InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FDIC grants exception requests for certain deposit insurance recordkeeping requirements
On August 4, the FDIC published responses to exception requests pursuant to the Recordkeeping for Timely Deposit Insurance Determination rule (Rule). The notice outlines two time-limited exceptions for covered institutions effective as of July 28. The Rule, codified at 12 CFR Part 370 (and amended last year—covered by InfoBytes here), requires covered institutions to implement information technology systems and recordkeeping capabilities in order to calculate quickly the available amount of deposit insurance coverage for each deposit account in the event of failure. The FDIC allows covered institutions to request an exception from one or more of Part 370’s requirements should circumstances “make it impracticable or overly burdensome to meet those requirements.” Additionally, a covered institution may—upon notice to the FDIC—rely upon another covered institution’s FDIC-granted exception request, if the two institutions have substantially similar facts and circumstances.
The first exception grants an exception of up to 18 months from certain information technology and general recordkeeping requirements to allow covered institutions to perform system updates and remediation efforts to ensure certain sole proprietorship deposit accounts are correctly classified by an institution’s information technology system. The second exception grants an exception of up to 12 months from certain information technology and general recordkeeping requirements “for a limited number of joint accounts that a covered institution has not confirmed are ‘qualifying joint accounts’ entitled to separate deposit insurance coverage.”
FFIEC discusses additional Covid-19 loan accommodations
On August 3, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement on managing loan accommodations granted to borrowers pursuant to federal, state, and local law to address Covid-19 related hardships. Specifically, the statement provides risk management and consumer protection principles to financial institutions working with borrowers that are near the end of their initial loan accommodation period. Among other things, the statement outlines:
- Risk Management Practices. The statement encourages financial institutions to institute sound credit risk management practices following an accommodation period, such as “reassess[ing] risk ratings for each loan based on a borrower’s current debt level, current financial condition, repayment ability, and collateral.” Additionally, the statement encourages institutions to provide “clear, accurate, and timely information to borrowers and guarantors regarding the accommodation” being granted.
- Sustainable Accommodations. The statement notes that the Covid-19 pandemic may have “long-term adverse impact[s] on borrower’s future earnings” and financial institutions should consider additional accommodation options to mitigate losses for the borrower and institutions by assessing “each loan based upon the fundamental risk characteristics affecting the collectability of that particular credit.”
- Consumer Protection. The statement encourages financial institutions to provide consumers with options to support repayment at the end of accommodations to avoid delinquencies and to consider offering credit product term changes to “support sustainable and affordable payments for the long term.”
- Accounting and Regulatory Reporting. The statement emphasizes that financial institutions should consider the effects of the Covid-19 pandemic in its allowance for loan and lease losses, or credit losses, estimation processes, consistent with generally accepted accounting principles.
- Internal Control Systems. The statement notes that internal control functions for the end of initial accommodation periods and for additional accommodations typically “include appropriate targeted testing of the process for managing each stage of the accommodation.” Additionally, the statement reminds financial institutions of their responsibility for ensuring service providers in charge of these functions act consistently with the institution’s policies and all applicable laws and regulations.
FDIC finalizes policy statement on bank employment standards
On July 24, the FDIC issued a final rule, which formalizes the agency’s Federal Deposit Insurance Act (FDI Act) Section 19 policy statement covering individuals seeking to work in the banking industry who have been convicted of certain crimes. In general, Section 19 of the FDI Act prohibits, without the prior written consent of the FDIC, any person who has been convicted of any criminal offense involving dishonesty, breach of trust, or money laundering—or who has entered into a pretrial diversion or similar program in connection with such an offense—from participating in the banking industry. In August 2018, the FDIC updated the statement of policy to, among other things, expand the criteria of de minimis offenses for which the FDIC will not require the filing of an application (covered by InfoBytes here), and in November 2019, the FDIC issued the proposed rule to finalize the policy statement (covered by InfoBytes here).
The final rule, among other things, (i) exempts all individuals whose covered offenses have been expunged; (ii) expands the scope of the de minimis exception for certain qualifying offenses involving the use of false or fake identification, as well as for small-dollar, simple theft offenses; (iii) eliminates waiting periods for applicants who have had only one qualifying covered offense; and (iv) allows a person with two de minimis offenses to qualify for the de minimis exception, and decreases the waiting period for two such offenses to three years (or 18 months for those who were 21 or younger at the time of the offense).
OCC proposes True Lender rule
On July 20, the OCC issued a proposed rule (see also Bulletin 2020-70) that addresses when a national bank or federal savings association (bank) is the “true lender” in the context of a partnership between a bank and a third party in order to clarify uncertainties about the legal framework that applies. Specifically, the proposed rule amends 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan.” The OCC notes that the proposal intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.”
In response, the Conference of State Bank Supervisors (CSBS) issued a statement opposing the proposal, stating that “the true lender doctrine is and should remain a matter of state law.”
As previously covered by InfoBytes, the OCC and the FDIC recently issued final rules clarifying that whether interest on a loan is permissible under federal law is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan, effectively reversing the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision. At the time, both agencies chose not to address the “true lender” issue.
FDIC seeks input on voluntary certification of innovative technologies
On July 20, the FDIC issued a Request for Information (RFI) seeking input on whether a public/private standard-setting partnership and voluntary certification program could be established to (i) promote the efficient and effective adoption of innovative technologies at supervised financial institutions; and (ii) support financial institutions’ efforts to implement innovative models, manage risk, and conduct due diligence of third-party fintech firms. The RFI is being issued as part of the agency’s FDiTech initiative (covered by InfoBytes here), which was established in 2019 to encourage innovation within the banking industry (particularly at community banks), support collaboration for piloting new products and services, eliminate regulatory uncertainty, and manage risks.
The FDIC stated that establishing a standards-setting body, developed by regulators and industry stakeholders, would help promote innovation across the banking sector and streamline the vetting process for fintech partners. The agency noted that a voluntary certification program could assist in standardizing due diligence practices and reduce costs for financial institutions that choose to participate. Additionally, the FDIC emphasized that it “is especially interested in information on models and technology services developed and provided by [fintechs].” Comments are due 60 days after publication in the Federal Register.
FDIC encourages regulatory relief for Michigan borrowers affected by severe weather
On July 16, the FDIC issued FIL-70-2020 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Michigan affected by severe storms and flooding from May 16 through May 22. In the guidance, the FDIC encourages institutions to consider, among other things, (i) extending repayment terms; (ii) restructuring existing loans; or (iii) easing terms for new loans to borrowers affected by the severe weather, provided the measures are “done in a manner consistent with sound banking practices, can contribute to the health of the local community and serve the long-term interests of the lending institution.” Additionally, the FDIC notes that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The FDIC states it will also consider relief from certain filing and publishing requirements.
Find continuing InfoBytes coverage on disaster relief guidance here.
EU - U.S. forum studies implications of Covid-19 for financial stability
On July 17, the U.S. Treasury Department issued a joint statement on the EU - U.S. Financial Regulatory Forum, which met virtually on July 14 and 15 and included participants from Treasury, the Federal Reserve Board, CFTC, FDIC, SEC, and OCC. Forum participants discussed six key themes: (i) potential financial stability implications and economic responses to the Covid-19 pandemic; (ii) capital market supervisory and regulatory cooperation, including cross-border supervision; (iii) “multilateral and bilateral engagement in banking and insurance,” including “cross-border resolution of systemic banks” and Volcker Rule implementation; (iv) approaches to anti-money laundering/countering the financing of terrorism financing and remittances; (v) the regulation and supervision of digital finance and financial innovation, such as “digital operational resilience and developments in crypto-assets, so-called stablecoins, and central bank digital currencies”; and (vi) sustainable finance developments. EU and U.S. participants recognized the importance of communicating mutual supervisory and regulatory concerns to “support financial stability, investor protection, market integrity, and a level playing field.”
FDIC follows OCC, adopts final rule addressing Madden
On June 25, the FDIC issued a final rule clarifying that whether interest on a loan is permissible under the Federal Deposit Insurance Act is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. The FDIC’s final rule effectively reverses the Second Circuit’s 2015 Madden v. Midland Funding decision as applicable to state banks and follows the OCC’s issuance of a similar rule earlier this month for national charters. Specifically, the FDIC’s final rule states that, “[w]hether interest on a loan is permissible under section 27 of the Federal Deposit Insurance Act is determined as of the date the loan was made. . . [and] shall not be affected by a change in State law, a change in the relevant commercial paper rate after the loan was made, or the sale, assignment, or other transfer of the loan, in whole or in part.” Additionally, the FDIC rule mirrors the OCC in specifying that the rule does “not address the question of whether a State bank. . .is a real party in interest with respect to a loan or has an economic interest in the loan under state law, e.g. which entity is the ‘true lender.’” Details on the effect of these rules can be found in Buckley’s Special Alert on the OCC’s issuance.
Agencies finalize covered funds changes to Volcker Rule
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
Agencies propose updates to Interagency Questions and Answers Regarding Flood Insurance
On July 6, the FDIC, OCC, Federal Reserve Board, NCUA, and the Farm Credit Administration published a request for public comments on proposed new questions and answers to be included in the Interagency Questions and Answers Regarding Flood Insurance, following changes made to flood insurance regulations under the agencies’ joint rule regarding loans in special flood hazard areas. The proposal updates interagency questions and answers last updated in 2011, and is intended to reduce compliance burdens for lenders related to flood insurance laws. Among the new questions and answers are those related to (i) the “escrow of flood insurance premiums”; (ii) the “detached structure exemption to the mandatory purchase of flood insurance requirement”; and (iii) force-placement of flood insurance procedures. The proposal also revises and reorganizes several existing questions and answers to improve clarity and user functionality. Comments are due September 4.
Additionally, FDIC FIL 67-2020 states that the agencies are currently drafting new Interagency Questions and Answers Regarding Flood Insurance related to the 2019 private flood insurance rule (covered by InfoBytes here), which will be proposed at a later date.