Financial Services Weekly Roundup
Our weekly newsletter highlights important legal, regulatory, and business developments related to consumer financial services and banking.
OIG: Review of the Supervision of Silvergate Bank
On September 27, the OIG issued a summary of its report assessing the Federal Reserves and the Federal Reserve Bank of San Francisco’s (FRBSF) supervision of Silvergate Bank (Silvergate). The scope of the evaluation included supervisory activities conducted from 2013 to 2023 related to Silvergate’s change in business strategy, deposit growth, concentrated business activities, and governance and risk management practices. The full report is not available to the public given that it contains confidential supervisory and trade secret information.
The evaluation found that the Federal Reserve’s and FRBSF’s decision to not require Silvergate to file an application under Regulation H when it shifted its business character to be crypto industry-focused is contradictory to the Federal Reserve’s guidance on Regulation H, thereby allowing Silvergate to enter a new activity without addressing the risks. Second, examiners should have escalated concerns through stronger, earlier and more decisive supervisory action in light of Silvergate’s unchecked growth. Third, the report identified that FRBSF could have transitioned Silvergate from the Community Banking Organization portfolio to the Regional Banking Organization portfolio earlier. Fourth, the Federal Reserve’s examiner guidance lacks information that could have been helpful for examiners to address the risks associated with Silvergate’s business model and deposit composition, in particular, guidance as to deposit flight risk. Fifth, the report found the Federal Reserve does not have guidance to help examiners assess whether a bank’s risk management capabilities and key control functions have evolved with a bank’s significant and rapid growth. The report also provides a list of recommendations designed to enhance supervisory processes based on lessons learned from Silvergate’s liquidation, including items such as updating existing supervisory guidance and developing new guidance regarding a bank’s change of its strategy and requiring examiners to take more aggressive supervisory action sooner.
OCC Issues Revised Lease Financing Booklet
On September 27, the OCC issued version 2.0 of the “Lease Financing” booklet (the Revised Booklet) of the Comptroller’s Handbook. The Revised Booklet discusses risks and risk management practices associated with lease financing and provides examiners with a framework for evaluating a bank’s lease financing activities. The Revised Booklet reflects changes to lease accounting standards since the booklet was last updated, reflects OCC issuances published and rescinded since the booklet was last updated, includes clarifying edits regarding supervisory guidance, sound risk management practices, and legal language, and revises certain content for general clarity.
The Revised Booklet replaced version 1.2 of the booklet with the same title issued January 2017. Also rescinded is OCC Bulletin 2014-40, “Lease Financing: Comptroller's Handbook Revision and Rescission,” which transmitted version 1.0 of the booklet in August 2014.
OCC Releases Bank Supervision Operating Plan for Fiscal Year 2024
On September 28, the OCC released its Bank Supervision Operating Plan for the Fiscal Year 2024, which began on October 1, 2023, and runs through September 30, 2024. The plan outlines the OCC’s supervisory priorities and is intended to facilitate the implementation of supervisory strategies for national banks, federal savings associations, federal branches and agencies of foreign banking organizations, as well as third-party service providers subject to examination by the OCC. The release notes that while the objectives are the same across supervised institutions, the OCC will develop risk-focused supervisory strategies, differentiating based on bank size, complexity and risk profile.
The OCC again highlighted examiners’ focus on the impacts of volatile economic conditions, including high inflation, rising interest rates and recession possibilities and geopolitical events, as it had done in its Fiscal Year 2023 Bank Supervision Operating Plan. Largely consistent with the 2023 plan, the OCC indicated that risk-based supervision would heighten its focus on asset and liability management, credit, allowance for credit losses, distributed-ledger technology related activities, change management, payments, cybersecurity, BSA/AML, consumer compliance, CRA, fair lending and, in the case of bans with over $100 billion in assets, climate-related financial risks.
Periodic updates on the OCC’s supervisory priorities, identified emerging risks, and horizontal risk assessments will be provided in the OCC’s Semiannual Risk Perspective report, typically issued in the spring and fall.
CFPB Mortgage Report Finds Jumps in Closing Costs and Denials for Insufficient Income, Growing Proportion of Cash-Out Refinances
On September 27, the CFPB released its annual report (Report) on residential mortgage lending activity and trends. The Report found that mortgage applications and originations markedly declined from the previous year; however, rates, fees and other costs increased, resulting in an overall decline in affordability.
The Report provided that lenders denied applications for insufficient income more frequently as compared to the previous year. The Report found that refinances during 2022 were predominately cash-out refinances and the median credit score of refinanced borrowers lowered below the median credit score of purchase borrowers, which reversed the previous years’ trend. However, independent lenders dominated home mortgage lending, with home equity lines of credit being the exception as in previous years. High interest rates had significant impacts on the mortgage market in 2022 and are likely to continue this trend given the continued increase in interest rates for 2023.
