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09.30.2016 | Legal Update

The Nutter Bank Report is a monthly publication of the firm's Banking and Financial Services Group.

Headlines
1. Federal Banking Agencies’ Report Recommends Significant Changes to Bank Powers
2. Federal Reserve Publishes Framework for Setting the Countercyclical Capital Buffer
3. FFIEC Issues Revised Guidance on Effective Information Security Programs
4. Comptroller Outlines Features the OCC May Include in Possible FinTech Charter
5. Other Developments: Affordable Home Loans and Foreign Correspondent Banking

1. Federal Banking Agencies’ Report Recommends Significant Changes to Bank Powers

The federal banking agencies released a joint report to Congress and the Financial Stability Oversight Council on September 8 that recommends changes to the activities in which banking organizations may engage and the investments which banking organizations may make. Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) required that the agencies study the types of activities and investments permissible for banking organizations and their associated risks, and recommend whether the activities or investments pose a risk to the safety and soundness of banks or the U.S. financial system, the appropriateness of those activities and investments, and any restrictions that may be necessary to address the reported risks. In the report, the Federal Reserve recommends statutory changes that would repeal the authority for certain types of banking entities to operate without activities restrictions or outside of the prudential framework applicable to other banking organizations. For example, the report recommends that Congress repeal the authority of financial holding companies to engage in merchant banking activities, and repeal the exemption that permits corporate owners of industrial loan companies to operate outside of the regulatory and supervisory framework applicable to other bank holding companies. The FDIC also stated in the report that it plans to consider whether activities related to investments in other financial institutions and other equity investments should be subject to additional restrictions under Part 362 of the FDIC’s regulations. Click here for a copy of the agencies’ joint report.

    Nutter Notes: The report also stated that the FDIC plans to consider whether any changes to the prudential conditions and standards under which the FDIC evaluates applications by banks under Part 362 with respect to mineral rights, commodities, and other so-called nontraditional activities are needed. According to the report, the OCC is evaluating whether to permit smaller national banks to establish or expand swap dealing businesses, particularly in commodity swaps. For example, the OCC stated that “a community bank might offer a swap to a mid-market energy or agriculture business in connection with a loan.” The OCC stated that it intends to clarify minimum prudential standards applicable to national banks engaged in these types of swap dealing activities to ensure that they establish a prudent control framework. The OCC also stated that it is considering whether additional guidance or restrictions are necessary to mitigate the risks to national banks and federal thrifts posed by their membership in certain clearinghouses, particularly clearinghouses with rules that do not cap members’ liability.

2. Federal Reserve Publishes Framework for Setting the Countercyclical Capital Buffer

The Federal Reserve Board has released a policy statement that details the framework it will follow in setting the Countercyclical Capital Buffer (“CCB”) for private-sector credit exposures located in the United States. The policy statement published on September 8 implements authority granted by Section 616 of the Dodd-Frank Act, which provides that the federal banking agencies must make certain regulatory capital requirements countercyclical, so that the amount of capital required to be maintained by a banking organization “increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the [banking organization].” The CCB can be used to raise capital requirements on internationally active banking organizations when the Federal Reserve determines that the risk of above-normal losses is elevated. CCB requirements apply to banking organizations that are subject to the advanced approaches capital rules—generally those with more than $250 billion in assets or $10 billion in on-balance-sheet foreign exposures—and to any depository institution subsidiary of such banking organizations. Click here for a copy of the policy statement.

    Nutter Notes: The policy statement clarifies that the Federal Reserve expects that the CCB will be activated when “systemic vulnerabilities are meaningfully above normal and that the [Federal Reserve] generally intends to increase the [buffer] gradually.” The Federal Reserve also expects to remove or reduce the CCB when the conditions that led to its activation have subsided and when the release of CCB capital would promote financial stability, according to the policy statement. The Federal Reserve said that it would generally expect to provide notice to the public and seek comment on the proposed level of the CCB as part of making any final determination to change the CCB. The Federal Reserve also said that it expects that any decision to adjust the CCB will be made jointly with the OCC and FDIC, but that the Federal Reserve will make final decisions about the appropriate level of the CCB for the firms that it supervises based on its judgment of the facts and circumstances presented. The policy statement provides background on the range of financial system vulnerabilities and other factors the Federal Reserve may consider when setting the buffer, including leverage in the nonfinancial sector, leverage in the financial sector, maturity and liquidity transformation in the financial sector, and asset valuation pressures.

3. FFIEC Issues Revised Guidance on Effective Information Security Programs

The Federal Financial Institutions Examination Council (“FFIEC”) has revised the Information Security booklet of the FFIEC’s Information Technology Examination Handbook (the “IT Handbook”) to include new guidance on effective information security programs, among other topics. The revised Information Security booklet released on September 16 describes examiners’ expectations for effective information security program management and how examiners will evaluate the adequacy of a bank’s integration of information security into its overall risk management program. The revised booklet provides an overview of information security operations, including the need for effective threat identification, assessment, and monitoring, and incident identification, assessment, and response. The revised booklet also describes the attributes that federal banking agencies associate with effective information security programs, including assurance and testing, and the adequacy of a bank’s culture, governance, and security operations. Click here for a copy of the revised Information Security booklet and the other booklets in the IT Handbook.

    Nutter Notes: The revised booklet includes examination procedures that the agencies will use to evaluate a bank’s assurance and testing, information security culture, governance, and operations. The revised guidance also describes cybersecurity concepts such as threats, controls, and resource requirements for preparedness, and the stages of the information technology risk management program, including risk identification, risk measurement, risk mitigation, monitoring, and reporting. The booklet emphasizes that a bank’s information security programs should have strong support from the bank’s board and senior management. The board and management should promote the integration of security activities and controls throughout the bank’s business processes and establish clear accountability for carrying out security responsibilities, according to the booklet. Because of the frequency and severity of cybersecurity attacks perceived by the agencies, the booklet recommends that banks place an increasing focus on cybersecurity controls.

4. Comptroller Outlines Features the OCC May Include in Possible FinTech Charter

In a speech before the Marketplace Lending Policy Summit 2016, Comptroller of the Currency Thomas Curry described the features that the OCC is considering for a possible limited-purpose federal charter for nonbank financial technology (“FinTech”) companies. In his September 13 remarks, the Comptroller said that if the OCC does decide to grant limited-purpose charters to FinTech companies, such companies would be subject to the same standards of safety, soundness, and fairness that other national banks and federal thrifts must meet. The Comptroller suggested that FinTech companies should be responsible for ensuring that any new product, service, or technology it deploys complies with existing laws, such as the Equal Credit Opportunity Act, that apply to all creditors, including nonbank creditors. The Comptroller also said that the OCC is considering whether new products, services, or technologies developed by FinTech companies should be subject to new regulatory regimes to “protect the public’s interest or prevent risk to the broader financial system.” Click here for a copy of the Comptroller’s speech.

    Nutter Notes: The Comptroller said that the OCC’s final framework under which FinTech charters would be considered will include eight principles: responsible innovation, receptiveness within the OCC, capitalizing on OCC supervisory experience, fair access for and treatment of consumers, effective risk management and corporate governance, encouraging banks of all sizes to consider strategic innovations, a continuing dialogue with all of the stakeholders of the financial services community, and collaboration with other regulators. The Comptroller also said that the OCC is considering whether a FinTech charter would allow companies to face lighter supervision or fewer consumer protections, and whether FinTech charters would permit companies to avoid state consumer protection laws. Finally, the Comptroller announced that the OCC’s framework for responsible innovations will be completed this fall.

5. Other Developments: Affordable Home Loans and Foreign Correspondent Banking

• FDIC Publishes Bankers’ Guide to Affordable Single-Family Home Loan Programs

The FDIC released on September 15 The Affordable Mortgage Lending Guide, Part I, which provides information about single-family mortgage products from federal agencies and government sponsored enterprises and provides technical assistance for community banks on affordable mortgage credit options. The FDIC intends the guide to be a one-stop resource for community banks to get an overview of a variety of program resources, compare different products, and understand Community Reinvestment Act implications.

    Nutter Notes: The guide explains for each program how broker/agent, correspondent selling to an aggregator, or approved seller-servicer options work. The FDIC also launched a related online Affordable Mortgage Lending Center that provides access to all of the program information found in the guide. Click here to obtain the guide.

• Treasury and Federal Banking Agencies Issue Guidance on BSA/AML Sanctions

The U.S. Department of the Treasury and the federal banking agencies issued on August 30 their Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement, which provides an overview of key aspects of federal supervisory and enforcement strategy and practices for banks that maintain correspondent accounts for foreign financial institutions.

    Nutter Notes: According to the fact sheet, federal bank examiners expect banks with foreign correspondent accounts to have robust Bank Secrecy Act and Office of Foreign Assets Control compliance programs that include appropriate customer due diligence so that the institutions have a clear understanding of a foreign financial institution’s risk profiles and expected account activity. Click here for a copy of the fact sheet.

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 Bridget L. Vellucci. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
mkrebs@nutter.com
Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.