Bank Regulatory News and Trends

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

In this edition:

• Community Reinvestment Act final rule published.
• Treasury announces CDFI certification application updates.
• Financial Services Chair Patrick McHenry will not seek re-election.
• Fed to gather more data, agencies extend comment period on large bank capital proposals.
• Comment period extended on long-term debt proposal for large banks.
• OCC guidance to banks engaged in venture lending.
• More states requiring a license under the bank partnership model.
• Potential for updated character and fitness requirements for New York bank executives.
• Banking agencies finalize climate-risk guidance for large banks.

Community Reinvestment Act final rule published. In a much anticipated step, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) jointly issued a final rule to modernize regulations implementing the Community Reinvestment Act (CRA).

Last year, the three federal banking agencies proposed a requirement for large banks to lend to communities in areas where they have a concentration of mortgage and small-business loans, rather than primarily in the vicinity of their physical branches, arguing that it would make the law more effective in today’s digital banking age. That proposal, and several others under the original proposed rule, ran into industry opposition and arguments that such a loan-threshold test could result in lenders restricting loans in more sparsely populated areas to avoid triggering CRA obligations.

After receiving 950 comment letters from stakeholders during the public comment period, the final rule, issued on October 24, 2023, modifies the initial proposal including by moderating the scope of the retail-lending assessment area while raising the threshold for the number of loans it takes to trigger CRA obligations, according to an Fed staff memo to the Board of Governors. The agencies said the final rule will accomplish the same set of key goals they initially set out to accomplish, including:

• Adapting to changes in the banking industry such as online and mobile banking
• Providing greater clarity and consistency in application of CRA regulations through a new metrics-based approach for evaluating bank retail lending and community development financing
• Using benchmarks based on peer and demographic data; and
• Tailoring CRA evaluations and data collection to bank size and type.

Treasury announces CDFI certification application updates. The US Treasury Department’s Community Development Financial Institutions (CDFI) fund on December 7, 2023 unveiled modifications to how banks, credit unions, and other lenders are certified as CDFIs. The revised CDFI Certification Application, Annual Certification and Data Collection Report (ACR), and Transaction Level Report (TLR) were approved by the Office of Management and Budget (OMB) and incorporate changes made in response to public comments received last year.

These changes include new standards for how certified lenders offer certain loan products including mortgages, requirements for CDFIs to submit demographic information about their board and executive leadership, and a streamlined process for applicants to submit their strategic plans and other documentation. The CDFI Fund is instituting a phased approach for organizations seeking to become newly certified or which are renewing their CDFI certification.

• Organizations that are not currently certified may immediately apply for CDFI certification after December 20, 2023, when the Certification Application Awards Management Information System reopened its submission portal.
• All currently certified CDFIs must reapply for certification using the revised version of the application by December 20, 2024. Until then, currently certified CDFIs will retain their status and remain eligible to apply for all CDFI Fund programs where certification is an eligibility requirement.

Financial Services Chair Patrick McHenry will not seek re-election. Representative Patrick McHenry (R-NC), chair of the House Financial Services Committee announced on December 5, 2023 that he will be retiring from Congress at the end of his current term, following the November 2024 elections. The announcement has already touched off speculation as to who would succeed Chair McHenry as the committee’s top Republican. The second highest-ranking Republican on the committee is Representative Frank Lucas (R-OK), who currently chairs another committee. Representative French Hill (R-AR) is currently designated as vice-chair of Financial Services and has been a key player on the issue of cryptocurrency regulations.

However, committee chairs are not selected strictly on the basis of seniority. Two other senior committee members who are considered top contenders are Representative Andy Barr (R-KY), who chairs the Financial Institutions and Monetary Policy Subcommittee, and Representative Bill Huizenga (R-MI), who currently chairs the Oversight and Investigations Subcommittee and was previously the top Republican on the Capital Markets Subcommittee.

• In a media interview, Chair McHenry said his agenda for 2024 will include cryptocurrency, data privacy, and capital formation issues, as well as a planned January oversight hearing on “rogue regulators.”

Fed to gather more data, agencies extend comment period on large bank capital proposals. Responding to industry and Congressional concerns, the federal banking regulatory agencies have decided to give stakeholders more time to respond to two proposals regarding capital requirements for large banks.

In July 2023, following stress tests conducted earlier in the year, the Federal Reserve approved the individual capital requirements for all banks with $100 billion or more in total assets. The new requirements, originally slated to go into effect October 1, 2023, have several components, including:

• The minimum capital requirement of 4.5 percent for all firms
• The stress capital buffer requirement, determined from stress test results, of at least 2.5 percent
• If applicable, a capital surcharge for global systemically important banks (G-SIBs), which is updated in the first quarter of each year to account for the overall systemic risk of each G-SIB
• Automatic restrictions on both capital distributions and discretionary bonus payments if a bank’s capital dips below its total requirement.

The proposal was approved at the Fed Board’s July 27, 2023 meeting by a 4-2 vote, a somewhat divisive outcome for the usually consensus-driven central bank. On October 20, 2023, the Fed announced it was launching a supplemental data collection to gather more information from the banks affected by the proposal in an effort to further clarify its estimated effects, and inform any final rule, with summaries to be made public. The submission deadline for the data collection is now January 16, 2024.

Also on July 27, 2023, the Fed, along with the FDIC and the OCC, requested comment on a proposal to modify large bank capital requirements to implement the final components of the Basel III agreement, also known as the Basel III endgame. Following bank turmoil and certain failures in March of this year, the proposal was intended to strengthen the banking system by applying a broader set of capital requirements to more large banks. The proposal would generally apply to banks with $100 billion or more in total assets, and community banks would not be impacted by the proposal.

