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On April 6, FINRA added new FAQs to its Covid-19 regulatory relief FAQs document, which was launched in March (covered by InfoBytes here). The newly added FAQs state that (i) firms may electronically transmit required copies of the Uniform Termination Notice for Securities Industry Registration (Form U5) to terminated individuals; (ii) the prescribed period in which continuing education must be completed will be extended through May 31 for persons whose window is currently expired or set to expire before June; and (iii) late filing fees for Forms U4/U5 may be refunded or reduced upon request.
Previously, FINRA added FAQs regarding the “Net Capital Treatment of Covered Loans Under the CARES Act.” The FAQs cover adding back to net capital the “Forgivable Expense Amount” of a loan during the “covered period,” and excluding the loan amount from “aggregate indebtedness.” FINRA will continue to update the FAQ document as necessary, and it will issue a regulatory notice when a date for the termination of the temporary relief measures is determined.
On April 3, the New Hampshire Banking Department issued guidance to state-chartered banks indicating that loans made under the Small Business Administration’s Payment Protection Program are exempt from applicable legal lending limits because the loans are guaranteed by the Small Business Administration.
On March 22, the Federal Reserve Board (Fed), CFPB, FDIC, NCUA, OCC, and Conference of State Bank Supervisors (CSBS) issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” to address the “unique and evolving situation” created by Covid-19. Guidance covered in the statement includes, among other things (i) “encourage[ing] financial institutions to work prudently with borrowers” negatively impacted by disruptions in the economy caused by the virus, to include providing loan modifications to borrowers and mitigating credit risk; (ii) advising that in “accounting for loan modifications” the modifications “do not automatically result in [troubled debt restructurings] (TDRs).” The agencies assert that “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs”; (iii) reporting loans as past due as a result of a payment deferral is “not expected”; (iv) reporting short-term loan arrangements, such as deferrals, as nonaccrual assets is temporarily not required; and (v) reminding financial institutions that restructured loans “continue to be eligible as collateral at the [Fed’s] discount window.” The statement adds that “the agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk,” and “agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.” (See Fed press release; OCC press release; FDIC press release and FIL-22-2020; NCUA press release; CFPB press release; and CSBS press release.)
On March 12, the OCC issued Bulletin 2020-14 announcing the revision of the Deposit-Related Credit booklet of the Comptroller’s Handbook that was issued in September 2018. The revised booklet provides guidance for OCC examiners in connection with the examination and supervision of national banks, federal savings associations, and federal branches and agencies of foreign banking organizations that provide small-dollar, unsecured credit products and services such as check credit, overdraft protection, and deposit advance products. The revised booklet includes, among other things, (i) updated guidance following the rescission of OCC Bulletin 2018-28, Deposit-Related Credit: Updated Comptroller’s Handbook Booklet Advance Products (previously covered by InfoBytes here); (ii) changes to OCC issuances, laws, and regulations made since the last booklet; (iii) information explaining the applicability of references to covered savings associations; and (iv) clarifying edits regarding supervisory guidance and sound risk management practices. An appendix containing a sample request letter is also included.
On February 6, the U.S. Treasury Department announced the 2020 National Strategy for Combating Terrorist and Other Illicit Financing. The report provides an overview of the anti-money laundering/countering the financing of terrorism (AML/CFT) program in the U.S. and details how the program can be updated to be more efficient and effective. Among other things, the report covers the most noteworthy threats to the financial system such as fraud, drug trafficking, and human trafficking, and highlights that one of the greatest vulnerabilities to the U.S. financial system is a failure to collect beneficial ownership information when new companies are formed or when company ownership changes. The report also focuses on ways to make the AML/CFT framework stronger, including through increased transparency and improved financial institution regulation and supervision. Additionally, the report advocates boosting the AML/CFT operational framework through the use of technologies, expanded data analytics, increased information sharing, and promotion of worldwide standards.
On February 6, the Federal Reserve Board (Fed) announced an enforcement action against a Virginia-based bank for alleged violations of the National Flood Insurance Act (NFIA) and Regulation H, which implements the NFIA. The consent order assesses a $9,500 penalty against the bank for an alleged pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
On January 30, the FDIC adopted the Final Rule to Revise Securitization Safe Harbor Rule (rule) as recommended by FDIC staff in a memorandum dated January 23. In July, as previously covered by InfoBytes, the FDIC approved a proposal to remove the requirement that, for safe harbor treatment, “the documents governing a securitization issuance require compliance with Regulation AB” of the SEC Regulation AB, “in circumstances where Regulation AB is not, by its terms, applicable to that transaction.” The proposal suggested that “it is no longer clear that compliance with the public disclosure requirements of Regulation AB in a private placement or in an issuance not otherwise required to be registered is needed to achieve the policy objective of preventing a buildup of opaque and potentially risky securitizations such as occurred during the pre-crisis years, particularly where the imposition of such a requirement may serve to restrict overall liquidity.” The final rule—which is unchanged from the proposal—eliminates the “significant disclosure requirements” to no longer mandate that private placements of securitization obligations provide Regulation AB disclosures. With the adoption of the final rule, only those transactions that are subject to Regulation AB are required to make the disclosures. The rule is expected to increase the securitization of residential mortgages and will become effective 30-60 days after it is published in the Federal Register.
On January 9, the Federal Reserve Board announced that it entered into a cease and desist order on December 30 with a Texas state-chartered bank due to “significant deficiencies” in the bank’s Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance program that were discovered in its latest examination of the bank. The requirements set out for the bank in the order include:
- Board oversight. The bank must submit a board-approved, written plan to improve oversight of BSA/AML requirements.
- BSA/AML compliance program. The bank must submit a written BSA/AML compliance program that includes BSA/AML training; independent testing of the compliance program; management of the program by a qualified compliance officer with adequate staffing support; BSA/AML compliance internal controls; and a BSA/AML risk assessment of the bank, its products and services, and its customers.
- Customer due diligence. The bank must submit a revised customer due diligence program that includes policies and procedures to ensure accurate client account information; a plan to bring existing accounts into compliance with due diligence requirements; a method to assign risk ratings to account holders; policies and procedures to ensure proper customer information is obtained according to the risk of the account holder; and risk-based monitoring procedures and updates to accounts.
- Suspicious activity monitoring and reporting. The bank must submit a written suspicious activity monitoring and reporting program that includes a documented process for establishing monitoring rules; policies and procedures for review of monitoring rules; customer and transaction monitoring; and policies and procedures for the review of suspicious activity.
On December 9, the OCC released its Semiannual Risk Perspective for Fall 2019, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations, including credit, operational, and interest rate risks. While the OCC commented that “bank financial performance is sound,” it also advised that “[b]anks should prepare for a cyclical change while credit performance is strong,” emphasizing that “[c]redit risk has accumulated in many portfolios.” The OCC also highlighted that competition with nonbank mortgage and commercial lending could pose a risk as well.
Specific areas of concern that the OCC described include: elevation of operational risk as advances in technology and innovation in core banking systems result in a changing and increasingly complex operating environment; increased use of third-party service providers that contribute to continued threats of fraud; need for prudent credit risk management practices that include “identifying borrowers that are most vulnerable to reduced cash flows from slower than anticipated economic growth”; “volatility in market rates [leading] to increasing levels of interest rate risk”; LIBOR’s anticipated cessation and whether banks have started to determine the potential impact of cessation and develop risk management strategies; and strategic risks facing banks as non-depository financial institutions (NDFI) use evolving technology and expand data analysis abilities (the OCC commented that NDFIs “are strong competitors to bank lending models”). The OCC also noted that there is increased interest from banks in sharing utilities with NDFIs to implement Bank Secrecy Act/anti-money laundering compliance programs and sanctions processes and controls.
On November 9, the Federal Reserve Board (Board) released the inaugural issue of a new publication, Supervision and Regulation Report (Report), which summarizes banking system conditions, Board supervisory and regulatory activities, trends dating back to the financial crisis, and differing approaches for large financial institutions and regional/community banking organizations. The Report discusses the safety and soundness of the banking industry, and states that the “strong economy” has had a positive effect on the return on equity and return on average assets for banks, with figures showing that industry profitability ratios in the second quarter of 2018 are at a 10-year high.
However, the Board also discusses several areas of concern including, among other things, that firms assigned “less-than-satisfactory-ratings generally exhibit weaknesses in one or more areas such as compliance, internal controls, model risk management, operational risk management, and/or data and information technology  infrastructure.” The Board also cites weaknesses in Bank Secrecy Act/anti-money laundering (BSA/AML) programs. The Report outlines future supervisory priorities, which continue to address risk management controls and cyber-related risks, and also include (i) a focus on four specific components: capital; liquidity; governance and controls; and recovery and resolution planning for the largest firms; and (ii) a focus on credit risk, operational risk, sales practices and incentive compensation, and BSA/AML compliance for regional and community banks. In addition, the report discusses plans to minimize regulatory burdens, tailor bank examinations to risk, and optimize supervision resources.
- Jonice Gray Tucker to discuss “Getting your company ready: Managing fair lending for IMBs” at the Mortgage Bankers Association Independent Mortgage Bankers Conference
- Jonice Gray Tucker to discuss “Be Your Compliance Best in 2022” at the California Mortgage Bankers Association webinar
- Lauren R. Randell to discuss “Significant legal developments in the Northeast” at the 37th Annual National Institute on White Collar Crime
- Jonice Gray Tucker to discuss “Small business & regulation: How fair lending has evolved & where it is heading?” at the Consumer Bankers Association Live program
- Jonice Gray Tucker and Kari Hall to discuss “Equity, equality, regulation and enforcement – The evolving regulatory landscape of fair lending, redlining, and UDAAP” at the ABA Business Law Committee Hybrid Spring Meeting