The federal banking agencies (the Federal Reserve Board, OCC, and FDIC (FBAs)), recently issued a “Policy Statement on Interagency Notification of Formal Enforcement Actions” that is intended “to promote notification of, and coordination on, formal enforcement actions among the FBAs at the earliest practicable date.”  The issuance of the policy statement follows the DOJ’s announcement last month of a new policy to encourage coordination among the DOJ and other enforcement agencies when imposing multiple penalties for the same conduct to discourage “piling on.”

The new policy statement recites that it is not intended as a substitute for routine informal communications among FBAs in advance of an enforcement action, including verbal notification of pending enforcement actions “to officials and staff with supervisory  and enforcement responsibility for the affected institution.”

The policy statement’s key instructions are:

  • When an FBA determines that it will take formal enforcement action against a federally-insured depository institution, depository institution holding company, non-bank affiliate, or institution-affiliated party, it should evaluate whether the action involves the interests of another FBA.  By way of example, the policy statement notes that an entity targeted by an FBA for unlawful practices might have significant connections with an institution regulated by another FBA.
  • If it is determined that one or more other FBAs have an interest in an enforcement action, the FBA proposing the action should notify the other FBA(s) at the earlier of the FBA’s written notification to the targeted entity or when the responsible agency official or group of officials determines that enforcement action is expected to be taken.
  • The information shared should be appropriate to allow the other FBA(s) to take necessary action in examining or investigating the entity over which they have jurisdiction
  • If two or more FBAs is considering bringing a complementary action, such as an action involving a bank and its parent holding company, those FBAs should coordinate the preparation, processing, presentation, potential penalties, service, and follow-up of the enforcement action.

We view the new policy statement as a very positive development.

Jelena McWilliams, President Trump’s nominee, was sworn in on June 5 for a five-year term as FDIC Chairman and a six-year term as a member of the FDIC Board of Directors.  As a result, the FDIC is firmly in the hands of Republicans.  Last month, Republicans also took firm control of the FTC.

As FDIC Chairman, Ms. McWilliams succeeds Martin Gruenberg, who was appointed Chairman by President Obama.  Since his term as an FDIC Board member does not expire until the end of this year, Mr. Gruenberg remains an FDIC Board member.  According to media reports, he has been recommended by Senator Chuck Schumer to serve as FDIC Vice Chairman, the position he held before his nomination as FDIC Chairman.

The other two current FDIC Board members are Comptroller of the Currency Joseph Otting and CFPB Acting Director Mick Mulvaney.  The FDIC Act provides  that the Comptroller and CFPB Director shall be Board members and that the three other members “shall be appointed by the President, by and with the advice and consent of the Senate, from among individuals who are citizens of the United States, 1 of whom shall have State bank supervisory experience.”  The FDIC Act mandates that no more than three Board members may have the same party affiliation.  Accordingly, President Trump must nominate a Democrat or Independent to fill the fifth seat.

American Banker has reported that, in a press call last week regarding the OCC’s new risk report, “Semiannual Risk Perspective for Spring 2018,” Comptroller Otting stated that in July 2018, the OCC expects to announce its decision on whether it will issue special purpose national bank (SPNB) charters to nondepository fintech companies.

Under Acting Comptroller Keith Noreika’s leadership, the OCC defended its authority to grant an SPNB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors (both of which were dismissed).  Mr. Otting has not yet taken a public position on the OCC’s SPNB charter proposal.  However, he has been dismissive of the argument made by opponents of the SPNB charter that it may lead to an inappropriate mixing of banking and commerce and has questioned the continuing need for the current barriers between banking and commerce.

American Banker reported that Mr. Otting also stated in the press call that some potential applicants for a SPNB charter have lost interest in obtaining a charter after learning more about the process for becoming a bank and seemed more focused on partnering with banks.  According to Politico, Mr. Otting expressed concern in the press call about “rent-a-charter” arrangements between banks and non-bank entities.  Mr. Otting was quoted by Politico as having said “We don’t believe that institutions should effectively lend their charter to a vendor.”

In its bulletin issued last week setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by OCC-supervised institutions, the OCC expressed an unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits.  We commented that while the context of the OCC’s view was “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85 of the National Bank Act.  Mr. Otting’s reported comment about “rent-a-charter” arrangements exacerbates this concern to the extent it indicates there is indeed OCC hostility to arrangements that rely on the originating bank’s Section 85 interest rate authority even outside of the small dollar loan context addressed by the bulletin.

