The FDIC and the Federal Reserve Board of Governors issued a joint advisory to make financial institutions aware of a 2018 amendment to the Fair Credit Reporting Act that provides that a financial institution may, but is not required, to offer a loan rehabilitation program (Section 602 Program) to private education loan borrowers whose credit reports contain a reported default on a private education loan.

The amendment was contained in Section 602 of the Economic, Growth, Regulatory Relief and Consumer Protection Act which was enacted on May 24, 2018.  Section 602 amended FCRA Section 623 to allow financial institutions to offer a 602 Program.  The advisory addresses the requirements for a Section 602 Program, including the need for a financial institution that intends to offer a Section 602 Program to submit a written request for approval to its appropriate federal banking agency.

The advisory states that if a borrower meets the requirements of a financial institution’s Section 602 Program that satisfies the statutory requirements for such a program, the institution can remove a reported default from the borrower’s credit report and the institution will be shielded (i.e. have a safe harbor) from potential FCRA claims related to the removal.

 

A group of 13 state attorneys general and the District of Columbia AG have sent a letter to the FDIC commenting on the agency’s request for information on small-dollar lending.  The RFI, published in November 2018, seeks input on “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.”

In their letter, the AGs assert that “payday lenders are once again returning to ‘rent-a-bank’ schemes in order to evade state law.”  They recommend that “the FDIC discourage banks from entering into these relationships in any guidance it issues on small-dollar lending.”

The AGs also recommend “that the FDIC discourage banks from extending small-dollar loans without considering the consumer’s ability to repay” and “include in any guidance on small-dollar lending factors banks should consider in evaluating a consumer’s ability to repay.”  The specific factors they urge the FDIC to identify are “a consumer’s monthly expenses such as recurring debt obligations and necessary living expenses,” “a consumer’s ability to repay the entire balance of the proposed loan at the end of the term without re-borrowing,” and the “consumer’s ability to absorb an unanticipated financial event…and, nonetheless, still be able to meet the payments as they become due.”

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  With the comment period on the FDIC’s RFI having ended on January 22, the FDIC could soon follow suit.

In October 2018, the CFPB issued a statement in which it stated that it expects to issue a proposed rule this month to revisit the ability-to-repay provisions of its final payday/vehicle title/ high-rate installment loan rule but not the rule’s payments provisions.  The Bureau also stated that its proposal would address the rule’s August 19, 2019 compliance date.  On January 14, American Banker published an article indicating that the Bureau was expected to issue its proposal “within days or weeks.”  According to the article, the Bureau has concluded that the best approach is to entirely remove the rule’s ability-to-repay provisions.

 

 

 

The FDIC has issued an Advance Notice of Proposed Rulemaking (ANPR) seeking comment on its regulatory approach to brokered deposits and interest rate restrictions.

The FDIC’s current regulations on brokered deposits and interest rate restrictions are set forth at 12 C.F.R. Section 337.6.  Such regulations implement Section 29 of the Federal Deposit Insurance Act which restricts an insured depository institution that is less than well capitalized from soliciting or accepting deposits by or through a “deposit broker.”  It also imposes restrictions on the interest rate that such institutions can pay on deposits.  

The FDIC states in the ANPR that it is undertaking a “comprehensive review[] [of] its brokered deposit and interest rate regulations in light of significant changes in technology, business models, the economic environment, and products since the regulations were adopted.”  Through the ANPR, the FDIC seeks input on how it “can improve its implementation of Section 29 of the FDI Act, while continuing to protect the safety and soundness of the banking system.”  The FDIC also seeks input on a series of specific questions, with one set of questions directed at  brokered deposits and a second set directed at interest rate restrictions.

In addition to two sections that discuss various issues concerning brokered deposits and interest rate restrictions, the ANPR’s Supplementary Information contains a section that reviews the current law and regulations and their history and another section that reviews the history of brokered deposit use by insured institutions, including the impact of the bank failures that occurred during the 1980s, and related research findings.  The ANPR also includes two appendices: Appendix 1 providing “descriptive statistics detailing the historical holdings of brokered deposits by bank size and [Prompt Corrective Action] capital classification status” and Appendix 2 providing an updated analysis of core and brokered deposits using data through the end of 2017.

Given the infrequency with which the FDIC has granted waivers to the interest rate restrictions for banks that are deemed less than well capitalized (including banks that have entered into an enforcement action with a capital provision), a reexamination of the brokered deposit rules will be viewed positively by the industry.  Further, although a financial institution could use brokered deposits to fund rapid growth, brokered deposits can be a more stable long-term funding source on a financial institution’s balance sheet.  The industry will benefit if financial institutions can use brokered deposits responsibly without significant limitations to manage liquidity needs and limit interest rate risk.

