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OCC cites preemption decision in valid-when-made rule challenge
On August 24, the OCC filed a statement of recent decision in support of its motion for summary judgment in an action brought against the agency by several state attorneys general challenging the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule). The final rule was designed to effectively reverse the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision and provide that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” (Covered by a Buckley Special Alert.) The states’ challenge argued that the rule “impermissibly preempts state law,” is “contrary to the plain language” of section 85 (and section 1463(g)(1)), and “contravenes the judgment of Congress,” which declined to extend preemption to non-banks. Moreover, the states contended that the OCC “failed to give meaningful consideration” to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” (Covered by InfoBytes here.) Both parties sought summary judgment, with the OCC arguing that the final rule validly interprets the National Bank Act (NBA) and that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the OCC asserted that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” (Covered by InfoBytes here.)
In its August 24 filing, the OCC brought to the court’s attention a recent order issued by the U.S. District Court for the Western District of Wisconsin. As previously covered by InfoBytes, the Wisconsin court reviewed claims under the FDCPA and the Wisconsin Consumer Act (WCA) against a debt-purchasing company and a law firm hired by the company to recover outstanding debt and purported late fees on the plaintiff’s account in a separate state-court action. Among other things, the court examined whether the state law’s notice and right-to-cure provisions were federally preempted by the NBA, as the original creditor’s rights and duties were assigned to the debt-purchasing company when the account was sold. The court ultimately concluded that the WCA provisions “are inapplicable to national banks by reason of federal preemption,” and, as such, the court found “that a debt collector assigned a debt from a national bank is likewise exempt from those requirements” and was not required to send the plaintiff a right-to-cure letter “as a precondition to accelerating his debt or filing suit against him.”
CSBS responds to Waters on state supervisory activities
On August 26, the Conference of State Bank Supervisors (CSBS) sent a letter to House Financial Services Committee Chairwoman Maxine Waters (D-CA) detailing information on CSBS' response to the Covid-19 pandemic related to supervisory efforts, policy initiatives, and mortgage servicing plans. The letter is in response to an August 5th letter from Chairwoman Waters to CSBS, CFPB, OCC, NCUA, FDIC, and Fed asking the agencies, among other things, to immediately update the “Joint Statement on Supervisory and Enforcement Practices Regarding the Mortgage Servicing Rules in Response to the COVID-19 Emergency and the CARES Act dated April 3, 2020,” and to take other steps to “provide vigorous oversight and encourage mortgage servicers to work with borrowers to avoid unnecessary foreclosures.”
The letter from the CSBS detailed the consumer protection and supervision efforts of state regulators during the Covid-19 pandemic, noting that they have “monitored the activities of mortgage originators and servicers … and have acted responsively and decisively with expanded examination approaches, new policy, and public guidance.” The letter expanded on these actions by setting forth its efforts in “three very broad categories”: networked supervision, direct supervision, and supervision policy. In the latter two categories, CSBS noted the steps it has taken during the pandemic to “remain vigilant to signs of unwarranted foreclosure activity or other consumer harm.” The letter also agreed that the “states’ dual mandate to protect consumers and ensure a healthy economic environment has been the appropriate approach” during Covid-19.
Agencies address nonfinancial corporations’ LIBOR transition concerns
On August 23, the U.S. Treasury Department, Federal Reserve Board, SEC, Federal Reserve Bank of New York, and CFTC released a letter responding to nonfinancial corporate stakeholders’ concerns as they prepare to transition from LIBOR to another reference rate. The agencies acknowledged that LIBOR’s cessation “presents considerable operational, technological, accounting, tax, and legal challenges for Main Street companies,” and recognized that “a smooth transition will be best supported if financial institutions offer alternatives to USD LIBOR that meet borrower needs and if this is done in a timely fashion.” The agencies further acknowledged challenges some stakeholders have faced when obtaining loan agreements based on the Secured Overnight Financing Rate (SOFR)—“even after they indicated that loan agreements based on SOFR would be their preferred choice”—and expressed concerns that nonfinancial corporations are not being offered such alternatives despite the short period of time before LIBOR’s cessation. Stressing the importance of using “reference rates built on deep, liquid markets that are not susceptible to manipulation” while also reiterating that “the official sector is not positioned to adjudicate the selection of reference rates between banks and their commercial customers,” the agencies stressed that “borrower preferences and needs clearly have a significant role to play in the selection of such rates.”
Find continuing InfoBytes coverage on LIBOR here.
OCC releases new Model Risk Management booklet
On August 18, the OCC issued a new Model Risk Management booklet as part of the Comptroller’s Handbook’s safety and soundness series. The booklet is used by OCC examiners when examining and supervising national banks, federal savings associations, and federal branches and agencies of foreign banking organizations. Among other things, the new booklet (i) outlines model risk management concepts and general principles; (ii) “informs and educates examiners about sound model risk management practices that should be assessed during an examination”; and (iii) “provides information needed to plan and coordinate examinations on model risk management, identify deficient practices, and conduct appropriate follow-up.” The booklet aligns with principals laid out in OCC Bulletin 2011-12 “Sound Practices for Model Risk Management: Supervisory Guidance on Model Risk Management.”