For state-chartered banks, state law interest rate limits are preempted by Section 27 of the Federal Deposit Insurance Act.  Many bank partnerships with non-bank entities involve state banks and the FDIC, in interpreting Section 27, has generally tracked the OCC’s views on Section 85.  As a result, the OCC’s views on bank partnerships should also be of concern to state banks entering into arrangements that rely on the originating bank’s Section 27 interest rate authority.

On May 7, 2018, in Arlington, Virginia, the FDIC will host a forum, “Use of Technology in the Business of Banking.”  Registration is required to attend.  The forum will also be webcast live and recorded for on-demand access after the event.

The FDIC’s notice states that panels at the forum  “will focus on emerging technologies that are transforming banking operations, the impact of emerging technologies on retail banking, including new and innovative delivery channels, enhanced customer experiences, economic inclusion; and consumer financial data access—balancing rights and security.”

It further states that the forum “will bring together representatives from banks that use or are considering using emerging technologies, representatives from firms offering emerging technologies, representatives from bank trade associations, thought leaders on the use of technology in the business of banking, leaders of consumer and community organizations, and representatives from federal and state financial regulatory agencies.”

Earlier this week, by a party-line 34-26 vote, the House Financial Services Committee passed H.R. 4861, a bill seemingly intended to ease restrictions on short-term, small-dollar loans made by depository institutions.  The bill is part of the efforts of House Republicans to provide greater regulatory relief to banks than would be provided by S. 2155, the banking bill passed by the Senate last week.  We expect that Jeb Hensarling, who chairs the House Committee, will attempt to make the bill part of a final banking bill.

H.R. 4861 would nullify the FDIC’s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised depository institutions from offering deposit advance products.  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  We had been sharply critical of that guidance, as well as the OCC’s substantially identical guidance as to national banks.  However, in October 2017,  just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment  loans (CFPB Rule), the OCC rescinded its guidance on deposit advance products.  Because the FDIC has not yet followed suit, H.R. 4861 would remove a regulatory impediment to state-chartered banks and savings institutions offering one form of small-dollar lending to their customers.

H.R. 4861 would require the federal banking agencies to promulgate regulations within two years “to establish standards for short-term, small-dollar loans or lines of credit made available by insured depository institutions.”  The standards must “encourage products that are consistent with safe and sound banking, provide fair access to financial services, and treat customers fairly.”  The regulations would preempt any state laws “that set standards for [such loans or lines of credit]” and would override the CFPB Rule for insured depository institutions that become subject to H.B. 4861 regulations.  (Insured and uninsured credit unions would gain relief from the CFPB Rule even before regulations are adopted.)

Presumably, the “standards” under H.B. 4861 regulations could include interest rate standards.  Thus, federal banking agencies supportive of short-term, small-dollar loans could authorize interest rates higher than the insured depository institutions could otherwise charge under applicable federal law.  Unfortunately, as it is currently drafted, H.R. 4861 could be interpreted to allow the banking agencies to establish rate limits that are more restrictive than the limits that currently apply under federal law.  Accordingly, we would hope that the final bill will clarify that it does allow the federal banking agencies to impair existing rate authority under applicable federal law, including Section 85 of the National Bank Act, Section 27 of the Federal Deposit Insurance Act, and Section 4(g) of the Home Owners’ Loan Act.

 

 

The CFPB has announced that with regard to the collection in 2018 of the expanded data fields under the revised Home Mortgage Disclosure Act (HMDA) rules, the CFPB does not intend to require data resubmission unless data errors are material, and does not intend to assess penalties with respect to errors in the data collected in 2018.

As we reported previously, in October 2015 the CFPB adopted significant changes to the HMDA rules that significantly expanded the amount of information that must be collected and reported, and the institutions that are required to collect and report data. Most of the data collection changes are effective January 1, 2018. In announcing the approach to enforcement, the CFPB acknowledged the significant systems and operational challenges faced by the industry in implementing the changes.

The CFPB also noted that any examinations of 2018 HMDA data will be diagnostic to help institutions identify compliance weaknesses, and indicated that it will credit good faith compliance efforts. This approach was expected by the industry, as it is consistent with the approach taken by the CFPB with the implementation of other significant mortgage rules. The FDIC and OCC also issued similar statements.

Significantly, the CFPB also announced that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules, such as the institutions that are subject to the rules, including the related transactional coverage tests, and the discretionary data points that were added to the statutory data points by the CFPB.  While the industry has pressed for a reconsideration of various requirements, and the Trump administration has signaled it was receptive to considering changes, this is the first public announcement by the CFPB that it will reconsider the revisions made to the HMDA rules.

Several federal agencies have issued reminders and requirements related to banking and credit services for borrowers affected by Hurricane Harvey.  We previously reported on mortgage-related guidance issued by Fannie Mae, Freddie Mac, HUD, and VA regarding mortgage loans.

On August 26, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and Conference of State Bank Supervisors (CSBS) issued a joint press release  urging financial institutions in disaster areas to “work constructively with borrowers in communities affected by Hurricane Harvey.”  The joint press release reminds financial institutions that they may receive Community Reinvestment Act (CRA) consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas. It also reminds banks to monitor municipal securities and loans affected by the hurricane, as government projects may be negatively affected.  The joint press release also assures banks that regulators will grant flexibility in regulatory reporting and publishing requirements, and that regulators will expedite any request to operate temporary banking facilities.

Additionally, the agencies have adopted the following disaster relief policies:

FRB

The FRB published letter SR 13-6 on March 29, 2013 to highlight the supervisory practices it employs during a disaster.  In general, the letter seeks to encourage covered banking organizations to adopt measures that help borrowers and other customers in communities under stress and that contribute to the health and recovery of these communities.  Per the letter, the FRB will aim to assist in disaster relief efforts by easing the regulatory burden on banks.  For example, the FRB may exercise its authority to waive real estate-related appraisal regulations, and may extend CRA consideration to activities that revitalize or stabilize a disaster area, even if the loans, investments, or services provided are to middle- or upper-income individuals.  The FRB also published a webpage of resources following Hurricanes Katrina and Rita that may be applicable here.

FDIC

On August 29, the FDIC published Financial Institution Letter FIL-38-2017 (the “Letter”), which applies to all FDIC-supervised institutions, including community banks.  The Letter encourages banks to “consider all reasonable and prudent steps to assist customers in communities affected by recent storms.”  Specifically, the FDIC suggests waiving fees, increasing ATM cash limits, easing credit card limits, allowing loan customers to defer or skip payments, and delaying the submission of delinquency notices to credit bureaus.  The Letter also suggests that banks use the non-documentary verification methods permitted by the Customer Identification Program requirement of the Bank Secrecy Act for affected customers who cannot provide standard identification documents.

The FDIC has also set up a webpage dedicated to Hurricane Harvey information for consumers and bankers.  That webpage links to a document created for institutions supervised by FFIEC member agencies and the Conference of State Bank Supervisors that discusses the lessons they learned from the effects of Hurricane Katrina.

The webpage includes resources for consumers including Hurricane Harvey FAQs, disaster planning assistance, and a disaster recovery to-do list.

OCC

On August 24, the OCC issued a Proclamation that permits national banking associations, federal savings associations, and federal branches and agencies of foreign banks to close offices in the areas affected by the emergency conditions for as long as deemed necessary for bank operation or public safety.  The Proclamation also referred to OCC Bulletin 2012-28, which sets forth previous bank guidance applicable to natural disasters (the “Bulletin”).  For the purposes of disaster relief, the Bulletin persuades banks to consider assisting affected borrowers by, among other things, waiving or reducing ATM fees, and restructuring borrowers’ debt obligations.

Banks should also consider previously issued OCC guidance that may be applicable in the event of a disaster.  For example, OCC Bulletin 2014-37 provides that a bank must halt all debt sales on accounts of customers in disaster areas.  According to FEMA declarations, this debt sales moratorium should have started on August 23 for affected counties in Texas, and on August 27 for Louisiana.

Farm Credit Administration (FCA)

On August 29, the FCA issued a press release  encouraging Farm Credit System institutions to extend the terms of loan repayments, restructure borrowers’ debt obligations, ease some loan documentation or credit-extension terms for new loans to certain borrowers, and seek FCA relief from specific regulatory requirements.

National Credit Union Administration (NCUA)

On August 25, in a press release, the NCUA reminded credit unions that its Office of Small Credit Union Initiatives can provide urgent needs grants of up to $7,500 to low-income credit unions that experience sudden costs to restore operations interrupted by the storm.

On August 28, the NCUA announced that there were 150 federally insured credit unions in the areas of Texas affected by Hurricane Harvey and approximately 28 credit unions in the areas of Louisiana affected by the storm.  To help these credit unions, the NCUA stated that its disaster assistance policy was to:

  • Encourage credit unions to make loans with special terms and reduced documentation to affected members;
  • Guarantee lines of credit for credit unions through the National Credit Union Share Insurance Fund;
  • Make loans to meet the liquidity needs of member credit unions through the Central Liquidity Facility; and
  • Reschedule routine examinations of affected credit unions.

Under certain conditions, the NCUA permits federal credit unions to assist other credit unions and non-members by using their correspondent services authority to provide emergency financial services, including check cashing, access to ATM networks, or other services to meet short-term emergency needs of individuals in the areas affected by the floods.  The NCUA notes that if a credit union provides such emergency services, it may not impose charges for such services that exceed its direct costs.

