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Federal banking agencies and FinCEN issue statement on risk-focused BSA/AML examinations
On July 22, the Federal Reserve Board, FDIC, NCUA, and the OCC along with the Financial Crimes Enforcement Network (FinCEN), released a joint statement to improve transparency of their risk-focused approach to Bank Secrecy Act/anti-money laundering (BSA/AML) supervision. The statement outlines common practices for assessing a bank’s risk profile, including (i) leveraging available information, including internal BSA/AML risk assessments, independent audits, and results from previous examinations; (ii) contacting banks between examinations or before finalizing the scope of an examination; and (iii) considering the bank’s ability to identify, measure, monitor, and control risks. Examiners will use the information from the risk assessments to scope and plan the examination, as well as to evaluate the adequacy of the bank’s BSA/AML compliance program. The statement notes that the extent of examination activities needed to evaluate a bank’s BSA/AML compliance program, “generally depends on a bank’s risk profile and the quality of its risk management processes.”
Agencies issue joint statement on Midwest flood disaster relief
On March 25, the OCC, Federal Reserve Board, FDIC, NCUA, and the Conference of State Bank Supervisors (collectively, the “agencies”) issued a joint statement providing guidance to financial institutions impacted by flooding in the Midwest. In the statement, the agencies encourage lenders to work with borrowers in impacted communities and to consider, among other things (i) modifying existing loans based on the facts and circumstances; and (ii) requesting expedited approval to operate temporary bank facilities if faced with operational difficulties. The agencies ask institutions to contact their appropriate federal and/or state regulator if they experience disaster-related difficulties complying with publishing or regulatory reporting requirements. The agencies further note that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The statement also provides links to previously issued examiner guidance for institutions affected by major disasters.
Find continuing InfoBytes coverage on disaster relief here.
Banking agencies issue final rule on private flood insurance
On February 12, the Federal Reserve Board, Farm Credit Administration, FDIC, National Credit Union Administration, and the OCC issued a joint final rule amending regulations governing loans secured by properties in special flood hazard areas to implement the provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 concerning private flood insurance. As previously covered by InfoBytes, the provisions, among other things, require regulated lending institutions to accept policies that meet the statutory definition of “private flood insurance,” and clarify that lending institutions may choose to accept private policies that do not meet the statutory criteria for “private flood insurance,” provided the policies meet certain criteria and the lending institutions document that the policies offer “sufficient protection for a designated loan, consistent with general safety and soundness principles.” The final rule takes effect July 1.
(See also FDIC FIL-8-2019, NCUA press release, and OCC press release.)
Final rule subject to approval will require federally regulated lending institutions to accept private flood insurance
Recently, the FDIC and OCC approved a joint final rule governing the acceptance of private flood insurance policies. (The final rule must also be approved by—and is still under review with—the other agencies jointly issuing the rule: the Federal Reserve Board, Farm Credit Administration, and National Credit Union Association.) The final rule amends regulations governing loans secured by properties in special flood hazard areas to implement the provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert Waters) concerning private flood insurance (see previous InfoBytes coverage of the proposed rule here). The National Flood Insurance Act and the Flood Disaster Protection Act require flood insurance on improved property that secures a loan made, increased, extended, or renewed by a federally regulated lending institution (lending institution) if the property is in a special flood hazard area for which flood insurance is available under the National Flood Insurance Program (NFIP). Biggert Waters required the Agencies to adopt regulations directing lending institutions to accept insurance that meets the definition of “private flood insurance” in lieu of NFIP flood insurance.
The final rule, once approved by all five regulators, will institute the following provisions to take effect July 1:
- Lending institutions must accept private flood insurance policies meeting the definition of “private flood insurance.”
- Lending institutions may rely on a “streamlined compliance aid provision” to determine, without further review, that a policy meet the definition of “private flood insurance” if the policy (or an endorsement to the policy) contains the following language: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
- Lending institutions may choose to accept private policies that do not meet the statutory criteria for “private flood insurance” as long as the policies meet certain criteria and the lending institutions document that the policies offer “sufficient protection for a designated loan, consistent with general safety and soundness principles.”
- Lending institutions may exercise discretion when accepting non-traditional flood coverage issued by “mutual aid societies,” subject to certain conditions including that the lending institutions’ primary federal supervisory agency has determined that the plans qualify as flood insurance. However, the final rule does not require lending institutions to accept coverage issued by mutual aid societies.
