President Biden spent nearly 18 months assembling his team of top financial services regulators. Michael Barr’s nomination as the top banking regulator at the Federal Reserve Board (FRB) will fill the last remaining vacancy as he was advanced by the Senate Banking Committee last month and his nomination is expected by the full Senate. The remainder of the team of regulatory chiefs who will be faced with the challenges of recovering from the economic challenges of critical issues like the global pandemic and fallout from the Russia/Ukraine conflict include Martin J. Gruenberg, now Acting Chair of the Federal Deposit Insurance Corporation (FDIC), which role he returned to following the resignation of Jelena McWilliams in February 2022. Mr. Gruenberg was a previous Chair of the FDIC and has served on the FDIC Board for almost two decades. Rounding out the banking group is Michael Hsu who became Acting Director of the Office of the Comptroller of the Currency (OCC) in May 2021. On the non-banking side, the top regulatory team consists of Gary Gensler, Chair of the Securities and Exchange Commission (SEC), Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB), Sandra L. Thompson, Acting Director of the Federal Housing Finance Agency (FHFA), and Lina Kahn, Chair of the Federal Trade Commission (FTC). Chairman Gruenberg and Directors HSU and Chopra currently make up the FDIC Board.
This alert explores four key areas that will be the primary focus of these agencies. Each will coordinate their efforts through, guidance, supervision, and enforcement to further the Administration’s objectives.
Community Reinvestment Act
In June 2020 (during the prior Administration), the OCC, independently and without the FDIC and FRB, issued a final rule amending the Community Reinvestment Act (CRA). In December 2021, the OCC rescinded that final CRA rule in order to work more closely with its peer agencies to put forward a joint rulemaking that strengthens and modernizes the statute. On May 5, 2022, the OCC, FDIC, and FRB announced an Interagency Notice of Proposed Rulemaking to Implement the CRA. The proposed rule is intended to:
- Update CRA regulations to strengthen the achievement of the statute’s purpose;
- Adapt to changes in the banking industry, including the expanded role of mobile and online banking;
- Provide greater clarity and consistency in the application of the regulations;
- Tailor performance standards to account for differences in bank size, business models, and local conditions;
- Tailor data collection, reporting requirements, and use existing data whenever possible;
- Promote transparency and public engagement;
- Confirm that CRA and fair lending responsibilities are mutually reinforcing; and
- Create a consistent regulatory approach that applies to banks regulated by all three agencies.
The proposed rule aims to achieve these objectives by providing among other things (1) new and expanded definitions of community-developed activities, (2) a publicly available illustrative, non-exhaustive list of activities including a process for confirming activities in advance, (3) impact reviews of community development activities, (4) a process by which main offices, branches, and remote service facilities would be considered for eligible community development activity and CRA credit, and (5) a revised evaluation framework tailored for differences in bank size, business model, and products offered.
Clearly, these proposals are meant to achieve more access to banking and financial services in rural and underserved areas, strengthen CRA enforcement, and measure socioeconomic outcomes. It is no coincidence that Director Chopra of the CFPB recently spoke in Montana about banking deserts.
In March 2022, shortly after Ms. McWilliams exited the FDIC, the agency released a Request for Information (RFI) soliciting comments regarding the application of the laws, practices, rules, regulations, guidance, and statements of policy that apply to merger transactions involving one or more insured depository institutions, including the merger between an insured depository institution and a noninsured institution. The RFI sought comments specifically on the effectiveness of the existing framework in meeting the requirements of section 18(c) of the Bank Merger Act. In May 2022, Acting Director Hsu spoke to the Brookings Institute regarding the need to update the statute and advocate for “smart mergers.” Considerable attention is being paid under the Biden administration to business combinations, potentially anticompetitive and monopolistic mergers and acquisitions, and even the Federal Trade Commission as noted below has taken a closer look at these issues in other industries as well.
Clearly, there is a call for more scrutiny and oversight when it comes to assessing merger proposals. Whether that scrutiny translates into actual changes to the Bank Merger Act, or revised guidelines by banking agencies and the Department of Justice, remains to be seen but undoubtedly expected.
Climate change is a significant priority for the Biden Administration, and it is expected that banking and non-banking agencies will prioritize this as well. In late March 2022, the FDIC requested comment from large financial institutions on the FDIC’s draft principles that provide a high-level framework for the management of exposures to climate-related financial risks. The principles focus these institutions on identifying, measuring, monitoring, and controlling the financial risks associated with a changing climate that could adversely affect a financial institution’s safety and soundness, as well as the overall financial system. The principles are designed to encourage financial institutions to consider climate-related financial risks in a manner that allows them to prudently meet the financial services needs in their communities.
The OCC released similar climate-related guidance and principles several months prior to the FDIC. The FRB issued its guidance on climate change and financial stability in March 2021. The FHFA has established an internal Climate Change and ESG Steering Committee to ensure that regulated entities are accounting for the risks associated with climate change and natural disasters.
Despite their guidance, these agencies will use their supervisory authority to ensure that climate risk is appropriately assessed and remediated.
The battle for who will regulate non-banks and fintechs will continue for the remainder of this Administration. On Jan. 18, 2022, the OCC conditionally approved Social Finance, Inc.’s application to charter a full-service national bank—SoFi Bank, National Association (“SoFi Bank”) which was the first approval of a large fintech company by the OCC and the first national bank charter for a fintech company. SoFi Bank will now be under the supervisory authority of the OCC. In April 2022, the CPFB announced that it was invoking its dormant supervisory authority on any non-bank if it posed risk to consumers. The CFPB promised to rely upon complaint data to identify these risks. It is believed this announcement was specifically targeted to fintechs. They too intend to use their supervisory authority to not only ensure compliance with federal consumer financial law but also ensure that Administration’s priorities are met. As noted above, the Federal Trade Commission is also supporting the key initiatives of the Biden Administration by studying proposed mergers and acquisitions for anticompetitive risks – with a focus on, among other industries, healthcare.
The FDIC, FRB, as well as the OCC, have frequently provided guidance to financial institutions when conducting due diligence with their fintech partners. Vendor management and the assessment third-party risk have been cornerstones of regulatory supervision. However, fintechs bring novel concerns and challenges. There is a renewed expectation that this due diligence be robust and effective.
What this Means
For all financial services entities subject to the supervision of one or more of these agencies, the time for internal risk assessments is now. Ensuring that your compliance management system is not only in place but well-executed, is critical to ensuring that you do not run afoul of the well-articulated priorities of this formidable array of top financial regulators. As we head into an uncertain economy, pressure will be mounting to ensure that businesses and consumers have access to the financial services they need. Investing resources in compliance updates at this juncture will go far to prevent disruption within your organization should that “proverbial” knock at the door occur.