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On October 18, 22 state attorneys general submitted comments opposing HUD’s proposed rule amending the agency’s interpretation of the Fair Housing Act’s disparate impact standard (also known as the “2013 Disparate Impact Regulation”), arguing the proposal would “render disparate impact liability a dead letter under the Fair Housing Act (FHA).” As previously covered by InfoBytes, in August, HUD issued the proposed rule, to bring the rule “into closer alignment with the analysis and guidance” provided in the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert) and to codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance. Specifically, the proposal codifies the burden-shifting framework outlined in Inclusive Communities, adding five elements that a plaintiff must plead to support allegations that a specific, identifiable, policy or practice has a discriminatory effect. Moreover, the proposal provides methods for defendants to rebut a disparate impact claim.
In the comment letter, the attorneys general argue that the proposal ignores “the Supreme Court’s binding interpretation of the FHA” in Inclusive Communities, stating that the Court “emphasiz[ed] the continued importance of the FHA’s disparate impact theory of liability in advancing the nation’s efforts to advance justice and equality.” Additionally, the attorneys general suggest that the proposal ignores HUD’s statutory mandate and is “arbitrary and capricious in light of its numerous substantive defects.” The attorneys general assert that no changes to the rule are necessary, as there are no revisions “that would add clarity, reduce uncertainty, decrease unwarranted regulatory burdens, or otherwise assist in determining lawful conduct.” The letter concludes with a threat of a “meritorious legal challenge” should HUD approve the changes.
Similarly, on October 16, FTC Commissioner, Rohit Chopra, voiced his concerns with the proposal in a comment letter, stating that it “appears to fundamentally misunderstand how algorithms, big data, and machine learning work in practice,” and that “it would provide safe harbors to the same technologies at issue in HUD’s own action against [a social media company].” Chopra opposes HUD’s proposal for three reasons: (i) algorithms can provide discriminatory results because they are not neutral; (ii) safe harbors should not be created “around technologies that are proprietary, opaque, and rapidly evolving”; and (iii) incentives are distorted by “outsourcing [the] liability for algorithmic discrimination to third parties.” Chopra concludes that the proposal should not be finalized because it “moves enforcement against discrimination backwards.”
On October 17, the OCC, Federal Reserve Board, FDIC, and NCUA published a proposed interagency policy statement on allowances for credit losses and proposed interagency guidance on credit risk review systems.
The proposed policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology for determining allowances for credit losses applicable to financial assets measured at amortized costs. It will apply to financial assets measured at amortized cost, loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures. The proposed policy statement also stipulates financial assets for which the CECL methodology is not applicable, and includes supervisory expectations for designing, documenting, and validating expected credit loss estimation processes. Once finalized, the proposed policy would be effective at the time of each institution’s adoption of CECL.
The proposed credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—will update the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The proposed guidance “discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution's loan portfolio to its management and board of directors.” Furthermore, the proposed guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
Comments on both proposals are due December 16.
On October 15, the FDIC approved the final rule revising stress testing requirements for FDIC-supervised institutions, consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule remains unchanged from the proposed rule, which was issued by the FDIC in December 2018 (previously covered by InfoBytes here). The final rule (i) changes the minimum threshold for applicability from $10 billion to $250 billion; (ii) revises the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduces the number of required stress testing scenarios from three to two. FDIC-supervised institutions that are covered institutions will “be required to conduct, report, and publish a stress test once every two years, beginning on January 1, 2020, and continuing every even-numbered year thereafter.” The final rule also adds a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. The final rule requires certain covered institutions to still conduct annual stress tests, but this is limited to covered institutions that are consolidated under holding companies required to conduct stress tests more frequently than once every other year. Lastly, the final rule removes the “adverse” scenario—which the FDIC states has provided “limited incremental information”—and requires stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios. The final rule is effective thirty days after it is published in the Federal Register.
As previously covered by InfoBytes, on October 4, the OCC issued its final rule incorporating the same revisions as the FDIC.
On October 11, the CFPB announced the Taskforce on Federal Consumer Financial Law that will examine the existing legal and regulatory environment facing consumers and financial services providers. The Bureau is accepting applications for the task force and seeking to fill the membership with a broad range of expertise in the areas of consumer protection and consumer financial products or services. Inspired by a commission established by the Consumer Credit Protection Act in 1968, the Bureau states that the task force will report to Director Kraninger and will “produce new research and legal analysis of consumer financial laws in the United States, focusing specifically on harmonizing, modernizing, and updating the enumerated consumer credit laws—and their implementing regulations—and identifying gaps in knowledge that should be addressed through research, ways to improve consumer understanding of markets and products, and potential conflicts or inconsistencies in existing regulations and guidance.”
