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Special Alert: OCC and FDIC propose rules to override Madden
On November 18, 2019 the Office of the Comptroller of the Currency (“OCC”) issued a proposed rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. The very next day, the Federal Deposit Insurance Corporation (“FDIC”) followed suit with respect to state chartered banks. The proposals are intended to address problems created by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, a decision that cast doubt, at least in the Second Circuit states, about the effect of a transfer or assignment on a bank loan’s stated interest rate that was nonusurious when made. Comments on these proposals are due 60 days following publication in the Federal Register, and as noted below, the case for robust banking industry comment is more compelling than is typically the case.
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Click here to read the full special alert.
If you have any questions about the alert or other related issues, please visit our Fintech practice page or contact a Buckley attorney with whom you have worked in the past.FDIC seeks to codify policy statement on bank employment standards
On November 19, the FDIC issued a proposed rule, which would formalize 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. As previously covered by InfoBytes, in August 2018, the FDIC updated the statement of policy to expand the criteria of de minimis offenses for which the FDIC will not require the filing of an application and (i) clarify when an expungement is considered complete for Section 19 purposes; (ii) recognize that convictions set aside based on procedural or substantive error should not be considered convictions under Section 19; and (iii) adjust the definition of “jail time” to not include “those on probation or parole who may be restricted to a particular jurisdiction.”
The proposal not only seeks to codify the policy statement but requests public comment on all aspects of the policy. According to Chairman McWilliams, the FDIC is particularly interested in “whether and how the FDIC should expand the criteria for what constitutes a de minimis offense.” Comments are due 60 days after publication in the Federal Register.
FDIC quarterly looks at growth in nonbank lending
On November 14, the FDIC released its latest issue of the FDIC Quarterly, which analyzes the U.S. banking system and focuses on changes occurring since the 2008 financial crisis, particularly within nonbank lending growth. The three reports—published by the FDIC’s Division of Insurance and Research—“address the shift in some lending from banks to nonbanks; how corporate borrowing has moved between banks and capital markets; and the migration of some home mortgage origination and servicing from banks to nonbanks.”
- Bank and Nonbank Lending Over the Past 70 Years notes that total lending in the U.S. has grown dramatically since the 1950s, with a shift in bank lending that reflects the growth of nonbank loan holders as nonbanks have gained market share in residential mortgage and corporate lending. The report states that in 2017, nonbanks represented 53 percent of mortgages originated by HMDA filers, and originated a significant volume of loans for sale to the GSEs. Mortgage servicing also saw a shift from banks to nonbanks, with nonbanks holding “42 percent of mortgage servicing rights held by the top 25 servicers in 2018.” The report also discusses shifts in lending for commercial real estate, agricultural loans, consumer credit, and auto loans, and notes that bank lending to nondepository financial institutions has grown from roughly $50 billion in 2010 to $442 billion in the second quarter of 2019.
- Leveraged Lending and Corporate Borrowing: Increased Reliance on Capital Markets, With Important Bank Links examines the shift in corporate borrowing from banks to nonbanks, with nonfinancial corporations “relying more on capital markets and less on bank loans as a funding source.” The report also, among other things, discusses resulting risks and notes that “[d]espite the concentration of corporate debt in nonbank credit markets, banks still face both direct and indirect exposure to corporate debt risks.”
- Trends in Mortgage Origination and Servicing: Nonbanks in the Post-Crisis Period examines changes to the mortgage market post 2007, including the migration outside of the banking system of a substantive share of mortgage origination and servicing. The report also discusses trends within the mortgage industry, key characteristics of nonbank originators and servicers, potential risks posed by nonbanks, as well as potential implications the migration to nonbanks may pose for banks and the financial system. Specifically, the report lists several factors contributing to the resurgence of nonbanks in mortgage origination and servicing, including (i) crisis-era legacy portfolio litigation at bank originators; (ii) more aggressive nonbank expansion (iii) nonbanks’ technological innovations and mortgage-focused business models; (iv) large banks’ sales of crisis-era legacy servicing portfolios due to servicing deficiencies and other difficulties; and (v) capital treatment changes to mortgage servicing assets applicable to banks. The report emphasizes, however, that “[c]hanging mortgage market dynamics and new risks and uncertainties warrant investigation of potential implications for systemic risk.”
FDIC, OCC approve final rule revising Volcker Rule
On November 14, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule, which will amend the Volcker Rule to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the five financial regulators released a joint notice of proposed rulemaking in July 2018 designed to reduce compliance costs for banks and tailor Volcker Rule requirements to better align with a bank’s size and level of trading activity and risks. The final rule clarifies prohibited activities and simplifies compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The final rule also addresses the activities of foreign banking entities outside of the United States.
Specifically, the final rule focuses on the following areas:
- Compliance program requirements and thresholds. The final rule includes a three-tiered approach to compliance program requirements, based on the level of a banking entity’s trading assets and liabilities. Banks with total consolidated trading assets and liabilities of at least $20 billion will be considered to have “significant” trading activities and will be subject to a six-pillar compliance program. Banks with “moderate” trading activities (total consolidated trading assets and liabilities between $1 billion and $20 billion) will be subject to a simplified compliance program. Finally, banks with “limited” trading activities (less than $1 billion in total consolidated trading assets and liabilities) will be subject to a rebuttable presumption of compliance with the final rule.
- Proprietary trading. Among other changes, the final rule (i) retains a modified version of the short-term intent prong; (ii) eliminates the agencies’ rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account; and (iii) adds a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. Additionally, banks subject to the market risk capital prong will be exempt from the short-term intent prong.
- Proprietary trading exclusions. The final rule modifies the liquidity management exclusion to allow banks to use a broader range of financial instruments to manage liquidity. In addition, exclusions have been added for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and certain purchases or sales of instruments that do not meet the definition of “trading assets and liabilities.”
- Proprietary trading exemptions. The final rule includes changes from the proposed rule related to the exemptions for underwriting and market making-related activities, risk-mitigating hedging, and trading by foreign entities outside the U.S.
- Covered funds. Among other things, the final rule incorporates proposed changes to the covered funds provision concerning permitted underwriting and market making and risk-mitigating hedging with respect to such funds, as well as investments in and sponsorships of covered funds by foreign banking entities located solely outside the U.S.
- Application to foreign banks. The final rule aligns the methodologies for calculating the “limited” and “significant” compliance thresholds for foreign banking organizations by basing both thresholds on the trading assets and liabilities of the firm’s U.S. operations. The final rule includes changes to the exemptions from the prohibitions for underwriting and market making-related activities, risk mitigating hedging, and trading by foreign banking entities solely outside the U.S. Additionally, the final rule also includes changes to the covered funds provisions, including with respect to permitted underwriting and market making and risk-mitigating hedging with respect to a covered fund, as well as investment in or sponsorship of covered funds by foreign banking entities solely outside the U.S. and the exemption for prime brokerage transactions.
FDIC board member Martin J. Gruenberg voted against the rule, stating the “final rule before the FDIC Board today would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits.” Gruenberg emphasized that the final rule “includes within the definition of trading account only one of these categories of fair valued financial instruments—those reported on the bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of financial instruments subject to the Volcker Rule.”
The final rule will take effect January 1, 2020, with banks having until January 1, 2021, to comply. Prior to the compliance date, the 2013 rule will remain in effect. Alternatively, banking entities may elect to voluntarily comply, in whole or in part, with the final rule’s amendments prior to January 1, 2021, provided the agencies have implemented necessary technological changes.
FDIC, bank reach RESPA settlement
On November 6, the FDIC announced that a Washington-based bank agreed to settle allegations that it violated RESPA by paying fees to real estate brokers and homebuilders in exchange for mortgage business referrals. Section 8(a) of RESPA “prohibits giving or accepting a thing of value for the referral of settlement service involving a federally related mortgage loan.” According to the FDIC, the bank’s discontinued mortgage banking line allegedly entered into arrangements with real estate brokers and homebuilders to co-market services through online platforms. The FDIC also alleged that the bank’s mortgage banking business rented desk space in brokers’ and homebuilders’ offices, which resulted in the payment of fees by the bank for referrals of mortgage loan business. The FDIC further stated, “While co-marketing arrangements and desk rental agreements are permissible where the fees paid bear a reasonable relationship to the fair market value of marketing or rental costs, such arrangements and agreements violate RESPA when the amounts paid exceed fair market value and the excess is for referrals of mortgage business.” The bank, which has neither admitted nor denied the charges, has agreed to pay a $1.35 million civil money penalty under the terms of the settlement order, and has terminated all of its co-marketing and desk rental agreements.
FDIC solicits comments on innovation pilot programs
On November 6, 2019 the FDIC published a notice and request for public comment in the Federal Register seeking input on a new collection of information titled “Information Collection for Innovation Pilot Programs.” The FDIC notes that the innovation pilot program framework is a continuation of the agency’s efforts to engage and collaborate “with innovators in the financial, non-financial, and technology sectors to, among other things, identify, develop, and promote technology-driven innovations among community and other banks in a manner that ensures the safety and soundness of FDIC-supervised and insured institutions.” The framework is intended to provide a regulatory environment to facilitate the testing of innovative and novel approaches or applications involving a variety of banking products and services that may lead to cost reductions, increased access to financial services, and a decrease in operational, risk management, or compliance costs for insured depository institutions. While the FDIC plans on announcing additional details and the framework’s parameters at a later date, the agency stated that “innovators (banks and firms in partnership with banks) will be invited to voluntarily propose time limited pilot programs, which will be collected and considered by the FDIC on a case-by-case basis.”
Comments on the proposal are due January 6, 2020.
Agencies simplify capital calculation for community banks
On October 29, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a final rule to simplify capital rule compliance requirements and reduce the regulatory burden for community banks in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things, the final rule allows qualifying community banks to adopt a simple community bank leverage ratio to measure capital adequacy, removing requirements for calculating and reporting risk-based capital ratios. Qualifying community banks must have less than $10 billion in total consolidated assets and meet additional criteria such as a leverage ratio greater than 9 percent. The agencies estimate that approximately 85 percent of community banks will qualify. The final rule also grants a community bank that temporarily fails to comply with the framework a two-quarter grace period to come back into full compliance, as long as its leverage ratio remains above 8 percent. According to the agencies, banking organizations will be permitted to use the community bank leverage ratio framework in their March 31, 2020 Call Report or Form FR Y-9C, as applicable. The final rule will take effect January 1, 2020.
FDIC releases September enforcement actions
On October 25, the FDIC announced its release of a list of administrative enforcement actions taken against banks and individuals in September. According to the press release, the FDIC issued 24 orders, which include “one consent order; five removal and prohibition orders; six assessments of civil money penalty; three voluntary terminations of deposit insurance; six section 19 orders; and three terminations of orders of restitution.”
Among other actions, the FDIC assessed separate civil money penalties (CMPs) against four banks for alleged violations of the Flood Disaster Protection Act:
- New Jersey-based bank CMP: Failure to (i) notify borrowers that they should obtain flood insurance; and (ii) follow force-placement flood insurance procedures;
- Wisconsin-based bank CMP: Failure to (i) maintain flood insurance coverage for the term of a loan; (ii) follow force-placement flood insurance procedures; and (iii) provide written notice to borrowers concerning flood insurance coverage prior to extending, increasing, or renewing a loan;
- Wisconsin-based bank CMP: Failure to (i) follow escrow requirements for flood insurance; and (ii) provide borrowers with notice of the availability of federal disaster relief assistance;
- Wisconsin-based bank CMP: Failure to (i) obtain flood insurance coverage on loans at the time of origination; (ii) obtain adequate flood insurance; (iii) follow escrow requirements for flood insurance; (iv) follow force-placement flood insurance procedures; and (v) provide borrowers with notice of the availability of federal disaster relief assistance.
The FDIC also assessed a CMP against an Oregon-based bank for allegedly violating RESPA and the TCPA by (i) placing telemarketing calls to consumers listed on the Do-Not-Call registry; and (ii) using an automated dialing system to send pre-recorded calls or text messages to consumers’ cell phones.
Additionally, the FDIC entered a notice of charges and hearing against a Georgia-based bank relating to alleged weaknesses in its Bank Secrecy Act compliance program.
Agencies finalize living will requirements
On October 28, the Federal Reserve Board and the FDIC issued a joint press release to announce the adoption of a final rule amending resolution planning requirements (known as living wills) for large domestic and foreign firms with more than $100 billion in total consolidated assets, while tailoring requirements to the level of risk a firm poses to the financial system. The final rule—which is substantially similar to the April 2019 proposal (previous InfoBytes coverage here)—makes improvements to the November 2011 joint resolution plan rule, and is consistent with amendments to Dodd-Frank made by the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among other things, the final rule tailors resolution planning requirements by using four “risk-based categories,” and extends the default resolution plan filing cycle. Global systemically important bank holding companies (GSIBs) will continue to be required to submit resolution plans on a two-year cycle; however, firms that do not pose the same systemic risk as GSIBs will only be required to submit their resolution plans on a three-year cycle. The agencies note in their release that both groups will alternate between submitting full and targeted resolution plans, and that “[f]oreign firms with relatively limited U.S. operations would be required to submit reduced resolution plans.” Additionally, firms with less than $250 billion in total consolidated assets that do not meet certain risk criteria will now be exempt under the final rule. The agencies also emphasize a change from the proposed rule: only smaller and less complex firms may request changes to their full resolution plans, subject to approval by both agencies prior to taking effect.
The final rule takes effect 60 days following publication in the Federal Register.
Federal financial regulators join the Global Financial Innovation Network
On October 24, the CFTC, FDIC, OCC, and SEC announced that they joined the Global Financial Innovation Network (GFIN). GFIN was created by the United Kingdom’s Financial Conduct Authority in 2018 and is an international network of 50 organizations, including the CFPB and other financial regulators. As previously covered by InfoBytes, GFIN members are committed to supporting financial innovation by (i) collaborating on innovation and providing accessible regulatory contact information for firms; (ii) providing a forum for joint regulation technology work; and (iii) providing firms with an environment in which to trial cross-border solutions. According to the FDIC’s announcement, “[p]articipation in the GFIN furthers these objectives and enhances the agencies’ abilities to encourage responsible innovation in the financial services industry in the United States and abroad.”