Bank Regulatory News and Trends

FinCEN to require minimum AML standards for banks lacking federal functional regulator

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Bank Regulatory News and Trends

Bank Regulatory News and Trends

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

In this edition:

  • FinCEN to require minimum AML standards for banks lacking federal functional regulator
  • Fed seeks “consistent approach” for interagency CRA overhaul
  • Fed to cap large banks’ dividends, halt share buybacks in fourth quarter
  • OCC confirms that banks may take deposits backed by fiat-pegged stablecoins
  • California to create its own state consumer financial protection agency
  • California begins rulemaking on commercial financing disclosure law
  • CFPB releases proposals on small business lending data collection requirements
  • FSOC warns of risk to financial stability from problems with Fannie and Freddie
  • OCC offers guidance on risk management of loan purchases
  • GAO calls on FinCEN to facilitate wider use of BSA data by law enforcement agencies

FinCEN to require minimum AML standards for banks lacking federal functional regulator. The Treasury Department’s Financial Crimes Enforcement Network has issued a final rule requiring minimum standards for anti-money laundering (AML) programs for banks without a federal functional regulator. The final rule, published in the Federal Register on September 15, also extends customer identification program and beneficial ownership requirements to those banks in an effort to ensure consistent Bank Secrecy Act (BSA) coverage across the industry. Institutions covered by the rulemaking include:

  • State-chartered, non-depository trust companies
  • Non-FDIC-insured state banks and savings associations and non-National Credit Union Share Insurance Fund (NCUSIF)-insured credit unions
  • Private banks and
  • International banking entities that are not FDIC insured but are authorized by Puerto Rico and the US Virgin Islands to provide banking and other services to non-resident aliens.

Banks not regulated by a federal banking agency (eg, the Fed, FDIC, OCC, NCUA, SEC or the Office of Thrift Supervision) are currently required to comply with certain Bank Secrecy Act obligations, including filing suspicious activity and currency transaction reports. FinCEN anticipates that banks lacking a federal functional regulator will be able to leverage existing policies, procedures and internal controls required by other statutory and regulatory requirements to fulfill the obligations set out in the final rule. The banks will have 180 days from publication of the rule to be in compliance.

Fed seeks “consistent approach” for interagency CRA overhaul. The Federal Reserve Board voted unanimously on September 21 to issue an advance notice of proposed rulemaking and request for public comment on an approach to modernize regulations that implement the Community Reinvestment Act. As we have reported in a number of previous editions of Bank Regulatory News and Trends, most recently in the June 5, 2020 edition, the Fed shares jurisdiction over the CRA with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. Last December, FDIC and OCC issued a joint notice of proposed rulemaking, which generated more than 7,500 comment letters. But the Fed was not onboard with the OCC/FDIC proposal. In May, OCC issued a CRA final rule. FDIC did not participate in the rulemaking. Fed officials have consistently expressed hope that the three agencies could come to an agreement on a plan to update the CRA. As the Fed explained in a fact sheet issued with the new proposal, the rulemaking “seeks to provide a foundation for the agencies to converge on a consistent approach that has broad support among stakeholders.” CRA modernization priorities identified by the Fed include addressing changes in the banking industry; better tailoring performance evaluations to local conditions, while accounting for differences in bank sizes and business models; minimizing data burdens; making a greater effort to address the needs in Indian Country and other underserved areas; promoting investment in minority depository institutions and community development financial institutions; and recognizing the special circumstances of small banks in rural areas.

  • Congress enacted the CRA in 1977 to address inequities in access to credit markets and meet the needs of low- and moderate-income (LMI) communities. It has been 25 years since the last significant revision to the CRA regulations.
  • Comments on the proposal will be accepted for 120 days after publication in the Federal Register.

Fed to cap large banks’ dividends, halt share buybacks in fourth quarter. Amid continued economic uncertainty, the Federal Reserve announced on September 30 that it is extending through the end of the year a prohibition on stock repurchases by banks with more than $100 billion in total assets. That restriction, originally imposed for the third quarter of 2020, was due to expire on October 1. In another action meant to ensure that large banks maintain a high level of capital resilience, dividend payments will continue to be capped and tied to a formula based on recent income. In June, the Fed released the results of its annual stress test and additional analysis, which found that the large banks were sufficiently capitalized. But, given the unique economic circumstances this year, the Fed put several restrictions in place to preserve bank capital, which provides a cushion against loan losses and supports lending. The Fed said in its most recent announcement that the capital positions of large banks have remained strong during the third quarter while the restrictions were in place. Later this year, the Fed will conduct a second round of stress tests to determine the continued resiliency of large banks, with the results to be released by the end of the year.

