Weekly RoundUp
March 2, 2023

Agencies Issue Joint Statement on Liquidity Risks Resulting from Crypto-Asset Market Vulnerabilities

In this Weekly Roundup Issue. The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement on liquidity risks resulting from crypto-asset market vulnerabilities; the Consumer Financial Protection Bureau (CFPB) is seeking public input on proposed construction loan disclosures; the CFPB finalized its update to rules of practice for adjudication proceedings; and the OCC updated its Change In Bank Control Booklet. These and other developments are discussed in more detail below.

Regulatory Developments

Agencies Issue Joint Statement on Liquidity Risks Resulting from Crypto-Asset Market Vulnerabilities

On February 23, the Federal Reserve, FDIC and OCC (the Agencies) issued a “Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypt-Asset Market Vulnerabilities” (the Statement). While the Statement indicates that banking organizations are not prohibited or discouraged from providing banking services to customers of any specific class or type, the statement follows a series of actions and statements by the Agencies, the Financial Stability Oversight Counsel and the White House calling attention to the risks to the banking system and financial stability, which could have a cooling effect on banks’ provision of services to crypto-asset-related entities.

The Statement highlights key liquidity risks that the Agencies believe are associated with crypto-assets (i.e., digital assets implemented using cryptographic techniques) and participants in the crypto-asset sector, focusing on potential risks to banking organizations resulting from unpredictability in the scale and timing of deposit inflows and outflows. As examples, the Agencies note that the stability of deposits at crypto-asset-related entities may be affected when deposits are held for the benefit of the entity’s own customers, who themselves may be influenced by periods of stress, market volatility and related vulnerabilities in the crypto-asset sector, or when the deposits are linked to the demand for stablecoins, which demand could be affected by public confidence in the stablecoin’s own arrangements or reserve practices or broader dislocations in the crypto-asset markets. The Agencies also caution that deposit fluctuations may be correlated among highly interconnected crypto-asset related entities, posing heightened risk if a banking organization’s deposit base is concentrated in such entities.

The Statement does not create new risk management principles, but it highlights the need for banking organizations that use funding from crypto-related asset entities to actively monitor liquidity risks inherent in such funding sources and to establish and maintain effective risk management and controls commensurate with the risks. The Statement identifies examples of effective practices, including understanding the direct and indirect drivers of potential depositor behavior and assessing concentration and interconnectedness across deposits and the attendant liquidity risks.

CFPB Seeks Public Input on Proposed Construction Loan Disclosures

On February 28, the CFPB announced that it is in the final stage of reviewing a Trial Disclosure Sandbox Application by the Independent Community Bankers of America (ICBA). The ICBA’s application seeks to adjust existing mortgage disclosures for loans that finance both a construction phase and permanent purchase of a home, for the purpose of enhancing consumer understanding of such loans. The CFPB invites input from consumers, lenders, and other stakeholders until March 29, 2023. If the CFPB approves ICBA’s application, individual lenders can apply to participate in an in-market testing pilot.

CFPB Finalizes Update to Rules of Practice for Adjudication Proceedings

On February 24, the CFPB finalized an update to its Rules of Practice for Adjudication Proceedings, choosing to retain proposed updates from its Interim Final Rule. To more closely track federal court proceedings, the final rule, among other things, allows parties to depose potential witnesses and allows the adjudication proceedings to be divided into multiple stages to resolve or clarify certain issues earlier in the process. While administrative adjudication is subject to review by a United States Court of Appeals, the CFPB noted that administrative adjudication will allow the CFPB to harness its regulatory expertise and effectively craft prospective remedies to prevent recurrence of violations. The CFPB also confirmed that it still plans to bring the vast majority of its matters in district court.

OCC Updates Change-In-Control Booklet

On February 16, the OCC issued the “Change In Bank Control” booklet of the Comptroller’s Licensing Manual. The revised booklet applies to all national banks, federal savings associations, and federal branches and agencies of foreign banking organizations. The booklet replaces outdated references with references to current guidance and makes other minor modifications and corrections throughout.

The revised booklet replaces the booklet of the same title issued September 2017.

Interest Exportation FAQs: 8 Questions to Consider When Offering a Credit Card or Lending Program

A recent settlement between Iowa regulators and a Utah-chartered bank makes now a good time for a primer on interest exportation. The settlement raises considerations for state banks exporting interest on loans made to Iowa residents. It also highlights Iowa’s opt out of the interest exportation rights enjoyed by state banks under the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). Goodwin counsel Juliana Gerrick outlines the top exportation considerations for banks and fintech-bank partnerships offering a credit card or lending program – consumer, small business, or commercial.

SEC Proposes New Regulation Best Execution — Brokers Must Achieve “Most Favorable Price” for Customers; Heightened Obligations for Conflicted Retail Transactions

The proposal would codify for the first time the federal-level best execution standard for brokers and related obligations. New Regulation Best Execution would result in a pivot from what has been a principles-based approach to achieving and regulating best execution, to a prescriptive, rules-based regime that heavily emphasizes brokers’ policies and procedures. If adopted, the regulation will reshape the landscape for order routing, execution, and broker economics. Despite that, the Commission seems to rely on significant conjecture to support the proposal, often referring to “may,” “could,” and “might” when describing concerns with existing practices and potential ameliorative effects of the proposed requirements. This could prove pivotal to the outcome of inevitable judicial challenges after likely adoption in late 2023.

Read more about this topic in a recent client alert.

Upcoming Webinar: Fee-ling the Impact: Increased Regulatory Scrutiny of ‘Junk’ Fees and Other Top Challenges for Consumer Credit Card Pricing Strategies

In June 2022, only a few months after the CFPB launched its Junk Fee Initiative, the CFPB initiated a close review of credit card companies’ penalty policies. These actions, coupled with a heightened focus on fee practices by various state and federal regulatory agencies, are cause for banks and other financial services companies to brace for impending investigation and enforcement scrutiny and compliance uplift.

This Goodwin-hosted webinar, hosted on March 15, 3:00-3:45 pm ET, will address:

  • CFPB Director Chopra’s movement to eliminate “junk fees,” and related regulatory focus, enforcement actions, and policy guidelines.
  • What to know about the CFPB's proposed rule to amend Reg. Z’s penalty fee safe harbor and how it will impact longstanding CARD Act legislation and influence consumer credit card pricing strategy.

This webinar is open to current and prospective Goodwin clients. If you are interested in attending this webinar, please click here.

Litigation and Enforcement

New Resource: Goodwin’s 2022 Consumer Financial Services Year In Review

Goodwin’s Consumer Financial Services Litigation and Enforcement + Government Investigations practices are excited to present its seventh annual Consumer Finance Year in Review. This in-depth report summarizes major regulatory, litigation and enforcement activity that impacted the consumer financial industry in 2022, and identifies the key trends for 2023.

The report also offers detailed analysis of proposals and planned federal enforcement actions across and within mortgage and auto origination and servicing, data privacy, student lending and other sectors under the CFPB’s purview.

To read the report, click here.

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William McCurdy

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Jiabao (Eva) Xu