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On February 14, the FDIC released economic scenarios—developed in coordination with the Federal Reserve Board (Fed) and the OCC—for certain supervised financial institutions with consolidated assets of more than $250 billion. The Dodd-Frank Act requires financial companies to run stress tests using the scenarios. According to the FDIC, the scenarios cover a baseline scenario that is “in line with a survey of private sector economic forecasters” and a severely adverse scenario “designed to assess the strength and resilience of financial institutions.”
As previously reported by InfoBytes, the OCC and the Fed both released their stress testing scenarios on February 6.
On February 7, the FDIC approved a proposed national bank’s application for deposit insurance and consent to merge with its parent company. The FDIC found that financial projections show the bank, which will offer banking products through mobile, online, and phone-based banking channels, will be “well capitalized” based on initial paid-in capital funds of no less than $104.4 million to be provided through the transfer of assets and liabilities. During the first three years of operation, the bank must maintain a Tier 1 leverage ratio of 10 percent or greater, and may also be required to maintain higher minimum capital requirements as dictated by the bank’s operating plan or as required by the OCC pursuant to its regulatory authority. According to the FDIC, the proposed national bank will be located in Utah, and while it will have no branches, deposit-taking ATMs, or offices available to the public, it will offer full-service banking products and combine “traditional retail banking approaches with modern technology.”
The FDIC noted that deposit insurance will not take effect until the bank has been granted a charter and its banking operation has been fully approved by the OCC to operate as a depository institution (in August 2018, the OCC granted preliminary conditional approval of the bank’s de novo chapter application). According to the FDIC, approval is conditioned on the Federal Reserve Board granting final approval to the parent company to become a bank holding company.
On February 6, the Federal Reserve Board (Fed) released the hypothetical scenarios banks and supervisors will use to conduct the 2020 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress tests exercises for large bank holding companies and large U.S. operations of foreign firms. This year’s stress tests will evaluate 34 large banks with more than $100 billion in total assets to ensure that these banks have adequate capital and processes to continue lending to households and businesses, even during a severe recession. Both scenarios—baseline and severely adverse—include 28 variables that cover domestic and international economic activity. In addition, banks with large trading operations must also factor in a global market shock component as part of their scenarios. Capital plan and stress testing submissions are due by April 6. The Fed noted that it “continues to work toward having the stress capital buffer in place for this year’s stress tests,” and that “[t]he release of these hypothetical scenarios does not affect that separate rulemaking process.”
On February 5, the House Financial Services Committee held a hearing titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps” to discuss policies relating to state interest rate caps and permissible interest rates on small dollar loans such as payday and car-title loans. As previously covered by a Buckley Special Alert, in November, the OCC and the FDIC proposed rules meant to override the 2015 Madden v. Midland funding decision from the U.S. Court of Appeals for the Second Circuit, and reinforce that when a national bank or savings association, or state chartered bank, transfers a loan, the permissible interest rate after the transfer is the same as it was prior to the transfer. In January, however, a group of attorneys general from 21 states and the District of Columbia submitted a comment letter to the OCC claiming the proposed rule would encourage predatory lending through “rent-a-bank schemes.” (Covered by InfoBytes here.) During the hearing, Committee Chairwoman Maxine Waters (D-CA), expressed concern that the two agency proposals would harm consumers by allowing non-banks to partner with banks and enable non-bank lenders to “peddle harmful short-term, triple-digit interest rate loans.” Representative Rashida Tlaib (D-MI) echoed that concern when she suggested that “rent-a-bank” schemes allow non-banks to dodge state interest rate laws. Many Republicans had views differing from those expressed by Tlaib and Waters. North Carolina Representative Patrick McHenry remarked that the proposals from the OCC and the FDIC merely formalized the “valid when made” rule that had been in use for over a century. At the hearing, HR 5050, which would cap federal interest rates on certain small loans at 36 percent, was also discussed, with several Democrats stressing that the cap may negatively affect credit availability to some consumers.
On January 30, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC issued a notice of proposed rulemaking to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule (Rule). As previously covered by InfoBytes, last fall the regulators signed off on final revisions to the Rule to simplify and tailor its restrictions on a banking entity’s ability to engage in proprietary trading and own certain funds. Specifically, the proposed amendments would modify the restrictions for banking entities investing in, sponsoring, or having certain relationships with covered funds, including simplifying provisions related to foreign public funds, loan securitizations, and small business investment companies. The amendments would also, among other things, (i) limit the extraterritorial impact of the Rule on certain foreign funds offered by foreign banks to foreign investors; (ii) modify and propose several existing exclusions to allow banking entities to invest in or sponsor certain types of funds—subject to certain safeguards—such as credit funds, venture capital funds, family wealth management vehicles, and customer facilitation funds; and (iii) permit intraday extensions of credit, payment, clearing, and settlement transactions between a banking entity and covered funds the banking entity advises or sponsors, or with which the banking entity has certain other relationships. Comments will be accepted through April 1.
On January 29, OCC Comptroller Joseph Otting testified at a hearing held by the House Financial Services Committee to discuss the OCC’s Community Reinvestment Act (CRA) modernization proposal. (See Buckley Special Alert covering the joint notice of proposed rulemaking issued last December by the OCC and FDIC.) Committee Chairwoman Maxine Waters (D-CA) expressed concerns with the NPR, arguing that the proposal “runs contrary to the purpose of the CRA and would lead to widespread bank disinvestment from low- and moderate-communities throughout the country.” Waters cited additional concerns with the NPR, including what she believes are efforts by the OCC “to deregulate megabanks” and “greenlight rent-a-bank schemes that allow lenders to skirt state usury caps.”
In his written testimony, Otting reiterated that the NPR is intended to strengthen and modernize CRA regulations and that the proposal does not permit redlining. “Nothing in this proposal changes the agencies’ authority to enforce fair lending laws to prevent discrimination and redlining. The regulations implementing the Fair Housing Act and the Equal Credit Opportunity Act prohibit discrimination and redlining,” Otting stressed in his oral statement. “These regulations are not changed in any way by this proposal.” (Emphasis in the original.) Otting also defended several of the proposed amendments that would, among other things, (i) remove uncertainty that discourages investments; (ii) focus on a bank’s sustained commitment to meeting a community’s credit needs and rewarding long-term investment; and (iii) accommodate banks of different sizes and business models by allowing small banks with less than $500 million in total assets to choose between the existing and the proposed revised framework for their evaluations. During the hearing, Otting also refuted the perception that the NPR employs the use of a single metric to determine a bank’s CRA rating, stating “there is no one ratio in this proposal. . .the average regional bank will have 502 measurement points so every community would be measured by units and dollars and at the top of the house it would be dollars.”
When Congressman Brad Sherman (D-CA) asked about the OCC’s recent request for bank-specific data to inform the NPR (previously covered by InfoBytes here) questioning why the agencies “want to adopt a rule on such a quick timetable when [they] still don’t have the information,” Otting responded that the additional information requested from the banks is meant to help validate the OCC’s analysis and conclusions. However, when the discussion turned to whether Congress could access the data and analysis used to create the NPR, Otting stated that he would be happy to discuss the data and analysis in person but that the information should not be publicly distributed. Waters stated Congress would subpoena the information if necessary. Otting also confirmed that the 60-day comment period of the NPR (which closes March 9) would not be extended, and that the goal would be to finalize the rule within 60 to 70 days after the comment period ends. With respect to the Federal Reserve’s decision not to join in the notice of proposed rulemaking, Otting said, “We have thousands of rules, regulations and guidance that differ amongst the agencies. So no…I do not see it as an impediment at all.” As previously covered by InfoBytes, earlier this month Federal Reserve Governor Lael Brainard discussed the Fed’s approach to the CRA modernization process and explained why the Fed chose not to join in the NPR.
