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Fed report highlights banks’ Covid-19 responses
On November 6, the Federal Reserve Board (Fed) issued its Supervision and Regulation Report, which summarizes banking system conditions and the Fed’s supervisory and regulatory activities. The current report discusses the safety and soundness of the banking industry, especially with respect to economic and financial stresses resulting from Covid-19 containment measures. The report highlights, among other things, that Fed programs “have helped to preserve the flow of credit” and that banks have taken several actions to maintain financial and operational resiliency. These actions include providing access to substantial lines of credit for corporate borrowers and playing a significant role in supporting small businesses through the Paycheck Protection Program. In addition, the report notes that loan growth has grown slightly since the beginning of the year and that capital positions and liquidity conditions remain strong. However, the report cautions that while “economic indicators have shown marked improvement since the second quarter, a high degree of uncertainty persist.” The report also details the Fed’s current areas of supervisory focus and describes how banks have adapted to a largely remote working environment.
The same day, the Fed also announced updates to the list of firms supervised by its Large Institution Supervision Coordinating Committee Program, which is responsible for supervising the largest and most complex firms. As a result, “certain foreign banks with U.S. operations that have substantially decreased in size and risk over the past decade will move to the Large and Foreign Banking Organization supervision portfolio, where they will be supervised with other banks of similar size and risk.” The Fed stresses that the “portfolio move will have no effect on the regulatory capital or liquidity requirements of any firm.”
CFPB finalizes rule on confidential information disclosures
On October 29, the CFPB issued a final rule to modify its procedures for the disclosure of records and information. As previously covered by InfoBytes, in August 2016, the Bureau issued a proposed rule seeking to, among other things, amend procedures used by persons in the public domain to obtain information from the CFPB under the Freedom of Information Act (FOIA), the Privacy Act of 1974, and legal proceedings. In September 2018, the Bureau published a final rule addressing FOIA, the Privacy Act, and certain legal proceedings (covered by InfoBytes here). The Bureau now issues a final rule addressing “the confidential treatment of information obtained from persons in connection with the exercise of its authorities under federal consumer financial law.” The final rule amends definitions and clarifies certain provisions of subparts A and D of section 1070 of title 12 of the Code of Federal Regulations, which the Bureau states are intended to, among other things, (i) “improve transparency” about the Bureau’s confidential information procedures; (ii) increase collaborations with agency partners; and (iii) improve the Bureau’s ability to protect confidential information.
Senator Brown objects to Bureau’s SEFL reorganization proposal
On October 21, Senator Sherrod Brown (D-OH) asked CFPB Director Kathy Kraninger to delay the implementation of a proposed reorganization of the Bureau’s Division of Supervision, Enforcement, and Fair Lending (SEFL) until after the election and a determination is made as to whether Kraninger will continue as Director. According to Brown, the proposed SEFL reorganization would remove the Office of Enforcement’s (Enforcement) “voice and role in critical SEFL decisionmaking processes,” and “introduces inefficiency and confusion.” Brown addressed several concerns, including that the proposed reorganization would (i) disband Enforcement’s Policy and Strategy Team, whose duties include determining overall priorities and strategies; (ii) strip “Enforcement of its seat at the table and vote to determine whether potential violations of federal consumer financial law should be resolved through supervisory examinations or through an enforcement action”; (iii) strip “Enforcement of its authority to open new research matters (precursors to investigations) or new investigations of potential violations of federal consumer financial laws”; (iv) strip “Enforcement of its E-Litigation Team, which provides specialized technology expertise and manages electronic data discovery from initial Enforcement investigations through trial”; and (v) strip “Enforcement of its representation in the ‘Clearance’ process, which will exclude Enforcement from sharing its views and potential concerns with other Bureau offices regarding proposed rules, regulations, guidance, advisory opinions, or other public Bureau statements.” Brown cautioned that while establishing a “consistent and unified SEFL approach to policy and strategic planning” may have merit, the manner in which this objective is achieved must be addressed.
Federal bank regulatory agencies release two final rules supporting large banks
On October 20, the Federal Reserve Board, OCC, and FDIC (collectively, “federal bank regulatory agencies”) finalized two rules for large banks.
The federal bank regulatory agencies first announced a final rule intended to reduce interconnectedness within the financial system between the largest banking organizations and to minimize systemic risks stemming from failure of these organizations. As the federal bank regulatory agencies noted in their announcement, the final rule, Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total Loss-Absorbing Capacity Requirements, “prescribes a more stringent regulatory capital treatment for holdings of [total loss-absorbing capacity] (TLAC) debt.” U.S. global systemically important banking organizations (GSIBs) will be required, among other things, to deduct from their regulatory capital certain investments in unsecured debt instruments issued by foreign or U.S. GSIBs in order to meet minimum TLAC requirements and long-term debt requirements, as applicable. The final rule recognizes the systemic risks posed by banking organizations’ investments in covered debt instruments and “create[s] an incentive for advanced approaches [for] banking organizations to limit their exposure to GSIBs.” The final rule takes effect April 1, 2021.
The federal bank regulatory agencies also announced a second final rule, Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, which will implement a stable funding requirement for certain large banking organizations established by a quantitative metric known as the net stable funding ratio (NSFR). The NSFR will measure banking organizations’ level of stability, and will require that a minimum level of stable funding be maintained over a one-year period. According to the federal bank regulatory agencies, the NSFR is intended “to reduce the likelihood that disruptions to a banking organization’s regular sources of funding will compromise its liquidity position,” and is designed to “promote effective liquidity risk management, and support the ability of banking organizations to provide financial intermediation to businesses and households across a range of market conditions.” The final rule “applies to certain large U.S. depository institution holding companies, depository institutions, and U.S. intermediate holding companies of foreign banking organizations, each with total consolidated assets of $100 billion or more, together with certain depository institution subsidiaries” with “increases in stringency based on risk-based measures of the top-tiered covered company.” The final rule takes effect July 1, 2021.
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.
CSBS discusses CARES Act response in congressional letter
On October 9, the Conference of State Bank Supervisors (CSBS) wrote to the ranking members of the Senate Banking Committee and the House Financial Services Committee with an update on the organization’s efforts regarding the CARES Act and oversight of nonbank mortgage servicers. CSBS notes that state regulators are the primary authority over nonbank mortgage servicers, and during the early stages of the Covid-19 pandemic, the state regulators “identified liquidity as a supervisory priority.” Thus, according to CSBS, state regulators have been actively monitoring liquidity and other business operations by seeking real time data and other updates from nonbank mortgage servicers. Moreover, CSBS discusses the efforts made in response to the CARES Act, including consumer and servicer guidance issued in conjunction with the CFPB (covered by InfoBytes here and here), as well as examination procedure guidance. Lastly, the letter highlights the organization’s recent release of proposed regulatory prudential standards for nonbank mortgage servicers. As previously covered by InfoBytes, the proposal includes baseline standards that would apply to all covered servicers and enhanced standards—covering capital, liquidity, stress testing, and living will/recovery and resolution planning—that would apply to certain larger servicers. CSBS concludes the letter with a commitment for “continued coordination and information exchange with federal agencies.”
OCC releases bank supervision operating plan for FY 2021
On October 1, the OCC’s Committee on Bank Supervision released its bank supervision operating plan (plan) for fiscal year 2021. The plan outlines the agency’s supervision priorities and highlights several supervisory focus areas including: (i) credit risk management; (ii) commercial and residential real estate concentration risk management, with a focus in areas heavily impacted by the Covid-19 pandemic; (iii) allowances for loan and lease losses; (iv) cybersecurity and operational resiliency; (v) Bank Secrecy Act/anti-money laundering compliance; (vi) compliance risk management related to Covid-19-related bank activities; (vii) Community Reinvestment Act performance; (viii) fair lending examinations and risk assessments; (ix) LIBOR phase-out preparations; (x) oversight of significant third-party relationships; (xi) change management to address significant operational changes; and (xii) payment systems products and services. The plan will be used by OCC staff members to guide the development of supervisory strategies for individual national banks, federal savings associations, federal branches, federal agencies, and technology service providers.
The OCC will provide updates about these priorities in its Semiannual Risk Perspective, as InfoBytes previously has covered.
CSBS announces single exam for money transmitters
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).
CFPB issues Summer 2020 Supervisory Highlights
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.
FDIC proposes revisions to its supervisory appeals process
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.