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Financial Services Law Insights and Observations

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  • OCC seeks fintech research

    Fintech

    On July 25, the OCC announced that it is seeking academic papers and policy-focused research on the effects of financial technology entities and nonbanks on banking and the markets for lending, deposit, and payment services. According to the announcement, authors of selected papers will be invited to present to agency staff and invited guests at the OCC headquarters in November, which “will serve as a platform for interested academic, regulatory, and other experts to discuss research that explores how the banking system, and community banks in particular, leverage technology and respond to the growth of new providers of banking services, whether competitive or cooperative.” Submissions, which must represent original, unpublished research, are due August 21.

    Fintech OCC Bank Regulatory

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  • FDIC updates its enforcement actions manual

    Agency Rule-Making & Guidance

    On July 25, the FDIC announced that it updated chapters its Formal and Informal Enforcement Actions Manual, entitled Overview and Administrative Matters and Cease-and-Desist Actions, respectively, regarding the agency’s minimum standards for terminating cease and desist and consent orders issued under Section 8(b) of the FDI Act. According to the FDIC, “the manual provides direction for professional staff related to the work necessary to pursue formal and informal enforcement actions,” and is “intended to support the work of the field, regional, and Washington office’s staff involved in processing and monitoring enforcement actions.” The FDIC is authorized to issue a cease-and-desist order if an insured depository institution has engaged, or is about to engage, in “an unsafe or unsound practice in conducting the business of the institution, or [a] violation of a law and/or regulation, written agreement with the FDIC, or written condition imposed by the FDIC in connection with the granting of any application or other request.” The updates, among other things, clarify that cease-and-desist or consent orders may be terminated if: (i) the institution is in full compliance with all provisions of the order and has fully corrected legal violations, unsafe or unsound practices, or other conditions that led to the issuance of the order; (ii) any provisions deemed “not in compliance” have become outdated or irrelevant; or (iii) deterioration or any provisions deemed “not in compliance” leads to issuance of a new or revised formal action.

    Agency Rule-Making & Guidance Federal Issues Bank Regulatory FDIC FDI Act Enforcement

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  • FDIC issues QBP for 1Q 2022

    On July 21, the FDIC released FDIC Quarterly, 2022, Volume 16, Number 3, which analyzes loan performance at community banks in five manufacturing-concentrated states: Indiana, Kentucky, Louisiana, Michigan and Wisconsin. The featured article, Community Bank Performance in Manufacturing-Concentrated States, noted that community banks in these states support their local economies “through a higher share of commercial loans relative to community banks in other states,” including commercial and industrial loans, commercial real estate loans, and construction and development loans. The FDIC also noted that “the manufacturing industry is sensitive to business cycles and recessions, which has direct implications on community banks and has weighed on their profitability through both direct credit exposure to manufacturing firms and indirectly through the manufacturing industry’s impact on the local economy.” Though the agency acknowledged that the manufacturing sector recovered more quickly than expected from the Covid-19 pandemic, credit risks remain for banks in manufacturing-heavy states. The Quarterly further stated that “[t]he manufacturing industry remains susceptible to the risks of plant closure due to the evolving nature of the pandemic, or relocation of firms due to global market pressures as production and demand normalize.”

    Bank Regulatory FDIC Community Banks Federal Issues Fintech

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  • FDIC proposes new standards TDRs

    On July 20, the FDIC issued a notice of proposed rulemaking (NPR) to incorporate updated accounting standards in the risk-based deposit insurance assessment system applicable to all large and highly complex insured depository institutions (IDIs). The NPR is in response to the Financial Accounting Standards Board’s elimination of accounting guidance for troubled debt restructurings (TDR) for adopters of the current expected credit loss standard. The NPR noted that the “FDIC calculates deposit insurance assessment rates for large and highly complex IDIs based on supervisory ratings and financial measures, including the underperforming assets ratio and the higher-risk assets ratio, both of which are determined, in part, using restructured loans or [TDRs].” Both of these measures, the underperforming assets ratio and higher-risk assets ratio, are used to determine deposit insurance assessments for large and highly complex [IDIs]. According to the FDIC, the NPR “would amend the assessment regulations to include a new term, ‘modifications to borrowers experiencing financial difficulty’” for the underperforming assets ratio and higher-risk assets ratio. The NPR does not apply to FDIC-insured and/or FDIC- supervised institutions with less than $10 billion in total consolidated assets. Comments are due 30 days after publication the Federal Register.

