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On September 21, the Federal Reserve Board (Fed) issued an Advance Notice of Proposed Rulemaking (ANPR) inviting public comment on its approach for modernizing the regulations that implement the Community Reinvestment Act (CRA). The Fed’s ANPR follows a final rule to modernize the regulatory framework implementing the CRA issued by the OCC in May (covered by a Buckley Special Alert), which was met by opposition from community coalitions and House Democrats (covered by InfoBytes here and here). Neither the FDIC nor the Fed joined in promulgating the OCC’s final rule, which is technically effective October 1, 2020, but provides for at least a 27-month transition period for compliance based on a bank’s size and business model.
According to the Fed, the ANPR’s objectives are to increase the clarity, consistency and transparency of CRA supervisory expectations and standards, while minimizing data collection burdens. The following are key takeaways from the ANPR:
- Promoting financial inclusion. The ANPR seeks feedback on ways to strengthen regulations and evaluate how banks meet the needs of low- and moderate-income (LMI) communities and address inequities in credit access. The ANPR proposes, among other things, (i) ways to encourage more activities that support minority depository institutions (MDIs), Community Development Financial Institutions, as well as women-owned financial institutions and low-income credit unions outside of a bank’s assessment area; (ii) seeks feedback on additional incentives for investing in and partnering with MDIs; and (iii) requests input on expanding geographic areas for community development activities to allow banks to receive special CRA credit for activities in areas with high unmet needs.
- Metrics. The ANPR introduces a metrics-based approach to bring greater clarity, consistency, and transparency to how banks are assessed and rated. The ANPR proposes assessing banks’ CRA performance using a Retail Test and a Community Development Test with options to be evaluated under certain subsets based on their size. According to the Fed’s fact sheet, the metrics would be “tailored to local market conditions and adjust[ed] automatically to reflect structural economic differences and changes over the business cycle.” Additionally, the proposed retail lending metrics formulas use the number of a bank’s loans, rather than the dollar amount of those loans, to avoid weighting larger loans more heavily than smaller ones.
- Internet banks. The ANPR contemplates defining an internet bank for CRA purposes and allowing such internet banks to delineate nationwide assessment areas to “more holistically capture their banking activities.”
- CRA deserts. The ANPR considers designating “CRA deserts”—“areas with little bank presence and corresponding lesser availability of banking products and services and community development activities”—and allowing banks to receive credit for community development activities in designated areas of need outside of their assessment areas. The ANPR also suggests providing additional consideration if a bank operates a branch in a designated banking desert within an assessment area.
- CRA-approved activities. The ANPR proposes publishing an illustrative, non-exhaustive list of community development activities that qualify for CRA consideration and seeks feedback on an activity pre-approval process.
- Small banks. The ANPR proposes eliminating the current intermediate small bank category and establishing an asset-size threshold of $750 million or $1 billion to distinguish between small and large retail banks. Currently, the asset threshold between small and intermediate small banks is $326 million, and the threshold between intermediate small and large banks is $1.305 billion. Small retail banks could continue to be evaluated under the current CRA framework but would have the option to be evaluated under certain of the new subtests. Small banks are also exempt from additional deposit and certain other data collection requirements.
- Consistent approach. Fed Chair Jerome Powell released a statement stressing that the ANPR “is an important step forward in laying a foundation for the [Fed, OCC, and FDIC] to build a shared, modernized CRA framework that has broad support.”
Comments on the ANPR are due 120 days after publication in the Federal Register.
On September 23, the SEC voted to adopt amendments to the rules governing its whistleblower program. According to the SEC, the amendments are meant to “provide greater transparency, efficiency and clarity, and to strengthen and bolster the program.” The amendments were proposed for public comment in June 2018 (covered by InfoBytes here) and have been adopted with some changes. Highlights include:
- Award Determinations. The amendments (i) add Exchange Act Rule 21F-6(c), which provides a presumption that meritorious claimants will receive the statutory maximum amount, for awards $5 million or less, where none of the negative award criteria specified in Rule 21F-6(b) are present, with certain exceptions; (ii) amend the definition of “action” to allow awards based on deferred prosecution agreements and non-prosecution agreements entered into by the DOJ or a state attorney general in a criminal case, or settlement agreements entered into by the SEC outside of a judicial or administrative proceeding that address securities law violations; and (iii) codify that a law-enforcement or separate regulatory action does not qualify as a “related action,” if there is a separate award scheme that more appropriately applies. Additional details can be found in the SEC Office of the Whistleblower’s concurrently released staff guidance regarding the process for determining award amounts for eligible whistleblowers.
- Definition of Whistleblower. The amendments establish a uniform definition of “whistleblower” that will apply to all aspects of Exchange Act Section 21F, in response to the Supreme Court's decision in Digital Realty Trust, Inc. v. Somers (as previously covered in a Buckley Special Alert).
- Increased Efficiency. The amendments (i) allow for a permanent bar of any applicant from seeking an award after that applicant has submitted three frivolous award applications; and (ii) allow for a summary disposition procedure for certain common denials.
- Others. The amendments also clarify and enhance certain policies, practices, and procedures in implementing the program, including allowing the waiver of Tip, Complaint or Referral (TCR) filing requirements if a whistleblower complies with the requirements within 30 days of (i) first providing the information; or (ii) first obtaining notice of the TCR filing requirements.
The amendments are effective 30 days after publication in the Federal Register.
On September 14, the Financial Crimes Enforcement Network (FinCEN) issued a final rule to align Bank Secrecy Act (BSA) requirements applicable to most banks with the requirements applicable to banks lacking a “federal functional regulator.” In particular, the final rule will require all non-federally regulated banks — including private banks, non-federally insured credit unions, and certain trust companies — to establish and implement anti-money-laundering (AML) programs and customer identification programs (CIP).
The Department of Housing and Urban Development earlier this month issued a final disparate impact regulation under the Fair Housing Act (Final Rule). HUD’s new Final Rule is intended to align its disparate impact regulation, adopted in 2013 (2013 Rule), with the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Inclusive Communities). While the new Final Rule is a notable development, the relatively recent Supreme Court decision makes it unclear to what extent courts and federal agencies will look to the rule for guidance.
On September 16, the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting comments on questions concerning potential regulatory amendments under the Bank Secrecy Act (BSA). According to the ANPRM, the proposed amendments “are intended to modernize the regulatory regime to address the evolving threats of illicit finance, and provide financial institutions with greater flexibility in the allocation of resources, resulting in the enhanced effectiveness and efficiency of anti-money laundering programs.” The ANPRM stems from FinCEN’s evaluation of recommendations received from the Bank Secrecy Act Advisory Group, which was established in 2019 to develop recommendations for strengthening the national AML regime. The ANPRM proposes, among other things, that all covered financial institutions subject to ALM program regulations would be required to maintain an “effective and reasonably designed” AML program that: (i) “assesses and manages risk as informed by a financial institution’s risk assessment, including consideration of [AML] priorities to be issued by FinCEN consistent with the proposed amendments”; (ii) “provides for compliance with [BSA] requirements”; and (iii) “provides for the reporting of information with a high degree of usefulness to government authorities.” The ANPRM also seeks comments on whether an explicit requirement for a risk assessment process should be established within the AML program regulations, as well as whether FinCEN’s director should issue a list of national AML priorities (tentatively titled “Strategic Anti-Money Laundering Priorities”) every two years. Comments are due by November 16.
On September 15, the CFPB released its “Outline of Proposals Under Consideration and Alternatives Considered” (Outline) for implementing the requirements of Section 1071 of the Dodd-Frank Act, which instructs the Bureau to collect and disclose data on lending to women and minority-owned small businesses. The detailed Outline describes the proposals under consideration and discusses other relevant laws, the regulatory process, and potential economic impacts. The Bureau also released a high-level summary of the Outline. Highlights of the proposals include:
- Scope. The Bureau is considering proposing that the data collection and reporting requirements would apply only to applications for credit by a small business. Financial institutions would not be required to collect and report data for women- and minority-owned businesses that are not considered “small,” as defined by the Small Business Act and the Small Business Administration’s (SBA) implementing regulations.
- Covered Lenders. The Bureau is considering proposing a broad definition of “financial institution” that would apply to a variety of entities engaged in small business lending, but is also considering proposing exemptions based on either a size-based (examples include $100 million or $200 million in assets), or activity-based threshold (examples range from 25 loans or $2.5 million to 100 loans or $10 million), or both.
- Covered Products. The Bureau is considering proposing exemptions from the definition of “credit” to include consumer-designated credit, leases, factoring, trade credit, and merchant cash advances.
- Application. Because an “application” would trigger requirements under Section 1071, the Bureau is considering proposing a definition that is largely consistent with Regulation B; however, the Bureau is also considering “clarifying circumstances,” such as inquiries/prequalifications, that would not be reportable.
- Data Points. The Bureau is considering a range of data points for collection, including, in addition to the mandatory data points required by Section 1071, “discretionary data points” to aid in fulfilling the purposes of Section 1071: “pricing, time in business, North American Industry Classification System (NAICS) code, and number of employees.”
- Privacy. The Bureau is considering using a “balancing test” for public disclosure of the data. Specifically, data “would be modified or deleted if its disclosure in unmodified form would pose risks to privacy interests that are not justified by the benefits of public disclosure.”
Additionally, the Bureau will convene a panel, as required by the Small Business Regulatory Enforcement Fairness Act (SBREFA), in October 2020 to “consult small entities regarding the potential impact of the proposals under consideration.” Feedback on the proposals is due no later than December 14.
Recently, the OCC, Federal Reserve Board, and FDIC (collectively, “the agencies”) adopted four interim final rules issued as a result of the Covid-19 pandemic as two final rules. Highlights of the rules include:
- Regulatory Capital. The agencies issued a final rule covering revisions to the regulatory capital rule and the liquidity coverage ratio (LCR) rule made under three interim final rules. The final rule, which adopts three of the interim final rules as final with no changes, (i) allows financial institutions to participate in the Money Market Mutual Fund Liquidity Facility (MMLF) and Paycheck Protection Program Lending Facility (PPPLF) by neutralizing the regulatory capital effects of participating in each of the programs (covered by InfoBytes here and here); and (ii) modifies the agencies’ LCR rule to support participation in the MMLF and the PPPLF (covered by InfoBytes here).
- Appraisals and Evaluations. The agencies adopted as final, with one revision, an interim final rule (covered by InfoBytes here) allowing regulated financial institutions to defer completion of appraisals and evaluations for certain residential and commercial real estate transactions, excluding those involving the acquisition, development, and construction of real estate. Financial institutions are allowed up to 120 days from the closing date to obtain the required appraisal or evaluation in order to expedite the liquidity needs of borrowers. The final rule is effective through December 31.
On September 14, the Financial Crimes Enforcement Network (FinCEN) issued a final rule, under its sole authority, to remove the anti-money laundering (AML) program exemption for non-federally regulated banks. According to FinCEN, the rulemaking was prompted by the “gap in AML coverage” between banks that have a federal functional regulator and those that do not, which has created “a vulnerability to the U.S. financial system that could be exploited by bad actors.” The final rule would bring non-federally regulated banks that are currently required to comply with certain Bank Secrecy Act (BSA) obligations, such as filing currency transaction reports and suspicious activity reports to detect unusual activity, into compliance with the same standards applicable to all other banks. Specifically, the final rule outlines minimum standards for non-federally regulated banks to ensure the establishment and implementation of required AML programs, and extends customer identification program (CIP) requirements, as well as beneficial ownership requirements outlined in FinCEN’s 2016 customer due diligence (CDD) rule (covered by InfoBytes here), to banks not already subject to these requirements. FinCEN believes that non-federally regulated banks will be able to take a risk-based approach when tailoring their AML and CIP programs to fit their size, needs, and operational risks, and that those banks should be able to build on “existing compliance policies and procedures and prudential business practices to ensure compliance. . .with relatively minimal cost and effort.” The final rule takes effect November 16.
For more details, please see a Buckley Special Alert on the final rule.
On September 10, the OCC issued Bulletin 2020-81 to address sound risk management principles concerning loan purchase activities. The OCC reminded banks that loan purchase activities “are subject to certain regulatory standards and long-standing risk management guidelines,” and that banks are expected to engage in these activities “in a safe and sound manner and in compliance with applicable accounting standards, laws, and regulations.” Banks should also ensure loan purchase activities align with strategic plans and are supported by sound risk management systems, the OCC added. The Bulletin includes examples of sound risk management of loan purchase activities, such as (i) developing well-defined strategic plans; (ii) conducting underwriting analysis and due diligence of loans prior to purchase; (iii) evaluating ways loan purchase activities may affect “credit, strategic, reputation, interest rate, liquidity, compliance, and operational risks”; and (iv) ensuring policies and procedures “support effective processes for engaging in loan purchase activities.” Other topics addressed include credit administration, such as due diligence and independent credit analysis, loan portfolio and pool purchases, and recourse arrangements. The OCC also emphasized that because entering into new, modified, or expanded products or services may alter a bank’s risk profile, “bank management should engage in sound risk management to identify, measure, monitor, and control the risks associated with new loan purchase activities.”
On September 9, the OCC announced an updated version of its “Federal Branches and Agencies” booklet of the Comptroller’s Licensing Manual. According to Bulletin 2020-80, the revised booklet clarifies and updates the OCC’s policies and processes covering the establishment, operations, and other corporate activities of federally licensed offices of foreign banks, including (i) notice and application filing requirements; (ii) decision factors and criteria; and (iii) removal of internal licensing procedures.
- Daniel P. Stipano to discuss "High standards: Best practices for banking marijuana-related businesses" at the ACAMS AML & Anti-Financial Crime Conference
- Daniel P. Stipano to discuss "Wait wait ... do tell me! Where the panelists answer to you" at the ACAMS AML & Anti-Financial Crime Conference
- Matthew P. Previn and Walter E. Zalenski to discuss "Is valid when made ... valid?" at the Women in Housing & Finance Partner Series webinar
- Warren W. Traiger and Caroline K. Eisner to discuss "CRA modernization and the OCC final rule" at CBA Live
- Daniel R. Alonso to discuss "Transnational corruption: A chat with former U.S. federal prosecutors in New York" at Marval Live Talks
- Sherry-Maria Safchuk and Lauren Frank to discuss "New CFPB interpretation on UDAAP" at a California Mortgage Bankers Association Mortgage Quality and Compliance Committee webinar
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- H Joshua Kotin to discuss "Mortgage servicing in a recession: Early intervention, loss mitigation and more" at the NAFCU Virtual Regulatory Compliance Seminar
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute