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Nutter Bank Report, February 2019
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- FDIC Proposes Changes to Deposit Insurance Assessment Rule for CBLR Banks
- Amended Rules Require Lenders to Accept Certain Private Flood Insurance Policies
- CSBS Releases Recommendations of its Vision 2020 Fintech Industry Advisory Panel
- CFPB Proposes to Rescind Ability-to-Repay Requirements for Payday Loans
- Other Developments: Prepaid Accounts and Education Loan Rehabilitation
1. FDIC Proposes Changes to Deposit Insurance Assessment Rule for CBLR Banks
The FDIC has published a proposal that describes how the agency would apply the Community Bank Leverage Ratio (“CBLR”) framework previously proposed by the federal banking agencies to the deposit insurance assessment system. The proposed amendments to the FDIC’s deposit insurance assessment regulations released on February 5 provide that a CBLR bank would have the choice to use either CBLR tangible equity or tier 1 capital for its assessment base calculation. The FDIC would use the higher of either the CBLR or the tier 1 leverage ratio (i.e., the value that would result in the lower assessment rate) as the Leverage Ratio for purposes of calculating a CBLR bank’s assessment rate under the proposed amendments. According to the FDIC, for a minority of small banks, the use of the CBLR or CBLR tangible equity could result in a higher assessment rate or a larger assessment base, respectively. The FDIC stated that it intends to apply the CBLR framework to the deposit insurance assessment system in a way that minimizes or eliminates any increase in assessments that may arise from a bank’s election to use the CBLR framework and reduces regulatory reporting burden. Comments on the FDIC’s proposed amendments are due by April 22, 2019. Click here for a copy of the proposed rule.
Nutter Notes: The federal banking agencies proposed the CBLR framework in November 2018. The CBLR framework would simplify regulatory capital requirements for community banking organizations with less than $10 billion in total consolidated assets that meet certain qualifying criteria. Under the proposed CBLR framework, a qualifying community banking organization that elects to use the CBLR framework would no longer be required to calculate or report the components of capital used in the calculation of risk-based capital ratios or the tier 1 leverage ratio, such as tier 1 capital, total capital, or risk-weighted assets. The proposed amendments to the FDIC’s deposit insurance assessment regulations provide that all such CBLR banks would be assessed using the small bank pricing methodology. The proposed amendments also clarify that a CBLR bank that meets the definition of “custodial bank” under the assessment regulations would have no change to its custodial bank deduction or reporting items required to calculate the deduction. The FDIC has made a spreadsheet tool available that estimates deposit insurance assessment amounts for CBLR banks calculated in accordance with the proposed amendments to the assessment regulations (using data as of September 30, 2018), which can be accessed by clicking here.
2. Amended Rules Require Lenders to Accept Certain Private Flood Insurance Policies
The federal banking agencies, along with the Farm Credit Administration and the National Credit Union Administration, have issued a final rule amending their respective National Flood Insurance Program (“NFIP”) regulations to require banks and other regulated lenders to accept privately issued insurance policies that meet a statutory definition of “private flood insurance” in place of NFIP policies. The amendments released on February 12 implement private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012, permitting regulated lenders to accept flood insurance policies issued by private insurers and plans providing flood coverage issued by mutual aid societies, subject to certain restrictions. To qualify under the statutory definition of “private flood insurance,” a flood insurance policy must provide coverage that is at least as broad as the coverage provided under a standard NFIP policy for the same type of property considering deductibles, exclusions, and conditions offered by the insurer. If a regulated lender wishes to accept a privately issued policy that does not meet the statutory definition, the final rule requires, among other things, that the policy provide sufficient protection for a designated loan, consistent with general safety and soundness principles, and that the regulated lender document its conclusion regarding the sufficiency of protection in writing. The amendments to the agencies’ NFIP regulations will become effective on July 1, 2019. Click here for a copy of the final rule.
Nutter Notes: The final rule includes a streamlined compliance aid provision that is meant to help banks and other regulated lenders evaluate whether a flood insurance policy meets the statutory definition of “private flood insurance.” The compliance aid allows a regulated lender to conclude that a policy meets the definition of “private flood insurance” without further review of the policy if the policy, or an endorsement to the policy, states: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” If a policy includes this statement, the regulated lender may rely on it and would not need to review the policy to determine whether it meets the statutory definition of “private flood insurance” under the final rule. However, the final rule does not permit a regulated lender to reject a policy that both meets the definition of “private flood insurance” and fulfills the flood insurance coverage requirement under the existing NFIP regulations, even if the policy does not include the statement. In other words, this provision does not permit regulated lenders to reject private flood insurance policies solely because they are not accompanied by the compliance statement. The agencies noted that they do not generally regulate insurers and cannot require an insurance policy to include the compliance statement. According to the agencies, a policy that includes this statement may provide policyholders and regulated lenders with recourse under state law against an insurance company that fails to abide by the terms included in the definition of “private flood insurance."
3. CSBS Releases Recommendations of its Vision 2020 Fintech Industry Advisory Panel
The Conference of State Bank Supervisors (“CSBS”), the national organization of state bank regulators, has released the recommendations of its 33-member Vision 2020 Fintech Industry Advisory Panel. CSBS agreed to implement 14 of the recommendations from the list issued on February 14 from the payments and lending industry sectors. However, only two of the seven specific recommendations from the lending industry sector were adopted, with the remaining recommendations being deferred for future action or implementation. CSBS provided a matrix of its responses to the recommendations and next steps. The adopted payment and lending industry recommendations primarily focus on harmonizing and standardizing state licensing, examination, supervision, and financial reporting requirements among CSBS members. They include developing a 50-state model money services businesses law; creating a standardized consumer finance call report; building an online database of state licensing and fintech guidance; developing a new state examination system to simplify examinations of non-banks operating on a multi-state basis; and expanding the use of the Nationwide Multistate Licensing System across all license types to include all state regulators and all non-bank industries supervised at the state level. Click here for a copy of the matrix of recommendations and next steps.
