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06.29.2022 | Legal Update

Headlines

1. FDIC Proposes Substantial Increase in Deposit Insurance Assessment Rates
2. Federal Reserve Releases New CECL Implementation Tool: Expected Losses Estimator
3. OCC Report Highlights Risks Facing the Federal Banking System
4. CFPB Clarifies States’ Authority to Regulate Certain Credit Reporting to Protect Consumers
5. Other Developments: Credit Card Fees and Elder Financial Exploitation

1. FDIC Proposes Substantial Increase in Deposit Insurance Assessment Rates

The FDIC has issued a proposed rule that, if adopted, would impose a significant increase in deposit insurance assessment rates beginning with the first quarterly assessment period of 2023. The proposed rule released on June 21 would raise deposit insurance assessment rates by 2 basis points for all banks, representing an increase of approximately 54% over the weighted average assessment rate for all banks for the assessment period ending March 31, 2022. Under the proposed rule, the change in assessment rate schedules would remain in effect unless and until the Deposit Insurance Fund (DIF) reserve ratio, calculated by dividing the DIF balance by the dollar amount of insured deposits in the banking system, meets or exceeds 2.0%. According to the FDIC, extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35%, to 1.30% as of June 30, 2020. In September 2020, the FDIC adopted a Restoration Plan to restore the DIF reserve ratio to at least 1.35% by September 30, 2028. However, growth in insured deposits has continued to exceed the growth of the DIF, resulting in a further decline of the reserve ratio to 1.23% as of March 31, 2022. Public comments on the proposed rule to increase deposit insurance assessment rates are due by August 20. Click here for a copy of the proposed rule.

Nutter Notes:  The FDIC also adopted an Amended Restoration Plan on June 21, which incorporates the proposed 2-basis point increase in assessment rates. The Federal Deposit Insurance Act requires that the FDIC adopt a restoration plan if the DIF reserve ratio falls below the statutory minimum of 1.35%. The law also requires that the restoration plan must restore the reserve ratio to the statutory minimum within eight years, absent extraordinary circumstances. The FDIC determined that slowing growth in the DIF balance combined with the expectation that insured deposit levels will continue to grow have decreased the likelihood that the reserve ratio will meet the statutory minimum by September 30, 2028. The FDIC said that its long-term goal of increasing the DIF reserve ratio to 2% is intended to reduce the likelihood that the FDIC would need to consider a potentially pro-cyclical assessment rate increase, and to increase the likelihood that the DIF would remain positive through possible future periods of significant losses due to bank failures.

2. Federal Reserve Releases New CECL Implementation Tool: Expected Losses Estimator

The Federal Reserve has made available a new spreadsheet-based tool to help community banks implement the Current Expected Credit Losses (CECL) accounting standard. The Expected Losses Estimator (ELE) released on June 16 is a spreadsheet-based tool that uses a bank’s loan-level data along with management assumptions to help the bank calculate its CECL allowances. The ELE tool builds on the Scaled CECL Allowance for Losses Estimator (SCALE) tool released in July 2021. The SCALE tool also uses publicly available regulatory and industry data to aid community banks in calculating their CECL allowances. By incorporating management assumptions as entered by the bank, the ELE tool automates the Weighted-Average Remaining Maturity (WARM) method for calculating CECL allowances, which may be appropriate for some, relatively more complex community banks according to the Federal Reserve. The WARM method uses average annual charge-off rates and remaining life to estimate the allowance for credit losses. CECL will become effective for smaller public companies and private companies, including banking organizations, on January 1, 2023. Click here to access the ELE and SCALE tools.

Nutter Notes: The Federal Reserve has noted in related guidance on CECL that WARM and other commonly used methodologies for calculating CECL allowances discussed by regulators do not indicate a preference by regulators for one type of methodology over another or convey any kind of safe harbor status. The Federal Reserve emphasized that there is no one method that is appropriate for every loan portfolio. The federal banking agencies previously issued an interim final rule in March 2020 that provided for an optional five-year transition period for the impact of the CECL accounting standard on regulatory capital and guidance on the temporary CECL relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. No further delays of the CECL implementation date are expected for banking organizations and other companies that have yet to adopt it.

3. OCC Report Highlights Risks Facing the Federal Banking System

The OCC has published a report that addresses key threats to the safety and soundness of national banks and federal savings associations and their compliance with applicable laws and regulations. The OCC’s Semiannual Risk Perspective for Spring 2022 issued on June 23 focuses on a number of key risk themes, including that banks’ financial performance is under pressure from inflation, a rising interest rate environment, and other challenges related to the COVID-19 pandemic and geopolitical events, such as Russia’s invasion of Ukraine. According to the report, that conflict is likely to result in higher inflation in the U.S. than previously projected due to increases in prices of energy, metals, and agricultural commodities impacted by the war. The report recommends that banks understand and maintain awareness of how a rising rate environment and inflationary concerns could impact their risk profiles. The report also discusses elevated operational risks banks face in an evolving and increasingly complex operating environment in which “cyber attacks evolve, become more sophisticated, and inflict damage to the U.S. economy.” Click here for a copy of the OCC’s report.

Nutter Notes: The OCC’s report also discusses heightened compliance risks faced by banks due to a combination of regulatory changes and difficulty retaining and replacing compliance subject matter experts due to increased demand for compliance personnel at both the staff and management levels. According to the report, examiners have remained focused on fair lending risk identification and management, regulatory changes, and policy initiatives related to the COVID-19 forbearance programs and the elevated volume of bank customers participating in deferred payment and loss mitigation programs. The report indicates that increased use by banks of third-party relationships, including with so-called fintech companies, to offer new products and service increase the level of compliance risk related to delivering necessary disclosures, defining responsibility for compliance-related processes, and monitoring and testing controls, such as complaint monitoring and post-implementation testing. The report emphasizes the need for banks to “conduct appropriate due diligence on third parties” to avoid selecting inexperienced or unqualified third parties to fill critical roles.

4. CFPB Clarifies States’ Authority to Regulate Certain Credit Reporting to Protect Consumers

The CFPB has issued an interpretive rule that affirms states’ authority to protect consumers by imposing their own fair credit reporting laws that are stricter than the federal Fair Credit Reporting Act (FCRA), with limited preemption exceptions. The interpretive rule released on June 28 clarifies that the FCRA’s express preemption provisions have a “narrow and targeted scope,” and that state laws that are not “inconsistent” with the FCRA—including those that are more protective of consumers than the FCRA—are generally not preempted. For example, the interpretive rule concludes that states may pass laws prohibiting consumer reporting agencies from including information about medical debt, evictions, arrest records, or rental arrears in a consumer credit report, or from including such information for a certain period of time. In addition, a state law governing when a furnisher, including a bank, may begin furnishing information to a consumer reporting agency on a consumer’s account would not be preempted by the FCRA, according to the interpretive rule. Click here for a copy of the interpretive rule.

Nutter Notes:  The CFPB also announced on June 24 an amendment to its Regulation V, which implements the FCRA, to address recent legislation that assists consumers who are victims of human trafficking. The amendment prohibits consumer reporting agencies from furnishing a consumer report containing adverse information about a consumer that resulted from certain types of human trafficking if the consumer has provided trafficking documentation to the consumer reporting agency. The amendment also establishes a method for a victim of trafficking to submit such documentation to consumer reporting agencies. The amendment implements a requirement under a recent amendment to FCRA to assist consumers who are victims of trafficking in building or rebuilding financial stability and personal independence. According to the CFPB’s release accompanying the amendment, a report by a non-profit organization that combats human trafficking found that 26% percent of trafficking victims had bank accounts or credit cards fraudulently opened in their names. The amendment to Regulation V becomes effective on July 25. Click here for a copy of the amendment.

5. Other Developments: Credit Card Fees and Elder Financial Exploitation

CFPB Gathering Information about Credit Card Late Fees and Late Payments

The CFPB announced on June 22 that it is seeking information from credit card issuers, including banks, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses relevant to certain provisions related to credit card late fees in the Credit Card Accountability Responsibility and Disclosure Act of 2009 and Regulation Z, which implements the federal Truth in Lending Act. Public comments in response to the request for information are due by July 22. Click here for a copy of the CFPB’s request for information.

Nutter Notes:  Some of the specific areas of the CFPB’s inquiry include factors used by card issuers to set late fee amounts, card issuers’ costs and losses associated with late payments, and the deterrent effects of late fees. The CFPB is also requesting information about cardholders’ late payment behavior, methods that card issuers use to facilitate or encourage timely payments, and card issuers’ use of the late fee safe harbor provisions in Regulation Z.

FinCEN Guidance Highlights Red Flags of Elder Financial Exploitation

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued guidance to banks and other financial institutions about the rising trend of elder financial exploitation. The guidance released on June 15 includes behavioral and financial red flags to aid financial institutions with identifying, preventing, and reporting suspected elder financial exploitation. Click here for a copy of FinCEN’s guidance.

Nutter Notes:  According to FinCEN’s guidance, it is critical for bank staff to be able to identify and consider certain behavioral red flags for possible elder financial exploitation when conducting transactions involving older customers, which information should be incorporated into Suspicious Activity Report filings and reported to law enforcement, as appropriate. Such red flags may include sudden and unusual changes in an older customer’s contact information or new connections to emails, phone numbers, or accounts that may originate overseas, or an older customer with known physical, emotional, and cognitive impairment who has unexplainable or unusual account activity, according to FinCEN’s 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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