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Financial Services Law Insights and Observations


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  • CFPB publishes HMDA review

    Federal Issues

    On March 3, the CFPB published findings from a voluntary review of the 2015 HMDA Final Rule issued in October 2015, as well as subsequent related amendments that eased certain reporting requirements and permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit (covered by InfoBytes here). Under Section 1022(d) of Dodd-Frank, the Bureau is required to conduct an assessment of each significant rule or order adopted by the agency under federal consumer financial law. The Bureau noted that it previously determined that the 2015 HMDA Final Rule “is not a significant rule for purposes of section 1022(d)” and said the decision to conduct the review was voluntary.

    The Report on the Home Mortgage Disclosure Act Rule Voluntary Review found, among other things, that (i) “[c]onsistent with the 2015 HMDA Final Rule’s increase in the closed-end reporting threshold for depository institutions, HMDA coverage of first lien, closed-end mortgages decreased between Q1 of 2017 and Q1 of 2018, from 97.0 percent to 93.8 percent”; (ii) for all financial institutions originating closed-end mortgages, “the share of those institutions reporting HMDA data decreased between 2015 and 2020, with the largest decreases observed in 2017 and 2020” after the reporting threshold rose from 25 loan originations to 100 loan originations; (iii) revising data points to include the age of applicant and co-applicant race, ethnicity, gender, and income, increased the amount of compiled data; and (iv) analyzing data assists in detecting fair lending risk and discrimination in mortgage lending. “HMDA’s expanded transactional coverage improved the risk screening used to identify institutions at higher risk of fair lending violation by improving the accuracy of analysis and thus reducing the false positive rate at which lenders were mistakenly identified as high risk,” the report said.

    The report also noted that interest rate data “provides an important observation that enables data users, including government agencies, researchers, and consumer groups to analyze mortgage pricing in order to better serve HMDA’s purposes. In particular, interest rate information brings a greater transparency to the market and facilitates enforcement of fair lending laws.” The Bureau further noted that HMDA data is “crucial” to federal regulators when conducting supervisory examinations and enforcement investigations. The Bureau commented that the “requirement to report new HMDA data points greatly increased the accuracy of supervisory data since the additional data points are now used to assess fair lending risks and are subject to supervisory exams for accurate filing to HMDA,” adding that the data is “also used to estimate appropriate remuneration amounts for harmed consumers.”

    Federal Issues CFPB HMDA Mortgages Dodd-Frank Consumer Finance Fair Lending Supervision Examination

  • Fed revises Bank Holding Company Supervision Manual

    The Federal Reserve Board recently updated sections of the Bank Holding Company Supervision Manual. (Changes to the manual were last made in November 2021.) The manual provides guidance for conducting inspections of bank holding companies and their nonbank subsidiaries, as well as savings and loan holding companies. “The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its nonbanking subsidiaries and its subsidiary banks,” the Fed explained. Included among the changes are updates to sections on the supervision of savings and loan holdings companies; supervision of holding companies with less than $10 billion in total consolidated assets; liquidity planning and positions applicable to large financial institutions; holding company ratings applicability and inspection frequency; supervision of subsidiaries related to nondeposit investment products; control and ownership of bank holding company formations; asset securitization risk management and internal controls; retail-credit classification; supervision of savings and loan holding companies; and Bank Holding Company Act exemptions. A new section—“Formal Corrective Actions”—revises previous guidance to include entities against which the Fed has statutory authority to take formal enforcement actions. The section also provides additional information on enforcement actions for Bank Secrecy Act and anti-money laundering compliance failures, as well as details on interagency enforcement coordination. The section further clarifies that the Fed “does not issue an enforcement action on the basis of a ‘violation’ of or ‘non-compliance’ with supervisory guidance.” Minor technical changes were made throughout the manual as well. A detailed summary of changes is available here.

    Bank Regulatory Federal Issues Federal Reserve Bank Holding Companies Bank Holding Company Act Supervision Nonbank

  • Agencies cite need to update bank merger evaluation framework

    On February 10, OCC Senior Deputy Comptroller and Chief Counsel Ben W. McDonough spoke before the OCC Banker Merger Symposium about the future of bank merger policy. Acting Comptroller of the Currency Michael J. Hsu’s prepared remarks, which were delivered on his behalf by McDonough, stressed the need to update the framework used for analyzing bank mergers. Hsu commented that without necessary enhancements, “there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks,” but cautioned that imposing a moratorium on bank mergers would inhibit growth and improvements that could benefit communities and increase competition. Hsu observed that “many experts have raised questions about the ongoing suitability of the current bank merger standards at a time of intense technological and societal change.” He noted that federal bank regulators currently use the Herfindahl–Hirschman Index (HHI) to assess market concentration—which, while transparent, empirically proven, and efficient—may not be as relevant since the bank merger guidelines were last updated in 1995. Hsu reflected that HHI—which is based solely on deposits—may now be “a less effective predictor of competition across product lines” due to the offering of other banking products, including online and mobile banking. Hsu also said that “the current framework for assessing the financial stability risks of bank mergers bears examining,” as “there is a resolvability gap for large regional banks in that our resolution tools may not be up to the task.” Additionally, Hsu pointed out that it is also critical to analyze a merger’s effects on the communities a bank serves, and that assessing each bank’s Community Reinvestment Act performance and ratings are just a starting point.

