Weekly RoundUp
October 23, 2019

Financial Services Weekly News: Fed Finalizes Tailoring Framework for Large Firms

In This Issue. The Board of Governors of the Federal Reserve System (Federal Reserve Board) approved its long-awaited framework for tailoring enhanced prudential standards for firms with $100 billion or more in assets; the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) requested information on the use and impact of CAMELS ratings; the Consumer Financial Protection Bureau (CFPB) issued a final rule extending the temporary exemption for certain smaller financial institutions from the collecting and reporting obligations of the Home Mortgage Disclosure Act; federal banking regulators requested comment on proposals regarding a policy statement and guidance on allowance for credit losses and credit risk review systems; and the Securities and Exchange Commission (SEC) proposed amendments to the application process for exemptions or other relief under the Investment Company Act of 1940. These and other developments are discussed in more detail below.

Regulatory Developments

Federal Reserve Board Finalizes Regulatory Tailoring Framework for Large Firms

On October 10, the Federal Reserve Board approved final rules that tailor enhanced prudential standards for both domestic and foreign financial institutions to more closely match their risk profiles, including consideration of their asset size, cross-jurisdictional activities, reliance on short-term whole funding sources, nonbank assets, and off-balance sheet exposures. The rules establish differential treatment based on an institution’s inclusion in one of five possible categories, grouped by size in conjunction with certain other risk profile characteristics. The most stringent standards will continue to apply to the Category I institutions, which are the eight U.S. global systemically important banks (GSIBs), while at the lowest end of the risk category spectrum, other firms will have reduced compliance requirements in recognition of their smaller risk profiles. In between those two categories, firms may be classified as Category II, III or IV, on the basis of asset size, asset types, and cross-jurisdictional activities, with varying levels of requirements tailored to match risk levels. The final rules are generally similar to the proposals that have been released throughout the past year, but are simplified with respect to treatment of foreign bank U.S. intermediate holding companies and standardized liquidity requirements for larger firms, both domestic and foreign. The Federal Reserve Board has estimated that the final rules will, in the aggregate, result in a 0.6% decrease in required capital and a 2% decrease in required liquid assets for banks with $100 billion or more in assets, with no changes to capital or liquidity requirements for GSIBs. These final rules will be effective 60 days after publication in the Federal Register.

FDIC and Fed Request Information on the Use and Impact of CAMELS Ratings

On October 18, the FDIC and the Federal Reserve Board (together, the Agencies) announced the Agencies’ request for public comments on the use of the Uniform Financial Institutions Rating System, commonly referred to as the CAMELS rating system. The Agencies are requesting comments on both the consistency of ratings assigned under the CAMELS rating system and how the Agencies use CAMELS ratings in enforcement actions and in reviewing bank applications. The Agencies’ request for information is not a proposal to modify the definitions used in the CAMELS rating system, as such definitions are issued through the Federal Financial Institutions Examination Council. Comments are due within 60 days of the request being published in the Federal Register.

CFPB Issues “Final” HMDA Rule to Benefit Smaller Financial Institutions

On October 10, the CFPB extended until January 1, 2022 the current “temporary” coverage threshold of 500 for collecting and reporting data about open-end lines of credit under the Home Mortgage Disclosure Act (HMDA), implemented by Regulation C. For data collection years 2020 and 2021, this rule excuses financial institutions that originated fewer than 500 open-end lines of credit in either of the two preceding calendar years from both collecting and reporting data with respect to open-end lines of credit. The CFPB also clarified partial exemptions from certain HMDA requirements inserted into the Economic Growth, Regulatory Relief, and Consumer Protection Act by Congress and signed into law by President Trump on May 24, 2018.

With these new rules, the CFPB incorporates into Regulation C clarifications from its August 2018 interpretive and procedural rule and addresses certain issues relating to the partial exemptions not addressed in such rule. However, the CFPB still intends to issue another “final” rule in 2020 that addresses raising the permanent coverage thresholds for collecting and reporting data not only for open-end lines of credit but for closed-end mortgage loans, as well.

