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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.”
OCC marks first anniversary of financial inclusion project
On July 15, the OCC marked the one-year anniversary of Project REACh, an initiative launched by the agency last year to promote greater financial inclusion of underserved populations. As previously covered by InfoBytes, Project REACh (Roundtable for Economic Access and Change) brings together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations to identify and reduce barriers to accessing capital and credit. While the project’s scope in its first year included a national workstream and a regional effort centered on Los Angeles, acting Comptroller Michael Hsu announced that Project REACh will soon expand its regional focus to Washington, D.C., Dallas, and Detroit in order “to replicate the success of the project’s national workstream.” In prepared remarks, Hsu emphasized that addressing economic inequality needs to be “transformational, not transactional,” pointing out that “the financial system can perpetuate inequality” as “traditional credit scores, traditional overdraft practices, and predatory lending make it expensive to be poor, while wealthy clients can borrow and access a wide range of financial services at lower cost.” Hsu explained that Project REACh’s structure and approach allows for collaborative problem identification and problem solving and creates opportunities for business and community representatives to incubate ideas and pilots “that can later be implemented on a broader scale than possible by any one institution.”
Federal agencies seek comments on third-party relationships
On July 13, the Federal Reserve Board, FDIC, and OCC announced a request for public comments on proposed guidance designed to aid banking organizations manage risks related to third-party relationships, including relationships with financial technology-focused entities. The guidance also responds to industry feedback requesting alignment among the agencies with respect to third-party risk management guidance. The proposed guidance provides “a framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships that takes into account the level of risk, complexity, and size of the banking organization and the nature of the third-party relationship.” The proposal addresses key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Comments on the proposal are due 60 days after publication in the Federal Register.
CFPB and FDIC release enhancements to financial education program for seniors
On July 14, the CFPB and FDIC announced enhancements to Money Smart for Older Adults, the agencies’ financial education program geared toward preventing elder financial exploitation. The enhanced version includes sections to help people avoid romance scams, which, according to data from the FTC, led to $304 million in losses in 2020. In addition, the agencies are also releasing an informational brochure on Covid-19 related scams. FDIC training materials and other resources for older adults are available from the CFPB here.
Biden orders federal agencies to evaluate banking, consumer protections
On July 9, President Biden issued a broad Executive Order (E.O.) that includes provisions related to the financial services industry.
- CFPB. The E.O. encourages the CFPB director to issue rules under Section 1033 of Dodd-Frank “to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products.” As previously covered by InfoBytes, last October, the Bureau issued an advanced notice of proposed rulemaking on Section 1033, seeking comments on questions related to consumers’ access to their financial records. The E.O. also instructs the Bureau to enforce Section 1031 of Dodd-Frank, which prohibits unfair, deceptive, or abusive acts or practices in consumer financial products or services, “to ensure that actors engaged in unlawful activities do not distort the proper functioning of the competitive process or obtain an unfair advantage over competitors who follow the law.”
- Treasury Department. The E.O. calls on Treasury to submit a report within 270 days on the effects on competition of large technology and other non-bank companies’ entry into the financial services space.
- FTC. The E.O. tasks the FTC with establishing rules to address concerns about “unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy.” The FTC already commenced that process on July 1, when it approved changes to its Rules of Practice to amend and simplify the agency’s procedures for initiating rulemaking proceedings. According to Commissioner Rebecca Kelly Slaughter, “[s]treamlined procedures for Section 18 rulemaking means that the Commission will have the ability to issue timely rules on issues ranging from data abuses to dark patterns to other unfair and deceptive practices widespread in our economy.”
- Bank Mergers. The E.O. encourages the Attorney General, in consultation with the Federal Reserve Board, FDIC, and OCC, to “review current practices and adopt a plan, not later than 180 days after the date of this order, for the revitalization of merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956.”
FSB addresses climate-related financial risks
On July 7, the Financial Stability Board (FSB) released several reports addressing climate-related financial risks. The FSB Roadmap for Addressing Climate-Related Financial Risks noted that a growing number of international initiatives are underway that address financial risks resulting from climate change. “Effective risk management at the level of individual companies and financial market participants is a precondition for a resilient financial system,” the report stated, adding that the “interconnections between climate-related financial risks faced by different participants in the financial system reinforce the case for coordinated action.” Among other things, the FSB set out a roadmap that focuses on four interrelated areas: (i) firm-level disclosures that should be used as the basis for pricing and managing climate-related financial risks at the level of individual entities and market participants; (ii) consistent metrics and disclosure data that can “provide the raw material for the diagnosis of climate-related vulnerabilities”; (iii) an analysis of vulnerabilities to provide the groundwork for designing and applying regulatory and supervisory framework and tools; and (iv) the establishment of regulatory and supervisory practices and tools to allow authorities to effectively identify climate-related risks to financial stability. FSB also released the Report on Promoting Climate-Related Disclosures, following a survey of members which explored national and regional current or planned climate-related disclosures. FSB presented several high-level recommendations, including, among other things, that financial authorities use a framework based on recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) across both non-financial corporates and financial institutions to propose a more consistent global approach. FSB issued another report entitled, The Availability of Data with Which to Monitor and Assess Climate-Related Risks to Financial Stability, that suggested various priorities to address climate-related data gaps “to improve the monitoring and assessment of climate-related risks to financial stability.”
Additionally, Federal Reserve Board Vice Chair for Supervision, Randal K. Quarles, spoke before the Venice International Conference on Climate Change on July 11, in which he discussed the work of the TCFD and stressed the importance of improving data quality and addressing data gaps, as well as ultimately establishing "a basis of comprehensive, consistent, and comparable data for global monitoring and assessing climate-related financial risks."
Fed to launch CECL tool for community banks
On July 1, the Federal Reserve Board announced plans to launch a new tool to assist community banks with assets of less than $1 billion implement the Current Expected Credit Losses (CECL) accounting standard. The new spreadsheet-based tool, known as the “Scaled CECL Allowance for Losses Estimator” (or SCALE) will use publicly available regulatory and industry data and is intended to simplify CECL compliance for community banks. The SCALE tool will be launched during an “Ask the Fed” webinar on July 15.