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CFPB releases semi-annual report
On April 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning April 1, 2021 and ending September 30, 2021. The report, which is required by Dodd-Frank, addresses several issues, including difficulties faced by consumers in obtaining consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) taken steps to increase workforce and contracting diversity; (ii) carefully observed consumer reporting agencies’ and furnishers’ compliance with Fair Credit Reporting Act accuracy obligations relating to rental information, and outlined specific areas of focus and concern; (iii) hosted a roundtable examining racial bias in home appraisals; (vi) expanded housing efforts into a comprehensive, cross-federal campaign aimed at connecting homeowners and renters facing housing insecurity as a result of the Covid-19 pandemic with the resources available to help them stay in their homes; and (v) launched an initiative to reduce fees that consumers are charged by banks and financial companies. In regard to supervision, enforcement and fair lending, the report highlighted its public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information and proposed and final rules.
FDIC highlights NSF/overdraft fees, fair lending in 2022 Consumer Compliance Supervisory Highlights
On March 31, the FDIC released the spring 2022 edition of the Consumer Compliance Supervisory Highlights to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2021. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities.
- An overview of the most frequently cited violations (approximately 78 percent of total violations involved TILA, the Flood Disaster Protection Act (FDPA), EFTA, Truth in Savings Act, and RESPA). During 2021, the FDIC initiated 20 formal enforcement actions and 24 informal enforcement actions addressing consumer compliance examination observations, and issued civil money penalties totaling $2.7 million against institutions to address violations of the FDPA and Section 5 of the FTC Act.
- Information on the charging of multiple non-sufficient funds fees (NSF) for re-presented items, and risk-mitigating activities taken by banks to avoid potential violations. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Recommendations on addressing overdraft issues are discussed in the report.
- An overview of fair lending concerns highlighting ways to mitigate risk, including “[m]aintaining written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy” and reviewing requirements used to screen potential applicants to make sure there is no “discriminatory impact.”
- Information on regulatory developments, such as (i) rulemaking related to the Community Reinvestment Act, flood insurance, false advertising/misuse of the FDIC’s name or logo rulemaking, deposit insurance, and LIBOR; and (ii) guidance on fintech due diligence, artificial intelligence/machine learning, and third-party risk management.
- A summary of consumer compliance resources available to financial institutions.
- An overview of consumer complaint trends.
FINRA: Supervisory obligations rest with a firm’s business management, not the chief compliance officer
On March 17, FINRA issued Regulatory Notice 22-10 reminding member firms that meeting their supervisory obligations under Rule 3110 “rests with a firm’s business management, not its compliance officials.” According to FINRA, a firm’s chief compliance officer’s (CCO) role generally is advisory and not supervisory, and as such, an action will not be brought against a CCO under Rule 3110 for failure to supervise unless a firm confers to the CCO supervisory responsibilities, and the CCO then fails “to discharge those responsibilities in a reasonable manner.” Specifically, FINRA stated that supervisory liability will not apply to a firm’s CCO unless the CCO is responsible for either establishing, maintaining, and updating the firm’s supervisory procedures, or has been “expressly or impliedly designated” to enforce the firm’s compliance with its supervisory procedures. With respect to determining a CCO’s liability when the CCO is exercising supervisory responsibilities, FINRA added that it would apply a reasonableness standard to a CCO’s actions. A CCO may be more likely to be held liable should it be discovered that (i) the CCO “was aware of multiple red flags or actual misconduct” and then failed to take steps to address the issues; (ii) the CCO “failed to establish, maintain, or enforce a firm’s written procedures”; (iii) “the CCO’s supervisory failure resulted in violative conduct”; or (iv) the “violative conduct caused or created a high likelihood of customer harm.”
FINRA also listed factors that would weigh against charging the CCO, including: (i) the CCO was given insufficient resources to undertake his supervisory responsibilities; (ii) the CCO was overburdened with other responsibilities; (iii) the CCO’s supervisory responsibilities were poorly defined; (iv) the firm changed in such a way such that it would be appropriate to allow the CCO time to update procedures; and (v) the CCO attempted to fulfill his duties, including by escalating concerns to senior leadership. FINRA added that it will also consider whether to take action against a firm or the firm’s president (or another individual with more director supervisory responsibility) rather than the CCO and explained that in some instances a Cautionary Action Letter may be more appropriate than formal disciplinary action.
OCC updates Large Bank Supervision booklet
On March 8, the OCC updated the Large Bank Supervision booklet of the Comptroller’s Handbook, which is used by OCC examiners during the examination and supervision of midsize and large national banks and federal savings associations, foreign-owned U.S. branches and agencies, and international operations of midsize and large banks. The updated booklet rescinds the 2019 version and includes a revised core assessment, “which will be effective for core assessment summaries using financial information as of March 31, 2022.” Among other things, the revised booklet (i) clarifies expectations related to the preparation and documentation of a bank’s core assessment summary; (ii) combines core assessment and risk assessment system information into the “Core Assessment” section; (iii) updates core assessment factors and subfactors; (iv) clarifies the difference between an annual core assessment summary and quarterly supervision updates; (v) updates supervisory activity types to include “focused review,” consistent with OCC current practices; and (vi) includes additional consistency and clarity updates.
Fed solicits comments on insurance supervision guidance
On January 28, the Federal Reserve Board announced it is soliciting comments on proposed guidance, which would implement a framework for the supervision of certain insurance organizations overseen by the Board. According to the Fed, the proposed framework for depository institution holding companies significantly engaged in insurance activities would apply guidance and allocate supervisory resources based on the risk of a firm and would “formalize a supervisory rating system for these companies and describe how examiners work with state insurance regulators.” Comments are due 60 days after publication in the Federal Register.
FFIEC issues final update for Examination Modernization Project
On January 21, the Federal Financial Institutions Examination Council (FFIEC) issued a statement presenting the results of the final phase of its Examination Modernization Project. The project, which was initiated to identify and assess measures to improve the community bank safety and soundness examination process, sought feedback on examination processes from select supervised institutions and examiners. FFIEC released previous project updates, which focused on meaningful supervisory burden reduction and tailoring examination plans and procedures based on risk (covered by InfoBytes here). The final phase addressed feedback related to examination requests and authentication requirements for FFIEC members’ supervision systems. Identified best practices include that: (i) information requests should be risk-focused and relevant to an examination; (ii) supervised institutions should be allowed sufficient time to produce requested information; (iii) examiners should coordinate information requests among the exam team to avoid duplication and redundancy; (iv) requests should be made through an institution’s designated regulatory examination point-of-contact; and (v) requests should be clearly articulated in writing. With respect to feedback received related to authentication requirements, FFIEC noted that its Task Force on Supervision has approved a common authentication solution to allow member agencies and supervised institutions “to securely authenticate to supervision systems, while eliminating the need for multiple credentials to access regulator systems.”
CFPB to examine college lending
On January 20, the CFPB announced its plans to examine the operations of post-secondary schools that extend private loans directly to students and update its exam procedures, including a new section on institutional student loans. The Bureau noted that it is “concerned about the borrower experience with institutional loans because of past abuses at schools,” high interest rates, and strong-arm debt collection practices. When examining institutions offering private education loans, in addition to examining general lending issues, the Bureau noted that examiners will review certain actions only schools can take against their students, which include, among other things: (i) placing enrollment restrictions; (ii) withholding transcripts; (iii) improperly accelerating payments; (iv) failing to issue refunds; and (v) maintaining improper lending relationships. The education loan exam procedures manual is intended for use by Bureau examiners, and is available as a resource to those subject to its exams. These procedures will be incorporated into the Bureau’s general supervision and examination manual.
OCC revises CRA small and intermediate bank asset-size threshold adjustments
On December 30, the OCC announced revisions to the asset-size thresholds used to define small and intermediate small banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, a small bank or savings association will mean an institution that, as of December 31 of either of the past two years, had assets of less than $1.384 billion. An intermediate small bank or savings association will mean an institution with assets of at least $346 million as of December 31 of both of the prior two years, and less than $1.384 billion as of December 31 of either of the prior two years. The adjustments follow a final rule issued last month, which rescinded the OCC’s 2020 CRA rule and replaced it with a rule based largely on the prior rules adopted jointly by the federal banking agencies in 1995, as amended. (Covered by InfoBytes here.) Under the 2021 final rule, banks are evaluated under different CRA examination procedures based on their asset-size threshold amounts. As previously covered by InfoBytes, the Federal Reserve Board and the FDIC also announced joint annual adjustments to the CRA asset-size thresholds used to define “small bank” and “intermediate small bank” in December.
Agencies release annual CRA asset-size threshold adjustments
On December 16, the Federal Reserve Board and the FDIC announced joint annual adjustments to the CRA asset-size thresholds used to define “small bank” and “intermediate small bank,” which are subject to streamlined CRA evaluations, but 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 $1.384 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 $346 million in assets, and as of December 31 of either of the past two calendar years, had less than $1.384 billion in assets. The joint final rule takes effect on January 1, 2022.
Agencies provide post-tornado assistance
On December 15, the OCC, Federal Reserve Board, FDIC, NCUA, and state regulators (collectively, “agencies”) issued a joint statement reminding banks of supervisory expectations related to disaster recovery, and specifically tornadoes. According to the statement, the agencies “recognize the serious impact of tornadoes on the customers and operations of many financial institutions and will provide appropriate regulatory assistance to affected institutions subject to their supervision.” The agencies also “encourage institutions operating in the affected areas to meet the financial services needs of their communities.” The statement also, among other things, addressed supervisory expectations connected to lending, temporary bank facilities, publishing requirements, regulatory reporting requirements, the Community Reinvestment Act credit, and investments.
The agencies acknowledged the unusual circumstances faced by institutions affected by the severe weather and suggested they work with borrowers in communities under stress, stating that this can be consistent with safe-and-sound practices as well as in the public interest. For example, the agencies noted that “many financial institutions face staffing, power, telecommunications, and other challenges in re-opening facilities after tornado damage,” and that “the damage caused by tornadoes may affect compliance with publishing and other requirements for branch closings, relocations, and temporary facilities under various laws and regulations.” The agencies noted that contacting one’s primary federal and/or state regulator is part of the steps when operational challenges persist and when compliance difficulties in publishing or other requirements arise. A complete list of the affected disaster areas can be found here.
The FDIC also issued FIL-78-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Kentucky affected by recent severe weather events. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other relief, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements.