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Financial Services Law Insights and Observations


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  • Agencies clarify LIBOR transition on regulatory capital instruments

    Agency Rule-Making & Guidance

    On July 29, the FDIC, Federal Reserve Board, and OCC (see FDIC FIL-54-2021, Fed SR 21-12, and OCC Bulletin 2021-32) provided answers to frequently asked questions (FAQs) about the impact on regulatory capital instruments under 12 CFR 324 when transitioning from LIBOR to another reference rate. Among other things, the agencies clarified that “such a transition would not change the capital treatment of the instrument, provided the alternative rate is economically equivalent with the LIBOR-based rate.” Specifically, the FAQs clarify that the agencies do “not consider the replacement or amendment of a capital instrument that solely replaces a reference rate linked to LIBOR with another reference rate or rate structure to constitute an issuance of a new capital instrument for purposes of the capital rule.” Additionally, such a replacement or amendment would not create an incentive to redeem, provided “there are no substantial differences from the original instrument from an economic perspective.” Supervised financial institutions should conduct an appropriate analysis demonstrating that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective and may be asked to provide the analysis to the agencies. “Considerations for determining that a replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective could include, but are not limited to, whether the replacement or amended instrument has amended terms beyond those relevant to implementing the new reference rate or rate structure,” the FAQs state. 

    Find continuing InfoBytes coverage on LIBOR here.

    Agency Rule-Making & Guidance FDIC LIBOR

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  • FDIC announces Michigan disaster relief

    Federal Issues

    On July 23, the FDIC issued FIL-52-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Michigan affected by severe storms, flooding, and tornadoes. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things, (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 further stated that it will also consider regulatory relief from certain filing and publishing requirements.

    Federal Issues FDIC Disaster Relief Consumer Finance Michigan CRA

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  • FDIC argues “valid-when-made rule” fills statutory gaps


    On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).

    The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”

    Courts Agency Rule-Making & Guidance State Issues State Attorney General FDIC Madden Interest Valid When Made

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  • OCC to rescind CRA final rule as agencies signal joint overhaul

    Agency Rule-Making & Guidance

    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.”

    Agency Rule-Making & Guidance OCC Federal Reserve FDIC CRA

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  • FDIC proposes changes to deposit insurance regulations for trust accounts and mortgage servicing accounts

    Agency Rule-Making & Guidance

    On July 20, the FDIC published a notice of proposed rulemaking (NPRM) that would amend the deposit insurance regulations for trust accounts and mortgage servicing accounts. The changes are intended to clarify the deposit insurance rules for depositors and bankers, enable more timely insurance determinations for trust accounts in the circumstance of a bank failure, and increase consistency of insurance coverage for mortgage servicing account deposits. According to the FDIC, some highlights include, among other things, that: (i) a deposit owner’s trust deposits would be insured up to $250,000 per beneficiary, but must not exceed five beneficiaries, regardless of if a trust is revocable or irrevocable, and regardless of contingencies or the allocation of funds among the beneficiaries; (ii) a maximum amount of deposit insurance coverage would be $1.25 million per owner, per insured depository institution for trust deposits; and (iii) “mortgage servicers’ advances of principal and interest funds on behalf of mortgagors in a mortgage servicing account would be insured up to $250,000 per mortgagor, consistent with the coverage for payments of principal and interest collected directly from mortgagors.” Additionally, the FDIC published a Fact Sheet on the NPRM, which provides an overview of simplifying deposit insurance rules for trust accounts and enhancing consistency for mortgage servicing account deposits. FDIC Chairman Jelena McWilliams released a statement specifying that the NPRM would, “merge the revocable and irrevocable trust categories into one uniform trust accounts category with one set of rules; establish a simple formula for calculating deposit insurance based on the number of beneficiaries; and eliminate the ability for a trust account to be structured to obtain unlimited deposit insurance at a bank, which is the case today, and certainly contrary to the spirit of the Federal Deposit Insurance Act.” Comments on the NPRM will be due 60 days after publication in the Federal Register.

    Agency Rule-Making & Guidance FDIC Deposit Insurance Mortgages FDI Act

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  • Federal agencies seek comments on third-party relationships

    Agency Rule-Making & Guidance

    On July 13, the Federal Reserve Board, FDIC, and OCC announced a request for public comments on proposed guidance designed to aid banking organizations manage risks related to third-party relationships, including relationships with financial technology-focused entities. The guidance also responds to industry feedback requesting alignment among the agencies with respect to third-party risk management guidance. The proposed guidance provides “a framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships that takes into account the level of risk, complexity, and size of the banking organization and the nature of the third-party relationship.” The proposal addresses key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Comments on the proposal are due 60 days after publication in the Federal Register. 

    Agency Rule-Making & Guidance FDIC OCC Federal Reserve Board Third-Party Fintech Risk Management

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  • CFPB and FDIC release enhancements to financial education program for seniors

    Agency Rule-Making & Guidance

    On July 14, the CFPB and FDIC announced enhancements to Money Smart for Older Adults, the agencies’ financial education program geared toward preventing elder financial exploitation. The enhanced version includes sections to help people avoid romance scams, which, according to data from the FTC, led to $304 million in losses in 2020. In addition, the agencies are also releasing an informational brochure on Covid-19 related scams. FDIC training materials and other resources for older adults are available from the CFPB here.

    Agency Rule-Making & Guidance FDIC CFPB Consumer Finance Elder Financial Exploitation Covid-19

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  • Biden orders federal agencies to evaluate banking, consumer protections

    Federal Issues

    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.”

    Federal Issues Biden CFPB FTC Dodd-Frank UDAAP Privacy/Cyber Risk & Data Security Consumer Finance Department of Treasury Federal Reserve FDIC OCC Agency Rule-Making & Guidance

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  • FDIC Chairman discusses innovation in banking

    Federal Issues

    On June 29, FDIC Chairman Jelena McWilliams spoke at the “Fintech: A Bridge to Economic Inclusion” conference on technology’s role in creating and facilitating a more inclusive financial system. McWilliams noted that while the proportion of U.S. households that were banked in 2019 was 94.6 percent, 7 million households still reported no banking relationship. Moreover, she noted that “the rates for Black and Hispanic households who do not have a checking or savings account at a bank remain substantially higher than the overall ‘unbanked’ rate.” McWilliams discussed the FDIC’s multi-pronged approach to tackle the issue of financial inclusion, which includes: (i) looking at financial innovations in the private sector; (ii) taking steps, including hosting tech sprints, to identify solutions; (iii) coordinating with Minority Depository Institutions and Community Development Financial Institutions; and (iv) conducting targeted public awareness campaigns on the importance of having a banking relationship. In explaining the initiatives, McWilliams pointed out that encouraging the use of alternative data that is not usually found in consumer credit files can “help firms evaluate the creditworthiness of consumers who might not otherwise have access to credit in the mainstream credit system.” She also discussed the use of artificial intelligence, updating brokered deposits rulemaking, and establishing a public/private standard-setting organization for due diligence of vendors and for the technologies they develop. According to McWilliams, “FDiTech is also leading tech sprints to identify data, tools, and technology to help community banks meet the needs of the unbanked, including how to measure impact.” (Covered by InfoBytes here.) McWilliams concluded her remarks by explaining that “[a]lthough the FDIC has limited ability to address directly the issue of unbanked Americans, there are things that [it] can do – and which [it is] doing – to foster innovation across all banks and to reduce the regulatory cost of and barriers to innovation.” 

    Federal Issues Fintech FDIC Non-bank

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  • FFIEC releases “Architecture, Infrastructure, and Operations” booklet

    Agency Rule-Making & Guidance

    On June 30, the Federal Financial Institutions Examinations Council (FFIEC) published the “Architecture, Infrastructure, and Operations” booklet of the FFIEC Information Technology Examination Handbook, which provides guidance to examiners on assessing the risk profile and adequacy of an entity’s information technology architecture, infrastructure, and operations (AIO). According to FDIC FIL-47-2021, the booklet, among other things: (i) describes the principles and practices that examiners should review in order to assess an entity’s AIO functions; (ii) focuses on “enterprise-wide, process-oriented approaches regarding the design of technology within the overall enterprise and business structure, implementation of information technology infrastructure components, and delivery of services and value for customers”; and (iii) mentions “assessing an entity’s governance of common AIO-related risks, enterprise-wide IT architectural planning and design, implementation of virtual and physical infrastructure, and on assessing an entity’s related operational controls.” In addition, according to an OCC announcement, the booklet discusses how appropriate governance of the AIO functions and related activities can: (i) promote risk identification across banks, nonbank financial institutions, bank holding companies, and third-party providers; (ii) support implementation of effective risk management; (iii) assist management through the regular assessment of an entity’s strategies; and (iv) promote alignment and integration between the functions. The booklet replaces the Operations booklet issued in July 2004.

    Agency Rule-Making & Guidance OCC FDIC CFPB FFIEC Risk Management

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