  • The one dissenting vote on the extension came from Fed Governor Lael Brainard, the only current Democratic member of the Fed Board. Brainard had voted against the original action in June, saying she wanted to stop dividend payments entirely. Brainard, who was nominated to the board by President Obama, was cited in a September 24 Bloomberg report as Joe Biden’s leading candidate for Treasury Secretary should he win the presidency.
  • Also on September 30, the Fed invited public comment on a proposed rulemaking that would update the capital planning requirements to be consistent with other recently modified Fed rules. Last year, the Fed finalized a framework that sorts large banks into different categories based on their risks, with rules tailored to the risks of each category. The new proposal updates capital planning requirements to reflect that framework, including putting banks in the lowest risk category on a two-year stress test cycle.

OCC confirms that banks may take deposits backed by fiat-pegged stablecoins. The Office of the Comptroller of the Currency on September 21 released an interpretive letter confirming that national banks and federal savings associations may take deposits that serve as reserves for fiat currency-pegged stablecoins. Jonathan V. Gould, senior deputy comptroller and OCC’s chief counsel, wrote that “we conclude that a national bank may hold such stablecoin ‘reserves’ as a service to bank customers.” Gould stressed that “this letter only addresses the use of stablecoin backed on a 1:1 basis by a single fiat currency [eg, the US dollar] where the bank verifies at least daily that reserve account balances are always equal to or greater than the number of the issuer’s outstanding stablecoins.” He also said the new guidance does not address the authority to support stablecoin transactions involving un-hosted wallets – software that enables users to hold their own cryptocurrency keys. As the letter explains, a stablecoin is a type of cryptocurrency designed to have a stable value as compared with other types of cryptocurrency, which frequently experience significant volatility. The letter emphasizes that banks must comply with BSA/AML laws and regulations, customer due diligence requirements and beneficial ownership identification and verification obligations.

  • "National banks and federal savings associations currently engage in stablecoin-related activities involving billions of dollars each day," Acting Comptroller of the Currency Brian P. Brooks said. "This opinion provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner."

For more information, please see our previous alert.

California to create its own state consumer financial protection agency. California Governor Gavin Newsom (D) on September 25 signed into law a package of legislation intended to protect consumers from financial predators and abusive business practices. Central to the 12-bill package is Assembly Bill No. 1864 (also available in a PDF version) that would establish the Department of Financial Protection and Innovation (DFPI), which the governor called “the nation’s strongest state consumer financial protection watchdog.” Over the next three years, 90 new investigator and attorney positions will be created “to transform the agency into California’s version of the federal Consumer Financial Protection Bureau.” In fact, California officials consulted with former CFPB Director Richard Cordray in developing the legislation. Newsom said the new agency will supervise financial institutions and crack down on financial predators, hire a team to monitor markets to proactively identify emerging risks to consumers, create another team dedicated to consumer education and outreach, and establish a new Office of Financial Technology and Innovation, “which will cultivate financial technology to serve – not exploit – consumers.” The law also expands the state’s power to target unfair, deceptive and abusive acts and practices by financial service providers – such as debt collectors and emerging fintech products. Although the state’s Department of Business Oversight already regulates banks and other financial entities, the new law directs the agency to monitor areas of the market that have operated with less scrutiny.

  • The measure was introduced in the Legislature in January of this year by Assembly Member Monique Limón (D-Santa Barbara) and takes effect January 1, 2021.
  • “While the federal government is getting out of the financial protection business, California is leaning into it,” Newsom said.

California begins rulemaking on commercial financing disclosure law. The California state Department of Business Oversight (DBO) has issued a Notice of Rulemaking Action to draft regulations implementing a law adopted in 2018 imposing disclosure requirements for certain business purpose loans. The measure, SB 1235 (Chapter 1011, Statutes of 2018) (also available as a PDF) made California the first state in the nation to require providers of commercial financing to make disclosures similar to those required by consumer finance laws such as the federal Truth in Lending Act. As DBO describes the law, “The goal of the new disclosures is to provide recipients more information about the actual costs and terms of financing agreements, as well as help them comparison shop for financing.” The new disclosures will include:

  • The total amount of funds provided
  • The total dollar cost of financing
  • The term or estimated term
  • The method, frequency and amount of payments
  • A description of prepayment policies and
  • Until January 1, 2024, the total cost of the financing expressed as an annualized rate.

