This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.
In this edition:
- Former Fed Chair Janet Yellen expected to be tapped as Treasury Secretary.
- Treasury asks Fed to return unused emergency lending funds; Fed reluctantly agrees.
- Senate fails to advance Fed nominee Judy Shelton.
- Trump nominates Brooks to full term at OCC.
- OCC proposes rule to prevent banks from blocking loans to certain industries.
- FHFA announces final capital rule for Fannie and Freddie.
- Dollar thresholds for exempt consumer credit and lease transactions remains unchanged.
- Threshold for smaller loan exemption from appraisal requirements for higher-priced mortgage loans also unchanged.
- FSB report says COVID-19-induced March madness demonstrates need to address systemic risk of non-banks.
- Fed confronts financial stability implications of climate change.
Former Fed Chair Janet Yellen Expected to be tapped as Treasury Secretary. Former Federal Reserve Chair Janet Yellen will be nominated as Treasury Secretary by president-elect Joe Biden, according to media reports. If ultimately nominated and confirmed by the Senate, Yellen would become the first woman to hold the top post at the Treasury. She was also the first woman to lead the Fed and the first to chair the White House Council of Economic Advisors. The news, first reported by the Wall Street Journal and based on “people familiar with the decision,” caps weeks of speculation that the Treasury nomination would go to either Yellen or current Fed Board member Lael Brainard. Media reports have indicated Brainard, currently the only Democrat on the Board of Governors, may be a candidate to succeed Fed Chair Jerome Powell when his term expires in 2022.
- With regard to banking regulation, the Office of the Comptroller of the Currency (OCC) falls under Treasury’s jurisdiction, though it is an independent bureau within the department.
- The Treasury Secretary is also designated under the Dodd-Frank Act as chair of the Financial Stability Oversight Council (FSOC), which coordinates communication among financial regulators. FSOC 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. The council also has the authority to set aside certain financial regulations published by the Consumer Financial Protection Bureau if those rules would threaten financial stability.
- Nominated as Fed chair by President Obama, Yellen presided over the imposition of new rules on banks intended to reduce their reliance on debt and increase their cash on hand, part of implementing the 2010 Dodd-Frank Act. After President Trump was elected, Yellen continued to advocate for maintaining most of those regulations. The president declined to re-nominate her as Fed chair when her term expired in 2018, opting instead for Jerome Powell who was said to have had a good working relationship with Yellen when they served together on the Fed Board.
- The Biden-Harris transition’s agency review team for financial regulatory matters is led by Gary Gensler, who served as the chair of the Commodity Futures Trading Commission (CFTC) under President Obama and as Under Secretary of the Treasury for Domestic Finance in the Clinton Administration. While at CFTC, Gensler advocated for strict regulation of derivatives. Some observers see Gensler’s prominent role in the transition as a signal that Biden will pursue a stronger financial regulatory posture after the relatively lighter regulatory touch of the Trump Administration.
Treasury asks Fed to return unused emergency lending funds; Fed reluctantly agrees. Treasury Secretary Steven Mnuchin has called on the Federal Reserve to allow several emergency lending programs, initiated in response to the coronavirus disease (COVID-19) pandemic, to expire by the end of the year. In a November 19 letter to Fed Chairman Jerome Powell, Mnuchin said the lending facilities established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March, “have clearly achieved their objectives.” Mnuchin indicated that the programs are no longer needed, writing, “Banks have the lending capacity to meet the borrowing needs of their corporate, municipal and nonprofit clients.” Programs appropriated under Treasury’s Exchange Stabilization Fund through the CARES Act and authorized under Section 13(3) of the Federal Reserve Act that will now run out of Treasury funding by December 31 include the:
- Primary Market Corporate Credit Facility
- Secondary Market Corporate Credit Facility
- Municipal Liquidity Facility
- Main Street Lending Program and
- Term Asset-Backed Securities Loan Facility.
Mnuchin’s letter did call for a 90-day extension of the Commercial Paper Funding Facility and the Primary Dealer Credit Facility, two programs originally adopted after the 2008 financial crisis and reauthorized this year in response to the financial impact of the pandemic. The secretary also called for 90-day extensions of the Money Market Liquidity Facility, adopted by Treasury and the Fed in March before the CARES Act was passed, and the Paycheck Protection Program Liquidity Facility, intended to bolster the effectiveness of the Small Business Administration-administered PPP.
- On November 20 Powell informed Mnuchin that, “We will work out arrangements with you for returning the unused portions of the funds allocated to the CARES Act facilities in connection with their year-end termination.” Powell’s letter further states, “As you noted in your letter, non-CARES Act funds remain in the [Exchange Stabilization Fund] and are, as always, available, to the extent permitted by law, to capitalize any Federal Reserve lending facilities that are needed to maintain financial stability and support the economy.”
- Congressional Democrats strongly criticized the move. “It is clear that Trump and Mnuchin are willing to spitefully destroy the economy and make it as difficult as possible for the incoming Biden Administration to turn this crisis around and lead the nation to a recovery,” House Financial Services Committee Chair Maxine Waters (D-CA) said in a November 19 statement. Four Senate Democrats, including Minority Leader Chuck Schumer (D-NY) and Banking Committee Ranking Member Sherrod Brown (D-OH), had called on Mnuchin and Powell to extend the emergency lending programs in a November 5 letter.
- Banking Committee Chair Mike Crapo (R-ID) said in a November 19 statement, “I agree with Secretary Mnuchin’s analysis of the success of the 13(3) facilities and the termination language of the CARES Act. Returning the unused $455 billion to the Treasury allows those funds to be re-appropriated for other uses, such as reducing our national debt, or providing additional targeted relief to sectors of the economy most in need.”
- Treasury under the incoming Biden administration could resume the lending programs in 2021. The Fed Board and the Treasury secretary must both agree to start any new loan programs by citing “unusual and exigent” circumstances.
Senate fails to advance Fed nominee Judy Shelton. The US Senate Republican majority was unable to break a filibuster to advance President Trump’s nomination of Judy Shelton to the Federal Reserve Board, due to the absence of key GOP lawmakers and opposition from others. The final tally on the procedural cloture vote to end debate and allow for a vote on the Senate floor was 47-50. Majority Leader Mitch McConnell, who had initially voted for the nominee, switched to vote against her, giving him the procedural right to bring Shelton’s nomination up for another vote in the near future. Shelton was nominated in January of this year, along with Christopher Waller, to fill the two vacancies on the seven-member Board. The prospect of Shelton joining the Board has been controversial since the president first announced his intention to nominate her in July 2019, due to her advocacy for returning to the gold standard and her past criticism of the Fed’s independence. Three Republican senators – Susan Collins of Maine, Mitt Romney of Utah, and Lamar Alexander of Tennessee – have come out against Shelton’s nomination. Further narrowing Shelton’s path to the nomination, Senator-elect Mark Kelly (D-AZ), could be sworn in as soon as November 30, since he won a special election to fill an unexpired term. Shelton’s nomination cleared the Senate Banking Committee on a party-line 13-12 vote in July. Waller’s nomination, considered much less controversial, was approved by the committee 18-7. But McConnell did not include Waller’s nomination in his cloture motion and it is unclear when a vote might occur on that nomination. If the Senate fails to approve Shelton and Waller before January, the nominations would expire and President-elect Joe Biden would be able to offer his own nominees for the Board vacancies.
Trump nominates Brooks to full term at OCC. President Trump on November 17 nominated Acting Comptroller of the Currency Brian Brooks to a full five-year term as comptroller. Brooks’s nomination would expire in January if he isn’t confirmed before the end of the year, unless Congressional Democrats agree to have it carry over to the next term. At this point it is unclear if the Senate Banking Committee would be able to move the nomination and if it would be brought to a floor vote in the Republican-controlled Senate, given the tight timeframe. Brooks assumed his current interim role in May and is serving in his acting capacity under the terms of the National Bank Act. He was designated as first deputy at the agency, which allowed him to take over upon former Comptroller Joseph Otting’s departure six months ago. Since taking over at the Office of the Comptroller of the Currency (OCC), Brooks has promoted the OCC’s positions on several fronts, including special-purpose charters for fintech and payments companies and revamping the Community Reinvestment Act. He has frequently clashed with state bank regulators but won the praise of financial innovation advocates in his drive to broaden the definition of what is considered a bank. If his full-term nomination does not advance, he could be removed from the post under his current status and the new Treasury secretary could replace him.
- In a statement, Brooks called the nomination “a great honor.”
- Banking Committee Ranking Democrat Sherrod Brown said in his statement, “Brian Brooks is not on the side of working people, and his nomination must be rejected immediately.”
- If Brooks is confirmed before the Biden Administration takes over, the standard for removing the comptroller is not as high as for other independent agencies: “The Comptroller of the Currency shall be appointed by the President, by and with the advice and consent of the Senate, and shall hold his office for a term of five years unless sooner removed by the President, upon reasons to be communicated by him to the Senate.” (12 U.S. Code § 2)
OCC proposes rule to prevent banks from blocking loans to certain industries. The OCC has proposed a rule that would stop banks from denying loans and other services to particular industries, such as fossil fuels, private prisons, firearms retailers and money services businesses. OCC’s notice of proposed rulemaking, announced November 20, would codify more than a decade of guidance from the agency that banks should provide access to services, capital and credit based on the risk assessment of individual customers, rather than broad-based decisions affecting whole categories or classes of customers. Bank practices which would be prohibited by the rulemaking have allegedly existed since “Operation Choke Point” – initiated in 2013 by the Obama Administration’s Department of Justice to target and “choke off” financial access for certain disfavored industries – gave rise to informal and unwritten recommendations by regulators to banks they supervise. Certain customers have experienced difficulty establishing and maintaining bank relationships when banks purportedly make sweeping decisions to distance themselves from industries, and banks are often circumspect in their basis for refusal of service – making it difficult for these businesses to respond or address concerns. The OCC said the proposal would apply to the largest banks in the country that may exert significant pricing power or influence over sectors of the national economy. “Fair access to financial services, credit, and capital are essential to our economy,” said Acting Comptroller of the Currency Brian P. Brooks. “This proposed rule would ensure that banks meet their responsibility to provide their services fairly since they enjoy special privilege and powers because if the system fails to provide fairness to all, it cannot be a source of strength for any.”
FHFA announces final capital rule for Fannie and Freddie. The Federal Housing Finance Agency has issued a final rule that establishes a new regulatory capital framework for Fannie Mae and Freddie Mac, the two most prominent government-sponsored enterprises (GSEs) which together provide guarantees for almost half of all US mortgages. Based on their combined size earlier this year, Fannie and Freddie would have to hold about $283 billion. At present, they hold roughly $35 billion and would need to make up the difference through a combination of retained earnings and possible future stock sales. The rule is a key step in the Trump Administration’s efforts to return the two companies to private ownership – an effort that many observers expect to be halted by the incoming Biden Administration. The GSEs were taken over by the government during the 2008 financial crisis in a process known as conservatorship. The final rule addresses both quality and quantity of capital, as well as backstop leverage requirements. According to a FHFA fact sheet, the final rule is largely similar to the proposed rule, announced in June, but includes changes reflecting public comments, including:
- Increasing the dollar amount of capital relief afforded to the enterprises’ credit risk transfer
- Better mitigating the model risks associated with a mortgage risk-sensitive framework
- More fully aligning credit risk capital requirements with those of other market participants and
- Reducing credit risk capital requirements on single-family mortgage exposures to borrowers impacted by COVID-19.
Dollar thresholds for exempt consumer credit and lease transactions remains unchanged. The Fed and the Consumer Financial Protection Bureau on November 18 announced final rules, official interpretations and commentary regarding the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply for determining exempt consumer credit and lease transactions in 2021. Amendments to the Truth in Lending Act and Consumer Leasing Act enacted as part of the Dodd-Frank Act require adjusting the thresholds annually based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Based on the annual percentage increase in the CPI-W as of June 1, the Regulation Z and M protections generally apply to consumer credit transactions and consumer leases of $58,300 or less in 2021 – the same level as the threshold the agencies set for 2020. However, private education loans and loans secured by real property are subject to the Truth in Lending Act regardless of the amount of the loan. The notices linked above will be published shortly in the Federal Register.
