On February 3, the FDIC issued FIL-10-2016 announcing the release of updated videos on interest rate risk. The new videos are intended to provide directors, management, and staff of financial institutions with a better understanding of interest rate risk and how to manage it. The FDIC previously released an interest rate video made specifically for directors, and a series of more technical videos tailored to management and staff responsible for interest rate risk management. The FDIC’s updated videos (i) reflect recent industry data and expand on relevant topics; (ii) emphasize the FDIC’s expectation that institutions prudently manage interest rate risk; and (iii) address industry trends, board and management responsibilities, types of interest rate risk, various risk measurement systems, key modeling assumptions, internal controls, and independent review. Finally, according to the FDIC, “[f]inancial institution balance sheets continue to reflect a heightened mismatch between asset and funding maturities that, coupled with tighter net interest margins, have left financial institutions more vulnerable to rising interest rates.”
CFPB Releases Compliance Bulletin, Letter to Financial Institutions, and Consumer Resources in an Effort to Address Access to Checking Accounts Concerns
On February 3, the CFPB held a field hearing to address concerns relating to consumers’ access to checking accounts. In Director Cordray’s opening remarks at the field hearing, he announced steps the CFPB is taking to alleviate concern that (i) consumers lack options that fit their financial need and situation; and (ii) inaccurate information is used to screen potential customers. To address the first issue, the CFPB sent a letter to the 25 largest retail banks urging them to make lower-risk account offerings that promise no authorized overdrafts available to consumers. The CFPB’s letter, which the agency describes as “simply a suggestion,” further recommends that banks already offering lower-risk products more prominently “feature them among their standard account offerings both in their branches and online.” Regarding the second concern, the CFPB issued Compliance Bulletin 2016-01, warning banks and credit unions (collectively, furnishers) of their obligation under Regulation V “to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information relating to consumers that they furnish to consumer reporting agencies (CRAs).” The bulletin notes that a furnisher’s failure to comply with such obligations under Regulation V could “potentially cause adverse consequences for consumers when included in a credit report, such as being denied a loan at a more favorable interest rate or being unable to open a transaction account.” Read more…
On February 1, the FDIC published its Winter 2015 issue of Supervisory Insights to promote sound principles and practices for bank supervision. The most recent issue of Supervisory Insights focuses on the following four areas: (i) cybersecurity, highlighting the importance of maintaining a cybersecurity awareness training program and ensuring that a bank’s “executive management and Board of Directors (board) play a key role in overseeing programs to protect data and technology assets and establishing a corporate culture consistent with the bank’s risk tolerance”; (ii) marketplace lending, emphasizing associated risks, such as third-party arrangements, and the significance of examining the overall marketplace lending model to ensure that it is aligned with the bank’s business strategy; (iii) an assessment of the lending landscape for banks, describing current lending conditions and the risks reported in the FDIC’s Credit and Consumer Products/Services Survey; and (iv) an overview of recently released regulations and supervisory guidance, including the revised interagency examination procedures for the new TRID rule.
The FDIC’s marketplace lending guidance comes after the California Department of Business Oversight’s December inquiry into the industry, requesting that 14 firms provide information on their business models and online platforms.
On February 2, the FDIC announced a settlement for more than $62 million with a New York-based financial institution to resolve “federal and state securities law claims based on misrepresentations in the offering documents for 14 RMBS [residential mortgage-backed securities] purchased by three failed banks.” The FDIC, as the receiver of the three failed banks, filed four lawsuits from February 2012 to January 2014 against the financial institution and other defendants for their alleged involvement in the sale of the RMBS to the three failed banks. These lawsuits are four of the 19 RMBS-related lawsuits that the FDIC has filed, as of December 31, 2015, on behalf of eight failed institutions.
On February 2, the European Commission issued a fact sheet regarding its plan to strengthen the fight against terrorist financing, posing and answering questions on topic areas including, but not limited to: (i) the measures the EU has already taken to combat the financing of terrorism; (ii) how the EU addresses terrorist financing risks linked to high-risk third countries; (iii) the possibility of defining a legal framework for freezing the assets of terrorists posing a threat to EU internal security; (iv) the risks associated with prepaid cards as used by terrorists; and (v) how the EU tackles the movement of large volumes of cash across borders. The fact sheet frequently refers to the Fourth Anti-Money Laundering package, which was adopted in May 2015 and, among other things, seeks to protect credit and financial institutions against the risks associated with money laundering and terrorist financing.
On January 26, OFAC announced amendments to the Cuban Assets Control Regulations (CACR) to further implement policy changes announced by the Obama Administration on December 17, 2014. The regulatory changes will, among other things, “remove existing restrictions on payment and financing terms for authorized exports and reexports to Cuba of items other than agricultural items and commodities, and establish a case-by-case licensing policy for exports and reexports of items to meet the needs of the Cuban people, including those made to Cuban state-owned enterprises.” Significantly, under the amendments, U.S. depository institutions will be authorized to provide financing for authorized exports and reexports, including issuing a letter of credit. Prior to the amendments, cash-in-advance or third-country financing were the only financing options available for authorized exports.
The FDIC published its most recent Quarterly Banking Profile, summarizing the latest financial results for the banking industry. According to the FDIC’s findings, community banks reported net income of $5.2 billion in the third quarter of 2015, up 7.5% from the previous year. The Profile’s featured article – Financial Performance and Management Structure of Small, Closely Held Banks – indicates that closely held banks are outperforming widely held banks in operational efficiency and financial performance. The FDIC’s research suggests that management structures in which a bank’s managers are members of the ownership group or ownership insiders prove beneficial in that principal-agent problems are minimized because the “manager can be expected to act in the interests of the owners because the manager is an owner.” Although the Profile comments on the disadvantages of the organizational form of closely held banks, including succession issues and difficulty in raising capital, the researchers conclude that the “favorable comparisons between closely held and widely held community banks suggest that the closely held organizational form is by no means an impediment to performance, and may well be one of the keys to the success of closely held banks.”
On January 25, Massachusetts AG Maura Healey announced that she was expanding her Abandoned Housing Initiative (AHI) in response to an increasing number of cities and towns seeking assistance to revitalize their neighborhoods. Under the AHI, the AG’s office seeks to have delinquent owners bring their distressed and abandoned residential properties into code compliance. If the owner refuses, a court-approved receiver completes repairs on the property and receives compensation, utilizing funds from the nationwide state-federal settlement over unlawful foreclosures, once the property is sold. According to Helen Zucco, Executive Director at Chelsea Restoration Corporation, the program “gives banks an incentive to approve construction loans, allows funds to be loaned to receivers at very low interest, and creates a streamlined process for receivers to obtain the funds they need to achieve their important role in [the] process.”
On January 21, New York Governor Andrew Cuomo nominated Maria Vullo to serve as the NYDFS’s superintendent. If approved by the New York State Senate, Vullo would replace former superintendent Benjamin Lawsky, who left the Department in June 2015. Governor Cuomo noted that Vullo is a “tough and fair litigator” who “has shown an immovable commitment to upholding the law and protecting consumers.” Vullo has worked in the private and public sectors, and has over 25 years of practice in business litigation and investigations. In 2010, Vullo also served under then AG Cuomo as Executive Deputy Attorney General for Economic Justice, handling various consumer protection, investor protection, and antitrust matters.
FDIC Seeks Comments on Revised Proposed Rule That Would Amend How Small Banks are Assessed for Deposit Insurance
On January 21, the FDIC issued a Notice of Proposed Rulemaking that would amend how FDIC-insured banks with less than $10 billion in assets are assessed for deposit insurance. Specifically, the proposed rule would “update the data and revise the methodology that the FDIC uses to determine risk-based assessments for these institutions to better reflect risks and to help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts.” The proposal, which is intended to be revenue neutral, revises an initial June 2015 proposal to, among other things, (i) use a brokered deposit ratio, as opposed to a core deposit ratio, to calculate assessment rates; (ii) remove the existing brokered deposit adjustment for established small banks; and (iii) revise the one-year asset growth measure. The comment period will be open for 30 days upon publication in the Federal Register.
On January 15, the CFPB announced that it is accepting applications for membership on its Consumer Advisory Board (Board) and two other advisory groups, the Community Bank Advisory Council, and the Credit Union Advisory Council (collectively, Advisory Councils). The Board and Advisory Councils are intended to give small financial institutions the opportunity to provide the CFPB with information regarding emerging trends and practices in the consumer financial products and services industries. In the fall of 2016, seven seats on the Board will become vacant, and eight seats on each of the Advisory Councils will become vacant. Applications are due February 29, 2016, according to the CFPB’s publication in the Federal Register.
On January 19, the FDIC issued FIL-6-2016 announcing that, between February 23, 2016 and December 5, 2016, it will conduct six identical live seminars regarding FDIC deposit insurance coverage for bank employees and bank officers. In addition to the live seminars, the FDIC posted to its YouTube channel three separate seminars, entitled (i) Fundamentals of Deposit Insurance Coverage; (ii) Deposit Insurance Coverage for Revocable Trust Accounts; and (iii) Advanced Topics in Deposit Insurance Coverage. Both the live seminars and the seminars readily available on the YouTube channel will provide bank employees and officers with an understanding of how to calculate deposit insurance coverage.
On January 16, the Department of the Treasury issued a statement regarding Implementation Day under the Joint Comprehensive Plan of Action (JCPOA), the plan reached between the P5+1 (the United States, China, France, Russia, the United Kingdom, and Germany), the European Union, and Iran concerning Iran’s nuclear program. In response to Iran taking the appropriate nuclear-related measures, the United States followed through on lifting nuclear-related “secondary sanctions” on Iran, which included certain financial and banking-related sanctions. To summarize the effect of Implementation Day, OFAC issued guidance and FAQs. As outlined in the FAQs and in addition to lifting the nuclear-related “secondary sanctions,” the United States removed more than 400 individuals and entities from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List). Still, as Treasury Secretary Lew noted, “other than certain limited exceptions provided for in the JCPOA, the U.S. embargo broadly remains in place, meaning that U.S. persons, including U.S. banks, will still be prohibited from virtually all dealings with Iranian entities.”
On January 19, FinCEN issued an advisory, FIN-2016-A001, to provide financial institutions with guidance on reviewing their obligations and risk-based approaches with respect to certain jurisdictions. According to the advisory, on October 23, the Financial Action Task Force (FATF) updated two documents identifying the following: (i) jurisdictions that are either subject to the FATF’s call to apply countermeasures, or to Enhanced Due Diligence (EDD) due to their AML/CFT deficiencies; and (ii) jurisdictions with AML/CFT deficiencies. FinCEN’s recently issued advisory summarizes the changes made to the respective lists and reiterates that a financial institution must file a Suspicious Activity Report if it “knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation.”
On January 12, the FHFA issued a final rule amending membership eligibility in the Federal Home Loan Bank (FHLBank) system. The final rule, which follows the FHFA’s September 2014 proposal to revise the requirements for financial institutions applying for and retaining membership in the FHLBank system, removes two provisions from the proposal “that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.” In addition, the final rule defines “insurance company” to exclude captive insurers, rendering such entities ineligible for FHLBank membership. According to the FHFA, a captive insurer’s primary business is to underwrite insurance for its “parent company or for other affiliates, rather than for the public at large.” According to the FHFA, “REITs and other entities have been forming captives solely for the purpose of providing ineligible institutions access to Bank advances,” and the FHFA’s final rule is “intended to prevent further use of captives to circumvent the membership eligibility of the Bank Act.” The final rule allows current captive insurer members who joined prior to the 2014 proposal up to five years to terminate their membership, and captive insurers who joined after the issuance of the 2014 proposal have one year to terminate. The final rule becomes effective 30 days from publication in the Federal Register.