On October 20, 2023, the three agencies announced that the comment period for the proposal would also be extended to January 16, 2024.

Comment period extended on long-term debt proposal for large banks. Federal banking regulatory agencies announced that they are extending the public comment period on a proposed rule to require certain large depository institution holding companies, US intermediate holding companies of foreign banking organizations, and insured depository institutions to issue and maintain outstanding a minimum amount of long-term debt until January 16, 2024.

In a notice of proposed rulemaking published in September, the federal banking agencies sought public comment on their joint proposal to require banks with total assets of $100 billion or more to maintain a layer of long-term debt which the agencies said would improve financial stability by increasing the resolvability and resiliency of such institutions. The agencies said recent large bank failures “have underscored the importance of supplementary, loss absorbing resources that regulators can use to resolve banks in a way that reduces costs and risk of disruption to the banking system.”

The proposal would give regulators additional resources to resolve failed banks and prevent contagion, foster depositor confidence, and decrease costs to the Deposit Insurance Fund, according to a fact sheet issued by the agencies in conjunction with the original September announcement.

OCC guidance to banks engaged in venture lending. On November 1, 2023, the OCC issued a bulletin to all banks under its regulations that are involved, or are considering involvement, in venture lending, or what the OCC refers to as “commercial loans to early-, expansion-, and late-stage companies.” The bulletin addresses the heightened risk that comes with lending to emerging growth companies, provides guidance on managing these risks, and includes discussions related to common venture lending risks such as approved risk management practices, guidance on risk-rating loans, evaluating repayment capacity, and capital adequacy. More information about this guidance can be found in the DLA Piper publication available here.

More states requiring a license under the bank partnership model. Connecticut and Nebraska have recently joined the list of states to enact laws requiring bank partners to be licensed for consumer loans even where they may not originate or hold the note. While the two states have taken somewhat different approaches, both laws address third-party marketers and servicers that act on behalf of insured depository institutions in connection with the origination and servicing of certain non-mortgage consumer loans.

• In Connecticut, legislation signed into law amends the definition of “small loan” to include any loan with an amount or value of $50,000 or less, while maintaining exemptions that include residential mortgage loans and retail installment contracts. The law provides that any person acting as an agent, service provider, or in another capacity for an insured depository institution must be licensed if:
  • (i) Such person holds, acquires, or maintains, directly or indirectly, the predominant economic interest in a small loan
  • (ii) Such person markets, brokers, arranges, or facilitates the loan and holds the right, requirement, or right of first refusal to purchase the small loans, receivables, or interests in the small loans, or
  • (iii) The totality of the circumstances indicate that such person is the lender and the transaction is structured to evade certain statutory requirements.
• In conjunction with the new law, which went into effect on October 1, 2023, the Connecticut Department of Banking issued industry guidance confirming that any non-banks that are partnering with banks to make small dollar loans ($50,000 or less and annual percentage rate, or APR, in excess of 12 percent) will need to be licensed. The guidance also states that licensure is required for persons acquiring or servicing small loans in amounts of $15,000 or less with APRs in excess of 12 percent that were originated prior to October 1, 2023.
• The Nebraska legislation amends the definition of “loan” to include any loan to a consumer with an interest rate greater than 16 percent and a principal balance of less than $25,000. The law states that a “license shall be required for any person that is not a financial institution who, at or after the time a loan is made by a financial institution, markets, owns in whole or in part, holds, acquires, services, or otherwise participates in such loan.” In contrast with Connecticut, the Nebraska statute does not include a requirement that the party act on behalf of a financial institution, or that it holds the “predominant economic interest” in a loan.

Illinois, Maine, and New Mexico are among other states that have enacted similar laws regarding bank partnerships, treating non-bank entities as the “true lender” if they hold the predominant economic interest in the loans.

Potential for updated character and fitness requirements for New York bank executives. The New York Department of Financial Services (DFS) proposed expanding the obligations of state-regulated banks and non-bank financial institutions regarding diligence of officers, directors, managers, and other senior officers. The proposed guidance would require these institutions’ diligence to include issues such as conflicts of interest and compliance with policies, both at onboarding and on a “regular ongoing basis,” although the guidance does not state how frequently the vetting is expected to occur. DFS advised that “covered institutions should take a risk-based and proportionate approach, tailoring their vetting frameworks to their specific business needs, operations, and risks.” DFS has not indicated when the rule will be finalized and go into effect.

Banking agencies finalize climate-risk guidance for large banks. The Federal Reserve Board, FDIC, and OCC on October 30, 2023 jointly issued principles for climate-related financial risk management for large financial institutions. The final interagency guidance, which was discussed in greater detail in a November 10, 2023 DLA Piper alert, is intended to help financial institutions with $100 billion or more in total assets address climate-related financial risks. The principles are intended to “provide a high-level framework for the safe and sound management of exposures to client-related financial risks, consistent with the risk management frameworks described in the agencies’ existing rules and guidance.”

The regulators set out principles for financial institutions to consider in six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis.

• At a November 15, 2023 House Financial Services Committee oversight hearing with top officials from the Fed, FDIC, and OCC, Chair McHenry announced that he will ask the Government Accountability Office to determine whether the climate risk guidance should be subject to the Congressional Review Act. Chair McHenry said, “Regardless of whether you call it guidance or regulation, these principles are significant and did not go through the appropriate process as governed by the Administrative Procedures Act.”