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  • FDIC to ease deposit-rate restrictions on less than well capitalized institutions

    Agency Rule-Making & Guidance

    On August 20, the FDIC announced a notice of proposed rulemaking (NPR) concerning interest rate restrictions applicable to less than well capitalized insured depository institutions. The NPR provides additional flexibility for these institutions to compete for funds and amends the methodology for calculating the national rate, national rate cap, and local rate cap for specific deposit products. According to the FDIC, the NPR is intended to “provide a more balanced, reflective, and dynamic national rate cap.” Specifically, under the NPR, the “national rate would be the weighted average of rates paid by all insured depository institutions on a given deposit product, for which data are available, where the weights are each institution's market share of domestic deposits,” while the national rate cap for particular products will be set at the higher of either (i) the 95th percentile of rates paid by insured depository institutions weighted by each institution’s share of total domestic deposits; or (ii) the proposed national rate plus 75 basis points. The NPR also will “simplify the current local rate cap calculation and process by allowing less than well capitalized institutions to offer up to 90 percent of the highest rate paid on a particular deposit product in the institution’s local market area.”

    Additionally, the FDIC seeks comments on alternative approaches to setting the national rate caps. According to the FDIC, “[s]etting the national rate cap too low could prohibit less than well capitalized banks from fairly competing for deposits and create an unintentional liquidity strain on those banks competing in national markets. . . . Preventing such institutions from being competitive for deposits, when they are most in need of predictable liquidity, can create severe funding problems.”

    Comments on the NPR are due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance FDIC Interest Rate

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  • FDIC, OCC approve final rule revising Volcker Rule

    Agency Rule-Making & Guidance

    On August 20, the OCC and the FDIC approved a final rule, which will amend the Volcker 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. (See the OCC press release here.) The Federal Reserve Board, CFTC, and SEC are expected to adopt the final rule as well. As previously covered by InfoBytes, the five financial regulators released a joint notice of proposed rulemaking in July 2018 designed to reduce compliance costs for banks and tailor Volcker Rule requirements to better align with a bank’s size and level of trading activity and risks. The final rule clarifies prohibited activities and simplifies 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 final rule also addresses the activities of foreign banking entities outside of the United States.

    Specifically, the final rule focuses on the following areas:

    • Compliance program requirements and thresholds. The final rule includes a three-tiered approach to compliance program requirements, based on the level of a banking entity’s trading assets and liabilities. Banks with total consolidated trading assets and liabilities of at least $20 billion will be considered to have “significant” trading activities and will be subject to a six-pillar compliance program. Banks with “moderate” trading activities (total consolidated trading assets and liabilities between $1 billion and $20 billion) will be subject to a simplified compliance program. Finally, banks with “limited” trading activities (less than $1 billion in total consolidated trading assets and liabilities) will be subject to a rebuttable presumption of compliance with the final rule.
    • Proprietary trading. Among other changes, the final rule (i) retains a modified version of the short-term intent prong; (ii) eliminates the agencies’ rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account; and (iii) adds a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. Additionally, banks subject to the market risk capital prong will be exempt from the short-term intent prong.
    • Proprietary trading exclusions. The final rule modifies the liquidity management exclusion to allow banks to use a broader range of financial instruments to manage liquidity. In addition, exclusions have been added for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and certain purchases or sales of instruments that do not meet the definition of “trading assets and liabilities.”
    • Proprietary trading exemptions. The final rule includes changes from the proposed rule related to the exemptions for underwriting and market making-related activities, risk-mitigating hedging, and trading by foreign entities outside the U.S.
    • Covered funds. Among other things, the final rule incorporates proposed changes to the covered funds provision concerning permitted underwriting and market making and risk-mitigating hedging with respect to such funds, as well as investments in and sponsorships of covered funds by foreign banking entities located solely outside the U.S.

    FDIC board member Martin J. Gruenberg voted against the rule, stating the “final rule before the FDIC Board today would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits.” Gruenberg emphasized that the final rule “includes within the definition of trading account only one of these categories of fair valued financial instruments—those reported on the bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of financial instruments subject to the Volcker Rule.”

