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Agencies release customer relationship and due diligence guidance
On July 6, the FDIC, Federal Reserve Board, FinCEN, NCUA, and OCC issued a joint statement concerning banks’ risk-based approach for assessing customer relationships and conducting customer due diligence (CDD). Specifically, the joint statement reinforces the agencies’ “longstanding position that no customer type presents a single level of uniform risk or a particular risk profile related to money laundering (ML), terrorist financing (TF), or other illicit financial activity.” Banks are reminded that they must apply a risk-based approach to CDD and adopt appropriate risk-based procedures for conducting ongoing CDD when developing risk profiles of their customers. Because customer relationships present varying levels of ML, TF, and other illicit financial activity risks, the agencies advised banks to, among other things, (i) understand the nature and purpose of customer relationships; and (ii) “conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.”
Additionally, banks that comply with applicable Bank Secrecy Act/anti-money laundering (BSA/AML) legal and regulatory requirements and effectively manage and mitigate risks related to the unique characteristics of customer relationships, “are neither prohibited nor discouraged from providing banking services to customers of any specific class or type,” the agencies said, adding that “as a general matter” they will not direct banks to open, close, or maintain specific accounts as they “recognize that banks choose whether to enter into or maintain business relationships based on their business objectives and other relevant factors, such as the products and services sought by the customer, the geographic locations where the customer will conduct or transact business, and banks’ ability to manage risks effectively.” Banks are encouraged “to manage customer relationships and mitigate risks based on customer relationships, rather than decline to provide banking services to entire categories of customers.”
The joint statement is applicable to all customer types referenced in the Federal Financial Institutions Examination Council (FFIEC) BSA/AML Examination Manual, as well as to those not specifically addressed in the manual. These include “independent automated teller machine owners or operators, nonresident aliens and foreign individuals, charities and nonprofit organizations, professional service providers, cash intensive businesses, nonbank financial institutions, and customers the bank considers politically exposed persons.” The agencies reiterated that the joint statement does not alter existing BSA/AML legal or regulatory requirements, nor does it establish new supervisory expectations. Moreover, the FFIEC BSA/AML Examination Manual does not establish requirements for banks, nor should the inclusion of sections on specific customer types be interpreted as a signal that certain customer types present uniformly higher risk.
Agencies list distressed middle-income areas
On July 1, the FDIC, Federal Reserve Board, and the OCC released the 2022 list of distressed or underserved nonmetropolitan middle-income geographies where revitalization or stabilization activities are eligible to receive Community Reinvestment Act (CRA) consideration. The agencies designated the identified distressed or underserved nonmetropolitan middle-income geographies in accordance with their CRA regulations that continue to “reflect local economic conditions, including unemployment, poverty, and population changes.” As previously covered by InfoBytes, the agencies released a joint Notice of Proposed Rulemaking (NPRM) in May to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. Under the CRA, banks are encouraged to help meet the credit needs of the local communities in which they are chartered, including low- and moderate-income neighborhoods. The agencies will receive comments on the NPRM through August 5.
Yellen stresses importance of stablecoin regulatory framework
On June 30, U.S. Treasury Secretary Janet Yellen discussed stablecoin risks during a meeting of principals representing the President’s Working Group (PWG) on Financial Markets in addition to the OCC, FDIC, and the CFPB, where she reiterated her call for a regulatory framework for stablecoins. Participants discussed developments since the release of a stablecoin report issued by the PWG, OCC, and FDIC last November (covered by InfoBytes here). The report noted that stablecoins may be more widely used in the future as a means of payment, which Yellen said at the time could increase “risks to users and the broader system.” The report also recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight.
According to Treasury’s readout, Yellen “emphasized how recent events have underscored the urgent need to ensure that stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis” and “highlighted the need to continue to constructively engage in serious legislative efforts to promptly put in place a regulatory framework for stablecoins that would address current and future risks, such as those related to runs, safety and soundness, consumer protection, the payment system, and the concentration of economic power, while complementing existing authorities with respect to market integrity, investor protection, and illicit finance.” She also “commended the steps that individual agencies have taken within the scope of their mandates and authorities.”
Agencies release host state loan-to-deposit ratios
On June 28, the FDIC, Federal Reserve Board, and OCC (collectively, "the agencies") released the current host state loan-to-deposit ratios for each state or territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). Under the Interstate Act, banks are prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies are also subject to the same restriction. Determining compliance with Section 109 requires a comparison of a bank’s estimated statewide loan-to-deposit ratio to the estimated host state loan-to-deposit ratio. If a bank’s statewide ratio is less than one-half of the published host-state ratio, an additional review is required by the appropriate agency, which involves a determination of whether a bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.
Fed to implement new Fedwire message format in March 2025
On June 27, the Federal Reserve Board announced the final timeline and implementation details for the adoption of the International Organization for Standardization’s (ISO) 20022 message format for its Fedwire Funds Service—a real-time gross settlement system owned and operated by the Federal Reserve Banks that enables businesses and financial institutions to quickly and securely transfer funds. (See notice here.) The final details are “broadly similar” to the Fed’s proposal issued last October (covered by InfoBytes here). The Fed confirmed that ISO 20022 will be adopted on a single day as previously proposed instead of in three separate phases. Additionally, the Fed extended the implementation timeframe from a target date of November 2023 to March 10, 2025, based on comments received in response to the initial proposal. The Fed also provided information concerning its revised testing strategy and backout strategy, as well as other details concerning the implementation of the new message format.
OCC releases report on mortgage performance
On June 27, the OCC released its quarterly mortgage metrics report, which presents performance data for the first quarter of 2022 for loans that reporting banks own or service for others as a fee-based business. The first-lien mortgages included in the OCC’s quarterly report comprise 22 percent of all residential mortgage debt outstanding in the U.S., or approximately 12.2 million loans totaling $2.6 trillion in principal balances. The report, among other things, found that the performance of first-lien mortgages in the federal banking system improved during the first quarter of 2022. According to the report, 96.9 percent of mortgages were current and performing at the end of the quarter. The percentage of seriously delinquent mortgages was 1.8 percent in the first quarter of 2022, compared to 2.3 percent in the prior quarter. However, foreclosures increased compared to the prior quarter and a year earlier as pandemic-related accommodations wound down, with servicers initiating 19,524 new foreclosures in the first quarter of 2022.
FDIC releases May enforcement actions
On June 24, the FDIC released a list of 14 public enforcement actions taken against banks and individuals in May. These orders consist of “two consent orders, one modification of an 8(e) prohibition order, three orders to pay civil money penalty, three orders of prohibition, two section 19 orders, and one order of prohibition from further participation and order to pay, one order terminating amended supervisory prompt corrective action directive, and one order of termination of insurance.” Included is an order to pay a civil money penalty imposed against a Texas-based bank related to alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank failed “to obtain flood insurance or obtain an adequate amount of insurance coverage, at or before loan origination, for all structures in a flood zone, including multiple structures,” and failed “to force-place flood insurance, after loan origination, when the insurance on buildings securing the loan” was insufficient or nonexistent. The order assessed a $2,000 civil money penalty.
The FDIC also issued a consent order against a Utah-based bank based on alleged unsafe or unsound banking practices relating to the Bank Secrecy Act. The bank neither admitted nor denied the alleged violations but agreed to, among other things, “increase its oversight of the Bank's compliance with the BSA” and “conduct a comprehensive assessment of BSA/AML staffing needs.”
OCC reports on key risks facing the federal banking system
On June 23, the OCC released its Semiannual Risk Perspective for Spring 2022, which reports on key risks threatening the safety and soundness of national banks, federal savings associations, and federal branches and agencies. The OCC reported that as “banks continue to navigate the operational- and market-related impacts of the pandemic along with substantial government stimulus, current geopolitics have tightened financial conditions and increased downside risk to economic growth.” However, the OCC noted that banks’ financial conditions remain strong and that banks are well-positioned to “deal with the economic headwinds arising from geopolitical events, higher interest rates and increased inflation.”
