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Financial Services Law Insights and Observations


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  • Federal regulators temporarily lower community bank leverage ratio

    Federal Issues

    On April 6, federal regulators issued two interim final regulatory capital rules that will modify the framework of the Community Bank Leverage Ratio (CBLR) in order to enable qualifying community banking organizations (banks) to support lending during the Covid-19 pandemic. The first rule implements Section 4012 of the CARES Act, making temporary changes to the framework of the CBLR so that banks with a leverage ratio of at least eight percent starting in the second quarter of 2020 “may elect to use the community bank leverage ratio framework.” The rule also provides a two-quarter grace period for community banks whose leverage ratios fall below the eight percent requirement, provided that the bank’s leverage ratio does not fall below seven percent. The second interim final rule allows for the temporary CBLR gradually to transition to eight and one-half percent in 2021, and then back to nine percent at the beginning of 2022.

    Federal Issues Agency Rule-Making & Guidance FDIC Federal Reserve OCC Bank Supervision Community Banks CARES Act Covid-19

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  • OCC issues bulletin to community banks on filing of Call Reports

    Federal Issues

    On March 25, the OCC issued Bulletin 2020-24, which encourages institutions to file March 31 call reports by the filing deadline, but recognizes that Covid-19-related disruptions may cause filing delays. As such the OCC will not take action against institutions affected by Covid-19 for submitting in good faith the March 31 call report within 30 days of the filing deadline.  Further, institutions may amend the filing to correct for unintentional and incidental reporting errors within 30 days of the filing deadline without penalty. Institutions affected by Covid-19 that expect a delay in their March 31 call report submission or anticipate challenges in obtaining director attestations before submission of the call report are encouraged to contact their supervisory office.

    Federal Issues Covid-19 OCC Community Banks Call Report

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  • Regulatory agencies issue pandemic planning statement

    Federal Issues

    On March 6, the Federal Reserve, FDIC, OCC, NCUA, Conference of State Bank Supervisors, and the CFPB—through the Federal Financial Institutions Examination Council—issued an Interagency Statement on Pandemic Planning, which, among other things, updates 2006 and 2007 guidance on the need for business continuity plans (BCPs) that address the effects of pandemics. The interagency statement encourages banks to develop plans that, among other things, limit disruption of operations, minimize staff contact by utilizing remote access, and plan for staffing challenges by cross-training bank staff. The statement recommends that the BCPs of financial institutions should include: (i) a preventive program; (ii) a documented strategy that applies to the stages of the pandemic; (iii) a “comprehensive framework of facilities, systems, or procedures to ensure that the institution’s critical operations will continue” (iv) a testing program; and (v) an oversight program to ensure ongoing review and updates to the plan.” The statement also lists websites that offer information on pandemic planning activities. The FDIC and the OCC also published advisories, FIL-14-2020, and OCC 2020-13, respectively.

    On March 9, the agencies issued a joint press release encouraging the financial institutions to “meet the financial needs of customers and members affected by” COVID-19. Also, the U.S. Senate sent a letter to trade associations encouraging them to provide job security for employees who self-quarantine or must miss work to take care of sick family members, and to ensure staff will not be required to use all sick leave/vacation leave or “report for work when such leave is exhausted.” The letter urges the entities to work with their customers by waiving late fees and overdraft fees among other measures. The Connecticut Department of Banking issued its own guidance as well regarding temporary remote work, and on March 5, the Washington Department of Financial Institutions issued similar guidance.

    Federal Issues Community Banks Financial Institutions State Regulators Federal Reserve FDIC OCC Covid-19 NCUA Credit Union CSBS CFPB

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  • Fed governor discusses modernizing payment systems for community banks

    Federal Issues

    On February 27, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Banking Outlook Conference held at the Federal Reserve Bank of Atlanta on ways the Fed can increase transparency and modernize payment services for community banks. Bowman stated that the Fed is “uniquely positioned as a provider of payment services and as a supervisor of banks to ensure that our nation’s evolving financial system works for community banks.” Bowman discussed how the Fed can achieve this objective by, among other things, (i) adopting an additional same-day automated clearinghouse (ACH) window, which “will allow banks and their customers, particularly those located outside the eastern time zone, to use same-day ACH services during a greater portion of the business day”; (ii) implementing FedNow, which would, as previously covered by InfoBytes, “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide”; and (iii) encouraging partnerships between community banks and fintech firms to “leverage the latest technology to provide customer-first, community-focused financial services and provide customers with efficiencies, such as easy-to-use online applications or rapid loan decisionmaking.” Bowman highlighted the Fed’s fintech innovation office hours, as well as the Fed’s recently launched fintech innovation webpage (covered by InfoBytes here), and emphasized the Fed’s desire to hear directly from banks and fintech companies on innovation challenges.

