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Nutter Bank Report, July 2018

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  1. Guidance Issued on Immediate Implementation of Certain Provisions of the EGRRCPA
  2. Federal Appeals Court Rules That the FHFA Is Unconstitutionally Structured
  3. OCC Issues Updated Guidance on Capital and Dividends and Various Supervisory Topics
  4. GAO Report Warns That Banks May Be Derisking Due to BSA/AML Supervisory Pressure
  5. Other Developments: Loan-to-Deposit Ratios and Call Reports

1. Guidance Issued on Immediate Implementation of Certain Provisions of the EGRRCPA

The federal banking agencies have published joint guidance on changes to regulatory and reporting requirements that are immediately affected by the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). The joint guidance issued on July 6 describes certain temporary positions that the agencies will take to accommodate the changes required by the EGRRCPA until the agencies can formally incorporate those changes into their regulations. The changes affect federal regulations that implement the Volcker Rule, limitations on high volatility commercial real estate exposures, and examination cycles, among other matters. For example, the EGRRCPA amends section 13 of the Bank Holding Company Act (the “BHC Act”), commonly referred to as the Volcker Rule, by narrowing the definition of the central term “banking entity” and revising the statutory provisions related to the naming of covered funds. Because those amendments are effective on the EGRRCPA’s date of enactment, the agencies announced that they will not enforce the final rule that implements the Volcker Rule in a manner inconsistent with the amendments made by the EGRRCPA to section 13 of the BHC Act. Click here for a copy of the agencies’ joint guidance on the EGRRCPA.

    Nutter Notes: In addition, the EGRRCPA provides that the federal banking agencies may only require a depository institution to assign a heightened risk weight (150%) to a high volatility commercial real estate (“HVCRE”) exposure if such exposure qualifies under the new, narrower definition of an “HVCRE ADC Loan,” as defined in section 214 of the EGRRCPA. That change also became effective upon the enactment of the EGRRCPA. Accordingly, the agencies’ guidance clarifies that a bank should risk-weight at 150% only those commercial real estate exposures it believes meet the statutory definition of HVCRE ADC Loan. When reporting HVCRE exposures on their Call Reports, the guidance advises banks to use available information to reasonably estimate and report only HVCRE ADC Loans. The guidance also explains that banks may refine their estimates in good faith as they obtain additional information, but will not be required to amend previously filed reports as these estimates are adjusted. The EGRRCPA also increases the total asset threshold for well-capitalized insured depository institutions to be eligible for an 18-month examination cycle from $1 billion to $3 billion, making an 18-month examination cycle available to a larger number of “1-rated” institutions, and authorizes the agencies to make corresponding changes for “2-rated” institutions. The agencies announced separately that the CFPB will soon issue guidance on the applicability of the EGRRCPA to HMDA data collected in 2018, in addition to information on formatting and submission of HMDA data.

2. Federal Appeals Court Rules That the FHFA Is Unconstitutionally Structured

A panel of the United States Court of Appeals for the Fifth Circuit has ruled that the Federal Housing Finance Agency (“FHFA”), the federal regulator of Fannie Mae and Freddie Mac, is unconstitutionally structured. The July 16 ruling came in a case brought by Fannie Mae and Freddie Mac shareholders who challenged an agreement between the FHFA, as conservator to Fannie Mae and Freddie Mac, and the U.S. Treasury Department. Under the agreement, the Treasury Department provided billions of dollars in capital and, in exchange, Fannie Mae and Freddie Mac were required to pay the Treasury Department quarterly dividends equal to their entire net worth. This exchange is commonly known as a “net worth sweep.” The shareholders challenged the leadership structure of the FHFA, among other things, in an attempt to invalidate the net worth sweep. In its ruling, the Fifth Circuit explained that the combined effect of the FHFA’s leadership structure makes the FHFA so insulated from executive branch control and oversight that its structure violates the constitutional principle of separation of powers. However, the court also ruled that the FHFA was within its statutory authority when it enacted the net worth sweep. Click here for a copy of the court’s opinion.

