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District court grants bank’s partial summary judgment in FDIC RMBS suit
On March 11, the U.S. District Court for the Southern District of New York granted partial summary judgment in favor of the securities arm of a large banking group (defendant) in an FDIC suit alleging securities violations in the offering, sale, or distribution of residential mortgage-backed security (RMBS) certificates to a now failed bank. As receiver for the failed bank, the FDIC filed suit in 2007 concerning, among other things, two senior certificates purchased by the failed bank. The FDIC alleged that the defendant omitted key facts and made numerous false statements of material fact to sell RMBS certificates to the failed bank and additionally performed due diligence on the underlying loans, thus participating in the distribution of the certificates. The agency further alleged that although the defendant “did not directly purchase or sell the senior certificates, [the defendant] is still an underwriter as defined under the Securities Act because of its ‘direct or indirect participation’ in the distribution of the senior certificates.”
The court sided with the defendant, finding that even though its “due diligence and review of prospectus supplements helped facilitate the securities offerings, those activities do not involve the purchase, offer, or sale of the securities and thus are not part of their distribution.” The court reasoned that the prospectus supplements of the senior class certificates specifically state that the defendant was only an underwriter for the subordinated class certificates and not for the senior class certificates purchased by the failed bank. Accordingly, the court granted the defendant’s motion for partial summary judgment, dismissing the two claims with respect to the senior certificates.
FDIC warns of scams
On March 18, the FDIC issued a press release reminding Americans that FDIC-insured banks “remain the safest place to keep their money.” The FDIC also warned of scams where imposters are pretending to be agency representatives to perpetrate fraudulent schemes.
Fed encourages use of discount window
On March 16, the federal bank regulatory agencies issued a statement encouraging depository institutions to use the Federal Reserve’s discount window to meet household and business demands for credit.
Fed encourages banks to use capital and liquidity buffers
On March 15, the Federal Reserve issued a press release that, among other things, encouraged banks to use their capital and liquidity buffers to lend to households and businesses and announced that reserve requirement ratios will be reduced to 0% effective March 26. The Federal Reserve, OCC, and FDIC issued a joint press release on March 17 with the same encouragement.
Fed agencies encourage flexibility in light of Covid-19 crisis
On March 13, the OCC, FDIC, and NCUA issued guidance on March 13 that borrows heavily from the Federal Reserve’s 2013 Guidance SR 13-6 / CA 13-3: Supervisory Practices Regarding Banking Organizations and Their Borrowers and Other Customers Affected by a Major Disaster or Emergency to address how institutions can work prudently with affected customers and how the agencies can provide regulatory relief in a safe and sound manner to institutions.
Releases by the FDIC (FIL-17-2020, OCC (Bulletin 2020-15, and NCUA (Letter 20-CU-02, along with the Fed’s 2013 Guidance all encourage financial institutions to be flexible in working with all borrowers affected by the coronavirus outbreak, with the FDIC especially calling out customers in vulnerable industry sectors such as airlines, energy, travel, tourism, shipping, and small businesses.The guidance suggests the following efforts to aid customers: (i) waiving certain fees (e.g. ATM, overdraft, and late payments); (ii) increasing ATM daily withdrawal limits; (iii) easing restrictions on check-cashing; (iv) increasing credit card limits for creditworthy borrowers; (v) offering payment accommodations (e.g. extending due dates and allowing deferrals); and (vi) working with consumers temporarily unable to work due to business closures, slowdowns, or sickness. The regulators also encourage prudent efforts to modify terms of existing loans, and in the OCC’s guidance, to consider easing terms on new loans in a manner consistent with prudent banking practices.
The regulators stated their intent to work with institutions to reduce the burden of examinations, including making greater use of off-site reviews, and not to assess penalties or take other supervisory actions if institutions are unable to comply with reporting requirements despite reasonable and prudent efforts. The guidance also encourages institutions that need to temporarily close physical locations to offer alternative service options when practical and to notify their primary federal or state regulator and customers about temporary closures and alternative service options as soon as practical.
Fed agencies issue Covid-19 guidance
On March 9, the Federal Reserve, CFPB, FDIC, NCUA, OCC, and CSBS issued a joint release encouraging institutions to “work constructively with borrowers and other customers in affected communities” and stating that “prudent efforts consistent with safe and sound lending practices should not be subject to examiner criticism.” The agencies also acknowledged that institutions would face staffing and other challenges and committed to expedite requests to provide more convenient availability of services and work to minimize the disruption and burden of examinations and inspections.
