This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
In this edition:
- OCC halts publication of proposed fair access rule.
- Climate issues emerge as heightened priority for banking regulators – and the industry.
- FDIC appoints fintech expert as first-ever CIO.
- Banking agencies propose notification rules for computer security incidents.
- FDIC: Banks report strong fourth quarter after tough year.
- Biden nominates Chopra as CFPB director.
- White House announces changes to PPP, targets support for under-banked small businesses.
- Fed releases 2021 stress test scenarios.
- Fed Board announces final rule to reduce risk through application of netting protections to a broader range of financial institutions.
- Reconstituted California regulator signs MOUs with earned wage access companies.
- New York lawmakers move to expand commercial lending disclosure requirements, delay effective date.
OCC halts publication of proposed fair access rule. In a sign of a potential policy shift with the arrival of the Biden Administration, the Office of the Comptroller of the Currency is pausing publication of a Trump-era proposal intended to prevent banks from denying loans and other services to certain industries, such as fossil-fuel-based energy producers. On January 14, the last day in office for former Comptroller of the Currency Brian Brooks, a Trump appointee, the OCC announced its finalized rule to ensure large national banks, federal savings associations and federal branches and agencies of foreign bank organizations provide fair access to banking services, capital and credit. Slated to take effect on April 1, the rule would have codified more than a decade of OCC guidance stating that banks should conduct risk assessment of individual customers rather than make broad-based decisions affecting whole categories or classes of customers. But, on January 28, OCC announced it was putting a hold on the new rule: “Pausing publication of the rule in the Federal Register will allow the next confirmed Comptroller of the Currency to review the final rule and the public comments the OCC received, as part of an orderly transition. The OCC’s long-standing supervisory guidance stating that banks should avoid termination of broad categories of customers without assessing individual customer risk remains in effect.”
- As we reported in the November 25, 2020 edition of Bank Regulatory News and Trends, OCC initially proposed the rule last November. Since then, opponents in Congress and among various advocacy organizations have criticized what they saw as a rushed process.
- The Bank Policy Institute, an advocacy group representing the nation’s leading banks, is one of the major critics of the OCC proposal. “The rule lacks both logic and legal basis, it ignores basic facts about how banking works, and it will undermine the safety and soundness of the banks to which it applies,” BPI president and CEO Greg Baer said in a January 14 statement. “Its substantive problems are outweighed only by the egregious procedural failings of the rulemaking process, and for these reasons it is unlikely to withstand scrutiny.”
- Some of the nation’s largest banks have indicated that they will stop providing loans for new oil and gas exploration and drilling in the Arctic, resulting in pushback from some members of Congress, including former Senate Banking Committee Chairman Jim Crapo (R-ID), and industry representatives, including the American Petroleum Institute. The now-withdrawn rule cited a letter from Alaska’s congressional delegation complaining of what they saw as discriminatory policies against fossil fuel industries.
- In addition to the oil and gas industry, some advocacy organizations have sought to discourage lending to other sectors, including payday lenders, gun manufacturers and for-profit prisons.
- OCC is currently being led by Acting Comptroller Blake Paulson until President Biden appoints a successor. Michael Barr, a Treasury Department official who also served in the Obama and Clinton administrations, is considered the leading candidate for the Comptroller position and has the support of Democratic moderates. But progressives, including Senator Brown, favor Mehrsa Baradaran, a UC Irvine law professor whose writing has focused on the racial wealth gap and discrimination against minorities in the financial system. The Comptroller is appointed to a five-year term by the president with the consent of the Senate.
Climate issues emerge as heightened priority for banking regulators – and the industry. The Federal Reserve Board of Governors has brought in a veteran official from the Federal Reserve Bank of New York to chair a new Supervision Climate Committee (SCC). Kevin Sitroh will soon step down as head of the Supervision Group at the New York Fed, and effective February 1 he assumed the leading role in the Fed’s supervisory work on the financial risks of climate change. According to a January 25 announcement by the New York Fed, Sitroh is now a senior advisor to Mike Gibson, director of the Fed’s Supervision and Regulation Division, and is chairing the SCC, a newly formed system-wide group bringing together senior staff across the Fed Board and the Reserve Banks. “The SCC will further build the Fed’s capacity to understand the potential implications of climate change for financial institutions, infrastructure, and markets,” according to the announcement. Sitroh has served in several senior posts since joining the New York Fed in 1999. Last year he was named co-chair of the Task Force on Climate-related Financial Risks of the international Basel Committee on Banking Supervision. Sitroh was slated to continue leading the New York Fed’s supervision team through February as James Hennessy, senior vice president in Supervision, takes over as interim group head. A formal search for a permanent successor is expected to be launched in the coming weeks.
