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08.31.2023 | Legal Update

Headlines

1. Federal Court Temporarily Blocks Implementation of CFPB Small Business Lending Rule
2. Federal Reserve to Begin Supervision Program for Novel Banking Activities
3. OCC Releases Guidance on Legal Lending Limits Applicable to Purchased Loans
4. Federal Banking Agencies Propose Long-Term Debt Requirement for Large Banks
5. Other Developments: BSA/AML and Large Bank Resolution Plans

1. Federal Court Temporarily Blocks Implementation of CFPB Small Business Lending Rule

A federal court has issued an order granting an injunction that delays the compliance dates for the CFPB’s final rule governing the collection of small business lending data required by Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The court order issued on July 31 will delay all deadlines for compliance with the final rule while the Supreme Court hears a separate, related case challenging the constitutionality of the CFPB’s funding structure. While the court’s order is not a nationwide injunction, it does apply to all members of the American Bankers Association, as well as members of the Texas Bankers Association. The American Bankers Association announced earlier this year that it had joined a suit filed by the Texas Bankers Association, which claims that the CFPB’s final rule improperly expands the data collection from the original 13 data points specified in Section 1071 of the Dodd-Frank Act to an additional 81 data points. The CFPB has not yet announced whether it will delay the compliance dates for all other institutions. Click here for a copy of the court’s order.

Nutter Notes: The CFPB issued its final rule amending Regulation B to implement Section 1071 of the Dodd-Frank Act on March 30, 2023. Under the rule, covered financial institutions, including banks, are required to collect and report data on applications for credit for small businesses, including those that are owned by women or minorities. For institutions not covered by the federal court’s injunction, compliance by financial institutions that originated at least 2,500 covered originations in both 2022 and 2023 will be required beginning October 1, 2024. Under the final rule, a covered origination generally includes any extension of credit under Regulation B to a small business. Institutions with volumes of at least 500 but less than 2,500 covered originations have until April 1, 2025 to begin complying with the rule. Those with volumes of at least 100 but less than 500 covered originations have until January 1, 2026.

2. Federal Reserve to Begin Supervision Program for Novel Banking Activities

The Federal Reserve has created a new program to supervise novel activities conducted by banking organizations it oversees. In an August 8 Supervision and Regulation Letter, the Federal Reserve announced that its Novel Activities Supervision Program was established to enhance the supervision of complex partnerships with non-bank financial technology (fintech) companies, crypto-asset related activities, and distributed ledger technology (DLT). According to the Federal Reserve, the Program will be risk-focused and will work with existing Federal Reserve supervisory teams to monitor and examine novel activities conducted by supervised banking organizations. The Federal Reserve stated that it will notify in writing those banking organizations whose novel activities will be subject to examination through the program. The Federal Reserve stated that it will periodically evaluate and update which banking organizations are subject to the examination of novel activities through the program, and those banking organizations will be notified accordingly. Click here for a copy of the Supervision and Regulation Letter on the Novel Activities Supervision Program.

Nutter Notes: Also on August 8, the Federal Reserve issued a separate Supervision and Regulation Letter that describes the process for a state bank supervised by the Federal Reserve to follow before engaging in certain activities involving tokens denominated in national currencies and issued using DLT or similar technologies to facilitate payments (dollar tokens). According to the Federal Reserve, the nonobjection process for dollar token activities was developed to address OCC Interpretive Letter 1174, in which the OCC recognized the authority of national banks to use DLT or similar technologies to conduct payments activities as principal, including by issuing, holding, or transacting in dollar tokens. The OCC conditioned the legal permissibility of these activities on a national bank demonstrating, to the satisfaction of its supervisors, that it has in place controls to conduct the activity in a safe and sound manner. Similarly, a state member bank seeking to engage in activities permitted for national banks under OCC Interpretive Letter 1174 must verify that this requirement has been met by seeking a written notification of supervisory nonobjection from the Federal Reserve before engaging in the proposed activities. A state member bank should notify its lead supervisory point of contact at the Federal Reserve of the bank’s intention to engage in the proposed activity and should include a description of the proposed activity in the notice. Click here for a copy of the Supervision and Regulation Letter on the nonobjection process for dollar token activities.

3. OCC Releases Guidance on Legal Lending Limits Applicable to Purchased Loans

The OCC has issued guidance for national banks and federal savings associations about the applicability of the legal lending limit to purchased loans. The guidance published on August 8 clarifies that a bank’s aggregate exposures from loans attributable to a single seller must be within the bank’s legal lending limit unless an exception applies. Loans are attributable to a seller under the OCC’s regulation if the bank has direct or indirect recourse to the seller. The guidance explains that direct or indirect recourse can be either explicit or implied. Explicit recourse is generally covered under a contractual arrangement or other written agreement between the bank and the seller. Implied recourse may be established through the bank’s course of dealing or conduct with a seller even if the contract or written agreement with the provider does not contain explicit recourse. Click here for a copy of the OCC’s guidance.

Nutter Notes: The OCC’s guidance includes examples of explicit and implied recourse scenarios. According to the guidance, explicit recourse includes a contractual obligation to substitute or repurchase defaulted loans or refill a reserve account, even if no substitutions, repurchases, or replenishments of the reserve account have occurred. Implied recourse includes situations in which the seller has routinely substituted or repurchased loans or refilled or replenished a reserve account even when the contract does not require those actions. If the bank does not have explicit or implied recourse to the seller, the loans are generally not attributable to the seller under the OCC’s legal lending limit regulation. The OCC’s guidance explains that the purchased loans would generally be attributable under the legal lending limit regulation to only the named borrowers on the loans, unless the direct benefit or common enterprise tests under the OCC’s loan attribution regulation are met or other provisions under the legal lending limit regulation warrant attribution to another party.

4. Federal Banking Agencies Propose Long-Term Debt Requirement for Large Banks

The federal bank regulatory agencies have issued a proposed rule that would require large banks with total assets of $100 billion or more to maintain a layer of long-term debt for the purpose of improving financial stability “by increasing the resolvability and resiliency of such institutions.” The proposal released on August 29 emerged from a rulemaking process announced in October 2022 aimed at evaluating several possible regulatory changes to promote more orderly resolutions for large banks. According to the agencies, the proposal would increase the options available to resolve such banks in case of failure by making a minimum amount of long-term debt available to absorb losses. The agencies also stated that, by reducing the risk that uninsured depositors would face losses, long-term debt could “reduce the speed and severity of bank runs, and limit the risk of contagion when a bank is under stress.” Public comments on the proposal are due by November 30, 2023. Click here for a copy of the proposed rule.

Nutter Notes: The federal banking agencies acknowledged that the recent failures of three large banks in spring 2023 drew attention to a need for supplementary, loss-absorbing resources that can be used to assist with bank resolutions in a way that reduces costs and risk of disruption to the banking system. Although the proposed rule would apply to banks with more than $100 billion in total consolidated assets, it would not change the existing requirements already in place for the largest and most complex banks (i.e., U.S. global systemically important banks) according to the agencies. Under the proposed rule, covered banks would be required to maintain a minimum amount of eligible long-term debt equal to the greater of 6% of risk weighted assets, 3.5% of average total consolidated assets, and for banks subject to the supplementary leverage ratio, 2.5% percent of total leverage exposure under the supplementary leverage ratio. The proposed rule also would prohibit large banks from engaging in certain activities that could complicate their resolution, and would disincentivize banks from holding long-term debt issued by other banks to reduce interconnectedness.

5. Other Developments: BSA/AML and Large Bank Resolution Plans

• The FFIEC Issues Revised Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual

The FFIEC on August 2 announced updates to certain sections and related examination procedures in its BSA/AML Examination Manual. The updates within the Assessing Compliance with BSA Regulatory Requirements section include: Due Diligence Programs for Correspondent Accounts for Foreign Financial Institutions, Prohibition on Correspondent Accounts for Foreign Shell Banks; Records Concerning Owners of Foreign Banks and Agents for Service of Legal Process, and Summons or Subpoena of Foreign Bank Records; Termination of a Correspondent Relationship; Records Concerning Owners of Foreign Banks and Agents for Service of Legal Process.

Nutter Notes: Additional updates include the Due Diligence Programs for Private Banking Accounts and Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity. Click here to access the updated exam manual materials.

• Federal Banking Agencies Propose Guidance to Enhance Resolution Planning at Large Banks

The FDIC and Federal Reserve on August 29 jointly issued proposed guidance to help certain large bank holding companies develop their Dodd-Frank Act Title I resolution plans, which describe their strategies for rapid and orderly resolution in the event of material financial distress or failure. The guidance would generally apply to bank holding companies with more than $250 billion in total assets but that are not global systemically important banks, which are already subject to guidance on resolution planning. Public comments on the proposal are due by November 20, 2023.

Nutter Notes: The proposed guidance would clarify supervisory expectations for both “single point of entry” and “multiple point of entry” strategy needs, which are different strategies bank holding companies may adopt for their rapid and orderly resolution. Click here for a copy of the proposed guidance.

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 Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989	Matthew D. Hanaghan mhanaghan@nutter.com Tel: (617) 439-2583	Michael K. Krebs mkrebs@nutter.com Tel: (617) 439-2288

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