Nutter Notes: The items that CSBS deferred for future consideration present thornier issues that are potentially beyond the authority of the state bank supervisors. They center on the lack of consistency in statutory definitions and requirements, and the manner in which they are interpreted by each state. The lending industry recommendations being deferred for future CSBS action or implementation include developing a list of state licensing requirements for modernization and consistency, including eliminating physical office requirements and providing for online delivery of notices and disclosures, and examining interpretive differences among similar state consumer finance statutes. The deferred recommendations also include creating a standardized definition of “commercial loan” based upon the use of the loan proceeds, treating loans to sole proprietors as consumer or commercial loans based solely upon the use of the proceeds rather than the entity type of the borrower, and developing consistent approaches to small business financing disclosure requirements that promote clear and transparent protections for small business borrowers. The CSBS Vision 2020 Fintech Industry Advisory Panel recommendations are extensive and will be challenging to execute. The level of cooperation required and resources needed to accomplish the adopted recommendations are significant and may tax the collective resources of CSBS and its members. The deferred recommendations also may require the involvement of state legislatures and state attorneys general, which may affect the timeliness and substance of any outcome.
4. CFPB Proposes to Rescind Ability-to-Repay Requirements for Payday Loans
The CFPB has issued proposed amendments to a final rule adopted by the agency in November 2017 governing payday, vehicle title, and certain high-cost installment loans that would rescind mandatory underwriting provisions. Specifically, the proposed amendments issued on February 6 would rescind regulations that provide that it is an unfair and abusive practice for a lender, including a bank, to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms. The proposed amendments would also rescind regulations that impose mandatory underwriting requirements for making ability-to-repay determinations, exempt certain loans from the underwriting requirements, and establish related definitions, reporting, and recordkeeping requirements. The proposed amendments affect provisions of the November 2017 final rule that have not yet become effective. Comments on the proposed amendments are due by May 15, 2019. Click here for a copy of the proposed amendments.
Nutter Notes: Compliance with the CFPB’s mandatory underwriting provisions under the November 2017 final rule governing payday, vehicle title, and certain high-cost installment loans becomes mandatory on August 19, 2019. Simultaneously with the release of its proposal to rescind the mandatory underwriting provisions, the CFPB released a proposal to delay the mandatory compliance date by 15 months to November 19, 2020 to allow more time to consider the proposed amendments. The mandatory underwriting provisions under the November 2017 final rule include two methods for compliance. One method requires banks and other lenders making covered short-term and longer-term balloon-payment loans to make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer’s basic living expenses and other major financial obligations without needing to re-borrow over the next 30 days, among other things. The other method permits lenders to make certain covered short-term loans without meeting all the specific underwriting criteria as long as the loan satisfies certain specified terms, the lender confirms that the consumer meets specified borrowing history conditions, and the lender provides required disclosures to the consumer. Comments on the proposed delay of the compliance date are due by March 18, 2019.
5. Other Developments: Prepaid Accounts and Education Loan Rehabilitation
- Federal Banking Agencies Issue Examination Guidance on Prepaid Accounts
The federal banking agencies released revised interagency examination procedures on February 22 that incorporate the CFPB’s October 2016 final rule amending Regulation E and Regulation Z, which created comprehensive consumer protections for prepaid accounts. The final rule becomes effective on April 1, 2019. Click here for a copy of the interagency examination procedures and related resources.
Nutter Notes: The amendments to Regulation E imposed certain disclosure requirements, limitations on liability and error resolution requirements, and periodic statement requirements for prepaid accounts. The amendments expanded the Regulation Z term “credit card” to include “hybrid prepaid-credit card,” and regulate credit features that may be offered in conjunction with prepaid accounts. Subsequent amendments to the final rule were made to address error resolution and limited liability requirements where a bank has not completed its customer identification and verification processes, and applied the rule’s credit provisions to digital wallets, among other updates.
- Guidance Published for Voluntary Private Education Loan Rehabilitation Programs
The FDIC and the Federal Reserve released joint guidance on February 4 for voluntary private education loan rehabilitation programs to promote a recent amendment to the Fair Credit Reporting Act (“FCRA”) that gives consumers the opportunity to rehabilitate a private education loan with a previously reported default under certain conditions. Banks that choose to establish a private education loan rehabilitation program under the amendments to the FCRA are entitled to a safe harbor from potential claims under the FCRA related to removal of the reported default, assuming the program satisfies certain statutory requirements. Click here for a copy of the joint guidance.
Nutter Notes: The amendment to FCRA concerning voluntary private education loan rehabilitation programs is contained in section 602 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. If a borrower meets the requirements of a bank’s section 602 program, the bank may remove a reported default from the borrower’s credit report and the removal will not be considered inaccurate under the FCRA. To qualify for the safe harbor, a bank must obtain written approval of the terms and conditions of its private education loan rehabilitation program from its primary federal bank regulator, among other requirements.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Thomas J. Curry, Jason J. Cabral and Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
| Thomas J. Curry Tel: (617) 439-2087 | Kenneth F. Ehrlich Tel: (617) 439-2989 | Michael K. Krebs Tel: (617) 439-2288 |
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