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On July 20, the OCC announced it will propose to rescind the agency’s May 2020 final rule overhauling the Community Reinvestment Act (CRA), signaling the OCC’s intention to collaborate with the Federal Reserve Board and the FDIC on a separate joint rulemaking. As previously covered by a Buckley Special Alert, the OCC’s final rule was intended to modernize the regulatory framework implementing the CRA by, among other things: (i) updating deposit-based assessment areas; (ii) mandating the inclusion of consumer loans in CRA evaluations; (iii) including quantitative metric-based benchmarks for determining a bank’s CRA rating; and (iv) including a non-exhaustive illustrative list of activities that qualify for CRA consideration.
The announcement follows the completion of a review undertaken by acting Comptroller Michael Hsu (covered by InfoBytes here). Hsu stated that although “the OCC deserves credit for taking action to modernize the CRA,” the adoption of the final rule was “a false start” in attempting to overhaul the regulation. According to Hsu, the OCC intends to work with the Fed and the FDIC to develop a joint Notice of Proposed Rulemaking and build on an Advance Notice of Proposed Rulemaking issued by the Fed last September (covered by InfoBytes here). The federal agencies issued an interagency statement noting that they have “broad authority and responsibility for implementing the CRA” and that “[j]oint agency action will best achieve a consistent, modernized framework across all banks to help meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods.”
Recently, the Federal Reserve Board and the OCC issued reports pursuant to Section 367 of the Dodd-Frank Act generally detailing the health of Minority Depository Institutions (MDIs) and the agencies’ efforts taken to assist MDIs as the Covid-19 pandemic disproportionately affected low- and moderate-income communities and racial and ethnic minorities. The Fed’s report, “Promoting Minority Depository Institutions,” discussed, among other things, extra steps taken by the agency to support and assist MDIs over the past year, which included conducting individualized outreach on several topics like how to access the discount window and the Paycheck Protection Program Liquidity Facility (covered by InfoBytes here and here). The report also examined efforts taken by the Fed to preserve and promote MDIs through its Partnership for Progress program—“a national outreach effort to help MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace”—and covered the Fed’s unanimous approval last September to approve an Advance Notice of Proposed Rulemaking on modernizing the Community Reinvestment Act (covered by InfoBytes here).
The OCC outlined actions taken to preserve and promote MDIs in its “2020 Annual Report,” including the launch of the Roundtable for Economic Access and Change known as Project REACh (covered by InfoBytes here). OCC subject matter experts also provided regulatory technical assistance to MDIs on topics including safety and soundness, cybersecurity, compliance with Bank Secrecy Act/anti-money laundering requirements, and current expected credit loss accounting methodology, among others. The OCC also noted that despite a seven-basis-points drop on the average return on assets for MDIs through the pandemic, the health of those institutions “remained satisfactory.”
On July 9, President Biden issued a broad Executive Order (E.O.) that includes provisions related to the financial services industry.
- CFPB. The E.O. encourages the CFPB director to issue rules under Section 1033 of Dodd-Frank “to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products.” As previously covered by InfoBytes, last October, the Bureau issued an advanced notice of proposed rulemaking on Section 1033, seeking comments on questions related to consumers’ access to their financial records. The E.O. also instructs the Bureau to enforce Section 1031 of Dodd-Frank, which prohibits unfair, deceptive, or abusive acts or practices in consumer financial products or services, “to ensure that actors engaged in unlawful activities do not distort the proper functioning of the competitive process or obtain an unfair advantage over competitors who follow the law.”
- Treasury Department. The E.O. calls on Treasury to submit a report within 270 days on the effects on competition of large technology and other non-bank companies’ entry into the financial services space.
- FTC. The E.O. tasks the FTC with establishing rules to address concerns about “unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy.” The FTC already commenced that process on July 1, when it approved changes to its Rules of Practice to amend and simplify the agency’s procedures for initiating rulemaking proceedings. According to Commissioner Rebecca Kelly Slaughter, “[s]treamlined procedures for Section 18 rulemaking means that the Commission will have the ability to issue timely rules on issues ranging from data abuses to dark patterns to other unfair and deceptive practices widespread in our economy.”
- Bank Mergers. The E.O. encourages the Attorney General, in consultation with the Federal Reserve Board, FDIC, and OCC, to “review current practices and adopt a plan, not later than 180 days after the date of this order, for the revitalization of merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956.”
On July 1, the Federal Reserve Board announced plans to launch a new tool to assist community banks with assets of less than $1 billion implement the Current Expected Credit Losses (CECL) accounting standard. The new spreadsheet-based tool, known as the “Scaled CECL Allowance for Losses Estimator” (or SCALE) will use publicly available regulatory and industry data and is intended to simplify CECL compliance for community banks. The SCALE tool will be launched during an “Ask the Fed” webinar on July 15.
On July 1, the Federal Reserve Board announced an enforcement action against a Tennessee-based bank for alleged violations of the National Flood Insurance Act (NFIA) and Regulation H. The consent order does not specify the number or the precise nature of the alleged violations of the NFIA or Regulation H, and the bank was assessed a $8,000 civil money penalty for an alleged pattern or practice of violations.
On June 25, the Federal Reserve Board announced the extension of the Paycheck Protection Program Liquidity Facility (PPPLF) for a final time to July 30. As previously covered by InfoBytes, the PPPLF was rolled out last year to provide liquidity to banks making loans to small businesses pursuant to the SBA’s Paycheck Protection Program at the start of the Covid-19 pandemic. In March, the Fed extended the PPPLF to June 30 (covered by InfoBytes here). The Fed noted that the most recent extension is being made as an “operational accommodation” for banks, community development financial institutions, and other financial institutions.
