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NYDFS to start collecting and publishing board diversity data
On July 29, NYDFS announced in an industry letter that it will start collecting gender, racial, and ethnic board and management composition data as of December 31, 2019 and 2020 from state-regulated (i) banking institutions with over $100 million in assets; (ii) non-depository financial institutions with over $100 million in gross revenue; and (iii) entities authorized to engage in virtual currency business activities. Citing its authority under Banking Law 37(3) to “require any banking organization to make special reports to her at such times as she may prescribe,” the Superintendent stated NYDFS plans to collect data over late summer and will publicly publish findings on an aggregate basis in the first quarter of 2022. The results will be categorized by institution type and other relevant factors to “allow firms to assess where they stand relative to their peers” and hopefully “raise the bar for the entire industry.” In the future, the NYDFS would consider collecting and disclosing similar information, “including on a more granular basis.” The letter also set out the NYDFS’ expectation that institutions would (i) make the diversity of their leadership “a business priority and integrate it into their corporate governance”; (ii) “pay close attention to their talent pipeline of future diverse leaders, in addition to the diversity of its affiliates”; and (iii) “view diversity like other strategic priorities.”
ARRC announces recommendation for SOFR term rate
On July 29, the Alternative Reference Rates Committee (ARRC) announced its recommendation of CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates, following the completion of key changes in trading conventions on July 26 under the SOFR First initiative. As previously covered by InfoBytes, ARRC announced in March that it “will not be in a position to recommend a forward-looking [SOFR term rate] by mid-2021.” However, the success of the SOFR First convention change, “along with the continued growth in SOFR cash and derivatives markets, has allowed the ARRC to recommend SOFR Term Rates, consistent with the principles and indicators it established to do so.” Federal Reserve Board Vice Chair for Supervision Randal K. Quarles noted that “[a]ll firms should be moving quickly to meet our supervisory guidance advising them to end new use of LIBOR this year.”
In addition to the announcement, ARRC released a factsheet outlining past milestones, SOFR’s strengths, and anticipated milestones. ARRC noted that SOFR is “the best replacement” for USD LIBOR because it is (i) deep enough to “not dry up in times of market stress”; (ii) resilient against market evolution; and (iii) entirely transaction-based, and therefore cannot be easily manipulated.
FDIC releases June enforcement actions
On July 30, the FDIC released a list of administrative enforcement actions taken against banks and individuals in June. During the month, the FDIC issued 14 orders and one decision, consisting of “four Orders to Pay Civil Money Penalties, one Section 19 Application, two Orders Terminating Consent Orders, four Orders of Termination of Insurance, and six Orders of Prohibition from Further Participation.” Among the orders is a civil money penalty imposed against a South Dakota-based bank related to alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank “[m]ade, 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.” The order requires the payment of a $30,000 civil money penalty.
The FDIC also imposed a civil money penalty against a Missouri-based bank concerning alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank “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 providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral.” The order requires the payment of a $1,000 civil money penalty.
Agencies clarify LIBOR transition on regulatory capital instruments
On July 29, the FDIC, Federal Reserve Board, and OCC (see FDIC FIL-54-2021, Fed SR 21-12, and OCC Bulletin 2021-32) provided answers to frequently asked questions (FAQs) about the impact on regulatory capital instruments under 12 CFR 324 when transitioning from LIBOR to another reference rate. Among other things, the agencies clarified that “such a transition would not change the capital treatment of the instrument, provided the alternative rate is economically equivalent with the LIBOR-based rate.” Specifically, the FAQs clarify that the agencies do “not consider the replacement or amendment of a capital instrument that solely replaces a reference rate linked to LIBOR with another reference rate or rate structure to constitute an issuance of a new capital instrument for purposes of the capital rule.” Additionally, such a replacement or amendment would not create an incentive to redeem, provided “there are no substantial differences from the original instrument from an economic perspective.” Supervised financial institutions should conduct an appropriate analysis demonstrating that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective and may be asked to provide the analysis to the agencies. “Considerations for determining that a replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective could include, but are not limited to, whether the replacement or amended instrument has amended terms beyond those relevant to implementing the new reference rate or rate structure,” the FAQs state.
Find continuing InfoBytes coverage on LIBOR here.
OCC takes measures to address climate change risks
On July 27, the OCC appointed Darrin Benhart as its Climate Change Risk Officer and announced its membership in the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). OCC’s membership in NGFS will allow the agency to collaborate with central banks and peer supervisors, share best practices, and contribute to the development of climate risk management in the financial sector. The appointment of Benhart to the newly created position “will significantly expand the agency’s capacity to collaborate with stakeholders and to promote improvements in climate change risk management at banks,” acting Comptroller Michael J. Hsu stated, adding that Benhart “brings a wealth of supervisory, policy, and leadership experience to the role.” Hsu emphasized that “[p]rudently managing climate change risk is a safety and a soundness issue,” noting that these changes “will enable the agency to be more proactive in accelerating the development and adoption of robust climate change risk management practices, especially at the larger banks.”
FDIC announces Michigan disaster relief
On July 23, the FDIC issued FIL-52-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Michigan affected by severe storms, flooding, and tornadoes. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC further stated that it will also consider regulatory relief from certain filing and publishing requirements.
FDIC argues “valid-when-made rule” fills statutory gaps
On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).
The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”
OCC to rescind CRA final rule as agencies signal joint overhaul
On July 20, the OCC announced it will propose to rescind the agency’s May 2020 final rule overhauling the Community Reinvestment Act (CRA), signaling the OCC’s intention to collaborate with the Federal Reserve Board and the FDIC on a separate joint rulemaking. As previously covered by a Buckley Special Alert, the OCC’s final rule was intended to modernize the regulatory framework implementing the CRA by, among other things: (i) updating deposit-based assessment areas; (ii) mandating the inclusion of consumer loans in CRA evaluations; (iii) including quantitative metric-based benchmarks for determining a bank’s CRA rating; and (iv) including a non-exhaustive illustrative list of activities that qualify for CRA consideration.
The announcement follows the completion of a review undertaken by acting Comptroller Michael Hsu (covered by InfoBytes here). Hsu stated that although “the OCC deserves credit for taking action to modernize the CRA,” the adoption of the final rule was “a false start” in attempting to overhaul the regulation. According to Hsu, the OCC intends to work with the Fed and the FDIC to develop a joint Notice of Proposed Rulemaking and build on an Advance Notice of Proposed Rulemaking issued by the Fed last September (covered by InfoBytes here). The federal agencies issued an interagency statement noting that they have “broad authority and responsibility for implementing the CRA” and that “[j]oint agency action will best achieve a consistent, modernized framework across all banks to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods.”
FDIC proposes changes to deposit insurance regulations for trust accounts and mortgage servicing accounts
On July 20, the FDIC published a notice of proposed rulemaking (NPRM) that would amend the deposit insurance regulations for trust accounts and mortgage servicing accounts. The changes are intended to clarify the deposit insurance rules for depositors and bankers, enable more timely insurance determinations for trust accounts in the circumstance of a bank failure, and increase consistency of insurance coverage for mortgage servicing account deposits. According to the FDIC, some highlights include, among other things, that: (i) a deposit owner’s trust deposits would be insured up to $250,000 per beneficiary, but must not exceed five beneficiaries, regardless of if a trust is revocable or irrevocable, and regardless of contingencies or the allocation of funds among the beneficiaries; (ii) a maximum amount of deposit insurance coverage would be $1.25 million per owner, per insured depository institution for trust deposits; and (iii) “mortgage servicers’ advances of principal and interest funds on behalf of mortgagors in a mortgage servicing account would be insured up to $250,000 per mortgagor, consistent with the coverage for payments of principal and interest collected directly from mortgagors.” Additionally, the FDIC published a Fact Sheet on the NPRM, which provides an overview of simplifying deposit insurance rules for trust accounts and enhancing consistency for mortgage servicing account deposits. FDIC Chairman Jelena McWilliams released a statement specifying that the NPRM would, “merge the revocable and irrevocable trust categories into one uniform trust accounts category with one set of rules; establish a simple formula for calculating deposit insurance based on the number of beneficiaries; and eliminate the ability for a trust account to be structured to obtain unlimited deposit insurance at a bank, which is the case today, and certainly contrary to the spirit of the Federal Deposit Insurance Act.” Comments on the NPRM will be due 60 days after publication in the Federal Register.
Fed, OCC report on health of MDIs
Recently, the Federal Reserve Board and the OCC issued reports pursuant to Section 367 of the Dodd-Frank Act generally detailing the health of Minority Depository Institutions (MDIs) and the agencies’ efforts taken to assist MDIs as the Covid-19 pandemic disproportionately affected low- and moderate-income communities and racial and ethnic minorities. The Fed’s report, “Promoting Minority Depository Institutions,” discussed, among other things, extra steps taken by the agency to support and assist MDIs over the past year, which included conducting individualized outreach on several topics like how to access the discount window and the Paycheck Protection Program Liquidity Facility (covered by InfoBytes here and here). The report also examined efforts taken by the Fed to preserve and promote MDIs through its Partnership for Progress program—“a national outreach effort to help MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace”—and covered the Fed’s unanimous approval last September to approve an Advance Notice of Proposed Rulemaking on modernizing the Community Reinvestment Act (covered by InfoBytes here).
The OCC outlined actions taken to preserve and promote MDIs in its “2020 Annual Report,” including the launch of the Roundtable for Economic Access and Change known as Project REACh (covered by InfoBytes here). OCC subject matter experts also provided regulatory technical assistance to MDIs on topics including safety and soundness, cybersecurity, compliance with Bank Secrecy Act/anti-money laundering requirements, and current expected credit loss accounting methodology, among others. The OCC also noted that despite a seven-basis-points drop on the average return on assets for MDIs through the pandemic, the health of those institutions “remained satisfactory.”