In addition to following the guidance above, in the absence of applicable exemptions or waivers granted by regulators, financial institutions wherever located must continue to comply with consumer protection and other banking laws.  In particular, financial institutions serving communities impacted by Hurricane Harvey should remain mindful of anti-money laundering, suspicious activity reporting, data security, and privacy requirements.

Effective July 18, 2017, the FDIC has adopted amendments to its Guidelines for Appeals of Material Supervisory Determinations.  The FDIC proposed the amendments last August and received only two comment letters, one from a trade association and the other from a financial holding company.

The amendments are intended to provide institutions with broader avenues of redress with respect to material supervisory determinations and enhance consistency with the appeals process of other federal banking agencies.  The term “material supervisory determinations” is defined by the Reigle Act to include determinations relating to (1) examination ratings; (2) the adequacy of loan loss reserve provisions; and (3) classifications of loans that are significant to an institution.  The Guidelines list the types of determinations that constitute “material supervisory determinations.”   Under the Guidelines, an institution may not file an appeal to the Supervision Appeals Review Committee (SARC) unless it has first filed a timely request for review of a material supervisory determination with the Division Director.

The amendments expand the definition of “material supervisory determination” by allowing determinations regarding an institution’s level of compliance with a formal enforcement action to be appealed as a material supervisory determination.  However, if the FDIC determines that lack of compliance with an existing enforcement action requires further enforcement action, the proposed new enforcement action would not be appealable.  Matters requiring board attention are also added to the list of appealable material supervisory determinations.

The amendments remove decisions to initiate informal enforcement action (such as a Memorandum of Understanding) from the list of determinations that are not appealable and add such decisions to the list of appealable material supervisory determinations.

Other amendments include the following:

  • A clarification that a formal enforcement-related action would commence and become unappealable when the FDIC initiates a formal investigation under 12 U.S.C section 1820(c) or provides written notice to the institution of a recommended or proposed formal enforcement action under applicable statutes or published enforcement-related FDIC policies, including written notice of a referral to the Attorney General pursuant to the ECOA or a notice to HUD for ECOA or FHA violations.
  • An amendment providing that when an institution has filed an appeal of a material supervisory determination through the SARC process, the appeal will not be affected if the FDIC subsequently initiates a formal enforcement-related action or decision based on the same facts and circumstances as the appeal.
  • An amendment providing for the publication of annual reports on Division Directors’ decisions with respect to requests by institutions for review of material supervisory determinations.
  • An amendment providing that the current standard for review for SARC appeals also applies to Division-level reviews.

 

 

Politico has reported that James Clinger, President Trump’s nominee to be the next FDIC Chairperson, has asked the White House to withdraw his nomination, citing family issues.

Last month, the White House announced that President Trump intended to nominate Mr. Clinger to be a FDIC member for a six-year term and to be Chairperson for a five-year term, effective November 29, 2017 when the current FDIC chairperson’s term ends.

 

 

The FDIC announced last week that it had entered into settlements with Bank of Lake Mills and two non-bank “institution-affiliated parties” through which the bank originated loans for allegedly engaging in unfair and deceptive practices in violation of Section 5 of the FTC Act.  The settlements should serve as a reminder to non-banks entering into arrangements with FDIC-supervised banks that they can become subject to FDIC enforcement authority.

The FDIC did not release the underlying stipulations and consent order and only released the orders requiring payment of restitution and civil money penalties.  The orders require the bank and two non-banks, Freedom Stores, Inc. (FSI) and Military Credit Services, LLC (MCS), to pay approximately $3 million in restitution to eligible borrowers and civil money penalties of, respectively, $151,000, $54,000, and $37,000.

The orders describe eligible borrowers as having received loans from the bank through “FSI and MCS channels.”  It would appear that, because the non-banks originated loans on behalf of the bank, the FDIC deemed the non-banks to be “institution-affiliated parties” under 12 U.S.C. section 1813(u)(1) which defines an “institution-affiliated party” to include any ” agent for an insured depository institution.”

According to the FDIC’s press release, the bank, FSI, and MCS violated Section 5 by practices that included:

  • Charging interest to borrowers who paid off their loans within six months when the loans were promoted as interest free for six months;
  • Selling add-on products without clearly disclosing the terms of those products; and
  • Failing to provide borrowers the opportunity to exercise the monthly premium payment option in conjunction with the purchase of optional debt cancellation coverage

In December 2014, FSI and MCS entered into a consent order with the CFPB to settle allegations that the companies had engaged in unlawful debt collection practices in violation of the CFPA UDAAP prohibition.