Federal Reserve finalizes capital and liquidity requirement rules for large firms; proposes changes to assessment fees
On October 10, the Federal Reserve Board approved final rules, consistent with changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, to establish a framework that revises the criteria for determining the applicability of regulatory capital and liquidity requirement for large U.S. banking organizations and U.S. intermediate holding companies (IHC) of certain foreign banking organizations with $100 billion or more in total assets. The framework—jointly developed with the FDIC and the OCC—establishes “four risk-based categories for determining the regulatory capital and liquidity requirements applicable to large U.S. banking organizations and the U.S. intermediate holding companies of foreign banking organizations, which apply generally based on indicators of size, cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure.” According to the Fed, while the framework is “generally similar” to proposals released for comment over the past year (see InfoBytes coverage here and here), the final rule further simplifies the proposals by applying liquidity standards to a foreign bank’s U.S. IHC that are based on the IHC’s risk profile instead of the combined U.S. operations of the foreign bank. For larger firms, the framework applies standardized liquidity requirements at the higher end of the range that was originally proposed for both domestic and foreign banks.
The following categories are established under the framework: (i) Category I will be reserved for U.S.-based global systemically important banks; (ii) Category II will apply to U.S. and foreign banking organizations with total U.S. assets exceeding $700 billion or $75 billion in cross-border activity that do not meet Category I criteria; (iii) Category III will apply to U.S. and foreign banking organizations with more than $250 billion in U.S. assets or $75 billion in weighted short-term wholesale funding, nonbank assets, or off balance sheet exposure; and (iv) Category IV will apply to other banking organizations with total U.S. assets of more than $100 billion that do not otherwise meet the criteria of the other three categories.
The framework will take effect 60 days after publication in the Federal Register.
Additionally, the Fed separately issued a notice of proposed rulemaking to raise the minimum threshold for being considered an assessed company and to adjust the amount charged to assessed companies. The notice also announces the Fed’s intention to issue a capital plan proposal that will “align capital planning requirements with the two-year supervisory stress testing cycle and provide greater flexibility for Category IV firms.” Comments on the proposal are due December 9.
On October 10, the CFPB issued a final rule extending the current temporary threshold of 500 open-end lines of credit under the HMDA rules for reporting data to January 1, 2022. As previously covered by InfoBytes, the CFPB temporarily increased the threshold for open-end lines of credit from 100 loans to 500 loans for calendar years 2018 and 2019. In May 2019, the Bureau proposed to extend that temporary threshold to January 1, 2022 and then permanently lower the threshold to 200 open-end lines of credit after that date (covered by InfoBytes here). The Bureau then reopened the comment period for the May 2019 proposed rule with respect to the permanent open-end and closed-end coverage thresholds (covered by InfoBytes here) and now intends to issue a final rule addressing the permanent threshold at a later date. The Bureau also intends to address the other closed-end aspects of the May 2019 proposed rule at a later date.
The final rule adopts the temporary extension of the 500 open-end lines of credit until January 1, 2022, and incorporates, with minor adjustments, the interpretive and procedural rule issued in August 2018 (2018 Rule), which implemented and clarified that the HMDA amendments included in Section 104(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (previously covered by InfoBytes here). The final rule is effective January 1, 2022.
On October 8, the Federal Reserve Board announced that all five federal financial regulators have signed off on final revisions to the Volker Rule (the Rule) to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the other four regulators approved the revisions last month. The revisions, which take full effect on January 1, 2021, clarify prohibited activities and simplify compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The Fed noted that community banks are generally exempt from the Rule by statute, and stressed that the “revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law,” and that the regulators “expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies’ 2013 rule.” However, Federal Reserve Governor Lael Brainard issued a dissenting statement, stressing that the revised Rule “weakens the core protections against speculative trading within the banking federal safety net,” and that the elimination without replacement of the “‘short-term intent’ test for firms engaged in higher levels of trading activities… materially narrows the scope of covered activities.” Brainard also expressed concern about “examiners’ ability to assess compliance with the final rule because it relies on firms’ internal self-policing to set limits to distinguish permissible market making from illegal proprietary trading, no longer requires firms to promptly report limit breaches and increases, and narrows the scope of the CEO attestation requirement.”
On October 8, the CFPB issued its Dodd-Frank mandated semi-annual report to Congress covering the Bureau’s work from October 1, 2018 to March 31, 2019. In presenting the report, Director Kathy Kraninger stressed that the Bureau will continue to use the tools provided by Congress to protect consumers, including “vigorous and even-handed enforcement” with a focus on prevention of harm. Kraninger also reiterated her commitment “to strengthening the consumer financial marketplace by providing financial institutions clear ‘rules of the road’ that allow them to offer consumers a range of high-quality, innovative financial services and products.” Among other things, the report analyzed significant problems consumers face when obtaining consumer financial products and services, assessed actions taken by state attorneys general or state regulators relating to federal consumer financial law, and provided a recap of supervisory and enforcement activities.
While the Bureau did not adopt any significant final rules or orders during the preceding year, it did issue two significant notices of proposed rulemaking relating to certain payday lending requirements under the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans.” (See previous InfoBytes coverage here.) The Bureau also adopted several “less significant rules,” and engaged in significant initiatives concerning, among other things, (i) the disclosure of loan-level HMDA data; (ii) Residential Property Assessed Clean Energy proposed rulemaking; (iii) an assessment of significant rules, including the Remittance Rule, the Ability to Repay/Qualified Mortgage Rule, and the RESPA Mortgage Servicing Rule; (iv) trial disclosure programs; (v) innovation policies related to no-action letters and product sandbox and trial disclosure programs; and (vi) suspicious activity reports on elder financial exploitation.
On October 10, the California attorney general released the highly anticipated proposed regulations implementing the California Consumer Privacy Act (CCPA). The CCPA—which was enacted in June 2018 (covered by a Buckley Special Alert), amended in September 2018, amended again in October 2019 (pending Governor Gavin Newsom’s signature), and is currently set to take effect on January 1, 2020 (Infobytes coverage on the amendments available here and here)—directed the California attorney general to issue regulations to further the law’s purpose. The proposed regulations address a variety of topics related to the law, including:
- The handling of consumer requests made under the CCPA, such as requests to know, requests to delete, and requests to opt-out;
- Service provider classification and obligations;
- The process for verifying consumer requests;
- Training and recordkeeping requirements; and
- Special requirements related to minors.
The California attorney general will hold four public hearings between December 2 and December 5 on the proposed regulations. Written comments are due by December 6.
Notably, the Notice of Proposed Rulemaking states that “the adoption of these regulations may have a significant, statewide adverse economic impact directly affecting business, including the ability of California businesses to compete with businesses in other states” and requests that the public consider, among other things, different compliance requirements depending on a business’s resources or potential exemptions from the regulatory requirements for businesses when submitting comments on the proposal.
Buckley will follow up with a more detailed summary of the proposed regulations soon.
On October 2, the OCC issued the final rule revising the stress testing requirements for OCC-supervised institutions, consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule remains unchanged from the proposed rule, which was issued by the OCC in December 2018 (previously covered by InfoBytes here). The final rule (i) changes the minimum threshold for applicability from $10 billion to $250 billion; (ii) revises the frequency of required stress tests for most FDIC-supervised institutions from annual to biannual; and (iii) reduces the number of required stress testing scenarios from three to two. Specifically, OCC-supervised institutions that are covered institutions will “be required to conduct, report, and publish a stress test once every two years, beginning on January 1, 2020, and continuing every even-numbered year thereafter.” The final rule also adds a new defined term, “reporting year,” which will be the year in which a covered bank must conduct, report, and publish its stress test. The final rule requires certain covered institutions to still conduct annual stress tests, but this is limited to covered institutions that are consolidated under holding companies required to conduct stress tests more frequently than once every other year. Lastly, the final rule removes the “adverse” scenario—which the OCC states has provided “limited incremental information”—and requires stress tests to be conducted under the “baseline” and “severely adverse” stress testing scenarios. The final rule is effective November 24.
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at an American Bar Association webinar
- Kari K. Hall and Christopher M. Walczyszyn to speak on the "Understanding updates to Regulation CC to ensure effective check processing" at a National Association of Federal Credit Unions webinar
- Daniel P. Stipano to discuss "ACAMS Moneylaundering.com Year-End Compliance Review and 2020 Outlook" at an ACAMS webinar
- APPROVED Webcast: Periodic reporting made easier
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference