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Agencies propose codifying that supervisory guidance lacks force of law
On October 20, the Federal Reserve Board, CFPB, FDIC, NCUA, and OCC released a notice of proposed rulemaking (NPRM), which seeks to codify the “Interagency Statement Clarifying the Role of Supervisory Guidance issued by the agencies on September 11, 2018 (2018 Statement).” As previously covered by InfoBytes, the 2018 Statement confirmed that supervisory guidance “does not have the force and effect of law, and [that] the agencies do not take enforcement actions based on supervisory guidance.” The Statement emphasized that the intention of supervisory guidance is to outline agencies’ expectations or priorities and highlighted specific policies and practices the agencies intend to take relating to supervisory guidance to further clarify the proper role of guidance, including: (i) not citing to “violations” of supervisory guidance; (ii) limiting the use of numerical thresholds or other “bright-line” requirements; (iii) limiting multiple issuances of guidance on the same topic; (iv) continuing to emphasize the role of supervisory guidance to examiners and to supervised institutions; and (v) encouraging supervised institutions to discuss supervisory guidance questions with their appropriate agency contact.
In addition to codifying the above elements of the 2018 Statement, the proposal would amend the 2018 Statement by (i) clarifying that references in the Statement limiting agency “criticisms” includes criticizing institutions “through the issuance of [matters requiring attention] MRAs and other supervisory criticisms, including those communicated through matters requiring board attention, documents of resolution, and supervisory recommendations”; and (ii) adding that supervisory criticisms should be “specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.”
Comments are due 60 days after publication in the Federal Register, which has not yet occurred.
FinCEN, federal banking agencies provide CIP program relief
On October 9, the Financial Crimes Enforcement Network (FinCEN), in concurrence with the OCC, Federal Reserve, FDIC, and NCUA (collectively, “federal banking agencies”), issued an interagency order granting an exemption from the requirements of the customer identification program (CIP) rules for insurance premium finance loans extended by banks to all customers. The exemption is intended to facilitate insurance premium finance lending for the purchase of property and casualty insurance policies and will apply to loans extended by banks and their subsidiaries, subject to the federal banking agencies’ jurisdiction. According to FinCEN, insurance premium finance loans present a low risk for money laundering due to the purpose for which the loans are extended and the limitations on how such funds may be used. Moreover, FinCEN emphasized that “property and casualty insurance policies themselves are not an effective means for transferring illicit funds.” Banks, however, must still comply with all other regulatory requirements, including those implementing the Bank Secrecy Act that require the filing of suspicious activity reports. Furthermore, the federal banking agencies determined that the order is consistent with safe and sound banking practices. The order supersedes a September 2018 order, which previously granted an exemption from the CIP rule requirements for commercial customers (covered by InfoBytes here).
Fed recommends derivatives market follow IBOR Fallback Protocol
On October 9, the Federal Reserve Board issued SR 20-22,which strongly advises supervised institutions to transition away from LIBOR and consider following the International Swaps and Derivatives Association’s (ISDA) IBOR Fallback Protocol and IBOR Fallback Supplement (collectively, “the Protocol”). The Fed warned market participants that because the publication of LIBOR is not guaranteed after 2021, its continued use poses financial stability risks. The Fed recommended that examiners alert supervised firms active in the derivatives market to strongly consider adhering to the Protocol, which will, among other things, “facilitate[] the transition away from LIBOR by providing derivatives market participants with new fallbacks for legacy and new derivative contracts,” and will “allow LIBOR derivatives contracts to continue to perform through the transition.” The ISDA released a statement the same day announcing the Protocol will be launched on October 23 and take effect on January 25, 2021.
Find continuing InfoBytes coverage on LIBOR here.
DOJ Cyber-Digital Task Force releases cryptocurrency enforcement framework
On October 8, U.S. Attorney General William P. Barr released his Cyber-Digital Task Force’s comprehensive overview of emerging threats and enforcement challenges associated with the increased use of cryptocurrencies. The report, titled Cryptocurrency: An Enforcement Framework, is divided into three parts and details the relationships that the DOJ has built with U.S. and foreign regulatory and enforcement partners, and summarizes the Department’s response strategies.
- Part I: Threat Overview. This section illustrates how malicious actors misuse cryptocurrency technology to harm users and commit crimes. The task force catalogs most illicit uses of cryptocurrency into the following three broad categories: (i) “financial transactions associated with the commission of crimes,” including soliciting funds to support terrorist activities; (ii) money laundering and the shielding of otherwise legitimate activity from tax, reporting, or other legal requirements; or (iii) crimes that directly implicate the cryptocurrency marketplace itself, such as stealing cryptocurrency or promising cryptocurrency to defraud investors.
- Part II: Law and Regulations. This section explores the various legal and regulatory authorities that the DOJ has used to bring cryptocurrency enforcement actions, and highlights its partnerships with other U.S. federal and state authorities and foreign enforcement agencies to prevent crime and provide investigatory assistance.
- Part III: Ongoing Challenges and Future Strategies. This section discusses the ongoing challenges presented by the misuse of cryptocurrency, as well as ongoing strategies to combat emerging threats. This includes an examination of certain business models and activities employed by cryptocurrency exchanges, including money service businesses, virtual asset and peer-to-peer exchanges and platforms, kiosk operators, and casinos.
This is the task force’s second report. The first report, published in 2018, provides a more general overview of cyber threats.
CFPB outlines application process for early termination of consent orders
On October 5, the CFPB issued a policy statement outlining the application process for entities seeking to terminate a consent order before the original expiration date. Generally, consent orders issued by the Bureau carry five-year terms, although the term may be extended in certain circumstances. While reiterating the essential role consent orders play in the Bureau’s enforcement work, the Bureau recognizes that consent orders can impose costly and resource-intensive reporting and record-keeping requirements, and may impact a regulated depository institution’s ability to open new branches or merge or acquire other financial institutions. Acknowledging that there may be “exceptional circumstances” where early termination may be appropriate, the policy statement sets forth eligibility criteria that entities must meet, and lays out the standards that the Bureau intends to use when evaluating early termination applications. It also notes that only entities are permitted to apply for early termination of a consent order. Individuals are not eligible do so.
Among other things, an entity applying for early termination must demonstrate that it (i) has fully complied with the consent order’s terms and conditions; and (ii) has a “satisfactory” compliance management system in its institutional product line or compliance area under which the consent order was issued. Entities must also meet certain timing and threshold eligibility criteria. The policy statement further specifies that an entity may not apply if it has been banned from participating in a certain industry, if the consent order involves violations of an earlier order, or if any criminal activity is involved. Once an application is determined to be complete, the Bureau states that it “generally intends to complete [its] compliance review within six months.”
The policy statement takes effect October 8.
CSBS proposes prudential standards for state-licensed nonbank mortgage servicers
On October 1, the Conference of State Bank Supervisors (CSBS) requested public comment on proposed regulatory prudential standards for nonbank mortgage servicers. According to CSBS, the proposal is being issued to address concerns about nonbank mortgage servicers, including the rapid market share growth, institution size, and financial stability and governance. The goals of the proposal are to (i) “[p]rovide better protection for borrowers, investors and other stakeholders in the occurrence of a stress event. . .[that] could result in harm”; (ii) “[e]nhance effective regulatory oversight and market discipline over these entities”; and (iii) “[i]mprove transparency, accountability, risk management and corporate governance standards.” Highlights of the proposal include:
- Baseline Standards. CSBS notes that the baseline standards, which cover eight areas—capital, liquidity, risk management, data standards and integrity, data protection/cyber risk, corporate governance, servicing transfer requirements and change of control—will represent regulatory requirements for state-licensed nonbank mortgage servicers and will “leverage existing standards or generally accepted business practices” in order to minimize the regulatory burden.
- Enhanced Standards. CSBS is proposing enhanced standards that would apply to servicers owning whole loans plus mortgage servicing rights (MSRs) totaling the lesser of $100 billion or representing at least a 2.5 percent total market share based on Mortgage Call Report quarterly data of licensed nonbank owned whole loans and MSRs (known as “Complex Servicers”). The enhanced standards would be applied to capital, liquidity, stress testing and living will/recovery and resolution planning. Additionally, the proposal notes that regulators may determine a nonbank mortgage servicer that does not meet the definition of Complex Servicer is still subject to the enhanced standards based on “a unique risk profile, growth, market importance, or financial condition of the institution.”
Comments on the proposal are due by December 31.
OCC issues CRA compliance resources
On October 1, the OCC released three items in support of the implementation of the new Community Reinvestment Act (CRA) final rule. The three newly released items include: (i) a compliance guide for small banks; (ii) an initial illustrative list of qualifying activities; and (iii) a form to request consideration of items to be added to the list of qualifying activities. As previously covered by a Buckley Special Alert, the OCC’s rule, while technically effective October 1, provides for at least a 27-month transition period for compliance based on a bank’s size and business model. Large banks and wholesale and limited purpose banks will have until January 1, 2023 to comply, and small and intermediate banks that opt-in to the final rule’s performance standards will have until January 1, 2024.
FCC seeks comment on TCPA exemptions
On October 1, the FCC issued a Notice of Proposed Rulemaking (NPRM), seeking comment on exemptions already granted under the TCPA allowing certain entities and types of calls to be made using an automatic telephone dialing system. The FCC is required by Section 8 of The Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act (TRACED Act) to ensure that any exemption granted under the TCPA “includes requirements with respect to: (i) the classes of parties that may make such calls; (ii) the classes of parties that may be called; and (iii) the number of such calls that may be made to a particular called party.” Section 8 of the TRACED Act requires the FCC to prescribe new regulations or amend existing regulations with regard to the TCPA exemptions no later than December 30, 2020. The FCC is seeking comment on the current nine exemptions, which include, among other things, financial-institution calls to a wireless number. The FCC notes that the current conditions under the financial institution exemption “appear to satisfy section 8 of the TRACED Act” because there are limitations on the class of calling parties, the class of called parties, and the number of calls (no more than three calls per event over a three-day period for each affected account).
Additionally, the FCC seeks comment on the exemption allowing commercial calls to residences that do not constitute telemarketing. The FCC notes that the current exemption does not appear to satisfy Section 8’s requirements, as there is not enough specificity of the class of party that makes the calls, nor is there a limit on the number of calls that can be made. The FCC proposes to alter this exemption into two types of classes of parties: informational and transactional callers and seeks comment on whether to limit the number of calls that can be made under this exemption.
Comments will be due 15 days after publication in the Federal Register.
Fed FAQs clarify bank control structure under BHC and HOLA
On September 30, the Federal Reserve Board issued several frequently asked questions related to its control and divestiture proceedings final control rule that took effect the same day. As previously covered by InfoBytes, in January the Fed revised the bank control framework to clarify the rules used to determine whether a company controls a bank or a bank controls a company pursuant to the Bank Holding Company Act (BHC Act) and the Home Owners' Loan Act (HOLA). Among other things, the Fed notes that it “does not expect” to revisit investment structures that had previously been reviewed prior to the effective date of the control rule, and would not require changes to investment structures “that represent a reasonable interpretation of [Fed] precedent at the time the structure was created.” The FAQs also discuss what constitutes a “limiting contractual right” with respect to a contractual provision between “a first company and a second company that requires the second company to conform its activities to the activities restrictions under the [BHC Act] or [HOLA],” along with whether the control rule differentiates “between limiting contractual rights based on the circumstances under which the right was created or the nature of the document in which the right resides.”
Fed proposes updates to capital planning requirements
On September 30, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) to tailor the requirements in the Fed’s capital plan rule applicable to large bank holding companies and U.S. intermediate holding companies of foreign banking organizations. The changes would conform the capital planning, regulatory reporting, and stress capital buffer requirements for firms with $100 billion or more in total assets (Category IV) with the tailored regulatory framework approved by the Fed last October (covered by InfoBytes here). The NPRM would also make additional changes to the Fed’s stress testing rules, stress testing policy statement, and regulatory reporting requirements related to “business plan change assumptions, capital action assumptions, and the publication of company-run stress test results for savings and loan holding companies” to be consistent with a final rule issued last year that amended resolution planning requirements for large domestic and foreign firms (covered by InfoBytes here). These changes include removing company-run stress test requirements and implementing biennial, rather than annual, supervisory stress tests for firms subject to Category IV standards. Additionally, the Fed seeks comments on its existing capital planning guidance for firms of all sizes. Notably, the Fed states that the NPRM would not affect the calculation of firms’ capital requirements. Comments on the NPRM are due November 20.