Nutter Bank Report: December 2021

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Headlines

  1. FDIC Board Governance Dispute on Review of Bank Mergers Aired Publicly
  2. FSOC Recommends Regulators Address Systemic Risks Posed by Digital Assets
  3. Federal Banking Agencies Provide Guidance on the Community Bank Leverage Ratio
  4. Truth in Lending Rules Amended to Enable the Transition Away from LIBOR
  5. Other Developments: Overdrafts and Community Reinvestment

1. FDIC Board Governance Dispute on Review of Bank Mergers Aired Publicly

CFPB Director Rohit Chopra on December 9 published on the CFPB’s website a blog post captioned “How Should Regulators Review Bank Mergers?” in which he expressed concerns about the potential adverse effects of consolidation on competition, including harming the ability of smaller players to break in, denying the public the benefits of competition, and making the economy less resilient and more vulnerable to shocks. He also noted that “some mergers and acquisitions can create chaos for consumers. Financial companies that rapidly expand through buyouts are often unprepared when it comes to integrating systems and ensuring accuracy of consumer accounts.” Chopra’s post stated that the FDIC Board of Directors, on which he sits, had approved for publication in the Federal Register a “Request for Information and Comment on Rules, Regulations, Guidance and Statements of Policy Regarding Bank Merger Transactions” (“RFI”). Chopra and FDIC Board member Martin Gruenberg, in a joint statement also published on the CFPB website, stated that the FDIC Board had approved the RFI, noting: “This marks the beginning of a careful review of the effectiveness of the existing regulatory framework in meeting the requirements of the Bank Merger Act.” Acting Comptroller of the Currency Michael Hsu, the third FDIC Board member supporting the issuance of the RFI, issued a statement in support of the RFI published on the OCC’s website on December 14. However, later on December 9, the FDIC posted on its website a press release which read: “Earlier today, the Consumer Financial Protection Bureau (CFPB) posted on its website a document, purportedly approved by the FDIC, requesting comment on bank mergers. No such document has been approved by the FDIC. The FDIC has longstanding internal policies and procedures for circulating and conducting votes of its Board of Directors, and for issuing documents for publication in the Federal Register.” In this case, the FDIC press release said, those policies and procedures were not followed and, as a result, there was no valid vote by the Board, and no such request for information and comment on bank mergers was approved by the agency for publication in the Federal Register.

Nutter Notes:  The status of the RFI is clouded by an ongoing dispute between the FDIC Chairman and three-quarters of the FDIC Board’s membership regarding Board procedures and the extent of Chairman’s ability to unilaterally control the Board’s agenda. Historically, FDIC Board disputes are resolved behind closed doors through consensus. This dispute is highly unusual in that it has spilled into the public with the FDIC Chairman publicly declaring the RFI to be invalid; the CFPB Director publishing the RFI and airing the dispute in a blog posting; and the FDIC Chairman rebuffing the attempt to have the three Board members’ notational vote approving the RFI entered into the FDIC Board’s official minutes. It appears that the three FDIC board members are relying on an express provision in the FDIC bylaws permitting any two Board members to call a special meeting. The FDIC Chairman lacks specific grants of authority under the Federal Deposit Insurance Act but enjoys broad operational delegations of authority under the FDIC bylaws dating back to the Savings and Loan Crisis. The FDIC Chairman in declaring the notational vote to be invalid appears to be relying upon past board practice, rather than an express bylaw provision. Ordinarily, notational voting is not used if one Board member objects to the procedure. The Joint Statement of Messrs. Gruenberg and Chopra in part reflects a recent Presidential executive order instructing U.S. agencies to consider the impact consolidation may have on competition, and highlights their desire for public comment on (1) including in the Bank Merger Act review framework the Dodd-Frank Act requirement that banking agencies consider the risk of a bank merger to the stability of the financial system, (2) the FDIC’s current approach in considering prudential factors (e.g., capital, management and earnings), including whether the minimum standards for approval should be more stringent, and (3) the convenience and needs of the community to be served by a proposed merger, including whether an “unsatisfactory” Community Reinvestment Act record is an appropriate standard and whether and how the CFPB should be consulted.

2. FSOC Recommends Regulators Address Systemic Risks Posed by Digital Assets

In its 2021 Annual Report, the Financial Stability Oversight Council (“FSOC”) made a number of recommendations to promote U.S. financial stability, including that federal and state regulators continue to examine and address risks to the financial system posed by new and emerging uses of stablecoins and other digital assets (i.e., cryptocurrencies). The FSOC noted in its Annual Report, released on December 17, that the price of digital assets may be highly volatile because “speculation appears to drive the majority of digital asset activity at this time,” and that digital assets “may also be subject to the risk of operational failures, fraud, and market manipulation.” According to the Annual Report, the FSOC plans to assess and monitor the potential risks of stablecoins, and recommends that its members—which include the heads of the federal banking agencies—consider “appropriate actions within each member’s jurisdiction to address those risks while continuing to coordinate and collaborate on issues of common interest.” The Annual Report stated that the FSOC will be prepared to consider steps to address risks outlined in the Report on Stablecoins issued jointly by the President’s Working Group on Financial Markets, the FDIC and the OCC on November 1, 2021 (the “PWG Report”), in the event that comprehensive legislation is not enacted. Click here for a copy of the FSOC’s 2021 Annual Report.

Nutter Notes: The PWG Report recommends, among other things, that Congress approve legislation that would require stablecoins to be issued only by insured depository institutions. The PWG Report notes that stablecoins are a digital asset that is generally designed to maintain a stable value relative to the U.S. dollar. One of the risks posed by stablecoins according to the FSOC’s 2021 Annual Report is that, although stablecoins are marketed as maintaining a stable value, “they may be subject to widespread redemptions and asset liquidations if investors doubt the credibility of that claim.” The PWG Report’s authors recommended that federal law should require that only insured depository institutions be permitted to issue or redeem stablecoins, or maintain reserve assets for stablecoins to address risks associated with the use of stablecoins as a means of payment and to protect against stablecoin runs. The report recommends that such legislation should provide for supervision of stablecoin issuers on a consolidated basis, should include prudential standards and should provide for, “potentially, access to appropriate components of the federal safety net,” possibly suggesting that stablecoin deposits be considered for eligibility for federal deposit insurance coverage – at least to some extent.  The PWG Report also recommends that federal law should impose activities restrictions on stablecoin issuers that would limit a stablecoin issuer’s affiliation with “commercial entities” and limit use of stablecoin users’ transaction data.

3. Federal Banking Agencies Provide Guidance on the Community Bank Leverage Ratio

The Federal Reserve, FDIC and OCC have issued an interagency statement on the December 31, 2021 expiration of temporary relief measures affecting the community bank leverage ratio framework. The interagency statement published on December 21 notes that a qualifying community bank that has elected the community bank leverage ratio framework will be subject to a community bank leverage ratio requirement of greater than 9% beginning on January 1, 2022. In 2020, the federal banking agencies issued a final rule that temporarily lowered the community bank leverage ratio requirement from 9% to 8%, as required by Section 4012 of the Coronavirus Aid, Relief, and Economic Security Act. The interagency statement explains that the agencies also established a gradual transition back to the original 9% requirement—a two-quarter grace period that allows a qualifying community bank to continue reporting under the framework and be considered “well capitalized” as long as its leverage ratio falls no more than 1 percentage point below the applicable community bank leverage ratio requirement. A qualifying community bank must report a leverage ratio greater than 8% beginning with its March 31, 2022 call report to use the two-quarter grace period according to the interagency statement. Click here for a copy of the interagency statement.

Nutter Notes: The interagency statement clarifies that a community bank would not be viewed negatively by federal examiners solely due to its use of the two-quarter grace period under the community bank leverage ratio framework. The interagency statement notes that at the end of the two-quarter grace period, a banking organization must meet all the qualifying criteria to remain in the community bank leverage ratio framework, including having less than $10 billion in total consolidated assets and meeting the community bank leverage ratio requirement of greater than 9%. According to the interagency statement, the grace period is intended to allow each qualifying community bank additional time to build capital and manage its balance sheet to either remain in the framework or transition to the generally applicable regulatory capital requirements. 

4. Truth in Lending Rules Amended to Enable the Transition Away from LIBOR

The CFPB issued a final rule amending Regulation Z (Truth in Lending) to facilitate the transition away from the London Interbank Offered Rate (“LIBOR”) as a reference rate to price variable rate consumer financial products. The final rule adopted on December 7 establishes requirements for how creditors, including banks, must select a replacement index for existing LIBOR-linked consumer loans after April 1, 2022. In particular, the final rule provides details on how to determine whether a replacement index is a comparable index to a LIBOR index for purposes of the closed-end refinancing provisions of Regulation Z. Under Regulation Z, if a creditor changes the index of a variable-rate closed-end loan to an index that is not a comparable index, the index change may constitute a refinancing for purposes of Regulation Z. The final rule also provides a “roadmap” for open-end credit, including home equity lines of credit and credit cards, for creditors to choose a compliant replacement index. The final rule generally becomes effective on April 1, 2022, and the mandatory compliance date for certain revisions to the change-in-terms notice requirements is October 1, 2022. Click here for a copy of the final rule.

Nutter Notes:  To help creditors determine whether a replacement index is comparable to LIBOR for closed-end loans, the final rule identifies certain Secured Overnight Financing Rate (“SOFR”)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (“ARRC”) for consumer products as examples to illustrate a reference rate that would be comparable to replace the 1-month, 3-month, or 6-month US Dollar LIBOR. The final rule includes a list of factors that creditors may use to help determine whether a replacement index meets the Regulation Z “comparable” standard regarding a particular LIBOR index. The final rule also updates sample post-closing disclosure forms for certain adjustable-rate mortgage loan products to replace LIBOR references with SOFR.  For open-end credit, the final rule generally requires that a replacement index must have historical fluctuations that are substantially similar to those of the LIBOR index and that the new interest rate or APR is substantially similar. The final rule provides creditors and credit card issuers with a list of factors that may be considered when determining whether a replacement index meets the Regulation Z standard for a particular LIBOR index, and identifies certain SOFR-based spread-adjusted indices recommended by the ARRC for consumer products and the Prime rate as examples of indices that meet this standard.

5. Other Developments: Overdrafts and Community Reinvestment

Acting Comptroller of the Currency Cites Attributes of Responsible and Fair Overdraft Programs

Acting Comptroller of the Currency Michael J. Hsu discussed reforming bank overdraft programs to improve individuals’ financial health in remarks on December 8 before a conference for consumer advocates, including attributes the OCC has identified for “responsible and fair overdraft programs.” According to Acting Comptroller Hsu, these attributes include requiring consumer opt-in to an overdraft program, providing a grace period before charging an overdraft fee, and allowing negative balances without triggering a fee. Click here for a copy of Acting Comptroller Hsu’s remarks.

Nutter Notes: Other attributes of responsible and fair overdraft programs according to Acting Comptroller Hsu are offering consumers balance-related alerts, providing consumers with access to real-time balance information, and using linked accounts for overdraft protection. He also encouraged banks to consider collecting overdraft fees from a consumer’s next deposit only after other items have been posted, and not charging separate overdraft fees for multiple items in a single day or when an item is re-presented.

OCC Formally Rescinds and Replaces 2020 Community Reinvestment Act Rule

The OCC issued a final rule on December 14 that rescinds its Community Reinvestment Act (“CRA”) rule issued in June 2020 and replaces it with a rule based on the rules adopted jointly by the federal banking agencies in 1995. The final rule aligns the OCC’s CRA rules with the current Federal Reserve and FDIC rules. Click here for a copy of final rule.

Nutter Notes:  The final rule includes transition provisions that will permit banks to receive CRA credit for activities in effect at the time the banks conducted the activities or entered into legally binding commitments to conduct the activities, including under the June 2020 rule, with respect to the qualifying activities criteria or retail or community development definitions under the final rule. The final rule takes effect on January 1, 2022, with a separate compliance date of April 1, 2022, for the rule’s public file and public notice requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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