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01.28.2022 | Legal Update

Headlines

1. Federal Reserve Considers Merits of Creating a U.S. Dollar Digital Currency
2. New Guidance Clarifies Rules for Federal Thrifts Electing to Be Treated as National Banks
3. FDIC Adopts a New Designated Exception Under Its Deposit Broker Rules
4. FFIEC Publishes Statement of Principles on Examination Information Requests
5. Other Developments: Deposit Insurance, Bank Fees, and Identity Verification

1. Federal Reserve Considers Merits of Creating a U.S. Dollar Digital Currency

The Federal Reserve has published a discussion paper that examines the pros and cons associated with the creation of a U.S. central bank digital currency (“CBDC”)—essentially, a digital dollar backed by the U.S. government. While the paper released on January 20 does not expressly promote or criticize the idea of issuing a U.S. CBDC, it represents the first step in the Federal Reserve’s policy-making process about whether it should pursue such a proposal. Among the potential benefits cited in the paper are that a U.S. CBDC would give the public “broad access to digital money that is free from credit risk and liquidity risk,” and that it could promote financial inclusion for economically vulnerable households and communities by lowering transaction costs. According to the paper, the risks include the potential to change the structure of the U.S. financial system. In particular, the paper speculates that a widely available U.S. CBDC could serve as a substitute for commercial bank money, which may then reduce the aggregate amount of deposits in the banking system, increase bank funding expenses, and reduce the availability of credit. The paper states that the Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law. The paper concludes with a request for public comments about a U.S. CBDC, which are due by May 20, 2022. Click here for a copy of the paper.

Nutter Notes:  In a related development, on January 13, Acting Comptroller of the Currency Michael J. Hsu publicly discussed the regulation of stablecoins and other crypto-assets, focusing on the benefits and risks associated with U.S. dollar-backed stablecoins. A stablecoin is a type of privately issued digital asset that is generally designed to maintain a stable value relative to the U.S. dollar through the maintenance by the issuer of reserve assets. Acting Comptroller Hsu suggested that stablecoins are at risk from market forces that could cause stablecoin holders to lose confidence in reserve management practices, leading to a run. Acting Comptroller Hsu said that federal bank regulation would be an effective tool to mitigate run risk, arguing in favor of regulating stablecoin issuers as banks. This echoes the recommendation made by the President’s Working Group on Financial Markets in November that Congress should pass legislation requiring stablecoin issuers to be insured depository institutions. The Federal Reserve’s U.S. CBDC discussion paper also identified runs as a risk associated with a U.S. CBDC because depositors could quickly convert bank deposits into CBDC during times of financial stress, making runs on banks more likely or more severe. The paper supposes that measures such as prudential supervision, government deposit insurance, and access to central bank liquidity may be insufficient to stave off such runs, reflecting Acting Comptroller Hsu’s remarks. Click here for a copy of Acting Comptroller Hsu’s remarks.

2. New Guidance Clarifies Rules for Federal Thrifts Electing to Be Treated as National Banks

The Federal Reserve has issued new guidance in the form of answers to frequently asked questions (“FAQs”) about which laws and regulations are applicable to Covered Savings Associations (“CSAs”) and companies controlling CSAs. The guidance published on December 30, 2021 applies to federal savings associations that had less than $20 billion in assets as of December 31, 2017 and elect to operate as a CSA. Section 5A of the Home Owners’ Loan Act provides that a CSA may exercise the same rights and privileges, and is subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations, as a national bank that has its main office in the same location as the home office of the CSA. For example, the FAQs clarify that the Federal Reserve generally treats a company that controls a CSA as a bank holding company rather than a savings and loan holding company—meaning that the agency applies the same statutes and regulations to a CSA holding company as would apply to a bank holding company. The FAQs also clarify that a CSA must become a member of the Federal Reserve System because every national bank is required to become a Federal Reserve member bank. Click here for a copy of the FAQs.

Nutter Notes:  The OCC issued a final rule on May 24, 2019 that implemented Section 5A of the Home Owners’ Loan Act by establishing the process by which a federal savings association may elect to operate as a CSA. The final rule provided, among other things, that a CSA is not required to satisfy the Qualified Thrift Lender test. The final rule also requires a covered savings association to divest, conform, or discontinue nonconforming subsidiaries, assets, and activities—i.e., those that would not be permissible for a national bank, subject to certain limited exceptions—not later than two years after the effective date of the election to operate with national bank powers. Similarly, the Federal Reserve’s FAQs clarify that a CSA holding company must divest or conform all assets and activities that are not permissible for a bank holding company within two years after the effective date of its subsidiary federal savings association’s election to operate as a CSA. The FAQs explain that the Federal Reserve has discretion to extend this period for up to one year at a time, provided that the aggregate extensions do not exceed three years.

3. FDIC Adopts a New Designated Exception Under Its Deposit Broker Rules

The FDIC has issued a new interpretation that identifies certain custodial arrangements as qualifying for a so-called “designated exception” that meets the primary purpose exception to the FDIC’s definition of a deposit broker. The new interpretation published January 10 applies to agents who place deposits in a custodial capacity but have no discretion over where the deposits are placed and act solely upon instructions given by the depositor or the depositor’s agent specific to each deposit account. Agents (both individuals and business entities) that meet the criteria specified in the interpretation may rely on the primary purpose exception to the FDIC’s deposit broker rules without submitting a notice or application for the exception to the FDIC, which means that deposits placed by such agents would not be considered brokered deposits. The criteria specified in the interpretation are that the agent is ‘‘engaged in the business of placing’’ customer funds at banks, in a custodial capacity, on instructions received from a depositor or depositor’s agent specific to each bank and deposit account, and the agent does not play any role in determining at which bank(s) to place any customers’ funds, or negotiate or set rates, terms, fees, or conditions, for the deposit account. Click here for a copy of the interpretation.

Nutter Notes:  The FDIC also announced that it would make conforming changes to the Call Report instructions in coordination with the FFIEC consistent with the new designated exception from the FDIC’s definition of a deposit broker. The FDIC adopted a final rule on December 15, 2020 that amended its brokered deposit rules to include 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. The final rule allows agents that do not meet one of the designated exceptions to apply to the FDIC for a primary purpose exception. Designated exceptions that were originally covered 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.

4. FFIEC Publishes Statement of Principles on Examination Information Requests

The FFIEC has issued interagency examination guidance that outlines the principles for examination information requests that the federal banking agencies and other member agencies developed and committed to implement based on results of the final phase of the FFIEC’s Examination Modernization Project. The FFIEC Statement of Principles on Examination Information Requests released on January 21 also discusses the development of a common authentication mechanism for external access to FFIEC members’ respective supervision systems. The guidance identifies a number of best practices for examiners to use when requesting information from financial institutions regulated by the agencies, including that information requests should be risk-focused and relevant to the examination, and supervised institutions should be given sufficient time to produce new or additional requested information. The best practices also include that examiners should coordinate information requests among their team to avoid duplication, requests should be made through the supervised institution’s designated point-of-contact, and requests should be clearly articulated in writing. Click here for a copy of the FFIEC’s guidance.

Nutter Notes:  According to the examination guidance, the FFIEC member agencies also evaluated areas in which increased technological cooperation among them could enhance efficiency and reduce burden for supervised institutions in connection with authentication requirements for external access to supervision systems. According to the guidance, the FFIEC Task Force on Supervision approved a common authentication solution for secure access to member agencies’ supervision systems. The FFIEC said that common authentication will allow supervised institutions and examiners to securely access the agencies’ systems, while eliminating the need for different credentials to access each system. The FFIEC announced that each member agency will have flexibility to implement common authentication “at its own planned pace and as resources become available.”

5. Other Developments: Deposit Insurance, Bank Fees, and Identity Verification

FDIC Adopts Final Rule to Simplify Deposit Insurance Regulations for Certain Accounts

The FDIC adopted a final rule on January 21 to simplify deposit insurance regulations for deposits held in connection with revocable and irrevocable trusts by merging them into a single category and applying a simpler, common calculation to determine coverage. The FDIC said that it expects that the majority of trust depositors will experience no change in the coverage for their deposits when the final rule takes effect. The final rule becomes effective on April 1, 2024. Click here for a copy of the final rule.

Nutter Notes:  The final rule provides that a deposit owner’s trust deposits will be insured in an amount up to $250,000 for each beneficiary up to five beneficiaries, so the maximum coverage will be up to $1.25 million per owner. The final rule also amends the regulation that governs deposit insurance coverage for mortgage servicing accounts to allow principal and interest funds advanced by a mortgage servicer to be included in the deposit insurance calculation. The coverage limit will remain $250,000 per mortgagor.

CFPB Announces Review of Bank Fees That May Mask the True Price of Products and Services

The CFPB announced on January 26 that it has launched a review of fees charged by banks and other financial service providers to consumers, including overdraft and non-sufficient funds fees. The CFPB’s announcement identified these and other fees charged to consumers as “areas where back-end fees might obscure the true cost of a product and undermine a competitive market.” The CFPB is requesting public comments related to such fees by March 31, 2022. Click here for a copy of the CFPB’s request for public comment.

Nutter Notes:  The CFPB described these types of fees as “junk fees,” and indicated that it may adopt new rules, issue industry guidance, and focus supervision and enforcement resources to reduce these kinds of junk fees and “strengthen competition in consumer finance.” The CFPB said that it is most interested in information about fees charged for things that consumers or other customers believed were covered in the base price of a financial product or service, unexpected fees, fees that seemed too high for the purported service, and fees for which it is unclear why a fee was charged.

FDIC Launches Initiative to Improve Digital Identity Verification Tools

The FDIC announced on January 11 that it is launching a “Tech Sprint” along with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to help develop solutions for both regulators and financial institutions, particularly community banks, that would help to measure the effectiveness of digital identity proofing for individuals that open a new account in a remote banking environment. The FDIC describes digital identity proofing as the process used to collect, validate, and verify information about a person. Click here for a copy of the FDIC’s announcement.

Nutter Notes:  The FDIC said that it will open registration for the Tech Sprint in the coming weeks, and that interested participants will then have approximately two weeks to submit applications, followed by a development period, and then a virtual “Demo Day” of team presentations to a panel of experts for evaluation. The FDIC said that it would publish all team presentations at the end of the Tech Sprint, and recognize teams based upon several criteria detailed in a forthcoming notice.

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:

Thomas J. Curry tcurry@nutter.com Tel: (617) 439-2087	Christine A. Docherty cdocherty@nutter.com Tel: (617) 439-2107	Kenneth F. Ehrlich kehrlich@nutter.com Tel: (617) 439-2989
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