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OCC and Federal Reserve issue joint response to question regarding market risk capital rule
On May 1, the OCC and the Federal Reserve Board issued a joint response to a public question about a capital implication under the market risk capital rule in light of current market conditions arising from the Covid-19 pandemic. The joint response notes that, in March and April of 2020, the agencies took supervisory action giving certain banks the option to apply the multiplication factor that applied as of December 31, 2019, rather than applying a higher multiplier based on the most recent exceptions.
4th Circuit: Disgorgement calculation lacks necessary casual connection between profits and violations
On April 27, the U.S. Court of Appeals for the Fourth Circuit held that a district court’s disgorgement calculation for a banker found in contempt of a consent order rested on “an erroneous legal interpretation of the terms of the underlying consent order” and “lacked the necessary causal connection” between profits and a violation. As previously covered by InfoBytes, the banker settled RESPA and state law allegations with the CFPB and the Maryland Attorney General concerning his participation in a mortgage-kickback scheme. The 2015 final judgment order banned the defendant from participating in the mortgage industry for two years but did not prohibit him “from acting solely as a personnel or human-resources manager for a mortgage business operated by a FDIC-insured banking institution. . . .” In 2018, the banker was held in civil contempt for violating the final judgment order, and the district court ordered the disgorgement of over half-a-million dollars of his contemptuous earnings. The banker appealed the contempt finding and disgorgement.
On appeal, the 4th Circuit first held that the district court properly found the banker in violation of the consent order, determining among other things that, while the final judgment order did not broadly prohibit his participation in the mortgage industry, there was sufficient evidence that he “continued to communicate impermissibly with third-party businesses engaged in settlement services” and that he failed to follow various reporting requirements, such as uploading the consent order to a national registry and notifying regulators of a change in residence and business activity. However, the 4th Circuit found that the district court erred in its approach to calculating disgorgement because it assumed that “managing the business was improper and set out identifying [the banker’s] profits from his business because any such profit was contemptuous income.” (Emphasis in the original.) Holding that the district court’s view relied on an overbroad interpretation of the consent order and lacked the causal connection between the banker’s profits and a violation, the 4th Circuit vacated the disgorgement order and remanded the case to the district court to reassess the disgorgement calculation based on the banker’s more limited conduct that did not comply with the order.
OCC appeals judgment in NYDFS fintech charter challenge
On April 23, the OCC filed its opening brief in the U.S. Court of Appeals for the Second Circuit to appeal a district court’s final judgment in an NYDFS lawsuit that challenged the agency’s decision to allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October the district court entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State. The judgment followed the court’s denial of the OCC’s motion to dismiss last May (covered by InfoBytes here), in which the court concluded, among other things, that the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, and that engaging in the “business of banking” under the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.” Highlights of the OCC’s appeal include:
- The OCC claims that NYDFS lacks standing and that its claims are unripe because its alleged injuries are premised on a non-depository fintech company receiving a SPNB charter and commencing business in the state. However, the OCC has yet to receive even an application. The OCC also argues that NYDFS “would not be prejudiced by waiting to resolve these claims until OCC takes affirmative steps to approve an application” because the period between preliminary conditional approval and final approval would provide “ample opportunity to challenge such an application.”
- The OCC argues that the district court erred in holding that the agency’s decision to accept SPNB charter applications from non-depository fintechs was not entitled to Chevron deference. Specifically, the term “business of banking” under the NBA is “ambiguous” on whether it requires deposit-taking, and the OCC’s resolution of that ambiguity is reasonable as it is consistent with U.S. Supreme Court case law.
- The OCC argues that even if NYDFS’s claims were justiciable (and even if the OCC’s interpretation was not entitled to Chevron deference), any relief NYDFS is entitled to receive must be limited to the state. The OCC contends that the district court’s decision to grant nationwide relief was improper because it is inconsistent with Article III, which establishes that “remedies should not extend beyond what is necessary to redress the plaintiff’s alleged injuries,” as well as equitable principles and the Administrative Procedure Act.
OCC issues guidance to banks on tracking PPP loan data
On April 27, the OCC issued guidance for banks on receiving credit under the Community Reinvestment Act (CRA) for the loans the banks made to small businesses through the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). The guidance suggests that lenders should track the PPP loan data, particularly for loans to businesses with $1 million or less in annual revenues that are located in underserved, distressed or low to moderate-income (LMI) areas. The OCC states that tracking this data along with lending decisions and loan volume data “is a prudent banking practice consistent with the principles of safety and soundness and fair access and fair treatment of borrowers.” The SBA’s PPP frequently asked questions can be found here.
OCC reminds banks of its exclusive visitorial authority
On April 24, the OCC issued Bulletin 2020-43 to “remind[] banks that it has exclusive visitorial authority over them.” The bulletin states that it is important for banks to quickly provide the Small Business Administration’s Paycheck Protection Program loans to small businesses. As such, state and local officials cannot examine banks’ books and records without prior authorization such that they attempt to exercise visitorial authority. Moreover, banks are not required to comply with such requests, and are further encouraged to contact their OCC examiner regarding any state and local requests. State and local officials are likewise encouraged to contact the OCC with any information or questions.
