intermediate holding companies (IHC) of certain foreign banking organizations with $100 billion or more in total assets. The framework—jointly developed with the FDIC and the OCC—establishes “four risk-based categories for determining the regulatory capital and liquidity requirements applicable to large U.S. banking organizations and the U.S. intermediate holding companies of foreign banking organizations, which apply generally based on indicators of size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure.” According to the Fed, while the framework is “generally similar” to proposals released for comment over the past year (see InfoBytes coverage here and here), the final rule further simplifies the proposals by applying liquidity standards to a foreign bank’s U.S. IHC that are based on the IHC’s risk profile instead of the combined U.S. operations of the foreign bank. For larger firms, the framework applies standardized liquidity requirements at the higher end of the range that was originally proposed for both domestic and foreign banks.
The following categories are established under the framework: (i) Category I will be reserved for U.S.-based global systemically important banks; (ii) Category II will apply to U.S. and foreign banking organizations with total U.S. assets exceeding $700 billion or $75 billion in cross-border activity that do not meet Category I criteria; (iii) Category III will apply to U.S. and foreign banking organizations with more than $250 billion in U.S. assets or $75 billion in weighted short-term wholesale funding, nonbank assets, or off balance sheet exposure; and (iv) Category IV will apply to other banking organizations with total U.S. assets of more than $100 billion that do not otherwise meet the criteria of the other three categories.
The framework will take effect 60 days after publication in the Federal Register.
Additionally, the Fed separately issued a notice of proposed rulemaking to raise the minimum threshold for being considered an assessed company and to adjust the amount charged to assessed companies. The notice also announces the Fed’s intention to issue a capital plan proposal that will “align capital planning requirements with the two-year supervisory stress testing cycle and provide greater flexibility for Category IV firms.” Comments on the proposal are due December 9.
On October 10, the CFPB issued a final rule extending the current temporary threshold of 500 open-end lines of credit under the HMDA rules for reporting data to January 1, 2022. As previously covered by InfoBytes, the CFPB temporarily increased the threshold for open-end lines of credit from 100 loans to 500 loans for calendar years 2018 and 2019. In May 2019, the Bureau proposed to extend that temporary threshold to January 1, 2022 and then permanently lower the threshold to 200 open-end lines of credit after that date (covered by InfoBytes here). The Bureau then reopened the comment period for the May 2019 proposed rule with respect to the permanent open-end and closed-end coverage thresholds (covered by InfoBytes here) and now intends to issue a final rule addressing the permanent threshold at a later date. The Bureau also intends to address the other closed-end aspects of the May 2019 proposed rule at a later date.
The final rule adopts the temporary extension of the 500 open-end lines of credit until January 1, 2022, and incorporates, with minor adjustments, the interpretive and procedural rule issued in August 2018 (2018 Rule), which implemented and clarified that the HMDA amendments included in Section 104(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (previously covered by InfoBytes here). The final rule is effective January 1, 2022.
On October 8, the Federal Reserve Board announced that all five federal financial regulators have signed off on final revisions to the Volker Rule (the Rule) to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the other four regulators approved the revisions last month. The revisions, which take full effect on January 1, 2021, clarify prohibited activities and simplify compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The Fed noted that community banks are generally exempt from the Rule by statute, and stressed that the “revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law,” and that the regulators “expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies’ 2013 rule.” However, Federal Reserve Governor Lael Brainard issued a dissenting statement, stressing that the revised Rule “weakens the core protections against speculative trading within the banking federal safety net,” and that the elimination without replacement of the “‘short-term intent’ test for firms engaged in higher levels of trading activities… materially narrows the scope of covered activities.” Brainard also expressed concern about “examiners’ ability to assess compliance with the final rule because it relies on firms’ internal self-policing to set limits to distinguish permissible market making from illegal proprietary trading, no longer requires firms to promptly report limit breaches and increases, and narrows the scope of the CEO attestation requirement.”
On October 2, the OCC issued the final rule revising the stress testing requirements for OCC-supervised institutions, consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule remains unchanged from the proposed rule, which was issued by the OCC in December 2018 (previously covered by InfoBytes here). The final rule (i) changes the minimum threshold for applicability from $10 billion to $250 billion; (ii) revises the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduces the number of required stress testing scenarios from three to two. Specifically, OCC-supervised institutions that are covered institutions 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 final rule also adds a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. The final rule requires certain covered institutions to still conduct annual stress tests, but this is limited to covered institutions that are consolidated under holding companies required to conduct stress tests more frequently than once every other year. Lastly, the final rule removes the “adverse” scenario—which the OCC states has provided “limited incremental information”—and requires stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios. The final rule is effective November 24.
On October 1, the OCC’s Committee on Bank Supervision released its bank supervision operation plan (Plan) for fiscal year 2020. The Plan outlines the agency’s supervision priorities and specifically highlights the following supervisory focus areas: (i) cybersecurity and operational resiliency; (ii) Bank Secrecy Act/anti-money laundering compliance; (iii) commercial and retail credit loan underwriting; (iv) effects of changing interest rates on bank activities and risk exposures; (v) preparation necessary for the current expected credit losses accounting standard, as well the potential phase-out of the London Interbank Offering Rate; and (vi) technological innovation and implementation.
The annual plan guides the development of supervisory strategies for individual national banks, federal savings associations, federal branches, federal agencies, service providers, and agencies of foreign banking organizations. Updates about these priorities will be provided in the OCC’s Semiannual Risk Perspective.
- Sherry-Maria Safchuk to speak on the "California Consumer Privacy Act (CCPA) Workshop" panel at the California Mortgage Banker's 2019 Legal Issues & Regulatory Compliance Conference
- Jon David D. Langlois to discuss "Legal and operational considerations" at the Mortgage Bankers Association's Whole Loan Trading Workshop
- Daniel P. Stipano to discuss “Connecting the dots on your CDD program” at the ABA/ABA Financial Crimes Enforcement Conference
- Daniel P. Stipano to discuss “Beneficial Ownership: You have questions – We have quick answers” at the ABA/ABA Financial Crimes Enforcement Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at an American Bar Association webinar
- Kari K. Hall and Christopher M. Walczyszyn to speak on the "Understanding updates to Regulation CC to ensure effective check processing" at a National Association of Federal Credit Unions webinar