On January 23, the OCC issued a notice of charges against five former senior executives for allegedly failing to adequately ensure a national bank’s incentive compensation plans regarding sales practices operated in accordance with bank policy. (See previous InfoBytes coverage here.) The relief sought by the OCC against these individuals could include a lifetime prohibition from participating in the banking industry, a personal cease and desist order, and/or civil money penalties. Under federal law, the individuals may request a hearing to challenge the allegations and relief sought by the OCC. The same day, the OCC also announced settlements with the bank’s former chairman/CEO, its former chief administrative officer and director of corporate human resources, and its former chief risk officer for their alleged roles in the bank’s sales practices misconduct. According to the OCC, the actions serve to, among other things, reinforce the agency’s expectations that management and employees of regulated entities comply with applicable laws and regulations.
On January 21, a bipartisan collation of attorneys general from 21 states and the District of Columbia, along with the Hawaii Office of Consumer Protection, submitted a comment letter in response to the OCC’s proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. (See Buckley Special Alert on the proposed rule.) The coalition, led by California, Illinois, and New York, urges the OCC to withdraw the proposed rule. Among their concerns, the AGs argue that the OCC’s proposal conflicts with the National Bank Act and Dodd-Frank, exceeds the OCC’s statutory authority, and is in violation of the Administrative Procedure Act. Specifically, the AGs claim that the proposed rule conflicts with National Bank Act (NBA) provisions that grant benefits of federal preemption only to national banks and no one else. Moreover, the AGs assert that Congress explicitly stated in Dodd-Frank that “that the benefits of federal preemption provided by the NBA accrue only to [n]ational [b]anks,” (emphasis in original) and argue that the proposed rule would contravene “this important limitation” and “cloak non-banks in [the NBA’s] preemptive power.” Moreover, the NBA sections say “nothing about interest chargeable by assignees, transferees, or purchasers of bank loans,” the AGs write.
The AGs also argue that the proposed rule would facilitate predatory “rent-a-bank schemes” by allowing non-bank entities to ignore state interest rate caps and usury laws. “The OCC has not addressed, even summarily, how the [p]roposed [r]ule, if adopted, will serve to incentivize and sanction predatory rent-a-bank schemes,” the AGs state. “This failure to consider the substantial negative consequences this rule would have on consumer financial protection across the country renders the OCC’s [p]roposed [r]ule arbitrary and capricious.” Furthermore, the AGs contend that the OCC’s proposed rule contains no factual findings or reasoned analysis to support its proposal to extend NBA preemption to all non-bank entities that purchase loans from national banks. “[T]his is beyond the agency’s power,” the AGs argue, asserting that “[t]he OCC simply ‘may not rewrite clear statutory terms to suit its own sense of how the statute should operate.’”
On January 21, the OCC assessed a nearly $18 million civil money penalty against a national bank lender for alleged violations of the Flood Disaster Protection Act (FDPA). According to the OCC, the bank allegedly maintained FDPA policies and procedures which allowed the bank’s third-party servicer to extend the 45-day period after notification to the borrower that the flood insurance did not adequately cover the collateral. The OCC alleged that this resulted in the “untimely force placement of flood insurance” on loans secured by buildings or mobile homes located in special flood hazard areas. The bank agreed to pay the penalty without admitting or denying any wrongdoing.
On January 16, 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. The new enforcement actions include formal agreements, prohibition orders, and terminations of existing enforcement actions against individuals and banks. Included among the actions is a formal agreement issued against an Illinois-based bank on December 18 for alleged unsafe or unsound practices relating to, among other things, consumer compliance. The agreement requires the bank to (i) establish a compliance committee to monitor the bank’s progress in complying with the agreement’s provisions; (ii) report such progress to the bank’s board on a quarterly basis; and (iii) implement a written consumer compliance program. This program must also include a policies and procedures manual that covers all consumer protection laws, rules, and regulations to which the bank should adhere, an independent audit program, and training of bank personnel in the consumer protection laws, rules, and regulations as appropriate.
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