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01.31.2023 | Legal Update

Headlines

1. Federal Reserve Policy Aims to Level the Playing Field for Insured and Uninsured Banks
2. Federal Banking Agencies Publish Guidance on Risks Related to Crypto-Assets
3. CFPB Issues Guidance on Marketing Negative Option Subscription Services
4. Federal Bank Regulators Issue Report on Minor Differences Among Their Capital Rules
5. Other Developments: Fair Lending and FDIC Logo

1. Federal Reserve Policy Aims to Level the Playing Field for Insured and Uninsured Banks

The Federal Reserve has issued a policy statement clarifying that uninsured state member banks will be subject to the same limitations on activities as insured state member banks, including novel banking activities, such as crypto-asset-related activities. According to the Federal Reserve, the policy statement released on January 27 is meant to promote the principle that two or more banks engaged in the same bank activity, and presenting the same risks, should be subject to the same regulatory framework, regardless of which agency supervises the bank. The policy statement explains that both insured and uninsured state members banks may engage in only those activities that are permissible for a national bank, with the exception of those activities that are permissible for a state bank by federal statute or under part 362 of the FDIC’s regulations. The policy statement reiterates that, even when engaged in a legally permissible activity, the Federal Reserve expects state member banks to conduct their business in a safe and sound manner. The policy statement includes a Supplementary Information section that provides examples of how the policy will be applied to certain crypto-asset-related activities. For example, the Federal Reserve has not identified any authority permitting national banks to hold most crypto-assets as principal in any amount, so the agency would prohibit state member banks from engaging in such activity absent a federal law or rule expressly authorizing state banks to hold crypto-assets as principal. The policy statement will become effective on the date it is published in the Federal Register, which is expected shortly. Click here for a copy of the policy statement.

Nutter Notes:  In a related development, the Federal Reserve announced on January 27 the agency’s denial of the application by a special purpose digital asset bank to become a member of the Federal Reserve System, and it was reported that the Federal Reserve Bank of Kansas City has denied the institution’s application for a Federal Reserve master account. The institution is an uninsured, state-chartered bank, which, according to the Federal Reserve, “proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks.” The announcement indicated that the Federal Reserve determined that the institution’s proposed activities would likely be inconsistent with safe and sound banking practices, and that the institution’s risk management framework “was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.”

2. Federal Banking Agencies Publish Guidance on Risks Related to Crypto-Assets

The federal banking agencies have issued joint supervisory guidance for banks highlighting key risks associated with crypto-assets and the crypto-asset sector and describing the agencies’ approach to examining and supervising banks engaged in crypto-asset activities. The risks addressed by the Joint Statement on Crypto-Asset Risks to Banking Organizations released on January 3 include the risk of fraud among crypto-asset sector participants, legal uncertainties related to custody, redemption, and ownership rights, and inaccurate or misleading representations and disclosures by crypto-asset firms. In particular, the joint guidance noted that misrepresentations about federal deposit insurance in connection with crypto assets may constitute unfair, deceptive, or abusive acts or practices (UDAAP) that harm both retail and institutional investors. While the joint guidance states that banks “are neither prohibited nor discouraged from providing banking services to customers of any specific class or type,” the guidance warns that banks are not permitted to engage in certain crypto-related activities. For example, the joint guidance explains that banks generally may not issue or hold, as principal, “crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network,” because those activities are likely to be inconsistent with safe and sound banking practices. The joint guidance indicates that the agencies will continue to review proposals from banks to engage in crypto-asset on a case-by-case basis. Click here for a copy of the joint guidance.

Nutter Notes:  The joint guidance cites recent failures of a number of large crypto-asset companies as evidence that crypto-asset-related activities continue to pose significant safety and soundness risks to banks. For example, the guidance warns that stablecoins are susceptible to run risk, which may cause deposit outflows for banks that hold stablecoin reserves. The joint guidance also warns that “interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements,” may expose banks with exposures to the crypto-asset sector to concentration risk. The joint guidance explained that the federal banking agencies have “significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”

3. CFPB Issues Guidance on Marketing Negative Option Subscription Services

The CFPB has issued new guidance clarifying that businesses, including banks, that offer so-called “negative option” subscription services must comply with federal consumer financial protection law, such as requirements for clear and conspicuous disclosure of the terms of the subscription services and obtaining consumers’ informed consent. According to the new guidance released on January 19, negative option programs include subscription services that automatically renew unless the consumer take action to cancel, such as add-on products and services marketed by credit card issuing banks. Negative option programs also include trial programs that initially charge a reduced fee for an add-on product and then automatically begin charging a higher fee after the trial period ends. The CFPB may take enforcement actions against businesses that engage in deceptive marketing or unfair billing practices in connection with negative option programs, including imposing civil money penalties and requiring restitution payments to affected customers. Click here for a copy of the guidance.

Nutter Notes: The CFPB has already taken enforcement action against credit card issuing banks in connection with conduct involving negative option programs that allegedly violated the prohibition against unfair, deceptive, or abusive acts or practices under the Dodd-Frank Wall Street Reform and Consumer Protection Act. For example, the agency brought enforcement action against a bank in a case involving confusing text on point-of-sale terminals that allegedly increased the likelihood that consumers applying for credit cards would not realize they were also purchasing debt-protection coverage. In other cases, telemarketers working on behalf of a credit card issuing bank allegedly failed to inform consumers that they would be billed after an initial trial period for debt-protection products if the consumers did not cancel the product. Credit card issuing banks have been subject to similar CFPB and OCC enforcement action in connection with UDAAP violations involving the marketing of credit-monitoring products and services.

4. Federal Bank Regulators Issue Report on Minor Differences Among Their Capital Rules

The federal banking agencies have submitted a report to Congress on differences among the accounting and capital standards used by the agencies for insured depository institutions. The report released on January 30 concluded that there are no material differences among the agencies in the accounting standards applicable to institutions, but that there are technical differences among the capital standards of the agencies’ capital rules. Among the differences noted in the report are differences in defined terms that generally serve to accommodate the different needs of the institutions that each agency charters, regulates, or supervises. For example, the agencies’ capital rules have differing definitions for “pre-sold construction loan.” The capital rules of all three agencies include the same core definition, but the Federal Reserve rule provides further clarification that, if a purchaser has terminated the construction contract, the institution must immediately apply a 100% risk weight to the loan and report the revised risk weight in the next quarterly Call Report. The result would be the same under the FDIC’s and OCC’s capital rules, though they do not include the added clarification within the definition. Click here for a copy of the report to Congress.

Nutter Notes:  The report also notes a technical difference between the FDIC’s capital rule and the Federal Reserve’s and OCC’s capital rules that apply to a deduction of examiner-identified losses. According to the report, each agency requires its examiners to determine whether their respective supervised institutions have appropriately identified losses. However, the FDIC’s capital rule explicitly requires an FDIC-supervised institution to deduct losses identified by examiners from common equity tier 1 capital elements if the institution’s common equity tier 1 capital would have been reduced if the appropriate accounting entries had been recorded. The report mentions as examples, “assets classified as loss, off-balance-sheet items classified as loss, any expenses that are necessary for the institution to record in order to replenish its general valuation allowances to an adequate level, and estimated losses on contingent liabilities.” The Federal Reserve and the OCC expect their supervised institutions to recognize such examiner-identified losses according to the report, but the requirement is not stated in their capital rules.

5. Other Developments: Fair Lending and FDIC Logo

• OCC Releases Updated Fair Lending Booklet

The OCC on January 12 published a revised version of its Fair Lending booklet of the Comptroller’s Handbook applicable to national banks and federal savings associations, which includes new and clarified details and risk factors for a variety of examination scenarios. The revised booklet reflects changes to laws and regulations since the booklet was last published in 2010, and also includes clarification of certain supervisory guidance, sound risk management practices, and applicable legal standards. Click here to access the revised booklet.

Nutter Notes:  The revised Fair Lending booklet’s new section on risk factors indicates that a bank’s use of third party service providers where there is a failure to adopt and implement a comprehensive program of oversight will be considered by examiners as a risk factor for fair lending violations. The new section on risk factors also includes a compliance management checklist that may be helpful to understand supervisory expectations.

• FDIC Extends Public Comment Period for Proposed Changes to Rule Governing Use of the Official FDIC Sign and Advertising Statements

The FDIC announced on January 30 that it is extending for 45 days the public comment period for a proposed rule that would make changes to the requirements for the use of the FDIC’s official sign and official advertising statement, misrepresentations of deposit insurance coverage, and misuse of the FDIC’s name or logo. Comments on the proposed change are now due by April 7, 2023. Click here for a copy of the FDIC’s announcement.

Nutter Notes:  The proposed rule would modernize the regulations governing the use of the official FDIC sign and bank’s advertising statements to reflect how customers do business with banks, including through digital and mobile banking platforms, and would clarify the FDIC’s regulations regarding misrepresentations of FDIC deposit insurance coverage. For example, the proposed amendments would clarify that FDIC-associated terms or images may not be used in marketing and advertising materials to suggest that an uninsured financial product is insured or guaranteed by the FDIC.

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

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.