Nutter Bank Report: November 2020

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Headlines

  1. Federal Banking Agencies Issue New Guidance on Managing the LIBOR Transition
  2. OCC Amends Licensing Policies and Procedures for National Banks and Federal Thrifts
  3. Federal Banking Agencies Propose Rule on the Role of Supervisory Guidance
  4. CFPB Adopts Rule with New Consumer Protections for Debt Collection Communications
  5. Other Developments: Customer Due Diligence; Truth in Lending; and Appraisals

1. Federal Banking Agencies Issue New Guidance on Managing the LIBOR Transition

The member agencies of the Federal Financial Institutions Examination Council (“FFIEC”) have issued joint guidance for banking organizations that clarifies that the agencies do not endorse a specific replacement rate for the London Interbank Offered Rate (LIBOR) as a reference rate to price variable rate loans, securities, deposits, borrowings, interest rate hedging transactions, and other financial contracts. The joint guidance issued on November 6, entitled Joint Statement on Managing the LIBOR Transition, encourages banking organizations to prepare for the expected discontinuation of LIBOR at the end of 2021 and address its associated risks. The guidance notes that the Alternative Reference Rates Committee—a group of private-market participants formed to help transition from LIBOR—has recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative transactions. However, a banking organization may use any reference rate for its loans and other financial contracts that it determines to be appropriate for its funding model and customer needs. The guidance advises each banking organization to assess the appropriateness of alternative reference rates in light of the organization’s funding costs and its customers’ needs. The guidance recommends that any new financial contract that uses a reference rate should either use a rate other than LIBOR or contain robust terms that provide for a clearly defined alternative reference rate after LIBOR’s discontinuation. Click here for a copy of the joint guidance.

Nutter Notes: The use of SOFR is voluntary and, according to the guidance, the agencies’ examiners will not criticize banking organizations solely for using a reference rate, including a credit sensitive rate, other than SOFR. Banking organizations should be in the process of identifying their LIBOR transition risks and taking appropriate steps to mitigate those risks commensurate with the size and complexity of their exposures, according to the guidance. That process should include a review of any financial contract that uses LIBOR as a reference rate and a determination as to how the replacement of LIBOR should be handled under the terms of each such contract. In certain cases, existing contracts may contain fallback language that addresses the replacement of a discontinued reference rate. Any contracts with inadequate fallback language may need to be formally amended to provide for a replacement of LIBOR, such as SOFR. The guidance also encourages banking organizations to consider any technical changes that might be required for internal systems to accommodate new reference rates or fallback rates as part of the organizations’ risk mitigation efforts. The agencies also encourage banking organizations to reach out to affected lending customers as soon as possible to ensure that they are aware of, and prepared for, the transition from LIBOR.

2. OCC Amends Licensing Policies and Procedures for National Banks and Federal Thrifts

The OCC has approved a final rule that, among other things, permits national banks and federal savings associations to make an election in a merger transaction with a bank in another state to follow the procedures applicable to a state bank or state savings association, as applicable, in the state in which the national bank’s or federal savings association’s main office is located. The final rule published on November 16 updates and clarifies certain OCC licensing policies and procedures and eliminates requirements deemed unnecessary by the OCC. In connection with an election to follow state merger procedures in an interstate merger, the OCC’s final rule includes new rules of construction so that the state procedures function logically for national banks and federal savings associations. For example, the final rule provides that any references to a state agency in the applicable state merger procedures would be read as referring to the OCC. In addition, the final rule provides that, unless otherwise specified in federal law, all filings required by the applicable state merger procedures would be made to the OCC. The final rule, with the exception of one technical amendment, will become effective on January 1, 2021. Click here for a copy of the final rule.

Nutter Notes: The OCC’s final rule also makes a number of changes to the licensing requirements applicable to the acquisition or establishment of an operating subsidiary or commencement of a new activity in an existing operating subsidiary by a national bank or federal savings association, and to the rules governing non-controlling investments by a national bank and pass-through investments by a federal savings association. For example, the final rule permits an operating subsidiary of a qualifying national bank or federal savings association to engage in an activity that is substantively the same as a previously approved bank or federal savings association activity, as applicable, by filing a notice with the OCC (for national banks) or an application through expedited review (for federal savings associations). The final rule also removes the annual national bank operating subsidiary reporting requirement. With regard to non-controlling investments by a national bank and pass-through investments by a federal savings association, the final rule permits, with prior OCC approval, investments in businesses that have not agreed to OCC supervision. The final rule also provides an expedited review procedure for these investments under certain conditions, which include requirements that the business must engage in permissible bank activities and the bank must be well managed and well capitalized.

3. Federal Banking Agencies Propose Rule on the Role of Supervisory Guidance

The federal banking agencies along with the CFPB and the NCUA have published a proposed rule that would codify a September 2018 interagency statement that clarified the differences between regulations and supervisory guidance. The proposed rule released on October 29 would affirm the principle that supervisory guidance does not have the force and effect of law, consistent with the 2018 interagency statement. The proposed rule would clarify that the agencies do not take enforcement actions or issue supervisory criticisms (such as matters requiring attention noted on reports of examination) based on non-compliance with supervisory guidance. According to the proposed rule, supervisory guidance outlines supervisory expectations and priorities, or articulates the agencies’ general views about appropriate practices on a particular issue. In contrast, the proposed rule would clarify that regulations do have the force and effect of law, and regulatory enforcement actions may be taken if financial institutions are in violation of a regulation. Public comments on the proposed rule are due by January 4, 2021. Click here for a copy of the proposed rule.

Nutter Notes: The federal banking agencies along with the CFPB and the NCUA issued the Interagency Statement Clarifying the Role of Supervisory Guidance on September 11, 2018 to explain the role of supervisory guidance and describe the agencies’ approach to supervisory guidance. Consistent with that September 2018 interagency statement, the proposed rule would commit the agencies to limit the use of numerical thresholds or other “bright-lines” in describing supervisory expectations in guidance documents. The proposed rule would clarify that, where numerical thresholds are used, the agencies intend that numerical thresholds are meant to provide examples only and do not suggest regulatory requirements. The proposed rule explains that, while examiners will not criticize a financial institution for a violation of or non-compliance with supervisory guidance, exam reports may reference supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.

4. CFPB Adopts Rule with New Consumer Protections for Debt Collection Communications

The CFPB has issued a final rule under the Fair Debt Collection Practices Act (“FDCPA”) that clarifies prohibitions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors when collecting consumer debt. The final rule released on October 30 in Regulation F, which implements the FDCPA, focuses primarily on collection communications by debt collectors and addresses the use by debt collectors of newer communications technologies, such as email and text messages. Among other things, the final rule clarifies that a consumer may restrict the media through which a debt collector communicates by designating a particular medium, such as email, as one that cannot be used for debt collection communications. The final rule includes certain limitations on the use of newer communications technologies to protect consumer privacy and to protect consumers from harassment or abuse, false or misleading representations, or unfair practices. For example, the final rule requires that each of a debt collector’s emails and text messages must include instructions for the consumer to opt out of receiving further emails or text messages. The final rule will become effective one year after it is published in the Federal Register, which is expected shortly. Click here for a copy of the final rule.

Nutter Notes: While a bank that is collecting its own loans in its own name is not considered a debt collector under the FDCPA, the federal banking agencies generally expect banks to avoid abusive collection practices and comply with the spirit of the FDCPA. In addition, the federal banking agencies generally expect banks to establish internal controls and on-going monitoring to determine whether third-party debt collectors acting on a bank’s behalf are complying with the FDCPA and Regulation F. The CFPB also said that it intends to issue a disclosure-focused final rule by the end of this year that would take up the agencies February 2020 proposal to require debt collectors to make certain disclosures when collecting time-barred debt, including model language and forms that debt collectors could use to comply with the proposed requirements. The February 2020 proposal would require a debt collector collecting a debt that the debt collector knows or should know is time-barred to disclose that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it. The February 2020 proposal also would require the debt collector to disclose whether the debt collector’s right to bring a legal action against the consumer to collect the debt can be revived under applicable law, the fact that revival can occur, and the circumstances in which it can occur. The February 2020 proposal would prohibit debt collectors from threatening to sue on debts they know or should know are time-barred.

5. Other Developments: Customer Due Diligence; Truth in Lending; and Appraisals

  • New Guidance Issued on BSA/AML Due Diligence Requirements for Charities and Nonprofits

The federal banking agencies along with FinCEN and the NCUA jointly issued new guidance on November 19 in the form of a fact sheet clarifying that insured depository institutions should approach Bank Secrecy Act customer due diligence requirements for charities and other nonprofit organizations based on the money laundering risks posed by the customer relationship. The guidance reminds insured depository institutions that charities and other nonprofits vary in their risk profiles and should be reviewed in a manner consistent with those profiles.

Nutter Notes: The new guidance clarifies that charities and nonprofit organizations as a whole do not present a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing, or sanctions violations. The new guidance also provides examples of customer information that may be useful to insured depository institutions in developing risk profiles that are appropriate for the risks presented by each customer. Click here for a copy of the new guidance.

  • Dollar Thresholds Announced for 2021 Exempt Consumer Credit and Lease Transactions

The Federal Reserve and the CFPB on November 18 issued the dollar thresholds under Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply for determining whether consumer credit and lease transactions are exempt from those regulations in 2021. Based on the annual percentage increase in the consumer price index, consumer protections under the Truth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $58,300 or less in 2021, which is the same threshold that applied in 2020.

Nutter Notes: The Regulation Z and Regulation M thresholds are set pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) that require adjusting the thresholds annually based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”). While the Dodd-Frank Act generally transferred rulemaking authority under the Truth in Lending Act and the Consumer Leasing Act to the CFPB, the Federal Reserve retains authority to issue rules for certain motor vehicle dealers, so the agencies issued the annual threshold notices jointly. Click here to access the 2021 threshold notices.

  • 2021 Dollar Threshold Issued for Exemption from Special Appraisal Requirements for Higher-Priced Mortgage Loans

The Federal Reserve, OCC, and CFPB on November 18 announced that the threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans will remain at $27,200 in 2021, which is the same threshold that applied in 2020. The threshold is based on the annual percentage increase in the CPI-W as of June 1, 2020.

Nutter Notes: The CPI-W published by the Bureau of Labor Statistics as of June 1, 2020 reflected only a 0.1% increase in the CPI-W from the prior year, which, after rounding resulted in an exemption threshold amount of $27,200. Click here to access the 2021 threshold notice.

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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