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Financial Services Law Insights and Observations

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  • FDIC announces deposit insurance seminars

    Federal Issues

    On October 7, the FDIC announced that it will conduct four identical seminars for bank employees and bank officers regarding FDIC deposit insurance coverage between October 21 and December 14. According to the FDIC, the seminars will: (i) provide an overview of FDIC-deposit insurance rules; (ii) cover topics such as the general principles of coverage, ownership categories, and requirements; (iii) provide information on additional deposit insurance resources; and (iv) include coverage examples and a live Q&A session. Registration will be required, but the seminars are free. Seminar participants must register at least two business days prior to the event, which can be accessed here.

    Federal Issues FDIC Deposit Insurance Bank Regulatory

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  • Fed announces enforcement action against Minnesota bank

    Federal Issues

    On October 7, the Federal Reserve Board announced an enforcement action against a Minnesota-based bank. In the consent order, the Fed alleges that the bank violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $11,00 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.

    Federal Issues Federal Reserve Enforcement Regulation H Flood Insurance National Flood Insurance Act Bank Regulatory

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  • Fed and Treasury address climate change risks

    Federal Issues

    On October 7, Federal Reserve Governor Lael Brainard spoke at the Federal Reserve Stress Testing Research Conference discussing the impacts of climate change on economic activity. Brainard revealed that the Fed is considering the potential implications of climate-related risks for financial institutions and the financial system and emphasized that scenario analysis is emerging as a possible key analytical tool. Regarding the climate scenario analysis, Brainard noted that climate change’s future financial and economic consequences depends on the physical effects and the nature and speed of the transition to a sustainable economy. She highlighted the importance of “model[ing] the transition risks arising from changes in policies, technology, and consumer and investor behavior and the physical risks of damages caused by an increase in the frequency and severity of climate-related events as well as chronic changes, such as rising temperatures and sea levels.” Brainard also discussed opportunities to learn from other countries' use of climate scenario analysis and overcoming the challenges in implementing climate scenario analysis, noting that “climate scenario analysis may need to consider interdependencies across the financial system,” among other things. Brainard added that she anticipates that it will be useful “to provide supervisory guidance for large banking institutions in their efforts to appropriately measure, monitor, and manage material climate-related risks, following the lead of a number of other countries.”

    The same day, the U.S. Treasury Department announced the Treasury Climate Action Plan, which is directed by Executive Order 14008 and Treasury’s efforts to support adaptation and increase resilience of its facilities and operations to the impacts of climate change. Among other things, the plan establishes five priority action areas, including: (i) rebuilding stagnated programs and capabilities; (ii) addressing climate change vulnerabilities across Treasury operations; (iii) ensuring a climate-focused approach to managing Treasury’s real property portfolio footprint; (iv) enabling management to fully consider climate change realities; and (v) accounting for a financial investment approach appropriate to Treasury’s climate objectives. In addition to the priority areas, Treasury will utilize the data and science of climate change to adjust policies, programs, and activities in improving its resilience to climate risks and impacts, according to the announcement.

    Federal Issues Climate-Related Financial Risks Federal Reserve Department of Treasury Bank Regulatory

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  • District Court says Reg. J does not preempt state law in wire transfer case

    Courts

    On October 5, a federal judge for the U.S. District Court for the Western District of Pennsylvania remanded a case back to state court, holding that the Federal Reserve’s regulation governing Fedwire transfers does not completely preempt state law claims. The elderly plaintiff alleged that bank employees helped her execute wire transfers totaling $4.3 million to an unknown scam artist, but never questioned whether she “intended, or knew, that the wire transfers were being made through a crypto currency bank to a crypto currency trust company.” The plaintiff sued the bank, claiming that it was negligent in not protecting her from the scheme, and that its advertising claims about keeping client information safe from scams were misleading and violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law. While recognizing that the plaintiff only asserted state law claims, the bank removed the case to federal court on the ground that the Fedwire system used to make the transfers was governed by the Fed’s Regulation J, and thus state law was preempted.

