Weekly RoundUp November 06, 2019

Financial Services Weekly News: Bank Agencies Revise Applicability of Capital and Liquidity Rules

Editor's Note

In This Issue. The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve Board), and the Federal Deposit Insurance Corporation (FDIC) issued two final rules — one changing the applicability thresholds under the agencies’ regulatory capital rule and liquidity coverage ratio rules, and the other permitting insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. The Consumer Financial Protection Bureau (CFPB), Federal Reserve Board, and OCC are collectively increasing the threshold for exempting higher-priced mortgage loans from special appraisal requirements. The CFPB and Federal Reserve Board also announced that in 2020, the protections of the Truth in Lending Act (Regulation Z) and Consumer Leasing Act (Regulation M) will apply to consumer credit and consumer lease transactions of $58,300 or less. Meanwhile, the Federal Reserve Bank of New York (New York Fed) announced plans to publish daily three compounded averages of the Secured Overnight Financing Rate. These developments are discussed in more detail below.

Editor's Note

Regulatory Developments

Federal Banking Agencies Revise Applicability of Capital and Liquidity Rules

On November 1, the OCC, the Federal Reserve Board, and the FDIC (together, Agencies) published in the Federal Register a final rule (Rule) changing the applicability thresholds under the Agencies’ regulatory capital rule and liquidity coverage ratio rules. The Rule utilizes four categories for determining the applicability to an organization of the Agencies’ capital and liquidity requirements, and an organization’s category is based on certain indicators of risk, including measures of size, cross-jurisdictional activity, nonbank assets, off-balance sheet exposures, and weighted short-term wholesale funding. Through the Rule’s risk-based categories, the Agencies will tailor the application of regulatory capital and liquidity requirements to large U.S. banking organizations, the U.S. intermediate holding companies of certain foreign banking organizations, and certain depository institutions. Concurrently, the Federal Reserve Board and the FDIC are also adopting final rules revising the criteria for determining the applicability of enhanced prudential standards for large domestic and foreign banking organizations, modifying stress test rules, and amending resolution planning requirements for consistency with the Rule’s risk-based category framework. The changes are effective December 31, 2019.

Agencies Raise Dollar Threshold for Exempting Higher-Priced Mortgage Loans from Regulation Z’s Special Appraisal Requirements

On October 31, the CFPB, Federal Reserve Board, and OCC collectively announced that, effective January 1, 2020, the threshold for exempting higher-priced mortgage loans from special appraisal requirements will increase from $26,700 to $27,200. This will reflect the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as of June 1, 2019, as required by 12 CFR 1026.35(c)(2)(ii) (Regulation Z), which mandates that the exemption threshold be adjusted annually to reflect increases in the CPI-W.

Agencies Reveal Dollar Exemption Thresholds for Regulation Z Consumer Credit and Regulation M Consumer Lease Transactions

On October 31, the CFPB and Federal Reserve Board announced that, in 2020, the protections of the Truth in Lending Act (Regulation Z) and Consumer Leasing Act (Regulation M) will apply to consumer credit and consumer lease transactions of $58,300 or less, to reflect the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as of June 1, 2019, as required by 12 CFR 1026.3(b)(1)(ii) and 12 CFR 1013.2(e)(1), which require that the exemption threshold be adjusted annually to reflect increases in the CPI-W. However, this new threshold does not impact private education loans or loans secured by real property (i.e., mortgages), which are subject to Regulation Z regardless of the loan amount. Additionally, the Federal Reserve Board retains authority to issue rules for certain motor vehicle dealers.

New York Fed Seeks Comment on Publication of SOFR Term Rates and Index

On November 4, the New York Fed announced plans to publish daily three compounded averages of the Secured Overnight Financing Rate (SOFR), with tenors of 30, 90 and 120 days, as well as a daily SOFR index to allow users to calculate average rates over custom time periods. The New York Fed also released its methodology for calculating the compounded averages and index. The New York Fed’s Alternative Reference Rates Committee has identified SOFR as its preferred alternative for U.S. dollar LIBOR, which is not guaranteed to be available after the end of 2021. Specifically, the New York Fed asked for responses to the following questions:

  • Is the proposed calculation methodology, including the compounding approach, appropriate for calculating the averages and index?
  • Are the proposed fixed 30-, 90-, and 180-day tenors for the SOFR averages appropriate, or should the published averages follow a modified following convention (which would not result in a fixed 30-, 90-, or 180-day count) or some other convention? Does the SOFR index appropriately address the need for calculating flexible period averages?
  • In addition to the proposed tenors for the SOFR averages, are there any additional tenors that should be considered for publication? Please explain the purposes that such tenors might be used for.
  • Are there any changes to the proposed decimal precision for the SOFR averages or index that should be considered?
  • Are there any other changes to the averages or index as proposed that would make them more useful? For what purpose(s)?
  • Are the proposed publication arrangements, including publication dates and times, appropriate to facilitate use of the averages and the index?

Comments must be submitted to the New York Fed by December 4, 2019 via email to rateproduction@ny.frb.org.

Agencies Revise Effective Date for Simplifications to the Capital Rule

On November 4, the FDIC, OCC and the Federal Reserve Board jointly issued a final rule that permits insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. As previously reported in the Roundup, on July 22, 2019, the Agencies issued a final rule titled Regulatory Capital: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (simplifications rule), which simplified the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and the calculation of minority interest. The simplifications rule and the final rule are applicable to all non-advanced approaches banking organizations, including those that qualify and elect to use the community bank leverage ratio framework. These revisions included in the simplifications rule were effective as of April 1, 2020. Under the effective date revision in the final rule, non-advanced approaches banking organizations may implement the simplification rule beginning on January 1, 2020 but not later than April 1, 2020. Non-advanced approaches banking organizations may implement the simplified capital treatment in the simplifications rule by completing their Call Report for the first quarter or second quarter of 2020, as applicable under the final rule.

This week’s Roundup contributors: Josh Burlingham and Alexander Callen.