Regulators encourage financial institutions to work with borrowers impacted by government shutdown; FHA also issues shutdown guidance
On January 11, the Federal Reserve Board, CSBS, CFPB, FDIC, NCUA, and OCC (together, the “Agencies”) released a joint statement (see also FDIC FIL-1-2019) to encourage financial institutions to work with consumers impacted by the federal government shutdown. According to the Agencies, borrowers may face temporary hardships when making payments on mortgages, student loans, auto loans, business loans, or credit cards. FDIC FIL-1-2019 states that prudent workout arrangements, such as extending new credit, waiving fees, easing limits on credit cards, allowing deferred or skipped payments, modifying existing loan terms, and delaying delinquency notice submissions to credit bureaus, will not be subject to examiner criticism provided the efforts are “consistent with safe-and-sound lending practices.”
Separately, on January 8, Federal Housing Administration (FHA) Commissioner Brian Montgomery issued a letter regarding the shutdown reminding FHA-approved lenders and mortgagees of their ongoing obligation to offer special forbearance to borrowers experiencing loss of income and to evaluate borrowers for available loss mitigation options to prevent foreclosures. In addition, FHA also encourages mortgagees and lenders to waive late fees and suspend credit reporting on affected borrowers.
Agencies encourage financial institutions to explore innovative industry approaches to BSA/AML compliance
On December 3, the Financial Crimes Enforcement Network (FinCEN) released a joint statement along with federal banking agencies—the Federal Reserve Board, FDIC, NCUA, and OCC (together, the “agencies”)—to encourage banks and credit unions to explore innovative approaches such as artificial intelligence, digital identity technologies, and internal financial intelligence units to combat money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system. According to the agencies, private sector innovation and the adoption of new technologies can enhance the effectiveness and efficiency of Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. Moreover, new innovations and technologies can also enhance transaction monitoring systems. Specifically, the agencies urged banks to test innovative programs to explore the use of artificial intelligence. However, the agencies emphasized that while feedback on innovative programs may be provided, the “pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful. Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.” The joint statement further specifies that the agencies will be willing to grant exceptive relief from BSA regulatory requirements to facilitate pilot programs, “provided that banks maintain the overall effectiveness of their BSA/AML compliance programs.” However, banks that maintain effective compliance programs but choose not to innovate will not be penalized or criticized.
According to Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker, “[a]s money launderers and other illicit actors constantly evolve their tactics, we want the compliance community to likewise adapt their efforts to counter these threats,” pointing to the recent use of innovative technologies to identify and report illicit financial activity related to both Iran and North Korea.
As previously covered by InfoBytes, earlier in October the agencies provided guidance on resource sharing between banks and credit unions in order to more efficiently and effectively manage their BSA/AML obligations.
(See also Federal Reserve Board press release, FDIC press release and FIL-79-2018, NCUA press release, and OCC press release and Bulletin 2018-44.)
Court stays fee action against bank during pendency of RMBS action
On November 30, the U.S. District Court for the Southern District of New York agreed to stay proceedings covering an investment company’s challenge to a bank’s practice of billing the legal fees incurred in defending a residential mortgage-backed securities (RMBS) trusts lawsuit to the RMBS trusts. According to the opinion, in 2014, an investment company filed a lawsuit against the national bank alleging breach of contract and other common law duties in the bank’s role as trustee for multiple RMBS trusts. In 2017, the investment company filed a separate lawsuit in the same court, challenging the bank’s practice of billing the RMBS trusts for the legal fees incurred by defending the original lawsuit. The two lawsuits were consolidated and the bank moved to dismiss the second lawsuit or stay the proceedings during the pendency of the original lawsuit. Upon review, the court agreed to stay the proceedings, noting the “claims at issue in the fees complaint may well turn on determinations made in the underlying suit.” The investment company argued that while the trusts’ agreements contain fee indemnity clauses, the clauses are not applicable to the bank’s alleged “willful misfeasance, bad faith, or gross negligence.” The court noted that whether the bank acted grossly negligent in its duties as trustee for the RMBS trusts is a “central factual question” in the original lawsuit and therefore, staying the proceedings “could avoid a possible waste of both the parties’ and the court’s resources.”
Additionally, in the same order, the court denied NCUA’s request to intervene in the fees action, holding the agency did not establish it could meet the higher burden of demonstrating inadequate representation by the investment company, which shares the same interests as NCUA.