Financial regulators provide supervisory relief, and VA encourages mortgage relief to veterans after Tennessee tornadoes
On March 12, the OCC, Federal Reserve Board, FDIC, NCUA, and the Tennessee Department of Financial Institutions issued an interagency statement on supervisory practices for financial institutions affected by the recent tornadoes in Tennessee. Among other things, the agencies called on financial institutions to “work constructively” with affected borrowers, noting that “prudent efforts” to adjust loan terms in affected areas “should not be subject to examiner criticism.” Institutions facing difficulties in complying with any publishing and reporting requirements should also contact their primary federal and/or state regulator. Additionally, the agencies noted that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services that revitalize or stabilize federally designated disaster areas. In FIL-16-2020, the FDIC further encouraged supervised institutions to consider, among other things, (i) extending repayment terms; (ii) restructuring existing loans; or (iii) easing terms for new loans to affected borrowers, if done in a manner consistent with sound banking practices. The FDIC stated it will also consider regulatory relief from certain filing and publishing requirements.
Separately, on March 10, the Department of Veterans Affairs (VA) issued Circular 26-20-5 to encourage mortgagees to provide relief for VA borrowers affected by the recent tornadoes in Tennessee. The Circular encourages loan holders and servicers to (i) extend forbearance to distressed borrowers and to members of the National Guard assisting in the recovery efforts; (ii) establish a 90-day moratorium on initiating new foreclosures; (iii) waive late charges; and (iv) suspend credit reporting on affected loans. The Circular will be rescinded April 1, 2021. Mortgage servicers and veteran borrowers are also encouraged to review the VA’s Guidance on Natural Disasters.
Find continuing InfoBytes coverage on disaster relief guidance here.
Regulatory agencies issue pandemic planning statement
On March 6, the Federal Reserve, FDIC, OCC, NCUA, Conference of State Bank Supervisors, and the CFPB—through the Federal Financial Institutions Examination Council—issued an Interagency Statement on Pandemic Planning, which, among other things, updates 2006 and 2007 guidance on the need for business continuity plans (BCPs) that address the effects of pandemics. The interagency statement encourages banks to develop plans that, among other things, limit disruption of operations, minimize staff contact by utilizing remote access, and plan for staffing challenges by cross-training bank staff. The statement recommends that the BCPs of financial institutions should include: (i) a preventive program; (ii) a documented strategy that applies to the stages of the pandemic; (iii) a “comprehensive framework of facilities, systems, or procedures to ensure that the institution’s critical operations will continue” (iv) a testing program; and (v) an oversight program to ensure ongoing review and updates to the plan.” The statement also lists websites that offer information on pandemic planning activities. The FDIC and the OCC also published advisories, FIL-14-2020, and OCC 2020-13, respectively.
On March 9, the agencies issued a joint press release encouraging the financial institutions to “meet the financial needs of customers and members affected by” COVID-19. Also, the U.S. Senate sent a letter to trade associations encouraging them to provide job security for employees who self-quarantine or must miss work to take care of sick family members, and to ensure staff will not be required to use all sick leave/vacation leave or “report for work when such leave is exhausted.” The letter urges the entities to work with their customers by waiving late fees and overdraft fees among other measures. The Connecticut Department of Banking issued its own guidance as well regarding temporary remote work, and on March 5, the Washington Department of Financial Institutions issued similar guidance.
FDIC and Fed issue proposed living will guidance for FBOs
On March 6, the FDIC and the Federal Reserve Board issued a joint notice and request for comment on their proposal for updates to resolution plan guidance for certain large foreign banking organizations (FBOs). Pursuant to the Dodd-Frank Act, FBOs must submit resolution plans—also known as “living wills”—which detail the strategic plans for their U.S. operations and subsidiaries for rapid and orderly resolution in bankruptcy in the event that the banks fail or fall under material financial distress. Updates in the proposal focus on the FBO’s derivatives and trading activities and payment, clearing, and settlement activities and are informed by responses from FBOs to the prior 2018 FBO guidance and 2019 domestic guidance. In addition, the proposal contains an appendix of frequently asked questions with answers provided by agency staff. The agencies also seek comments “on objective, quantitative criteria to determine its applicability.” Comments must be received by May 5.
Agencies seek comments on covered funds under Volcker Rule
On February 28, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC issued a notice of proposed rulemaking (NPR) to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. (Previous InfoBytes coverage of the Volcker Rule here). According to the press release, the proposed amendments “would modify and clarify the regulations concerning covered funds and would address certain related issues, including qualifying foreign excluded funds.” Among other things, the amendments to the regulations would (i) “permit the activities of qualifying foreign excluded funds”; (ii) “revise the exclusions from the definition of covered fund for foreign public funds, loan securitizations, and small business investment companies”; (iii) create exclusions from “covered fund credit funds, qualifying venture capital funds, family wealth management vehicles, and customer facilitation vehicles”; (iv) allow certain transactions that would otherwise be prohibited under the so-called “Super 23A” restrictions; (v) redefine “ownership interest”; and (vi) exclude certain investments from “a banking entity’s calculation of its ownership interest in the covered fund.” Comments in response to the NPR must be submitted by April 1.