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Federal Reserve Board Reports On Prepaid Cards, Domestic Payments
Recently, the Federal Reserve Board released two payments-related reports: (i) a report to Congress on government-administered general use prepaid cards; and (ii) a detailed report on the Federal Reserve’s 2013 payments study. The report on government-administered prepaid cards analyzes the $502 million in fee revenue collected by issuers in 2013, a majority of which was attributable to interchange fees. For consumer-related fees, the report indicates such fees derived primarily from ATM-related charges. The second report details findings from the 2013 Federal Reserve Payments Study, the fifth in a series of triennial studies conducted by the Federal Reserve System to comprehensively estimate and study aggregate trends in noncash payments in the United States. The paper expands on the 2013 summary findings originally published last December, and includes, among many other things, the following new findings: (i) credit cards are more prevalent than other general-purpose card types; (ii) among general-purpose cards with purchase activity in 2012, consumers preferred debit cards, with an average use of 23 payments per month, compared with an average of 11 payments per month for general-purpose credit cards and 10 payments per month for general-purpose prepaid cards; (iii) although the number of ATM cash withdrawals using debit cards and general-purpose prepaid cards dropped slightly, growth in the value of ATM withdrawals continued to exceed inflation; (iv) the number of online bill payments reported by major processors, which included those initiated through online banking websites and directly through billers and settled over ACH, exceeded three billion in 2012; and (v) there were more than 250 million mobile payments made using a mobile wallet application, and at least 205 million person-to-person or money transfer payments.
Federal Reserve Takes Action Against Bank For Vendor's Allegedly Deceptive Practices
On July 1, the Federal Reserve Board announced a joint enforcement action with the Illinois Department of Financial and Professional Regulation against a state bank that allegedly failed to properly oversee a nonbank third-party provider of financial aid refund disbursement services. The consent order states that from May 2012 to August 2013, the bank opened over 430,000 deposit accounts in connection with the vendor’s debit card product for disbursement of financial aid to students. The agencies claim that during that time, the vendor misled students about the product, including by (i) omitting material information about how students could get their financial aid refund without having to open an account; (ii) omitting material information about the fees, features, and limitations of the product; (iii) omitting material information about the locations of ATMs where students could access their account without cost and the hours of availability of those ATMs; and (iv) prominently displaying the school logo, which may have erroneously implied that the school endorsed the product. The regulators ordered the bank to pay a total of $4.1 million in civil money penalties. In addition, the Federal Reserve is seeking restitution from the vendor, and, pursuant to the order against the bank, may require the bank to pay any amounts the vendor cannot pay in restitution to eligible students up to the lesser of $30 million or the total amount of restitution based on fees the vendor collected from May 2012 through June 2014. The consent order also requires the bank to submit for Federal Reserve approval a compliance risk management program in advance of entering into an agreement with a third party to solicit, market, or service a consumer deposit product on behalf of the bank.
Federal, State Prudential Regulators Issue HELOC Guidance
On July 1, the OCC, the Federal Reserve Board, the FDIC, the NCUA, and the Conference of State Bank Supervisors issued interagency guidance on home equity lines of credit (HELOCs) nearing their end-of-draw periods. The guidance states that as HELOCs transition from their draw periods to full repayment, some borrowers may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values. As such, the guidance describes the following “core operating principles” that the regulators believe should govern oversight of HELOCs nearing their end-of-draw periods: (i) prudent underwriting for renewals, extensions, and rewrites; (ii) compliance with existing guidance, including but not limited to the Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidelines for Real Estate Lending Policies; (iii) use of well-structured and sustainable modification terms; (iv) appropriate accounting, reporting, and disclosure of troubled debt restructurings; and (v) appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses estimation processes. The guidance also outlines numerous risk management expectations, and states that institutions with a significant volume of HELOCs, portfolio acquisitions, or exposures with higher-risk characteristics should have comprehensive systems and procedures to monitor and assess their portfolios, while less-sophisticated processes may be sufficient for community banks and credit unions with small portfolios, few acquisitions, or exposures with lower-risk characteristics.
Prudential Regulators Propose Changes To Timing Of Stress Tests
On June 12, the Federal Reserve Board and the OCC separately released proposed rules that would push back by 90 days the start date of the stress test cycles and the deadlines for submitting stress test results. The regulators propose making the new schedules effective beginning with the 2015-2016 cycles. On June 13, the FDIC proposed a rule to similarly shift the stress test cycles. In addition, the Federal Reserve’s proposed rule would (i) modify the capital plan rule to limit a large bank holding company’s ability to make capital distributions to the extent that its actual capital issuances were less than the amount indicated in its capital plan; (ii) clarify the application of the capital plan rule to a large bank holding company that is a subsidiary of a U.S. intermediate holding company of a foreign banking organization; and (iii) make other technical clarifying changes. Comments on the Federal Reserve’s proposal are due by August 11, 2014. Comments on the OCC’s and the FDIC’s proposals are due 60 days after their publication in the Federal register.
Payday Lenders Sue Government Over Operation Choke Point
On June 5, the Community Financial Services Association and one of its short-term, small dollar lender members filed a lawsuit in the U.S. District Court for the District of Columbia claiming the FDIC, the OCC, and the Federal Reserve Board have participated in Operation Choke Point “to drive [the lenders] out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders.” The complaint asserts that the operation has resulted in over 80 banking institutions terminating their business relationships with CFSA members and other law-abiding payday lenders. The lenders claim that the regulators are using broad statutory safety and soundness authority to establish through agency guidance and other means broad requirements for financial institutions, while avoiding the public and judicial accountability the regulators would otherwise be subject to if they pursued the same policies under the Administrative Procedures Act’s (APA) notice and comment rulemaking procedures. The lenders assert that in doing so, the regulators have violated the APA by (i) failing to observe its rulemaking requirements; (ii) exceeding their statutory authority; (iii) engaging in arbitrary and capricious conduct; and (iv) violating lenders’ due process rights. The lenders ask the court to declare unlawful certain agency guidance regarding third-party risk and payment processors and enjoin the agencies from taking any action pursuant to that guidance or from applying informal pressure on banks to encourage them to terminate business relationships with payday lenders.
Prudential Regulators Issue Statement On Increased Maximum Flood Insurance Coverage
On May 30, the OCC, the FDIC, the Federal Reserve Board, the NCUA, and the Farm Credit Administration issued an interagency statement regarding the increased maximum amount of flood insurance available for “Other Residential Buildings” (i.e., non-condominium residential buildings designed for use for five or more families) beginning June 1, 2014. The statement explains that the maximum amount of flood insurance available under the NFIP for Other Residential Buildings increased from $250,000 to $500,000 per building, which may affect the minimum amount of flood insurance required for both existing and future loans secured by Other Residential Buildings. The statement also informs institutions that FEMA instructed insurers to notify Other Residential Building policyholders—which potentially could include notice to lenders on those policies—of the new limits before June 1, 2014. The agencies state that “[i]f a financial institution or its servicer receives notification of the increased flood insurance limits available for an Other Residential Building securing a designated loan, the agencies expect supervised institutions to take any steps necessary to determine whether the property will require increased flood insurance coverage.” According to the statement, lenders are not required to perform an immediate full file search, but, for safety and soundness purposes, lenders may wish to review their portfolios in light of the availability of increased coverage to determine whether additional flood insurance coverage is required for the affected buildings. If, as a result of this increase, a lender or its servicer determines on or after June 1 that an Other Residential Building is covered by flood insurance in an amount less than required by law, then it should take steps to ensure the borrower obtains sufficient coverage, including lender-placing insurance.
Banking Agencies Seek Comments On Outdated, Unnecessary Regulations
On June 4, the Federal Reserve Board, the FDIC, and the OCC published a notice of regulatory review and request for comments to identify outdated, unnecessary, or unduly burdensome regulations imposed on insured depository institutions. The review is required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996, and this is the first of four requests for comments that will be issued over the next two years. The request seeks comments on regulations in three specific categories: (i) applications and reporting; (ii) powers and activities; and (iii) international operations. The agencies ask commenters to specifically consider, among other things: (i) the need for statutory change; (ii) the need and purpose of the regulations; (iii) the effect on competition; (iv) reporting, recordkeeping, and disclosure requirements; and (v) the burden on small institutions, including community banks. Comments are due September 2, 2014.
Federal Reserve Board Repeals Duplicative Regulations, Finalizes Red Flag Rule Amendments
On May 22, the Federal Reserve Board repealed its Regulation DD, which implements TISA, and Regulation P, which implements Section 504 of the GLBA because the Dodd-Frank Act transferred rulemaking authority for those laws to the CFPB, and the CFPB has already issued rules implementing them. The Board also finalized amendments to the definition of “creditor” in its Identity Theft Red Flags rule, which implements Section 615 of FCRA. Generally, the Red Flags rule requires each financial institution and creditor that holds any consumer account to develop and implement an identity theft prevention program. The revision excludes from the foregoing requirements businesses that do not regularly and in the ordinary course of business (i) obtain or use consumer reports in connection with a credit transaction; (ii) furnish information to consumer reporting agencies in connection with a credit transaction; or (iii) advance funds to or on behalf of a person. The repeals and Red Flags rule amendments take effect June 30, 2014.
House Financial Services Chairman Questions Regulators' Use Of Reputation Risk
On May 22, House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent letters to the Federal Reserve Board, the OCC, the FDIC, and the NCUA asking the regulators to explain their use of “reputational risk,” and citing Operation Choke Point as an example of the potential for “reputation risk” to become “a pretext for the advancement of political objectives, which can potentially subvert both safety and soundness and the rule of law.” Congressman Hensarling asked each regulator to explain (i) whether it consider reputation risk in its supervision of depositories, and, if so, to explain the legal basis for such consideration and why it is appropriate; (ii) what data are used to analyze reputational risk and why such data are not already accounted for under CAMELS; and (iii) whether a poor reputation risk rating could be sufficient to warrant recommending a change in a depository’s business practices notwithstanding strong ratings under CAMELS.
Swiss Bank Pleads Guilty In Alleged Tax Evasion Conspiracy
On May 19, the DOJ announced that a Swiss bank pleaded guilty and entered into agreements with federal and state regulators to resolve a multi-year investigation into the bank’s alleged conspiracy to assist U.S. taxpayers in filing false income tax returns and other documents with the IRS by helping those individuals conceal undeclared foreign bank accounts. Under the plea agreement, the bank agreed to (i) disclose its cross-border activities; (ii) cooperate in treaty requests for account information; (iii) provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; (iv) close accounts of account holders who fail to come into compliance with U.S. reporting obligations; and (v) enhance compliance, recordkeeping, and reporting programs. The plea agreement also reflects a prior related settlement with the SEC in which the bank paid $196 million in disgorgement, interest, and penalties. Under the current agreements, the bank will pay $2.6 billion in fines and penalties, including $1.8 billion to the DOJ, $100 million to the Federal Reserve Board, and $715 million to the New York DFS. Federal authorities did not individually charge any officers, directors, or senior managers, and the agreements do not require the bank to dismiss any officers or employees, but eight bank executives have been indicted since 2011 and two of those individuals pleaded guilty. Further, federal and state regulators did not directly restrict the bank’s ability to operate in the U.S.—the New York Federal Reserve Bank allowed the bank to remain a primary dealer and the New York DFS did not revoke the bank’s state banking license.