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12.22.2020 | Legal Update

Headlines

1. FDIC Modernizes Brokered Deposit Rule and Amends Interest Rate Restrictions
2. CFPB Expands the Definition of a Qualified Mortgage for Truth in Lending Purposes
3. FDIC Adopts New Rules Regulating Parent Companies of Insured Industrial Banks
4. Joint Guidance on Fintech Due Diligence Requirements for Community Banks to Come
5. Other Developments: LIBOR Transition, Branch Applications, and SAR Filing Requirements

1. FDIC Modernizes Brokered Deposit Rule and Amends Interest Rate Restrictions

The FDIC has adopted a final rule that establishes new standards for determining whether deposits made through certain kinds of arrangements with third parties qualify as brokered deposits, such as those between banks and financial technology (“fintech”) companies. The final rule approved on December 15 also amends the methodology for calculating the interest rate restrictions that apply to less than well capitalized banks by defining the “National Rate” as the weighted average of rates paid by all banks and credit unions on a given deposit product based on each institution’s market share of domestic deposits. The final rule includes an exclusion from the definition of a brokered deposit for deposits placed by a third party that has an exclusive deposit placement arrangement with one bank. The final rule identifies several, specific business relationships involving the placement of a customer’s funds on deposit at a bank by the agent of the customer as meeting the primary purpose exception—which applies to exclude a deposit from the definition of a brokered deposit when the primary purpose of the agent’s business relationship with its customers is not the placement of funds with banks. Such “designated exceptions” in the final rule include, among others, agents that place customer funds into Health Savings Accounts for the primary purpose of paying for or reimbursing qualified medical expenses, property management firms that place customer funds into deposit accounts for the primary purpose of providing property management services, and agents that place customer funds into deposit accounts for the primary purpose of providing mortgage servicing. The final rule allows agents that do not meet one of the designated exceptions to apply to the FDIC for a primary purpose exception. The final rule will become effective on April 1, 2021, though full compliance with the final rule will not be required until January 1, 2022. Click here for a copy of the final rule.

Nutter Notes: For banks that have significant relationships with fintech companies, the amendments to the brokered deposit rule will provide greater clarity to the process for determining which deposits constitute brokered deposits. A fintech company that is involved in the placement of customer deposits only with one bank would not constitute a deposit broker under the exclusion for exclusive deposit placement arrangements under the final rule. The list of designated exceptions that meet the primary purpose exception under the final rule is simpler than the proposal published last year. The final rule lists 11 types of “enabling” transactions for which no application or notice to the FDIC will be necessary for reliance on the primary purpose exception to the brokered deposit rule. Those enabling transactions apply to accounts established for the following purposes, among others: property management services, cross-border clearing services, escrow and other real estate related services, certain segregated customer reserve accounts that securities broker-dealers and futures commission merchants are required to maintain, deposits placed as required collateral for credit card loans, deposits placed on behalf of customers participating in Health Savings Accounts under Section 223 of the Internal Revenue Code, deposits placed for qualified tuition programs under Section 529 of the Internal Revenue Code, deposits placed in a retirement account that is not part of an employee benefit plan, and deposits placed by agencies to disburse government benefits.

2. CFPB Expands the Definition of a Qualified Mortgage for Truth in Lending Purposes

The CFPB has approved two amendments to Regulation Z, its Truth in Lending rules, that broaden the scope of home mortgage loans that may be considered qualified mortgages (“QMs”), which are presumed to meet the ability-to-repay requirements under Regulation Z. The amendments announced on December 10 adjust the general definition for a QM and create a new category of QM, referred to as a “Seasoned QM.” The adjustments to the general definition of a QM include replacing the current limit on general QM loans – that the borrower’s debt-to-income (“DTI”) ratio may not exceed 43% – with a limit based on the loan’s pricing. Under the amended rule, a loan meets the general QM loan definition if the annual percentage rate exceeds the average prime offer rate for a comparable loan by 1.5 percentage points or more but by less than 2.25 percentage points as of the date the interest rate is set. The final rule provides higher thresholds for loans with smaller loan amounts (less than $110,260, indexed for inflation), for certain manufactured housing loans, and for subordinate-lien loans. The amendments to the general QM loan definition and the amendments creating the new category of Seasoned QM will become effective 60 days after being published in the Federal Register, which is expected shortly. Click here for a copy of the amendments to the general QM loan definition, and click here for a copy of the amendments creating the new category of Seasoned QM.

