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FDIC issues RFI on bank mergers
On March 25, the FDIC issued a request for information (RFI) seeking public comments on bank mergers, including mergers between an insured depository institution and a noninsured institution, to aid the agency’s understanding of and any potential policymaking in this area. Specifically, the RFI seeks input related to the effectiveness of the existing framework in meeting the requirements of Section 18(c) of the Federal Deposit Insurance Act (known as the Bank Merger Act). According to the FDIC, “[s]ignificant changes over the past several decades in the banking industry and financial system warrant a review of the regulatory framework.”
Among the questions posed by the RFI are topics concerning (i) whether additional requirements or criteria (including quantitative measures) should be added to the existing regulatory framework to address financial stability risks that may arise from bank mergers (e.g. “[s]hould the FDIC presume that any merger transaction that results in a financial institution that exceeds a predetermined asset size threshold, for example $100 billion in total consolidated assets, poses a systemic risk concern?”); (ii) the extent to which prudential factors should be considered when acting on a merger application, and whether bright line minimum standards for these factors should be established; (iii) whether agencies should rethink the way they consider whether a merger might affect the convenience and needs factor of a community, and to “what extent should the CFPB be consulted by the FDIC when considering the convenience and needs factor and should that consultation be formalized”; (iv) whether the existing merger review framework creates “an implicit presumption of approval” or requires “an appropriate burden of proof” on bank applicants to prove they have met the criteria of the Bank Merger Act; (v) to what extent has the Bank Merger Act exception “proven beneficial or detrimental to the bank resolution process and to financial stability”; and (vi) to what extent would responses to the questions differ if the merger transaction involves a small insured depository institution.
Comments on the RFI are due 60 days after publication in the Federal Register.
OCC’s Hsu warns banks not to be the last to update overdraft programs
On March 28, acting Comptroller of the Currency Michael J. Hsu warned banks that they “don’t want to be the last bank with a traditional overdraft program.” Hsu’s op-ed pointed to recent overdraft reforms taken by several OCC-regulated banks that may end up saving consumers more than $2 billion annually. Recognizing that these reforms are “just the start,” Hsu stressed that “[b]anks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers.” Hsu outlined several points banks should consider when implementing overdraft changes, including taking a “customer-oriented approach” and implementing meaningful changes with lasting benefits to both customers and the bank, rather than “taking a profit-oriented approach and reverse engineering costs to meet predetermined revenue targets.” Banks should also “use data to identify the reforms that help customers the most,” Hsu stated, including “grace periods that give customers time to cover overdrafts and avoid fees, grace amounts that allow customers to overdraft by certain amounts without a fee, and changes in posting order, i.e., the sequence in which payments are made, to limit repeat fees.” Additionally, banks should build on the “pro-customer” overdraft reform momentum when developing small dollar lending capabilities and considering other products, such as buy now/pay later and earned-wage access products. “The cumulative effect of these pro-consumer initiatives holds the promise of materially and sustainably improving the financial health of underserved populations and, by doing so, fortifying banks’ reputation for treating all customers, including the most financially vulnerable, fairly and thus earning their long-term trust,” Hsu said.
FDIC releases February enforcement actions
On March 25, the FDIC released a list of administrative enforcement actions taken against banks and individuals in February. During the month, the FDIC made public six orders consisting of “three Orders to Pay Civil Money Penalty, two orders terminating consent order, and one consent order.” Among those announced were two civil money penalties for alleged violations of the Flood Disaster Protection Act. In one civil money penalty, imposed against a Kansas-based bank, the FDIC claimed that the bank “made, increased, extended, renewed, sold, or transferred a loan secured by a building or mobile home located or to be located in a special flood hazard area without properly notifying the Administrator of FEMA or their designee.” The order requires the payment of a $2,250 civil money penalty. In another civil money penalty, imposed against a Minnesota-based bank, the FDIC claimed that the bank: (i) “made, increased, extended, or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance”; (ii) “made, increased, extended or renewed a loan secured by a building or mobile home located or to be located in a special flood hazard area without providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral”; and/or (iii) “failed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the term of the loan.” That order requires the payment of a $3,000 civil money penalty.
OCC applies heightened risk governance standards to mortgage servicer
Recently, the OCC published Interpretive Letter #1180 addressing the application of heightened risk governance standards under 12 C.F.R. Part 30, Appendix D, OCC Guidelines Establishing Heightened Standards (Guidelines) to a supervised bank. Specifically, the OCC determined that the bank’s operations were highly complex and presented a heightened risk. This determination was based on information provided by the Supervisory Office, which concluded that the bank’s operations, including significant mortgage servicing activities, warranted application of the Guidelines to the bank. “The Guidelines provide that a covered institution should establish and adhere to a written risk governance framework to manage and control its risk-taking activities,” the OCC stated, adding that the Guidelines “also provide minimum standards for an institution’s board of directors to oversee the risk governance framework.” In the interpretive letter, the OCC stated that it had notified the bank last December that it was considering exercising its reservation of authority to apply the Guidelines; however, the bank responded that application of the Guidelines was not appropriate at that time. The bank is expected to comply with the Guidelines by February 29, 2024.