    With respect to third-party service providers, Bowman proposed several important initiatives for the Fed to help community banks effectively manage their third-party relationships and access innovative new technology. These include providing clear, consistent due diligence guidance on third-party relationships to provide uniform standards that are aligned with guidance issued by the OCC and other banking agencies. Bowman also suggested increasing the transparency of its third-party supervisory program by releasing information that may be useful about key service providers to community banks, and tailoring regulatory burdens for community banks with assets under $1 billion.

    Federal Issues Federal Reserve Community Banks Third-Party Vendor Management Fintech ACH OCC

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  • FDIC introduces deposit insurance application for nonbanks

    Agency Rule-Making & Guidance

    On February 10, the FDIC issued FIL-8-2020, which incorporates Procedures for Deposit Insurance Applications from Applicants that are Not Traditional Community Banks into its Deposit Insurance Application Procedures Manual (manual). In addition to the updating the manual, the agency also issued a handbook, entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions (handbook), advising that the updated manual together with the handbook provide comprehensive instructions for completing deposit insurance applications. According to the letter, the updated manual and the handbook contain mostly “technical edits and clarifications” and are meant to “provide transparency and clarity” for applicants. The letter also supplies the definitions of “non-bank” and “non-community bank.”

    Agency Rule-Making & Guidance Deposit Insurance Nonbank Federal Issues Community Banks Supervision

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  • Fed governor identifies community banks' fintech challenges


    On February 10, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Conference for Community Bankers on the interaction between innovation and regulation for community banks. In discussing her “vision for creating pathways to responsible community bank innovation,” Bowman identified particular challenges facing smaller banks when identifying and integrating new technologies and offered suggestions for ways the Fed can assist these banks in managing relationships with third-party service providers. Acknowledging that responsible innovation requires community banks to identify goals and pinpoint products and services to implement their strategies, Bowman recognized that compliance costs can create an outsized and undue burden on smaller banks and stated that federal regulations should be tailored to bank size, risk, and complexity. Among other things, Bowman stated that the Fed could align its third-party service provider guidance with the OCC and other banking agencies to provide uniform standards to banks. “It is incredibly inefficient to have banks and their potential fintech partners and other vendors try to navigate unnecessary differences and inconsistencies in guidance across agencies,” Bowman noted. Regulators and supervisors have a role in easing the burden for community banks, she added, noting that third-party guidance should allow banks to conduct shared due diligence on potential partners and pool resources to avoid duplicating work. In addition, Bowman commented that the Fed could help banks make this choice by publishing a list of service providers subject to regulatory supervision and increasing transparency around “who and what” the Fed evaluates. Bowman further stated that any guidance should also explain what due diligence looks like for potential fintech partners, since standards applied to other third parties may not be universally applicable. Giving community banks a better vision of what success in due diligence looks like, Bowman stated, will require releasing more information on its necessary elements.

    Bowman also highlighted the Fed’s upcoming fintech innovation office hours, as well as the Fed’s recently launched fintech website section, (both covered by InfoBytes here), which are designed to help provide access to Fed staff, highlight supervisory observations regarding fintech, provide a hub of information for interested stakeholders on innovation-related matters, and deliver practical tips for banks and other companies interested in engaging in fintech activity.

    Fintech Federal Reserve Third-Party Community Banks Vendor Management

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  • FHFA raises annual CFI cap

    Agency Rule-Making & Guidance

    On January 22, the Federal Housing Finance Agency published its annual adjustment to the cap on average total assets used to determine whether a Federal Home Loan Bank member qualifies as a community financial institution (CFI). The new cap is $1,224,000,000. Under the Federal Home Loan Bank Act, insured depository institutions that qualify as a CFI receive certain advantages in qualifying for bank membership and the ability to receive and collateralize long-term advances. The adjustment took effect January 1.

    Agency Rule-Making & Guidance FHFA Community Banks FHLB

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  • FDIC extends deadline for comments on innovation pilot programs

    Agency Rule-Making & Guidance

    On January 14, the FDIC again published a notice and request for comments in the Federal Register on innovation pilot programs. The FDIC first solicited comments on innovation pilot programs in November, with comments due by January 6. As no comments were submitted, the agency is once again requesting comments on the programs, which, as previously covered by InfoBytes, it hopes will spur collaboration “with innovators in the financial, non-financial, and technology sectors to, among other things, identify, develop, and promote technology-driven innovations among community and other banks in a manner that ensures the safety and soundness of FDIC-supervised and insured institutions.”

    Comments must be received by February 13.

    Agency Rule-Making & Guidance Fintech Community Banks Supervision FDIC

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  • Agencies simplify capital calculation for community banks

    Agency Rule-Making & Guidance

    On October 29, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a final rule to simplify capital rule compliance requirements and reduce the regulatory burden for community banks in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things, the final rule allows qualifying community banks to adopt a simple community bank leverage ratio to measure capital adequacy, removing requirements for calculating and reporting risk-based capital ratios. Qualifying community banks must have less than $10 billion in total consolidated assets and meet additional criteria such as a leverage ratio greater than 9 percent. The agencies estimate that approximately 85 percent of community banks will qualify. The final rule also grants a community bank that temporarily fails to comply with the framework a two-quarter grace period to come back into full compliance, as long as its leverage ratio remains above 8 percent. According to the agencies, banking organizations will be permitted to use the community bank leverage ratio framework in their March 31, 2020 Call Report or Form FR Y-9C, as applicable. The final rule will take effect January 1, 2020.

    Agency Rule-Making & Guidance Federal Reserve FDIC OCC Community Banks EGRRCPA

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  • McWilliams highlights upcoming CRA examination updates for MDIs, encourages partnerships between community banks and fintechs

    Federal Issues

    On October 2, FDIC Chairman Jelena McWilliams spoke at the National Bankers Association’s annual convention to discuss the agency’s objectives regarding minority depository institutions (MDIs). McWilliams highlighted recent FDIC initiatives, including past and future roundtable discussions between large and minority banks regarding potential partnership opportunities. McWilliams noted that many large banks are unaware of how these partnerships can count for Community Reinvestment Act (CRA) credit. Therefore, the FDIC is updating its examiner instructions for CRA performance evaluations to identify activities involving MDIs. McWilliams also reminded attendees about the upcoming inaugural meeting of the agency’s new MDI Subcommittee to its Advisory Committee on Community Banking, which will focus on issues, tools, and resources unique to MDIs. One of the subcommittee’s goals, she noted, is to “identify additional opportunities to provide regulatory relief for MDIs with less-complex balance sheets while maintaining safety and soundness.” Concerning the FDIC’s franchise-marketing process for failing MDIs, McWilliams commented that “[g]oing forward, when a new marketing initiative begins, we will provide a two-week window exclusively for MDIs,” and will also contact all qualified MDIs on the bid list and provide technical assistance.

    Earlier, on October 1, McWilliams delivered keynote remarks at the Federal Reserve Bank in St. Louis, in which she warned community banks that their ability to survive and thrive depends on their ability to innovate and adapt to changing technology. Specifically, McWilliams discussed the growth of digitization, open banking, machine learning/artificial intelligence, and personalization, stressing that banking technology is advancing at a “relentless pace.” Consequently, “we all must challenge ourselves to think about what that means for the future of the banking industry, and community banks in particular.” McWilliams noted, however, that community banks’ inability to keep pace with innovation is due to both cost and regulatory uncertainty. “The cost to innovate is in many cases prohibitively high for community banks. They often lack the expertise, the information technology, and research and development budgets to independently develop and deploy their own technology.” She suggested that community banks partner with fintech firms that have already developed, tested, and rolled out new technology, and emphasized that her goal is for the FDIC to lay “the foundation for the next chapter of banking by encouraging innovation that meets consumer demand, promotes community banking, reduces compliance burdens, and modernizes our supervision.”

    Federal Issues Agency Rule-Making & Guidance FDIC CRA Fintech Community Banks

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