Nutter Bank Report, March 2017

Nutter McClennen & Fish LLP

1. Fed Raises Threshold That Triggers Review of Systemic Risk of a Proposed Merger
2. OCC Issues Draft of Criteria for Evaluating Fintech Charter Applications
3. FDIC Publishes Supervisory Guidance on Credit Risk Management for CRE Lending
4. Division of Banks Announces Availability of New BSA/AML Self-Assessment Tool
5. Other Developments: Trade Settlement and ECOA

1. Fed Raises Threshold That Triggers Review of Systemic Risk of a Proposed Merger

In a recent decision on a proposed merger of two bank holding companies, the Federal Reserve indicated that it has increased the threshold below which the agency presumes a merger does not raise material financial stability concerns. The March 16 Federal Reserve decision stated that a proposal that involves an acquisition of less than $10 billion in assets, that results in a holding company with less than $100 billion in total assets “may be presumed not to raise material financial stability concerns absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risk factors.” The Federal Reserve had previously announced in a 2012 merger decision that the threshold for a systemic risk review was an acquisition of $2 billion or more in assets that results in a holding company with $25 billion or more in total assets. Transactions below the new, higher threshold are unlikely to be subject to a review of systemic risks created by the proposed business combination, possibly encouraging mergers involving regional and community banking organizations. Click here for a copy of the Federal Reserve’s merger decision.

     Nutter Notes: The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) amended Section 3 of the Bank Holding Company Act to require the Federal Reserve when considering business combination proposals to consider “the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system.” The agency reviews a number of factors when conducting a systemic risk review, including measures of the size of the resulting institution, the availability of alternative sources for any critical products and services offered by the combining institutions, the interconnectedness of the resulting institution with the banking or financial system, the extent to which the resulting institution contributes to the complexity of the financial system, and the extent of the cross-border activities of the resulting institution. The Federal Reserve may, in its discretion, consider other quantitative factors that it deems relevant to a systemic risk review. The Federal Reserve also considers certain qualitative factors when conducting a systemic risk review, including the opaqueness and complexity of an institution’s internal organization that are “indicative of the relative degree of difficulty of resolving the resulting firm.”

2. OCC Issues Draft of Criteria for Evaluating Fintech Charter Applications

The OCC has published a draft supplement to the Comptroller’s Licensing Manual that describes how the agency will apply the licensing standards and requirements in existing regulations and policies to financial technology (“fintech”) companies applying for special purpose national bank charters. The supplement issued on March 15 also describes the factors that the OCC will consider when evaluating fintech charter applications, the agency’s expectations for promoting fair access, fair treatment, and financial inclusion, and the agency’s approach to supervising those fintech companies that become national banks. For example, the draft supplement states that the OCC will not approve a fintech charter application “that would result in an inappropriate commingling of banking and commerce” because it “could introduce into the banking system risks associated with non-banking related commercial activities, interfere with the efficient allocation of credit throughout the U.S. economy and foster anti-competitive effects and undesirable concentrations of economic power.” Public comments on the OCC’s draft supplement are due by April 14. Click here for a copy of the draft supplement.

     Nutter Notes: The draft supplement states that, when the OCC evaluates a fintech charter application, it will consider whether the institution has personnel with “appropriate skills and experience,” capital that is adequate for the projected transaction volume, type of business, and risk profile, and a business plan that “articulates a clear path and a timeline to profitability.” The draft supplement also states that the OCC will expect a fintech charter applicant whose business plan includes lending or providing services to consumers or small businesses to “demonstrate a commitment to financial inclusion.” In such cases, the applicant will be expected to develop and implement a Financial Inclusion Plan (“FIP”). According to the draft supplement, the OCC will consider whether the applicant’s business plan and, if applicable, FIP adequately describes the company’s proposed goals, approach, activities, and milestones for serving the relevant market and community. The OCC may also identify specific controls or requirements that the agency deems necessary for the success of the applicant’s business plan or to ensure that chartering standards are met, according to the draft supplement. In such cases, the OCC will impose special conditions on the charter approval in addition to the standard conditions imposed on all de novo national bank charters, including the requirement that the institution obtain a written waiver from the OCC if the institution deviates significantly from its business plan.

3. FDIC Publishes Supervisory Guidance on Credit Risk Management for CRE Lending

The FDIC has issued supervisory guidance that identifies trends in credit risk in commercial real estate (“CRE”), agriculture, and oil and gas-related lending, and provides an overview of the FDIC’s expectations for a bank’s risk-management practices affecting those areas. The guidance is provided in the FDIC’s March 7 article “Credit Risk Trends and Supervisory Expectation Highlights,” in the Winter 2016 issue of the agency’s Supervisory Insights publication, which also discusses weaknesses that the FDIC has observed in loan underwriting, administration, and oversight practices during the agency’s examinations of CRE lending. Such weaknesses include an absence of, or unsupported or excessive, limits approved by the bank’s board of directors for CRE portfolios or subdivisions of CRE portfolios, inadequate reporting of concentrations to the bank’s board or the relevant committee(s), and a lack of discussion about lending concentrations in board or the relevant committee(s) meetings. The FDIC’s guidance also describes weaknesses that examiners have found in underwriting practices, including too many exceptions-to-policy loans, inadequate tracking of loan policy exceptions, unsupported cash flow projections, lack of global cash flow analysis of guarantors, and excessive or inappropriate use of cash-out financing and interest only payment terms. Click here for a copy of the supervisory guidance.

     Nutter Notes: The FDIC’s supervisory guidance reiterates that examiners expect banks to demonstrate that they have adopted and implemented lending policies, practices, and underwriting that are appropriate for the size and complexity of the bank’s business model, maintain strong administration and oversight of lending activities and related funding strategies, and ensure adequate loan loss allowances and capital levels. The guidance identifies certain key resources that banks should review in connection with CRE risk-management functions, including The FDIC Risk Management Manual of Examination Policies, Part 364 (Appendix A) of the FDIC’s rules and regulations entitled Interagency Guidelines Establishing Standards for Safety and Soundness, Part 365 of the FDIC’s rules and regulations entitled Real Estate Lending Standards, the 2006 interagency guidance entitled Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, the 2015 interagency guidance entitled Statement on Prudent Risk Management for Commercial Real Estate Lending, the 2014 FDIC advisory on risk-management practices for agricultural lending entitled Prudent Management of Agricultural Credits through Economic Cycles, and the 2016 FDIC advisory on risk-management practices for oil and gas lending entitled Prudent Risk Management of Oil and Gas Exposure.

4. Division of Banks Announces Availability of New BSA/AML Self-Assessment Tool

The Massachusetts Division of Banks has issued a letter to Massachusetts banks highlighting the availability of a new BSA/AML Self-Assessment Tool for the industry developed by the Conference of State Bank Supervisors (“CSBS”) in conjunction with state banking regulators. According to the February 24 letter, the assessment tool is intended to help banks develop “a consistent framework for assessing and communicating internally about their BSA/AML risk management program in a format that is customizable to each [bank]’s risk profile.” The Division’s letter points out that the use of the assessment tool is voluntary, and is provided as a supplement to banks’ existing BSA/AML risk management programs. Click here to access the BSA/AML Self-Assessment Tool.

     Nutter Notes: According to the instructions for the BSA/AML Self-Assessment Tool provided by the CSBS, the tool is not a replacement for any part of a bank’s BSA/AML risk management program, but is an optional supplement to that program. The purpose of the tool, according to the CSBS, is to help banks to assess and manage their BSA/AML risks more effectively and reduce some of the regulatory burden of BSA/AML compliance. The CSBS also said that the tool was designed to be customizable, and allows a bank to adjust the various formulas, rating values, and other variables it uses to more appropriately reflect the risks specific to the bank’s operations.

5. Other Developments: Trade Settlement and ECOA

  • SEC Shortens the Standard Settlement Cycle for Most Broker-Dealer Transactions

The SEC on March 22 issued a final rule amending the settlement cycle requirements under the Securities Exchange Act to shorten the standard settlement cycle for most purchases and sales of securities by broker-dealers, including banks and their broker-dealer affiliates, from three business days after the trade date to two business days after the trade date. Compliance with the new settlement cycle will be required by September 5, 2017.

     Nutter Notes: The SEC said that it was shortening the trade settlement cycle to reduce credit, market, and liquidity risks, and overall systemic risk for U.S. securities market participants. Click here for a copy of the final rule.

  • CFPB Proposes Changes to ECOA Rules to Provide Flexibility in GMI Collection

The CFPB on March 24 proposed amendments to Regulation B that the agency said are meant to provide more flexibility to banks and other lenders required to collect government monitoring information (“GMI”) from home mortgage loan borrowers under the Equal Credit Opportunity Act (“ECOA”) and its implementing rule, Regulation B. Public comments on the proposed amendments will be due within 30 days after publication in the Federal Register, which is expected shortly.

     Nutter Notes: The Proposed Amendments to Regulation B are meant in part to better align ECOA collection requirements with 2015 amendments to collection requirements for race and ethnicity information under Regulation C, which implements the Home Mortgage Disclosure Act, and would permit creditors to collect GMI in certain circumstances when they would not otherwise be required to do so. Click here for a copy of the proposed amendments.

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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