    Separately, Federal Reserve Governor Michelle W. Bowman touched upon the topic of bank mergers during a speech before the American Bankers Association Community Banking Conference. Bowman discussed topics related to the Fed’s independence in bank regulation, predictability in bank merger applications, and tailoring of regulations and supervision. Among other things, Bowman commented that while the bank merger review framework is the same for all applications, each case varies widely, which “necessitates an in-depth review of each transaction on its own merits.” According to Bowman, “these reviews are most effective when the expectations of the regulators are clear in advance and the parties can reasonably anticipate the application review process.” She pointed to a recent increase in average processing times in the merger review process and expressed concerns about how delays may lead to increased operation risk, as well as fears that “the increase in average processing times will become the new normal.” Bowman said she believes that transparency between regulators and applicants can help to ensure clear expectations about certain potential delays.

    Bank Regulatory Federal Issues OCC Federal Reserve Bank Mergers Supervision CRA

  • Barr says AI should not create racial disparities in lending

    On February 7, Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, delivered remarks during the “Banking on Financial Inclusion” conference, where he warned financial institutions to make sure that using artificial intelligence (AI) and algorithms does not create racial disparities in lending decisions. Banks “should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” Barr said, pointing to findings that show “significant and troubling disparities in lending outcomes for Black individuals and businesses relative to others.” He commented that “[w]hile research suggests that progress has been made in addressing racial discrimination in mortgage lending, regulators continue to find evidence of redlining and pricing discrimination in mortgage lending at individual institutions.” Studies have also found persistent discrimination in other markets, including auto lending and lending to Black-owned businesses. Barr further commented that despite significant progress over the past 25 years in expanding access to banking services, a recent FDIC survey found that the unbanked rate for Black households was 11.3 percent as compared to 2.1 percent for White households.

    Barr suggested several measures for addressing these issues and eradicating discrimination. Banks should actively analyze data to identify where racial disparities occur, conduct on-the-ground testing to identify discriminatory practices, and review AI or other algorithms used in making lending decisions, Barr advised. Banks should also devote resources to stamp out unfair, abusive, or illegal practices, and find opportunities to support and invest in low- and moderate-income (LMI) communities, small businesses, and community infrastructure. Meanwhile, regulators have a clear responsibility to use their supervisory and enforcement tools to make sure banks resolve consumer protection weaknesses, Barr said, adding that regulators should also ensure that rules provide appropriate incentives for banks to invest in LMI communities and lend to such households.

    Bank Regulatory Federal Issues Federal Reserve Supervision Discrimination Artificial Intelligence Algorithms Consumer Finance Fair Lending

  • Fed says limits on banking activities will apply regardless of insurance status

    On January 27, the Federal Reserve Board issued a policy statement providing guidelines on how the agency evaluates requests from supervised uninsured and insured banks seeking to engage in novel activities, such as those involving crypto assets. Recognizing that in recent years the Fed has received numerous inquiries, notifications, and proposals from banks seeking to engage in new or unprecedented activities, the Fed clarified that when evaluating such inquiries, uninsured and insured banks supervised by the Fed would be subject to the same limitations that are currently imposed on OCC-supervised national banks, including crypto-asset-related activities. According to a board memo published the same day, the Fed said it “will presumptively exercise its authority to limit state member banks to engaging as principal in only those activities that are permissible for national banks—in each case, subject to the terms, conditions, and limitations placed on national banks with respect to the activity—unless those activities are permissible for state banks by federal law.” This “equal treatment” is intended to “promote a level playing field and limit regulatory arbitrage,” the Fed said.

    The Fed reiterated that banks must be able to ensure that any activities they plan to engage in are permitted by law and conducted in a safe and sound manner. A bank should implement risk management processes, internal controls, and information systems that are “appropriate and adequate for the nature, scope, and risks of its activities,” the Fed noted. The Fed, however, explained that the policy statement does “not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws.”

    The policy statement was issued the same day the Fed denied a request from a Wyoming-based digital asset firm to become a member of the Federal Reserve System. The Fed explained that the firm—a special purpose depository institution chartered by the state of Wyoming that “proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks…“ presented significant safety and soundness risks.” Additionally, the Fed determined that the digital asset firm’s risk management framework failed to sufficiently address heighted risk concerns, including its ability to mitigate money laundering and terrorism financing risks.

    Bank Regulatory Federal Issues Digital Assets Federal Reserve Supervision Cryptocurrency

  • CFPB updates Mortgage Servicing Examination Procedures

    Agency Rule-Making & Guidance

    On January 18, the CFPB released an updated version of its Mortgage Servicing Examination Procedures, detailing the types of information examiners should gather when assessing whether servicers are complying with applicable laws and identifying consumer risks. The examination procedures, which were last updated in June 2016, cover forbearances and other tools, including streamlined loss mitigation options that mortgage servicers have used for consumers impacted by the Covid-19 pandemic. The Bureau noted in its announcement that “as long as these streamlined loss mitigation options are made available to borrowers experiencing hardship due to the COVID-19 national emergency, those same streamlined options can also be made available under the temporary flexibilities in the [agency’s pandemic-related mortgage servicing rules] to borrowers not experiencing COVID-19-related hardships.” Servicers are expected to continue to use all the tools at their disposal, including, when available, streamlined deferrals and modifications that meet the conditions of these pandemic-related mortgage servicing rules as they attempt to keep consumers in their homes. The Bureau said the updated examination procedures also incorporate focus areas from the agency’s Supervisory Highlights findings related to, among other things, (i) fees such as phone pay fees that servicers charge borrowers; and (ii) servicer misrepresentations concerning foreclosure options. Also included in the updated examination procedures are a list of bulletins, guidance, and temporary regulatory changes for examiners to consult as they assess servicers’ compliance with federal consumer financial laws. Examiners are also advised to request information on how servicers are communicating with borrowers about homeowner assistance programs, which can help consumers avoid foreclosure, provided mortgage servicers collaborate with state housing finance agencies and HUD-approved housing counselors to aid borrowers during the HAF application process.

    Agency Rule-Making & Guidance CFPB Federal Issues Supervision Examination Mortgages Mortgage Servicing Covid-19 Consumer Finance

  • CFPB proposes T&C registry for nonbanks

    Agency Rule-Making & Guidance

    On January 11, the CFPB announced a proposed rule to create a public registry of terms and conditions used in non-negotiable, “take it or leave it” nonbank form contracts that “claim to waive or limit consumer rights and protections.” Under the proposal, supervised nonbank companies would be required to report annually to the Bureau on their use of standard-form contract terms that “seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce or exercise their rights.” The terms and conditions—which would be made publicly available—would include those that address waivers of consumer claims, liability limits, legal action limits, class action bans, arbitration agreements, liquidated damages clauses, as well as other waivers of consumer rights.

    The Bureau explained that its proposal is intended to “facilitate public awareness and oversight” about what nonbanks are putting in form contracts. “Some companies slip terms and conditions into their form contracts that try to take away consumer protections, try to limit how consumers exercise their rights, or try to quiet consumer complaints or criticism,” the Bureau stated in its announcement. “[M]ore broadly, the terms and conditions potentially undermine consumer financial protection law.”

    The Bureau provided several examples of such terms and conditions, including: (i) unlawful mandatory arbitration agreements that are included in servicemember loan contracts; (ii) credit monitoring service agreements that “undermine credit reporting rights” by prohibiting consumers from pursuing legal action, including class action lawsuits, for FCRA violations; (iii) occurrences where lenders use clauses that waive liability for bank fees that borrowers incur due to repeated payment collection attempts; (iii) mortgage contracts that make “deceptive” use of waivers and limitations that are inconsistent with TILA restrictions; and (v) terms and conditions that try to quiet consumer complaints or criticism.

    All supervised nonbanks, including those operating in payday lending, private student loan origination, mortgage lending and servicing, student loan servicing, automobile financing, consumer reporting, consumer debt collection, and international remittances would be subject to the rule. However, the Bureau is proposing certain exemptions for nonbanks with lower levels of receipts. Comments on the proposal are due 30 days after publication in the Federal Register.

    “[T]the registry would help regulators and law enforcement more easily detect when companies are offering products and services using prohibited, void, and restricted contract terms described above. This would be especially useful to state and tribal regulators with limited resources to alert or take action against companies violating the law,” CFPB Director Rohit Chopra said in an accompanying statement, adding that the Bureau plans to “use data from the registry to identify supervised nonbanks and the risks their terms and conditions pose, prioritize which firms to examine, and plan the scope of those exams.”

    House Financial Services Committee Chairman Patrick McHenry (R-NC) slammed the proposal, saying the “proposed registry of terms and conditions will facilitate the naming and shaming of firms to empower progressive activists. Requiring nonbank financial firms to register publicly with the Bureau is unprecedented—no other industry is required to make public such detailed contract information. The days of Congress giving Director Chopra a free pass for his reckless actions have come to an end.”

    The proposed registry follows a proposal announced in December by the Bureau that would create a database of enforcement actions taken against certain nonbank covered entities, which would include all final public written orders and judgments (including any consent and stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of certain consumer protection laws related to unfair, deceptive, or abusive acts or practices. (Covered by InfoBytes here.)

    Agency Rule-Making & Guidance Federal Issues CFPB Nonbank Consumer Finance Consumer Protection Supervision House Financial Services Committee

  • CFPB says exam manual and general supervisory findings are nonbinding

    Federal Issues

    On January 9, the CFPB released a blog post, What new supervised institutions need to know about working with the CFPB, discussing what institutions can expect from a supervisory relationship with the Bureau. Among other things, the Bureau noted that it relies on a “prioritization” process that includes analyzing risk to consumers to determine which consumer financial markets and which entities to include in its supervisory work. Specifically, the Bureau noted that when conducting an examination, CFPB examiners generally, among other things: (i) collect and review available information from within the CFPB, other agencies, and public sources, consistent with statutory requirements; (ii) review documents and information obtained through information requests sent to supervised entities; and (iii) conduct portions of exams to observe, conduct interviews, review additional documents and information, transaction test, and assess compliance management.

    The Bureau emphasized that examiners use the Supervision and Examination Manual as a resource when conducting exams and other supervisory activities. While supervised institutions are bound by statutes and regulations, and not by the manual, the CFPB makes its manual publicly available. The Bureau highlighted the disclaimer attached to the manual, which notes that it “should not be relied on as a legal reference.” The Bureau also stressed that legal discussions in the exam manual are not binding on examiners or other CFPB staff, and noted that at the end of an exam or other supervisory activities, examiners provide the supervised institution with their findings, which may include “matters requiring attention” (MRA). Examiners use MRAs to communicate specific goals to address violations of law, risk of such violations, or compliance management deficiencies.

    Federal Issues CFPB Consumer Finance Examination Supervision

  • NYDFS releases proposed guidance for mitigating climate-related risks

    State Issues

    On December 21, NYDFS proposed guidance for regulated banking and mortgage institutions to support efforts for responding to evolving risks stemming from climate change. The proposed guidance—which was developed to align with the climate-related work of federal and international banking regulators—will aid institutions in identifying, measuring, monitoring, and controlling material climate-related financial risks, consistent with existing risk management principles. Institutions should “minimize and affirmatively mitigate adverse impacts on low- and moderate-income communities while managing climate-related financial risks,” NYDFS said, explaining that the proposed guidance focuses on areas of risk management related to corporate governance, internal control frameworks, risk management processes, data aggregation and reporting, and scenario analysis that also accounts for unknown future risks. Among other things, the proposed guidance warned institutions of the importance of ensuring fair lending is provided to all communities, including low- to moderate-income neighborhoods that may face heightened risks, when managing climate-related financial risks. The proposed guidance also outlined tools institutions should use to measure and protect against climate change risks. NYDFS warned institutions that they may have to directly absorb a greater portion of losses and should plan for insurance coverage premiums to either increase or be withdrawn entirely in areas where climate risks are prevalent.

    NYDFS commented that the proposed guidance serves as a basis for supervisory dialogue and instructed interested parties to provide input as it undertakes a data-driven approach to formulating the final guidance. Comments are due by March 21, 2023. A webinar will be held on January 11, 2023 to provide an overview of the proposed guidance.

    “Regulators must anticipate and respond to new risks to operational resiliency and safety and soundness, jeopardizing an institution’s future,” Superintendent Adrienne A. Harris said. “NYDFS is committed to working with all stakeholders to further refine expectations and finalize guidance appropriate for institutions to address material climate-related financial risks.”

    State Issues State Regulators Bank Regulatory NYDFS Climate-Related Financial Risks Redlining New York Mortgages Risk Management Supervision Fair Lending

  • Agencies release annual CRA asset-size threshold adjustments

    On December 19, the Federal Reserve Board, FDIC, and OCC announced (see here and here) joint annual adjustments to the CRA asset-size thresholds used to define “small bank” and “intermediate small bank,” which are not subject to the reporting requirements applicable to large banks unless they choose to be evaluated as one. A “small bank” is defined as an institution that, as of December 31 of either of the prior two calendar years, had less than $1.503 billion in assets. An “intermediate small” bank is defined as an institution that, as of December 31 of both of the prior two calendar years, had at least $376 million in assets, and as of December 31 of either of the past two calendar years, had less than $1.503 billion in assets. The joint final rule takes effect on January 1, 2023.

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance CRA FDIC Federal Reserve Supervision


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