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On September 15, the Conference of State Bank Supervisors (CSBS) announced the launch of a single, streamlined examination for money transmitters operating nationwide (i.e., in 40 or more states), known as “MSB Networked Supervision.” The single exam—which will apply to “78 of the nation’s largest payments and cryptocurrency companies”—will be led by one state overseeing a group of examiners sourced from around the country. MSB Networked Supervision is a result of recommendations from the CSBS Fintech Industry Advisory Panel and CSBS Vision 2020 (covered by InfoBytes here).
On September 4, the CFPB released its summer 2020 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of consumer reporting, debt collection, deposits, fair lending, mortgage servicing, and payday lending. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between September and December of 2019. Highlights of the examination findings include:
- Consumer Reporting. The Bureau cited violations of the FCRA’s requirement that lenders first establish a permissible purpose before they obtain a consumer credit report. Additionally, the report notes instances where furnishers failed to review account information and other documentation provided by consumers during direct and indirect disputes. The Bureau notes that “[i]nadequate staffing and high daily dispute resolution requirements contributed to the furnishers’ failure to conduct reasonable investigations.”
- Debt Collection. The report states that examiners found one or more debt collectors (i) falsely threatened consumers with illegal lawsuits; (ii) falsely implied that debts would be reported to credit reporting agencies (CRA); and (iii) falsely represented that they operated or were employed by a CRA.
- Deposits. The Bureau discusses violations related to Regulation E and Regulation DD, including requiring waivers of consumers’ error resolution and stop payment rights and failing to fulfill advertised bonus offers.
- Fair Lending. The report notes instances where examiners cited violations of ECOA, including intentionally redlining majority-minority neighborhoods and failing to consider public assistance income when determining a borrower’s eligibility for mortgage modification programs.
- Mortgage Servicing. The Bureau cited violations of Regulation Z and Regulation X, including (i) failing to provide periodic statements to consumers in bankruptcy; (ii) charging forced-placed insurance without a reasonable basis; and (iii) various errors after servicing transfers.
- Payday Lending. The report discusses violations of the Consumer Financial Protection Act for payday lenders, including (i) falsely representing that they would not run a credit check; (ii) falsely threatening lien placement or asset seizure; and (iii) failing to provide required advertising disclosures.
The report also highlights the Bureau’s recently issued rules and guidance, including the various responses to the CARES Act and the Covid-19 pandemic.
On August 21, the FDIC announced a proposal to amend the agency’s Guidelines for Appeals of Material Supervisory Determinations (Guidelines) and establish a new, independent Office of Supervisory Appeals (Office) that would replace the current Supervision Appeals Review Committee. The new Office, which will have final authority to resolve appeals, would be independent from other divisions within the FDIC that have authority to issue material supervisory determinations. According to the release, to promote the Office’s independence, the FDIC intends to recruit externally and employ reviewing officials on a part-time or intermittent, time-limited basis. The proposal also includes modifications to the procedures and timeframes regarding when determinations underlying formal enforcement-related actions may be appealed.
Among other things, the proposal would update the Guidelines to clarify that for purposes of the supervisory appeals process, a formal enforcement-related action begins, and appeal rights are temporarily unavailable, when the FDIC: (i) initiates a formal investigation; (ii) issues a notice of charges or notice of assessment, as applicable; (iii) provides an institution with a draft consent order; or (iv) provides written notice stating “that the FDIC is reviewing the relevant facts and circumstances to determine whether a formal enforcement action is merited.” Under the proposal, should the FDIC provide written notice that it is determining whether a formal enforcement action is merited, the agency would be required to provide the institution with a draft consent order within 120 days, as well as an opportunity to engage in settlement negotiations. If the FDIC fails to provide the institution with a draft consent order within the initial 120-day period, supervisory appeal rights would become available to the institution. If a settlement is not reached, the FDIC would have 90 days to issue a notice of charges or assessment or open an order of investigation, or the institution’s supervisory appeal rights would be made available. In either case, once supervisory appeal rights are made available, the institution would have 60 days to file an appeal, which is consistent with the standard timeline for appealing a material supervisory determination. If the institution agrees to the consent order, “then the matter would be resolved and the need for an appeal would be obviated.”