Responses to the ANPR will be due no later than 90 days after the date of its publication in the Federal Register.  

 

On November 15, 2018, in response to a November 7, 2018 letter from Republican Senators, FDIC Chairman Jelena McWilliams announced that the FDIC has engaged outside counsel to investigate the Obama-era Operation Choke Point, under which the FDIC and other government agencies pressured banks not to do business with payday lenders. In her letter, McWilliams said that “[r]egulatory threats, undue pressure, coercion, and intimidation designed to restrict access to financial services for lawful businesses have no place at this agency.”

She appears to mean it. She went on to say that, “[w]e have placed clear limitations on the ability of any FDIC personnel to recommend the termination of account relationships, including requirements that any such recommendations be made in writing, that Regional Directors review such recommendations, and that all such recommendations are reported to the FDIC Board of Directors and Division Directors.” That internal policy is in furtherance of her deep investment in “transparency and accountability at the FDIC.”

She also backed-up the internal policy with an external check. “To ensure that the FDIC’s commitment to integrity remains unequivocally clear, I am asking an outside law firm to review the prior actions taken by the FDIC in [Operation Choke Point] so that I can better ascertain the effectiveness of our response.” “Under my leadership, the FDIC’s oversight responsibilities will be exercised based on our laws and our regulations, not personal or political beliefs,” she concluded.

As we’ve noted in earlier posts on this, litigation is currently pending in the D.C. federal court on prior FDIC administrations’ participation in Operation Choke Point.

Thirteen Republican Senators have sent a letter to FDIC Chairman Jelena McWilliams urging the FDIC to take action to ensure that lawful businesses are no longer at risk of adverse financial consequences as a result of “Operation Choke Point, and its associated culture and Choke Point-like regulatory actions.”

“Operation Choke Point” was a federal enforcement initiative involving various agencies, including the DOJ, OCC, FDIC, and Fed.  Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In June 2014, the national trade association for the payday lending industry and several payday lenders initiated a lawsuit in D.C. federal district court against the FDIC, Fed, and OCC in which they alleged that certain actions taken by the regulators as part of Operation Choke Point violated the Administrative Procedure Act and their due process rights.  In September 2018, pursuant to a joint stipulation of dismissal, the Fed was dismissed from the lawsuit.  Cross-motions for summary judgment are currently pending before the court.

In their letter, the Senators ask the FDIC if it is the agency’s official position “that lawful businesses should not be targeted by the FDIC simply for operating in an industry that a particular administration might disfavor” and “[i]f so, what [the FDIC is] doing to make sure that bank examiners and other FDIC officials are aware of this policy and have communicated it to regulated institutions?”  They also ask whether there were any communications explaining supervisory expectations of “elevated risk” or “high risk” merchants with regulated institutions that would likely qualify as a rule under the Congressional Review Act that were not properly submitted to Congress and what the FDIC is doing to ensure that its staff does not communicate policy in a matter that is inconsistent with the position of the FDIC’s Board of Directors.

The letter does not reference the FDIC’s January 2015 Financial Institution Letter (FIL) entitled “Statement on Providing Banking Services” that attempted to rectify the damage created by Operation Choke Point.  In the Statement, the FDIC “encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk.”  The Statement followed the FDIC’s July 2014 FIL in which the FDIC withdrew the list of “risky” merchant categories (such as payday lenders and money transfer networks) that was included in prior guidance on account relationships with third-party payment processors (TPPPs).  Consistent with the July 2014 FIL and an October 2013 FIL on TPPP relationships, the 2015 FIL advised banks that they were neither prohibited nor discouraged from providing services to customers operating lawfully, provided they could properly manage customer relationships and effectively mitigate risks.  However, unlike the prior FILs, the new FIL expressly acknowledged that “customers within broader customer categories present varying degrees of risk” and should be assessed for risk on a customer-by-customer basis.

 

 

The FDIC has published a request for information (RFI) on small-dollar lending, including “steps the FDIC could take to encourage FDIC-supervised institutions to offer responsible, prudently underwritten small-dollar credit products that are economically viable and address the credit needs of bank customers.”  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  Comments must be received by January 22, 2019.

In May 2018, the OCC issued a bulletin intended to encourage its supervised institutions to offer small-dollar loans.  The FDIC’s issuance of the RFI signals that the FDIC intends to follow suit.