Threshold for smaller loan exemption from appraisal requirements for higher-priced mortgage loans also unchanged. Also on November 18, the Fed. Consumer Financial Protection Bureau and OCC announced a final rule keeping the Truth in Lending Act (TILA) smaller loan exemption threshold at $27,200 for the special appraisal requirements for higher-priced mortgage loans, as it was in 2020. The threshold amount and the final rule will be effective January 1, 2021, and, like the Regulation Z and M thresholds, is based on the annual percentage increase in the CPI-W as of June 1. TILA as amended by Dodd-Frank requires creditors to obtain a written appraisal before making a higher-priced mortgage loan unless the loan amount is at or below the threshold exemption. The linked notice will be published shortly in the Federal Register.
FSB report says COVID-19-induced March madness demonstrates need to address systemic risk of non-banks. The Financial Stability Board (FSB) is vowing to address concerns underscored by the market turmoil, economic shock and related liquidity stress that erupted in March of this year as the COVID-19 pandemic crashed the global economy. FSB, an international standard-setting body, on November 17 published a letter from its chair and two reports delivered to G20 Leaders ahead of their recent summit in Riyadh, Saudi Arabia. In the November 15 letter to the governments and central banks of the 19 largest sovereign economies plus the European Union, FSB Chair Randal Quarles wrote, “The shocks related to the COVID Event offer lessons for financial stability policy going forward.” While noting that banks and financial markets were mostly able to absorb the shock, Quarles, who also serves as the Federal Reserve’s vice chair for supervision, wrote that “some stresses were intensified through impacts on non-bank financial intermediation (NBFI), which has come to play an increasingly important role in the financing of the real economy and managing the savings of households and companies." FSB issued a report titled Holistic Review of the March Market Turmoil that lays out an NBFI work program focusing on three main areas:
- Work to examine and address specific risk factors and markets that contributed to amplification of the shock
- Enhancing understanding of systemic risks in NBFI and the financial system as a whole, including interactions between banks and non-banks and cross-border spillovers, and
- Assessing policies to address systemic risks in NBFI.
FSB’s analysis found that a “flight to safety” phase took place from late February to early March, when investors sold riskier assets and bought less risky ones. That was followed by a more acute phase in mid-March, the “dash for cash,” as investors sold risky as well as relatively safe assets in an attempt to get cash.
- FSB provided the G20 summit participants with another report, titled Covid-19 pandemic: Financial stability impact and policy responses, which considers the financial stability impact and policy responses to the COVID-19 economic fallout and examines financial stability developments since the G20’s July meeting of finance ministers and central bank governors.
Fed confronts financial stability implications of climate change. For the first time, the Fed has officially identified climate change as a potential threat to the stability of the financial system and said it is working to better understand the danger. In its semi-annual Financial Stability Report, published November 9, the Fed includes a discussion of the implications of climate change in the section titled “Near-Term Risks to the Financial System.” The report does not include any new mandates, policy directives or official guidance because the Fed is in the early stages of analyzing the issue. It does identify several approaches to “moderate climate-related financial vulnerabilities or the likelihood of large shocks,” including more transparency from financial firms on how their investments could be affected by frequent and severe weather and could improve the pricing of climate risks, “thereby reducing the probability of sudden changes in asset prices.”
- Randal Quarles told the Senate Banking Committee at a November 10 hearing that he expects the Fed to be accepted for membership early next year in the Network for Greening the Financial System, 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 New York Department of Financial Services is pushing state-regulated financial institutions to integrate financial risks from climate change into their governance frameworks, risk management processes and business strategies. In an October 29 letter to financial services CEOs in the state, NY DFS Superintendent Linda Lacewell outlined expectations for addressing climate risks. The move follows similar recent guidance to the insurance industry. New York’s action is discussed in greater detail in this November 9 DLA Piper Alert.