REGULATORY DEVELOPMENTS

OCC and FDIC Propose Rules to Fix Madden Problem

On November 18 and 19, respectively, the OCC and FDIC each issued a proposed rule designed to clarify that interest rates valid when a loan is made remain valid when the loan is transferred or sold. This “valid-when-made” doctrine, a longstanding common-law principle, was called into question by the U.S. Court of Appeals for the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, which held that a nonbank buyer of a loan originated by a national bank could not export the originated interest rate because it violated state law where the borrower lived.

In order to “address recent confusion about the impact of an assignment on the permissible interest resulting from the Madden case,” the OCC proposal would amend 12 CFR 7.4001 and 12 CFR 160.110 by adding a new paragraph, which would provide that interest on a loan that is permissible under Sections 85 and 1463(g)(1) of the National Bank Act shall not be affected by the sale, assignment, or other transfer of the loan. The FDIC proposal would establish a new regulation, 12 CFR Part 331, which would implement Sections 24(j) and 27 of the Federal Deposit Insurance Act (FDIA) and provide that (1) the permissibility of interest on a loan under Section 27 of the FDIA would be determined at the time the loan is made and (2) interest on a loan permissible under Section 27 would not be affected by subsequent events, such as a change in state law, a change in the relevant commercial paper rate, or the sale, assignment, or other transfer of the loan. The FDIC also published a fact sheet in connection with its proposal. Together, the proposals would codify the “valid-when-made” doctrine for national banks, federal and state savings associations, and state chartered banks.

Each proposed rule explicitly states that it does not address which entity is the true lender when a bank makes a loan and assigns it to a third party. However, the FDIC’s proposed rule stated that “the FDIC views unfavorably entities that partner with a state bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state.”

Comments on the proposed rules will be accepted for 60 days after publication in the Federal Register.

Federal Bank Regulatory Agencies Finalize Rule to Update Calculation of Counterparty Credit Risk for Derivative Contracts

On November 19, the Board of Governors of the Federal Reserve System (Federal Reserve), OCC and FDIC adopted a final rule updating how certain banking organizations are required to measure counterparty credit risk for derivative contracts under their regulatory capital rules. The FDIC also released a fact sheet in connection with the final rule. The final rule implements the "standardized approach for measuring counterparty credit risk," also known as SA-CCR. According to the agencies, this updated methodology better reflects improvements made to the derivatives market since the 2007-2008 financial crisis such as central clearing and margin requirements. SA-CCR would replace the "current exposure methodology" for large, internationally active banking organizations, while other, smaller banking organizations could voluntarily adopt SA-CCR. While generally consistent with the proposal released for comment in October 2018, the final rule has been revised in response to comments from the public. Specifically, the final rule makes adjustments to the exposure amount calculation for derivative contracts with commercial end-user counterparties and the netting treatment for settled-to-market derivative contracts. It also allows for greater recognition of collateral in the calculation of total leverage exposure relating to client-cleared derivative contracts. The final rule will be effective on April 1, 2020, with a mandatory compliance date of January 1, 2022.

Agencies Finalize Changes to Supplementary Leverage Ratio as Required by Economic Growth, Regulatory Relief, and Consumer Protection Act

On November 19, the Federal Reserve, OCC and FDIC finalized changes to a capital requirement for banking organizations predominantly engaged in custodial activities, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act). The FDIC also published a fact sheet in conjunction with its approval of the final rule. The final rule is unchanged from the proposal issued for public comment in April of 2019. The Growth Act requires the agencies to permit banking organizations that are “predominantly engaged in custody, safekeeping, and asset servicing activities” to exclude qualifying deposits at certain central banks from their supplementary leverage ratio. According to the agencies, based on current data, only The Bank of New York Mellon Corporation, Northern Trust Corporation, and State Street Corporation, together with their depository institution subsidiaries, would qualify for the rule. The final rule will be effective on April 1, 2020.

Federal Bank Regulatory Agencies Issue Final Rule on Treatment of High-Volatility Commercial Real Estate

On November 19, the Federal Reserve, OCC and FDIC finalized a rule to modify the treatment of high-volatility commercial real estate (HVCRE) exposures as required by the Growth Act. The final rule clarifies certain terms contained in the HVCRE exposure definition, generally consistent with their usage in the Call Report instructions. The final rule also clarifies the treatment of credit facilities that finance one- to four-family residential properties and the development of land, which is substantially similar to the proposal covered by the Roundup on July 17, 2019. Additionally, in response to the comments, the final rule provides banking organizations with the option to maintain their current capital treatment for acquisition, development, or construction loans originated between January 1, 2015, and the effective date of the final rule, April 1, 2020.

CFPB Issues Interpretive Rule on Screening and Training Requirements for Mortgage Loan Originators

On November 15, the CFPB issued an interpretive rule clarifying that individual states – not employers – are responsible for performing the screening and training of loan originators with temporary authority to originate loans, as part of the state’s review of the applicant for a state loan originator license. The interpretive rule will become effective on November 24, 2019.

Top Compliance Topics Observed in Examinations of Investment Companies and Observations from Money Market Fund and Target Date Fund Initiatives

On November 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert to provide investment companies, investors, and other market participants with information on the most often cited deficiencies and weaknesses that the staff has observed in nearly 300 examinations of registered investment companies over a two-year period. The most often cited deficiencies and weaknesses were those related to:

• the fund compliance rule;
• disclosure to investors;
• the board approval process involving advisory contracts; and
• the fund code of ethics rule.

The risk alert also includes observations by the staff from national examination initiatives focusing on money market funds and target date funds. The OCIE staff examined more than 70 money market funds for compliance with the amendments to the rules governing money market funds that became effective in October 2016. During such examinations, the OCIE staff observed instances of deficiencies or weaknesses related to money market funds’ portfolio management practices, compliance programs, and disclosures, particularly in the areas of “eligible securities” and minimal credit risk determinations, summary of significant stress testing assumptions, policies and procedures, and websites and advertising materials.

In addition, the OCIE staff examined over 30 target date funds, including both “to” and “through” funds, to review whether the target date fund’s assets were invested according to the asset allocations stated in the funds’ prospectuses, and whether the associated investment risks were consistent with fund disclosures (including representations made in marketing materials). During such examinations, the OCIE staff noted that some target date funds had incomplete and potentially misleading disclosures in their prospectuses and advertisements, particularly those related to asset allocations, glide path changes and the impact of these glide path changes on asset allocations, and conflicts of interest, such as those that may result from the use of affiliated funds and affiliated investment advisers. The OCIE staff also observed that many target date funds had incomplete or missing policies and procedures, including those for monitoring asset allocations, overseeing implementation of changes to their current glide path asset allocations, overseeing advertisements and sales literature (which resulted in advertising disclosures that were inconsistent with prospectus disclosures and were potentially misleading), and monitoring whether disclosures regarding glide path deviations were accurate.

Goodwin Alert: SEC Proposes Amendments to Rules on Proxy Voting Advice and Shareholder Proposals

As previously reported in the Roundup, on November 5, the SEC proposed amendments to the proxy rules to improve the accuracy and transparency of proxy voting advice. On the same day, the SEC also proposed amendments to modernize the rules that govern the process for shareholder proposals to be included in a company’s proxy statement. The SEC approved both proposals by a 3-2 vote, with Chairman Jay Clayton and Republican Commissioners Hester Peirce and Elad Roisman forming the majority in each vote, and Democratic Commissioners Robert Jackson and Allison Lee dissenting. The proposed amendments will be subject to a public comment period likely to expire in January 2020. We expect that if the proposed amendments become effective, the effective date would be sometime following the spring 2020 annual meeting cycle. For a summary of the proposed amendments, read the client alert issued by Goodwin’s Public M&A and Corporate Governance group.

ENFORCEMENT & LITIGATION

FTC Files Suit and Obtains Temporary Restraining Order Against Alleged Student Loan Debt Relief Scam

On November 12, the Federal Trade Commission announced that it had filed a lawsuit against a collection of interrelated companies and individual defendants for allegedly misrepresenting themselves as affiliated with the Department of Education in order to convince consumers to sign up for student loan debt relief. Read the Enforcement Watch blog post.

Massachusetts AG Announces Settlement with Debt Buyer for Alleged Abusive Debt Collection Practices

On November 11, the Massachusetts Attorney General’s Office (AG) announced that it had settled an investigation against a national debt buyer and collector for alleged violations of Massachusetts’ consumer protection law and debt collection regulations through its debt collection practices. Specifically, the AG alleged that the debt collector pressured debtors with only exempt income to make payments, required repayment of debts that could not be substantiated, misled consumers about protections they were entitled to, and failed to verify the accuracy of information provided to credit reporting agencies. Read the Enforcement Watch blog post.