    Once approved by the Federal Reserve, SEC, and CFTC, the final rule will take effect January 1, 2020, with banks having until January 1, 2021, to comply. Prior to the compliance date, the 2013 rule will remain in effect. Alternatively, banking entities may elect to voluntarily comply, in whole or in part, with the final rule’s amendments prior to January 1, 2021, provided the agencies have implemented necessary technological changes.

    Agency Rule-Making & Guidance FDIC Federal Reserve OCC CFTC SEC Bank Holding Company Act Volcker Rule Of Interest to Non-US Persons

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  • OCC finalizes assessment fee refunds

    Agency Rule-Making & Guidance

    On August 21, the OCC published in the Federal Register a final rule providing partial assessment refunds to banks under OCC jurisdiction that exit the OCC’s jurisdiction within the prescribed timeframe. As previously covered by InfoBytes, in March, the OCC proposed to maintain semiannual assessment fee payments, but allow for partial refunds equal to the prospective half of the assessment for banks that leave the OCC’s jurisdiction between the date of the applicable Call Report and the date of collection. The final rule was adopted without substantive changes to the proposed rule and is effective as of September 20.

    Agency Rule-Making & Guidance OCC Assessments

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  • NCUA allows credit unions to serve hemp businesses

    Agency Rule-Making & Guidance

    On August 19, the NCUA released interim guidance allowing federally insured credit unions to service hemp businesses. The guidance notes that, as of December 20, hemp is no longer a controlled substance at the federal level—the Agriculture Improvement Act of 2018 (2018 Farm Bill) removed hemp from Schedule I of the Controlled Substances Act. However, hemp may not be produced lawfully under federal law, beyond a 2014 pilot program, until the USDA promulgates regulations and guidelines to implement the hemp production provisions of the 2018 Farm Bill. The guidance instructs credit unions to be aware of federal, state, and tribal laws and regulations that apply to any hemp-related businesses they may service and to have Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance programs equal to the level of complexity and risks involved. The guidance emphasizes that lending to lawfully operating hemp-related businesses is permissible, but that the lending must be done in accordance with NCUA’s regulations for lending, and appropriate underwriting standards must be considered. NCUA notes that the guidance will be updated once the USDA regulations are finalized.

    Agency Rule-Making & Guidance NCUA Credit Union Bank Secrecy Act Anti-Money Laundering

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  • California DBO releases draft regulations for commercial financing disclosures

    State Issues

    In July, the California Department of Business Oversight (DBO) issued a request for comment on the first draft of regulations implementing the state’s new law on commercial financing disclosures. As previously covered by InfoBytes, in September 2018, the California governor signed SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. Most notably, the act requires financing entities subject to the law to disclose in each commercial financing transaction—defined as an “accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes”—the “total cost of the financing expressed as an annualized rate” in a form to be prescribed by the DBO.

    The draft regulation provides general format and content requirements for each disclosure, as well as specific requirements for each type of covered transaction. In addition to the detailed information in the draft regulation, the DBO has released model disclosure forms for the six financing types, (i) closed-end transactions; (ii) open-ended credit plans; (iii) general factoring; (iv) sales-based financing; (v) lease financing; and (vi) asset-based lending. Additionally, the draft regulation uses an annual percentage rate (APR) as the annualized rate disclosure (as opposed to the annualized cost of capital, which was considered in the December 2018 request for comments, covered by InfoBytes here). Moreover, the draft regulation provides additional information for calculating the APR for factoring transactions as well as calculating the estimated APR for sales-based financing transactions.

    Comments on the draft regulations are due by September 9.

    State Issues Small Business Lending Fintech Disclosures APR Commercial Finance Agency Rule-Making & Guidance Nonbank

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  • HUD revises proposed FHA mortgage lender certification

    Agency Rule-Making & Guidance

    On August 14, HUD published revisions in the Federal Register to the Federal Housing Administration’s (FHA) lender certification requirements originally issued in May. (Previously covered by InfoBytes here.) In response to comments received on its initial proposal, HUD released a proposed streamlined FHA Annual Lender Certification, which removes a broad statement regarding lenders certifying compliance with all HUD requirements in order to maintain FHA approval. Commenters generally recommended HUD: “(1) Rescind the annual certification statements since the National Housing Act does not require certification of compliance with FHA eligibility requirements or completion of an annual certification; or (2) revise the annual certification statements to a general acknowledgement of the existence of policies and procedures that are reasonably designed to ensure material compliance.” Comments are due September 13.