    Bank Regulatory Federal Register FDIC Troubled Debt Restructuring

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  • Brainard discusses CRA reforms in Native American lands

    On July 19, Federal Reserve Vice Chair Lael Brainard spoke before the National Native Coalition Virtual Series regarding the Community Reinvestment Act (CRA) Notice of Proposed Rulemaking (NPRM). During her remarks, Brainard noted that in May, the Fed, FDIC, and OCC issued a joint notice of proposed rulemaking modernizing CRA regulations to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated (covered by InfoBytes here). Brainard called this a “once-in-a-generation opportunity to strengthen the CRA to bring greater credit, investment, and banking services to the communities that have faced the greatest challenges.” She further noted that “the CRA will provide powerful incentives for banks to make investments in communities that do not have access to branches, such as in Native lands.” Her speech then focused on several aspects of the proposal that are beneficial for Native communities. She stated that the NPRM “provides greater incentives for community investments in Native Land Areas by providing enhanced clarity and specificity about what activities qualify for CRA credit.” Noting that Native community development financial institutions and minority depository institutions “are critical players in supporting credit access and investment in Native communities,” Brainard explained that the proposal provides additional certainty that activities with Treasury-certified CDFIs will qualify for CRA consideration and provides greater clarity to banks on receiving credit for activities with MDIs. She also described “another important change” of the NPRM, which is that the proposal “would result in greater CRA activity outside of where banks have branches and physical locations in order to address unmet needs in communities that have more limited access to bank branches.” Brainard concluded her remarks by reminding the audience that comments on the NPRM are due August 5.

    Bank Regulatory Tribal Lending Federal Reserve FDIC OCC CRA Minority Depository Institution

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  • Fed issues NPRM for default rules on certain LIBOR contracts

    On July 19, the Federal Reserve Board announced in a notice of proposed rulemaking (NPRM) that it is soliciting comments on a proposal that provides default rules for certain contracts that use LIBOR, which would implement the Adjustable Interest Rate (LIBOR) Act. As previously covered by InfoBytes, LIBOR will be discontinued after June 30, 2023. The NPRM would establish benchmark replacements for the one-, three-, six-, and 12-month “tenors” of LIBOR where a given contract does not have terms that provide for the use of any substitute for the specified LIBOR rate. According to the NPRM, “[o]f particular concern are so-called ‘tough legacy contracts,’ which are contracts that reference USD LIBOR and will not mature by June 30, 2023, but which lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of USD LIBOR.” The proposal identifies separate Fed-selected replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. As required by the law, each proposed replacement rate is based on the Secured Overnight Financing Rate. Comments on the proposal are due 30 days after publication in the Federal Register.

    Find continuing InfoBytes coverage on LIBOR here.

    Bank Regulatory Federal Reserve LIBOR Federal Issues ARRC SOFR

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  • Fed updates Regulation O FAQs

    On July 8, the Fed updated its frequently asked questions (FAQs) regarding Regulation O, Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (12 CFR Part 215). The Fed clarified that a bank’s payment of premiums as part of a split dollar life insurance arrangement does not constitute as an extension of credit to an insider, provided that certain conditions are met. The agency noted that, “under a split dollar life insurance arrangement, a bank pays the premiums on a policy insuring the life of an employee of the bank. Split dollar life insurance arrangements can take many forms. For example, the insurance policy can be owned by the bank, the employee, or a third party (typically a trust).” The Fed further explained that “[r]egardless of form, the bank is entitled to receive from the proceeds of the insurance policy a pre-negotiated amount upon the death of the insured or when the insured surrenders the policy.”