Nutter Notes: To be eligible as a QM under the new category of Seasoned QM, a home mortgage loan must be a first-lien, fixed-rate loan that has met certain performance requirements, and has been held in portfolio by the originating lender or first purchaser for a 36-month period (subject to certain exceptions for the 36-month portfolio requirement that are similar to exceptions to the general QM portfolio requirement for small creditors). A Seasoned QM may have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the 36-month seasoning period. Seasoned QMs also must comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. A Seasoned QM must have substantially equal periodic payments that are fully amortizing and may not have any balloon payment feature. The loan term may not exceed 30 years, and the loan may not be a “high-cost mortgage,” as defined in Regulation Z. In order to become a Seasoned QM, the loan’s total points and fees also must not exceed limits specified for general QMs.

3. FDIC Adopts New Rules Regulating Parent Companies of Insured Industrial Banks

The FDIC has approved a final rule that establishes certain conditions and commitments that will apply when an FDIC-insured industrial bank or industrial loan company (each an “ILC”) becomes a subsidiary of a company that is not subject to consolidated supervision by the Federal Reserve (a “covered parent company”). The final rule issued on December 15 requires a covered parent company to enter into written agreements with the FDIC and with its subsidiary ILC that, among other things, require the covered parent company to provide capital and liquidity support to the ILC. The covered parent company’s mandatory commitments to the FDIC also include certain recordkeeping and reporting requirements. The final rule requires a covered parent company to consent to examination by the FDIC of the covered parent company and each of its subsidiaries, including subsidiaries other than ILCs. The final rule enables the FDIC to require additional commitments from a covered parent company beyond those mandated by the final rule that the FDIC deems appropriate in light of the ILC’s business model. The final rule will become effective on April 1, 2021. Click here for a copy of the final rule.

Nutter Notes: ILCs have operated in the U.S. under state charters for over a century, and many did not initially accept deposits. The Garn-St. Germain Depository Institutions Act of 1982 made all ILCs eligible for federal deposit insurance. All ILCs are considered state banks under the Federal Deposit Insurance Act. However, Congress exempted ILCs meeting certain requirements in 1987 from the definition of a bank under the Bank Holding Company Act (“BHCA”). As a result, companies that control ILCs are not bank holding companies subject to the BHCA’s activities restrictions or Federal Reserve supervision and regulation. The exception in the BHCA for ILCs allows a commercial business to own or control an FDIC-insured depository institution. By contrast, bank holding companies and savings and loan holding companies are subject to consolidated supervision by the Federal Reserve and are generally prohibited from engaging in commercial activities (though bank holding companies may engage in certain activities that are considered financial in nature). As recently as 1986, a commercial company could acquire control of three types of depository institutions without becoming subject to the BHCA. Now, the ILC is the only type of depository institution that a commercial company may acquire.

4. Joint Guidance on Fintech Due Diligence Requirements for Community Banks to Come

The federal banking agencies are developing interagency guidance on vendor due diligence for community banks when entering into arrangements with fintech companies. Federal Reserve Board Governor Michelle W. Bowman described the proposed guidance during a December 4 speech to the Independent Community Bankers of America. According to Governor Bowman, the fintech due diligence guidance would be aligned with existing supervisory expectations and would include sample questions for fintech companies. Governor Bowman said that the guidance will be “specific about the documents and information that community banks need in order to successfully complete their due diligence.” Governor Bowman also said that she expects the Federal Reserve staff to work with the OCC and FDIC to update and align applicable interagency guidance for third-party risk management to “enhance clarity on supervisory expectations for community bank partnerships with fintech companies.” The FFIEC’s current Outsourcing Technology Services Handbook, which provides some guidance on performing due diligence of information technology providers, was issued in 2004. Click here to access Governor Bowman’s remarks.