    Nutter Notes: The Fifth Circuit Court’s decision on the constitutionality of the leadership structure of the FHFA may affect how other courts address similar challenges to the constitutionality of the leadership structure of the CFPB. The leadership structure of the FHFA is similar to that of the CFPB. Like the FHFA, the CFPB is under the authority of a single director who is removable only “for cause” by the President, the CFPB’s funding stream is outside the normal Congressional appropriations process, and the CFPB does not have a bipartisan leadership composition requirement. Those elements are the underpinnings of the Fifth Circuit’s ruling that the FHFA is unconstitutionally structured. While the D.C. Circuit Court of Appeals ruled in January that the CFPB is constitutionally structured, that ruling overturned a three-judge panel of the D.C. Circuit, which had held that the CFPB is not constitutionally structured. More recently, on June 21, a federal district court judge in the Southern District of New York ruled that the CFPB’s structure is unconstitutional, contradicting the en banc ruling of the D.C. Circuit Court of Appeals. The disagreements among these federal courts may eventually require the Supreme Court to consider the question of the constitutionality of the leadership structure of the FHFA and the CFPB.

3. OCC Issues Updated Guidance on Capital and Dividends and Various Supervisory Topics

The OCC has issued a number of new and revised booklets of the Comptroller’s Handbook. On July 23, the OCC issued the “Capital and Dividends” booklet of the Comptroller’s Handbook, which revises and replaces the “Capital Accounts and Dividends” booklet. The “Capital and Dividends” booklet presents the regulatory capital framework and discusses the regulatory capital rules that define regulatory capital and establish minimum capital standards. The booklet also provides guidance to examiners for assessing banks’ capital adequacy and compliance with capital and dividend regulations. The OCC also issued on June 28 revised “Bank Supervision Process,” “Community Bank Supervision,” “Compliance Management Systems,” and “Large Bank Supervision” booklets of the Comptroller’s Handbook. Click here to access the “Capital and Dividends” booklet and click here to access the OCC’s other booklets revised and updated as of June 28.

    Nutter Notes: In addition to the new and revised booklets, the OCC on June 28 updated the “Federal Branches and Agencies Supervision” booklet. Among other things, the revisions and updates clarify the applicability of each booklet to community, mid-size, and large banks. The revisions and updates also incorporate the revised Uniform Interagency Consumer Compliance Rating System, and add asset management core assessment guidance to the “Large Bank Supervision” booklet. According to the OCC, factors for assigning the trust component rating in the regulatory ratings core assessment are unchanged, and examiners will continue to use the Uniform Interagency Trust Rating System. The booklets also provide examiner guidance for assessing asset management and BSA/AML/OFAC risks. The regulatory guidance for assessing the quantity of BSA/AML/OFAC risk is consistent with appendices J and M of the FFIEC BSA/AML Examination Manual, according to the OCC. The booklets clarify the roles of a bank’s board of directors and management, and include revised concepts and references regarding third-party risk management and new, modified, or expanded bank products or services.

4. GAO Report Warns That Banks May Be Derisking Due to BSA/AML Supervisory Pressure

The U.S. Government Accountability Office (the “GAO”) has issued a report recommending that the federal banking agencies and FinCEN conduct a review of BSA/AML regulations, examinations, and regulatory enforcement that focuses on how banks’ BSA/AML risk management concerns may be affecting access to banking services, particularly for Southwest border residents and businesses, and for money services businesses that serve certain fragile countries. The GAO report published on June 26, titled Bank Secrecy Act: Further Actions Needed to Address Domestic and International Derisking Concerns, considers the extent to which the federal banking agencies have taken effective actions to address “derisking”—the practice of banks limiting certain services or terminating customer relationships to avoid perceived regulatory concerns about facilitating money laundering or other criminal activity such as financing to terrorist groups. In February 2018, the GAO reported that money laundering risk is high in the Southwest border region because of the high volume of cash transactions, and that BSA/AML regulatory concerns have played a role in banks’ decisions to terminate and limit accounts and close branches. In March 2018, the GAO reported that money transmitters serving certain countries it identified as fragile, such as Haiti, Liberia, Nepal, and Somalia, reported losing bank accounts or having restrictions placed on them during the last 10 years, resulting in a number of money transmitters resorting to nonbanking channels to transfer funds. The June 2018 report raised the concern that failure to address derisking could result in more foreign remittances being processed through nonbanking channels, which are generally less transparent than banking channels and more susceptible to the risk of money laundering and terrorism financing. Click here to view the GAO’s report on derisking.

    Nutter Notes: In February 2018, the GAO reported that many Southwest border banks may be engaging in derisking due to BSA/AML concerns resulting in a diminution of services and branches available to residents and businesses in the region. The GAO also found that, nationally, analyses suggest that counties that are urban, younger, have higher income, or have higher money laundering-related risk were more likely to lose bank branches. In March 2018, the GAO reported that most of the banks interviewed expressed concerns about account holders who are money transmitters because they tended to be low-profit, high-risk clients. The banks that served money transmitters also reported significantly increased BSA/AML compliance costs over the last 10 years because they had to hire additional staff and upgrade information systems to conduct electronic monitoring of all transactions processed through their systems. Some banks reported to the GAO that the revenue from money transmitter accounts was at times not sufficient to offset the BSA/AML compliance costs, leading to terminations and restrictions on money transmitter accounts. The GAO has concluded that the federal banking agencies have not taken sufficient actions to address these concerns and have not evaluated all factors that may influence banks to derisk or close branches. GAO also concluded that the Treasury Department lacks the data needed to assess possible effects on remittance flows.

5. Other Developments: Loan-to-Deposit Ratios and Call Reports

  • OCC Publishes Guidance on Host State Loan-to-Deposit Ratios

The OCC issued guidance on July 25 that explains how the federal banking agencies’ host state loan-to-deposit (“LTD”) ratios are used to determine compliance with section 109 of the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 (“IBBEA”). To determine compliance with section 109, the appropriate federal banking agency first compares a bank’s estimated statewide LTD ratio to the estimated host state LTD ratio for a particular state. If the bank’s statewide LTD ratio is at least one-half of the published host state LTD ratio, the bank has complied with section 109 according to the guidance.

    Nutter Notes: The federal banking agencies published on June 15 the host state LTD ratios that the agencies will use to determine compliance with section 109 of the IBBEA. In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Section 106 of the Gramm-Leach-Bliley Act of 1999 amended coverage of section 109 of the IBBEA to include any branch of a bank controlled by an out-of-state bank holding company. Click here to access the OCC’s guidance.

  • FDIC Publishes Guidance on Changes to Second Quarter 2018 Call Reports

The FDIC has issued guidance on changes to the Call Reports for the second quarter of 2018, including changes required by the EGRRCPA. According to the guidance, the EGRRCPA includes two sections that affect reporting in the second quarter 2018 Call Report: the risk weighting of HVCRE ADC Loans for risk-based capital purposes and an exclusion of a capped amount of reciprocal deposits from treatment as brokered deposits by qualifying institutions.

    Nutter Notes: The guidance also explains certain additional burden-reducing revisions that the federal banking agencies are implementing in all three versions of the Call Report for the second quarter of 2018, which result from ongoing efforts by the FFIEC and the banking agencies to ease reporting requirements and lessen reporting burden that are focused on small institutions. Click here for a copy of the FDIC’s Call Report guidance, which was issued on July 16.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Thomas J. Curry

Tel: (617) 439-2087

Kenneth F. Ehrlich

Tel: (617) 439-2989

Michael K. Krebs

Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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