Trending publication

03.31.2023 | Legal Update

Headlines

1. President Recommends Regulatory Reforms to Address Recent Bank Failures
2. Federal Reserve Offers a New Liquidity Facility for Eligible Banks
3. CFPB: Federal Law Does Not Preempt State Commercial Finance Disclosure Laws
4. New Federal Reserve Instant Payment Service to Become Operational in July
5. Other Developments: Crypto-Assets and Student Loan Servicing

1. President Recommends Regulatory Reforms to Address Recent Bank Failures

President Biden has issued a statement urging the federal banking agencies to adopt regulatory reforms that are meant to reduce the risk of future banking crises, including the reversal of certain rule changes implemented under the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) in 2019. The President’s statement released on March 30 advocates for, among other things, the reinstatement of liquidity and stress testing requirements, and comprehensive resolution plans that applied before 2019 to banks with assets between $100 billion and $250 billion. The President’s statement also requests that the federal banking agencies consider reducing the transition periods for banks that exceed $100 billion in assets before they must comply with capital stress testing requirements. The Federal Reserve revised its enhanced prudential standards, and the federal banking agencies revised their capital and liquidity rules applicable to banks with between $100 billion and $250 billion in assets, following the passage of the EGRRCPA in 2019. The President’s statement echoes recent remarks by Federal Reserve Vice Chair for Supervision Michael S. Barr and FDIC Chairman Martin J. Gruenberg in testimony before the House Committee on Financial Services. Click here for a copy of the President’s statement, here for Vice Chair Barr’s testimony, and here for Chairman Gruenberg’s testimony.

Nutter Notes:  In separate testimony delivered on March 29 before the House Committee on Financial Services, Vice Chair Barr and Chairman Gruenberg each suggested possible proposals for regulatory reform to address perceived shortcomings exposed by recent bank failures. In his remarks, Vice Chair Barr noted that one of the failed banks “was subject to a less stringent set of enhanced prudential standards than would have applied before 2019,” and was not subject to the liquidity coverage ratio, the net stable funding ratio, or the supplementary leverage ratio, and its capital levels did not have to reflect unrealized losses on certain securities. Vice Chair Barr’s remarks suggest that the federal banking agencies may reconsider their 2019 rules tailoring capital and liquidity requirements for large banking organizations. Chairman Gruenberg noted certain similarities in the failed banks that may have implications for prudential standards and capital and liquidity requirements. For example, Chairman Gruenberg noted that two of the banks suffered an accumulation of losses in their securities portfolios and had “heightened exposure to interest-rate risk, which lay dormant as unrealized losses . . . as rates quickly rose over the last year.” Chairman Gruenberg suggested that the prudential regulation of large banks “merits additional attention, particularly with respect to capital, liquidity, and interest rate risk,” including “the capital treatment associated with unrealized losses in banks’ securities portfolios.” Chairman Gruenberg also stated that the FDIC expects to issue a proposal in May 2023 for a special assessment on banking organizations to recover the loss to the Deposit Insurance Fund arising from the use of the systemic risk exception that enabled the FDIC to extend deposit insurance protection to uninsured depositors.

 2. Federal Reserve Offers a New Liquidity Facility for Eligible Banks

The Federal Reserve has created a new credit facility to provide an additional source of liquidity to eligible depository institutions in response to market conditions arising from the recent bank failures. Through the Bank Term Funding Program (“BTFP”) announced on March 12, the Federal Reserve Banks is offering loans of up to one year in length to banks, savings associations, credit unions, and other depository institutions that are eligible for primary credit under the Federal Reserve discount window. Eligible collateral is limited to collateral that was owned by the institution as of March 12, 2023 and is eligible for purchase by the Federal Reserve in open market operations, including U.S. Treasuries, agency debt, mortgage-backed securities, and pool certificates and development company participation certificates that are fully guaranteed by the Small Business Administration. According to the Federal Reserve, the liquidity provided by the BTFP is meant to eliminate the need for depository institutions to quickly sell high-quality securities in times of stress. The Federal Reserve Banks are committed to making advances under the BTFP immediately, and advances may be requested until at least March 11, 2024, according to the Federal Reserve. Click here to access the BTFP term sheet.

Nutter Notes:  Under the BTFP, eligible collateral will be valued at its par value, rather than at its fair market value as is required for primary credit, the main discount window lending program. The rate for advances under the BTFP will be the one-year overnight index swap rate plus 10 basis points, which will be fixed for the term of the advance on the day the advance is made. According to the Federal Reserve, it is not necessary for a depository institution to have a master account at a Federal Reserve Bank in order to obtain an advance under the BTFP. However, a depository without a master account must have a correspondent relationship with an institution that does have a master account into which advances can be credited and repaid. A depository institution may contact its local Reserve Bank to request an advance under the BTFP. The Federal Reserve also announced that, with the approval of the Treasury Secretary, the U.S. Treasury Department can make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP.

