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11.30.2023 | Legal Update

Headlines

1. FDIC Finalizes Special Assessment to Recover Losses from Recent Bank Failures
2. OCC Releases Guidance on Loan Programs Aimed at Venture-Backed Companies
3. U.S. Treasury Revising Liability Standards for Paying Canceled Treasury Checks
4. FDIC Enforcement Action Illustrates Supervisory Expectations for Fintech Vendor Oversight
5. Other Developments: Long-Term Debt Requirement and Truth in Lending

1. FDIC Finalizes Special Assessment to Recover Losses from Recent Bank Failures

The FDIC has issued a final rule that will 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 final rule released on November 16 will impose special assessments on banking organizations with total assets over $5 billion, at an annual rate of approximately 13.4 basis points, an increase from the 12.5 basis point annual rate initially proposed. The special assessments will be collected over eight quarterly assessment periods, with a resulting quarterly rate of approximately 3.36 basis points. Banking organizations with $5 billion or less in estimated uninsured deposits as of December 31, 2022, will not contribute to the special assessments. Banking organizations with more than $5 billion in estimated uninsured deposits reported as of December 31, 2022, will pay based on the marginal amounts of uninsured deposits they reported. Banking organizations with total assets over $50 billion are expected to pay more than 95% of the special assessments. The final rule will become effective on April 1, 2024, and the first collection for the special assessment will appear on the invoice for the first quarterly assessment period of 2024. Click here for a copy of the final rule.

Nutter Notes:  According to the FDIC, the estimated loss pursuant to the systemic risk determination will be periodically adjusted, and assessments collected may change due to corrective amendments to the amount of uninsured deposits reported for the December 31, 2022, reporting period. Therefore, the final rule permits the FDIC to cease collection early or extend the special assessment collection period beyond the initial eight-quarter collection period to collect the difference between actual or estimated losses and the amounts collected. The final rule also permits the FDIC to impose a final shortfall special assessment to collect the difference between actual losses and the amounts collected on a one-time basis after the receiverships for the failed banks terminate. The FDIC estimates that it will collect approximately $16.3 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.

2. OCC Releases Guidance on Loan Programs Aimed at Venture-Backed Companies

The OCC has issued guidance to national banks and federal savings associations about supervisory expectations for commercial lending programs that target high-risk borrowers in early-, expansion-, or late-stages of corporate development, referred to as “venture loans.” According to the guidance published on November 1, the OCC expects banks engaged in venture lending to establish appropriate operational and managerial standards consistent with the safe and sound practices articulated in the Interagency Guidelines Establishing Standards for Safety and Soundness. The guidance provides examples of the types of general operational and managerial practices the OCC deems appropriate for venture lending, including lending plans or strategies appropriate for the bank’s size and complexity that contain a risk appetite statement and risk limits for venture lending approved by the bank’s board of directors, and qualified lending staff with relevant experience underwriting loans for startup or high-growth companies. The guidance also recommends that banks develop internal reporting and management information systems to help identify, measure, monitor, and control venture lending risks. Click here for a copy of the guidance.

Nutter Notes:  Although the OCC’s guidance applies to national banks and federal savings associations, it is likely instructive about the FDIC and Federal Reserve’s supervisory expectations for state-chartered banks engaged in venture lending activities. The OCC’s guidance emphasized the responsibilities of the board of directors and senior management for establishing and communicating the bank’s risk appetite “through policies and procedures that define responsibility and authority.” The guidance indicates that examiners will expect banks to demonstrate how they monitor growing or material exposures in venture loans, and that they have established “prudent credit underwriting practices that take adequate account of concentration of credit risk” in venture loans. According to the guidance, the OCC has not set a bright line standard that limits a bank’s volume of venture lending, but clarified a bank is responsible for demonstrating to examiners that the bank’s venture lending activities are consistent with its “risk appetite, maintained within established risk limits, appropriately documented and underwritten, accurately risk-rated, and sufficiently reserved.”

3. U.S. Treasury Revising Liability Standards for Paying Canceled Treasury Checks

The Bureau of the Fiscal Service of the U.S. Treasury Department has issued a final rule under which banks will be held liable for paying canceled checks drawn on the U.S. Treasury (Treasury checks) without waiting to receive the return information that would enable the bank to know the check has been canceled. The final rule published in the Federal Register on November 1 that amends the regulations governing Treasury checks coincides with the development of the Treasury Department’s enhanced check post payment processing system, which will provide Treasury check return information to banks more quickly. According to the Treasury Department, banks will receive this information through their existing communication channels with the Federal Reserve Banks. The new processing system is meant to deliver check return information before the applicable Federal Reserve Regulation CC deadline under which a bank is required to make funds from a Treasury check deposit available for withdrawal. Under the final rule, a bank will be required to wait for check return information within the time periods established by Regulation CC to verify that a Treasury check is valid. The final rule will become effective on December 1, 2023. Click here for a copy of the final rule.