Interested parties may present statements or arguments in writing to DBO on the proposed rulemaking – including a request for a public hearing – by October 28. No public hearing is currently scheduled.

  • As reported in the September 9 edition of Bank Regulatory News and Trends, both houses of the New York state Legislature passed a similar measure in July. Upon the signature of Governor Andrew Cuomo, New York would become the second state to adopt a commercial financing disclosure statute.

CFPB releases proposals on small business lending data collection requirements. The Consumer Financial Protection Bureau has published its outline of proposals and alternatives under consideration for small business lending data collection and reporting to comply with Section 1071 of Dodd-Frank. The provision mandates certain reporting requirements for lenders making business loans and is intended to facilitate enforcement of fair lending laws and identify business and community development needs for women-owned and minority-owned businesses. In its September 15 announcement, CFPB provides its outline of proposals and alternatives, a high-level summary of the outline, additional materials related to the rulemaking and general information on the Small Business Regulatory Enforcement Fairness Act (SBREFA), the 1996 law providing for greater participation of small businesses in the federal regulatory process. The bureau will form a panel this month to consult with small businesses about how a rule might affect them and then release a report. CFPB is asking for public comment on the proposals by December 14. Feedback should be emailed to 2020-SBREFA-1071@cfpb.gov.

FSOC warns of risk to financial stability from problems with Fannie and Freddie. The Financial Stability Oversight Council has issued its long-awaited review of the secondary mortgage market, finding that distress affecting Fannie Mae and Freddie Mac could pose risks to the broader financial system if not properly mitigated. Issued on September 25, the FSOC statement endorsed a proposal to raise capital requirements for the two government sponsored enterprises (GSEs). The Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, in June proposed an Enterprise Regulatory Capital Framework intended to ensure the GSEs are sufficiently capitalized and able to minimize the risk to housing finance markets in a severe economic downturn. FSOC’s review considered, among other questions, whether the proposed capital rule is appropriately sized and structured given the GSEs’ risks and their key role in the housing finance system, and whether the rule promotes stability in the broader housing finance system. The Council encouraged FHFA to implement regulatory capital definitions that are similar to those in the US banking framework.

  • “I commend the Council for its historic acknowledgement that the Enterprises' activities could pose risk to financial stability," said FHFA Director Mark Calabria, adding that FSOC’s recommendations will inform the finalized capital rule over the “coming months.”
  • FSOC, created by Dodd-Frank and currently chaired by Treasury Secretary Steven Mnuchin, has broad authorities to identify and monitor excessive risks to the US financial system arising from the distress or failure of large, interconnected bank holding companies or non-bank financial companies, or from risks that could arise outside the financial system.
  • Fannie, the Federal National Mortgage Association. and Freddie, the Federal Home Loan Mortgage Corporation, stand behind about one half of the $11 trillion US mortgage market. They are both publicly traded corporations.

OCC offers guidance on risk management of loan purchases. The Office of the Comptroller of the Currency on September 10 issued a bulletin to inform banks of sound risk management principles regarding loan purchase activities. The bulletin reinforces for bank officials OCC’s expectations that loan purchase activities comply with applicable accounting standards, laws, regulations and longstanding risk management guidelines, aligned with banks’ strategic plans, size, complexity and risk profile. Commercial and retail loan purchase activities include purchasing whole loans, loan pools, loan portfolios, loan participations or participations in syndicated loans from other banks or non-bank lenders. Addressed to CEOs and department heads of national and community banks, as well as examiners and other interested parties, the new bulletin rescinds the 1984 banking circular Purchases of Loans in Whole or in Part—Participations.

GAO calls on FinCEN to facilitate wider use of BSA data by law enforcement agencies. The Government Accountability Office on September 22 issued a report that found that some of the law enforcement agencies without direct access to Bank Secrecy Act reports may be underutilizing these reports – to the detriment of their investigations. GAO, often described as Congress’s watchdog, noted that many federal, state and local law enforcement agencies use BSA reports for investigations of money laundering or other crimes, such as drug trafficking, fraud and terrorism. FinCEN grants direct access to the information for certain law enforcement agencies, while others can submit requests for individual reports. GAO said the FinCEN director should develop and implement written policies and procedures to help promote greater use of BSA reports by law enforcement agencies that do not have direct access, including outreach strategies and educational or training materials. FinCEN has concurred with the recommendation.