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District Court denies request to reverse summary judgment in FDIA suit
On August 29, the U.S. District Court for the Eastern District of Pennsylvania denied a consumer plaintiff’s request to reconsider its summary judgment order against him in a Federal Deposit Insurance Act (FDIA) suit. According to the opinion, the plaintiff accrued debt to a federally-insured, state-chartered bank, which had then assigned that debt to defendants, who were not state-chartered, federally-insured banks. The plaintiff’s debt included interest charges that had accrued at an annual rate between 24.99 percent and 25.99 percent, which the plaintiff argued could not be collected by defendants because the interest exceeded the six percent allowed under Pennsylvania's usury law. The court ruled in favor of the defendants, relying on a recently promulgated FDIC rule that determined that state usury laws are preempted by section 27 of the FDIA in cases where state usury law interferes with state-chartered, federally-insured banks' ability to make loans or when they interfere with a state-chartered, federally-insured bank’s assignee’s efforts to collect on those loans. The plaintiff requested the reconsideration of the district court's summary judgment decision and filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit. In his motion for reconsideration, the plaintiff argued that the court’s previous summary judgment decision was “erroneous” because: (i) the 3rd Circuit held in In re: Community Bank of Northern Virginia that “the FDIA unambiguously excludes non-bank purchasers of debt from its coverage and that deference to the FDIC’s contrary interpretation would, therefore, be inappropriate”; (ii) the FDIC’s rule cannot apply to his debts because such an application would be impermissibly retroactive; and (iii) LIPL fits within the FDIC rule’s exception for “licensing or regulatory requirements.”
The court denied the plaintiff’s motion for reconsideration, holding that the plaintiff “failed to identify an appropriate basis for reconsideration,” as the consumer’s arguments are “either a new argument that could have been presented before judgment was entered or a reprisal of an argument that the Court addressed in its original decision.” The court further noted that it would be “inappropriate for the Court to grant a motion to reconsider under either of those circumstances.” The court went on to determine that the new arguments advanced by the plaintiff were unpersuasive in any event, finding that the 3rd Circuit had not held section 27 of the FDIA to be unambiguous in its meaning and that application of the FDIC’s rule did not create an impermissible retroactive effect.
FDIC examines effects of insurance premiums on bank lending
Recently, the FDIC’s Center for Financial Research released a working paper examining the procyclical effects of FDIC insurance premiums on bank lending. Using confidential FDIC data from the 2008-2009 financial crisis, the FDIC analyzed procyclical deposit insurance premium schedules and bank lending. Among other things, the study found that the lending growth rate decreased 1.6 percent in the quarter after a seven basis-point increase in deposit insurance premiums. The study also found that this effect was exaggerated for banks with less than $100 million in assets who experienced a 2 percent decrease in lending growth rates. According to the FDIC, the working paper “suggest[ed] that deposit insurance premiums, which have been relatively overlooked in the procyclicality discussion, can be a significant driver of bank credit procyclicality.” The FDIC also noted that “changes in deposit insurance premiums can influence the real economy through the bank lending channel,” and suggested that “there may be costs to raising deposit insurance premiums that should be considered, particularly during a crisis.” The working paper highlighted that throughout its long history, “the FDIC has adapted its approach to setting deposit insurance premiums in response to an evolving banking system” and has recently implemented changes that address some procyclicality concerns. These changes include the use of scorecards for large banks to determine assessment rates derived from data showing how each institution fared during the financial crisis, updating of the pricing structure for established small banks, and the indefinite suspension of dividends under the Deposit Insurance Fund management plan “to increase the probability that the reserve ratio will reach a level sufficient to withstand a future crisis.” The working paper concludes that “[t]hese efforts will likely reduce the risk of major assessment-rate increases during future economic downturns.”
FDIC issues CDO against five crypto companies
On August 19, the FDIC issued letters (see here, here, here, here, and here) to five companies demanding that they cease and desist from making crypto-related false and misleading statements regarding their FDIC deposit insurance status and take immediate corrective action to address these false statements. The FDIC noted that “each of these companies made false representations—including on their websites and social media accounts—stating or suggesting that certain crypto-related products are FDIC-insured or that stocks held in brokerage accounts are FDIC-insured.” Specifically, the FDIC noted that “a company offering a so-called cryptocurrency also registered a domain name that suggests affiliation with or endorsement by the FDIC,” calling such representations “false and misleading.” The FDIC said that the companies’ actions violated the FDI Act, which “prohibits any person from representing or implying that an uninsured product is FDIC–insured or from knowingly misrepresenting the extent and manner of deposit insurance,” and “further prohibits companies from implying that their products are FDIC–insured by using ‘FDIC’ in the company’s name, advertisements, or other documents.” The FDI Act authorizes the FDIC to enforce this prohibition against any person. The FDIC demanded that the companies take corrective actions by removing the misrepresentations or false statements and providing written confirmation to the FDIC that they have fully complied with the removal request.
FDIC, Fed issue CDO against crypto brokerage firm
On July 28, the FDIC and the Federal Reserve Board issued a joint letter demanding that a crypto brokerage firm cease and desist from making false and misleading statements regarding the company’s FDIC deposit insurance status and take immediate corrective action to address these false statements. The agencies claimed that the firm made false and misleading representations online, including on its website, stating or suggesting that: (i) it is FDIC–insured; (ii) customers who invested with the firm’s cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, and held by, the firm; and (iii) the FDIC would insure customers against the failure of the firm. The FDIC noted that the false and misleading statements Violate the FDIC Act. The FDIC demanded that the firm take corrective actions by removing the misrepresentations or false statements and provide written confirmation to the FDIC and Board of Governors that it has fully complied with the removal request within two days.
FDIC issues advisory on crypto companies’ deposit insurance claims
On July 29, the FDIC announced an advisory addressing certain misrepresentations about FDIC deposit insurance made by some crypto companies. The advisory, among other things, reminded insured banks that they must be aware of how FDIC insurance operates as well as the need to assess, manage, and control risks arising from third-party relationships, including those with crypto companies. The advisory noted that recently “some crypto companies have suspended withdrawals or halted operations," and that in certain cases, "these companies have represented to their customers that their products are eligible for FDIC deposit insurance coverage, which may lead customers to believe, mistakenly, that their money or investments are safe.” In dealing with crypto companies, the agency cautioned that “FDIC-insured banks should confirm and monitor that these companies do not misrepresent the availability of deposit insurance.” The FDIC also issued a Fact Sheet reminding the public that the FDIC only insures deposits held in insured banks and savings associations and only in the event of an insured bank’s failure. The FDIC does not insure assets issued by non-bank entities, such as crypto companies.
FDIC issues a proposed rule on assessments, revised deposit insurance assessment rates
On June 21, the FDIC Board of Directors issued a notice of proposed rulemaking to increase deposit insurance assessment rates by 2 basis points for all insured depository institutions to increase the likelihood that the reserve ratio of the Deposit Insurance Fund (DIF) reaches the statutory minimum of 1.35 percent by September 2028, the statutory deadline. In September 2020, the FDIC adopted a DIF restoration plan to restore the reserve ratio to at least 1.35 percent by September 2028. However, according to the press release, insured deposits continued to grow and, as of March 31, the reserve ratio declined by 4 basis points to 1.23 percent. The FDIC also adopted on June 21 an Amended Restoration Plan, incorporating the increase in assessment rates to provide a buffer to ensure that the DIF achieves the 2028 target and accelerate capitalization of the fund toward the long-term 2 percent goal. In a memorandum providing an update on the restoration plan to the Board of Directors, the FDIC stated that “for the industry as a whole, staff estimate that the estimated annual increase in assessments would average 1% of income, which includes an average of 0.9% for small banks and an average of 1% percent for large and highly complex institutions.” The FDIC also released a Fact Sheet on the DIF, which provides information on the amended restoration plan and notice of proposed rulemaking on assessments and revised deposit insurance assessment rate. The FDIC released a statement regarding the DIF Restoration Plan to incorporate a uniform increase in initial base deposit insurance assessment rates of 2 basis points and to accelerate the time for the reserve ratio to reach the statutory minimum, stating that it “would allow the banking industry to remain a source of strength for the economy during a potential future downturn, and would promote public confidence in federal deposit insurance.” CFPB Director Rohit Chopra released a statement expressing his support for the Amended Plan and proposed increase, referring to these as “important short-term actions.” Chopra also expressed support for the Board to, in the long term, “explore a new mechanism to automatically adjust premiums upward and downward based on economic conditions, rather than relying on ad-hoc actions.” Comments are due by August 20.
FDIC approves final rule for trust, mortgage servicing account insurance
On May 18, the FDIC published a final rule that amends the deposit insurance regulations for trust accounts and mortgage servicing accounts. According to the FDIC, the final rule is “intended to make the deposit insurance rules easier to understand for depositors and bankers, facilitate more timely insurance determinations for trust accounts in the event of a bank failure, and enhance consistency of insurance coverage for mortgage servicing account deposits.”
The final rule, among other things: (i) establishes updates to the Banker Resources Guide Deposit Insurance Page with the Small Entity Compliance Guide (Community Bank Information) to promote understanding of the regulations; (ii) amends the deposit insurance regulations by merging the revocable and irrevocable trusts categories; (iii) “amends the regulation to expand the current per-borrower coverage of up to $250,000 to include any funds paid into the account to satisfy the principal and interest obligation of the mortgagors to the lender”; and (iv) establishes that certain “depositors within excess of $1.25 million in trusts deposits at a particular IDI may want to make changes given the new coverage limits” effective April 1, 2024.
FDIC issues 2021 annual report
On February 17, the FDIC released its 2021 Annual Report, providing an overview of the agency’s goals and agenda over the past year, and describing the financial health of the agency, its funds, and insured financial institutions. The report highlighted areas of focus for the FDIC over the past year, such as:
- Financial inclusion. According to the report, the FDIC “has seen meaningful improvements in recent years in reaching the ‘last mile’ of unbanked households in this country. Based on the results of our biennial survey of households, the proportion of U.S. households that were banked in 2019 – 94.6 percent – was the highest since the survey began in 2009.” The report noted several FDIC-led initiatives related to inclusive banking. In June 2021, the FDIC’s technology lab, FDiTech, announced a tech sprint, Breaking Down Barriers: Reaching the Last Mile of Unbanked U.S. Households, which challenged participants to “explore new technologies and techniques that would help expand the capabilities of banks to meet the needs of unbanked individuals and households.” (Covered by InfoBytes here.) The FDIC also expanded its #GetBanked public awareness campaign into the Los Angeles, Dallas, and Detroit metropolitan areas in continuation of the agency’s efforts to increase financial inclusion to the unbanked population. (Covered by InfoBytes here.)
- Mission-Driven Banks. According to the report, the FDIC increased Minority Depository Institutions (MDI) representation on the agency’s Community Bank Advisory Committee (CBAC), which “established a new MDI subcommittee of the CBAC to highlight the work of MDIs in their communities and to provide a platform for MDIs to exchange best practices, and enabled MDIs to review potential purchases of a failing MDI before non-MDI institutions are given this opportunity.” As previously covered by InfoBytes, these efforts were incorporated in a Statement of Policy.
- Competitiveness of Community Banking. According to the report, the FDIC held a “rapid phased prototyping competition” where more than 30 technology firms were invited to participate in the competition "to develop tools for providing more timely and granular data to the FDIC on the health of the banking sector while also making such reporting less burdensome for banks. Of those 30 firms, we asked four participants to move forward in the competition by proposing a proof of concept for their technologies – either independently or jointly.” The FDIC also facilitated the development of “a public/private standard-development organization to establish standards for due diligence of vendors and for the technologies they develop.”
- Deposit Insurance Fund (DIF). According to the report, the DIF balance increased to a record $123.1 billion in 2021–a $5.2 billion increase from the year-end 2020 balance. No insured financial institutions failed in 2021 and “contingent liability for anticipated failures declined to $20.8 million as of December 31, 2021, compared to $78.9 million as of December 31, 2020.”
FDIC announces final rule to simplify deposit insurance
Recently, the FDIC published a final rule that amends the deposit insurance regulations for trust accounts and mortgage servicing accounts. According to the FDIC, the final rule is intended to make the deposit insurance rules more understandable, facilitate timely insurance determinations for trust accounts in the event of a bank failure, and enhance consistency of insurance coverage for mortgage servicing account deposits. Highlights of the final rule include, among other things: (i) merging the revocable and irrevocable trust deposit insurance categories into a “trust accounts” category; (ii) establishing a consistent formula for calculating deposit insurance coverage for trust accounts; (iii) establishing that “a deposit owner’s trust deposits will be insured in an amount up to $250,000 per beneficiary, not to exceed five beneficiaries, regardless of whether a trust is revocable or irrevocable, and regardless of contingencies or the allocation of funds among the beneficiaries”; and (iv) providing a maximum amount of deposit insurance coverage of $1,250,000 per owner, per insured depository institution for trust deposits. The final rule becomes effective on April 1, 2024, which provides “depositors and insured depository institutions more than two years to prepare for the changes in coverage.” The FDIC also released a fact sheet which provides information on the final rule.
FDIC approves final rule for trust, mortgage servicing accounts
On January 21, the FDIC published a final rule that amends the deposit insurance regulations for trust accounts and mortgage servicing accounts. According to the FDIC, the final rule is “intended to make the deposit insurance rules easier to understand for depositors and bankers, facilitate more timely insurance determinations for trust accounts in the event of a bank failure, and enhance consistency of insurance coverage for mortgage servicing account deposits.” The final rule, among other things: (i) establishes a formula to calculate deposit insurance coverage for all revocable and irrevocable trust accounts; (ii) “provides a maximum amount of deposit insurance coverage of $1,250,000 per owner, per insured depository institution for trust deposits”; and (iii) establishes that “a deposit owner’s trust deposits will be insured in an amount up to $250,000 per beneficiary, not to exceed five beneficiaries, regardless of whether a trust is revocable or irrevocable, and regardless of contingencies or the allocation of funds among the beneficiaries.” Additionally, the final rule allows principal and interest funds advanced by a mortgage servicer to be included in the deposit insurance calculation. The rule is effective April 1, 2024. In addition, the FDIC released a fact sheet on the final rule.