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

In this edition:

  • FDIC finds bank profits down 70 percent in second quarter; liquidity and capital levels stay strong
  • Fed unveils real-time payment system
  • Banking agencies issue joint statements on BSA/AML enforcement
  • FinCEN issues separate statement on BSA enforcement
  • OCC says national banks can provide cryptocurrency custody services
  • OCC proposes “true lender” rule
  • CFPB proposes new “Seasoned QM” category to help promote access to affordable mortgage credit
  • Fed announces capital requirements for large banks
  • Banking agencies issue three final rules
  • FHFA extends steps to provide mortgage and housing assistance during national emergency
  • Congressional panel finds fraud and abuse in PPP but divides along party lines
  • Fed expands Main Street Lending Program to nonprofits…
  • …But Main Street program remains little used by small and medium-sized businesses
  • Fed nominee clears Banking Committee
  • New York lawmakers approve small business financing disclosure bill
  • Mexican banking authorities issue new fintech regulations

FDIC finds bank profits down 70 percent in second quarter; liquidity and capital levels stay strong. The FDIC said that its insured institutions reported lower profitability in the second quarter of 2020, with commercial banks and savings institutions experiencing a decrease in net income of 70 percent from a year ago. But liquidity and capital levels remained strong and are expected to be sufficient to meet loan demand and absorb any losses in the future, according to FDIC’s August 25 announcement. For the 5,066 institutions insured by the FDIC, aggregate net income totaled $18.8 billion in second-quarter 2020, down $43.7 billion (70 percent) from a year ago. The decline in net income is a continuation of uncertain economic conditions, which drove an increase in provision expenses. FDIC also reported that net interest margin compressed at a record rate of 58 basis points from a year ago to 2.81 percent, the lowest level ever reported in its quarterly profile. Of the banks included in the data, 47.5 percent saw lower net income, while 5.4 percent were unprofitable. But community banks saw a 3.2 percent increase in net income year-over-year and increased their lending by 13.5 percent, driven in large part by the government-backed Paycheck Protection Program (PPP). Financial results for second quarter 2020 are included in the FDIC’s latest Quarterly Banking Profile.

Fed unveils real-time payment system. The Federal Reserve on August 6 announced the details of the FedNow℠ Service, a new-round-the clock interbank settlement service with clearing functionality to support instant payments in the US. The Fed said its goal is to develop a widely accessible, “24x7x365” instant payments infrastructure that would “modernize the US payment system and bring the benefits of instant payments broadly to communities across the country.” In its August 11 Federal Register notice, the Fed said it will take a phased approach to implementation. The first release of the FedNow Service will provide core clearing and settlement features that will support market needs and help banks manage the transition to a 24x7x365 service. Additional features and service enhancements will be introduced over time, with the input of stakeholders. The target launch date for the service is 2023 or 2024, with a more specific timeframe to be announced after additional work is completed. FedNow would exist alongside the system launched by the Clearing House Payments Co., a private-sector payment system infrastructure that operates the Small Value Payments Company (SVPCO), an electronic check clearing and settlement system, and the Clearing House Interbank Payments System (CHIPS), an automated funds transfer system for domestic and international high-value payment transactions in US dollars. “The rapid expenditure of . . . emergency relief payments highlighted the critical importance of having a resilient instant payments infrastructure with nationwide reach, especially for households and small businesses with cash flow constraints,” said Federal Reserve Board Governor Lael Brainard. The Fed had announced its intention to create the instant payments service almost a year earlier to the day of the latest announcement and has since been receiving public comments on how the platform should function.

Banking agencies issue joint statements on BSA/AML enforcement. Four federal banking regulatory agencies have updated their guidance on how they evaluate enforcement actions regarding Bank Secrecy Act/anti-money laundering (BSA/AML) obligations. The August 13 joint statement was issued by the Federal Reserve Board, FDIC, National Credit Union Administration (NCUA) and Office of the Comptroller of the Currency (OCC). The statement – which does not create new expectations or standards – clarifies policy for when an agency will issue a mandatory cease-and-desist order to address noncompliance with certain BSA/AML requirements. It also addresses how the agencies evaluate violations of the individual “pillars” of the BSA/AML compliance program and describes how customer due diligence (CDD) regulations and recordkeeping requirements issued by the Treasury Department as part of the internal controls pillar of the financial institution’s compliance program are incorporated by the agencies. The interagency statement also describes the circumstances in which regulators may use their discretion to issue formal or informal enforcement actions or use other supervisory actions to address BSA-related violations, or unsafe or unsound banking practices, or other deficiencies. It does not address the assessment of civil money penalties for BSA violations, for which the agencies have authority under their general enforcement statute, as does the Financial Crimes Enforcement Network (FinCEN), which has independent authority to assess civil money penalties under BSA [see following item]. Isolated or technical violations or deficiencies are generally not considered the kinds of problems that would result in an enforcement action, the statement explains. The new statement supersedes the agencies’ 2007 BSA/AML guidance. DLA Piper’s full alert is available here.

  • On August 21, the Fed, FDIC, FinCEN, NCUA and OCC issued a joint statement clarifying that BSA due diligence requirements for customers who may be considered “politically exposed persons” (PEPs) should be commensurate with the risks posed by the PEP relationship. The term PEP is commonly used to refer to foreign individuals entrusted with a prominent public function, as well as their immediate family members and close associates. The agencies noted the money-laundering threat posed by corruption of foreign officials continues to be a US national security priority. Their statement clarifies that, while banks must adopt appropriate risk-based procedures for conducting customer due diligence, the CDD rule does not create a regulatory requirement, and there is no supervisory expectation for banks to have unique, additional due diligence steps for customers who are considered PEPs.

FinCEN issues separate statement on BSA enforcement. The Financial Crimes Enforcement Network (FinCEN) on August 18 issued its own Statement on Enforcement of the Bank Secrecy Act, laying out its approach to enforcing BSA rules and regulations. FinCEN, a key BSA regulator and administrator, provided a list of factors it considers when assessing the severity of a violation, including, but not limited to, the following:

  1. Nature and seriousness of the violations, including the extent of possible harm to the public and the amounts involved.
  2. Impact or harm of the violations on FinCEN’s mission to safeguard the financial system from illicit use, combat money laundering and promote national security.
  3. Pervasiveness of wrongdoing within an entity, including management’s complicity in, condoning or enabling of, or knowledge of the conduct underlying the violations.
  4. History of similar violations, or misconduct in general, including prior criminal, civil and regulatory enforcement actions.
  5. Financial gain or other benefit resulting from, or attributable to, the violations.
  6. Presence or absence of prompt, effective action to terminate the violations upon discovery, including self-initiated remedial measures.
  7. Timely and voluntary disclosure of the violations to FinCEN.
  8. Quality and extent of cooperation with FinCEN and other relevant agencies, including as to potential wrongdoing by its directors, officers, employees, agents and counterparties.
  9. Systemic nature of violations. Considerations include, but are not limited to, the number and extent of violations, failure rates (eg, the number of violations out of total number of transactions) and duration of violations.
  10. Whether another agency took enforcement action for related activity. FinCEN will consider the amount of any fine, penalty, forfeiture and/or remedial action ordered.

FinCEN also spelled out its various enforcement options, including no action, a warning letter, equitable remedies, settlements, civil money penalties and, if circumstances warrant, criminal referral.

OCC says national banks can provide cryptocurrency custody services. The Office of the Comptroller of the Currency on July 22 published an interpretive letter clarifying that national banks are allowed to hold crypto assets on behalf of their clients. The letter, which was written in response to questions posed by one or more banks, is one in a series of actions taken by Acting Comptroller Brian Brooks to clarify how traditional banking regulations apply to modern fintech (financial technology) activities. It is expected to provide more legal certainty for banks interested in providing custody services for customers who own cryptocurrencies, even as federally insured institutions are restricted from holding digital assets themselves. The OCC concludes that providing cryptocurrency custody services, including holding unique cryptographic keys, is a modern form of traditional bank activities related to custody services. “This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency,” Brooks said. OCC’s opinion applies to national banks and federal savings associations of all sizes. Several states have already authorized state banks or trust companies to provide similar functions, and Brooks said OCC’s determination is consistent with those authorizations.

DLA Piper’s full alert is available here.

OCC proposes “true lender” rule. The OCC on July 20 proposed a regulation to determine when a national bank or federal savings association makes a loan and is the “true lender” in the context of a partnership between a bank and a third party, such as a marketplace lender. Under OCC’s notice of proposed rulemaking, a bank makes a loan if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan. In May, OCC adopted a final rule that clarified that the interest rate on a loan made by a bank will still be valid after it is sold to a nonbank, even if the rate exceeds the usury cap in another state. FDIC has proposed, but not finalized, a similar rule. [See the June 5 edition of Bank Regulatory News and Trends.]

But the agencies have not specified when a bank should be considered the true lender. Consumer advocacy groups and some state banking regulators are concerned about the potential for predatory lenders to use banks merely as a vehicle to skirt state laws that cap interest rates. Many banks and fintech marketplace lenders, on the other hand, see in the proposed rule an opportunity to bring clarity and a uniform regulatory standard in place of the differing approaches that state courts have applied. Nat Hoopes, executive director of the Marketplace Lending Association, was quoted in a July media report praising the OCC action, saying, “The OCC proposal, implemented responsibly, can help bring clarity for national banks and their fintech partners, and ensure that consumers can retain access to low-rate financial products.” Rep. Patrick McHenry (R-NC), the top Republican on the House Financial Services Committee, said the “move by the OCC is another important step toward providing clarity to banks and non-banks on the ‘true lender’ doctrine.” All of the Financial Services Committee Republicans signed a July 17 letter to the OCC and the FDIC in support of a rulemaking on the true lender doctrine to provide greater clarity for consumers and businesses. But the Center for Responsible Lending, in a July 20 statement, said the OCC proposal “would facilitate fraudulent ‘rent-a-bank’ schemes where a non-bank lender forms a superficial partnership with a bank in order to charge interest rates beyond what state law allows non-banks to charge.”

CFPB proposes new “Seasoned QM” category to help promote access to affordable mortgage credit. The Consumer Financial Protection Bureau (CFPB) has proposed creating a new category under its Qualified Mortgage (QM) rule for “seasoned” loans – those at least a year old and in which the borrower has a good payment history and are thus considered unlikely to default. CFPB’s notice of proposed rulemaking, released August 18, would create a new category, Seasoned QMs, for first-lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period, are held in portfolio until the end of the seasoning period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. This latest announcement follows two earlier CFPB rulemaking proposals regarding QMs, announced in June of this year.

Under the Dodd-Frank amendments to the Truth in Lending Act (Regulation Z), creditors are required to make a reasonable, good-faith determination of a consumer’s ability to repay any residential mortgage loan, and loans that meet the regulation’s requirements for QMs obtain certain protections from liability. Regulation Z contains several categories of QMs, including the General QM category and a temporary category (Temporary GSE QM loans) of loans that are eligible for purchase or guarantee by government-sponsored enterprises (GSEs) while they are operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA).

Fed announces capital requirements for large banks. The Federal Reserve on August 10 announced individual capital requirements for 34 of the largest banks operating in the US, determined in part by stress tests conducted earlier this year. The new requirements for banks with more than $100 billion in total assets will be effective October 1. The Fed’s announcement includes a chart providing information on the total common equity tier 1 (CET1) capital requirements for each large bank. Minimum capital requirements of 4.5 percent are the same for each firm. The chart also shows stress capital buffer (SCB), which is determined from the stress test results, and is at least 2.5 percent. If applicable, a capital surcharge for global systemically important banks (GSIBs) of at least 1 percent is also listed.

Banking agencies issue three final rules. The Fed, FDIC and OCC jointly announced on August 26 the impending publication in the Federal Register of three finalized rules that are identical or substantially similar to the interim final rules issued earlier this year and currently in force. They include:

  • A final rule that temporarily modifies the community bank leverage ratio, as required by the CARES Act. It adopts without change two interim final rules issued in April. The final rule temporarily lowers the community bank leverage ratio threshold and provides a gradual transition back to the prior level. The threshold would be 8 percent for the remainder of this year, 8.5 percent for 2021 and 9 percent beginning January 1, 2022. This final rule is effective as of October 1.
  • A final rule that makes more gradual the automatic restrictions on distributions, such as share repurchases, dividend payments and bonus payments, if a banking organization's capital levels decline below certain levels. This final rule also adopts without change two interim final rules issued in March and is effective as of January 1, 2021.
  • A final rule that allows institutions that adopt the current expected credit losses (CECL) accounting standard in 2020 to mitigate the estimated effects of CECL on regulatory capital for two years. This is substantially similar to the interim final rule issued in March. It gives eligible institutions the option to mitigate the estimated capital effects of CECL for two years, followed by a three-year transition period. In a change from the interim rule, the final rule expands the pool of eligible institutions to include any institution adopting CECL in 2020. The CECL final rule is effective immediately upon publication in the Federal Register.

FHFA extends steps to provide mortgage and housing assistance during national emergency. The Federal Housing Finance Agency (FHFA) in late August announced the extension of two policies adopted to assist borrowers and renters as the pandemic continues, as well as a delay in the implementation of a controversial fee proposal, and an opportunity for the public to learn more about a proposed capital rule.

  • The Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, better known as Freddie Mac, will extend the moratoriums on single-family foreclosures and real estate owned (REO) evictions until at least December 31. In its August 27 announcement, FHFA said the foreclosure moratorium applies only to its government-sponsored-enterprise (GSE)-backed single-family mortgages. The moratorium applies to properties that have been acquired by a GSE through foreclosure or deed-in-lieu of foreclosure transactions. The current moratoriums were set to expire on August 31.
  • Fannie and Freddie will extend buying qualified loans in forbearance and several loan origination flexibilities until September 30, 2020, the agency announced on August 26. Those emergency policies were also set to expire on August 31. Extended flexibilities include:
    • Buying qualified loans in forbearance
    • Alternative appraisals on purchase and rate term refinance loans
    • Alternative methods for documenting income and verifying employment before loan closing and
    • Expanding the use of power of attorney to assist with loan closings.
  • FHFA announced on August 25 that it is directing Fannie and Freddie to delay implementation of their Adverse Market Refinance Fee until December 1. The fee – which was met with opposition both from industry and consumer advocates, as well as lawmakers on Capitol Hill and the White House – was previously scheduled to take effect September 1. Refinance loans with balances below $125,000, nearly half of which are held by lower income borrowers, will be exempt. FHFA said the fee is necessary to cover anticipated losses of at least $6 billion.
  • FHFA will hold public listening sessions on its re-proposed capital rule for Fannie and Freddie. According to FHFA’s August 28 announcement, the first session, focusing on credit risk transfers, will be held on September 10 at 10am EDT, while the second session, which addresses affordable housing access, is scheduled for September 14 at 10am EDT. The sessions do not substitute formal comment letters, the agency stated. FHFA's re-proposed capital rule for the GSEs was published in the June 30 Federal Register and is largely based on a 2018 proposal.
    • Interested parties may request a speaking slot at one of the upcoming listening sessions here. A transcription will be posted in the public docket.
  • The FHFA moves come as the Trump Administration has recently taken a series of other steps regarding foreclosures and evictions, including:
    • An order issued by the Centers for Disease Control and Prevention (CDC) that would make it illegal to evict any individual who expects to make less than $99,000 or a joint-filing couple that expects to make less than $198,000 in 2020, that was scheduled to be published in the September 4 Federal Register, and
    • An extension by the Department of Housing and Urban Development (HUD) of a ban on evictions and foreclosures for homes backed by Federal Housing Administration (FHA) through the end of the year. The Office of Management and Budget’s Office of Information and Regulatory Affairs concluded its review of the action on August 14.
  • President Trump signed an executive order on August 8 directing federal agencies to review “whether any measures temporarily halting residential evictions” are necessary to fight the pandemic.

Congressional panel finds fraud and abuse in PPP but divides along party lines. The majority Democrats on the House Select Subcommittee conducting the study have reported that their investigators have identified possible fraud and abuse in the $650 billion-plus Paycheck Protection Program (PPP), leading to billions being misspent. The committee’s preliminary draft report, released September 1, also found that more than $1 billion went to companies that received multiple loans, which is prohibited by PPP rules. Rep. James Clyburn (D-SC), chairman of the select subcommittee, sent a letter to the Small Business Administration (SBA) and Treasury Department Inspectors General requesting a review of the Administration’s management of PPP. Among the report’s recommendations are calls for improved internal controls for loan forgiveness and an improved audit plan for PPP borrowers.

  • On the same day, the members of the subcommittee’s Republican minority issued their own report finding PPP to be a “resounding success.” The GOP report said PPP has supported more than 51 million jobs across the country, including in economically distressed areas and rural communities. In particular, the report lauds the efforts of SBA and Treasury employees to speedily resolve glitches with connecting bank systems to the SBA’s E-Tran portal within a few days after PPP went live on April 3.
  • PPP was created under the CARES Act, enacted in March of this year, with a second infusion of funding added in April. The program officially closed on August 8 with more than $120 billion in unused funds remaining. Congressional observers expect that the next relief legislative package will extend the program, further relax the rules for PPP loan forgiveness and possibly allow for a second PPP loan for eligible small businesses.
  • In its July 23 Procedural Notice, SBA laid out instructions for lender submission of PPP loan forgiveness decisions and SBA and loan forgiveness reviews.
  • SBA has adopted a new rule, effective August 25, establishing an administrative process for appealing PPP loan decisions, which is discussed in greater detail in this September 2 DLA Piper Alert.

Fed expands Main Street Lending Program to nonprofits The Federal Reserve has modified its Main Street Lending Program (MSLP) to provide greater access to credit for nonprofit organizations such as educational institutions, hospitals and social service organizations. The Fed on July 17 announced the expansion to the emergency lending program created under the CARES Act, and published terms sheets for both the expanded loan facility and new loan facility for nonprofits. The lending program for small and medium-sized businesses was similarly composed of new and expanded loan facilities. The nonprofit loan terms mirror those for Main Street for-profit business loans in many other ways, including the interest rate, principal and interest payment deferral, five-year term and minimum and maximum loan sizes. Based on public feedback to proposals released for comment in June, the minimum employment threshold for nonprofits was lowered from 50 employees to 10, the limit on donation-based funding was eased and several financial eligibility criteria were adjusted to accommodate a wider range of nonprofit operating models. Eligible borrowers must be a tax-exempt organization as described in section 501(c)(3) or 501(c)(19) of the Internal Revenue Code.

…But Main Street program remains little used by small and medium-sized businesses. After much anticipation, MSLP finally began accepting applications in June, but the Fed program has only used a fraction of its $600 billion in lending authority. As of August 19, only $496.8 million in loans had been made under the program, according to the fourth report of the Congressional Oversight Commission. “Some of the Main Street Lending Program’s modest activity may be because some businesses accessed the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), while others are able to rely on existing credit lines or other sources of liquidity,” the report stated. According to a number of recent media reports, such as this September 1 Reuters article, banks and businesses alike have complained that the program’s terms are too stringent to generate significant interest from lenders or borrowers.

Fed nominee clears Banking Committee. The Senate Banking Committee on July 21 approved the nomination of Judy Shelton for a seat on the Federal Reserve’s Board of Governors on a party-line vote. President Trump had originally signaled his intention to nominate Shelton in July 2019, and her nomination was officially announced by the White House in January of this year. Among other controversial stances, Shelton has advocated a return to the gold standard, a position that has been greeted with skepticism on both sides of the aisle. Democrats have also criticized Shelton for seemingly shifting her views on a number of issues to be more in line with the president’s opinions about the Fed. A vote in the full Senate has not yet been scheduled. Two Republican senators – Susan Collins of Maine and Mitt Romney of Utah – have announced that they will vote against Shelton’s nomination. Assuming that all of the Senate Democrats vote against the nominee, two more Republicans would be needed to block Shelton’s nomination.

  • The Banking Committee on August 5 approved three other financial regulatory nominees. In voice votes, the committee approved Hester Peirce and Caroline Crenshaw for commissioner positions at the Securities and Exchange Commission (SEC) and Kyle Hauptman for a board spot at National Credit Union Administration (NCUA). Pierce was previously confirmed by the Senate in 2017 to complete the remaining term of a Republican vacancy on the SEC. No date has yet been set for a vote in the full Senate.

New York lawmakers approve small business financing disclosure bill. Both houses of the New York state Legislature have approved legislation that would require fintechs and other non-bank commercial lenders to disclose metrics such as an estimated annual percentage rate (APR), the total repayment amount and other fees or costs of financing extended to small businesses. The twin measures, known as the Truth in Lending Act – Assembly Bill A10118A and Senate Bill S5470B – passed on July 23 in corresponding votes in the Senate and Assembly. Pending their signature into law by Governor Andrew Cuomo (D), the legislation would make New York the second state in the nation to require increased transparency from nonbank lenders making small-business loans, following California. Banks and credit unions are exempt from the terms of the legislation, as are lenders regulated under the federal Farm Credit Act, and those making no more than five commercial financial transactions in New York in a 12-month period. Bank loans and credits above $500,000 are also exempt. Sales-based, closed-end and open-end transactions are subject to the legislation. Civil penalties under the act, upon findings of a violation by the New York Superintendent of Financial Services, would be a maximum of $2,000 for each offense or $10,000 per violation “where such violation is willful.” The bills were sponsored by Senator Kevin Thomas and Assemblyman Kenneth Zebrowski (both D). In a statement in support of the legislation, the Responsible Business Lending Coalition said, “This legislation represents the nation’s strongest commercial lending disclosure requirements.” The coalition also said the bill provides “a welcome victory for minority business owners who often struggle with securing affordable financing for their businesses.”

Mexican banking authorities issue new fintech regulations. Mexico’s National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) recently issued new regulations pursuant to the Law to Regulate Financial Technology Institutions (Ley para regular las Instituciones de Tecnología Financiera), commonly known as the fintech law. These new regulations – published on June 4 in the Mexican Official Gazette (Diario Oficial de la Federación) – provide guidelines on the establishment of application programming interfaces (APIs) to enable connectivity, access and sharing of certain data between FTIs, or fintechs. These interface guidelines also establish security standards to protect the infrastructure and confidentiality of the data exchanged, architectural framework, and a dictionary for ATMs for the exchange of information and a procedure to follow in case of a data breach. The types of data to be shared under the Law are:

  • Open data: Information generated by the Regulated Entities that does not contain confidential information – for example, general information on the products or services offered and the location of their offices, branches, ATMs and other points of access to their products and services
  • Aggregated: Statistical information on transactions conducted by or through Regulated Entities which is presented in a way that prevents personally identifiable information (PII) or individual transaction records to be exchanged and
  • Transactional: Data related to the use by clients of the Regulated Entities of a specific product or service, including deposit accounts, loans and other means of withdrawal, which data constitute PII and therefore may only be shared with clients’ prior consent (which shall specify the purpose of sharing).

The fintech law, adopted in 2018, regulates two types of institutions:

  • Collective Financing Institutions (Instituciones de Financiamiento Colectivo): Crowdfunding institutions that connect applicants and investors, through computer applications, interfaces, internet pages or any other means of electronic or digital communication, to provide funds to applicants’ businesses (including debt, equity and rewards-based crowdfunding).
  • Electronic payment funds institutions (Instituciones de Fondos de Pago Electrónico), or electronic wallets: Institutions whose purpose is the issuance, administration, redemption and transmission of electronic payment funds, including national currency, foreign currency or virtual assets (cryptocurrencies), through means of electronic or digital communication.

The complete document in Spanish can be accessed here:

Disposiciones de Carácter General relativas a las Interfaces de Programación de Aplicaciones Informáticas Estandarizadas a que hace referencia la Ley Para regular las Instituciones de Tecnología Financiera