- Sitroh’s appointment follows the December 15 announcement that the Fed has formally become a member of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a global coalition of central banks and regulators seeking to ensure that the financial system is prepared to deal with risks posed by climate change. The move had been expected for some time as the Board of Governors began participating in NGFS discussions and activities more than a year ago. As we reported in the November 25, 2020 edition of Bank Regulatory News and Trends, Randal Quarles, the Fed’s vice chair for supervision, told the Senate Banking Committee at a November 10 hearing that he expected the Fed to be accepted for NGFS membership in early 2021. “By bringing together central banks and supervisory authorities from around the world, NGFS supports the exchange of ideas, research, and best practices on the development of environment and climate risk management for the financial sector,” the Fed’s announcement stated.
- Federal Reserve Governor Lael Brainard, currently the only Democratic board member, has endorsed mandatory climate risk disclosures for businesses to “help market participants appropriately assess and price climate-related risks and opportunities.” In a February 18 speech before a Climate Summit hosted by the Institute of International Finance (IIF), Brainard noted that the “frequency and severity of climate-related events,” as well as “the nature and the speed at which countries around the world transition to a greener economy” will exercise increasing financial and economic impacts. “Current voluntary disclosure practices are an important first step, but they are prone to variable quality, incompleteness, and a lack of actionable data,” Brainard said. “Ultimately, moving toward standardized, reliable, and mandatory disclosures could provide better access to the data required to appropriately manage risks.” Brainard, who was on President Biden’s short list for treasury secretary, stressed that the views she expressed were her own and did not necessarily reflect those of the Fed Board or the Fed’s Open Markets Committee.
- Fed Chair Jerome Powell, testifying at a February 23 Senate Banking Committee hearing, expressed support for the eventual goal of standardized templates for how financial institutions disclose climate-change-related risks. Powell said disclosure “is really [a Securities and Exchange Commission] issue” but said “financial institutions everywhere … are working on this question.” For the time being, Powell said the current process, with differences in how various jurisdictions and institutions are addressing the issue, should be allowed to “bear fruit for a while.” But, he added, “I think in the long run we have to be going in the direction of more standardization.”
- On February 18, the same day as Brainard’s speech, a coalition of banks, insurers and trading firms issued a pledge to support efforts to combat climate change. The US Finance Climate Working Group, composed of 11 financial services trade associations, outlined their recommendations in a joint report backing the international goals of the Paris climate agreement, which the US has rejoined. The coalition’s “Principles for a U.S. Transition to a Sustainable Low-Carbon Economy” are intended to provide “essential building blocks that should encourage a pragmatic approach to the transition” to a “lower carbon economy.” But the report stresses that climate-related financial regulation should be risk-based and “remain dedicated to ensuring the resilience and stability of the financial sector.” IIF, which hosted Brainard’s presentation, organized the working group, which includes the American Bankers Association, the Bank Policy Institute and the Financial Services Forum, among other industry trade associations.
- At IIF’s February 18 Climate Summit event, there was some industry pushback against political, economic and other pressure to end financial support for fossil fuel producers and carbon-intensive industries (as discussed in the previous item on the fair access rule). Panelists from several major financial firms urged market-oriented approaches to foster innovation and the transition to a more environmentally sustainable economy, rather than using banking regulation to restrict financing to certain industries. BlackRock CEO Larry Fink warned against “a full divestiture of hydrocarbons,” which he called “greenwashing.”
- Treasury Secretary Janet Yellen has suggested that climate-related stress tests for banks could be in the offing. Speaking at a February 22 New York Times DealBook DC Policy Project event, Yellen noted that the Fed is currently examining its regulatory options in this area. “There’s a new movement now toward stress testing of financial institutions — the recognition that financial institutions can be affected, that climate change creates risks,” Yellen said, adding that, “It’s not envisioned that these tests would have the same status in terms of limiting payouts and capital requirements” as the Fed’s annual supervisory stress tests, “but I think they would be very revealing both for the regulators and the firms themselves in terms of managing their own risks.” Yellen, a former Fed Board chair, was the opening speaker at the two-day Times-sponsored virtual event.
