Translating Goals Into Action.Many financial institutions likely would say that financial regulatory reform in the Trump administration has fallen short of expectations, at least so far. While various executive orders and agency reports have stated that financial regulatory reform was a priority for the administration, there has been little change to existing laws and regulations during the president’s first nine months in office. Recently, however, there have been signs that things may be changing. In August, the Federal Reserve Board requested public comment on a corporate governance proposal designed to “enhance the effectiveness of boards of directors” by refocusing boards on their core responsibilities and identifying supervisory expectations for boards of directors that could be eliminated or revised. Last week, as discussed in more detail below, the federal banking agencies released a notice of proposed rulemaking that would simplify certain regulatory capital rules for non-advanced approaches banking organizations. It appears that federal financial regulators finally may be translating the goal of financial regulatory reform into actionable items that reduce the regulatory burden on both large and community-based institutions.

The Roundup will be on hiatus due to the federal holiday observed next week. We will resume publication on October 18.

Regulatory Developments

Federal Banking Agencies Propose Simplifying Regulatory Capital Rules

On September 27, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (Agencies) issued a notice of proposed rulemaking (NPR) that would simplify certain regulatory capital rules for non-advanced approaches banking organizations, although proposed changes to the treatment of acquisition, development, or construction loans would apply to all banking organizations. Key changes include:

• Replacing the complex definition of high volatility commercial real estate (HVCRE) exposures with a simpler definition for high volatility acquisition, development, or construction (HVADC) exposures, which would receive a 130% risk weight.
• Simplifying the treatment for exposures subject to the common equity tier 1 threshold deductions, including increasing the limit on mortgage servicing assets; increasing the limit on temporary difference deferred tax assets (DTAs) not realizable through carryback; and removing the distinction between significant and non-significant investments in the capital of unconsolidated institutions by applying a limit to all such investments.
• Simplifying the limitations on minority interest includable in regulatory capital.

The Agencies have prepared a community bank summary of the proposal, and the FDIC has prepared a tool for estimating the impact of the proposed changes. Comments on the NPR must be received within 60 days of its publication in the Federal Register.

OCC Releases 2018 Supervisory Priorities

The OCC today released its bank supervision operating plan for fiscal year 2018. The plan provides the foundation for policy initiatives and for supervisory strategies as applied to individual banks. OCC staff members use this plan to guide their supervisory priorities, planning and resource allocations. The plan outlines the supervisory priorities for the National Risk Committee, Large Bank Supervision, Midsize and Community Bank Supervision, Compliance and Community Affairs, the Office of the Chief National Bank Examiner and the supervision of technology service providers. Supervisory strategies for 2018 focus on:

• Cybersecurity and operational resiliency;
• Commercial and retail credit loan underwriting, concentration risk management, and the allowance for loan and lease losses;
• Business model sustainability and viability and strategy changes;
• Bank Secrecy Act/anti-money laundering (BSA/AML) compliance management; and
• Addressing new regulatory requirements.

The OCC will provide periodic updates about supervisory priorities through the Semiannual Risk Perspective in the fall and spring.

FDIC Adopts Final Rule on Qualified Financial Contracts

On September 27, the FDIC adopted a final rule to enhance the resilience and safety and soundness of state savings associations and banks supervised by the FDIC that are affiliated with systemically important U.S. and foreign banking organizations (“covered FDIC-supervised institutions”). Under the final rule, qualified financial contracts (QFCs):

• May not allow for immediate cancellation or termination under certain circumstances;
• Must clearly state that they are subject to temporary stays under U.S. resolution regimes; and
• Must prohibit the exercise of default rights against, or imposing transfer restrictions on, the covered FDIC-supervised institution based on the entry of an affiliate of the covered FDIC-supervised institution into bankruptcy.

The final rule also amends the definitions of “qualifying master netting agreement” and related terms in the FDIC’s capital and liquidity rules to account for the final rule.

CSBS Develops Tool to Help Financial Institutions Prepare for CECL

The Conference of State Bank Supervisors (CSBS) has released a tool to help financial institutions prepare for Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), commonly referred to as the Current Expected Credit Losses (CECL). The tool, known as the Current Expected Credit Losses Readiness Tool, was developed to provide a framework that a financial institution could use to plan for the eventual implementation of the accounting changes required by CECL. According to the CSBS, the tool is being offered as an optional resource to plan and prepare for the implementation of CECL; there is no regulatory expectation that the tool, or its suggested implementation dates, be used; and the tool does not replace or revise any agency guidance related to CECL.

CFTC and the Bitcoin Give and Take

Recently, the U.S. Commodity Futures Trading Commission (CFTC) granted LedgerX, LLC registration as a derivatives clearing organization (DCO) under the Commodity Exchange Act, and with it, the right to clear fully collateralized digital currency swaps, subject to applicable law. It became the “first federally regulated Bitcoin options exchange and clearinghouse to list and clear fully collateralized, physically settled Bitcoin options for the institutional market.” LedgerX announced stringent trading rules on its website, embracing the CFTC regulations. Yet, right before its planned launch later this month, the CFTC announced another first — an anti-fraud enforcement action against alleged Bitcoin fund fraudsters. View the Digital Currency and Blockchain Perspectives blog post.

Client Alert: SEC Announces Cyber Enforcement Initiative: Distributed Ledger Technology, Initial Coin Offerings Under the Microscope

The new SEC Enforcement Cyber Unit will target cyber-related misconduct, including violations involving distributed ledger technology, initial coin offerings and misconduct perpetrated using the dark web. For more information, read the client alert issued by Goodwin’s Financial Industry and Digital Currency and Blockchain Technology practices.

Enforcement & Litigation

Loan Brokerage Firm Agrees to $70,000 Settlement With CFPB Over Personal Loans Made to Recipients of Victim Compensation Funds

On September 19, the Consumer Financial Protection Bureau (CFPB) announced a simultaneous complaint and proposed consent order with a loan brokerage company and two associated individuals (the “Defendants”). The Defendants are alleged to have made misrepresentations concerning the brokerage and the loan terms they offered to potential borrowers. According to the CFPB, the Defendants focused their efforts on the recipients of legal settlements or victim-compensations funds, such as former National Football League players suffering from neurological disorders, victims of the Deepwater Horizon oil-rig disaster, and 9/11 first responders. View the Enforcement Watch blog post.

CFPB, Student Loan Securitizer and Debt Collector Agree to Combined $21.6 Million Settlement for Alleged Illegal Collection Practices

On September 18, the CFPB announced that it had entered into a settlement and proposed consent judgment with a student loan owner and securitizer, and a separate consent judgment with the securitizer’s debt collector. The securitizer has a loan portfolio of approximately 800,000 student loans. According to the CFPB, the securitizer—a collection of Delaware statutory trusts—has no employees of its own, but contracts with third-parties such as the debt collector to interact with borrowers. The debt collector allegedly hired a network of law firms around the country to prosecute collections lawsuits on behalf of the securitizer. View the Enforcement Watch blog post.