Weekly RoundUp
September 26, 2018

Financial Services Weekly News

In This Weekly Roundup Issue. The Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (together, the Federal Banking Agencies) issued a joint notice of proposed rulemaking that would revise the definition of high volatility commercial real estate (HVCRE) exposures; the Federal Banking Agencies, together with the Farm Credit Administration and Federal Housing Finance Agency, finalized a rule that harmonizes swap margin and qualified financial contract requirements across the agencies; the Federal Reserve proposed to repeal its own versions of Regulations H and K, which are now incorporated into the rules of the Consumer Financial Protection Bureau (CFPB); and the Financial Crimes Enforcement Network (FinCEN) released a revised list of the jurisdictions that are subject to countermeasures or enhanced due diligence due to anti-money laundering and counter-terrorist financing deficiencies. These and other recent developments are covered below.

Regulatory Developments

Federal Banking Agencies Propose Revised Definition of High Volatility Commercial Real Estate Exposure

On September 18, the Federal Banking Agencies jointly issued a notice of proposed rulemaking (NPR) that would revise the definition of an HVCRE exposure, in accordance with Section 214 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, and provide interpretation on certain aspects of the revised HVCRE exposure definition. Specifically, the NPR would revise the definition of an HVCRE exposure to conform to the statutory definition of a high volatility commercial real estate acquisition, development, or construction (HVCRE ADC) loan, which includes a credit facility that:

  • is secured by real property;
  • primarily finances, has financed, or refinances acquisition, development, or construction of real property;
  • has the purpose of providing financing to acquire, develop, or improve such real property into income-producing property; and
  • is dependent on future income or sales proceeds from, or refinancing of, such real property for repayment.

The NPR also would exclude loans financing the acquisition, development or construction of the following real properties from the definition of HVCRE exposures:

  • one- to four-family residential properties;
  • community development projects;
  • agricultural land;
  • existing income-producing property secured by permanent financings;
  • certain commercial real property projects;
  • real property where the loan has been reclassified as a non-HVCRE ADC loan; and
  • real estate where the loan was made before January 1, 2015.

The NPR also proposes interpretations of certain terms generally consistent with their usage in other relevant regulations or the instructions to the Call Report.

Agencies Finalize Rule Harmonizing Swap Margin, QFC Requirements

On September 21, five federal agencies approved certain amendments to swap margin requirements, conforming those requirements to recent changes in rules that impose restrictions on certain qualified financial contracts (QFCs) of systemically important banking institutions (QFC Rules). These amendments provide that legacy swaps entered into before applicable compliance dates (and thus grandfathered from application of related margin requirements) will not become subject to those margin requirements when netting agreements are amended to conform to the QFC Rules. The approved amendments also (1) harmonize the definition of “eligible master netting agreement” with the definition of “qualifying master netting agreement” in the QFC Rules; (2) make clear that merely complying with QFC Rules cannot be a basis for exclusion of a netting agreement from the definition of “eligible master netting agreement”; and (3) ensure that the margin required for non-cleared swaps covered by eligible master netting agreements can be calculated on a net portfolio basis, even if changes are made to the netting agreements to comply with the QFC Rules. The final rule amendments will be effective 30 days after publication in the Federal Register.

Federal Reserve to Repeal Regulations H and K

On September 21, the Federal Reserve published a proposal to repeal its Regulations H and K that incorporate the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “S.A.F.E. Act”). The S.A.F.E. Act requires nationwide licensing and registration of residential mortgage loan originators. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, rulemaking authority for the S.A.F.E. Act was transferred to the CFPB. Any entity currently covered by the S.A.F.E. Act will be subject to the rules issued by the CFPB.

FinCEN Updates List of AML/CFT Jurisdictions

On September 21, FinCEN issued an advisory notice updating the Financial Action Task Force (FATF) Identified Jurisdictions with strategic anti-money laundering/combatting the financing of terrorism (AML/CFT) deficiencies. FinCEN also lists those jurisdictions with AML/CFT deficiencies that are working to correct such deficiencies. The jurisdictions are listed in the FATF Public Statement and the Global AML/CFT Compliance: On-going Process documents. The FATF Public Statement added the Democratic People’s Republic of Korea and Iran to the list of jurisdictions with significant AML/CFT deficiencies. In addition, the Global AML/CFT Compliance document added Pakistan to its listed jurisdictions for significant deficiencies related to counter-terrorist financing. The list removed both Iraq and Vanuatu as listed jurisdictions for their progress improving their AML/CFT regime and for establishing the legal and regulatory frameworks to meet their action plan commitments. The advisory notice provides that a financial institution should file an SAR if it knows, suspects or has reason to suspect that any transaction involves funds derived from illegal activity, or that a customer is engaged in activities of money laundering, terrorist financing, or other violations of federal law or regulations.

Goodwin News

Western Bankers Association Bank Counsel Seminar – October 2

In this content-rich program, bank counsel, BSA/AML officers, and compliance officers converge to explore legislation, regulatory change, education, and discover resources to ensure efficient processes and practices. Goodwin partner Samantha Kirby will present on the “Regulators’ Changing Views on Bank Boards of Directors and Governance” panel. For more information, please visit the event website.

7th Annual London White Collar Crime Institute – October 8-9

Hosted by the American Bar Association’s Criminal Justice Section, the 7th Annual London White Collar Crime Institute will take place October 8-9, 2018. Federica De Santis, an associate in Goodwin’s Financial Industry group, will be a featured speaker on cryptocurrencies and blockchain.

Block-Con 2018 – October 10-12

Goodwin will once again be a sponsor of Block-Con, a three-day conference bringing together thousands of blockchain, crypto and dApp industry leaders in Santa Monica, CA for workshops, panel discussions and networking sessions. To register, please visit the event website.

This week’s Roundup contributors: Jessica Craig and Bill McCurdy.