    Agency Rule-Making & Guidance HUD FHA Mortgage Lenders Mortgages Compliance

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  • FHA releases individual condo rule

    Agency Rule-Making & Guidance

    On August 14, the FHA issued a new condominium approval regulation, along with policy implementation guidance, which allows for certain individual condominium units to be eligible for FHA mortgage insurance even if the condominium project is not FHA approved. Among other things, the rule also: (i) extends the recertification requirement for approved condominium projects from two to three years; and (ii) allows more mixed-use projects to be eligible for FHA insurance. Under the new policy guidance in the FHA’s Single Family Handbook, an individual unit may be eligible for single-unit approval if the individual condominium unit is located in a completed project that is not approved and: (i) for projects with 10 or more units, no more than 10 percent of individual units can be FHA-insured; and (ii) for projects with less than 10 units, no more than two individual units can be FHA-insured. The new policy is effective October 15.

    Agency Rule-Making & Guidance FHA Mortgages

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  • FHFA issues final rule on new credit score models

    Agency Rule-Making & Guidance

    On August 13, the FHFA announced its final rule on the validation and approval of third-party credit score model(s) that can be used by Fannie Mae and Freddie Mac (the GSEs), implementing Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule defines a four-phase process for a GSE to validate and approve credit score models: (i) solicitation of applications from credit score model developers; (ii) submission and review of applications; (iii) credit score assessment; and (iv) business assessment, which, among other things, evaluates the impact of using the credit score model on industry operations and mortgage market liquidity. Additionally, the final rule lays out timing and notices for GSE decisions under the process. After a GSE approves or disapproves of an application, within 45 days the FHFA must approve or disapprove of the GSE’s proposed determination. If any applications are approved, the credit score solicitation will be made publicly available. The rule will take effect 60 days after it is published in the Federal Register.

    Agency Rule-Making & Guidance FHFA Credit Scores Fannie Mae Freddie Mac EGRRCPA

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  • Federal agencies update host state loan-to-deposit ratios

    Agency Rule-Making & Guidance

    On August 9, the Federal Reserve Board, the FDIC, and the OCC released the current host state loan-to-deposit ratios for each state or U.S. territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the 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 yearly host state loan-to-deposit ratios. If a bank’s statewide ratio is less than one-half of the yearly 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. Banks that do not meet the compliance requirements are subject to sanctions by the OCC. Notably, Section 109 is not applicable to federal savings associations or community banks with covered interstate branches.

    Agency Rule-Making & Guidance OCC Federal Reserve FDIC Bank Compliance

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  • Fed issues final rules related to rate decreases

    Agency Rule-Making & Guidance

    On August 12, the Federal Reserve Board (Fed) published two final rules following its July 31 decision to lower the target range for the federal funds rate to 2 - 2.25 percent. These rules affect the primary and secondary credit available to depository institutions as a short-term backup source of funding, as well as reserve requirements that depository institutions must meet.

    A final rule amending Regulation A (Extensions of Credit by Federal Reserve Banks) was issued to reflect the Fed’s approval of a one-quarter percent decrease, from 3 percent to 2.75 percent. Additionally, because the formula for the secondary credit rate incorporates the primary rate, the secondary credit rate also decreased by one-quarter percentage point, from 3.50 percent to 3.25 percent. The amendments are effective August 12, with rate changes for primary and secondary credit applicable on August 1.

    A second final rule amending Regulation D (Reserve Requirements of Depository Institutions) was issued to reflect approval of a one quarter percent decrease to the rate of interest paid on balances maintained to satisfy reserve balance requirements (IORR), along with the rate of interest paid on excess balances (IOER) maintained at Federal Reserve Banks by or on behalf of eligible institutions. The final rule specifies that both the IORR and the IOER are 2.10 percent. The amendments are effective August 12, with IORR and IOER rate changes applicable on August 1.

    Agency Rule-Making & Guidance Federal Reserve Regulation A Regulation D Bank Compliance

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