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Financial Services Law Insights and Observations


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  • Hsu urges banks to evaluate risk management exposures

    On May 17, acting Comptroller of the Currency Michael J. Hsu stressed “[n]ow is the time for banks to take a fresh look at their exposures and take actions to adjust their risk positions—to ‘trim their sails,’ so to speak—ahead of potential uncertainty and volatility.” Hsu said banks should take action now to examine exposure and adjust risk profiles ahead of potential uncertainty and volatility in interest rates and loan performance. “Empowering risk managers and enforcing discipline in risk-taking will enable banks to better navigate the rate environment and will lower the chances of nasty surprises as quantitative tightening occurs,” Hsu stressed. Banks should also re-review their risk identification capabilities and assess the comprehensiveness of their counterparty credit risk management practices, paying close attention to areas where risk limits or other practices have been relaxed for “high-priority, high-growth clients, especially where increasing wallet share has been a goal.” He also cautioned banks against taking on too much risk associated with a single economic concentration, flagging commercial real estate and loans to non-depository financial institutions (including broker-dealers, asset managers, and investment funds) as specific areas where banks may suffer considerable losses when markets turn. Banks should also be careful not to relax underwriting standards, Hsu warned, pointing to some banks that have lowered their retail credit underwriting to obtain new customers and volume growth. “Actions today to defease high-impact tail risks can temper the need to go full ‘risk-off’ tomorrow, ensuring that the banking industry can remain a source of strength to the economy, as it has throughout the pandemic and recent market turbulence,” Hsu stated.

    Bank Regulatory Federal Issues OCC Risk Management Underwriting

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  • FDIC rule seeks to thwart misrepresentations about deposit insurance

    On May 17, the FDIC approved a final rule implementing its authority to prohibit any person or organization from making misrepresentations about FDIC deposit insurance or misusing the FDIC’s name or logo. According to the FDIC, the final rule responds to the “increasing number of instances where individuals or entities have misused the FDIC’s name or logo, or have made false or misleading representations about deposit insurance.” To promote transparency on the FDIC’s processes for investigating and enforcing potential breaches of prohibitions under Section 18(a)(4) of the Federal Deposit Insurance Act, the final rule clarifies the agency’s procedures for identifying, investigating, and where necessary, taking formal and informal action to address potential violations, and establishes a primary point-of-contact for receiving complaints and inquiries about potential misrepresentations regarding deposit insurance. The final rule takes effect 30 days after publication in the Federal Register.

    In response, the CFPB released Consumer Financial Protection Circular 2022-02 to provide that covered firms are likely in violation of the CFPA’s prohibition on deceptive acts or practices “if they misuse the name or logo of the FDIC or engage in false advertising or make material misrepresentations to the public about deposit insurance, regardless of whether such conduct (including the misrepresentation of insured status) is engaged in knowingly.” As previously covered by InfoBytes, the newly introduced circulars serve as policy statements for other agencies with consumer financial protection responsibilities. Specifically, the Bureau warned that (i) “[m]isrepresenting the FDIC logo or name will typically be a material misrepresentation”; (ii) claiming “financial products or services are ‘regulated’ by the FDIC or ‘insured’ or ‘eligible for’ FDIC insurance are likely deceptive if those claims expressly or implicitly indicate that the product or service is FDIC-insured when that is not in fact the case” (e.g. emerging financial products and services including digital assets and crypto-assets); and (iii) misusing the FDIC’s name or logo creates harm for firms that engage in honest advertising and marketing. CFPB Director Rohit Chopra, as an FDIC board member, announced the Bureau’s support for the final rule. “Misrepresentation claims about deposit insurance are particularly relevant today,” Chopra noted. “FDIC staff has noted an uptick in potential violations in recent years. We are especially concerned about potential misconduct involving novel technologies, including so-called stablecoins and other crypto-assets. While new technologies may yield significant benefits for households, workers, and small businesses, they nonetheless pose risks to consumers who may be baited by misrepresentations or false advertisements about deposit insurance.”

    Acting Comptroller of the Currency Michael J. Hsu specifically called out the timeliness of the final rule in light of changes in the marketplace, technological developments, and rapidly evolving consumer behaviors. The final rule “is especially important in light of the growth of nonbank crypto firms and fintechs and their relationships with banks,” Hsu stated. “The potential for consumer confusion about the status of cash held at these firms is high and this final rule will help provide clarity.”

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance FDIC CFPB OCC FDI Act CFPA UDAAP Deceptive

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  • OCC discusses use of AI

    On May 13, OCC Deputy Comptroller for Operational Risk Policy Kevin Greenfield testified before the House Financial Services Committee Task Force on Artificial Intelligence (AI) discussing banks' use of AI and innovation in technology services. Among other things, Greenfield addressed the OCC’s approach to innovation and supervisory expectations, as well as the agency’s ongoing efforts to update its technological framework to support its bank supervision mandate. According to Greenfield’s written testimony, the OCC “recognizes the paramount importance of protecting sensitive data and consumer privacy, particularly given the use of consumer data and expanded data sets in some AI applications.” He noted that many banks use AI technologies and are investing in AI research and applications to automate, augment, or replicate human analysis and decision-making tasks. Therefore, the agency “is continuing to update supervisory guidance, examination programs and examiner skills to respond to AI’s growing use.” Greenfield also pointed out that the agency follows a risk-based supervision model focused on safe, sound, and fair banking practices, as well as compliance with laws and regulations, including fair lending and other consumer protection requirements. This risk-based approach includes developing supervisory strategies based upon an individual bank’s risk profile and examiners’ review of new, modified, or expanded products and services. Greenfield further noted that “the OCC is focused on educating examiners on a wide range of AI uses and risks including risks associates with third parties, information security and resilience, compliance, BSA, credit underwriting, and fair lending and data governance, as part of training courses and other educational resources.” According to Greenfield’s oral statement, “banks need effective risk management and controls for model validation and explainability, data management, privacy, and security regardless of whether a bank develops AI tools internally or purchases through a third party.”

    Bank Regulatory Federal Issues OCC House Financial Services Committee Privacy/Cyber Risk & Data Security Artificial Intelligence Third-Party Risk Management Fintech

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  • Hsu discusses expanding diversity and inclusion

    On May 12, acting Comptroller of the Currency Michael J. Hsu spoke before the Asian Real Estate Association of America Diversity and Fair Housing Summit focusing on the agency’s efforts to decrease barriers to homeownership and promote financial inclusion. In his remarks, Hsu described the agency’s commitment to expanding diversity and inclusion by “encouraging banks to expand their financing of affordable housing and other community needs, especially in low- and moderate-income (LMI) areas.” He further discussed the interagency Community Reinvestment Act (CRA) notice of proposed rulemaking (NPR) on new regulations updating how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. (Covered by InfoBytes here.) Hsu noted that the provisions of the NPR “are intended to expand access to credit, investment, and basic banking services in LMI areas where they are most needed,” and that it “significantly update[s] regulations intended to encourage banks to meet the credit needs of the entire communities they serve.” Hsu also stated that the agency will “continue to diversify its staff, and train and promote a diverse leadership team.” Hsu explained that through Project REACh (Roundtable for Economic Access and Change), the agency “is harnessing the energy and ideas of concerned civil rights, community, banking, business, and other industry leaders across the nation” and that progress has been made through its various workstreams. As previously covered by InfoBytes, Project REACh brings together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations to identify and reduce barriers to accessing capital and credit. Finally, Hsu mentioned that he is “concerned by the hype and the risk consumers face” regarding the growing interest in cryptocurrency investments and other digital assets. He believes that “better financial education and information will benefit all consumers and help reduce our nation’s broad racial wealth gap.”

    Bank Regulatory Federal Issues OCC Financial Inclusion Diversity Consumer Finance

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  • Agencies issue revised interagency flood insurance Q&As

    On May 11, the FDIC, OCC, Federal Reserve Board, NCUA, and the Farm Credit Administration jointly issued revised, reorganized, and expanded interagency questions and answers (Q&As) regarding federal flood insurance laws. The revised Q&As supersede versions published in 2009 and 2011, and consolidate Q&As proposed by the agencies in 2020 and 2021 (covered by InfoBytes here). Reflecting significant changes to flood insurance requirements made by the Biggert-Waters Flood Insurance Reform Act and the Homeowner Flood Insurance Affordability Act, as well as regulations issued by the agencies to implement these laws, the revised Q&As consist of 144 Q&As (including 24 private flood insurance Q&As) covering a range of topics, including the escrow of flood insurance premiums, the detached structure exemption to the mandatory flood insurance purchase requirement, force placement procedures, and the acceptance of flood insurance policies issued by private insurers. The agencies also made non-substantive revisions to certain Q&As to provide more direct responses to questions asked, additional clarity, or make technical corrections. In response to concerns raised by several commenters, the agencies confirmed that they are providing the interagency Q&As “as guidance only,” and clarified that “all the Q&As apply to all policies, whether [National Flood Insurance Program] or a flood insurance policy issued by a private insurance company, unless otherwise noted in the Q&A.” Additionally, the agencies noted “that they are working individually and on an interagency basis to address financial risks associated with climate change consistent with the [a]gencies’ regulatory and supervisory authorities,” and therefore “decline to make changes to any of the Q&As in response to climate risk change.

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance OCC FDIC Federal Reserve NCUA Farm Credit Administration Risk Management Flood Insurance Mortgages National Flood Insurance Program

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  • Hsu: Bank merger framework needs updating

    On May 9, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the Brookings Institution focusing on updating the framework used to analyze bank merger applications. In his remarks, Hsu described that bank mergers have “received significant attention this past year” and that “[c]oncerns about the negative effects of bank mergers on competition, communities and financial stability have prompted some to call for a moratorium on merger activity.” Hsu also noted that “others have defended the benefits of mergers,” noting that “the U.S. financial services market is highly competitive, and mergers allow institutions to achieve needed economies of scale and to diversify risk through geographic or product expansion.” The OCC adopted the DOJ’s bank merger review guidelines, which were last revised in 1995, but public comments as to whether it should update the guidelines to reflect trends in the banking and financial services sector and to modernize its approach to bank merger review is currently pending. Stating that the frameworks for analyzing bank mergers need updating, Hsu noted that imposing a moratorium on mergers would “lock in the status quo,” thus, “prevent[ing] mergers that could increase competition, serve communities better, and enhance industry resiliency.” Considering that it is time to “rethink the frameworks” for analyzing bank merger applications, Hsu stated that he does not believe that “the statutory prongs of competitiveness, safety and soundness, meeting community needs, and financial stability need to be revisited.” Instead, he described that, “the modes of analysis used by regulators to apply these factors need to be improved.” According to Hsu, there is a “resolvability gap” among large regional banks, which is creating a whole new set of "too-big-to-fail" entities as these banks grow in size. 

    Bank Regulatory Federal Issues OCC Bank Mergers DOJ

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  • Special Alert: Breaking down the proposed CRA overhaul

    Federal Issues

    The federal banking agencies last week announced their highly anticipated proposal to revamp and modernize regulations implementing the Community Reinvestment Act. The proposal may significantly impact the compliance obligations of large banks, which the proposal generally defines as those with assets greater than $2 billion, while granting smaller banks the option of continuing to comply under the existing framework. The proposal aims to bring to a close the CRA reform process that began more than a decade ago, and was marked most recently by the OCC’s decision to pull back its 2020 regulatory overhaul (as covered by InfoBytes here).

    Federal Issues Bank Regulatory Special Alerts Federal Reserve OCC FDIC CRA Agency Rule-Making & Guidance

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  • Agencies overhaul CRA requirements

    On May 5, the Federal Reserve Board, FDIC, and OCC (collectively, “agencies”) issued a joint notice of proposed rulemaking (NPRM) on new regulations implementing the Community Reinvestment Act (CRA) to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. According to the NPRM, the “CRA encourages banks to help meet the credit needs of the local communities in which they are chartered, consistent with a bank’s safe and sound operations, by requiring the Federal banking regulatory agencies to examine banks’ records of meeting the credit needs of their entire community, including low- and moderate-income neighborhoods.” The agencies are, among other things, proposing to:

    • Expand access to credit, investment, and banking services in low- and moderate-income (LMI) communities to promote community engagement and financial inclusion. The proposal would also evaluate bank lending to small businesses and farms with gross annual revenues of $250,000 or less to maintain focus on the borrowers with the greatest need;
    • Adapt changes to update CRA assessment areas to include activities associated with online and mobile banking, branchless banking, and hybrid models;
    • Use a retail lending volume screen and metric-based performance ranges to evaluate a bank’s retail lending volumes. CRA evaluations of retail lending and community development financing will include public benchmarks for greater clarity and consistency. The proposal would also clarify eligible CRA activities, such as affordable housing, that are focused on LMI, underserved, and rural communities;
    • Tailor CRA evaluations and data collection to recognize differences in bank size and business models. Smaller banks would continue to be evaluated under the existing CRA framework with the option of being evaluated under aspects of the proposed framework; and
    • Maintain a unified approach across agencies and incorporate stakeholder feedback.

    The agencies also released a Fact Sheet describing key elements of the proposal. Acting Comptroller of the Currency, Michael J. Hsu, called the issuance of the joint NPRM an “important milestone” in bringing the three federal banking agencies back together to develop a uniform approach for addressing inequalities in credit access and other financial services. Fed Governor Lael Brainard pointed out that “[t]he last major revisions to the CRA regulations were made in 1995.” “The CRA is one of our most important tools to improve financial inclusion in communities across America, so it is critical to get reform right,” she stressed. CFPB Director Rohit Chopra, who voted in favor of the NPRM as an FDIC board member, said the proposal “better effectuates Congressional directives intended to ensure that the needs of historically underserved individuals and communities are adequately met,” but reminded policymakers that it is also important “to consider whether nonbank mortgage lenders should also be required to better meet the needs of the communities they serve.” Treasury Secretary Janet Yellen similarly applauded the release of the NPRM. Comments on the NPRM are due August 5.

    A Buckley Special Alert is forthcoming.

    Bank Regulatory Federal Issues Agency Rule-Making & Guidance Federal Reserve FDIC OCC Department of Treasury CFPB CRA Consumer Finance

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  • OCC hosts virtual innovation hours

    On May 4, the OCC announced it will host virtual Innovation Office Hours on June 14 through 15 to promote responsible innovation in the federal banking system. As previously covered by InfoBytes, the OCC established the Office of Innovation in 2017 to implement certain aspects of the OCC’s responsible innovation framework, including, among other things: (i) creating an outreach and technical assistance program; (ii) conducting awareness and training activities for OCC staff, such as implementing an internal web page that provides OCC staff a ‘one-stop-shop’ to access information on industry trends and innovative products, services, and processes; and (iii) encouraging coordination and facilitation among the regulatory community and industry stakeholders. According to the OCC’s recent announcement, parties should request a virtual office hours session by May 20 and should provide information on their interested topic(s). The OCC will determine specific meeting times and arrangements after it receives and accepts the request.

    Bank Regulatory Federal Issues OCC Fintech

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  • Hsu discusses stablecoin standards

    On April 27, acting Comptroller of the Currency Michael J. Hsu issued a statement regarding stablecoin standards after appearing before the Artificial Intelligence and the Economy: Charting a Path for Responsible and Inclusive AI symposium hosted by the U.S. Department of Commerce, National Institute of Standards and Technology, FinRegLab, and the Stanford Institute for Human-Centered Artificial Intelligence. According to Hsu, the internet has “technical foundations” that “provide for an open, royalty-free network.” He further noted that “[t]hose foundations did not emerge on their own. They were developed by standard setting bodies like IETF (Internet Engineering Task Force) and W3C (World Wide Web Consortium), which had representatives with differing perspectives, a shared public interest ethos, and a strong leader committed to the vision of an open and inclusive internet.” Hsu further stated that stablecoins do not have “shared standards and are not interoperable.” However, to make stablecoins “open and inclusive,” Hsu said that he believed that “a standard setting initiative similar to that undertaken by IETF and W3C needs to be established, with representatives not just from crypto/Web3 firms, but also from academia and government.” As previously covered by InfoBytes, Hsu discussed stablecoin policy considerations earlier this month in remarks before the Institute of International Economic Law at Georgetown University Law Center, calling for the establishment of an “intentional architecture” for stablecoins developed through principles of “[s]tability, interoperability and separability,” as well as “core values” of “privacy, security, and preventing illicit finance.”

    Bank Regulatory Federal Issues OCC Digital Assets Cryptocurrency Stablecoins Risk Management Fintech

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