Regulatory Developments
On September 17, the federal banking agencies adopted a final rule finalizing the optional simplified measure of capital adequacy for qualifying community banking organizations, commonly known as the community bank leverage ratio, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. In connection with the adoption of the final rule, the FDIC published a fact sheet providing an overview of the community bank leverage ratio framework. In order to qualify for the community bank leverage ratio framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and must hold 25% or less of total consolidated assets in off-balance sheet exposures and 5% or less of total consolidated assets in trading assets and liabilities. For institutions that fall below the 9% capital requirement but remain above 8%, the final rule establishes a two-quarter grace period to either meet the qualifying criteria again or comply with the generally applicable capital rule. A qualifying community banking organization that opts into the community bank leverage ratio framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The community bank leverage ratio framework will be available for banks to use in their March 31, 2020, Call Report. The FDIC intends to issue a compliance guide to accompany the rule prior to this date.
In a related action, the FDIC adopted a final rule making technical changes to incorporate the community bank leverage ratio framework into the deposit insurance assessment system. A bank that uses the community bank leverage ratio framework will not have any changes to how its assessment rate is calculated. This final rule is effective January 1, 2020.
The federal banking agencies also accelerated the date on which non-advanced approaches banking organizations may use the simpler regulatory capital requirements for mortgage-servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and minority interest when measuring their tier 1 capital as finalized by the agencies on July 22, 2019. Non-advanced approached institutions may now adopt these simpler regulatory capital requirements as of January 1, 2020, instead of April 1, 2020.
On September 17, the federal banking agencies, FCA and FHFA, issued a proposed rule that would amend the 2015 Swap Margin Rule to, among other things, remove the requirement for covered swap entities to collect initial margin from affiliates and permit swaps entered into prior to an applicable compliance date (legacy swaps), which are exempt from the margin rules, to continue to be classified as legacy swaps even if amended to replace existing interest rate provisions based on certain interbank offered rates, including LIBOR, that are reasonably expected to be discontinued or to have lost their relevance as reliable benchmarks. In 2015, the agencies adopted regulations that require swap dealers and security-based swap dealers under the agencies’ respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule). In addition to requiring the exchange of initial and variation margin with unaffiliated counterparties, the Swap Margin Rule also requires that insured depository institutions collect initial and variation margin from affiliates. The international framework agreed to in Basel in 2013 deferred on this issue to individual jurisdictions, but foreign jurisdictions generally do not require initial margin for transactions with affiliates. The proposed rule would repeal the requirement that insured depository institutions collect initial margin from affiliates while retaining the requirement that they exchange variation margin with affiliates. The proposal does not change the margin requirements for transactions with unaffiliated counterparties. In addition, the proposed rule would permit legacy swaps to retain their legacy status in the event that they are amended to replace an interbank offered rate, including LIBOR, or other discontinued rate. The proposed rule would also clarify the point in time at which trading documentation must be in place, permit legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercises, and make technical changes to relocate the provision addressing amendments to legacy swaps that are made to comply with the Qualified Financial Contract Rules, as defined in the Supplementary Information section. Comments are due 30 days after publication in the Federal Register.
On September 17, the SEC proposed a rule updating the statistical disclosures that bank holding companies, banks, savings and loan holding companies, and savings and loan associations (banking registrants) are required to make in their filings made pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. The proposed rules would update the statistical information that banking registrants are required to provide to investors, codify certain Industry Guide 3 disclosures, and eliminate disclosures that overlap with SEC rules, U.S. GAAP or IFRS in a new subpart of Regulation S-K, replacing Industry Guide 3, Statistical Disclosure by Bank Holding Companies. According to the SEC, the proposed rules reflect the significant financial reporting changes, including the issuance of new accounting standards, that have taken place for banking registrants since the last substantive update to Industry Guide 3 in 1986. The revised disclosure rules would, among other things:
- Reduce the reporting period for statistical information regarding banking registrants from five years to the periods covered by the registrant’s financial statements (although initial registration statements and Regulation A offering documents would still require five years of such statistical information);
- Disaggregate categories of interest-earnings assets and interest-bearing liabilities required to be included in average balance sheet and rate/volume tables;
- Eliminate the requirements to disclose the investment portfolio book value, maturity and investments exceeding 10 percent or more of stockholders’ equity as they overlap with existing U.S. GAAP and IFRS requirements;
- Conform the categories of investment securities subject to weighted-average yield disclosure to those required by U.S. GAAP and IFRS;
- Eliminate certain of the loan portfolio composition, loan portfolio risk elements and other interest-bearing assets disclosures required by Item III of Guide 3 as they overlap with existing U.S. GAAP and IFRS requirements;
- Modify the categories of loans subject to loan maturity and interest rate sensitivity disclosure to conform to those required to be included in the financial statements;
- Require the disclosure of additional credit ratios and a discussion of factors that drove material changes on the ratios or related components;
- Codify the majority of existing deposit related disclosures, subject to some revisions, including a requirement to disclose information regarding uninsured deposits and information about time deposits in excess of the FDIC insurance limits;
- Eliminate the requirement to disclose return on assets, return on equity, the dividend payout ratio and the equity to assets ratio, while noting that registrants may wish to include such information in the MD&A if material to investors;
- Replace existing short-term borrowing disclosures with disclosure of the average balance and related average rate paid of interest-bearing liabilities; and
- Apply Article 9 of Regulation S-X to savings and loan holding company and savings association registrants.
The proposed rule will have a 60-day public comment period following its publication in the Federal Register. Comments may be submitted by using the SEC’s internet submission form or via e-mail to rule-comments@sec.gov.
CFPB Issues Policies to Facilitate Compliance and Promote Innovation
On September 10, the CFPB issued three new policies to promote innovation and facilitate compliance: the No-Action Letter (NAL) Policy, Trial Disclosure Program (TDP) Policy, and Compliance Assistance Sandbox (CAS) Policy. These policies follow the CFPB’s request for comment on proposed changes to their NAL and TDP policies that were first announced in 2018. The CFPB believes that the new NAL policy provides a more streamlined review process for the product or service under review. Under the new TDP Policy, entities seeking to improve consumer disclosures may seek the CFPB’s permission to conduct in-market testing of alternative disclosures for a limited time. The new CAS Policy enables testing of a financial product or service where there is regulatory uncertainty by providing approved applicants with a limited “safe harbor” to conduct product testing for a limited time. More information about the new NAL, TDP, and CAS policies can be found here.
CFPB and State Regulators Launch American Consumer Financial Innovation Network
On September 10, the CFPB announced the creation of the American Consumer Financial Innovation Network (ACFIN) — a partnership with several state bank regulators to enhance coordination among federal and state regulators to facilitate financial innovation. The initial members of ACFIN are the Attorneys General of: Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah. ACFIN members will share information to facilitate coordination among the members, and coordinate on innovation-related policies and programs. A copy of the ACFIN charter can be found here.
Enforcement & Litigation
Colorado AG Obtains $175,263 in Borrower Debt Relief
On August 19, the Colorado Attorney General (AG) announced that it had reached a settlement with two financial services firms, resolving allegations that the firms had violated Colorado consumer protection laws. Between 2017 and 2019, one of the firms – a lender operating in the state – made numerous loans to the clients of a debt reduction service provider. However, both the lender and the debt reduction service provider were owned and operated by the same individuals. The AG alleged that this arrangement created a conflict of interest and was prohibited under Colorado law. Read the Enforcement Watch blog post.
Goodwin News
MBA Regulatory Compliance Conference 2019 — September 22-24
At this three-day conference, the Mortgage Bankers Association brings together inside and outside counsel, compliance officers, company executives, government relations professionals, policy directors and quality assurance professionals to discuss current topics impacting the mortgage industry’s regulatory environment. Goodwin is a sponsor of the conference. Financial Industry partner Tom Hefferon will be a speaker. For more information, please visit the event website.
ChIPs Global Summit — September 25-27
The ChIPs Global Summit launched in 2012 as a conversation among friends. A conversation that sparked a single idea has grown into an annual conference that connects women, promotes their advancement as leaders and celebrates their achievements. Now in its eighth year, the Global Summit will bring together more than 750 women from the United States and abroad to celebrate women who are “Changing the Future.” For more information, please visit the event website.
This week’s Roundup contributors: Carl Owens.