If the proposal is adopted, institutions “would continue to be encouraged to make good-faith efforts to resolve disagreements with examiners or the appropriate regional office or division director.” However, if an institution is unable to resolve a disagreement regarding a material supervisory determination through such efforts, it would be able to appeal that determination to the Office.
Chairman Jelena McWilliams commented that the while the proposal retains several aspects of the existing appeals process—for example, the burden of proof on appeal will continue to rest with the institution—the “proposal seeks to establish a fair, independent process for a bank to appeal material supervisory decisions,” which is “key to promoting consistency among examiners across the country, ensuring accountability at the agency, and, ultimately, maintaining stability and public confidence in the nation’s financial system.” McWilliams added that she does not expect the proposed changes to result “in an avalanche of appeals.”
Comments on the proposal will be accepted until October 20.
On August 21, the FDIC approved a proposed statement of policy, which updates and clarifies the agency’s policies and procedures related to Minority Depository Institutions (MDIs). Among other things, the proposed statement of policy outlines the efforts the agency has undertaken and will continue to take to “preserve and promote” MDIs. Additionally, the proposal defines the program terms for technical assistance, training, educations, and outreach. Finally, the proposal includes a description of the FDIC’s examination rating system for MDIs. Comments on the proposal will be due 60 days after publication in the Federal Register.
On August 12, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert to broker-dealers and investment advisers (firms) impacted by the Covid-19 pandemic addressing observations and recommendations related to several categories, including investor asset protection; personnel supervision; practices related to fees, expenses, and financial transactions; investment fraud; business continuity; and protecting sensitive information. The alert recommends firms review—and where appropriate—modify supervisory and compliance policies and procedures as they deal with market volatility and technological challenges brought by the Covid-19 pandemic. The alert notes that firms may need to update their practices to address, among other things, (i) unusual or unscheduled investor withdrawals; (ii) staffers communicating or executing transactions off-site or on personal devices, or making securities recommendations tied to market sectors experiencing high volatility or fraud; and (iii) supervisors having less oversight and interaction with staff in remote environments, leading to difficulties in maintaining effective due diligence, conducting background checks when hiring, or overseeing requisite examinations. Additionally, firms are instructed to monitor potential conflicts of interest and fee errors when informing investors about the costs of services, investment products, and related compensation, while also ensuring recommendations are made in the “best interest of investors.” The alert also recognizes that “times of crisis or uncertainty can create a heightened risk of investment fraud through fraudulent offerings,” and advises firms to “be cognizant of these risks when conducting due diligence on investments and in determining that the investments are in the best interest of investors.” Firms and investors who suspect fraud are advised to contact the SEC and report the potential fraud.
On July 24, the Federal Reserve Board issued a final rule revising its “Rules Regarding Availability of Information,” to update and clarify the Board’s regulations implementing the Freedom of Information Act (FOIA) and the rules covering the disclosure of confidential supervisory information (CSI). The final rule, among other things, adopts standards consistent with the OCC’s rules, including (i) permitting supervised financial institutions to disclose CSI with their directors, officers, and employees “when necessary or appropriate for business purposes”; (ii) “permitting disclosures to the supervised financial institution’s outside legal counsel and auditors when the disclosures are ‘necessary or appropriate in connection with the provision of legal or auditing services’”; and (iii) “eliminat[ing] the requirement that supervised financial institutions obtain prior [Board] approval to disclose [CSI] to their other service providers, such as consultants, contractors, and contingent workers.” The final rule also updates definitions for expedited processing, clarifies terms, and helps users “more easily navigate the process of filing a FOIA request.” The final rule is effective 30 days after publication in the Federal Register.
On July 6, the CFPB announced the launch of Consumer Financial Protection Week from July 14 through July 17. Over the course of four days, the Bureau is hosting or participating in multiple virtual events, including (i) a tutorial and overview of the HMDA data browser; (ii) a discussion on the Bureau’s supervisory and enforcement prioritized assessment approach; and (iii) a discussion on the Bureau’s Taskforce on Federal Consumer Financial Law.
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
On June 24, the Federal Reserve Board sent a letter to the Federal Reserve Banks (FRBs) providing guidance regarding the supervision of de novo state member banks, as well as the evaluation of de novo insured depository institutions (IDI) seeking to become state member banks. Under the letter, an insured depository institution is considered to be in the de novo stage until it has been operating for at least three years. Supervisory Letter SR 20-16, which supersedes Supervisory Letter SR 91-17, “applies to any commercial bank, thrift, Edge Act corporation, or industrial bank that has been in existence for less than three years and is converting to become a state member bank,” and outlines de novo application submission guidelines and FRB examination requirements. SR 20-16 provides that within six months following a de novo’s formation or conversion to a state member bank, the responsible FRB should conduct a targeted examination and issue a report summarizing supervisory findings, with targeted focus on the de novo’s risk management process or the management component of the CAMELS rating, as well as any business and operating plans submitted in connection with its membership application.” SR 20-16 outlines the examination cycle and notes that the full-scope statutorily required examination schedule will not occur until a de novo has had three full-scope examinations and has been in operation for three years. SR 20-16 further provides that, for de novo banks that are subsidiaries of existing bank holding companies, an FRB at its discretion, may elect to make a risk-based determination that if the parent bank has consolidated assets of greater than $3 billion and is in good standing, the subsidiary may be examined less frequently.
On June 23, the federal financial institution regulatory agencies (Federal Reserve Board, OCC, FDIC, and NCUA), in conjunction with the state bank and credit union regulators, issued interagency examiner guidance for assessing the safety and soundness of financial institutions in light of the Covid-19 pandemic. The joint guidance states that due to the “unique, evolving, and potentially long-term nature of the issues confronting institutions” from the Covid-19 pandemic, examiners will “exercise appropriate flexibility in their supervisory response.” The guidance acknowledges that Covid-19 can have an adverse impact on the financial condition and operational capabilities of financial institutions that have appropriate governance and risk management systems in place.
Among other things, the guidance notes that examiners will (i) “continue to assign supervisory ratings in accordance with the interagency CAMELS and ROCA rating systems”; and (ii) “assess the reasonableness of management’s actions in response to the pandemic given the institution’s business strategy and operational capacity.” The guidance also provides details on things such as capital adequacy and asset quality for examiners to consider when assigning composite and component CAMELS and ROCA ratings.
- Daniel P. Stipano to discuss "Making customers whole: Trends in remediation and restitution expectations" at the American Bar Association Business Law Virtual Section Meeting
- Jonice Gray Tucker to discuss "Fairness gone viral: Fair lending considerations for financial institutions amid Covid-19" at the American Bar Association Business Law Virtual Section Meeting
- Daniel P. Stipano to discuss "High standards: Best practices for banking marijuana-related businesses" at the ACAMS AML & Anti-Financial Crime Conference
- Daniel P. Stipano to discuss "Wait wait ... do tell me! Where the panelists answer to you" at the ACAMS AML & Anti-Financial Crime Conference
- Matthew P. Previn and Walter E. Zalenski to discuss "Is valid when made ... valid?" at the Women in Housing & Finance Partner Series webinar
- Warren W. Traiger and Caroline K. Eisner to discuss "CRA modernization and the OCC final rule" at CBA Live
- Daniel R. Alonso to discuss "Transnational corruption: A chat with former U.S. federal prosecutors in New York" at Marval Live Talks
- Sherry-Maria Safchuk and Lauren Frank to discuss "New CFPB interpretation on UDAAP" at a California Mortgage Bankers Association Mortgage Quality and Compliance Committee webinar
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute