This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

FDIC issues deposit insurance application guidelines for banks that are not traditional community banks. On February 10, the FDIC released Financial Institution Letter FIL-8-2020, which provides insured depository institutions (IDIs) information regarding the publication of:

  • A supplement to the Deposit Insurance Application Procedures Manual establishing guidelines for deposit insurance applications for non-banks and non-community banks
  • An updated version of the procedures manual
  • An updated version of the handbook for organizers of de novo institutions, titled “Applying for Deposit Insurance – a Handbook for Organizers of De Novo Institutions.”

The supplement signals a willingness on the part of the FDIC to entertain deposit insurance applications for institutions that are considered banks under the Federal Deposit Insurance Act (FDIA) but are not considered banks under the Bank Holding Company Act (BHCA). According to the supplement, this includes industrial banks, industrial loan companies, trust and credit card banks and other institutions, such as municipal deposit banks. The FDIC release, along with recent actions by other agencies, such as OCC approval of a national trust bank, is a strong indication that this may be a good opportunity for applicants to consider charter options which are permitted by state and federal law but have generally been unavailable for some time given uncertainty as it relates to agency receptivity.

Agencies extend CRA comment period another 30 days. Responding to requests from Congressional Democrats, the FDIC and the OCC have agreed to extend the public comment period for their proposed changes to the regulations implementing the Community Reinvestment Act until April 8. The 30-day extension, announced jointly on February 19, is in addition to the 60-day comment period provided for under the plan announced by the two agencies in December. As reported in the January 14 edition of Bank Regulatory News and Trends, the FDIC-OCC proposal represents the first substantive regulatory update in 25 years of the CRA, a law enacted in 1977 with the intention of encouraging banks to lend more in low- and moderate-income (LMI) neighborhoods. The third agency with authority to issue CRA regulations, the Federal Reserve, has not signed onto the proposal and is looking at an alternative approach for overhauling the CRA. Democratic members of the House Financial Services Committee and the Senate Banking Committee had called for a 120-day comment period, which would have extended into May.

Proposal to amend the CRA criticized in House hearing. The FDIC-OCC proposal to update the CRA was the subject of a contentious January 29 hearing before the Financial Services Committee, with Comptroller of the Currency Joseph Otting as the sole witness. Titled “The Community Reinvestment Act: Is the OCC Undermining the Law’s Purpose and Intent?”, the hearing featured criticism of Otting for declining an invitation to attend a December Financial Services regulatory oversight hearing. Committee Chair Maxine Waters (D-CA) said she would issue a subpoena to compel Otting to release the data used to craft the proposal, which Otting has argued is confidential information not appropriate for public distribution. “Yet another misperception suggests that the proposal strays too far from the statute and loses its focus on low- and moderate-income people and neighborhoods,” Otting said in his prepared testimony. “On the contrary, the list of approved activities are more true to the statute’s original intent and refocuses on LMI individuals by closing harmful loopholes that exist today.” But Waters said the OCC’s plan would allow banks to claim CRA credit for projects that do not benefit communities. “Under Comptroller Otting, the Community Reinvestment Act would become the Community Disinvestment Act,” Waters said.

House Committee looks at “rent-a-bank” concerns. On February 5, the House Financial Services Committee held the first of two planned hearings titled “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.” The hearing, which featured testimony from state officials, consumer advocates and public policy academicians, was called to address rising concerns about payday lenders. Committee Democrats are particularly worried about situations where banks originate high-interest loans at the direction of non-bank lender partners and then sell those loans to the non-bank lenders, with rates higher than what the non-bank partner could charge directly staying in effect after the sale. As noted in a January 31 committee memorandum, “consumer advocates and experts have warned of the dangers of ‘rent-a-bank’ partnerships where the sole purpose is for non-banks to use these partnerships to export high cost loans, such as small dollar ‘payday’ loans into states with lower interest rate caps.” While several pieces of legislation have been introduced addressing the issue of rate caps, the February 5 hearing focused on a bipartisan bill (HR 5050, the Veterans and Consumers Fair Credit Act) introduced by Representatives Jesús (Chuy) Garcia (D-IL) and Glenn Grothman (R-WI) that would extend to all consumers the 36-percent annual percentage rate cap that now applies to loans to active duty military and recent veterans. The OCC and the FDIC proposed parallel rules in November to address a 2015 court ruling – Madden v. Midland Funding LLC – that had rejected the longstanding premise that interest rates agreed to by a borrower and bank at origination continue even when the loan is sold. In that decision, the Second US Circuit Court of Appeals held that a non-bank purchaser of bank-originated credit card debt was subject to New York State’s usury laws. As reported in the January 27 edition of Bank Regulatory News and Trends, attorneys general from more than 20 states, led by New York Attorney General Letitia James, voiced opposition to OCC’s proposed rule. A second HFS hearing on the issue is scheduled for Wednesday, February 26, at 10am.

Congressional task force holds hearing on AI bias. The House Financial Services Committee’s Task Force on Artificial Intelligence held a hearing on February 12 titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.” A major recurring theme of the hearing was the difficulty in finding agreement on an appropriate definition of fairness. Witnesses with expertise in AI and machine learning, as well as consumer protection and privacy, testified that, without proper constraints, algorithms used by the financial services industry could perpetuate existing historical and societal biases, such as higher rejection rates for African Americans and Latinos. The panel generally agreed that a big challenge for regulators and stakeholders will be how to strike the right balance between fairness and accuracy as they determine what boundaries to place on AI in financial services. A February 7 memorandum from the committee warns of ethical and data accuracy concerns, including compliance difficulties arising from the inherent unpredictability of complex algorithms; lack of diversity among programmers being reflected in the programs they develop; and substandard or “dirty data” sets marked by inaccurate, incomplete or non-representative information. “Applying the existing legal framework where rights and protections are clearly defined to these AI technologies could pose challenges for regulators as they attempt to gauge compliance with many of these laws that do not contemplate the use of AI,” the committee memo stated.

Fannie and Freddie announce updates on ARM products for LIBOR transition. Fannie Mae and Freddie Mac have both issued guidance documents providing updates to adjustable-rate mortgage (ARM) products incorporating the Alternative Reference Rates Committee’s (ARRC’s) recommended interest rate benchmark fallback language in anticipation of the discontinuation of the London Inter-bank Offered Rate (LIBOR) after 2021. On February 5, Fannie Mae issued Lender Letter LL-2020-01 and Freddie Mac issued Bulletin 2020-1 to single-family sellers to prepare their customers for a successful transition from LIBOR to ARRC’s recommended Secured Overnight Financing Rate (SOFR) for newly originated loans. The updates follow the November release of ARRC’s recommended fallback language for use in new, closed-end, residential ARM documentation, and Fannie’s and Freddie’s announcement of their intention to incorporate that language into their ARM documentation beginning this year. Both government-sponsored enterprises (GSEs) will stop purchasing LIBOR ARMS after October 1. For Fannie Mae (officially, the Federal National Mortgage Association), all LIBOR ARMS must be purchased as whole loans by the end of the year, or in mortgage-backed security (MBS) pools with issue dates by December 1. Freddie Mac (Federal Home Loan Mortgage Corporation) will no longer purchase LIBOR-indexed ARMS beginning next January 1.

Financial data-sharing network launched by Fidelity and other major banks. With the announced goal of giving consumers more control over who has access to their financial data, FMR LLC, the parent company of Fidelity Investments, has announced the spin-off of Akoya℠ as an independent company that will be jointly owned by Fidelity, The Clearing House Payments Co. and 11 of its member banks. According to a February 20 announcement from the Clearing House, “Akoya operates a secure application programming interface-based (API) network that creates a safer and more transparent way for consumers to grant access to their personal financial data to third-party financial apps. The network acts as a bridge between financial institutions and data recipients, such as fintechs/data aggregators, and is available to the entire financial services industry.” The launch is part of an ongoing effort to transition to a more streamlined system in which apps like Venmo would no longer need to ask customers for their bank logins to obtain information such as routing numbers from their accounts, allowing banks, apps and third-party data aggregators alike access to a secure data-sharing network. In addition to FMR and the Clearing House, additional new owners of Akoya are Bank of America, Capital One, Citi, Huntington National Bank, JPMorgan Chase, KeyBank, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo.