Bank Regulatory News and Trends

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

In this edition:

• Administration seeks to fill key banking regulatory posts.
• New leadership at the FDIC.
• Powell renominated as Fed chair, Brainard as vice chair.
• Quarles resigns as Fed’s chief of supervision and as a board member; Raskin nominated as successor.
• Biden names three to fill Fed Board vacancies.
• OCC nominee withdraws.
• OCC’s Hsu continues in acting capacity on issues such as CRA reform, crypto and climate risk.
• LIBOR (1969-2021).
• FDIC announces additional designated business relationship covered by the primary purpose exception to the brokered deposit rule.
• FinCEN solicits input on AML/CFT modernization.
• California lender licensing law exemption for single loan has expired.
• Update: Obligations under NY Commercial Finance Disclosure Law will not go into effect until regulations issued.
• New leader for NYDFS.

Administration seeks to fill key banking regulatory posts. One year into his term, President Joe Biden has the opportunity to put a major stamp on the policies and priorities of the US banking regulatory agencies with a series of nominations for top positions at the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).

New leadership at the FDIC.  With the resignation of Jelena McWilliams as Chair of the FDIC, Martin Gruenberg, a former FDIC chair who still sits on the agency’s board, will become acting chair until a new chair is confirmed. The other current board members are Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra and Michael Hsu, Acting Comptroller of the Currency. With McWilliams’s departure, there will be two vacancies on the five-member board. President Biden has not yet announced a nominee to succeed McWilliams or for the other vacant seat.

Powell renominated as Fed chair, Brainard nominated as vice chair. President Biden renominated Jerome Powell to a second four-year term as chair of the Federal Reserve Board of Governors. The president also nominated Fed Board Governor Lael Brainard for vice chair. Powell had his confirmation hearing before the Senate Banking Committee on January 11. Brainard testified before the committee on January 13. The committee has not yet set a date for a vote on moving the nominations to the full Senate. Powell, who was nominated by President Trump for his first term as chairman, has served on the board since 2011. Brainard, who joined the board in 2014, frequently cast dissenting votes on deregulatory initiatives during the Trump Administration as the sole Democratic nominee on the board. “Together, they also share my deep belief that urgent action is needed to address the economic risks posed by climate change, and stay ahead of emerging risks in our financial system,” President Biden said in his November 22 statement on the nominations. Former Fed Vice Chair Richard Clarida resigned on January 14, shortly before his term was due to expire on January 31.

Quarles resigns as Fed’s chief of supervision and as a board member; Raskin nominated as successor. As reported in the October 19, 2021 edition of Bank Regulatory New and Trends, the four-year term of Randal Quarles, the Fed’s vice chair for supervision, expired October 13. Quarles subsequently announced his resignation from the Board of Governors altogether, even though his 14-year term would not have expired until 2032. In a November 8 letter to President Biden, Quarles said he would resign by the end of the year. The Senate-confirmed post of vice chair for supervision was created by the 2010 Dodd-Frank Act. Quarles was the first person to serve in that role, for which he was nominated by President Donald Trump. Implementing the provisions of the Economic Growth, Regulatory Relief and Consumer Protection Act, the Dodd-Frank overhaul legislation that was enacted in 2018, was a major focus of Quarles’s tenure. In his December 2 farewell speech, Quarles said his successor will have to grapple with, among other issues, calibration of leverage capital standards, reducing “volatility” in the Fed’s stress testing scenarios, regulating digital assets and applying lessons learned from the design and implementation of the COVID-19-related emergency lending facilities.

• President Biden on January 14 announced the nomination of Sarah Bloom Raskin to serve as the Fed’s next vice chair of supervision. Raskin is a former member of the Fed Board of Governors, nominated by President Obama and confirmed by the Senate in 2010. She resigned from the Board when President Obama nominated her to serve as Deputy Secretary of Treasury, for which she was confirmed in 2014. She had previously served as commissioner of financial regulation for the state of Maryland. She has gained a reputation as an advocate for consumer protection and addressing issues related to income inequality.

Biden names three to fill Fed Board vacancies. The departures of Quarles and Clarida from the Fed Board created two additional vacancies in addition to the pre-existing vacant seat on the seven-member board. In addition to the nomination of Raskin noted above, President Biden on January 14 also announced the  nominations of Lisa Cook and Phillip Jefferson as members of the Board of Governors.

• Cook is currently a professor of economics and international relations at Michigan State University and has also taught at Harvard and Stanford universities. Her research has particularly focused on economic growth and development, innovation, financial institutions and markets, and economic history. She also served at the White House Council of Economic Advisers under President Obama. Cook was elected as a director of the Federal Reserve Bank of Chicago in January.
• Jefferson is a professor of economics at Davidson College and previously taught at Swarthmore College. In addition to serving as a faculty affiliate of the Institute for Research on Poverty at the University of Wisconsin-Madison, Jefferson serves on the Board of Advisors of the Opportunity and Inclusive Growth Institute at the Federal Reserve Bank of Minneapolis. He is also a past president of the National Economic Association.
• The Senate Banking Committee has set a February 3 hearing on the nominations of Raskin, Cook and Jefferson.

OCC nominee withdraws. Saule Omarova, nominated by President Biden to serve as Comptroller of the Currency, withdrew her nomination in December following a contentious confirmation hearing in the Senate Banking Committee. As noted in the October 19 edition of Bank Regulatory News and Trends, Omarova’s nomination drew stiff resistance from Congressional Republicans and several influential centrist Democrats. The American Bankers Association also expressed reservations about some of her proposed changes to the banking system. In a December 7 White House statement, President Biden praised Omarova as “a strong advocate for consumers and a staunch defender of the safety and soundness of our financial system.” The president has not yet announced another nominee.

OCC’s Hsu continues in acting capacity on issues such as CRA reform, crypto and climate risk. Meanwhile, Michael Hsu has been serving as acting Comptroller since May. He and his agency have been active on a number of fronts, including:

• CRA. The OCC on December 14 issued a final rule to rescind the Community Redevelopment Act (CRA) overhaul promulgated under former Comptroller Joseph Otting in 2020 and replace it with a new rule based on the rules adopted jointly by the federal banking agencies. The OCC’s change in direction on the CRA was discussed in greater detail in the October 19, 2021 edition of Bank Regulatory News and Trends when it was still at the proposal stage.
• Crypto. The OCC on November 23 issued an interpretive letter intended to clarify that banks and federal savings associations must receive the permission of their supervisory offices before engaging in cryptocurrency, distributed ledger and stablecoin activities. In a series of interpretive letters from 2020 and early 2021, the OCC under then-acting Comptroller Brian Brooks indicated that banks were permitted to hold crypto in custody for clients, keep reserves that back stablecoins and process payments on a blockchain. The new OCC policy states that banks must first receive a non-objection letter from their supervisory office before they can engage in such activities.
  • In his January 13 remarks on crypto-asset regulation before the Transatlantic Finance Forum Executive Roundtable, Hsu called for stablecoins to be subjected to bank-like regulations.
  • In a report released in November, the President’s Working Group on Financial Markets called for legislation to require stablecoin issuers to be insured depository institutions and mandate that custodial wallet providers be subject to appropriate federal oversight.
  • The Senate Banking and House Financial Services committees both held hearings in December on regulating digital assets. Senator Sherrod Brown (D-OH), Banking chair, called for stricter scrutiny, likening cryptocurrencies to the over-the-counter derivatives and subprime mortgages that led up to the 2008 financial crisis. Representative Patrick McHenry (R-NC), ranking Financial Services member, urged caution against regulating the emerging sector too hastily and stifling innovation.
  • OCC’s November 23 letter also reiterated that a January 11, 2021 interpretive letter on the OCC's chartering authority of national trust banks did not expand on or change a bank’s existing obligations under the OCC’s fiduciary activities regulations. The OCC stated that it retains discretion in determining whether an activity is conducted in a fiduciary capacity for purposes of federal law.

Managing climate risk. OCC is seeking stakeholder feedback on draft principles intended to help guide US banks with more than $100 billion in total consolidated assets in identifying and managing climate-related financial risks. While the OCC guidance, announced December 16, is aimed at larger banks, it also will likely influence many small and regional banks in developing strategies to address risks associated with a changing climate. Indeed, an OCC Bulletin issued in conjunction with the draft principles includes a note to community banks that “all banks, regardless of size, may have material exposures to climate-related financial risks.” OCC’s high-level framework does not mandate new regulations but is part of broader scrutiny among financial regulators in the US and globally to encourage banks to be more focused on and transparent about the risks from climate change to properties they finance and their exposure to fossil fuel investments. The general principles call for banks’ boards of directors and management to demonstrate an appropriate understanding of climate-related financial risk exposures, allocate necessary resources, assign climate-related financial risk responsibilities throughout the organization and maintain clear internal lines of communication. Climate-related financial risk exposures should be considered when setting the bank’s overall business strategy, risk appetite and financial, capital and operational plans, and management should develop and implement climate-related scenario analysis frameworks. Risk mitigation plans should particularly focus on credit, liquidity, operations, legal issues and compliance, and other financial and non-financial risks.

• The OCC is inviting public feedback on the principles. The deadline for submitting comments is February 14, 2022.

LIBOR (1969-2021). The beginning of the new year heralded the end of the London Interbank Offered Rate, better known as LIBOR, based on the interest rate that banks themselves had to pay and used in setting interest rates on everything from mortgage loans, reverse mortgages and home equity lines of credit, to credit cards and student loan. Over the past few years, and particularly in the last few months of 2021, the major US financial regulatory agencies began to intensify their efforts to facilitate a smooth transition away from the benchmark rate that underpinned hundreds of trillions of dollars’ worth of financial transactions internationally, and to help banks and other financial institutions prepare for the changeover. An interagency statement on managing the LIBOR transition, revised October 22, was issued by the five major bank regulators, the Fed, FDIC, OCC, CFPB and the National Credit Union Administration (NCUA).

• Originally conceived in 1969, LIBOR emerged as the international benchmark rate in the 1980s. But a rate-fixing scandal that came to light in 2012, resulting in prosecutions and billions in fines, led global regulators to determine that LIBOR was too susceptible to manipulation and that more reliable benchmarks needed to be developed.
• With the discontinuance of LIBOR, the go-to rate used around the world, a number of different benchmarks have been implemented in various countries. In the US, the Secured Overnight Financing Rate (SOFR), produced by the Federal Reserve Bank of New York, is the leading replacement. It is based on transaction data, not estimates, and provides a broad measure of the general cost of financing Treasury securities overnight. It is calculated based on the data used for the Broad General Collateral Rate (BGCR), plus transactions cleared through the Fixed Income Clearing Corporation's (FICC) Delivery-versus-Payment repo service. The US dollar is the only currency that will continue to publish an official LIBOR rate, but only for legacy loan products.

FDIC announces additional designated business relationship covered by the primary purpose exception to the brokered deposit rule. The FDIC on January 10 published a notice in the Federal Register identifying a new business relationship that meets the primary purpose exception to the brokered deposits rule through a new designated exception. The business relationship relates to specific, non-discretionary custodial services offered by third parties to depositors or depositors’ agents. Entities that meet the criteria detailed in the FDIC notice will be permitted to rely on the primary purpose exception without submitting a notice or application. According to the notice, the following additional business arrangement meets the primary purpose exception: “[t]he agent or nominee is ‘engaged in the business of placing’ customer funds at IDIs [insured depository institutions], in a custodial capacity, based upon instructions received from a depositor or depositor’s agent specific to each IDI and deposit account, and the agent or nominee neither plays any role in determining at which IDI(s) to place any customers’ funds, nor negotiates or set rates, terms, fees, or conditions, for the deposit account.” Notice or application to the FDIC is not required to rely on this exception.

• FDIC also published an updated Q&A sheet on the brokered deposit rule.

FinCEN solicits input on AML/CFT modernization. The Financial Crimes Enforcement Network on December 15 published in the Federal Register a request for information (RFI) seeking comments on ways to streamline, modernize and update the US anti-money laundering and countering the financing of terrorism (AML/CFT) regime. The notice states that FinCEN is particularly interested in feedback from stakeholders – including regulated financial institutions as well as state, local and tribal governments, law enforcement and regulators – on ways to modernize risk-based AML/CFT regulations and guidance, issued pursuant to the Bank Secrecy Act (BSA), to protect national security in a cost-effective and efficient manner. The RFI also supports FinCEN’s efforts to conduct a formal review of BSA regulations and related guidance, as required by Section 6216 of the Anti-Money Laundering Act of 2020. FinCEN will report to Congress the findings of the review, including administrative and legislative recommendations. 

• Comments should be submitted by February 14, 2022.

California lender licensing law exemption for single loan has expired. The beginning of the new year meant the end of the exemption from licensing under the California Financing Law (CFL) for certain commercial lenders. The law prohibits any person from engaging in the business of a finance lender without first obtaining a license from the Commissioner of Financial Protection and Innovation. However, occasional lenders have relied on the de minimis exemption in Financial Code Section 22050.5, which provided that the CFL does not apply to any person who makes no more than one loan in a 12-month period if that loan is a commercial loan as defined in the CFL. That provision included a sunset clause that the exemption would remain in effect only until January 1, 2022. A bill proposed in the state Senate last year to lift the sunset provision was not enacted.

Update: Obligations under NY Commercial Finance Disclosure Law will not go into effect until regulations issued. The New York Department of Financial Services (NYDFS) issued a December 31 letter explaining that commercial financing providers’ obligations under the Commercial Finance Disclosure Law (CDFL) do not arise until the department issues final implementing regulations and those regulations take effect. The CDFL, enacted last February, requires providers who offer commercial financing in amounts under $2.5 million to make standardized disclosures about the terms of credit. As reported in the October 19, 2021 edition of Bank Regulatory News and Trends, NYDFS had published “pre-proposed” rules on disclosure requirements in September. NYDFS issued the actual proposed rule a short time later and is currently reviewing stakeholder feedback. The CDFL went into effect on January 1, but, as the December 31 guidance states, “In light of the public comments received and provider concerns about when they must comply with obligations under the CDFL, [NYDFS has] concluded that CDFL obligations do not arise until the Department issues final implementing regulations and those regulations take effect.”

New leader for NYDFS. The New York State Senate on January 25 confirmed Governor Kathy Hochul’s nominee to be superintendent of the Department of Financial Services. As reported in the October 19, 2021 edition of Bank Regulatory News and Trends, Adrienne Harris previously served in the Treasury Department and the White House National Economic Council during the Obama Administration. Harris has been serving as acting director of NYDFS since the resignation of her predecessor Linda Lacewell in August.