Nutter Notes: According to the Treasury Department, several days often pass before information on Treasury check returns can be provided to the Federal Reserve Banks using the current post payment processing system for transmission to banks. Under the current Treasury regulations, a bank generally is not liable for paying a cancelled Treasury check if the bank has taken “reasonable efforts” to ensure the check is valid. The final rule amends the definition of reasonable efforts to include a requirement that a bank must wait for check return information within the time periods set out by Regulation CC to help verify that a Treasury check is valid. Under the final rule, if a bank has waited for check return information from the Treasury Department but the check return information on a properly presented Treasury check is not transmitted to the bank before the funds availability deadline specified in Regulation CC, the bank would not be liable for paying the Treasury check.

4. FDIC Enforcement Action Illustrates Supervisory Expectations for Fintech Vendor Oversight

The FDIC has entered into a consent order with a bank related to the bank’s oversight of a third-party vendor relationship with a financial technology (fintech) company. The consent order, issued on November 21, cites the bank’s relationship with a fintech vendor in which the FDIC determined that the bank violated the prohibitions against unfair and deceptive acts or practices, including Section 5 of the Federal Trade Commission Act. Specifically, the FDIC found that implied claims were made to consumers that certain credit products apparently offered through the fintech company and that contained non-optional debt cancellation features were unemployment insurance, that consumers who did not qualify for the debt cancellation feature were approved anyway, and that the fees and benefits for those products were misrepresented. The consent order details a variety of actions the bank must take to improve its compliance management system and vendor oversight functions. Among other regulatory principles, the consent order requires the bank’s corrective measures to consider the Interagency Guidance on Third-Party Relationships: Risk Management issued on June 6, 2023. Click here for a copy of that guidance on third-party vendor risk management.

Nutter Notes:  The Interagency Guidance on Third-Party Relationships: Risk Management offers a framework of risk management principles for banking organizations to consider in developing risk management policies and procedures for third-party vendor relationships, including due diligence and vendor selection, contract negotiation, ongoing monitoring, and termination. The guidance emphasizes that the use of a third-party vendor does not diminish the responsibilities of a banking organization’s board of directors to provide oversight of senior management or the responsibilities of senior management to oversee the activity in which the vendor is engaged to ensure compliance with safety and soundness considerations and all applicable laws and regulations, including consumer protection laws and regulations. The guidance reaffirms the supervisory principle that banking organizations are expected to adopt risk management practices that are commensurate with the level of risk, complexity, and size of the banking organization and the nature of the relevant third-party vendor relationship. The recent FDIC enforcement action illustrates supervisory expectations stated in the guidance that banks should “engage in more comprehensive and rigorous oversight and management of third-party relationships that support higher-risk activities, including critical activities.”

5. Other Developments: Long-Term Debt Requirement and Truth in Lending

• Federal Banking Agencies Extend Comment Period for Proposed Long-Term Debt Requirement for Large Banks

The federal banking agencies announced on November 22 that they will extend until January 16, 2024, the public comment period for their proposed rule that would require large banks with total assets of $100 billion or more to maintain a layer of long-term debt for the purpose of improving financial stability “by increasing the resolvability and resiliency of such institutions.” Click here for a copy of the extension announcement.

Nutter Notes:  Under the proposed rule, covered banks would be required to maintain a minimum amount of eligible long-term debt equal to the greater of 6% of risk weighted assets, 3.5% of average total consolidated assets, and for banks subject to the supplementary leverage ratio, 2.5% percent of total leverage exposure under the supplementary leverage ratio. The proposed rule also would prohibit large banks from engaging in certain activities that could complicate their resolution, and would disincentivize banks from holding long-term debt issued by other banks to reduce interconnectedness. Click here for a copy of the proposed rule.

• Federal Agencies Set New Dollar Thresholds for Truth in Lending and Consumer Leasing Regulations

The Federal Reserve and the CFPB announced on November 13 the dollar thresholds that will be used to determine whether certain consumer credit and lease transactions in 2024 are subject to regulatory requirements under the Truth in Lending Act and Regulation Z, or to Consumer Leasing Act and Regulation M. Regulation Z and Regulation M generally will apply to consumer credit transactions and consumer leases of $69,500 or less in 2024, though private education loans and loans secured by real property, such as mortgages, are subject to Regulation Z regardless of the amount of the loan.

Nutter Notes:  The agencies are required to adjust the thresholds annually for inflation based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Click here for access to the revised thresholds.

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.