Nutter Notes: On a related note, FBI Director Christopher Wray reportedly expressed concern that cyber criminals may be targeting third-party service providers to gain unauthorized access to financial institution data. Director Wray was responding to questions following his December 8 speech at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference when he delivered his warning about the potential information security vulnerabilities that third-party service providers represent for banks. The federal banking agencies are developing a joint rule that would require a banking organization to provide its primary federal regulator with prompt notification of any information security breach that constitutes a “notification incident” under the proposed rule. The proposed rule would define a notification incident to include a computer-security incident that could materially disrupt, degrade, or impair the ability of the banking organization to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base. The proposed rule would require a banking organization to notify its primary federal regulatory as soon as possible and no later than 36 hours after the banking organization believes in good faith that a notification incident has occurred. The FDIC approved the proposed rule on December 15, and it is still under consideration by the OCC and Federal Reserve. Click here to access Director Wray’s speech and click here for a copy of the proposed computer-security incident notification rule.

5. Other Developments: LIBOR Transition, Branch Applications, and SAR Filing Requirements

• Federal Banking Agencies Issue Additional Guidance on LIBOR Transition

The federal banking agencies on November 30 issued a statement encouraging banks to cease entering into new contracts that use U.S. dollar (“USD”) LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. According to the statement, the LIBOR administrator, ICE Benchmark Administration Limited, has announced its intention to end the publication of the one week and two month USD LIBOR settings immediately after the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. Click here for a copy of the interagency statement.

Nutter Notes: Separately, the federal banking agencies recently issued joint guidance that a bank may use any reference rate for its loans in place of LIBOR that the bank determines to be appropriate for its funding model and customer need. The joint guidance recommends that any new financial contract that uses a reference rate should either use a rate other than LIBOR or contain robust terms that provide for a clearly defined alternative reference rate after LIBOR’s discontinuation.

• FDIC Amends Branch Application Requirements Related to Historic Preservation and Environmental Policy

The FDIC announced on December 14 that it has approved a final rule amending its application requirements for the establishment and relocation of branches and offices so that such applications no longer require statements of compliance with the National Historic Preservation Act of 1966 (“NHPA”) and the National Environmental Policy Act of 1969 (“NEPA”). The final rule is effective for branch or deposit insurance applications subject to Part 303 received on or after December 14, 2020. Click here for a copy of the final rule.

Nutter Notes: The final rule makes the FDIC’s branch application procedures consistent with the OCC’s procedures for national banks and the Federal Reserve’s procedures for state member banks, which do not require consideration of the NHPA and NEPA in connection with branch applications.

• FDIC Considers Amending SAR Requirements to Provide Case-by-Case Exemptions

The FDIC on December 15 issued a proposed rule that would amend its Suspicious Activity Report (“SAR”) rules to permit the agency to issue case-by-case exemptions from SAR filing requirements to banks. Comments on the proposed rule will be due within 30 days after it is published in the Federal Register, which is expected shortly. Click here for a copy of the proposed rule.

Nutter Notes: The FDIC’s current SAR rules allow exemptions for banks from SAR filing requirements for physical crimes (robberies and burglaries) and lost, missing, counterfeit, or stolen securities. The proposed rule would amend the SAR rules to permit the FDIC, in conjunction with FinCEN, to issue additional exemptions from SAR filing requirements on a case-by-case basis to banks that “develop innovative solutions to otherwise meet Bank Secrecy Act requirements more efficiently and effectively.”

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