On April 22, the American Bankers Association (ABA) sent a letter to the OCC, the Federal Reserve, and the FDIC regarding force-place flood insurance (also known as lender-placed insurance). The ABA probed the question of whether or not the advancement of a lender-placed flood insurance premium constitutes an “increase” to the designated loan – a statutory “tripwire” under the Flood Disaster Protection Act (FDPA). According to the letter, “increasing reports” from ABA members suggest that examiners are taking the position that “advancing a flood insurance premium in order to force-place flood insurance increases a loan balance and therefore constitutes a MIRE event [(making, increasing, renewing, or extending a designated loan)].” The letter summarizes FDPA requirements, noting that, if examiners are in fact considering the advancement of a premium to force-place flood insurance as an increase to a designated loan, such an “interpretation is new to the industry and is inconsistent with industry practice and contractual obligations under standard mortgage loan agreements.” According to the ABA, this new approach would result in increased borrower confusion and expense: “[i]ndeed, if adding the flood insurance premium to the loan is considered to increase the loan amount, following that logic through, the payment of a force-placed hazard insurance premium, taxes, or even a late fee would also ‘increase’ the loan—and result in a MIRE event as it is wholly inconsistent to treat these protective advances differently. Accordingly, a delinquent borrower could experience a ‘MIRE event’ as frequently as monthly with each late payment. Clearly, this was not Congress’s intent.” The ABA urged the banking agencies to release interagency guidance to address concerns related to the advancement of flood insurance premiums as a potential MIRE event.
On April 26, the FDIC voted to approve a final rule that amends how small banks – those with less than $10 billion in total assets – are assessed for deposit insurance. The rule will (i) revise the financial ratios method, basing it on a statistical model that estimates the probability of failure over three years; (ii) update the financial measures used in the financial ratios method to ensure consistency with the statistical model; and (iii) eliminate risk categories for established small banks and use the financial ratios method to determine assessment rates for the small banks. According to FDIC Chairman Martin J. Gruenberg, the final rule will “allow future assessments to better differentiate riskier banks from safer banks . . . . [and] will better allocate the costs of maintaining a strong Deposit Insurance Fund.” The FDIC first published a proposed rule regarding the deposit insurance assessment of small banks in June 2015, and issued a revised proposal in January 2016. Intended to be revenue neutral, the final rule is effective July 1, 2016 with the following caveat: “[i]f the reserve ratio reaches 1.15 percent before that date, the assessment system described in the final rule will become operative July 1, 2016. If the reserve ratio has not reached 1.15 percent by that date, the assessment system described in the final rule will become operative the first day of the calendar quarter after the reserve ratio reaches 1.15 percent.”
On April 5, the FDIC issued a special Corporate Governance Edition of its Supervisory Insights publication titled, “21st Century Reflections on the FDIC Pocket Guide for Directors.” The new edition provides guidance to community bank boards of directors as well as an expanded, community bank-focused commentary on the FDIC Pocket Guide for Directors, which was issued in 1988. It covers a range of topics, such as the proper roles of directors and officers, as well as objectives for the development of policies and procedures for risk management and strategic planning. While the existing version of the Pocket Guide remains unchanged, this edition of Supervisory Insights incorporates more recent guidance and resources that the FDIC has provided since 1988. For example, the FDIC emphasizes that, “[i]n addition to covering areas outlined in the Pocket Guide and Safety and Soundness Standards, community bank directors should ensure that senior management has established appropriate risk management policies and procedures in Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) compliance, information technology and cyber risk, and compliance with Community Reinvestment Act and consumer protection laws and regulations.”
FinCEN, Banking Agencies Release Guidance on Applying Customer Identification Program Requirements to Holders of Prepaid Cards
On March 21, the Federal Reserve, FDIC, NCUA, OCC, and FinCEN published guidance to issuing banks (i.e., banks that authorize the use of prepaid cards) intended to clarify the application of customer identification program (CIP) requirements to prepaid cards. The guidance clarifies that when the issuance of a prepaid card creates an “account” as defined in CIP regulations, CIP requirements apply. The guidance indicates that a prepaid card should be treated as an account if it has attributes of a typical deposit product, including prepaid cards that provide the ability to reload funds or provide access to credit or overdraft features. Once an account has been opened, CIP regulations require identification of the “customer.” The guidance explains that the cardholder should be treated as the customer, even if the cardholder is not the named accountholder, but has obtained the card from a third party program manager who uses a pooled account with the bank to issue prepaid cards. Finally, the guidance stresses that third party program managers should be treated as agents, not customers, and that “[t]he issuing bank should enter into well-constructed, enforceable contracts with third-party program managers that clearly define the expectations, duties, rights, and obligations of each party in a manner consistent with [the] guidance.”
On March 15, the FDIC approved a final rule to increase the Deposit Insurance Fund (DIF) reserve ratio from 1.15 percent to the statutorily required minimum of 1.35 percent. The final rule, which is substantially similar to the proposed rule adopted in October 2015, imposes on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after certain adjustments are made. The rule becomes effective on July 1, 2016. If the reserve ratio reaches 1.15 percent before the effective date, the surcharges will begin on that date; if the reserve ratio has not reached 1.15 percent by the effective date, surcharges will begin the first quarter after the reserve ratio reaches 1.15 percent. The FDIC noted that it expects the reserve ratio to reach the 1.35 percent statutory minimum approximately two years after the surcharges begin. FDIC Chairman Martin J. Gruenberg commented, “With these surcharges, the [DIF] is expected to reach the statutory minimum level ahead of the statutory deadline of 2020, reducing the risk that the FDIC will have to raise rates unexpectedly in the event of stress in the financial sector.”