On June 15, FinCEN announced a $4.5 million civil money penalty against a West Virginia-based bank for alleged violations of the BSA from 2008 through 2013. According to the Assessment of Civil Money Penalty, the bank failed to monitor, detect, and report suspicious activity as a result of an inadequate AML and customer due diligence program, ultimately allowing over $9.2 million in structured and otherwise suspicious cash transactions to pass though the financial institution unreported. FinCEN found that the bank failed to establish and maintain an AML program that provided, at a minimum: (i) a system of internal controls to ensure ongoing compliance; (ii) a designated individual or individuals responsible for coordinating and monitoring day-to-day compliance; (iii) independent testing for compliance to be conducted by either an outside party or bank personnel; and (iv) training for appropriate personnel. FinCEN’s enforcement action and $4.5 million civil money penalty against the bank is concurrent with a $3.5 million penalty imposed by the FDIC, of which $2.2 million is concurrent with a forfeiture pursuant to a deferred prosecution agreement with the U.S. Attorney’s Office for the Southern District of West Virginia.
On June 22, the federal banking agencies issued a joint final rule that modifies the mandatory purchase of flood insurance regulations to implement some provisions of the Biggert-Waters and Homeowner Flood Insurance Affordability Acts. Notable highlights include that the final rule, among other things: (i) expands escrow requirements for lenders who do not qualify for a small lender exception, (ii) clarifies the detached structure exemption, (iii) introduces new and revised sample notice forms and clauses relating to the escrow requirement and the availability of private flood insurance, and (iv) clarifies the circumstances under which lenders and servicers may charge borrowers for lender-placed flood insurance coverage. The escrow provisions and sample notice forms will become effective on January 1, 2016, and all other provisions will become effective October 1, 2015. The agencies reminded that the escrow provisions in effect on July 5, 2012, the day before Biggert-Waters was enacted, will remain in effect and be enforced through December 31, 2015.
The agencies also indicated that they plan to address Biggert-Waters’ private flood insurance provisions through a separate rulemaking.
On June 9, six federal agencies – the Federal Reserve, CFPB, FDIC, NCUA, OCC, and the SEC – issued a final interagency policy statement creating guidelines for assessing the diversity policies and practices of the entities they regulate. Mandated by Section 342 of the Dodd-Frank Act, the final policy statement requires the establishment of an Office of Minority and Women Inclusion at each of the agencies and includes standards for the agencies to assess an entity’s organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of diversity and inclusion within the organization. The final interagency guidance incorporates over 200 comments received from financial institutions, industry trade groups, consumer advocates, and community leaders on the proposed standards issued in October 2013. The final policy statement will be effective upon publication in the Federal Register. The six agencies also are requesting public comment, due within 60 days following publication in the Federal Register, on the information collection aspects of the interagency guidance.
On May 12, FDIC Chairman Martin Gruenberg delivered remarks at the American Association of Bank Directors (AABD)-SNL Knowledge Center Bank Director Summit. In his prepared remarks, Gruenberg discussed, among other things, (i) the role of bank directors with respect to the safety and soundness of the U.S. banking system, particularly the importance of an effective corporate governance framework within community banks, and (ii) current challenges facing the boards of community banks, citing strategic and cyber risk as the most pressing. Of significant importance, Gruenberg provided information concerning community bank directors’ professional liability in regard to the banking regulator’s supervisory expectations, reminding that as receiver for a failed bank, the FDIC has the authority to bring legal action against professionals, including bank directors, for their role in a bank’s failure. BuckleySandler’s David Baris serves as President of AABD.
On May 21, the FDIC’s Division of Depositor and Consumer Protection is scheduled to host a teleconference that will focus on the implementation of the new mortgage rules issued by the CFPB in 2013. According to the FDIC, officials from the banking regulator will discuss findings and highlight best practices that its examiners have noted during initial examinations in the first year since the rules became effective in 2014. Registration is required, and will begin at 2:00 p.m. EST.
FDIC OIG Publishes Results of Audit of Personally Identifiable Information in Owned Real Estate Properties
On April 28, the FDIC’s Office of the Inspector General published a report – The FDIC’s Controls for Identifying, Securing, and Disposing of Personally Identifiable Information in Owned Real Estate Properties – regarding its audit of the agency’s internal controls of personally identifiable information (PII) in owned real estate (ORE) properties, which it acquires from failed FDIC-insured financial institutions. The audit was conducted to determine whether or not the FDIC’s internal controls sufficiently identified, secured, and disposed of ORE properties’ PII. According to the report, the OIG determined that the agency’s Division of Resolutions and Receivership (DRR), which is responsible for the liquidation of assets, often did not identify PII in a timely manner, and its “practices for handling and disposing of the information were inconsistent in certain key respects.” As a result of the audit, the OIG recommends that the DRR incorporate the following enhancements to its current review process of PII at ORE properties: (i) Obtain from the agency’s legal division an opinion that outlines and clarifies the requirements for handling PII at ORE properties; (ii) Review existing policies, procedures, guidance, and training and make adjustments where necessary; and (iii) Establish “the appropriate disposition of the PII that was identified at three of the ORE properties reviewed during the audit and that is currently in off-site storage.”