The OCC highlighted operational, compliance, interest rate, and credit risks as key risk themes in the report. Observations include: (i) operational risk, including evolving cyber risk, is elevated, with an observed increase in attacks on the financial services industry given current geopolitical tensions; (ii) compliance risk remains heightened as banks navigate the current operational environment, regulatory changes, and policy initiatives; and (iii) credit risk remains moderate, with banks facing certain areas of weakness and potential longer-term implications resulting from the Covid-19 pandemic, inflation, and direct and indirect effects of the war in Ukraine. Staffing challenges among banks also present risks, with challenges posed by “strong competition” in the labor market.
The report also discussed the importance of appropriate due diligence of new digital asset products and services. The OCC said that it “continues to engage on an interagency basis to analyze various crypto-asset use cases,” and is looking to “provide further clarity on legal permissibility, as well as safety and soundness and compliance considerations related to crypto-assets” in the banking industry.
The OCC further stated it “will continue to monitor the development of climate-related financial risk management frameworks at large banks,” and reported that “OCC large-bank examination teams will integrate the examination of climate-related financial risk into supervision strategies and continue to engage with bank management to better understand the challenges banks face in this effort, including identifying and collecting appropriate data and developing scenario analysis capabilities and techniques.”
Fed announces enforcement actions against Minnesota and Arkansas state banks
On June 21, the Federal Reserve Board released civil penalty orders against two state banks, both relating to alleged violations of the National Flood Insurance Act (NFIA) and its implementing regulation, Regulation H. The first civil penalty order, against a Minnesota-based bank, assessed a $4,950 penalty for an alleged pattern or practice of violations of Regulation H but does not specify the number or the precise nature of the alleged violations. The second civil penalty order, against an Arkansas-based bank, assessed a $13,950 penalty for an alleged pattern or practice of violations of Regulation H without specifying the number or precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
CFPB to look at late fees on cards
On June 22, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) rules inherited by the CFPB from the Federal Reserve, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. However, the rules provide for a safe harbor limit that allows banks to charge certain fees, adjusted for inflation, regardless of the costs incurred. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.”
In 2010, the Federal Reserve Board approved implementing regulations for the CARD Act that allowed credit card issuers to charge a maximum late fee, plus an additional fee for each late payment within the next six billing cycles (subject to an annual inflation adjustment). As the CFPB reported, the safe harbor limits are currently set at $30 and $41 respectively. The CFPB pointed out that in 2020, credit card companies charged $12 billion in late fee penalties. “Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” CFPB Director Rohit Chopra said. Chopra issued a separate statement on the same day discussing the current credit card market, questioning whether it is appropriate for card issuers to receive enforcement immunity if they hike the cost of credit card late fees each year by the rate of inflation. “Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?” he asked.
Among other things, the ANPRM requests information relevant to certain CARD Act and Regulation Z provisions related to credit card late fees to “determine whether adjustments are needed.” The CFPB’s areas of inquiry include: (i) factors used by card issuers to determine late fee amounts and how the fee relates to the statement balance; (ii) whether revenue goals play a role in card issuers’ determination of late fees; (iii) what the costs and losses associated with late payments are for card issuers; (iv) the deterrent effects of late fees and whether other consequences are imposed when payments are late; (v) methods used by card issuers to facilitate or encourage timely payments such as autopay and notifications; (vi) how late are most cardholders’ late payments; and (vii) card issuers’ annual revenue and expenses related to their domestic consumer credit card operations. The Bureau stated that public input will inform revisions to Regulation Z, which implements the CARD Act and TILA. Comments on the ANPRM are due July 22.
The ANPRM follows a June 17 Bureau blog post announcing the agency’s intention to review a “host of rules” inherited from other agencies such as the FTC and the Federal Reserve, including the CARD Act. (Covered by InfoBytes here.)