FDiTech launches tech sprint to test institutions' resilience
On August 16, the FDIC’s technology lab, FDiTech, announced a tech sprint, which challenges participants to “identify solutions that can be used by institutions of all sizes to measure and test their resilience to a major disruption.” The tech sprint, From Hurricanes to Ransomware: Measuring Resilience in the Banking World, is designed to review new measures, data, tools, or capabilities to calculate how well community banks, and the banking sector as a whole, can withstand a major disruption. According to the FDIC, “[r]ecognizing the evolving threat environment to bank operations, their need to strengthen resilience, and given the challenges that banks face in identifying criteria to determine their respective levels of tolerance for a disruption, the FDIC seeks solutions that improve sector-wide resilience by helping answer the question: ‘What would be the most helpful set of measures, data, tools, or other capabilities for financial institutions, particularly community banks, to use to determine and to test their operational resilience against a disruption?’” Registration will be required for stakeholders to participate, and additional information on how to participate is expected on the FDiTech website.
OCC updates bank accounting guidance
On August 16, the OCC released an annual update to its Bank Accounting Advisory Series (BAAS). Intended to address a variety of accounting topics and promote consistent application of accounting standards and regulatory reporting among OCC-supervised banks, the BAAS reflects updates to accounting standards issued by the Financial Accounting Standards Board through March 31, 2021, related to, among other things, (i) the amortization of premiums on callable debt securities; and (ii) evaluating goodwill impairment triggering events for private companies. The 2021 edition also includes answers to frequently asked questions from industry and bank examiners. Additionally, the OCC notes that the BAAS does not represent OCC rules or regulations but rather “represents the Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance based on the facts and circumstances presented.”
OCC updates Liquidity booklet
On August 16, the OCC issued Bulletin 2021-38 announcing the updated version of the Liquidity booklet of the Comptroller’s Handbook. The booklet replaces the 2012 version and provides information and examination procedures on liquidity coverage ratio and net stable funding ratio requirements. Among other things, the revised booklet: (i) discusses risks associated with liquidity; (ii) reflects changes in regulations and relevant OCC issuances since 2012; and (iii) clarifies edits on supervisory guidance, sound risk management practices, and legal language.
FDIC seeks input on off-site examinations
On August 13, the FDIC issued a notice and request for information (RFI) seeking comments from financial institutions regarding the agency’s supervisory approach to examinations during the Covid-19 pandemic, including on-site and off-site activities, use of technology, and communication methods. Specifically, the RFI seeks input on areas that worked well in the off-site examination context “to inform plans for future examinations, consistent with applicable law and the purpose of examinations.” Areas of interest include identifying (i) examination activities that worked best or were most effective during the off-site approach; (ii) new or emerging technologies that would support additional off-site examination activities (the FDIC noted that leveraging technology has improved efficiency and reduced burdens on financial institutions); and (iii) what improvements, if any, could be made to communication methods used during off-site examinations, including whether the FDIC should continue to use secure mail as an alternative to hardcopy mail to communicate supervisory correspondence. Comments are due October 12.
DOJ, FTC comment on Fed’s proposed debit card interchange fees and routing changes
Recently, the DOJ and the FTC submitted comments on the Federal Reserve Board’s notice of proposed rulemaking (NPRM) on debit card interchange fees and routing. As previously covered by InfoBytes, the Fed’s NPRM would require banks to ensure that two unaffiliated payment networks are available on their debit cards for online purchases. Among other things, the proposed amendments to the commentary to Regulation II, which implements Section 920 of the EFTA, (i) “clarify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions”; and (ii) clarify requirements imposed “on debit card issuers to ensure that at least two unaffiliated payment card networks have been enabled for debit card transactions.”
On August, 11, the DOJ’s Antitrust Division filed a comment in support of the NPRM, “commend[ing] the Board for its efforts to promote competition in this important part of the debit card industry by ensuring that smaller debit networks will have a greater ability to compete for merchants’ business.” While offering support for the NPRM, the DOJ asked the Fed to “consider whether the proposal is drafted broadly enough to capture all card-not-present transactions,” adding that “incumbent industry participants may attempt to circumvent the proposed rule.” The DOJ encouraged the Fed to “actively assess additional ways the proposed rule may be enhanced to increase competition for debit payment processing.”
Also on August 11, the FTC submitted a comment letter urging the Fed to clarify and strengthen the implementation of debit card fee and routing reforms, stressing that the Fed should “prohibit debit card networks from paying incentives to an issuer based on how electronic debit transactions are routed by merchants using that issuer’s debit cards.” According to the FTC, “[e]liminating routing-based incentive programs will make it less likely that issuers will search for ways to circumvent Regulation II, whether by violating the rule (necessitating an enforcement action) or by finding a loophole (necessitating future revisions to Regulation II).”
Fed announces flood insurance violations
On August 12, the Federal Reserve Board announced enforcement actions against two state banks. In the first consent order issued against a Massachusetts-based bank, the Fed alleged that the bank violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $71,000 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.
In the second consent order issued against a New York-based bank, the Fed alleged that the bank violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $11,000 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.