Weekly RoundUp
December 18, 2019

Financial Services Weekly News: Agencies Propose Modernizing Community Reinvestment Act

In This Issue. The Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) proposed the first substantive amendments to regulations implementing the Community Reinvestment Act in nearly 25 years; the FDIC issued a proposal to modernize its rules regarding brokered deposits in response to technological changes and innovations; and the Chairman of the Commodity Futures Trading Commission (CFTC) warned market participants of “Zombie” LIBOR risks. These and other developments are covered in more detail below.

Please note: The Roundup will be on hiatus for the next two weeks, and will resume publication on January 8. We wish all of you a happy holiday season and a wonderful New Year!

Regulatory Developments

FDIC and OCC Propose First Substantive Amendments to CRA Regulations in Nearly 25 Years

On December 12, the FDIC and the OCC issued a joint Notice of Proposed Rulemaking (NPR) to comprehensively amend the Community Reinvestment Act’s (CRA) implementing regulations, which were last substantially updated nearly 25 years ago. The FDIC also issued a fact sheet summarizing the NPR. The Board of Governors of the Federal Reserve System did not sign on to the NPR. 

According to the FDIC and OCC, the proposed revisions seek to “modernize and update CRA regulations to better achieve the law’s underlying purpose of encouraging banks to serve their communities” and are “intended to make the regulatory framework more objective, transparent, consistent, and easy to understand.” Specifically, according to the regulators, the NPR seeks to modernize the CRA regulations by:

  • Clarifying and expanding what qualifies for CRA credit;
  • Expanding where CRA activity counts by creating additional “assessment areas” tied to where deposits originate;
  • Providing a more objective method to measure CRA performance by establishing activity thresholds as a percentage of domestic deposits; and
  • Revising data collection, recordkeeping, and reporting requirements.

The NPR would allow small banks, defined as banks with $500 million or less in total assets, to continue to be evaluated under the current CRA small bank test or opt in to the new general performance standards.

The NPR has so far received a chilly December reception from community advocacy groups and Democratic members of Congress, who have expressed concerns that, among other things, the proposal (1) relies too much on a general performance metric that measures activity thresholds as a percentage of retail domestic deposits and (2) does not sufficiently protect the incentives banks have to maintain physical branches in low- to moderate-income communities. The FDIC and OCC have defended the NPR against these criticisms, arguing that the NPR would increase incentives for banks to lend to, and lead to greater investment in, low- and moderate-income communities.

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

FDIC Proposes Revised Brokered Deposit Rules

On December 12, the FDIC invited public comment on a Notice of Proposed Rulemaking (Rule) that would modernize the FDIC’s rules regarding brokered deposits in response to technological changes and innovations, such as access to deposits through collaborations between banks and FinTech companies. In anticipation of the Rule, the FDIC previously solicited public comments in late 2018 on all aspects of its brokered deposit regulations, as previously reported in the Roundup.

Insured depository institutions that are less than well capitalized are limited by the Federal Deposit Insurance Act and its implementing regulations in their ability to solicit, accept, renew, or roll over deposits from a “deposit broker.” A “deposit broker” is a person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; or as an agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.

The Rule would provide that a person would meet the “facilitation” prong of the definition by, while engaged in business, engaging in at least one of the following activities: (1) sharing any third-party information with the insured depository institution; (2) having legal authority to close the account or move the third party’s funds to another insured depository institution; (3) providing assistance or being involved in setting rates, fees, terms, or conditions for the deposit account; or (4) acting as an intermediary, with respect to the placement of deposits, between a third party that is placing deposits on behalf of a depositor and an insured depository institution, other than in a purely administrative capacity.

The Rule would also modify some of the exclusions from the definition of “deposit broker.” First, the Rule would specify that certain wholly owned operating subsidiaries of an insured depository institution are deemed part of the parent, and therefore excluded. Second, the Rule would clarify who qualifies for the “primary purpose” exception by creating an application process through which an agent or nominee would obtain an FDIC determination that its “primary purpose is not the placement of funds with depository institutions.” The Rule would provide instructions regarding the appropriate application type and content for a given applicant, and it would require the FDIC to approve applications under specified circumstances. Approved applicants for the “primary purpose” exception would be subject to ongoing reporting requirements, which would be specified by the FDIC in its approval determination.

The FDIC will be accepting comments about the topics highlighted above, as well as other aspects of the Rule, for 60 days after the Rule’s publication in the Federal Register.

CFTC Chairman Tarbert Warns of “Zombie” LIBOR Risks

On December 11, CFTC Chairman Heath Tarbert spoke before the CFTC’s Market Risk Advisory Committee Meeting. Chairman Tarbert reminded market participants that LIBOR will no longer be published by the end of 2021 and urged the derivatives industry to continue to prepare for the transition from LIBOR to the Secured Overnight Financing Rate (SOFR). The Chairman noted that failing to transition away from LIBOR is a source of risk to individual firms as well as the global financial system. Among the risks posed by the end of LIBOR is the threat of a “zombie” LIBOR. A “zombie” LIBOR could occur if some, but not enough, panel banks continue to submit daily rates for a period of time after the Financial Conduct Authority no longer requires LIBOR to be published. At that time, LIBOR would still exist, but such rate would not be representative of a real rate at which market participants could fund their operations. To avoid a potential zombie LIBOR apocalypse, the CFTC is considering several potential solutions, including pre-cessation trigger events, to address “zombie” LIBOR risk. The CFTC is working with a number of financial market associations, including the International Swaps and Derivatives Association, to create trigger events, fallback language and adjustments to SOFR required to transition away from LIBOR in 2020.

To mitigate the other risks posed by the end of LIBOR, and assist with the transition to SOFR-based swaps, the CFTC expects to provide LIBOR-transition-related relief in the form of no-action letters. The no-action relief for swap dealers cover the CFTC’s trade execution, clearing, margin, business conduct standard, and swap confirmation rules applicable to swap dealers and other market participants. The CFTC’s no-action relief is expected to address the amendments that may be required for existing swaps. Specifically, it is expected that any amendment made in connection with the transition from LIBOR to SOFR will not be a “life-cycle” event that would otherwise trigger the application of certain CFTC rules. The CFTC expects to publish its series of LIBOR-related no-action letters on December 20, 2019.

Enforcement & Litigation

TCPA’s Constitutionality Under the First Amendment Poised for Supreme Court Intervention

On December 2, the United States government submitted a brief to the U.S. Supreme Court urging it to deny review of a Ninth Circuit Court of Appeals ruling holding a provision of the Telephone Consumer Protection Act (TCPA) unconstitutional under the First Amendment. In the case in question, Gallion v. United States, 772 F. App’x. 604 (9th Cir. 2019), the Ninth Circuit held that the TCPA’s exception allowing for autodialed calls if “made solely to collect a debt owed to or guaranteed by the United States,” 42 U.S.C. § 227(b)(1)(A)(iii), is unconstitutional. The court reasoned that the provision “is a content-based speech regulation” that fails the rigorous constitutional test for restrictions on speech. The court, however, did not strike down the entirety of the TCPA under the First Amendment, instead opting to sever the unconstitutional provision from the statute. Read the LenderLaw Watch blog post.

This week’s Roundup contributors: Alex Callen.