    The court ruled that, while the bank could invoke Regulation J as a defense, the regulation does not expressly provide a private right to seek redress in federal court, nor does the regulation itself allow the bank to remove the case to federal court. “[T]he court concludes that the more persuasive case law reflects that only Congress (not a federal agency in a regulation) can completely preempt a state law cause of action to create removal jurisdiction.” The plaintiff did not assert federal claims, and so “[t]he mere fact that [the bank] intends to assert Regulation J as a preemption defense does not create removal jurisdiction.” Furthermore, the court cited the Fed’s commentary to Regulation J, which said regulations “may pre-empt inconsistent provisions of state law” but do not affect state law where there was no conflict. Since there was no conflict between Regulation J and the Pennsylvania law, the federal regulation does not provide the exclusive cause of action, the court said.

    Courts Federal Reserve State Issues Regulation J Wire Transfers Preemption Bank Regulatory

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  • HUD and Fed consider transition from LIBOR

    Agency Rule-Making & Guidance

    On October 5, HUD issued an advanced notice of proposed rulemaking (ANPRM) seeking comments regarding the transition from the London Interbank Offered Rate (LIBOR) to alternate indices on adjustable rate mortgages (ARMs). According to the ANPRM, most ARMs insured by FHA are based on LIBOR, which is likely to become uncertain after December 31 and to no longer be published after June 30, 2023. Due to the uncertainty, HUD has begun to transition away from LIBOR and has approved the Secured Overnight Financing Rate (SOFR) index in some circumstances. In recognizing that there may be certain difficulties for mortgagees transitioning to a new index, HUD “is considering a rule that would address a Secretary-approved replacement index for existing loans and provide for a transition date consistent with the cessation of the LIBOR index.” Furthermore, HUD “is also considering replacing the LIBOR index with the SOFR interest rate index, with a compatible spread adjustment to minimize the impact of the replacement index for legacy ARMs.” Comments on the ANPRM are due by December 6.

    The same day, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke at the Structured Finance Association Conference in Las Vegas, Nevada, reminding participants that they should cease utilizing LIBOR by the end of the year, “no matter how unhappy they may be with their options to replace it,” and further warned that the Fed will supervise firms accordingly. Quarles emphasized that, “[g]iven the availability of SOFR, including term SOFR, there will be no reason for a bank to use [LIBOR] after 2021 while trying to find a rate it likes better.”

    Agency Rule-Making & Guidance HUD LIBOR Federal Register Federal Reserve SOFR Adjustable Rate Mortgage Mortgages Bank Regulatory

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  • OCC focuses attention on board diversity and inclusion

    Federal Issues

    On October 5, acting Comptroller of the Currency Michael J. Hsu stated the agency is exploring several options to improve bank board diversity and inclusion. Speaking during the Women in Housing & Finance Public Policy Luncheon, Hsu stated that the OCC is considering “encouraging banks to make it a practice to nominate or consider a diverse range of candidates or requiring institutions to either diversify their boards or explain why they have not.” Hsu cited examples such as the SEC’s approval of a new Nasdaq “diversify or explain” listing rule, as well as laws passed by the California legislature “requiring companies to have a certain number of female directors and directors from underrepresented communities.” In addition, the OCC is looking at ways other countries are approaching board diversity. “Without diverse leadership, banks and their regulators may develop blind spots or suffer from groupthink,” Hsu said. “These blind spots can lead to the kinds of nasty surprises that threaten safety and soundness—and possibly the financial sector as a whole. There is a growing body of empirical evidence that companies that address these blind spots by having diverse boards of directors have stronger earnings, more effective corporate governance, better reputations, and less litigation risk.” Hsu added that it is time to shift cultural expectations concerning diversity and inclusion and improve diversity transparency at banks, both at the executive and board levels.

    Federal Issues OCC Diversity Bank Regulatory

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  • FDIC updates brokered deposits FAQs

    Federal Issues

    On October 5, the FDIC released an update to the Questions and Answers Related to the Brokered Deposits Rule document. The FDIC added an FAQ to expressly state that a broker-dealer that sweeps deposits to only one insured depository institution (IDI) does not need to file a notice to rely upon the 25 percent designated exception, because a third party that has an exclusive deposit placement arrangement with only one IDI does not meet the definition of “deposit broker.” The FAQs also specify that an individual “meets the first part of the ‘deposit broker’ definition when it is ‘engaged in the business of placing deposits’ on behalf of a third party (i.e., a depositor) at IDIs.” The FAQs further clarify that an individual “is ‘engaged in the business of placing deposits’ of third parties if that person, while engaged in business, receives third party funds and deposits those funds at more than one IDI.”