Federal Financial Regulatory Agencies Seek Comment on Proposed Interagency Policy Statement on Allowances for Credit Losses and Proposed Interagency Guidance on Credit Risk Review Systems

On October 17, the Federal Reserve Board, FDIC, Office of the Comptroller of the Currency and the National Credit Union Administration requested comment on a proposed Interagency Policy Statement on Allowances for Credit Losses. This proposed policy statement is intended to promote consistency in the interpretation and application of the Financial Accounting Standards Board’s (FASB) credit losses accounting standard, which introduces the current expected credit losses (CECL) methodology. The proposed interagency policy statement describes the measurement of expected credit losses using the CECL methodology and updates concepts and practices detailed in existing supervisory guidance that remain applicable. CECL is effective for most public financial institutions beginning in 2020, and the FASB recently decided to defer the effective date of CECL for all other institutions to 2023. The proposed interagency policy statement would be effective at the time of each institution’s adoption of the credit losses accounting standard.

The agencies also are requesting comment on the proposed Interagency Guidance on Credit Risk Review Systems. The guidance presents principles for establishing a system of independent, ongoing credit risk review in accordance with safety and soundness standards.

Comments on each proposal will be accepted for 60 days after publication in the Federal Register.

Amendments to Procedures With Respect to Applications Under the Investment Company Act of 1940

On October 18, the SEC proposed amendments to the application process for exemptions or other relief under the Investment Company Act of 1940 (the 1940 Act). The SEC intends for the proposed amendments to allow it to grant relief as efficiently and quickly as possible, while also ensuring that it continues to carefully analyze applications consistent with the relevant statutory standards. The proposed amendments would reduce costs for applicants and fund shareholders would generally share in that benefit as well. To achieve these efficiencies, the proposed amendments would: (1) amend Rule 0-5 under the 1940 Act to establish an expedited review procedure for certain applications from registered investment companies seeking orders for exemptions or other relief that are substantially identical to recent precedent; (2) amend Rule 0-5 to deem an application outside of the new expedited review withdrawn when the applicant does not respond to comments from SEC staff within 120 days; and (3) create a new rule that establishes an internal timeframe for staff to take action on applications outside of expedited review within 90 days of the initial filing and amendments. The public may comment on the proposed amendments until 30 days after publication in the Federal Register.

FASB Approves Delay of CECL Implementation for Small Companies

On October 16, the Financial Accounting Standards Board voted to approve its July 17, 2019 proposal to extend the implementation of the current expected credit loss (CECL) standard for smaller reporting companies (as defined by the SEC), non-SEC public companies, and private companies until fiscal years beginning after December 15, 2022. For all other public companies, CECL would still take effect for fiscal years ending after December 15, 2019. Early adoption will continue to be permitted for all entities for fiscal years beginning after December 15, 2018.

Enforcement & Litigation

House Seeks Leave to File Amicus Curiae Brief in Support of CFPB’s Constitutionality

On October 4, the U.S. House of Representatives moved the Supreme Court for leave to file an amicus curiae brief in opposition to Seila Law’s petition for writ of certiorari to review the Ninth Circuit’s decision in CFPB v. Seila Law LLC, No. 7-56324 (9th Cir. 2019), which upheld the constitutionality of the Consumer Financial Protection Act’s for-cause removal provision applicable to the director of the CFPB. See Seila Law LLC v. CFPB, No. 19-7. Although the deadline for amicus briefs had passed, the House noted that it received letters from the director, informing it of the CFPB’s new position that the single-director structure is unconstitutional (as previously reported). Read the LenderLaw Watch blog post.

Goodwin News

Money 2020 — October 27-30

The Money 20/20 Conference, one of the largest global events focused on payments and financial services innovation, attracts more than 1,500 CEOs from over 4,500 companies and 85 countries. Goodwin is a sponsor. For more information, please visit the event website.

ABA Annual Convention — October 27-29

The American Bankers Association Annual Convention gathers bankers from institutions of all sizes to explore trends and emerging issues in financial services — and how we can respond to ensure a strong future for our industry. The program provides solutions and best practices delivered by industry experts, ideas from banker peers and the latest information from the banking regulatory agencies. Samantha Kirby will be speaking at the convention.

This week’s Roundup contributors: Josh Burlingham, William Lane, Bill McCurdy.