    Bank Regulatory Federal Reserve Regulation O FAQs

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  • Hsu highlights financial health for consumers

    On July 14, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the U.S. Department of the Treasury’s Financial Literacy Education Commission (FLEC) discussing financial health for consumers. Hsu began by emphasizing that those who are invested in crypto-assets “are disproportionately young, diverse, and underbanked.” He noted the need “to take a careful and cautious approach” to crypto-assets, and then described the agency’s November 2021 reminder to national banks that their crypto activities must “be done in a safe, sound, and fair manner and that they need to obtain supervisory non-objections from us before engaging in new activities.” Hsu also mentioned that the OCC staff joined the FLEC Digital Assets working group to develop consumer materials clearly explaining new products in the cryptocurrency arena. Additionally, Hsu discussed the OCC’s “Financial Health: Vital Signs” discussion series, which explores issues affecting consumer financial health and well-being (covered by InfoBytes here). He further explained that a “financial health lens focused on individuals and communities, rather than solely on products or services, should enable a more sophisticated and effective approach to balancing the financial empowerment and protection of consumers.” Hsu concluded by noting the second anniversary of “Project REACh,” an initiative to promote greater financial inclusion of underserved populations, as previously covered by InfoBytes.

    Bank Regulatory OCC Underserved Consumer Finance Federal Issues

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  • FDIC announces Oklahoma, Montana disaster relief

    On July 15, the FDIC issued guidance (see FIL-31-2022 and see FIL-32-2022) to provide regulatory relief to financial institutions and help facilitate recovery in areas of Oklahoma affected by a severe storm, tornadoes, and flooding that occurred between May 2 and 8 and in areas of Montana affected by a severe storm and flooding that occurred from June 10 and continuing. The FDIC writes that, in supervising impacted institutions, it will consider the unusual circumstances those institutions face. The guidance suggests that institutions work with borrowers impacted by the severe weather to extend repayment terms, restructure existing loans, or ease terms for new loans “in a manner consistent with sound banking practices.” The FDIC notes that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The agency will also consider relief from certain reporting and publishing requirements.

    Bank Regulatory Federal Issues FDIC Disaster Relief Consumer Finance Mortgages CRA Oklahoma Montana

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  • FDIC clarifies third party-related brokered deposit reporting requirements

    On July 15, the FDIC released a new Question and Answer (Q&A) and updated public information on its Banker Resource Center Brokered Deposits Page, reminding “FDIC-insured depository institutions (IDIs) that deposits swept from broker dealers with a primary purpose exception to unaffiliated IDIs must be reported as brokered if any additional third parties are involved that qualify as deposit brokers, as defined by Section 337.6 –Brokered Deposits, of the FDIC’s Rules and Regulations.” According to a statement released by the FDIC, Call Report data analysis submitted after the Brokered Deposits Final Rule took effect “suggests that some IDIs receiving sweep deposits from unaffiliated broker-dealers appear to be reporting the sweep deposits as non-brokered, despite the involvement of a third party that engages in facilitating the placement of deposits, including through engaging in matchmaking activities.” The agency emphasized that while an IDI may not have a direct relationship with an additional third party providing services to a broker dealer with a primary purpose exception, “when reporting sweep deposits, it is the IDI’s responsibility to file accurate Call Report data,” which may include reviewing agreements between the broker dealer and any additional third parties for any services that constitute matchmaking activities. The FDIC clarified, however, that banks will not be required to refile previous Call Reports “if, after good faith efforts, certain deposits were not previously reported as brokered by the IDI due to a misunderstanding of how the facilitation aspect of the deposit broker definition applies when additional third parties are involved.”

    Bank Regulatory Federal Issues FDIC Brokered Deposits Third-Party

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