3. CFPB: Federal Law Does Not Preempt State Commercial Finance Disclosure Laws

The CFPB has announced its determination that state commercial financing disclosure laws covering lending to businesses in California, New York, Utah, and Virginia are not preempted by the federal Truth in Lending Act (“TILA”). The determination released on March 28 affirms the there is no conflict between those state laws and TILA because the state laws impose disclosure requirements for extensions of credit to businesses rather than consumers. The CFPB’s determination finalizes a preliminary determination made in response to a challenge brought by an industry trade association in 2022 to New York’s commercial financing disclosure law arguing that the New York law is preempted by TILA. TILA preempts state disclosure laws only if they are “inconsistent” with the provisions of TILA, and then only to the extent of the inconsistency. The CFPB’s preliminary determination was that the New York law is not preempted by TILA because the New York law regulates commercial financing transactions rather than extensions of credit to consumers. Click here for a copy of the CFPB’s determination.

Nutter Notes: The California Commercial Financing Disclosures Law and the New York Commercial Finance Disclosure Law require certain providers of commercial credit to issue disclosures before completing certain financing transactions made for business purposes, including but not limited to sales-based financing. The required disclosures include a finance charge and an annual percentage rate (“APR”). The Utah Commercial Financing Registration and Disclosure Act requires disclosures for certain commercial financing transactions, but does not require the disclosure of a finance charge or APR. The Virginia commercial finance disclosure law applies only to sales-based financing, which is defined as a transaction that is repaid by the borrower (termed the “recipient”) to the lender (termed the “provider”), over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient. The Virginal law requires the disclosure of a finance charge, but does not require the disclosure of APR.

4. New Federal Reserve Instant Payment Service to Become Operational in July

The Federal Reserve has announced that it will launch the new FedNow real-time electronic payment service in July. The FedNow service will permit electronic funds transfers between participating banks to settle instantly, which is expected to eliminate interbank obligations and short-term credit risk commonly associated with other electronic funds transfer systems. In its March 15 statement, the Federal Reserve indicated that it will begin the formal certification of participants in the FedNow service during the first week in April. According to the Federal Reserve, certification is comprised of “a comprehensive testing curriculum with defined expectations for operational readiness and network experience.” The Federal Reserve expects that certified participants will conduct production validation activities in June to confirm readiness for the launch of FedNow in July. Click here for more information about the FedNow service.

Nutter Notes: According to the Federal Reserve, FedNow can support mobile and online person-to-person payments platforms as well as commercial electronic payment transactions. FedNow will be available at any time of day, 365 days a year. FedNow will enable payment recipients to have full access to funds immediately. Access will be provided through the Federal Reserve's FedLine network. FedNow payments will be settled in the Federal Reserve master accounts of participating banks and will not require prefunding, according to the Federal Reserve. The service will also offer optional fraud tools, including negative lists and the ability to set lower credit transfer limits. The maximum transaction value limit initially will be set at $500,000. Participating banks will have a default limit of $100,000, with the option to adjust it higher or lower within that maximum transaction value limit, according to the Federal Reserve.

5. Other Developments: Crypto-Assets and Student Loan Servicing

• Acting Comptroller of the Currency Continues to Advocate for Comprehensive Regulation of the Crypto-Asset Sector

In recent remarks at the Annual Washington Conference of the Institute of International Bankers, Acting Comptroller Michael J. Hsu compared the 1991 failure of the Bank of Credit and Commerce International to the failure of the cryptocurrency exchange FTX. Acting Comptroller Hsu suggested by analogy that the crypto-asset sector lacks “a lead or ‘home’ regulator with authority and responsibility for developing a consolidated and holistic view” of market participants. Click here for a copy of Acting Comptroller Hsu’s remarks.

Nutter Notes:  In line with Acting Comptroller Hsu’s stated desire for comprehensive supervisory and regulatory framework for crypto-asset and other financial technology participants, the OCC announced the establishment of its Office of Financial Technology on March 30. The Office of Financial Technology will be responsible for “analysis, evaluation, and discussion of relevant trends in financial technology, emerging and potential risks, and the potential implications for OCC supervision.”

• CFPB Issues Guidance about Unfair Private Student Loan Servicing Practices

The CFPB has released a regulatory bulletin that warns private student loan servicers, including banks, against unfair practices in collecting student loans that have been discharged by bankruptcy courts. According to the guidance, CFPB examiners have found that certain loan servicers have improperly returned non-qualified education loans to repayment status after they were discharged in bankruptcy and continued to bill and collect payments on those loans, which violates the Consumer Financial Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices. Click here for a copy of the guidance.

Nutter Notes:  The CFPB’s guidance notes that, in order to secure a discharge of “qualified education loans” (as defined by the federal tax code) in bankruptcy, borrowers must demonstrate that the loans would impose an undue hardship if not discharged. Student loans that are not qualified education loans are discharged under standard bankruptcy discharge orders. These types of loans include certain types of private student loans, such as loans made to cover expenses incurred while studying for professional exams, loans made to cover costs associated with medical or dental residency, and loans made to attend schools that are not permitted to process U.S. federal student aid (e.g., unaccredited schools and foreign schools).

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.