Federal Banking Agencies Issue Proposed Rule to Implement Changes to Capital Treatment of High-Volatility Commercial Real Estate Loans

On September 18, 2018, the federal banking agencies issued a release with a proposed rule to implement the changes made to the capital treatment of certain high-volatility commercial real estate (“HVCRE”) loans by section 214 of the Economic Growth, Regulatory Reform, and Consumer Protection Act (“EGRRCPA”). The deadline for comments on the proposal is 60 days after publication of the proposal in the Federal Register and thus will likely fall in late November.

Before turning to the substance of section 214 and the proposed rule, two features of the implementation of section 214 are worth noting. First, because section 214 took effect immediately upon enactment, the agencies provided initial guidance more than two months ago on how to report loans subject to section 214 in the call report. This guidance remains in effect, even though the proposed rule is unlikely to be finalized for several months. Second, section 214 by its terms applies only to capital treatment at the bank level, but under the proposed rule, the Federal Reserve Board would apply section 214’s changes to holding companies as well.

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CFTC and Monetary Authority of Singapore Sign Cooperation Agreement on FinTech Innovation

Late last week, the Commodities Futures Trading Commission (CFTC) and the Monetary Authority of Singapore (MAS) announced a cooperation agreement on FinTech innovation.  The agreement is principally focused on information sharing on FinTech trends and developments and on each regulator’s FinTech sandboxes.

The agreement could also, however, help FinTech companies move more easily between the U.S. and Singaporean markets.  In particular, the agreement establishes a referral mechanism where each regulator can refer to the other regulator innovators that seek to operate in, or have questions about, the other regulator’s jurisdiction.  The referral process is non-binding and does not obligate either regulator to accept the licenses or authorizations of the other regulator.  Nevertheless it may, in practice, help facilitate easier entry of U.S. innovators into Singapore markets, and vice-versa.

CFTC’s agreement with MAS is its second FinTech cooperation agreement with a non-US authority (the first being its agreement with the FCA), and it reflects both agencies’ ongoing efforts to engage their foreign counterparts in productive dialogue.

NYSDFS Sues to Block the OCC’s Special Purpose National Bank Charters for Fintech Companies

On September 14, 2018, Superintendent of the New York State Department of Financial Services (“NYSDFS”) Maria T. Vullo filed a complaint in federal court against the U.S. Office of the Comptroller of the Currency (“OCC”) to block the OCC from issuing any special purpose national bank (“SPNB”) charters. The OCC announced last month, after much industry anticipation, that a nondepository financial technology (“fintech”) company that engages in a core banking activity, such as paying checks or lending money, can now apply for a SPNB charter (the “Fintech Charter Decision”).

In its complaint, the NYSDFS argues that the Fintech Charter Decision exceeds the OCC’s authority under the National Bank Act (“NBA”), which limits national bank charters to institutions engaged in the “business of banking.” Through a regulation, the OCC has interpreted this phrase to include receiving deposits, paying checks, or lending money, whereas the NYSDFS’s suit takes the position that the “business of banking . . . at a minimum requires taking deposits.”

In addition, the complaint argues that the NBA does not expressly authorize the preemption of state law under a SPNB charter as would be required by the Tenth Amendment to the U.S. Constitution for the charter to have preemptive effect.

The NYSDFS complaint includes a scathing preliminary statement decrying the Fintech Charter Decision as “lawless, ill-conceived, and destabilizing of financial markets” and as “reckless folly.” The statement asserts that the preemption of state laws by SPNB charters would leave consumers less protected, enable “too big to fail” levels of consolidation, and create risks “similar to what was seen in the 2008 financial crisis.”

The NYSDFS’s suit asks the U.S. District Court for the Southern District of New York (“SDNY”) to strike down the Fintech Charter Decision and permanently enjoin the OCC from issuing “any other special purpose charter” to a nondepository institution under the OCC’s interpretive regulation.

In December 2017, the SDNY dismissed (paywall) a similar case brought by the NYSDFS on standing and ripeness grounds, noting that the OCC at the time was merely considering offering a SPNB charter and that the agency had not yet reached a “final” decision. In April 2018, the U.S. District Court for the District of Columbia dismissed (paywall) a similar case brought by the Conference of State Bank Supervisors on similar justiciability grounds. Notably, though, the court suggested in that dismissal that a renewed case might remain premature until the OCC actually issues a SPNB charter.

OCC Releases Proposal to Allow Federal Savings Associations to Exercise National Bank Powers

On September 10, 2018, the Office of the Comptroller of the Currency (“OCC”) released a proposed rule to implement section 206 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, codified in section 5A of the Home Owners’ Loan Act (“HOLA”).  Section 5A permits a federal savings association with total consolidated assets of $20 billion or less as of December 31, 2017, to elect to operate as a “covered savings association.”  A covered savings association would have the same rights and privileges as a national bank that has its main office situated in the same location as the home office of the covered savings association, and would be subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that would apply to such a national bank.  Under the terms of the statute, however, a covered savings association would still be treated as a federal savings association for certain purposes, including governance, dividends, and mergers.

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Banking Regulators Issue Joint Policy Statement Downplaying the Role of Supervisory Guidance in Enforcement

On September 11, 2018, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Bureau of Consumer Financial Protection (the “Bureau”, and, collectively, the “Agencies”) issued a statement “clarifying the role of supervisory guidance.” The release affirms that the Agencies “do not take enforcement actions based on supervisory guidance” and that such guidance “does not have the force and effect of law.” This statement continues a recent pattern in regulatory policy of downplaying the force of guidance documents, at least as they relate to enforcement actions.

The statement explains that, rather than create binding rules with the force and effect of law, guidance “outlines supervisory expectations or priorities” and/or provides examples of practices the Agencies consider acceptable under applicable legal standards, such as safety and soundness standards. Further, the Agencies state that guidance is often issued in part as a response to requests from supervised institutions to “provide insight to industry” and help “ensure consistency in the supervisory approach.”

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Past is Prologue: A New Approach to Cross-Border Application of Dodd-Frank Swaps Provisions

On September 4, 2018, in a speech at the City Guildhall in London, Chairman Giancarlo previewed a new approach to cross-border application of Dodd-Frank swaps provisions, which will be memorialized in a forthcoming white paper.

Chairman Giancarlo began his remarks with a historical overview of cross-border swaps regulation, highlighting post Dodd-Frank reforms. He then summarized the current regulatory regime, emphasizing the substantial progress that has been made in the world’s primary swaps trading jurisdictions to implement commitments made after the 2008 financial crisis at the Pittsburgh G-20 summit.

The Chairman went on to offer a Mea culpa and an apologia, stating that the CFTC’s current approach to applying swaps rules to its cross-border activities has resulted in a number of problems. The Mea culpa was offered for the 2013 cross-border guidance which imposed CFTC transaction rules on swaps traded by U.S. persons even in jurisdictions committed to G-20 swaps reforms. Chairman Giancarlo expressed his view that such an approach “alienated many overseas regulatory counterparts and squandered important American leadership and influence in global reform efforts.” The Chairman allowed that CFTC’s “over-expansive assertion of jurisdiction” may have been understandable in 2013 when other G-20 jurisdictions had not yet implemented swaps reforms. However, today, he views the approach as increasingly out of sync with the world’s major swaps trading regimes, which have since adopted comparable swaps reforms.

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With New CFTC Commissioners Onboard, Major CFTC Rulemakings Likely to Follow this Fall

On August 29, 2018, the U.S. Senate confirmed Dawn Stump and Dan Berkovitz as Commissioners of the Commodity Futures Trading Commissioner (“CFTC” or “Commission”). Each has extensive experience in the derivatives markets. Ms. Stump, among other things, has served as Executive Director and Senior Vice President of U.S. Policy for the Futures Industry Association. Mr. Berkovitz, among other things, served as General Counsel of the CFTC from 2009-2013. Ms. Stump and Mr. Berkovitz were sworn in last week, meaning the CFTC now has a full slate of Commissioners for the first time since 2014. Even without a full Commission, the CFTC under Chairman Giancarlo has undertaken various initiatives, including its regulatory simplification program Project KISS (which has led to several proposed and final rules), but now with a full Commission, it is likely that the CFTC will be able to move on several major rulemakings.

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Amendments to California Privacy Law Expand Exemption for Consumer Financial Data

On August 31, 2018, the California Senate approved a “clean-up” bill that, if signed by the governor, would amend the California Consumer Privacy Act (“CCPA”), California’s sweeping new privacy law enacted in June.  The amendments fall short of addressing many of the most significant criticisms of the CCPA, and are, on the whole, relatively minor. Our sister blog, Inside Privacy, has a full rundown of the changes.

However, while these amendments appear modest, they could transform the effect of the CCPA on financial institutions. In particular, the bill clarifies the exemption for personal information that is regulated under the Gramm-Leach-Bliley Act (“GLBA”) and adds an exemption for personal information regulated under the California Financial Information Privacy Act (or “S.B. 1”). These two statutes regulate the privacy of consumer financial information.

Most importantly, the amendments delete the CCPA’s language providing that the GLBA exemption only applies if the CCPA is “in conflict with” GLBA. GLBA contains a similar provision that preempts state laws that conflict with GLBA:  under that law, a state law is preempted if it is “inconsistent with” GLBA, and “then only to the extent of inconsistency.” Further, GLBA makes clear that a state law that provides “greater protection” than GLBA is not inconsistent with it.

Because the CCPA arguably provides “greater protection” to consumers than GLBA, the effect of the original GLBA exemption was unclear.

The amended bill clarifies that “personal information collected, processed, sold, or disclosed pursuant to” GLBA or S.B. 1 would not be subject to most provisions of the CCPA. (The provision that creates a private right of action for data breaches would still apply to this data.) While the full breadth of the exemption is not certain, personal information subject to GLBA and S.B. 1 could include nonpublic personal information as defined under those statutes, which consists generally of personally identifiable financial information relating to consumers.

OCC Releases Advanced Notice of Proposed Rulemaking Regarding CRA Framework

On August 28, 2018, the Office of the Comptroller of the Currency (“OCC”) released an advanced notice of proposed rulemaking (“ANPR”) inviting comments on a revised Community Reinvestment Act (“CRA”) framework. In the ANPR, the OCC described its vision for a new CRA framework that would:

  • encourage more lending and investment activity in low and moderate income communities;
  • provide more consistency across CRA evaluations and ratings; and
  • promote clarity regarding CRA-qualifying activities.

The ANPR requests responses to 31 questions across several topic areas, including the current CRA regulatory approach; a modernized CRA regulatory approach; CRA-qualifying activities; and recordkeeping and reporting.

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Dodd-Frank Reform Update: Banking Agencies Issue Two Interim Final Rules; Senate Republicans Push for Regulatory Relief for Certain Banks

Following enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) in May 2018, the Board of Governors of the Federal Reserve System (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC” and collectively, the “Agencies”), have begun the process of implementing the regulatory relief required under the law.

Most recently, the Agencies issued two interim final rules under EGRRCPA, and Senate Republicans submitted a letter to FRB Vice Chairman for Supervision Randal Quarles expressing concern about recent public comments by FRB leadership.

Interim Final Rule Regarding High-Quality Liquid Assets – Municipal Securities

On August 22, 2018, the Agencies issued an interim final rule to treat certain municipal securities as high-quality liquid assets. EGRRCPA required the Agencies to amend their liquidity coverage ratio (LCR) rule to treat municipal obligations that are “liquid and readily-marketable” and “investment grade” as high-quality liquid assets, and the interim rule implements this requirement.

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