FFIEC releases APR, APY computational tools
On April 16, the FFIEC, on behalf of its member agencies, announced the release of two computational tools for annual percentage rates (APR) and annual percentage yields (APY). These web-based tools are intended to assist financial institutions when complying with consumer protection laws and regulations.
The APR Computational Tool is intended to help examiners and financial institutions verify finance charges and APRs included on consumer loan disclosures subject to TILA and Regulation Z, including calculations “related to unsecured and secured installment and construction loans, including real estate-secured loans.” The tool can also be used to verify military annual percentage rates for loans subject to the Military Lending Act. The APY Computational Tool is designed to support the verification of APYs on consumer deposit account disclosures, including advertisements and periodic statements, subject to the Truth in Savings Act and Regulation DD. See FDIC FIL-45-2020 and OCC Bulletin 2020-40 regarding the release of these tools.
Agencies to hold webinar for bankers on loan modifications and reporting
On April 16, the FDIC released FIL-46-2020, announcing a webinar to provide accounting and reporting guidance for bankers pursuant to Section 4013 of the CARES Act and the revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (covered by InfoBytes here). The webinar is scheduled for Friday, April 24 at 3:00 pm EDT and will be jointly hosted by the FDIC, the Federal Reserve, the OCC, and the NCUA. Participants are encouraged to email questions prior to the webinar to asktheregulators@stls.frb.org. To register for the webinar, click here.
OCC announces FEMA's flood insurance payment deadline extension
On April 15, the OCC released a statement addressing the Federal Emergency Management Agency’s (FEMA) extension to the grace period for renewing flood insurance policies from 30 days to 120 days due to the Covid-19 pandemic. FEMA’s guidance in Bulletin W-20002 relates to National Flood Insurance Program policies with expiration dates from February 13, 2020 to June 15, 2020, and states that coverage will not lapse if the policy premium is paid prior to the end of the extended grace period. FEMA’s bulletin indicates that the payment grace period was extended “to allow additional time for policyholders who may be struggling financially during this unprecedented time to pay insurance premiums by ensuring that their policies are not canceled for nonpayment of premium due to circumstances beyond their control.” Likewise, the OCC statement “recognizes the serious impact the COVID-19 emergency may have on consumers” and conveys that it will not take enforcement or supervisory action against banks for “reasonable delays in complying with” the OCC’s force placement of flood insurance regulations. The OCC reminds banks that if flood insurance is force placed during the extended grace period, the banks must refund the cost of the overlapping coverage to the borrower.
OCC to host info sessions on PPP
On April 14, the OCC announced that the Office of Innovation will host three Paycheck Protection Program (PPP) listening sessions in April. The sessions will discuss questions and possible solutions for three PPP related topics. The first session covering payroll verification will be held on April 16, from 11:00 am to 1:00 pm (EDT), and will discuss how to make payroll verification quicker and more efficient for PPP loans. The second session, fraud identification, will be held on April 20, from 1:00 pm to 3:00 pm (EDT), to discuss possible methods for financial institutions to detect instances of fraud regarding the PPP. The third session will discuss backend processes, including identifying possible issues that may arise for financial institutions in monitoring PPP loans and in PPP loan forgiveness. This last session will be held on April 21, from 1:00 pm to 3:00 pm (EDT). Participants may share PPP concerns prior to the sessions by contacting the Office of Innovation here.
Agencies defer real estate appraisals and evaluations affected by Covid-19
On April 14, the FDIC, Federal Reserve Board (Fed), CFPB, NCUA, and OCC (agencies), in consultation with the CSBS, issued an interagency statement addressing challenges related to appraisals and evaluations for real estate financial transactions impacted by the Covid-19 pandemic. The statement outlines flexibilities for physical property inspections and appraisals of residential properties underwritten to Fannie Mae and Freddie Mac (covered by InfoBytes here). The agencies also remind financial institutions of existing exceptions outlined in appraisal regulations previously issued by the OCC, Fed, and FDIC. “The agencies encourage financial institutions to make use of these exceptions,” the statement stresses. “The use of an existing appraisal or evaluation for subsequent transactions may be particularly relevant during the COVID-19 emergency.”
The same day, the OCC, Fed, and FDIC also issued an interim final rule to amend and temporarily defer interagency regulations that require real estate appraisals for certain transactions. Specifically, regulated financial institutions will be allowed to defer completion of appraisals and evaluations for all residential and commercial real estate transactions, with the exception of those involving the acquisition, development, and construction of real estate. Financial institutions will be allowed up to 120 days from the closing date to obtain the required appraisal or evaluation in order to expedite the liquidity needs of borrowers during the Covid-19 pandemic. However, the OCC, Fed, and FDIC expect financial institutions to “make best efforts to obtain a credible valuation of real property collateral before the loan closing, and otherwise underwrite loans consistent with the principles in the agencies’ Standards for Safety and Soundness and Real Estate Lending Standards.” The interim final rule takes effect upon publication in the Federal Register and will expire December 31, 2020.