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05.31.2023 | Legal Update

Headlines

1. FDIC Announces Special Assessments to Recover Losses from Recent Bank Failures
2. OCC Issues Supervisory Guidance on Treatment of Banks With “Persistent Weaknesses”
3. FDIC Proposes Options for Deposit Insurance Reform, Including Unlimited Coverage
4. CFPB Warns Against Reopening Deposit Accounts that Consumers Previously Closed
5. Other Developments: Small Business Lending and Liquidity

1. FDIC Announces Special Assessments to Recover Losses from Recent Bank Failures

The FDIC has issued a proposed rule that would impose special assessments to recover the loss to the Deposit Insurance Fund (Fund) arising from the systemic risk determination announced on March 12, 2023 that protected uninsured depositors in two recent bank failures. The proposed rule released on May 11 would impose special assessments on banking organizations with total assets over $5 billion, at an annual rate of approximately 12.5 basis points, over eight quarterly assessment periods. Banking organizations with $5 billion or less in estimated uninsured deposits as of December 31, 2022 would not contribute to the special assessments. Banking organizations with more than $5 billion in estimated uninsured deposits reported as of December 31, 2022 would pay based on the marginal amounts of uninsured deposits they reported. The FDIC estimates that banking organizations with total assets under $5 billion would not be subject to the special assessments, and that banking organizations with total assets over $50 billion would pay more than 95% of the special assessments. The special assessments would be collected beginning with the first quarterly assessment period of 2024 under the proposed rule. Public comments on the proposed rule are due by July 21, 2023. Click here for a copy of the proposed rule.

Nutter Notes: According to the FDIC, the special assessment rate is subject to change before the rule becomes final, depending on any adjustments to the loss estimate, bank mergers or failures, or amendments to reported estimates of uninsured deposits. The FDIC estimates that it would collect approximately $15.8 billion from the special assessments, which is approximately equal to the loss to the Fund attributable to the protection of uninsured depositors under the systemic risk determination. Because the estimated loss pursuant to the Fund will be periodically adjusted, the FDIC would retain the ability to cease collection of the special assessments early, extend the collection period for one or more quarters beyond the initial eight-quarter collection period to make up the difference between actual or estimated losses and the amounts collected, and impose a single, final shortfall special assessment on a one-time basis after the receiverships for the two banks terminate.

2. OCC Issues Supervisory Guidance on Treatment of Banks With “Persistent Weaknesses”

The OCC has released a revised manual on bank supervision that discusses the actions the OCC will consider taking against a national bank or federal savings association that demonstrates “persistent weaknesses.” The actions may include breaking up the bank. The updated supervisory guidance published on May 25, Appendix C to Policies and Procedures Manual (PPM) 5310-3, “Bank Enforcement Actions and Related Matters,” is focused on larger and more complex banks the OCC supervises. According to the updated guidance, examples of persistent weaknesses include composite or management component ratings of 3 or worse, or three or more “weak or insufficient quality of risk management assessments,” over more than three years; a bank’s failure to adopt, implement, and adhere to, in a timely manner, all the corrective actions required by a formal enforcement action; or multiple enforcement actions against a bank during a three-year period. The actions the OCC may take against a bank that exhibits any such persistent weaknesses may include additional capital or liquidity requirements, restrictions on the bank’s growth, business activities, or payments of dividends. The OCC also may require a bank to “simplify or reduce its operations,” which may include requiring the bank to reduce its assets, sell subsidiaries or business lines, or “exit from one or more markets of operation.” Click here for a copy of the updated guidance.

Nutter Notes:  The OCC’s revisions to its supervisory guidance on treatment of banks with persistent weaknesses was made in apparent response to concerns voiced earlier this year by Acting Comptroller of the Currency Michael J. Hsu that some banks may become too big to manage. In his remarks at the Brookings Institution on January 17, 2023, Acting Comptroller Hsu said that some banking organizations “can become so big and complex that control failures, risk management breakdowns, and negative surprises occur too frequently – not because of weak management, but because of the sheer size and complexity of the organization.” He also said that “[t]he most effective and efficient way to successfully fix issues at a [too-big-too-manage] bank is to simplify it – by divesting businesses, curtailing operations, and reducing complexity.” The OCC cited these remarks as related to its issuance of the revised supervisory guidance on treatment of banks with persistent weaknesses. While the OCC’s supervisory guidance applies only to national banks and federal savings associations, it may be indicative of the measures that the FDIC and Federal Reserve may consider to deal with large banking organizations under similar circumstances.

3. FDIC Proposes Options for Deposit Insurance Reform, Including Unlimited Coverage

The FDIC has published a report that proposes options for deposit insurance reform to address financial stability concerns resulting from recent bank failures. The report released on May 1, Options for Deposit Insurance Reform, evaluates three options to reform the deposit insurance system: (1) limited coverage, which would maintain deposit insurance with a finite deposit insurance limit that applies across depositors and types of accounts; (2) unlimited deposit insurance coverage for all deposits and across all types of depositors and accounts; and (3) so-called targeted coverage, which would allow for different levels of deposit insurance coverage across different types of accounts. According to the report, targeted coverage would focus on higher coverage for business payment accounts, such as those from which employee payroll payments are made. The report indicates also that targeted coverage includes the possibility that certain types of accounts could receive unlimited deposit insurance coverage. The report recommends a targeted coverage approach to deposit insurance reform “to improve financial stability relative to its effects on bank risk-taking, bank funding, and broader markets.” Any comprehensive deposit insurance reform would require Congressional action. Click here to access the report.

Nutter Notes: FDIC Chairman Gruenberg directed the agency to analyze the current deposit insurance framework and identify reform options for consideration following recent bank failures and related losses to the Fund. The report considered options for reform in the context of the objectives established by Congress for the federal deposit insurance system, including “promoting public confidence in the banking system and supporting financial stability, protecting small savers, and containing the cost of the deposit insurance system through regulation, supervision, deposit insurance pricing and insurance fund management.” The FDIC noted that some aspects of the changes discussed in its report lie within the scope of the FDIC’s current rulemaking authority. For example, changes to simplify the FDIC’s deposit insurance coverage rules for revocable trusts, irrevocable trusts, and mortgage service accounts will become effective on April 1, 2024.

4. CFPB Warns Against Reopening Deposit Accounts that Consumers Previously Closed

The CFPB has issued regulatory guidance clarifying that a bank may violate federal consumer protection law “if it unilaterally reopens a deposit account to process transactions after a consumer has already closed it.” The guidance released on May 10, Consumer Financial Protection Circular 2023-02, responds to complaints received by the agency from consumers that, after consumers have completed all the required steps to close their accounts, some banks have reopened the closed accounts and assessed overdraft and nonsufficient funds fees. The CFPB also has received complaints that some banks have charged account maintenance fees upon reopening such accounts, even if the consumer was not required to pay account maintenance fees prior to account closure. The guidance warns banks that they risk violating the Consumer Financial Protection Act’s prohibition on unfair acts or practices by unilaterally reopening closed accounts. Click here for a copy of the CFPB’s guidance.

Nutter Notes:  The CFPB’s guidance notes that banks sometimes unilaterally reopen a consumer’s closed account if the bank receives a debit or deposit to the closed account. The guidance indicates that the CFPB would consider bringing an enforcement action under the Consumer Financial Protection Act if a bank engages in the practice of reopening deposit accounts consumers had previously closed without seeking prior authorization from the consumers or providing timely notice to the consumers. The guidance explains that, in addition to potentially subjecting affected consumers to various fees, including overdraft and NSF fees, the practice may also permit creditors to initiate debits to reopened accounts and draw down the funds, possibly resulting in negative balances and the accumulation of more fees. The CFPB has concluded in at least one previous case that a bank’s practice of “reopening consumer accounts without obtaining consumers’ prior authorization and providing timely notice caused substantial injury to consumers that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.” The CFPB may impose various remedies for violations of the Consumer Financial Protection Act’s prohibition on unfair acts or practices, including the payment of consumer remediation and civil money penalties.

5. Other Developments: Small Business Lending and Liquidity

• Lawsuit Seeks to Block CFPB Rule on Small Business Lending Data

Banking industry trade groups have filed a lawsuit seeking to block the CFPB’s recently adopted final rule governing the collection of small business lending data required by Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The American Bankers Association announced on May 24 that it has joined a suit filed by the Texas Bankers Association, which claims that the CFPB’s final rule improperly expands the data collection from the original 13 data points specified in Section 1071 of the Dodd-Frank Act to an additional 81 data points. Click here for a copy of the complaint.

Nutter Notes:  The CFPB issued its final rule amending Regulation B to implement Section 1071 of the Dodd-Frank Act earlier this year. Under the rule, covered financial institutions, including banks, are required to collect and report data on applications for credit for small businesses, including those that are owned by women or minorities. If the rule is permitted to take effect, compliance is required for financial institutions that originate the most covered small business loans beginning October 1, 2024. Institutions with a moderate transaction volume have until April 1, 2025 to begin complying with the rule and those with the lowest volume have until January 1, 2026. Click here for a copy of the final rule.

• OCC Issues Revised Guidance on Liquidity

OCC issued an updated Liquidity booklet of the Comptroller’s Handbook, which provides guidance on assessing the quantity of a national bank’s or federal savings association’s liquidity risk and quality of liquidity risk management. Click here for a copy of the updated booklet.

Nutter Notes:  The updated booklet discusses risks associated with liquidity, reflects changes in regulations since the booklet was last updated, and includes clarifying edits regarding supervisory guidance, sound risk management practices, and legal language. For example, the OCC has added a discussion of risks related to surge deposits during a decline in economic and lending activity. The updated booklet warns that the behavior of surge deposits is difficult to predict as they are more sensitive to rates and market conditions. The booklet suggests that banks should have appropriate policies and procedures in place to monitor and manage the volume of surge deposits.

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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