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18 October 202117 minute read

Bank Regulatory News and Trends

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

In this edition:

  • Federal banking regulators issue due diligence guidance on community bank-fintech relationships.
  • Quarles will no longer be the Fed’s vice chair for supervision.
  • Chopra confirmed to lead the CFPB.
  • White House declares climate change a systemic risk to US economy and finance system.
  • OCC nominee gets mixed reaction.
  • OCC moves to rescind CRA overhaul.
  • Federal crypto enforcement team launched at DOJ.
  • Government-backed digital currency: The Fed and other central banks offer possible ways forward.
  • FinCEN names new acting director.
  • Banks continued to show strong profitability in Q2.
  • NY regulators move toward adopting rules governing Commercial Finance Disclosure Law.
  • NY governor nominates NYDFS superintendent.

Federal banking regulators issue due diligence guidance on community bank-fintech relationships. The FDIC, the Federal Reserve and the OCC jointly published guidance intended to help community banks in conducting due diligence when considering relationships with financial technology (fintech) companies. Announced on August 27, the guide, titled Conducting Due Diligence on Financial Technology Companies: A Guide for Community Banks, is intended to serve as a resource for bank management on prospective relationships with fintech companies. While the guide is geared primarily to community banks, its content could be useful for fintechs and banks of any size as well as for other types of third-party relationships. The guide draws from the federal banking regulators’ existing supervisory guidance on third-party risk management and follows the agencies’ release in July of proposed interagency guidance, which we described in the July 23 edition of Bank Regulatory New and Trends. With banks increasingly entering into business arrangements with fintechs to offer enhanced products and services, increase efficiency and reduce internal costs, the agencies’ guidance focuses on six key areas of due diligence that banks should consider:

  • Business experience and qualifications
  • Financial condition
  • Legal and regulatory compliance
  • Risk management and controls
  • Information security and
  • Operational resilience.

Quarles will no longer be the Fed’s vice chair for supervision. The Federal Reserve has announced that its Committee on Supervision and Regulation will not have a designated chair as of October 13, the date on which Randal Quarles’s four-year term as vice chair for supervision expired. Instead, the committee – which consists of Quarles and fellow-Fed Governors Lael Brainard and Michelle Bowman – will meet “as necessary” and “on an unchaired basis,” according to a statement from a Fed spokesperson. President Biden has not yet announced a nominee for vice chairman for supervision, a post that requires Senate confirmation, nor has the president indicated whether Fed Chair Jerome Powell will be renominated to the chairmanship. Powell and Quarles, nominated as chair and vice chair by former President Trump, have faced criticism from some Congressional Democrats and progressive advocacy groups. Brainard, currently the only board member nominated by a Democratic president, has been frequently mentioned as a potential successor to the current Fed Board Chair if Biden decides not to renominate Powell.

  • Quarles also chairs the Financial Stability Board, an international standard-setting body. His three-year term as FSB chair expires in December.
  • Quarles’s term as a member of the Fed’s Board of Governors runs until January 31, 2032. Powell’s term as a board member expires January 21, 2028. Board members serve for 14-year terms, while the chair and vice-chair terms are for four years.
  • Fed Vice Chair Richard Clarida’s term on the board also expires in January. Clarida was nominated by Trump and confirmed by the Senate in 2018 to fill an unexpired term. There additionally continues to be a vacancy on the seven-member Board of Governors. Thus, Biden will have opportunities to put his imprint on the Fed.

Chopra confirmed to lead the CFPB. The Senate on September 30 confirmed Rohit Chopra as the third director of the Consumer Financial Protection Bureau. He was officially sworn in on October 12. Chopra’s nomination by President Biden was approved on a 50-48 vote, with Republican senators lining up in unison to oppose the nominee. As we have noted previously, including in the July 23 edition of Bank Regulatory News and Trends, Chopra’s nomination vote was expected to break along party lines. Chopra had served as a commissioner on the Federal Trade Commission (FTC), where he has earned a reputation for scrutinizing the practices of Big Tech companies, since 2018. Previously, he was the top student loan official at the Consumer Financial Protection Bureau (CFPB) during the Obama Administration. He worked closely with Senator Elizabeth Warren (D-MA), then a White House advisor and currently a member of the Senate Banking Committee, in setting up the CFPB in 2011.

  • The Consumer Bankers Association issued a congratulatory statement on Chopra’s confirmation, but urged that Chopra stand by his commitment to transparency and listen to input from all stakeholders.
  • Since Biden’s inauguration, the CFPB has shown signs of shifting to a more aggressive enforcement posture. Under its current acting director, Dave Uejio, the CFPB has reversed or rescinded some of the policies enacted under former CFPB Director Kathleen Kraninger. Industry observers expect investigations into fair-lending violations to feature prominently on the bureau’s docket.
  • Chopra’s confirmation leaves the FTC with a 2-2 partisan split. The White House on September 13 announced that Biden nominated Alvaro Bedoya, the founding director of the Center on Privacy and Technology at Georgetown Law, to replace Chopra at the FTC.

White House declares climate change a systemic risk to US economy and finance system. The Biden administration on October 15 issued a comprehensive, government-wide strategy to assess and mitigate the financial risks of climate change. “Climate change poses serious and systemic risks to the US economy and financial system,” the White House report states. The systemic risk declaration serves notice to the financial services industry that investment and lending decisions will have to incorporate the potentially volatile impacts of climate change. On May 20, President Biden signed Executive Order 14030 on Climate-Related Financial Risk, which called for a whole-of-government approach to mitigating climate-related financial risks and urged financial regulators to step up efforts to assess these risks. The administration’s strategy rests on six main pillars:

  • Promoting the resilience of the financial system to climate-related financial risks, with a forthcoming report from the Financial Stability Oversight Council expected to lay out the strategy in detail, along with new initiatives from the Treasury Department and SEC helping to launch this process
  • Protecting life savings and pensions from climate-related financial risk, with the Labor Department proposing a new rule making clear that investment managers can consider climate change and other environmental, social and corporate governance factors in making investment decisions
  • Using the leverage of the world’s largest purchaser of goods and services – the federal government – to address climate-related financial risk as part of procurement regulations
  • Incorporating climate-related financial risk into federal financial management and budgeting, with the White House Office of Management and Budget and the Federal Accounting Standards Advisory Board developing climate-related risk assessments and disclosure requirements for federal agencies
  • Incorporating climate-related financial risk into federal lending and underwriting, with several agencies already working on enhancing their standards
  • Building resilient infrastructure and communities, including updating the National Flood Insurance Program

OCC nominee gets mixed reaction. President Biden on September 23 announced the nomination of Saule Omarova to the post of Comptroller of the Currency. Omarova is currently a professor at Cornell University, where she directs the Program on the Law and Regulation of Financial Institutions and Markets. In her scholarly writings, Omarova has expressed skepticism about fintech firms and digital currencies – and the consumer benefits they profess to offer. An outspoken critic of traditional banking, she has called for restructuring the Federal Reserve system to play a more direct and controlling role in the financial and banking systems, including by replacing retail banking services with individual bank accounts at the Fed, and has been quoted as saying she wants to “end banking as we know it.” As head of the OCC, an independent agency within the Treasury Department, Omoarova would be responsible for chartering, regulating and supervising national banks and federal savings associations as well as federal branches and agencies of foreign banks.

  • Senate Banking Committee Chair Sherrod Brown (D-OH) called Omarova’s nomination historic. “Saule Omarova has spent her career working with both Republicans and Democrats on systemic financial stability issues and is well-versed in new financial technologies. Her experience as a policymaker, in the private sector, and in academia will allow her to work with stakeholders across our financial system to ensure the economy works for everyone, and to protect our economic recovery from the risky activities of Wall Street and other bad actors.”
  • Banking Committee Ranking Member Pat Toomey (R-PA) said he has “serious reservations” about Omarova’s nomination. In an October 6 Senate floor speech, he stated, “I don’t think I’ve ever seen a more radical choice for any regulatory spot in our federal government.”
  • American Bankers Association President and CEO Rob Nichols said in a statement to media outlets on the Omarova nomination, “We have serious concerns about her ideas for fundamentally restructuring the nation’s banking system which remains the most diverse and competitive in the world. Her proposals to effectively nationalize America’s community banks, end regulatory tailoring based on risk and eliminate the dual banking system are particularly troubling.”
  • In 2018, the Comptroller’s office announced that it would permit non-depository fintech companies to operate under a federal charter overseen by the OCC. As we have discussed in Bank Regulatory News and Trends, including in the July 23 edition, the OCC’s fintech charter has been the target of lawsuits by state banking regulators over jurisdictional issues. Among the decisions awaiting the new Comptroller is whether to continue to promote and defend the special charter adopted during the previous administration in the face of ongoing legal challenges and potential legislative action.

OCC moves to rescind CRA overhaul. As the process for installing new leadership at the OCC begins, the agency, under Acting Comptroller Michael Hsu, proposed rescinding a Trump-era rule intended to modernize the Community Reinvestment Act. On September 8, the OCC issued a notice of proposed rulemaking that would replace the CRA rule issued in 2020 with rules adopted jointly by the federal banking agencies in 1995 (as amended). The OCC said its latest action would facilitate ongoing interagency work to modernize the CRA regulatory framework while improving consistency in its application. The OCC’s 2020 regulation was promulgated by former Comptroller Joseph Otting without the participation of the Fed and the FDIC, the other two agencies with jurisdiction over the CRA, as we stated in the June 5 edition of Bank Regulatory News and Trends. In July of this year, the three agencies issued a joint interagency statement committing to working together to modernize regulations implementing the CRA, as stated in our July 23 edition. A coalition of major banking organizations in May of this year issued a Request to Formally Withdraw or Delay the June 2020 CRA Rule.

  • Enacted in 1977, the CRA was designed to encourage banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.
  • Comments on the OCC proposal are due October 29.

Federal crypto enforcement team launched at DOJ. The US Department of Justice (DOJ) announced on October 6 the creation of a National Cryptocurrency Enforcement Team (NCET) with responsibility for investigating and prosecuting criminal misuses of cryptocurrency. Under the supervision of Assistant Attorney General Kenneth Polite, the new team will focus on crimes committed by virtual currency exchanges, mixing and tumbling services, and the leaders of money laundering operations. NCET will draw on the resources of the DOJ’s Criminal Division’s Money Laundering and Asset Recovery Section, Computer Crime and Intellectual Property Section and other sections, with experts detailed from US Attorneys’ Offices. The team will also assist in tracing and recovering assets lost to fraud and extortion, including cryptocurrency payments to ransomware groups. In announcing the launch of the new initiative, Deputy Attorney General Lisa Monaco said NCET will augment the DOJ’s “capacity to dismantle the financial entities that enable criminal actors to flourish — and quite frankly to profit — from abusing cryptocurrency platforms,” adding, “As the technology advances, so too must the Department evolve with it so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems.” The DOJ said that NCET will also play a critical support role for international, federal, state, local, tribal and territorial law enforcement authorities grappling with new technologies and new forms of criminal tradecraft.

Government-backed digital currency: The Fed and other central banks offer possible ways forward. A group of seven central banks including the Federal Reserve, meeting under the auspices of the Bank for International Settlements (BIS), issued a new set of reports exploring how retail central bank digital currencies (CBDCs) could function to benefit consumers while working in conjunction with existing payments systems and minimizing risks to the global financial system. Announced on September 30, the reports analyze how CBDCs could best meet users’ future needs through developing systems that support private innovation while preserving public trust. “To be effective, a CBDC system would need to involve both public and private actors to ensure interoperability and coexistence with the broader payment system,” the report’s executive summary states. Following the summary, the central bankers/BIS group published three detailed papers on the following topics:

The Fed is expected to issue a study in the near future that examines the benefits and risks of issuing a digital dollar, and the other central banks are also actively pursuing the idea of virtual currencies. Given the Fed’s role in helping to draft the BIS reports, the documents could provide clues as to the US approach.

  • In addition to the Fed, the other central banks involved in the project were the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Sveriges Riksbank and Swiss National Bank.
  • BIS is an international financial institution owned by central banks that “fosters international monetary and financial cooperation and serves as a bank for central banks.”

FinCEN names new acting director. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced on August 3 that Himamauli Das would assume the role of acting director effective August 29, as the agency conducts a public search for a permanent director. Das is a national security expert with experience at the White House, National Security Council, National Economic Council and the Treasury and State Departments. He replaces FinCEN’s previous acting director, Michael Mosier. Das assumes the role at a time when FinCEN is moving to implement provisions of the Anti-Money Laundering Act of 2020, which became law in January of this year. The new law makes the most sweeping changes to US anti-money laundering laws since the USA PATRIOT Act of 2001. (See The New Anti-Money Laundering Act of 20202: A Potential Game Changer for Enforcement and Compliance.)

Banks continued to show strong profitability in Q2. The nation’s banks reported aggregate net income of $70.4 billion in the second quarter of this year, their second-highest quarterly earnings ever – behind only the first quarter of 2021. The FDIC’s quarterly report for April-June, released on September 8, found that the nearly 5,000 commercial banks and savings institutions insured by the FDIC experienced nearly an increase of $51.9 billion, or 281 percent, in income over the same period in 2020, during the height of the coronavirus disease 2019 (COVID-19) pandemic.

NY regulators move toward adopting rules governing Commercial Finance Disclosure Law. The New York State Department of Financial Services (NYDFS) published “pre-proposed” rules on disclosure requirements for certain providers of commercial financing transactions. Late last year, then-Governor Andrew Cuomo signed into law legislation that requires consumer-like disclosures for commercial financing transactions of $2.5 million or less. The proposed regulation would give provisions added by the legislation the title Commercial Finance Disclosure Law (CFDL). The law goes into effect on January 1, 2022. But the proposed regulations, titled “Disclosure Requirements for Certain Providers of Commercial Financing Transactions,” are published on the NYDFS website, not in the State Register, meaning that there will be another comment period when the actual proposed rules are published. While it may be premature to start drafting new disclosures since modifications may be made to the draft rules, providers of commercial financing should be prepared to comply with the CFDL at the beginning of the new year. Other notable points about the pre-proposed rules:

  • They provide very detailed requirements for the content and formatting of the CFDL-required disclosures, which vary depending on the type of commercial financing being provided and also vary from the recently proposed California rules.
  • They did not include model forms that providers of commercial financing can use to ease their compliance burden, although NYDFS could still include those as part of the finalized rule.
  • NYDFS has not stated explicitly that the CFDL-disclosure requirements are only triggered when the borrower is principally located in New York.
  • There will be a 60-day comment period once a proposed rule is published in the State Register.

NY governor nominates NYDFS superintendent. New York Governor Kathy Hochul on August 31 announced the nomination of Adrienne Harris as the next superintendent of the Department of Financial Services. Pending approval by the state senate, Harris would become one of the nation’s most high-profile financial regulators, given the concentration of banks and investment firms on Wall Street. Harris, who served as an economic advisor to former President Obama in the White House National Economic Council, would succeed Linda Lacewell, who resigned in August. She is already serving as acting superintendent. In her announcement of the nomination, Hochul praised Harris for “her vast experience in the private sector helping ensure companies of all sizes act as good corporate citizens.” Harris is an advisor to several fintech and property technology (PropTech) companies, according to her bio from the Gerald R. Ford School of Public Policy at the University of Michigan, where she has taught.