On June 21, the Federal Financial Institutions Examinations Council (FFIEC) published updated versions of four sections of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual (Manual), which provides examiners with instructions for assessing a bank or credit union’s BSA/AML compliance program and compliance with BSA regulatory requirements. The revisions can be identified by a 2021 date label on the FFIEC BSA/AML InfoBase and include the following updated sections: International Transportation of Currency or Monetary Instruments Reporting, Purchase and Sale of Monetary Instruments Recordkeeping, Reports of Foreign Financial Accounts, and Special Measures. The FFIEC notes that the “updates should not be interpreted as new instructions or as a new or increased focus on certain areas,” but are intended to “offer further transparency into the examination process and support risk-focused examination work.” In addition, the Manual itself does not establish requirements for financial institutions as these requirements are found in applicable statutes and regulations. (See also FDIC FIL-12-2021 and OCC Bulletin 2021-10.) As previously covered by InfoBytes, in February the FFIEC updated the following sections of the Manual: Assessing Compliance with Bank Secrecy Act Regulatory Requirements, Customer Identification Program, Currency Transaction Reporting, and Transactions of Exempt Persons.
On June 9, the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy held a hearing titled “Building A Stronger Financial System: Opportunities of a Central Bank Digital Currency” to discuss the potential opportunities of a central bank digital currency (CBDC). Among the issues discussed at the hearing were protecting consumer privacy and security, financial inclusion, and the Federal Reserve’s authority.
The Honorable J. Christopher Giancarlo, Senior Counsel at Willkie Farr & Gallagher, was a witness on behalf of the Digital Dollar Project (DDP). The digital dollar, proposed by the Fed, would be distributed through the two-tiered banking system and operated alongside physical currency and commercial bank money. Senator Catherine Cortez Masto (D-NV) asked how a CBDC should be designed, implemented, and regulated to reduce the risk of fraud and ensure privacy. Giancarlo, who stated he is not convinced of the need for CBDC, but believed in the need to examine this issue, said the DDP convened a privacy subcommittee which addressed four principles: (i) economic privacy; (ii) security; (iii) inclusion; and (iv) sufficient transparency to provide settlement and payment certainty. When Senator Mark Warner (D-VA) questioned witness Dr. Neha Narula, Director of the Digital Currency Initiative at MIT, on security risks associated with cryptocurrencies, she responded that, with respect to ransomware attacks, the issue is that valuable data has not been properly secured, and suggested that a CBDC could have built-in safeguards. She also believed that open source software is critical for security.
Subcommittee Chairwoman Senator Elizabeth Warren (D-MA) suggested that banks use “abusive” practices and that the crypto industry has promised a better and more inclusive financial system, which reduces cost and improves quality. When Warren asked if a well-designed CBDC could help people who are poorly served by the current financial system, Narula emphasized the importance of designing a CBDC with a focus on accessibility and reducing barriers to access.
Senator Sherrod Brown (D-OH) argued that Americans should not be subject to excessive fees to access their own money. He also noted that a CBDC may work with a solution he has proposed, called No-Fee Accounts, which would be available to every American and backed by the Fed. As previously covered by InfoBytes, Federal Reserve Governor Lael Brainard noted in a speech that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” Ranking Member Pat Toomey (R-PA) expressed his concerns around the Fed’s position in retail banking services and was doubtful that the Fed would provide high quality customer service, while Ranking Member John Kennedy (R-LA) questioned if it is appropriate for the federal government to get entangled in the credit markets by way of a CBDC.
On June 2, the Federal Reserve Board announced plans to wind down the portfolio of the Secondary Market Corporate Credit Facility (SMCCF), a temporary emergency lending facility that was established and provided by the Treasury Department under the CARES Act, which closed in December 2020. The SMCCF (covered by InfoBytes here) played a role in restoring market functioning, supported the availability of credit for certain employers, and assisted employment numbers during the Covid-19 pandemic. According to the announcement, sales from the SMCCF portfolio will be “gradual and orderly,” aiming to decrease the likelihood of “any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.” The announcement also indicates that the Federal Reserve Bank of New York, which manages the operations of the SMCCF, will release more details before sales begin.
On June 2, the Federal Reserve Board announced the approval of a final rule amending Regulation D, which eliminates “references to an interest on required reserves” rate and “to an interest on excess reserves” rate and replaces them with a reference to “a single interest on reserve balances” rate. The final rule also simplifies “the formula used to calculate the amount of interest paid on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks.” The final rule is effective July 29.
Earlier, on June 1, the Fed also issued a proposed rule, which would create a new, comprehensive set of rules for governing funds transfers over the FedNow Service. Specifically, the proposed rule would amend Regulation J by establishing a new subpart C to specify terms and conditions for the processing of funds transfers by Reserve Banks. It would also grant Reserve Banks the authority to issue operating circulars for the FedNow Service, and would include, among other things, a requirement that a beneficiary’s bank agree to “make funds available to the beneficiary immediately after it has accepted the payment order.” The Fed is also proposing changes and clarifications to subpart B, which governs the Fedwire Funds Services, “to reflect the fact that the Reserve Banks will be operating a second funds transfer service in addition to the Fedwire Funds Service.” As previously covered by InfoBytes, the Fed intends to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024. Comments on the proposed rule are due 60 days after publication in the Federal Register.
- Jeffrey P. Naimon to provide “Fair lending update” at the Colorado Mortgage Lenders Association Operational and Compliance Forum
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- APPROVED Webcast: Strategy & Technology: A dynamic duo for successful regulatory exams
- Jonice Gray Tucker to discuss "Fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss “State law regulatory and enforcement trends” at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting
- H Joshua Kotin to discuss “Modifications and exiting forbearance” at the National Association of Federal Credit Unions Regulatory Compliance Seminar
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute