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NYDFS strongly opposes OCC’s proposed CRA rulemaking
On April 8, NYDFS Superintendent Linda Lacewell sent a letter to OCC Comptroller Joseph Otting expressing her “strong opposition” to the OCC’s notice of proposed rulemaking (NPR) issued last December to modernize the Community Reinvestment Act (CRA). (See Buckley Special Alert discussing the NPR). Lacewell urged the OCC to revise substantially or abandon the NPR, referring to the Department’s “extensive experience with the CRA” through its oversight of state-chartered banks’ compliance with the New York Community Reinvestment Act, which, according to Lacewell “largely mirrors the current federal CRA.”
Lacewell addressed several concerns, including that the NPR’s proposed evaluation framework would “reduce CRA evaluations to a single, dollar value comparison of banks’ CRA-qualifying activities to deposits.” This single-metric CRA ratio, Lacewell, stated, would eliminate important qualitative aspects of CRA evaluations and “incentivize banks to focus on large-dollar CRA activities to the detriment of complex and innovative small-dollar projects.” Lacewell also expressed concerns with deposit data limitations, and cited the OCC’s separate request for bank-specific data (covered by InfoBytes here) as an indicator that the data to be relied upon for the CRA ratio may be questionable. Lacewell also asserted that the NPR detrimentally redefines CRA-qualifying activities that may not positively impact low- and moderate-income communities, and fails to evaluate properly assessment area changes. Furthermore, Lacewell argued that the NPR reduces the importance of bank branches in CRA evaluations, and imposes new burdens that disproportionately impact intermediate-small banks.
Lacewell expressed support for an alternative approach suggested by Federal Reserve Governor Lael Brainard in January (covered by InfoBytes here), whose proposal would include, among other things, a set of thresholds calibrated for local conditions and two tests—a retail test and a community development test—that would tailor performance metrics for banks of different sizes and business models.
FFIEC releases updated instructions for call reports and FFIEC 101
On April 9, the FFIEC released two depository institution reports—Capital-related Revisions to the Consolidated Reports of Condition and Income (Call Report) and the FFIEC 101 Report, and Consolidated Reports of Condition and Income for First Quarter 2020. The reports reiterate the agencies’ March 25 statement (covered by InfoBytes here) that March 31, 2020 Call Reports submitted after the filing deadline will not result in agency action, if “the report is submitted within 30 days of the official filing date.” Additionally, they explain that Call Report instructions were impacted by three interim final rules (IFRs) the agencies recently released due to issues caused by Covid-19. The regulatory capital IFRs cover: (i) the Money Market Mutual Fund Liquidity Facility (MMLF) IFR (covered here); (ii) the Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (SA-CCR rule) IFR (covered here); and (iii) the transition of Current Expected Credit Losses (CECL) IFR (covered here). A notice regarding eligible retained income, along with the three IFRs, not only affected the instructions for March 31, 2020 Call Reports, but also impacted calculation instructions for regulatory capital on Schedule RC-R, and FFIEC 101 for regulatory capital reporting for institutions that use the advanced capital adequacy framework. The FFIEC’s updated instructions for the first quarter call report may be found here, and the updated instructions for the first quarter FFIEC 101 may be found here.
CARES Act information was also added to the appendix of the Quarterly Call Report Supplemental Instructions to include section 2302, “Modifications for Net Operating Losses,” section 4013, “Temporary Relief from Troubled Debt Restructurings,” and section 4014, “Optional Temporary Relief from Current Expected Credit Losses.”
OCC to move ahead with CRA modernization proposal; Senate Democrats request new proposal
On April 9, OCC Comptroller Joseph M. Otting issued a statement thanking stakeholders for commenting on the joint notice of proposed rulemaking (NPR) to modernize the Community Reinvestment Act (CRA) issued by the OCC and FDIC last December. (See Buckley Special Alert discussing the NPR.) Otting emphasized that the OCC anticipates releasing a final rule during the first half of the year, explaining that the Covid-19 pandemic has highlighted communities’ need for even greater access to lending, capital, and services. “It is our intention to craft a final rule that will encourage banks to lend and invest more in the communities they serve, including low- and moderate-income neighborhoods,” Otting stated. “Further delay would only prevent these valuable resources from reaching those who need them most in this time of national emergency.”
However, 42 Senate Democrats, led by Senator Sherrod Brown (D-OH), sent a letter the same day asking the agencies to rescind the NPR, which, according to the lawmakers, currently “threatens to undermine more than 40 years of access to sustainable mortgage credit, small business loans, community development, and partnerships between financial institutions and the communities they serve.” According to the Senators, the NPR’s proposal to give banks a presumptive CRA grade based mainly on the ratio of the dollar value of all CRA activity to deposits is “inconsistent with the clear Congressional intent of the CRA,” in that it would force “dollar values onto activities that are not easily measured in monthly balance sheet totals,” and would also, among other things, encourage “banks to meet their CRA obligations with activities that produce the maximum dollar figure with the least effort.” Additionally, the Senators stressed that the NPR fails to address the lack of investment in rural areas, Indian Country, and currently underserved CRA markets, despite Otting noting in his statement that the OCC seeks “to increase support to small businesses, small and family-owned farms, Indian country, and distressed areas.” The Senators urged the agencies “to develop a new proposal that reflects evidence, community input, and Congressional intent.”
As previously covered by InfoBytes, on April 8, NYDFS Superintendent Linda Lacewell also sent a letter to the OCC expressing “strong opposition” to the NPR. A coalition of state attorneys general submitted a comment letter urging the agencies to withdraw the NPR as well.
Fed, Treasury announce $2.3 trillion loan facilities
On April 9, the Federal Reserve Board (Fed) and the Department of Treasury (Treasury) announced actions to enhance liquidity in the financial system, including the expansion of recently initiated facilities and the launch of several new lending facilities. (See Fed press release here). As previously covered by InfoBytes, on March 23, Treasury announced the creation of three facilities to provide liquidity to the financial system: (i) the Term Asset-Backed Securities Loan Facility (TALF); (ii) the Primary Market Corporate Credit Facility (PMCCF); and (iii) the Secondary Market Corporate Credit Facility (SMCCF). To increase the flow of credit to consumers and businesses, the TALF will expand purchases to include “highly rated newly issued collateralized loan obligations and legacy commercial mortgage-backed securities as eligible collateral.” Treasury Secretary Steven T. Mnuchin approved a $10 billion equity investment in TALF, and—pursuant to the CARES Act—a $75 billion equity investment in PMCCF and SMCCF, which together are expected to provide up to $850 billion in credit. (See the TALF term sheet here, the PMCCF term sheet here, and the SMCCF term sheet here.)
Three new facilities approved by Secretary Mnuchin to support the flow of credit include the Paycheck Protection Program Lending Facility (PPPLF), the Main Street Business Lending Program, and a Municipal Liquidity Facility (MLF) to support the flow of credit in the economy. Pursuant to the CARES Act, the SBA’s Paycheck Protection Program (PPP) provides funding for small business loans so that they are able to pay their employees. The PPP will benefit from the PPPLF, which will provide liquidity to banks originating the PPP loans through term financing, and will then hold the PPP loans as collateral at face value. To advance the use of the PPPLF, the Fed, OCC, and FDIC issued an interim final rule, the “Regulatory Capital Rule: Paycheck Protection Program Lending Facility and Paycheck Protection Program Loans,” which is effective immediately. The interim final rule ensures that lending banks are able to “neutralize the regulatory capital effects of participating in the facility.” In addition, the CARES Act provides that SBA PPP loans “will receive a zero percent risk weight under the agencies’ capital rule.” Comments on the rule must be received within 30 days after publication in the Federal Register. (See the PPPLF term sheet here.)
Treasury, through CARES Act funds, will provide $75 billion in equity to the Main Street facility, which will support the Main Street Lending Program with funding for up to $600 billion in loans to small and mid-sized businesses. The program extends four-year loans with deferred principal and interest payments for one year. Originating banks retain 5 percent of the Main Street loans, and sell 95 percent of the loans to the Main Street facility. Borrowers seeking Main Street loans “must commit to make reasonable efforts to maintain payroll and retain workers.” (See the Main Street New Loan Facility here, and the Main Street Expanded Loan Facility here.)
Finally, the Fed will establish an MLF to support liquidity to state and local governments. The MLF will provide up to $500 billion for which Treasury will provide credit protection of $35 billion to the Fed with CARES Act funding. (See the MLF term sheet here).
Secretary Mnuchin stated that “[t]he combination of these facilities will provide up to $2.3 trillion in new financing to support American workers by helping American businesses preserve jobs, sustain operations, and continue to serve their customers.” Likewise, the Fed asserted that it “will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds.”
Senators seek protection against predatory lending practices during Covid-19 pandemic
On April 6, Senators Richard Durbin (D-IL) and Sherrod Brown (D-OH) sent a letter to the federal financial regulators (Federal Reserve Board, FDIC, OCC, CFPB, and NCUA), asking them to issue guidance and lending principles to help protect small businesses and consumers affected by Covid-19 from predatory lending practices. As previously covered by InfoBytes, last month, the agencies issued a joint statement recognizing that small-dollar lending can play an important role in meeting credit needs, and recommending that financial institutions offer loans “through a variety of structures including open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.” The Senators expressed concerns, however, that without clear guidance banning predatory lending practices, consumers “are at risk of being exploited because of a financial hardship created through no fault of their own.” The Senators propose several measures intended to ensure that loan products include strong consumer protections. These include: (i) capping interest rates—preferably at a maximum rate of 36 percent—for small dollar short-term loan products; (ii) ensuring that borrowers are able to meet clear ability-to-repay standards; (iii) “prohibit[ing] loan products with unpaid principal from automatically enrolling the borrower in a new loan product without their knowledge and consent”; and (iv) “eliminat[ing] the potential for one-time lump sum payments or balloon payments.”
Federal regulators temporarily lower community bank leverage ratio
On April 6, federal regulators issued two interim final regulatory capital rules that will modify the framework of the Community Bank Leverage Ratio (CBLR) in order to enable qualifying community banking organizations (banks) to support lending during the Covid-19 pandemic. The first rule implements Section 4012 of the CARES Act, making temporary changes to the framework of the CBLR so that banks with a leverage ratio of at least eight percent starting in the second quarter of 2020 “may elect to use the community bank leverage ratio framework.” The rule also provides a two-quarter grace period for community banks whose leverage ratios fall below the eight percent requirement, provided that the bank’s leverage ratio does not fall below seven percent. The second interim final rule allows for the temporary CBLR gradually to transition to eight and one-half percent in 2021, and then back to nine percent at the beginning of 2022.
Financial institution regulators provide Covid-19 mortgage servicer guidance
On April 3, the Federal Reserve (Fed), CSBS, CFPB, FDIC, NCUA, and the OCC (agencies) jointly announced an interagency statement (Joint Statement) to clarify the agencies’ supervisory and enforcement approach “regarding certain consumer communications required by the mortgage servicing rules” under Regulation X during the Covid-19 pandemic. Along with the Joint Statement, the CFPB released FAQs on the mortgage servicing rules during the pandemic. The agencies advised mortgage servicers to consider both the Joint Statement and the FAQs “when developing approaches to work with borrowers.”
The Joint Statement, among other things, gives mortgage servicers greater flexibility to provide CARES Act forbearance of up to 180 days and other short-term options upon the request of borrowers with federally backed mortgages without having to adhere to otherwise applicable compliance rules. In addition, the Joint Statement provides that no supervisory or enforcement action will be taken for delays in: (i) “sending the written early intervention notice to delinquent borrowers”; (ii) “establishing or making good faith efforts to establish live contact with delinquent borrowers”; or (iii) “sending the loss mitigation-related notices.”
Federal agencies extend Volcker Rule comment period
On April 2, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) jointly announced that they would extend the comment period to May 1 on their proposal to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. As previously covered by InfoBytes, the proposed amendments would, among other things, clarify the regulations concerning covered funds and address certain related issues, including permitting the activities of qualifying foreign excluded funds. The comment period originally was scheduled to end April 1. However, due to potential disruptions as a result of the Covid-19 pandemic, the agencies agreed to extend the comment deadline to May 1.
OCC, FDIC outline SBA relief programs pursuant to the CARES Act
On April 2, the OCC issued Bulletin 2020-31 and the FDIC issued Financial Institution Letter (FIL) 33-2020 to highlight for banks the SBA-relief programs available pursuant to the CARES Act. The bulletin urges banks to utilize the programs to help small businesses that have been financially impacted by Covid-19, adding that the SBA “is streamlining its eligibility criteria and processes to enable more financial institutions to use these programs for eligible small business borrowers.” The guidance highlights three relief programs, including (i) the Paycheck Protection Program (PPP), which is “an expansion of the SBA’s 7(a) loan program” and provides SBA-guaranteed loans to eligible borrowers; (ii) the Economic Injury Disaster Loan and Loan Advance Program, which is also an expansion of a current SBA program—the disaster assistance loan program—where borrowers may receive a loan of up to $2 million for working capital, and up to $10,000 as an advance that the borrower is not required to repay; and (iii) the Debt Relief Program, which provides 6 months of principal, interest and fees on 7(a) loans already in existence or originated prior to September 27.
Additional information on PPP loans can be found on the SBA website here and on the Treasury Department website here. Information about other SBA resources can be found here, and on the FDIC’s Coronavirus Information page here.
OCC issues Comptroller’s Handbook booklet updating interest rate risk
On March 26, the OCC issued Bulletin 2020-26 announcing the revision of the Interest Rate Risk booklet of the Comptroller’s Handbook, which replaces the June 1997 version of the same name. The revised booklet “incorporates and reflects applicable statutes and regulations, guidance, and examination procedures,” and expands model risk and model risk management discussions, “including developing, reviewing, and stress testing model assumptions.” The revised booklet also provides guidelines “consistent with the Pillar 2 supervisory approach outlined in the Basel Committee on Banking Supervision’s Interest Rate Risk in the Banking Book.”