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OCC Issues New Comptroller’s Licensing Manual Booklet to Provide Guidance on Articles of Association Amendments, Charters, and Bylaws
On June 19, the Office of the Comptroller of the Currency (OCC) released Bulletin OCC 2017-23 announcing a new booklet designed to provide consolidated guidance on several policies and procedures impacting national banks and federal savings associations when forming the framework of articles of association or charter documents. The “Articles of Association, Charter, and Bylaw Amendments” booklet, which is a part of the Comptroller’s Licensing Manual, covers:
- regulatory requirements for articles of association, charters, and bylaws;
- an overview of the process required to notify the OCC or obtain OCC approval of an amendment;
- requirements for the content of the articles of association, charters, and bylaws;
- actions a national bank or federal savings association should take during the amendment process; and
- references and links to informational resources and sample documents that national banks or federal savings associations may use during the amendment process.
Bipartisan Coalition of State Attorneys General File Petition to the FCC Seeking Broadband Consumer Protections
On June 19, New York Attorney General Eric T. Schneiderman announced a petition filed on behalf of a bipartisan coalition of 35 state attorneys general to jointly oppose a cable and telecommunications industry petition, which is intended to stop state and local authorities from enforcing state consumer protection laws and leave the regulating of broadband disclosure requirements to the authority of the FCC. In seeking a declaratory ruling from the FCC, the industry groups request confirmation and clarification on federal regulatory requirements governing broadband speed disclosures, and further assert that “national, uniform rules [are] particularly important” once the FCC launches procedures to implement a “national ‘light-touch framework.’” In response to the petition, the FCC filed a public notice for comment on May 17. The state attorneys general, in responding to the request, claim the petition “asks the FCC to convert a limited safe harbor from FCC’s own enforcement, into blanket federal and state immunity for fixed and wireless broadband companies from liability for false statements contained in advertisements and marketing.” Furthermore, they assert that the industry groups are seeking a ruling that exceeds the FCC’s authority, is “procedurally improper,” and would “upend the longstanding dual federal-state regulation of deceptive practices in the telecommunications industry—which would leave consumers across the country without the basic state protections from unfair and deceptive business practices.”
Federal Reserve Chair Comments on CCAR and Stress Test Transparency
On June 16, Federal Reserve (Fed) Chair Janet Yellen sent a letter to Rep. Blaine Luetkemeyer (R-Mo.) underscoring the Fed’s understanding of the need to provide transparency in its Comprehensive Capital Analysis and Review (CCAR) process and stress test scenarios. The Fed, Yellen asserts, will continue to published CCAR instructions in advance of the submission date for capital plans. Yellen further committed to releasing instructions and scenarios for the stress tests by February 15. The guidance will offer banks more details about the qualitative and quantitative components of the exam. However, Yellen warned that disclosing all the details of the Fed's modeling on the annual exams “would give banks an incentive to adjust their business practices in ways that change the results of the stress test without changing the risks faced by the firms . . . [resulting in] less effective stress tests that present a misleading picture of the actual vulnerabilities faced by firms. There would also be a risk of increased correlations in asset holdings among large banks, making the financial system more vulnerable to adverse economic shocks.” However, Yellen said the Fed is weighing different approaches to provide banks with more information about the agency's modeling.
Industry Groups Submit Comments on FHFA’s Proposed Evaluation Guidance for “Duty to Serve” Provisions
As previously discussed in InfoBytes, the Federal Housing Finance Agency (FHFA) published a final rule last December implementing certain “Duty to Serve” provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, the rule requires that Fannie Mae and Freddie Mac (Enterprises) adopt formal plans to improve the availability of mortgage financing in a “safe and sound manner” for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. The FHFA also published a Proposed Evaluation Guidance to outline the following: (i) FHFA's expectations regarding the development of such Underserved Markets Plans, and (ii) the process by which FHFA will evaluate annually Fannie’s and Freddie’s achievements under their Plans. The deadline to submit comments was June 7.
Mortgage Bankers Association (MBA) Letter. In its June 7 comment letter, the MBA stated that it commends efforts undertaken by the FHFA to develop a framework of requirements for the Enterprises to follow when preparing their Underserved Market Plans, as well as an evaluation system to rate implementation progress. Particularly, the MBA noted that, based on its data, the U.S. “will see 15.9 million additional households formed over the decade ending in 2024 . . . [which] will increase the need for all types of housing, including already limited affordable housing for very low-, low-, and moderate-income borrowers.” Furthermore, “manufactured home financing, affordable housing preservation, and additional rural housing opportunities can play a key role in providing both first-time home-buying opportunities and affordable rental options for consumers in these underserved markets.” With respect to the Proposed Evaluation Guidance, the MBA stressed the importance of flexibility so adjustments can be made for “unanticipated obstacles or opportunities caused by significant changes in market conditions that arise.”
Center for Responsible Lending (CRL) Letter. Also on June 7, CRL issued a comment letter to the Proposed Guidance in which it offered recommendations concerning “public input and transparency, assessing the contents of the plants to ensure meaningful objectives, and the evaluation and scoring process.” Specifically, CRL noted that while the Enterprises have taken measures such as reinstating lower down payment programs and creating pilot programs to address the underserved markets, it believes a “robust duty to serve process will further access credit initiatives by promoting and incentivizing responsible and sustainable lending to lower wealth households.” However, the CRL also raised several issues over the Proposed Evaluation Guidance, specifically in terms of the proposed scoring system. Under current FHFA guidance, Enterprises’ plans are scored on three factors: progress, impact, and effort/implementation. Conversely, under the proposed scoring system, failure only occurs due to a lack of progress because the impact and effort criteria are assessed only after the Enterprise receives a pass/fail determination. In reaction, CRL raised the following concerns: (i) “What guards against Enterprises putting only low impact objectives in the plan?” (ii) “What incentives do Enterprises have to score highly (above minimally passing)?” and (iii) “What guards against only proposing easily achievable objectives?” In addition to scoring methodology changes, CRL recommended that the FHFA implement a more rigorous loan product and loan purchase evaluation process and increase transparency.
OCC to Host Operational Risk Workshop, Will Hold Innovation "Office Hours"
On July 25, the OCC will host an operational risk workshop in Charleston, WV for directors of national community banks and federal savings associations supervised by the OCC. The workshop will focus on the key components of operational risk, governance, third-party risk, vendor management, and cybersecurity.
Additionally, on July 24 through the 26, the OCC’s Office of Innovation will hold “Office Hours” in New York City for national banks, federal savings associations, and fintech companies to provide an opportunity for attendees to discuss matters related to financial technology, new products and services, bank or fintech partnerships, as well as other items related to financial innovation. Meeting requests are due by July 5.
CFPB Seeks Comments on Proposed Amendments to Prepaid Rule, Releases Updated Small Entity Compliance Guide
On June 15, the CFPB announced a request for comment on proposed amendments to Regulation E, which concerns prepaid accounts under the Electronic Fund Transfer Act (EFTA) and the Truth in Lending Act (Regulation Z). According to the Bureau, the request aims to address prepaid companies’ concerns over “unanticipated complexities” regarding certain aspects of the rule. As previously covered in InfoBytes, in April the CFPB issued a final rule delaying the general effective date to April 1, 2018. The prepaid rule provides consumers, among other things, additional federal protections under EFTA on prepaid financial products, person-to-person payment products, and other electronic accounts with the ability to store funds. Specifically, the proposed amendments would impact error resolution requirements for unregistered accounts, enhance flexibility for credit cards linked to digital wallets, and open for consideration whether a further delay to the rule’s effective date is necessary due to the proposed amendments or if safe harbor provisions should be added for early compliance. The proposal also addresses amendments affecting the following: (i) the exclusion of loyalty, award, or promotional gift cards; (ii) “unsolicited issuance of access devices and pre-acquisition disclosures”; and (iii) submission of account agreements to the Bureau. Comments are due 45 days after the request is published in the Federal Register.
Separately, on the same day, the Bureau released an updated edition of its small entity compliance guide for the prepaid rule. The guide notes the new effective date, and also offers clarification on prepaid reload packs, the consistent use of fee names and other terms, foreign language disclosure requirements, URL names in short form disclosures, mobile accessible transaction histories, account agreement submissions to the Bureau, and clarification that stipulates “reversing a provisional credit does not otherwise trigger Regulation Z coverage under the Prepaid Rule.”
ABA, State Bankers Associations Respond to HUD’s Request for Comment; Discuss Need to Clarify Disparate Impact
On May 15, HUD issued a request for comment on its review of regulations as required by Executive Order 13777, which compels each agency to review and carry out regulatory reform. According to the request for comment, the self-assessment will address suggestions for “specific current regulations that may be outdated, ineffective, or excessively burdensome, and therefore, warranting repeal, replacement, or modification.” The request, which closed for public comment on June 14, received 100 comments from state bankers associations, financial institutions, and individuals.
American Bankers Association (ABA) and State Bankers Associations. On June 14, a joint comment letter was sent on behalf of the ABA and state bankers associations representing all 50 states. A key issue raised by the letter was that HUD adopted an incorrect and improper standard for disparate impact liability in its rule implementing the Fair Housing Act’s discriminatory effects standard—a rule the groups calls “outdated and legally wrong.” Under the terms of the rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent” and then articulated a burden shifting framework for such claims in which a plaintiff can establish a prima facie case using statistics alone. However, the groups claim that the burden shifting framework conflicts with a Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, and assert that “a case premised on statistics alone is a prime example of an abuse of disparate impact.” The groups further wonder if HUD will “maintain the supervisory view that statistics alone can establish a prima facie case, as stated in the [r]ule[.]” It is the opinion of the groups that the Supreme Court enforced strict limitations of the use of disparate impact—“in stark contrast to the Rule’s approach”—in order to “avoid injecting the consideration of race into decision making and . . . address important constitutional concerns.” Thus, “[a] rule that creates, rather than eliminates, confusion undermines its own purpose and is entirely ineffective.” Furthermore, the letter (i) indicates that the groups are willing to engage in discussions with HUD on the topic of disparate impact, and (ii) raises the issue of whether a revised rule or a reopening of comments on the existing rule are in order.
CFPB’s CARD Act Request for Information Garners Consumer and Industry Comments
As previously covered in InfoBytes, the CFPB issued a notice and request for information seeking public comments regarding the consumer credit card market. The request, which closed for public comment on June 8, received 32 public comments from consumer education groups as well as retail industry groups.
The Financial Services Roundtable and the Consumer Bankers Association (the Associations). On June 8, the Associations—one representing integrated financial services companies, and the other representing retail banking and personal banking services—submitted a joint comment letter addressing a number of the issues in the CFPB’s request. The Associations put forth the following recommendations, among others, for consideration:
- “With respect to deferred interest products, we encourage the Bureau to rely on the existing, robust regulatory regime and to not take further action on these products”;
- “hold third-party comparison sites making representations about credit cards responsible for their interactions with consumers”;
- “streamline processes for consumers to elect to receive electronic disclosures”;
- “credit card rewards programs have successfully developed under an effective self-regulatory construct, and that consumers with variable interest rate products are generally aware of the current interest rate environment, negating the need for additional regulations in both regards”; and
- “strong debt collection rules are important for consumers and issuers alike, and burdensome restrictions on communications should be avoided”.
Consumer Action (CA). Also on June 8, the CA—advocating for underrepresented consumers—submitted a comment letter to the CFPB request for information suggesting that the Card Act has been mostly effective “to keep credit card issuers in check” but that “some practices . . . have worsened over time.” Specifically, among other things, the CA provided the following recommendations:
- “retailers and cards that offer deferred interest not be allowed to apply interest until the end of the deferral period, and that retroactive interest be prohibited, and that the interest charged when a deferred interest period ends be on a going forward basis only”;
- “the clause alerting applicants that the terms, rates, and fees ‘are subject to change at any time for any reason’ remains in some card notices . . . While technically legal, this one-sided contract that penalizes consumers who [do] not perfectly abide by account terms and conditions yet gives card issuers a pass on committing to its end of the contract remains an unfair business practice and should be prohibited by the Bureau “;
- “consider requiring more prominent disclosure of a financial link between comparison sites and card issuers”;
- “true secured cards are remarkably risk-free. One danger is when the issuer does not report payment history to credit bureaus. Most consumers want a secured card to build credit and failure on the part of the issuer to report to credit bureaus means the customer is captive to the secured issuer. Users should be educated beforehand as to the proper use of a secured card so they can see it as a tool to help them graduate to an unsecured card eventually. For example, they should be aware that cash advances carry very high interest rates and start accruing interest on transactions immediately”; and
- “we also strongly support the Bureau’s planned prohibition on class-action bans in arbitration clauses and hope to see the Bureau release a final rule shortly.”
OCC, Fed Supervisory Guidance on Model Risk Management Followed by FDIC
On June 7, the FDIC issued Financial Institution Letter FIL-22-2017 announcing that, in order to provide consistency across institutions and agencies, it is adopting the 2011 model risk management supervisory guidance that was issued by the Federal Reserve (SR 11-7 ) and the OCC (OCC Bulletin 2011-12) thereby making the guidance applicable to certain FDIC-supervised institutions, namely those with $1 billion or more in total assets. The FDIC guidance defines the term “model” as “a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates.” The FDIC indicated that banks’ heavy reliance on models in financial decision-making can come with costs, especially when the decisions are “based on models that are incorrect or misused.”
According to the FIL, the guidance contains “technical conforming changes” that make it relevant to institutions that are regulated by the FDIC, such as a “revised definition of 'banks' to reflect the FDIC's supervisory authority.”
Among other things, the FIL highlights that an effective model risk management framework should include the following:
- “disciplined and knowledgeable development that is well documented and conceptually sound”;
- “controls to ensure proper implementation”;
- “processes to ensure correct and appropriate use”;
- “effective validation processes”; and
- “strong governance, policies, and controls.”
For institutions with assets totaling less than $1 billion, the guidance will only apply in certain circumstances, such as when “the institution's model use is significant, complex, or poses elevated risk to the institution.”
OCC Supplement Answers Frequently Asked Questions Covering Third-Party Relationships: Risk Management Guidance
On June 7, the OCC released Bulletin 2017-21, which provides answers to frequently asked questions from national banks and federal saving associations concerning third-party procedure guidance. The Bulletin, issued to supplement Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance” released October 30, 2013, highlights the OCC’s responses to the following topics:
- defines third-party relationships and provides guidance on conducting due diligence and ongoing monitoring of service providers;
- provides insight on how to adjust risk management practices specific to each relationship;
- discusses ways to structure third-party risk management processes;
- discusses advantages and disadvantages to collaboration between multiple banks when managing third-party relationships;
- outlines bank-specific requirements when using collaborative arrangements;
- provides information-sharing forums that offer resources to help banks monitor cyber threats;
- discusses how to determine whether a fintech relationships is a “critical activity” and covers risks associated with engaging a start-up fintech company;
- addresses ways in which banks and fintech companies can partner together to serve underbanked populations;
- covers criteria to consider when entering into a marketplace lending arrangement with a nonbank entity;
- clarifies whether OCC Bulletin 2013-29 applies when a bank engages a third-party to provide mobile payments options to consumers;
- outlines the OCC’s compliance management requirements;
- discusses banks’ rights to access interagency technology service provider reports; and
- answers whether a bank can rely on the accuracy of a third-party’s risk management report.
As previously covered in InfoBytes, the OCC released a supplement (Bulletin 2017-7) to Bulletin 2013-29 in January of this year identifying steps prudential bank examiners should take when assessing banks’ third-party relationship risks.