White House Issues Executive Order to “Restore Integrity” to America’s Financial System

On May 19, the White House issued an Executive Order (and accompanying Fact Sheet) directing the Secretary of the Treasury and federal financial regulators to take steps to enhance safeguards against fraud, illicit finance, labor trafficking, payroll tax evasion, hidden account ownership, and other perceived threats to the financial system while reinforcing customer identification and due diligence requirements for financial institutions. The White House stated that the policy is intended to safeguard financial institutions against structural risks and deter fraud and abuse, including risks associated with extending banking and lending services to individuals who are not authorized to work in the US. The Order also directs the Treasury and federal financial regulators to issue advisories and guidance and to consider regulatory changes.

On May 15, the Office of the Comptroller of the Currency (OCC) issued two final rules concerning OCC-supervised institutions’ real estate lending powers related to the payment of interest on funds held in escrow accounts. The first rule codifies the authority of OCC-supervised institutions to establish and maintain escrow accounts in connection with real estate loans and to determine the terms and conditions of those accounts, including whether and to what extent to pay interest or other compensation on escrow balances or assess fees. The second rule formally determines that federal law, including the National Bank Act, preempts state laws, including New York’s interest-on-escrow law and the laws of 13 other states and territories with substantively equivalent laws, that restrict OCC-supervised institutions’ flexibility to decide whether and to what extent to pay interest or other compensation on escrow balances or assess fees. Both final rules take effect June 18.

On May 22, the Federal Deposit Insurance Corporation (FDIC) approved a notice of proposed rulemaking that would establish Bank Secrecy Act (BSA) and sanction compliance standards for FDIC-supervised permitted payment stablecoin issuers (PPSIs) under the Guiding and Establishing National Innovation for U.S. Stablecoins Act. The proposal would require PPSIs to maintain anti-money laundering and countering the financing of terrorism (AML/CFT) programs and comply with economic sanctions obligations administered by the U.S. Department of the Treasury, including regulations issued by the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control. The rule would also align supervisory and enforcement standards for PPSIs’ AML/CFT programs with FinCEN requirements and clarify the FDIC’s oversight responsibilities for stablecoin issuers that are subsidiaries of insured state nonmember banks and state savings associations approved to issue payment stablecoins. Comments are due 60 days following publication in the Federal Register.

On May 20, the Board of Governors of the Federal Reserve System (Federal Reserve) announced proposed revisions to the Federal Reserve Policy on Payment System Risk and related account access guidelines to establish a new type of “payment account” that would permit certain eligible institutions to access Federal Reserve payment rails. The proposal generally would limit payment accounts to payment and settlement functions, prohibit interest on balances, cap closing balances at no more than $1 billion, restrict access to intraday credit and overdrafts, and impose enhanced anti-money laundering, sanctions, and other illicit finance risk controls while also barring account holders from engaging in certain correspondent activities. The Federal Reserve encouraged reserve banks to temporarily pause decisions on Tier 3 account access requests while the proposal is under consideration. Comments are due by July 27.

On May 19, the Federal Financial Institutions Examination Council (FFIEC) proposed changes to the Uniform Financial Institutions Rating System (aka the CAMELS rating system), which is used to evaluate banks, savings associations, and credit unions supervised under the FFIEC framework. The proposal would retain the existing CAMELS structure — Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk — while modifying component and composite rating definitions and evaluation factors to better align supervisory ratings with an institution’s safety and soundness, financial condition, and material risk profile. Among other things, the proposal would place greater emphasis on material financial risks and less emphasis on concerns related to policies, procedures, or documentation. The FFIEC and member agencies have stated that the proposal is intended to modernize the framework, improve transparency and predictability in ratings, and promote greater consistency in supervisory assessments. Comments are due August 17.