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Nutter Bank Report, September 2018

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09.28.2018 | Legal Update

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  1. Federal Banking Agencies Issue Joint Statement on the Role of Supervisory Guidance
  2. FinCEN Creates Exceptions to Beneficial Ownership Rules for Rollovers and Renewals
  3. OCC Proposal Would Allow Certain Federal Thrifts to Elect National Bank Powers
  4. Federal Banking Agencies Propose Changes to Definition of HVCRE Exposure
  5. Other Developments: Brokered Deposits and Credit Report Disclosures

1. Federal Banking Agencies Issue Joint Statement on the Role of Supervisory Guidance

The federal banking agencies, along with the CFPB and the NCUA, have issued a joint statement clarifying the role of supervisory guidance—such as advisories, bulletins, policy statements, and answers to frequently asked questions—for banks and other regulated institutions. The joint statement issued on September 11 explains that supervisory guidance does not have the force and effect of a law or regulation, and that the agencies do not take enforcement actions based on supervisory guidance. According to the joint statement, supervisory guidance can outline the agencies’ supervisory expectations or priorities and articulate the agencies’ general views about appropriate practices on a particular issue. The joint statement also explains that examiners will not criticize a financial institution for a “violation” of supervisory guidance. Examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation, however, and may cite supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and methods for addressing compliance with laws or regulations. Click here for a copy of the joint statement.

Nutter Notes: According to the joint statement, the agencies intend to limit the use of numerical thresholds in describing the agencies’ expectations in supervisory guidance. The agencies will continue to use numerical thresholds to “tailor, and otherwise make clear, the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.” To the extent that any supervisory guidance includes numerical thresholds, the joint statement clarifies that such thresholds are only exemplary and do not represent legal or regulatory requirements. The agencies also intend to avoid issuing multiple supervisory guidance documents on the same subject, according to the joint statement. The agencies will continue their practice of seeking public comment on certain supervisory guidance documents, but the joint statement explains that seeking public comment does not mean that such guidance is intended to be a regulation or have the force and effect of law. The joint statement explains that the public comment process helps the agencies improve their understanding of an issue, gather information on institutions’ risk management practices, or find ways reduce regulatory burdens.

2. FinCEN Creates Exceptions to Beneficial Ownership Rules for Rollovers and Renewals

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has published an administrative ruling that grants an exemption to banks and other covered financial institutions from certain requirements under FinCEN’s Beneficial Ownership Rule, which applies to legal entity customers of covered financial institutions. The administrative ruling issued on September 7 provides that covered financial institutions will not be required to identify and verify beneficial ownership information in connection with certificate of deposit rollovers, renewals, modifications, and extensions of loans, commercial lines of credit and credit cards that do not require underwriting review and approval, and safe deposit box rental renewals. The exceptions only apply to the rollover, renewal, modification, or extension of any of these types of accounts occurring on or after May 11, 2018. The exceptions created by the administrative ruling do not apply to the initial opening of any of these types of accounts and do not apply to relieve any covered financial institution of its customer due diligence requirements under anti-money laundering program requirements. Click here for a copy of the administrative ruling.

Nutter Notes: The administrative ruling results from guidance that FinCEN issued on the Beneficial Ownership Rule earlier this year. The Beneficial Ownership Rule requires covered financial institutions to obtain information on the beneficial owners of a legal entity that opens a new account, even for existing customers. In April, FinCEN released answers to frequently asked questions about the rule in which it stated that “[c]onsistent with the definition of ‘account’ in the [Customer Identification Program] rules and subsequent interagency guidance, each time a loan is renewed or a certificate of deposit is rolled over, the bank establishes another formal banking relationship and a new account is established.” FinCEN’s guidance explained that, because certificate of deposit rollovers and certain loan renewals are the establishment of a new account relationship, covered financial institutions must obtain the required information at the first renewal following the applicability date of the Beneficial Ownership Rule. As a result of this position, the industry requested that FinCEN except these accounts from the obligations of the Beneficial Ownership Rule because industry practice is not to treat such rollovers and renewals as the opening of a new account because there is typically no change to account information, among other considerations. FinCEN granted temporary relief from the Beneficial Ownership Rule in May and extended that relief for 30 days last month. The administrative ruling supersedes that temporary relief.

3. OCC Proposal Would Allow Certain Federal Thrifts to Elect National Bank Powers

The OCC has issued a proposed rule that would allow federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017, to elect national bank powers and operate as “covered savings associations.” According to the OCC, the proposed rule released on September 18, if adopted, would provide certain federal savings associations with flexibility to “adapt to new economic conditions and business environments without changing their charters.” The proposed rule would implement a provision of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) that amended the Home Owners’ Loan Act (“HOLA”) to require the OCC to issue regulations allowing federal savings associations with total consolidated assets of $20 billion or less as of December 31, 2017, to elect national bank powers. The new section of the HOLA also requires the OCC to issue rules that, among other things, establish streamlined standards and procedures for elections to operate as a covered savings association and that clarify requirements for the treatment of covered savings associations. Public comments on the proposed rule are due by November 19, 2018. Click here for a copy of the proposed rule.

Nutter Notes: Under the proposed rule, a covered savings association would generally have the same rights and privileges as a national bank that has its main office in the same state as the home office of the covered savings association. A covered savings association making such an election would be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that apply to a national bank, with certain exceptions. The covered savings association would retain its federal savings association charter and continue to be treated as a federal savings association for most purposes, including corporate governance, distribution of dividends, consolidation, merger, dissolution, conversion, conservatorship, and receivership. A covered savings association would be permitted to continue to operate any branch or agency that it operates on the date on which its election to exercise national bank powers takes effect under the proposed rule. The proposed rule would also allow a covered savings association to continue to exercise national bank powers even if its total consolidated assets exceed $20 billion after it makes the election.

4. Federal Banking Agencies Propose Changes to Definition of HVCRE Exposure

The federal banking agencies have jointly issued a proposal to amend their capital rules that would revise the definition of a High Volatility Commercial Real Estate (“HVCRE”) exposure as required by Section 214 of the EGRRCPA. The proposed amendment released on September 18 would also provide guidance on the interpretation of certain aspects of the revised HVCRE exposure definition. Specifically, the proposed amendment would revise the definition of an HVCRE exposure to conform to the new statutory definition in the EGRRCPA of a high volatility commercial real estate acquisition, development, or construction (“HVCRE ADC”) loan, which includes a credit facility that is secured by real property, primarily finances or refinances acquisition, development, or construction of real property that will be income-producing property, and is dependent for repayment on future income or sales proceeds from, or refinancing of, the real property. The proposed amendment would exclude from the definition of HVCRE exposure loans that finance the acquisition, development, or construction of one-to-four family residential properties, community development projects, agricultural land, existing income-producing property securing permanent financings, certain commercial real property projects, real property where the loan has been reclassified as a non-HVCRE ADC loan, and real estate where the loan was made before January 1, 2015. Public comments on the proposed amendment will be due within 60 days after it is published in the Federal Register, which is expected shortly. Click here for a copy of the proposed amendment.

Nutter Notes: The federal banking agencies’ capital rules adopted in 2013 included provisions to capture the risk of certain kinds of real estate exposures that the capital rules define as HVCRE exposure. Currently, HVCRE exposure is defined to include a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property. The HVCRE exposure definition generally excludes ADC credit facilities that finance one-to-four family residential properties, community development, or agricultural land exposures, and commercial real estate projects where the borrower meets certain contributed capital requirements and other prudential criteria. HVCRE exposures are assigned a heightened risk weight of 150% under the capital rules. Section 214 of the EGRRCPA amended the Federal Deposit Insurance Act (“FDI Act”) to provide a statutory definition of an HVCRE ADC loan and to provide that the federal banking agencies may only require a depository institution to assign a heightened risk weight to an HVCRE exposure if such exposure is an HVCRE ADC loan under the EGRRCPA. The statutory HVCRE ADC loan definition excludes any loan made prior to January 1, 2015.

5. Other Developments: Brokered Deposits and Credit Report Disclosures

  • FDIC Proposes Change to Brokered Deposit Rules for Reciprocal Brokered Deposits

The FDIC has released a proposal on September 13 that would revise the FDIC’s current brokered deposit regulations to except a capped amount of reciprocal brokered deposits from treatment as brokered deposits for certain banks. Under the proposed rule, a well-capitalized and well-rated bank would not be required to treat reciprocal deposits as brokered deposits up to the lesser of 20% of its total liabilities or $5 billion, and banks that are not both well-capitalized and well-rated would also be permitted to exclude reciprocal deposits from their brokered deposits under certain circumstances.

Nutter Notes: The FDIC considers reciprocal deposits to be those based on an arrangement  involving a network of banks, managed by a third party, that place funds at other participating banks in order for depositors to receive insurance coverage for the entire amount of their deposits. The proposed rule on the treatment of reciprocal deposits is the first of a two-part effort by the FDIC to revisit the brokered deposit rules. Public comments on the proposed rule will be due within 30 days after it is published in the Federal Register, which is expected shortly. Click here for a copy of the proposed rule.

  • CFPB Updates Model Consumer Report Disclosure Forms

The CFPB issued an interim final rule with a request for public comments on September 12 that updates the model forms under its Regulation V for the Summary of Consumer Identity Theft Rights and the Summary of Consumer Rights to incorporate a notice of consumer rights required by a new Fair Credit Reporting Act (“FCRA”) provision added by the EGRRCPA. The FCRA now requires that a new notice of rights be included whenever a consumer is required to receive a summary of rights under Section 609 of the FCRA. The interim final rule became effective on September 21, 2018.

Nutter Notes: The new notice of rights does not appear in the model forms currently in Appendices I and K of Regulation V. The interim final rule amends the model forms to incorporate the new required notice of rights, amends the model form in Appendix I to reflect a statutory change to the minimum duration of initial fraud alerts, and makes adjustments to update contact information for certain FCRA enforcement agencies in the model form in Appendix K. Public comments on the interim final rule are due by November 19, 2018. Click here for a copy of the interim final rule.

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 ChambersandPartners.com. 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 

tcurry@nutter.com

Tel: (617) 439-2087

Kenneth F. Ehrlich

kehrlich@nutter.com

Tel: (617) 439-2989

Michael K. Krebs

mkrebs@nutter.com

Tel: (617) 439-2288

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