- And, at the state level, the New York Department of Financial Services announced on February 9 that projects that support climate resiliency in low- and moderate-income communities could win credit under the New York Community Reinvestment Act. The DFS industry letter to banks states that “institutions subject to the New York CRA may receive credit for financing activities that reduce or prevent the emission of greenhouse gases that cause climate change (‘climate mitigation’), and adapt to life in a changing climate (‘climate adaptation’) (together with climate mitigation, ‘climate resiliency’).” Noting the disproportionate impacts of climate change to disadvantaged communities, NY DFS provided examples of lending and credit initiatives that could qualify under the CRA, including renewable energy equipment, community solar projects and battery storage, projects addressing flooding or sewer issues, and flood resilience activities for multifamily buildings offering affordable housing. NY DFS was the first US financial regulator to join the NGFS global coalition.
FDIC appoints fintech expert as first-ever CIO. The Federal Deposit Insurance Corporation on February 16 announced the appointment of Sultan Meghji as the agency’s first Chief Innovation Officer. The position appears to align with the Chief Innovation Officer role created by the OCC in 2016 and currently held by Beth Knickerbocker. Meghji will be responsible for leading the FDIC’s efforts to promote the adoption of innovative technologies across the financial services sector. He is co-founder of Neocova, a St. Louis-based financial technology (fintech) firm that develops artificial-intelligence-based software for community banks and credit unions. He has also been involved in efforts to bring digital and peer-to-peer banking to underserved areas of Africa and Central Asia. In addition, he has served as an advisor to the US Treasury, the Group of Seven (G7), the OCC and the FBI in the areas of cybersecurity, quantum computing and artificial intelligence. FDIC Chair Jelena McWilliams called Meghji “a recognized expert in financial technology” who will help the agency “find innovative ways to utilize technology to modernize our bank supervision, enable community banks to adopt technological solutions, and bring more underserved people into the financial fabric of our nation.” Said Meghji, “My personal mission is to engage both public and private sector partners to ensure the financial system of the future is innovative, resilient, and equitable.”
Banking agencies propose notification rules for computer security incidents. The three main federal bank regulatory agencies have published a proposed rule that would require supervised banking organizations to provide their primary federal regulator with notification within 36 hours of any “computer-security incident” that rises to the level of a “notification incident.” In particular, alerts would be required for incidents that could result in a bank’s inability to deliver services to a substantial portion of its customer base, jeopardize the viability of key operations or impact the stability of the financial sector. In addition, the proposal would require service providers to notify affected banks immediately when the service provider experiences computer security incidents that materially disrupt, degrade or impair certain services they provide. The agencies said that, “This notification requirement is intended to serve as an early alert to a banking organization's primary federal regulator and is not intended to provide an assessment of the incident.” The rule, proposed by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, was published in the January 12 Federal Register. Comments on the proposal must be received by April 12.
FDIC: Banks report strong fourth quarter after tough year. The Federal Deposit Insurance Corporation’s latest Quarterly Banking Profile offers a bad news/good news story for the banking industry. Full-year 2020 net income for FDIC-insured institutions declined 36.5 percent compared to 2019, to $147.9 billion. But quarterly net income increased 9.1 percent during the fourth quarter of 2020, totaling $59.9 billion. According to FDIC, the overall annual decline was primarily attributable to higher provision expenses in the first half of 2020, due to a general decline in economic conditions. The average return-on-assets ratio (ROA) declined from 1.29 percent in 2019 to 0.72 percent in 2020. On the other hand, the improvement in quarterly net income was driven by a reduction in provision expenses, as 57.4 percent of banks reported annual improvements in quarterly net income. The share of unprofitable institutions remained relatively stable from a year ago at 7.3 percent. The ROA was 1.11 percent during the fourth quarter, up from 0.97 percent in the third quarter, but down from the high of 1.41 percent in third quarter 2018. FDIC attributed banks’ stronger third-quarter earnings results (compared to the first six months of 2020) to modest improvements in the economy and higher consumer spending, though economic uncertainties and pressure on revenue from unprecedented net interest margin compression continued to weigh on the industry. “Nonetheless, the industry remains well positioned to accommodate loan demand and support the economy,” the FDIC said. Other key findings of the quarterly profile include:
- The fourth-quarter net interest margin remained unchanged from the third quarter at a record-low level.
- Loan balances declined from the previous quarter, led by lower commercial and industrial lending activity.
- Asset quality metrics remained stable from the previous quarter and a year ago.
- Community banks reported a 21.2 percent increase in quarterly net income year-over-year.
FDIC Chair Jelena McWilliams said that, despite the full-year decline, “banks remained resilient in fourth quarter 2020, consistent with the improving economic outlook.”