CFPB Director Rohit Chopra’s full statement on the Report’s findings can be found here.
“The higher interest rate environment had profound effects on the mortgage market in 2022, with borrowers paying much more in monthly payments. These trends are likely to continue given further increases in interest rates in 2023.”
- Rohit Chopra, CFPB Director
SEC Proposes Registration Form For Registered Index-Linked Annuities
On September 29, the SEC proposed rule and form amendments to provide a registration form tailored to registered index-linked annuities (RILAs). A RILA provides one or more investment options with returns based on the performance of an index that is registered with the SEC under the Securities Act of 1933. Rather than create a new form, the SEC proposes amending Form N-4, the registration form used for variable annuities, so that it also may be used for RILAs. If adopted, the amendments would move the registration from the catch-all forms – S-1 and S-3 – which are ill suited to RILAs to a tailored form, a move long sought by the insurance industry.
The SEC also proposed form changes applicable to all annuities based on staff experience and investor testing, including revisions to the key information table adopted in 2020 and requirements related to fixed options. The SEC has requested comment on whether Form N-4 should be used for market value adjustment annuities.
Comments are due the later of November 28, 2023 and 60 days after publication in the Federal Register.
Litigation and Enforcement Developments
SEC Brings Charges Against 10 Firms Relating to Recordkeeping Failures
On September 29, the SEC announced charges against 10 investment firms, including broker-dealers and investment advisers, for failures to maintain and preserve electronic communications. The charges were the result of SEC investigations where the SEC staff observed employee communications through personal text message and other off-channel communications about business matters. The SEC staff found that the firms did not maintain or preserve the majority of such communications, which was in violation of various federal securities laws, including the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The penalties totaled $79 million and the firms were ordered to refrain from future violations and to retain independent compliance consultants to conduct reviews of their policies and procedures relating to the preservation of electronic communications.
Check Out Goodwin’s Latest Industry Insights
Horizon Scan for Private Investment Funds: Key Recent and Expected Funds, Regulatory, and Tax Developments to Look Out For
In the third edition of Goodwin’s Horizon Scan, the team has grouped the developments under the following headings: UK and EU funds; sustainable finance (UK, EU, and US); regulatory developments (UK and EU); tax topics (UK and EU); and US-specific developments (for non-US fund managers marketing in the US and other than environmental, social, and governance (ESG)). The team also included additional topics and anticipated developments to look out for over the next few months that are likely to impact the private funds. To view this Horizon Scan, click here.
SEC Adopts Rule Enhancements to Prevent Misleading or Deceptive Investment Fund Names
On September 20, the SEC, by a 4-1 vote, adopted certain amendments (final rule or amendments) to Rule 35d-1 (the Names Rule) under the Investment Company Act of 1940 and to certain SEC forms addressing fund names that the SEC believes are likely to mislead investors about a fund’s investments and risks. The amendments consist of changes that will require (i) more funds to adopt an 80% investment policy, (ii) ongoing monitoring of funds’ alignment with the 80% investment policy, (iii) enhanced prospectus disclosure for terminology used in fund names, and (iv) additional reporting and recordkeeping regarding compliance. To continue reading this client alert, which summarizes key aspects of the final rule, click here.
Upcoming Event: Join Goodwin and J.P. Morgan for Lunch During Money 20/20
On October 24, Goodwin's Fintech group and co-host J.P. Morgan will be hosting a luncheon reception at TAO Asian Bistro during the Money 20/20 conference. Please reach out to firstname.lastname@example.org for more information or to register.
Upcoming Event: Perspectives From Both Sides of the Pond: Regulatory Impacts Affecting the Digital Currency & Blockchain Industry
On November 9, Goodwin's global Digital Currency and Blockchain team will be hosting a client event in the London office that will feature a panel discussion about the recent wave of US and UK regulatory developments. Please reach out to email@example.com for more information or to register.
Upcoming Event: Discuss the Latest Fintech Developments at Goodwin’s Fintech Forum in San Francisco
On November 14, join the conversation about the latest developments in fintech! Goodwin invites you to join our Fintech Forum in San Francisco, where fintech companies, financial institutions, and investors will converge to delve into the latest trends shaping the industry. Please reach out to firstname.lastname@example.org for more information or to register.
On-Demand Webinar: CFPB v. Consumer Financial Services Association of America: Post-Argument Debrief on the Constitutionality of the CFPB
On October 3, the Supreme Court heard another challenge to the constitutionality of the CFPB, this time focusing on the agency’s funding mechanism and whether it violates the Constitution’s Appropriations Clause. Members of Goodwin’s Supreme Court and Appellate and Consumer Financial Services practices attended in person and shared reactions from the argument during a webinar on October 4. View the webinar recording here.
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