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Treasury releases CFIUS Enforcement and Penalty Guidelines
On October 20, the U.S. Treasury Department released CFIUS Enforcement and Penalty Guidelines to provide the public with information on how the Committee on Foreign Investments in the United States (CFIUS) assesses violations of laws and regulations on transaction parties. The guidelines inform the public about how CFIUS—which is tasked with identifying and mitigating certain national security risks related to foreign investments—assesses whether to impose a penalty or take other enforcement action for a violation of a party’s obligation, as well as factors that CFIUS considers when making such a determination. “The vast majority of those who come before CFIUS abide by their legal obligations and work collaboratively with the Committee to mitigate any national security risks arising from the transaction; however, those who fail to comply with CFIUS mitigation agreements or other legal obligations will be held accountable,” Assistant Secretary of the Treasury for Investment Security Paul Rosen stressed. “Today’s announcement sends a clear message: Compliance with CFIUS mitigation agreements is not optional, and the Committee will not hesitate to use all of its tools and take enforcement action to ensure prompt compliance and remediation, including through the use of civil monetary penalties and other remedies.”
FDIC proposes amendments to its guide on supervisory appeals process
On October 18, the FDIC Board of Directors announced it is soliciting further public comments on proposed amendments to its Guidelines for Appeals of Material Supervisory Determinations. The notice follows an action taken by the Board earlier in May, which restored the Supervision Appeals Review Committee (SARC) as the final level of review in the agency’s supervisory appeals process (covered by InfoBytes here). While the revised guidelines took effect immediately, the FDIC solicited comments on the changes. In response to comments received, the proposed amendments would add the agency’s ombudsman to the SARC as a non-voting member, and the ombudsman would be responsible for monitoring the supervision process after a financial institution submits an appeal. The proposed amendments would also require that materials considered by the SARC be shared with both parties to the appeal (subject to applicable legal limitations on disclosure), and allow financial institutions to request a stay of material supervisory determination while an appeal is pending. Additionally, the division director would be given the discretion to grant a stay or grant a stay subject to certain conditions. Comments on the proposed amendments are due within 30 days of publication in the Federal Register.
FDIC raises deposit insurance assessment rates
On October 18, the FDIC Board of Directors approved the adoption of a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by two basis points beginning with the first quarterly assessment period of 2023. (See also FDIC fact sheet here.) The FDIC said that after considering comments and updated analysis and projections, the increase in assessment rates was adopted without change from when it was proposed in June (covered by InfoBytes here). The FDIC emphasized that the increased assessment revenue is intended to increase the likelihood that the reserve ratio of the Deposit Insurance Fund (DIF) reaches the statutory minimum of 1.35 percent by the mandated deadline of September 30, 2028, while also reducing the likelihood that the FDIC would need to consider a potentially pro-cyclical assessment rate increase where it raises assessments when banking and economic conditions may be less favorable. This increase “is projected to have an insignificant effect on institutions’ capital levels, is estimated to reduce income slightly by annual average of 1.2 percent, and should not impact lending or credit availability in any meaningful way,” the FDIC said. Concurrently, the FDIC maintained the Designated Reserve Ratio for the DIF at two percent for 2023.
Acting Chairman Martin J. Gruenberg stressed that it “is better to take prudent but modest action earlier in the statutory 8-year period to reach the minimum reserve ratio, than to delay and potentially have to consider a pro-cyclical assessment increase.” CFPB Director and FDIC Board Member Rohit Chopra also chimed in, saying that while he voted in favor of finalizing the deposit insurance rate increase, there are a number of changes that must be made over the long term to deposit insurance assessment policies. These include (i) finding ways for banks that pose the most risk to the DIF “to pay more, relative to smaller institutions where the likelihood of large losses to the Fund are tiny”; (ii) building a framework to ensure assessment rate changes are countercyclical where premiums are adjusted “upward and downward based on economic conditions, recent industry profits, and other appropriate indicators”; and (iii) developing “a framework that relies less on ad-hoc adjustments and more on a systematized formula” based on specific quantitative factors.
FDIC issues final rule on troubled debt restructuring accounting standards
On October 18, the FDIC published a final rule in the Federal Register to incorporate updated accounting standards in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions. According to the FDIC, the final rule adds a new term, “modifications to borrowers experiencing financial difficulty,” to two financial measures—the underperforming assets ratio and the higher-risk assets ratio—that are used to determine deposit insurance assessments for large and highly complex insured depository institutions.
FSB outlines steps to promote convergence in cyber incident reporting
On October 17, the Financial Stability Board (FSB) released a series of recommendations for promoting convergence in cyber incident reporting (CIR). Recognizing that a “one-size-fits-all approach” is neither feasible nor preferable, FSB noted that financial authorities and financial institutions may choose to adopt the report’s recommendations as appropriate and necessary, consistent with their legal and regulatory frameworks. Among other things, the recommendations call on financial authorities to (i) establish and maintain clearly defined incident reporting objectives and explore ways to align their CIR regimes with other relevant authorities; (ii) adopt common reporting formats and develop standardized formats for exchanging incident reporting information; (iii) review the effectiveness of their CIR processes and address impediments to cross-border information sharing; (iv) engage regularly with financial institutions to foster mutual understanding of the benefits of CIR and provide guidance on effective CIR communication; and (v) implement secure forms of incident information handling to protect sensitive information. Additionally, financial authorities and institutions should collaboratively implement measures for sharing information related to cyber events and vulnerabilities in order to “combat situational uncertainty” and “pool knowledge in collective defense of the financial sector.” Financial institutions should also continuously identify and address any gaps in their CIR capabilities.
VA seeks comments on loss-mitigation options for guaranteed loans
On October 17, the Department of Veterans Affairs published a proposed rule in the Federal Register related to the Department’s Loan Guaranty Service. The proposed rule requests public comments regarding the expansion of the VA’s incentivized loss mitigation options that are available to servicers assisting veterans whose VA-guaranteed loans are in default. Specifically, the VA encourages comments regarding “any other topic that will help VA as it explores whether to expand the incentivized loss-mitigation options outlined in VA regulation.” Comments are due by January 17.
Fed, FDIC to consider enhancing large bank resolution requirements
On October 18, the FDIC Board of Directors approved the publication of an advance notice of proposed rulemaking (ANPRM) seeking comments on whether new requirements should be drafted to enhance the regulators’ ability to resolve large banks in an orderly way should they fail. The jointly proposed FDIC/Federal Reserve Board ANPRM seeks feedback on several new possible requirements, including a long-term debt requirement, that could be used for the orderly resolution of domestic large banking organizations in Categories II and III (which generally exceed a threshold of $250 billion in total consolidated assets) to help prevent customer and counterparty disruption. According to a Fed memo, the regulators are exploring whether certain bank resolution standards applicable to global systemically important banks (GSIBs) should be extended to other large banks that, while not as large as GSIBs, “could have very large or complex operations” and have expanded in size due to mergers and “organic growth.” The ANPRM, among other things, also seeks comment on the costs associated with such a proposal, recognizing that “a long-term debt requirement could impact the cost and availability of credit.” The regulators are also evaluating whether they should establish separability requirements, “such as the sale, transfer, or disposal of significant assets, portfolios, legal entities or business lines on a discrete product line or regional basis,” for some or all large banks to aid recovery or resolvability. Comments on the ANPRM are due within 60 days following publication in the Federal Register.
“As the banking system changes, policymakers must continuously evaluate whether resolution-related standards and prudential standards for large banks keep pace,” Fed Vice Chair for Supervision Michael S. Barr said in an announcement issued by the Fed earlier in the week. He explained that the regulators are evaluating whether capital requirements for large banks (including GSIBs), as well as other elements of the prudential framework, should be updated.
Expressing support for the joint ANPRM, acting Comptroller of the Currency Michael J. Hsu stressed that “[e]xploring the development of a rule that can ensure the resolvability of large, domestically-systemic banks will promote financial stability by guarding against the rise of non-GSIBs that may become too-big-to-fail, while enabling true competition amongst the largest banks.” CFPB Director and FDIC Board Member Rohit Chopra also expressed his support for the ANPRM. However, Chopra cautioned that if rulemaking is pursued, it “should not serve as a rationale for continuing a lax and opaque merger review process.” Chopra also advised that efforts “to reduce the risk of bailouts or increased concentration upon the failure of domestic systemically important banks should be complemented by efforts to reduce the probability of their failure,” and that the “increased attention on domestic systemically important banks should not be interpreted to mean that it is ‘mission accomplished’ when it comes to” GSIBs.
Agencies finalize TILA, CLA 2023 thresholds
On October 13, the CFPB and Federal Reserve Board finalized the annual dollar threshold adjustments that govern the application of TILA (Regulation Z) and the Consumer Leasing Act (Regulation M) (available here and here), as required by the Dodd-Frank Act. The exemption threshold for 2023, based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, will increase from $61,000 to $66,400, except for private education loans and loans secured by real or personal property used or expected to be used as the principal dwelling of a consumer, which are subject to TILA regardless of the amount. The final rules take effect January 1, 2023.
FHFA proposes amendments to help GSEs better serve colonias
Recently, FHFA announced a notice of proposed rulemaking (NPRM) to amend its Enterprise Duty to Serve Underserved Markets regulation. Under Section 1129 of the Housing and Economic Recovery Act of 2008, Fannie Mae and Freddie Mac (GSEs) are required to develop loan products and flexible underwriting guidelines for facilitating “a secondary market for mortgages on housing for very low-, low-, and moderate-income families for the manufactured housing, affordable housing preservation, and rural housing markets.” The amendments would add a “colonia census tract” definition, which would serve as a census tract-based proxy for a “colonia” (as generally applied to “unincorporated communities along the U.S.-Mexico border in California, Arizona, New Mexico, and Texas that are characterized by high poverty rates and substandard living conditions”), and would amend the “high-needs rural region” definition by substituting “colonia census tract” for “colonia.” The NPRM would also revise the definition of “rural area” to include all colonia census tracts regardless of their location, in order to make GSE activities in all colonia census tracts eligible for duty to serve credit. “FHFA is committed to promoting affordability, equity, and sustainability in the nation’s housing finance markets, especially in underserved communities,” FHFA Director Sandra L. Thompson said in the announcement. “With this rule, we seek to remove barriers that have hindered the [GSEs’] Duty to Serve activities for people living in colonias.”
SEC amends electronic recordkeeping requirements for security-based swap entities
On October 12, the SEC adopted final amendments to its rule governing the electronic recordkeeping requirements for security-based swap entities. (See SEC fact sheet here.) The updates are applicable to security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs), and are intended to make the rule adaptable to new technologies in electronic recordkeeping. The amendments will also facilitate examinations of broker-dealers, SBSDs, and MSBSPs by “designating broker-dealer examining authorities as Commission designees for purposes of certain provisions of the broker-dealer record maintenance and preservation rule,” the SEC said. Specifically, the amendments address requirements related to the maintenance and preservation of electronic records, the use of third-party recordkeeping services to hold records, and the prompt production of records. Under the SEC’s broker-dealer electronic recordkeeping rule, broker-dealers are required “to preserve electronic records exclusively in a non-rewriteable, non-erasable format,” known as the “write once, read many format.” The amendments now provide an audit-trail alternative under which broker-dealers “must preserve electronic records in a manner that permits the recreation of an original record if it is altered, over-written, or erased.” According to the SEC’s announcement, the audit-trail alternative is intended to provide broker-dealers greater flexibility when configuring their electronic recordkeeping systems so they more closely align with current electronic recordkeeping practices, while also ensuring that the authenticity and reliability of the original records are protected. The amendments are also applicable to nonbank SBSDs and MSBSPs.
The final amendments are effective 60 days after publication in the Federal Register.