    Federal Issues FDIC Brokered Deposits Agency Rule-Making & Guidance Bank Regulatory

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  • Fed to adopt Fedwire message format, asks for comments on expedited adoption

    Agency Rule-Making & Guidance

    On October 4, the Federal Reserve Board announced that it will adopt the International Organization for Standardization’s (ISO) 20022 message format for its Fedwire Funds Service—a real-time gross settlement system owned and operated by the Federal Reserve Banks that enables businesses and financial institutions to quickly and securely transfer funds. This change will enable “enhanced efficiency of both domestic and cross-border payments, and a richer set of payment data that may help banks and other entities comply with sanctions and anti-money laundering requirements,” the Fed stated. Additionally, the Fed requested public comments on a revised plan (targeted for no earlier than November 2023) to implement the ISO 20022 message format on a single day rather than in three separate phases, as originally proposed. According to the Fed, the adoption of ISO 20022 is part of the agency’s initiative to enhance its payment services. Comments must be received 90 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve Federal Issues Payments Payment Systems Depository Institution Federal Reserve Banks Bank Regulatory

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  • 5th Circuit: Extended overdraft charges are not interest

    Courts

    On September 29, the U.S. Court of Appeals for the Fifth Circuit held that the daily fees imposed on a consumer who failed to timely pay an overdraft were deposit-account service charges, not interest, and thus not subject to usury limits. The plaintiff allegedly overdrew her account and her bank paid the overdraft. The bank began charging a daily fee after the plaintiff did not repay the overdraft within five business days (called an “Extended Overdraft Charge”), which the plaintiff argued constituted interest on an extension of credit and was usurious in violation of the National Bank Act (NBA). In dismissing the plaintiff’s complaint for failure to state a claim, the district court reasoned that the bank does not make a loan to a customer when it covers the customer’s overdraft, and therefore the NBA’s limitations on interest charges do not apply. On appeal, the appellate court sided with the district court and deferred to the interpretation of the OCC that the fees at issue were not “interest” under the law. The court found the OCC’s interpretation to be reasonable and otherwise entitled to Auer deference, and on that basis affirmed.

    Courts Fifth Circuit Appellate National Bank Act Fees OCC Overdraft Usury Bank Regulatory

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  • EU and U.S. release statement on Joint Financial Regulatory Forum

    Financial Crimes

    On September 29 and 30, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S. – EU Joint Financial Regulatory Forum to continue their ongoing financial regulatory dialogue. Matters discussed focused on six different themes: “(1) market developments and current assessment of financial stability risks, (2) sustainable finance, (3) multilateral and bilateral engagement in banking and insurance, (4) regulatory and supervisory cooperation in capital markets, (5) financial innovation, and (6) anti-money laundering and countering the financing of terrorism (AML/CFT).”

    While acknowledging that both the EU and U.S. are experiencing “robust economic recoveries,” participants cautioned that the uncertainty around the Covid-19 pandemic and the economic outlook has not dissipated. “[C]ooperative international engagement to mitigate financial stability risks remains essential,” participants warned. Participants also explored issues concerning climate-related challenges for the financial sector and mandates for addressing climate-related financial risks, and touched upon the EU’s strategy for financing its transition to a sustainable economy. Regarding financial innovation, participants discussed potential central bank digital currencies and exchanged views on topics such as new types of digital payments, crypto-assets, and stablecoins, with all participants recognizing the “benefits of greater international supervisory cooperation” and “promot[ing] responsible innovation globally.” In addition, participants discussed progress made in strengthening their respective AML/CFT frameworks, “exchanged views on the opportunities and challenges arising from financial innovation in the AML/CFT area and explored potential areas for enhanced cooperation to combat money laundering and terrorist financing bilaterally and in the framework of [the Financial Action Task Force].”

    Financial Crimes Department of Treasury EU OCC Federal Reserve CFTC SEC FDIC Fintech Of Interest to Non-US Persons Supervision Anti-Money Laundering Combating the Financing of Terrorism FATF Climate-Related Financial Risks Bank Regulatory

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