FFIEC issues second Examination Modernization Project update
On November 27, the Federal Financial Institutions Examination Council (FFIEC) issued the second update on the status of its Examination Modernization Project. The project’s objective is to identify and assess measures to improve the community bank safety and soundness examination process, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act’s review of regulations. As previously covered by InfoBytes, in March, the FFIEC released the first update, which identified four areas with potential for the most “meaningful supervisory burden reduction.” The second update focuses on tailoring examination plans and procedures based on risk in order to reduce burden. Specifically, after a review of risk-based procedures and processes, the Federal Reserve Board, the FDIC, the NCUA, the OCC, and the State Liaison Committee have committed to issue reinforcing and clarifying examiner guidance to their examination staffs on risk-focused examination principles for community financial institutions, if necessary. The guidance covers, among other things, the following practices (i) consideration of the unique risk profile, complexity, and business model of the institution when developing the exam plan; (ii) tailoring of the document request list based on the financial institution’s business model, complexity, risk profile and planned scope of review; and (iii) applying examination procedures in a way that reduces the level of review of low risk institutions or low risk areas.
The FFIEC noted it may take further action to improve the examination process as the project progresses.
Federal, state financial regulatory agencies issue guidance for institutions affected by California wildfires; FinCEN encourages financial institutions to communicate BSA filing delays
On November 19, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions that file Bank Secrecy Act reports encouraging such institutions to communicate with FinCEN and their functional regulators regarding any expected filing delays caused by the California wildfires. FinCEN also reminded financial institutions to review advisory FIN-2017-A007, previously covered by InfoBytes, which discusses potential fraudulent activity related to recent disaster relief schemes.
In a related action, the Federal Reserve Board, California Department of Business Oversight, Conference of State Bank Supervisors, FDIC, NCUA, and OCC (collectively, the “agencies”) issued a joint statement on November 15 providing guidance to financial institutions impacted by the California wildfires. The agencies encouraged lenders to work with borrowers in impacted communities to modify loans as appropriate based on the facts and circumstances of each borrower and loan. In addition, the agencies assured lenders that they would (i) expedite any request to operate temporary facilities to provide more convenient services to those affected by the wildfires; (ii) not generally assess penalties for institutions that take prudent steps to satisfy any publishing or reporting requirements, including by contacting their state or federal regulator to discuss satisfaction of such requirements; and (iii) consider granting institutions favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.
Find continuing InfoBytes coverage on disaster relief here.
Agencies permit bank resource sharing for Bank Secrecy Act compliance
On October 3, the Financial Crimes Enforcement Network, Federal Reserve Board, FDIC, NCUA, and OCC (together, the agencies) issued an interagency statement outlining instances where banks and credit unions may choose to enter into collaborative arrangements to share resources in order to more efficiently and effectively manage their Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations. The statement noted that collaborative arrangements are most suitable for “banks with a community focus, less complex operations, and lower-risk profiles for money laundering or terrorist financing.” The agencies described several examples in which collaboration between banks may be beneficial, such as (i) conducting internal control functions, including reviewing and drafting BSA/AML policies and procedures and risk-based customer identification and account monitoring processes; (ii) sharing resources for BSA/AML independent testing; and (iii) conducting BSA/AML training on regulatory requirements and internal policies, procedures, and processes. Other potential benefits include cost reductions, increases in operational efficiencies, and the availability to leverage specialized expertise.
However, the agencies cautioned that banks who choose to enter into collaborative agreements should carefully consider the associated risks “in relation to the bank’s risk profile, adequate documentation, consideration of legal restrictions, and the establishment of appropriate oversight mechanisms.” Moreover, banks should ensure that the collaborative arrangement is consistent with sound principles of corporate governance, have in place a contractual agreement, conduct periodic performance reviews, and consult their regulator’s guidance concerning third-party relationship to ensure compliance. The agencies further noted that “each bank is responsible for ensuring compliance with BSA requirements. Sharing resources in no way relieves a bank of this responsibility.” The interagency statement emphasizes that it is not applicable “to collaborative arrangements or consortia formed for the purpose of sharing information under Section 314(b) of the USA PATRIOT Act,” and “banks that form collaborative arrangements as described in this interagency statement are not an association for purposes of Section 314(b) of the USA PATRIOT Act.”
(See also Federal Reserve Board press release, FDIC press release, NCUA press release, and OCC press release and Bulletin 2018-36.)