On April 21, the United States Court of Appeals for the Tenth Circuit upheld the dismissal of a bank shareholders’ suit against a bank holding company – and its officers and directors – for breach of fiduciary duty. Barnes v. Harris, No. 14-4002 WL 1786861 (10th Cir. Apr. 24, 2015) The shareholders had filed a derivative suit in 2012 against the officers and directors of the bank holding company after the bank failed in 2010 and was placed into FDIC receivership. The FDIC filed a motion to intervene in the suit, which was granted. Upon a bank’s failure, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) states the FDIC owns “all rights, titles, powers, and privileges of the [bank], and any stockholder … of such [bank] with respect to the [bank] and the assets of the [bank].” The applicability of FIRREA to a derivative suit against a failed bank’s holding company in this court was a question of first impression and the Tenth Circuit agreed with the Fourth, Seventh, and Eleventh Circuits who have all concluded FIRREA gives the FDIC sole ownership of shareholder derivative claims and state law must be used to determine if the claims are derivative. In this case, though the shareholders were alleging harm to the holding company, all of that harm was due to the failure of the bank, which was the holding company’s only asset. The claims were found to be derivative, with the exception of a poorly pleaded fraud complaint that belonged solely to the holding company, and the district court’s dismissal of all claims was affirmed.
On April 6, the Federal Reserve, OCC, and FDIC (Agencies) revealed that their ongoing regulatory review under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) will now be expanded to include recently issued regulations. The EGRPRA requires the Agencies and the FFIEC to review and identify outdated, burdensome, or unnecessary regulations at least every 10 years. The regulators have held two public outreach meetings with additional outreach sessions currently scheduled for May 4 in Boston, August 4 in Kansas City, October 19 in Chicago, and concluding on December 2 in Washington, D.C.
On April 6, three prudential banking regulators – the Federal Reserve, OCC, and FDIC – issued interagency guidance to clarify and answer questions from regulated financial institutions with respect to the regulatory capital rule adopted in 2013. The FAQs address various topics, including (i) the definition of capital; (ii) high-volatility commercial real estate exposures; (iii) other real estate and off-balance sheet exposures; (iv) separate account and equity exposures to investment funds; (v) credit valuation adjustment; and (vi) the definition of a qualifying central counterparty.
On March 2, FDIC Vice Chairman Thomas Hoenig addressed the Institute of International Banking Annual Conference in Washington, D.C. In his prepared remarks, Vice Chairman Hoenig, who formerly served as President of the Federal Reserve Bank of Kansas City, highlighted four supervisory principles that he believes are necessary to ensure effective supervision. These principles include (i) requiring full-scope examinations for all financial institutions, even large financial institutions, (ii) promoting greater transparency regarding the financial condition of large financial institutions, (iii) fully implementing the Volcker Rule, and (iv) increasing capital requirements to levels that the market purportedly would demand in the absence of a public safety net.
On February 24, the FDIC announced fourth quarter earnings for all federally insured institutions, with substantial increases in community bank earnings. Community bank earnings for the fourth quarter rose $1.0 billion to $4.8 billion (an increase of approximately 28% from the previous year). Comparatively, FDIC-insured banks and savings institutions as a whole earned $36.9 billion in the fourth quarter, which is a decrease of 7.3% from the industry’s earnings a year before. The surge in earnings was attributed to higher net interest income, increased noninterest income, and higher loan growth.
On February 19, the FDIC released a study showing that brick-and-mortar banking offices continue to be the principal means through which banks deliver services to customers, despite increased growth in the use of online and mobile banking. The study found that four main factors have contributed to the changes in the number and distribution of banking offices since 1935: (i) population growth and geographic shifts in population; (ii) banking crises; (iii) legislative changes to branching laws; and (iv) technological innovation and increased use of electronic banking. Notwithstanding the increase of online and mobile banking, the study found that visiting brick-and-mortar banking offices continues to be the most common way for customers to access their accounts and obtain financial services.
On February 18, three federal banking agencies – the Federal Reserve Board, OCC, and FDIC – issued a joint notice seeking public comments on a proposed information collection form and its reporting requirements, FFIEC 102 – “Market Risk Regulatory Report for Institutions Subject to the Market Risk Capital Rule.” If finalized, market risk institutions will be required to file the proposed FFIEC 102 to allow the agencies to, among other things, assess “the reasonableness and accuracy of the institution’s calculation of its minimum capital requirements . . . and . . . the institution’s capital in relation to its risks.” The proposed FFIEC 102 sets forth reporting instructions for financial institutions to which the market risk capital rule applies, and specifies that reporting requirements would take effect starting March 31, 2015. Comments to the proposal must be submitted on or before March 20.
On February 13, the FDIC released the third and final technical assistance video intended to assist bank employees to comply with certain mortgage rules issued by the CFPB. The final video addresses the Mortgage Servicing Rules and the “Small Servicer” exemption. The first video, released on November 19, 2014, covered the ATR/QM Rule, and the second video, released on January 27, covered the Loan Originator Compensation Rule.
On February 10, officials from federal and state banking authorities – the Fed, FDIC, NCUA, OCC, and the CSBS – testified at a U.S. Senate Banking Committee on ways the agencies can provide “regulatory relief” to community banks and credit unions, which disproportionately incur burdens to implement the rules and provisions of the Dodd-Frank Act. Specifically, officials from each of the federal banking agencies detailed current initiatives and proposals that would provide less burdensome compliance costs.