Biden nominates Chopra as CFPB director. President Biden has announced the nomination of Rohit Chopra, currently one of two Democratic commissioners at the Federal Trade Commission (FTC), as the next director of the Consumer Financial Protection Bureau. Kathleen Kraninger, who had led the agency since 2018, submitted her resignation at the president’s request. Dave Uejio was appointed by Biden to serve as the acting director pending Chopra’s confirmation by the Senate. Chopra is an ally and close associate of Senator Elizabeth Warren (D-MA), a member of the Senate Banking Committee. Chopra worked with Warren when she was a White House special advisor during the Obama Administration to set up the agency established by the Dodd-Frank financial reform law of 2010. Chopra also served as an assistant director of the CFPB under former director Richard Cordray. Under Chopra’s leadership, the CFPB is expected to take a more aggressive approach in initiating investigations and pursuing enforcement actions than was the case during the Trump administration. The role of the bureau’s Office of Enforcement is likely to play a more prominent role, particularly in the mortgage lending and servicing domain. Observers also expect the Chopra-led CFPB to return to more frequent use of civil money penalties through the types of settlements, consent orders and administrative actions utilized by the CFPB during the Cordray era (2012-2017). Chopra may also seek to restore the bureau’s original Payday Lending Rule and to increase enforcement over student lending, a major focus during his time as assistant director.
- The Senate Banking Committee has scheduled a confirmation hearing for Chopra on Tuesday, March 2. Gary Gensler, Biden’s nominee for the post of Securities and Exchange Commission (SEC) chair, will also testify at the same hearing.
- Banking Committee Chairman Sherrod Brown (D-OH) praised Chopra as “a bold and experienced choice to serve as the next Director” who “will not only return the CFPB to its central mission – protecting consumers – but also ensure the agency plays a leading role in combatting racial inequities in our financial system.”
- House Financial Services Committee Ranking Member Patrick McHenry (R-NC) panned the Chopra nomination as “proof that the Biden team is pandering to members of the far-left who want to weaponize the CFPB to go after financial services companies they simply don’t like.” He called CFPB “the most unaccountable agency in government.”
- In the interim, as Chopra awaits Senate action on his nomination, Acting Director Uejio has indicated that two regulations finalized by the bureau last year but not yet implemented may be set aside. In a February 4 blog post, Uejio discussed his vision for a “change in policy direction” at the bureau and outlined directions he has issued to the Division of Research, Markets, and Regulations (RMR) to take immediate actions. With regard to the regulations finalized during the previous administration – a revision of the Qualified Mortgage (QM) rule, and a rule updating requirements for debt collectors – Uejio said he has asked staff to “explore options for preserving the status quo.” The QM rule revised a post-financial-crisis regulation requiring mortgage lenders to assess borrowers’ ability to repay before making a loan. The debt-collection rule would allow debt collectors to call consumers up to seven times in a week and give consumers the option to restrict communications to a particular medium, such as emails or phone calls. Both rules were opposed by Congressional Democrats. Uejio also asked RMR to prepare analyses on housing insecurity and barriers to racial equity.
White House announces changes to PPP, targets support for under-banked small businesses. The Biden Administration is offering the country's smallest employers two weeks of exclusive access to emergency loans under the Paycheck Protection Program (PPP) in a bid to target aid to businesses that have struggled the most to obtain the funds during the pandemic. Under the plan announced by the White House on February 22, a 14-day period, starting February 24 and extending through March 9, will be instituted during which only businesses with fewer than 20 employees can apply for relief through the PPP. The Administration notes that enterprises of this size account for 98 percent of small businesses and that they “often struggle more than larger businesses to collect the necessary paperwork and secure relief from a lender.” The Administration “will also make a sustained effort to work with lenders and small business owners to ensure small businesses take maximum advantage of this two-week window.” Less than half of the PPP's more than $284 billion in current funding has been used since the program relaunched on January 11. There have been persistent concerns that the PPP – created last year under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and run by the Small Business Administration (SBA) – has not reached many of the hardest-hit employers, particularly minority-owned businesses that do not have relationships with banks responsible for processing PPP applications.
Fed releases 2021 stress test scenarios. The Federal Reserve Board of Governors has announced hypothetical scenarios for this year’s stress tests of large banks, which will examine how they would fare if the economy dips back into recession during the first three months of the year. The 2021 Stress Test Scenarios incorporate updates to capital planning requirements adopted over the past two years to help ensure large banks plan for and determine their capital needs under a range of different scenarios. In 2019 the Fed finalized a framework – known as the “tailoring rule” – that sorts large banking organizations into four categories of prudential standards based on their risk profiles, and last month a final rule to update capital planning requirements for large banks to be consistent with the tailoring rule was adopted. Following last year’s exercise, the Fed determined that large banks were generally well capitalized under a range of hypothetical events, but due to continuing economic uncertainty placed restrictions on bank payouts. With the goal of ensuring that large banks are able to lend to households and businesses even in a severe recession, the stress tests evaluate the resilience of major financial institutions by estimating their loan losses and capital levels, which provide a cushion against losses, under hypothetical recession scenarios that extend nine quarters into the future. The hypothetical recession begins in the first quarter of 2021 and features a severe global downturn with substantial stress in commercial real estate and corporate debt markets, along with rising unemployment, a steep decline in GDP, and sharp drops in asset and equity prices. In its February 12 announcement, the Fed provided reassurance that the “scenarios are not forecasts and the severely adverse scenario is significantly more severe than most current baseline projections for the path of the U.S. economy under the stress testing period.”
Fed Board announces final rule to reduce risk through application of netting protections to a broader range of financial institutions. On February 18, the Federal Reserve Board issued “a final rule that is intended to reduce risk and increase efficiency in the financial system by applying netting protections to a broader range of financial institutions.” The amendments to the Fed’s Regulation EE (Financial Institution Netting) were adopted under the Federal Deposit Insurance Corporate Improvement Act of 1991 (FDICIA) and apply to the operation of certain netting agreements. Parties to a netting agreement agree to pay and receive net payments, rather than gross amounts due, under the netting contract. FDICIA’s provisions create market certainty – and provide related regulatory capital benefits – that these netting contracts will be enforced, “even in the event of the insolvency of one of the parties.” The Fed’s amendments to Regulation EE bring new entities, including swap dealers, into the scope of financial institutions that are parties to netting agreements and covered by FDICIA’s protections. The Board noted in its release that the amendments were adopted with an aim toward consistency with “FDICIA's goals of reducing systemic risk and increasing efficiency in the financial markets” and “expands the definition of financial institution to ensure that certain entities qualify as financial institutions,” such as:
- Swap dealers and security-based swap dealers
- Major swap participants and major security-based swap participants
- Nonbank systemically important financial institutions
- Certain financial market utilities
- Foreign banks
- Bridge institutions
- Qualifying central counterparties
- The Bank for International Settlements
- Foreign central banks and
- Federal Reserve Banks.
The final rule is effective March 29.
Reconstituted California regulator signs MOUs with earned wage access companies. The California Department of Financial Protection and Innovation (DFPI) announced on January 27 that it has signed memorandums of understanding with five earned wage access companies. DFPI indicated in its announcement that it believes the MOUs “to be the first agreements of their kind between the fintechs and a state regulator.” The agency’s announcement explains that “earned wage access companies give employees access to wages they have earned but haven’t yet received through their employer payroll, a service that providers say can help employees pay their bills on time or cover unexpected expenses without overdraft charges or credit card fees, and can be an alternative to payday lending.” The five companies DFPI has entered into agreements with are: Even Responsible Finance, Inc., doing business as Even; Activehours, Inc., doing business as Earnin; Bridge IT, Inc., doing business as Brigit; Payactiv, Inc.; and Branch Messenger Inc., doing business as Branch. The MOUs, which are identical except for information about the specific companies, state that employees do not get an advance of the full gross amount of their earned wages, but rather a “limited to a portion thereof.” (The MOU between DFPI and Even is attached.)
- For its part, Even issued a January 27 statement saying the MOU “reflects the California agency's proactive approach to oversight, which seeks to both protect consumers and foster innovation in financial services.”
- Under the California Consumer Financial Protection Law (CCFPL), which became effective on January 1, DFPI is the new name given to the state’s former Department of Business Oversight (DBO).
- Information on the MOUs and other enforcement activities can be found on the DFPI’s Actions, Orders and Administrative Hearing Decisions page.
New York lawmakers move to expand commercial lending disclosure requirements, delay effective date. The New York Assembly on February 10 passed legislation (S 898), which had been approved by the state Senate last month, to amend the state’s recently enacted commercial financing disclosure law. The pending legislation would increase the coverage of the disclosure requirements to commercial transactions under $2.5 million – instead of $500,000, as provided for under the recently enacted law – and create a new exemption for certain vehicle dealers. The bill also provides for the effective date to be extended from June 21 to January 1, 2022. As we reported in the January 12 edition of Bank Regulatory News and Trends, Governor Andrew Cuomo signed the “Truth in Lending Act” in late December. The statute defines “commercial financing” as “open-end financing, closed-end financing, sales-based financing, factoring transaction, or other form of financing, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.” New York is the second state to adopt such a measure. California passed similar legislation in 2018.