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Financial Services Law Insights and Observations

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  • OCC counters CSBS’s arguments in fintech charter challenge

    Courts

    On April 29, the OCC responded to the Conference of State Bank Supervisors’ (CSBS) most recent challenge to the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). As previously covered by InfoBytes, CSBS filed a complaint last December opposing the OCC’s alleged impending approval of an SPNB for a financial services provider, arguing that the OCC is exceeding its chartering authority.

    The OCC countered, however, that the same fatal flaws that pervaded CSBS’s prior challenges (covered by InfoBytes here), i.e., that its challenge is unripe and CSBS lacks standing, still remain. According to the OCC, the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB—the proposed bank would conduct a full range of services, including deposit taking. Further, the OCC stated, even it if was an application for a SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe. As to standing, the OCC asserted that any alleged injury to CSBS or its members is purely speculative. Finally, the OCC contended that CSBS’s challenge fails on the merits because the challenge relies on the premise that the company’s application must be for a SPNB, not a national bank, because the company is not going to apply for deposit insurance but there is no requirement in the National Bank Act, the Federal Deposit Insurance Act, or the Federal Reserve Act that requires all national banks to acquire FDIC insurance.

    Courts State Issues CSBS OCC Fintech National Bank Act Preemption Fintech Charter

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  • OCC updates Credit Card Lending booklet

    Agency Rule-Making & Guidance

    On April 29, the OCC issued Bulletin 2021-22 announcing the revision of the Credit Card Lending booklet of the Comptroller’s Handbook. The booklet rescinds OCC Bulletin 2015-14 and replaces version 1.2 of the “Credit Card Lending” booklet that was issued on January 6, 2017. Among other things, the revised booklet (i) discusses the adoption of current expected credit loss methodology and the increased use of such modeling in credit card origination and risk management; (ii) reflects changes to OCC issuances; (iii) includes refining edits regarding supervisory guidance, sound risk management practices, and legal language; and (iv) includes revisions for clarity.

    Agency Rule-Making & Guidance OCC Comptroller's Handbook Credit Cards CECL

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  • State AGs urge Congress to rescind OCC’s “true lender” rule

    Federal Issues

    On April 21, a coalition of 26 state attorneys general sent a letter urging Congress to exercise its authority under the Congressional Review Act (CRA) and rescind the OCC’s “True Lender Rule” in order to “safeguard states’ fundamental sovereign rights to protect their citizens from financial abuse.” As previously covered by InfoBytes, the OCC’s final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement or (ii) funds the loan. The final rule also clarified that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” In their letter, the AGs expressed concern that the final rule “establishes a simplistic standard to redefine the meaning of ‘true lender,’” enabling predatory lenders to “circumvent” state interest-rate caps through “rent-a-bank” schemes, which would in turn allow banks to act as lenders in name only while passing state law exemptions for banks to non-bank entities. The letter references a complaint filed by eight state AGs against the OCC in January challenging the final rule (covered by InfoBytes here) and argues that in finalizing the rule the OCC “acted in a manner contrary to centuries of case law [and] the OCC’s own prior interpretation of the law,” and seeks to preempt state usury law and “infringe on the States’ historical police powers and facilitate predatory lending.” 

    In March, both House and Senate Democrats introduced CRA resolutions (see H.J. Res. 35 and S.J. Res. 15) intended to provide for congressional disapproval and invalidation of the OCC’s final rule. The OCC responded on April 14, arguing that “disapproval of the rule would return bank lending relationships to the previous state of legal and regulatory uncertainty, which. . . adversely affects the function of secondary markets and restricts the availability of credit.” The OCC further stated that the final rule is intended to enhance the agency’s ability to supervise bank lending and “does not change bank’s authority to export interest rates” nor does it “permit national banks to charge whatever rate they like” as both federal and state-chartered banks are required to conform to applicable interest rate limits. “Disparities of interest rates from state to state result from differences in the state laws that impose these caps, not OCC rules or actions,” the OCC stressed, adding that “[s]tates retain the authority to set interest rates.” However, the Conference of State Bank Supervisors sent a letter to Congress in support of S.J. Res. 15, disagreeing with the OCC and noting that the final rule, if it stands, would “eviscerate the power of state interest rate caps and rid state regulators of the most effective tool to protect consumers from such predatory lending.”

    Federal Issues OCC True Lender State Attorney General U.S. House U.S. Senate CRA Agency Rule-Making & Guidance State Issues Valid When Made

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  • OCC releases recent enforcement actions

    Federal Issues

    On April 15, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included among the actions is a March consent order against a Colorado-based bank, which requires the bank to waive any and all rights to the issuance of a Notice of Charges. According to the order, the Bank entered into a Formal Agreement in May 2016 for engaging in “certain unsafe and unsound practices related to the Bank’s capital, strategic planning, corporate governance, credit administration, trust administration, and Bank Secrecy Act/Anti-Money Laundering compliance program.” In addition, as a result of this order, the Bank is in “troubled condition,” as set forth in 12 C.F.R. § 5.51(c)(7)(ii), unless otherwise informed in writing by the OCC.

    Federal Issues OCC Enforcement Notice Privacy Rule Bank Secrecy Act

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  • OCC releases new Allowances for Credit Losses booklet

    Federal Issues

    On April 15, the OCC released the “Allowances for Credit Losses” (ACL) booklet to update, consolidate, and rescind various booklets in the Comptroller’s Handbook. The booklet highlights (i) the current expected credit losses methodology’s scope, risks associated with ACLs, and seven primary components used to estimate ACLs; (ii) documentation and considerations for expected credit losses, estimation processes, the maintenance of appropriate ACLs, the responsibilities of boards of directors and management, and examiner reviews of ACLs; and (iii) procedures to aid examiners when assessing appropriateness of a bank’s ACL methodologies and balances. In addition, the booklet is consistent with the “Interagency Policy Statement on Allowances for Credit Losses” included in OCC Bulletin 2020-49 and “Frequently Asked Questions on the New Accounting Standard on Financial Instruments—Credit Losses” conveyed by OCC Bulletin 2019-17.

    Federal Issues OCC Comptroller's Handbook

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  • Agencies issue MRMG; seek comments on BSA/AML compliance

    Agency Rule-Making & Guidance

    On April 9, the Federal Reserve Board, FDIC, and OCC, in consultation with FinCEN and the NCUA, issued a joint statement on the use of risk management principles outlined in the agencies’ “Supervisory Guidance on Model Risk Management” (known as the “model risk management guidance” or MRMG) as it relates to financial institutions’ compliance with Bank Secrecy Act/anti-money laundering (BSA/AML) rules. While the joint statement is “intended to clarify how the MRMG may be a useful resource to guide a bank’s [model risk management] framework, whether formal or informal, and assist with BSA/AML compliance,” the agencies emphasized that the MRMG is nonbinding and does not alter existing BSA/AML legal or regulatory requirements or establish new supervisory expectations. In conjunction with the release of the joint statement, the agencies also issued a request for information (RFI) on the extent to which the principles discussed in the MRMG support compliance by financial institutions with BSA/AML and Office of Foreign Assets Control requirements. The agencies seek comments and information to better understand bank practices in these specific areas and to determine whether additional explanation or clarification may be helpful in increasing transparency, effectiveness, or efficiency. Comments on the RFI are due within 60 days of publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve FDIC OCC FinCEN NCUA Bank Secrecy Act Anti-Money Laundering OFAC Risk Management Of Interest to Non-US Persons

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  • Prudential regulators exploring how institutions use AI

    Agency Rule-Making & Guidance

    On March 29, the FDIC, Fed, OCC, CFPB, and NCUA issued a request for information (RFI) seeking input on financial institutions’ use of artificial intelligence (AI), which may include AI-based tools and models used for (i) fraud prevention to identify unusual transactions for Bank Secrecy Act/anti-money laundering investigations; (ii) personalization of customer services; (iii) credit underwriting; (iv) risk management; (v) textual analysis; and (vi) cybersecurity. The RFI also solicits information on challenges financial institutions face in developing, adopting, and managing AI, as well as on appropriate governance, risk management, and controls over AI when providing services to customers. Additionally, the agencies seek input on whether it would be helpful to provide additional clarification on using AI in a safe and sound manner and in compliance with applicable laws and regulations. According to FDIC FIL-20-2021, while the agencies support responsible innovation by financial institutions and believe that new technologies, including AI, have “the potential to augment decision-making and enhance services available to consumers and businesses, . . . identifying and managing risks are key.” Comments on the RFI are due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Issues Artificial Intelligence Federal Reserve FDIC OCC CFPB NCUA Fintech

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  • Treasury issues emergency capital investment program FAQs

    Agency Rule-Making & Guidance

    On March 30, the U.S. Treasury Department issued frequently asked questions to provide timely guidance concerning all aspects of the Emergency Capital Investment Program (ECIP). The FAQs cover issues regarding:

    • The types of institutions eligible to participate in the ECIP;
    • Submission of an ECIP application and emergency investment lending plan;
    • How Treasury will decide allocation of the available capital among applicants that meet the thresholds for eligibility, including how well an applicant has responded to the needs of communities impacted by the Covid-19 pandemic;
    • Whether an institution can choose to issue preferred stock or subordinated debt in the ECIP; and
    • Compliance and reporting requirements.

    The ECIP was established by the Consolidated Appropriations Act of 2021 (covered by InfoBytes here), and will provide up to $9 billion in capital directly to Community Development Financial Institutions and minority depository institutions to provide, among other things, “loans, grants, and forbearance for small and minority businesses and consumers in low income communities” that may be disproportionately impacted by the Covid-19 pandemic. As previously covered in InfoBytes, on March 22, the OCC, Federal Reserve Board, and the FDIC published an interim final rule (IFR) to facilitate the implementation of the ECIP.

    Agency Rule-Making & Guidance ECIP OCC Federal Reserve Board FDIC Covid-19

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  • Agencies issue rulemaking to facilitate Emergency Capital Investment Program for CDFIs and MDIs

    Agency Rule-Making & Guidance

    On March 22, the OCC, Federal Reserve Board, and the FDIC published an interim final rule (IFR) to facilitate the implementation of the Emergency Capital Investment Program (ECIP). As previously covered by InfoBytes, the ECIP was established by the Consolidated Appropriations Act of 2021, and will provide up to $9 billion in capital directly to Community Development Financial Institutions and minority depository institutions to provide, among other things, “loans, grants, and forbearance for small and minority businesses and consumers in low income communities” that may be disproportionately impacted by the Covid-19 pandemic. The IFR outlines capital designations and investment eligibility criteria, and specifically notes that the agencies have revised “the capital rule to clarify that senior preferred stock will qualify as additional tier 1 capital and subordinated debt will qualify as tier 2 capital.” The ECIP will expire six months after the date on which the national Covid-19 emergency ends.

    Agency Rule-Making & Guidance Federal Reserve OCC FDIC CDFI Minority Depository Institution Covid-19

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  • Agencies to allow supplementary leverage ratio flexibility to expire

    Agency Rule-Making & Guidance

    On March 19, the OCC, FDIC, and Federal Reserve Board announced that the temporary changes to the supplementary leverage ratio (SLR) for depository institutions will expire as scheduled on March 31. As previously covered by InfoBytes, the federal banking agencies issued an interim final rule last May, which temporarily permitted depository institutions to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the SLR, enabling depository institutions to expand their balance sheets to provide additional credit to households and businesses in light of the Covid-19 pandemic. In connection with announcing its decision to allow the temporary SLR changes to expire, the Fed noted that due to “recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability.” The Fed noted it intends to “shortly seek comments on measures to adjust the SLR” and “will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements.”

    Agency Rule-Making & Guidance Federal Reserve FDIC OCC Covid-19

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