InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FDIC refutes CFPB’s bank merger policy announcement
On December 9, the FDIC issued a statement refuting a request for review of bank merger policies announced in a CFPB blog post. According to a joint statement issued by FDIC Board member Martin J. Gruenberg and Rohit Chopra (who has an automatic board seat as Director of the CFPB), the FDIC Board of Directors voted to launch a public comment period on updating the FDIC’s regulatory implementation of the Bank Merger Act. Gruenberg and Chopra indicated that the Board members taking part in this action have approved a Request for Information and Comment on Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger Transactions, which would seek public input on the FDIC’s approach to considering prudential factors in acting on a bank merger application, specifically related to “whether bright line minimum standards for prudential factors should be established, and if so, what minimum standards for which prudential factors.” In his blog post, Chopra noted that the Bureau is particularly interested in how the assessment of a bank merger’s impact on families and businesses in local communities would work in practice, and how should regulators ensure a merger does not increase the risk of bank failure or otherwise disrupt the economy should the bank face financial distress. According to the Gruenberg and Chopra joint statement, the Board’s action authorizes the FDIC’s executive secretary to publish the RFI in the Federal Register, upon which a 60-day window for comments will commence.
Shortly following the release of the joint statement, the FDIC released a statement disputing that any action had been approved, stressing that it “has longstanding internal policies and procedures for circulating and conducting votes of its Board of Directors, and for issuing documents for publication in the Federal Register.” Adding that “[i]n this case, there was no valid vote by the Board, and no such request for information and comment has been approved by the agency for publication in the Federal Register,” the FDIC commented that “[n]otwithstanding the actions taken today, the FDIC expects this time-honored tradition of collegiality and comity to continue.”
OCC warns of key cybersecurity and climate-related banking risks
On December 6, the OCC reported in its Semiannual Risk Perspective for Fall 2021 the key issues facing national banks and federal savings associations and the effects of Covid-19 on the federal banking industry. The agency reported that although banks showed resilience in the current environment with satisfactory credit quality and strong earnings, weak loan demand and low net interest margins continue to affect performance.
The OCC identified elevated operational risk as banks continue to face increasingly complex cyberattacks, pointing to an increase in ransomware attacks across financial services. While innovation and technological advances can help counter such risks, the OCC warned they also come with additional concerns given the expansion of remote financial services offered through personally owned computers and mobile devices, remote work options due to the Covid-19 pandemic, and the reliance on third-party providers and cloud-based environments. “The adoption of innovative technologies to facilitate financial services can offer many benefits to both banks and their customers,” the report stated. “However, innovation may present risks. Risk management and control environments should keep pace with innovation and emerging trends and a comprehensive understanding of risk should be achieved to preserve effective controls. Examiners will continue to assess how banks are managing risks related to changes in operating environments driven by innovative products, services, and delivery channels.”
The report calls on banks to “adopt robust threat and vulnerability monitoring processes and implement stringent and adaptive security measures such as multi-factor authentication or equivalent controls” to mitigate against cyber risks, adding that critical systems and records must be backed up and stored in “immutable formats that are isolated from ransomware or other destructive malware attacks.”
The report further highlighted heightened compliance risks associated with the changing environment where banks serve consumers in the end stages of various assistance programs, such as the CARES Act’s PPP program and federal, state, and bank-initiated forbearance and deferred payment programs, which create “increased compliance responsibilities, high transaction volumes, and new types of fraud.”
The report also discussed credit risks, strategic risk challenges facing community banks, and climate-related financial risks. The OCC stated it intends to request comments on its yet-to-be-published climate risk management framework for large banks (covered by InfoBytes here) and will “develop more detailed expectations by risk area” in 2022.
CFPB finalizes LIBOR transition rule
On December 7, the CFPB issued a final rule facilitating the transition from LIBOR for consumer financial products. (Corrected rule published February 16, 2022.) The final rule amends Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans.
- Closed-end provision amendments provide examples of indices that meet certain Regulation Z standards, which may be used to replace LIBOR indices. To assist creditors in determining a comparable index for closed-end loans, the final rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products. The final rule also provides a non-exhaustive list of factors for creditors to use when determining whether a replacement index meets the Regulation Z “comparable” standard.
- Updated post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replace LIBOR references with a SOFR index.
- Amendments related to open-end loans add LIBOR-specific provisions, which allow creditors for home equity lines of credit (HELOCs) and credit card issuers to transition existing accounts using a LIBOR index to a replacement index on or after April 1, 2022, provided certain conditions are met. Creditors and card issuers are provided a non-exhaustive list of factors to consider when determining whether a replacement index meets Regulation Z’s “historical fluctuations are substantially similar” standard. In addition to identifying certain ARRC recommended SOFR-based spread-adjusted indices for consumer products, the final rule also lists the Prime rate as an example of an index that also meets this standard.
- The final rule also addresses change-in-terms notice provisions for HELOCs and credit card accounts related to the disclosure of margin reductions once LIBOR ends. Additionally, the final rule discusses how the requirement for reevaluating rate increases on credit card accounts applies to the transition from using LIBOR indices to a replacement index.
The final rule takes effect April 1, 2022, with the exception of certain provisions related to an amendment to appendix H which is effective October 1, 2023. Additionally, while the mandatory compliance date for change-in-terms notice requirement revisions is October 1, 2022, the mandatory compliance date for all other final rule provisions is April 1, 2022. Furthermore, the Bureau “is reserving judgment about whether to include references to a 1-year USD LIBOR index and its replacement index in various comments; the Bureau will consider whether to finalize comments proposed on that issue in a supplemental final rule once it obtains additional information.”
CFPB Director Rohit Chopra warned that “[n]o new financial contracts may reference LIBOR as the relevant index after the end of 2021,” and that beginning June 2023, “LIBOR can no longer be used for existing financial contracts.” Chopra further emphasized that creditors and servicers must continue to prepare for LIBOR’s cessation and should take clear and orderly steps to reduce risk and mitigate compliance, legal, financial, and operational risks.
FinCEN issues ANPRM to curb real estate-related illicit finance
On December 6, the Financial Crimes Enforcement Network (FinCEN) issued an advanced notice of proposed rulemaking (ANPRM) seeking comments on potential requirements under the Bank Secrecy Act (BSA) to address vulnerabilities in the U.S. real estate market to money laundering and other illicit activity. Systemic money laundering vulnerabilities in this space, FinCEN cautioned, present opportunities for corrupt officials and illicit actors to launder criminal proceeds through the purchase of real estate and threaten U.S. national security and the integrity of the U.S. financial system. FinCEN stressed that, because of the real estate market’s opacity and gaps in industry regulation, “the U.S. real estate market continues to be used as a vehicle for money laundering and can involve businesses and professions that facilitate (even if unwittingly) acquisitions of real estate in the money laundering process.” Regulated financial institutions, such as banks that provide real estate transactions, are subject to federal anti-money laundering rules and are not as susceptible to money laundering because they must report suspicious activity to FinCEN, the agency stated. However, FinCEN reported that when real estate is purchased in other ways, beneficial ownership can be extremely difficult to trace. Currently FinCEN does not impose the BSA’s general recordkeeping and reporting requirements on persons involved in all-cash real estate transactions (although title insurance companies are subject to specific transaction reporting requirements through Geographic Targeting Orders—covered by InfoBytes here). To address these issues, the ANPRM seeks comments on ways to enhance the transparency of the U.S. residential and commercial real estate market on a nationwide basis while minimizing the burden on businesses. Comments are due within 60 days of publication in the Federal Register.
Fed revises bank holding company supervision manual
Recently, the Federal Reserve Board’s Division of Supervision and Regulation released Supplement 55 of the Bank Holding Company Supervision Manual. Among other things, the updates reflect new regulatory provisions, guidance, and instructions since the last update in February 2020. The revisions include additional sections, removal of several sections, and revised sections. The revised sections include, among others: (i) Internal Credit-Risk Ratings at Large Firms; (ii) Risk-Focused Supervision Framework for Large Complex Banking Organizations; and (iii) Supervision Standards for De Novo State Member Banks of Bank Holding Companies.
OCC releases 2022 fees and assessments schedule
On December 1, the OCC issued Bulletin 2021-58, which informs all national banks, federal savings associations, and federal branches and agencies of foreign banks of the agency’s 2022 fees and assessment rates. The OCC noted that for the 2022 assessment year, among other things, (i) there will be no inflation adjustment to assessment rates; (ii) new entrants to the federal banking system will be assessed on a prorated basis using call report information as of December 31 or June 30, depending on the entrance date; and (iii) the hourly fee for special examinations and investigations will increase from $150 to $155. The bulletin takes effect January 1, 2022.
CFPB sets 2022 FCRA asset threshold
On November 29, the CFPB announced the annual adjustment to the maximum amount that consumer reporting agencies are permitted to charge consumers for making a file disclosure to a consumer under the FCRA. According to the rule, the ceiling on allowable charges under Section 612(f) of the FCRA will increase to $13.50, which is a $0.50 increase from the ceiling on allowable charges for 2021. The rule is effective on January 1, 2022.
Fed provides guidance on LIBOR transition
On November 19, the Federal Reserve Board announced answers to “Supervision FAQs on the Transition away from LIBOR.” The Fed’s announcement follows an October 2021 joint statement by the CFPB, Fed, FDIC, NCUA, and OCC, in conjunction with the state bank and state credit union regulators, regarding the transition away from LIBOR. (Covered by InfoBytes here.) Among other things, the FAQs included statements regarding what qualifies as a “new contract” under the previously issued guidance, specifically regarding: (i) modifications to adjustable-rate mortgages; (ii) loans that “automatically renew” after December 31, 2021; and (iii) physical settlement of a contract that existed before December 31, 2021. The FAQs also discussed: (i) Board-supervised institutions engaging in secondary trading of LIBOR-linked cash instruments that were issued before December 31, 2021; (ii) the need for fallback language in contracts entered into prior to 2022; and (iii) the approach by examiners in assessing firms’ LIBOR transition plans.
OCC gives guidance on cryptocurrency, trust bank chartering
On November 23, the OCC issued Interpretive Letter 1179, which clarified and expanded on prior interpretive letters concerning bank engagements in cryptocurrency activities. Interpretive Letter 1179 also addressed the OCC’s authority to charter national trust banks. According to the OCC, national banks and federal savings associations may engage in certain cryptocurrency activities discussed in Interpretive Letters 1170, 1172, and 1174, provided a bank is able to “demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner.” Legally permissible activities include those pertaining to (i) cryptocurrency custody services; (ii) the holding of dollar deposits to serve as “reserves backing stablecoin in certain circumstances”; (iii) acting “as nodes on an independent node verification network” to verify customer payments; and (iv) bank engagements with distributed ledger technology to facilitate payment transactions for certain stablecoin activities. A bank intending to engage in such activities must first notify its supervisory office and should not engage in any activity until it receives permission. Supervisory offices must assess whether a bank’s risk management systems and controls are sufficiently adequate for engagement in such activities. “Today’s letter reaffirms the primacy of safety and soundness. Providing this clarity will help ensure that these cryptocurrency, distributed ledger, and stablecoin activities will be conducted by national banks and federal savings associations in a safe and sound manner,” acting Comptroller Michael Hsu stated in an agency press release. “Because many of these technologies and products present novel risks, banks must be able to demonstrate that they have appropriate risk management systems and controls in place to conduct them safely. This will provide assurance that crypto-asset activities taking place inside of the federal regulatory perimeter are being conducted responsibly.”
The Interpretive Letter also addressed OCC standards for chartering national bank trusts, as previously discussed in Interpretive Letter 1176. The OCC reiterated that it “retains discretion to determine if an applicant’s activities that are considered trust or fiduciary activities under state law are considered trust or fiduciary activities for purposes of applicable federal law.” The OCC further emphasized that the OCC’s chartering authority does not expand or modify current responsibilities under 12. C.F.R. Part 9 for national banks that have already been granted fiduciary powers, and that “national banks currently conducting activities in a non-fiduciary capacity that are not subject to Part 9 have not, and will not, become subject to 12 C.F.R. Part 9 because of the letter.”
Agencies finalize 2022 HPML exemption threshold
On November 30, the CFPB, OCC, and Federal Reserve Board published finalized amendments to the official interpretations for regulations implementing Section 129H of TILA, which establishes special appraisal requirements for “higher-priced mortgage loans” (HPMLs). The final rule increases the TILA smaller loan exemption threshold for the special appraisal requirements for HPMLs. Each year the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold for 2022 will increase from $27,200 to $28,500 effective January 1.