The RFI requests input on 21 questions dealing with the following topics:

  • Consumer demand
  • Challenges
  • Product features
  • Innovation
  • Alternatives
  • Other considerations

The questions dealing with “Challenges” include one that asks whether there are “any legal, regulatory, or supervisory factors that prevent, restrict, discourage, or disincentivize banks from offering small-dollar credit products.”  A glaring regulatory impediment to small-dollar lending by FDIC-supervised institutions is the FDIC’ s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised institutions from offering deposit advance products.  (In October 2017, just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment loans, the OCC rescinded substantially identical guidance on deposit advance products, applicable to national banks and federal savings associations.)

While the OCC’s encouragement of small-dollar lending was in one sense a welcome development, the OCC bulletin raised several concerns.  As discussed more fully in our blog post about the bulletin, those concerns were the bulletin’s failure to confirm that the National Bank Act authorizes national banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, as well as the bulletin’s unfavorable view of bank-nonbank partnerships.

Unlike the FDIC, the OCC did not issue an RFI in advance of issuing its bulletin.  The FDIC’s RFI thus serves as an opportunity for commenters to provide input that could result in the FDIC’s issuance of guidance that addresses the shortcomings in the OCC bulletin.  For example, the RFI asks: “What are the potential benefits and risks related to banks partnering with third parties to offer small-dollar credit?”  In addition, it invites comment on the structure of small-dollar credit products offered by FDIC-supervised institutions.  Thus, commenters can ask the FDIC to consider structures other than the structure suggested by the OCC bulletin–even-payment amortizing loans with terms of at least two months.

Additionally, and perhaps most significantly, this RFI could serve as a vehicle for the FDIC to confirm that, in a properly structured loan program between a bank and a nonbank marketing and servicing agent, the Federal Deposit Insurance Act authorizes state-chartered banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state, despite “true lender” and Madden arguments to the contrary.

The FDIC’s Center for Financial Research has issued a research paper that discusses the use of the information contained in a “digital footprint,” meaning the information that people leave online by accessing or registering on a website, for predicting consumer default.

The researchers considered ten digital footprint variables that included:

  • The device type (e.g. tablet or mobile)
  • The operating system (e.g. iOS or Android)
  • The channel through which a customer comes to a website (e.g. search engine or price comparison site)
  • Two pieces of information about the user’s email address (e.g. includes first and/or last name and includes a number)

According to the researchers, the results of their research suggest that “even the simple, easily accessible variables from the digital footprint proxy for income, character and reputation are highly valuable for default prediction.”  For example, ownership of an iOS device was found to be one of the best predictors for being in the top quartile of income distribution, customers coming from a price comparison website were found to be almost half as likely to default as customers directed to the website by search engine ads, and customers having their names in the email address were found to be 30% less likely to default.  The researchers also found that digital footprint information complements rather than substitutes for credit bureau information, suggesting that a lender that uses information from both sources can make superior lending decisions.

The researchers observe that “digital footprints can facilitate access to credit when credit bureau scores do not exist, thereby fostering financial inclusion and lowering inequality.”  They indicate that their results “suggest that digital footprints have the potential to boost financial inclusion to parts of the currently two billion working-age adults worldwide that lack access to services in the formal financial sector.”

The researchers also comment that regulators are likely to closely watch the use of digital footprints, noting that U.S. lenders using digital footprint information “are likely to face scrutiny whether the digital footprint proxies for [borrower characteristics such as race and gender that may not be considered under the Equal Credit Opportunity Act] and therefore violate fair lending laws.”

 

The FDIC has issued a request for information that seeks comment on how the FDIC can make its communications with insured depository institutions (IDIs) “more effective, streamlined, and clear.”  Concerned that the amount of information the FDIC provides to IDIs can create challenges for banks, particularly community banks, the FDIC is soliciting input “on how to maximize efficiency and minimize burden associated with obtaining information on FDIC laws, regulations, policies, and other materials relevant to RDIs.”  In addition to IDIs and other financial institutions and companies, the FDIC encourages comments from individual depositors and consumers, consumer groups, and other members of the financial services industry.

The RFI contains specific questions on which the FDIC seeks input that address three topics: efficiency, ease of access, and content.  Comments must be received by the FDIC by December 4, 2018.

 

In a recent interview (her first since being sworn in as Chair of the Federal Deposit Insurance Corporation), Jelena McWilliams provided insight into the FDIC’s likely regulatory agenda.

Ms. McWilliams stated that the FDIC’s top priorities included: (1) reducing regulatory burden on community banks; (2) increasing the speed with which the FDIC reviews charter and deposit insurance applications; and (3) assisting banks to introduce new financial products that serve underserved communities.

Unlike the previous FDIC Chair, Martin Gruenberg, Ms. McWilliams expressed a willingness to reexamine bank capital requirements.  Her comments suggest the FDIC might revisit its opposition to a proposal to revise the enhanced supplementary leverage ratio applicable to U.S. global systemically important bank holding companies (GSIB) issued by the OCC and the Board of Governors of the Federal Reserve System that would: (i) set the enhanced supplementary leverage ratio for a GSIB at 50 percent of a the GSIB’s risk-based capital surcharge; (ii) replace the current 6 percent threshold at which an insured depository institution subsidiary of a GSIB is considered “well capitalized” under the prompt corrective action (PCA) framework with a threshold set at 3 percent plus 50 percent of the GSIB surcharge applicable to the insured depository institution; and (iii) make a corresponding change to each GSIB’s external total loss absorbing capacity (TLAC) leverage buffer and long-term debt requirement (and other, minor amendments, to the TLAC rule).

Ms. McWilliams agreed with Mr. Gruenberg that the Volcker Rule, (which bans proprietary trading and which, since the passage of Economic Growth, Regulatory Relief, and Consumer Protection Act, is only applicable to financial institutions with $10 billion of assets or more) is too complicated. Ms. McWilliams voiced her support for rules to revamp the Community Reinvestment Act (CRA), a project that is also on the OCC’s agenda.  Ms. McWilliams said banks need more clarity about what activities qualify for CRA credit and the qualifications for CRA loans, and she also appeared to suggest that CRA assessment areas should be reexamined because banks are closing branches in rural communities to avoid criticism of their CRA activities (or the lack thereof) in those communities, which results in less access to financial services and does not serve the needs of those communities.

Finally, Ms. McWilliams stated that the FDIC is reviewing whether to rescind its guidelines for deposit advance loans and that she is considering allowing applicants seeking deposit insurance to make a preliminary, confidential filing to get feedback before a formal application.  These comments followed her first speech as Chair in June, where she suggested that the FDIC would make faster decisions on deposit insurance applications, a statement that was interpreted as a signal that under her leadership the FDIC might be more receptive to applications from applicants seeking to form an industrial loan company and de novo charters generally.  (In its recent fintech report, the Treasury Department recommended that the FDIC reconsider its guidance on direct deposit advance services and issue new guidance similar to that issued by the OCC.  In May 2018, the OCC issued a bulletin setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks and encouraging banks to engage in such lending.)

Last week, Representative Blaine Luetkemeyer, Chair of the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, and Representative Scott Tipton sent a letter to Jelena McWilliams, Chair of the FDIC, that identified concerns with the FDIC’s interpretations and regulations surrounding brokered deposits and requested the FDIC to revisit its June 2016 Frequently Asked Questions on Identifying, Accepting and Reporting Brokered Deposits “in light of the rapid technological changes in the banking and payments industry.”

Congressmen Luetkemeyer and Tipton assert that the FAQ is inconsistent with the definition of “deposit broker” under 12 C.F.R. § 337.6(a)(2).  The regulation defines a brokered deposit as “any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.”  The term “deposit broker” is defined under 12 USC §1831f to include “(A) any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and (B) an agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.”

The Congressmen believe that the broad classifications in the FAQ of what deposits are brokered and when an entity is a deposit broker: (1) exposes institutions to restrictive and costly supervisory limits and deposit insurance assessments; (2) has reduced the number of financial institutions that can afford to participate in certain markets and, thereby, limited consumer access to financial products; (3) interfered with innovation; and (4) diminished the access of financial institutions to “stable sources of deposits,” thereby “limiting the funding banks can make available for lending to small businesses and consumers.”

By way of example, the 2016 FAQ states that deposits generated by “advertising or referrals by third parties (such as nonprofit affinity groups as well as commercial enterprises), in exchange for volume-based fees” would be deemed brokered deposits even if the customers themselves would subsequently become core customers of the institution.  The FAQ further states that “[i]f a company merely designs deposit products or deposit accounts for one or more banks, without placing deposits or facilitating the placement of deposits at these banks, the company will not be classified as a deposit broker,” but if a company also markets a bank’s deposit products in exchange for volume-based fees, then it would be a deposit broker.

When considering the costs of the design of new deposit products and the development of new technological applications to serve financial institution customers, a determination that the use of volume-based fees will cause deposits to be deemed brokered deposits does appear to stifle innovation and limit the ability of financial institutions with fewer resources to develop technological advances that would benefit consumers.

The FDIC has not yet responded.