As previously covered by InfoBytes, last October the OCC issued a consent order against the bank for allegedly maintaining inadequate risk management controls related to its servicing and default servicing activities. The OCC asserted that the bank had previously been informed about the alleged risk management deficiencies and did not take timely corrective action. Under the terms of the consent order, the bank was required to take comprehensive corrective measures, including developing and implementing internal controls that are “commensurate with the types and complexity of risks associated with all transactions the [b]ank executes.”
PAVE task force delivers plan on appraisal bias
On March 23, HUD delivered the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) Action Plan to President Biden. Created in June 2021 to address racial bias in home lending and appraisals and establish actions to root out inequity, PAVE Task Force members include HUD Secretary Marcia L. Fudge and White House Domestic Policy Advisor Susan Rice, the U.S. Attorney General, the Secretaries of Agriculture, Labor, and Veterans Affairs, the Comptroller of the Currency, the Chairmen of the Federal Reserve Board, FDIC, NCUA, Directors of the CFPB and FHFA, and the Executive Director of the Appraisal Subcommittee of the FFIEC.
According to the announcement, the Action Plan to Advance Property Appraisal and Valuation Equity (the Plan) will represent “the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.” According to the Task Force’s executive summary, “[o]n average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents.” The summary also reports that the impact of undervaluation on homebuyers, sellers, and communities can sometimes result in higher down payments for home buyers, often causing sales to fall through, while low valuations in a refinance transaction can reduce the cash-out available and sometimes affect the refinance interest rate and mortgage insurance premiums paid by the homeowner. The Task Force further notes that since the Fair Housing Act was passed more than 50 years ago, “the racial wealth gap is wider than ever: in 2021, the Black homeownership rate reached only 44 percent, while the white homeownership rate reached 74 percent.”
The Plan will focus primarily on actions to substantially reduce racial bias in home appraisals, as well as steps federal agencies can “take using their existing authorities to enhance oversight and accountability of the appraisal industry and empower homeowners and homebuyers to take action when they receive a valuation that is lower than expected.” Among other things, the Plan states that Task Force members will exercise broad oversight and compliance authority to strengthen “guardrails against unlawful discrimination in all stages of residential valuation.” Agencies will also issue guidance on FHA and ECOA’s application to the appraisal industry and update appraisal-specific policies to “ensure that appraisers or regulated institutions’ use of appraisals are directly included in supervisory [FHA] and ECOA compliance requirements, and are considered in every review of relevant existing and future policies and guidance.” Relevant agencies have also committed to addressing potential bias in the use of technology-based valuation tools through a rulemaking related to automated valuation models (AVMs), including the addition of a nondiscrimination quality control standard in the proposed rule. In consultation with Congress, Task Force members will also pursue legislation to modernize the governance structure of the appraisal industry.
In the coming months, the Task Force will assess: (i) the “expanded use of alternatives to traditional appraisals as a means of reducing the prevalence and impact of appraisal bias”; (ii) the use of “range-of-value estimates instead of point estimates as a means of reducing the impact of racial or ethnic bias in appraisals”; (iii) the “potential use of alternatives and modifications to the sales comparison approach that may yield more accurate and equitable home valuation”; and (iv) “public sharing of a subset of historical appraisal data to foster development of unbiased valuation methods.”
CFPB Director Rohit Chopra stated that the Bureau will take an active leadership role in the Appraisal Subcommittee and will work “to implement a dormant authority in federal law to ensure that algorithmic valuations are fair and accurate.”
Acting Comptroller of the Currency Michael J. Hsu also announced that the OCC plans to enhance its supervisory methods for identifying discrimination in property valuations and will take steps to ensure consumers are aware of their rights regarding appraisals. The agency also intends to “support research that may lead to new ways to address the undervaluation of housing in communities of color caused by decades of discrimination.”
Additionally, acting FDIC Chairman Martin J. Gruenberg noted that the agency is committed to taking several concrete actions, including collaborating with Task Force members to exercise authorities “to support a more equitable state appraisal certification and licensing system.”
OCC releases 2021 4Q mortgage performance results
On March 22, the OCC announced the release of the OCC Mortgage Metrics Report, Fourth Quarter 2021, its quarterly report of the performance of seven national bank mortgage servicers representing 22 percent of all outstanding residential mortgages. As explained in the report, servicers initiated 1,294 new foreclosures in the fourth quarter of 2021—a 39.9 percent increase from the previous quarter and a 64 percent increase from a year ago. The impact of Covid-19, including foreclosure moratoriums, significantly affected these metrics, the OCC stated. Servicers also completed 47,488 mortgage modifications in the fourth quarter, up 40.8 percent from the previous quarter. Of these modifications, “70.5 percent reduced borrowers’ monthly payments, and 46,475, or 97.9 percent, were ‘combination modifications’—modifications that included multiple actions affecting the affordability and sustainability of the loan, such as an interest rate reduction and a term extension,” the OCC reported.
Agencies seek to update administrative enforcement proceedings
On March 22, the Federal Reserve Board, OCC, FDIC, and NCUA issued an interagency proposal to update policies and procedures governing administrative proceedings for supervised financial institutions. According to the proposal, the amendments are necessary to account for the routine use of electronic presentations in hearings and for use of technology in administrative proceedings, and to account for relevant legal developments since the rules were last updated, including the abolishment of the Office of Thrift Supervision, and the grant of new authorities to the agencies. Additionally, according to the proposal, the Fed “proposes to codify and clarify its long-standing practices concerning the conduct of formal administrative investigations and promulgate rules governing all formal investigations of organizations and individuals within the Board’s jurisdiction.” Finally, the FDIC proposes to amend its rules of administrative proceeding to permit greater use of depositions in the course of administrative proceedings.
Bank fined $140 million for BSA/AML compliance failures
On March 17, FinCEN announced a $140 million civil money penalty against a federal savings bank for violating the Bank Secrecy Act (BSA) and its implementing regulations from at least January 2016 through April 2021 by allegedly failing to implement and maintain an effective, reasonably designed anti-money laundering (AML) program. According to FinCEN, the bank “also admitted that it willfully failed to accurately and timely report thousands of suspicious transactions to FinCEN involving suspicious financial activity by its customers, including customers using personal accounts for apparent criminal activity.” The consent order further noted that in 2017, the OCC informed the bank that its AML program failed to meet all the requirements of the agency’s regulations. The bank agreed to overhaul its AML program but, according to the order, the bank has not yet met all of the terms of its commitments to address the deficiencies. FinCEN emphasized that the bank’s violations resulted “in millions of dollars in suspicious transactions flowing through the U.S. financial system without appropriate reporting,” and stressed “that growth and compliance must be paired, and AML program deficiencies, especially deficiencies identified by federal regulators, must be promptly and effectively addressed.”
The same day, the OCC announced a $60 million penalty against the bank for related violations resulting from the separate but coordinated investigation with FinCEN. Among other things, the consent order identified several deficiencies related to inadequate internal controls and risk management practices, suspicious activity identification, staffing, training, and third-party risk management. FinCEN’s announcement noted that “[a]s many of the facts and circumstances underlying the OCC’s civil penalty also form the basis of FinCEN’s Consent Order, FinCEN agreed to credit the $60 million civil penalty imposed by the OCC,” adding that, combined, the bank “will pay a total of $140 million to the U.S. Treasury for its violations, with $80 million representing FinCEN’s penalty and $60 million representing the OCC’s penalty.”
OCC issues final rule for granting exemptions to SAR requirements
On March 16, the OCC issued a final rule amending its suspicious activity report (SAR) regulations. The rule sets out a process for national banks and federal savings associations to request exemptions from the OCC’s SAR requirements. To request exemption under the final rule, national banks or federal savings associations, including federal branches and agencies of foreign banks, must submit a request in writing to the OCC. The agency “will consider whether the exemption is consistent with the purposes of the [Bank Secrecy Act] and with safe and sound banking and may consider any other appropriate factors.” Where required, institutions must separately seek an exemption from FinCEN, and the OCC intends to coordinate with FinCEN on such requests. The final rule will also allow “the OCC to facilitate changes required by the Anti-Money Laundering Act of 2020" and “will make it possible for the OCC to grant relief to national banks or federal savings associations that develop innovative solutions intended to meet Bank Secrecy Act requirements more efficiently and effectively.”
FDIC rescinds Covid-19 filing extension for Part 363 annual reports
On March 15, the FDIC rescinded its Statement on Part 363 Annual Reports in Response to the Coronavirus, which had provided certain insured depository institutions (IDIs) with total assets of $500 million or more an additional 45 days to file their Part 363 Annual Reports and Other Reports and Notices. FIL-10-2022 rescinds FIL-30-2020 and is effective for fiscal years beginning after December 31, 2021. Going forward, the deadline for IDIs to file their annual reports “reverts to either 90 or 120 days after the end of the IDI’s fiscal year, depending on the IDI’s status as a public filer.” The FDIC reminded IDIs that if they are unable to meet their filing deadline, they “must submit a written Notice of Late Filing to the FDIC, the appropriate federal banking agency, and any appropriate state bank supervisor by the 90- or 120-day report filing deadline.”