Agencies Publish Rule Simplifying Capital Calculations for Community Banks

 

On October 29, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board (FRB) adopted a final rule that simplifies capital requirements for community banks. The final rule allows community banks with less than $10 billion in total consolidated assets, a leverage ratio of greater than nine percent (9%) and limited amounts of off-balance-sheet exposures and trading assets to adopt a simple leverage ratio to measure their compliance with the capital requirements. The simplified leverage ratio framework removes requirements for calculating and reporting risk-based capital ratios for qualifying community banks that opt into the framework. FDIC Release. Federal Reserve Release.

HUD and Justice Department Sign Interagency Memorandum on Enforcement of False Claims Act

 

On October 28, the U.S. Department of Housing and Urban Development (HUD) and U.S. Department of Justice (DOJ) issued a Memorandum of Understanding (MOU) between the two agencies that provides prudential guidance on the appropriate use of the False Claims Act (FCA) for violations by Federal Housing Administration (FHA) lenders. The MOU aims to bring greater clarity to regulatory expectations within the FHA program and ease banks’ worries about facing future penalties for mortgage-lending errors. HUD expects that FHA requirements will be enforced primarily through HUD’s administrative proceedings, but the MOU specifically addresses how HUD and the DOJ will consult with each other regarding the use of the FCA in connection with defects on mortgage loans insured by the FHA. In addition to the MOU, the FHA is simplifying certain certifications that lenders make in connection with the FHA program to better track statutory requirements and address materiality and culpability considerations. HUD Release. DOJ Release.

The Position on Equivalence Post Brexit

 

Context and Background

On October 22, the House of Commons European Scrutiny Committee (the Committee) published its first report of session 2019/20 (the Report). In section 10, this includes consideration of the UK’s access to the EU financial services markets after Brexit and, more specifically, the European Commission’s recent review of the EU law on equivalence.

The notion of equivalence, and its importance in this context, was explained by the European Commission in a Press Release dated July 29 where it stated that:

“EU equivalence has become a significant tool in recent years, fostering integration of global financial markets and cooperation with third-country authorities. The EU assesses the overall policy context and to what extent the regulatory regimes of a given third country achieves the same outcomes as its own rules. A positive equivalence decision, which is a unilateral measure by the Commission, allows EU authorities to rely on third-country rules and supervision, allowing market participants from third countries who are active in the EU to comply with only one set of rules.”

However, the Report notes that, in light of Brexit, the financial industry of the UK will face a number of hurdles in relation to the provision of services to EU based customers. It is explained that the “current, automatic right of market access for banks, insurers and investment firms based on their UK-issued licence (known as ‘passporting’) will automatically fall away when EU law ceases to apply to and in the UK.”

Consequences

Where these rights fall away and, to the extent EU law ceases to apply in the UK, UK firms and business providing these services will have to comply with local regulations to access any of the EU’s national markets. Alternatively, the UK will need to apply for equivalence. Concerning the European Commission’s recent review of the use of equivalency, the Report notes on the one hand that “the EU would be wary of granting the UK equivalence in the most economically-important sectors (especially investment services) without safeguards that it will not substantially diverge from EU regulations.” On the other, however, it is stated that by not seeking equivalency, the UK runs the risk of seeing economic activity shift from the UK to the EU if UK firms are no longer able to provide services to their EU customers.

Equivalency is and has been addressed in the Political Declarations as annexed to the Withdrawal Agreements. Boris Johnson has indicated that parts of this document are to be renegotiated and it remains to be seen, whether equivalency is one of these points.

In the Report, the Committee asks the Economic Secretary to clarify, by October 31, if the government is seeking any changes to the sections of the political declaration related to financial services. He is also asked to confirm if the government is considering seeking equivalence under EU law post-Brexit and, if so, which specific pieces of EU legislation the equivalence is being prioritized under. In anticipation of the response, the Committee cleared the Commission’s equivalence review from scrutiny. Report. Press Release.

FRB Finalizes Rules that Tailor its Regulations for Banks to More Closely Match Their Risk Profiles

 

On October 10, the Federal Reserve Board (FRB) finalized rules that tailor its regulations for domestic and foreign banks to more closely match their risk profiles. The rules establish a framework that sorts banks with $100 billion or more in total assets into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Firms in the lowest risk category will have reduced compliance requirements, and as the risk of a firm increases and it moves into a new risk category, its requirements will increase. Release.

Thresholds Increase for the Major Assets Prohibition of the Depository Institution Management Interlocks Act Rules

 

On October 10, the Office of the Comptroller of the Currency (OCC) published a final rule in the Federal Register that increases the major assets prohibition thresholds for management interlocks in the OCC’s rule implementing the Depository Institution Management Interlocks Act (DIMIA). The final rule reduces the number of national banks and federal savings associations subject to the major assets prohibition in the OCC’s DIMIA rule by increasing both major assets prohibition thresholds from $1.5 billion and $2.5 billion to $10 billion. Release.

Amendments to the Stress Testing Rule for National Banks and Federal Savings Associations

 

On October 10, the OCC published a final rule in the Federal Register that will amend the OCC’s stress testing rule at 12 CFR 46. The final rule implements requirements imposed by section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The final will raise the minimum asset threshold for national banks and federal savings associations covered by the company-run stress testing requirement from $10 billion to $250 billion in total consolidated assets. Release.

CFPB Issues Final HMDA Rule to Provide Relief to Smaller Institutions

 

On October 10, the Consumer Financial Protection Bureau (CFPB) issued a rule which finalizes certain aspects of its May 2019 Notice of Proposed Rulemaking under the Home Mortgage Disclosure Act (HDMA). It extends for two years the current temporary threshold for collecting and reporting data about open-end lines of credit under the HDMA. The rule also clarifies partial exemptions from certain HMDA requirements which Congress added in the EGRRCPA. Release.

S.D.N.Y. Allows NCUA to Amend RMBS Suit Against Deutsche Bank and Grants in Part and Denies in Part Motion to Dismiss

 

Judge Sidney H. Stein in the United States District Court for the Southern District of New York allowed the National Credit Union Administration (NCUA) to amend its complaint to add a new plaintiff to attempt to establish standing and proceed with its lawsuit against Deutsche Bank National Trust Company (DBNTC), while granting in part DBNTC’s motion to dismiss, which limited the proceeding to NCUA’s breach of contract claims.

Originally filed November 10, 2014 (as covered here), NCUA’s complaint alleges that DBNTC failed in its duties as trustee for 37 RMBS trusts, resulting in losses to those trusts and their investors, including five failed credit unions that were taken over by NCUA. Judge Stein allowed NCUA to amend its complaint to insert a different plaintiff—Graeme W. Bush, a specially-appointed trustee selected by Bank of New York Mellon—with direct standing for a variety of NCUA Guaranteed Note Trusts (NGN Trusts) that were created from the assets of five failed credit unions after the financial crisis. Because Bank of New York Mellon serves as the trustee for the NGN Trusts, NCUA does not have direct standing, and courts had not settled on whether NCUA had derivative standing on behalf of the NGN Trusts. The NCUA’s substitution followed a Second Circuit decision in a similar case affirming the dismissal of NCUA’s derivative claims for lack of standing. NCUA also successfully substituted itself as a direct plaintiff for NGN Trusts that have “unwound” and whose underlying certificates have been returned to NCUA.

After allowing the amendment, Judge Stein went on to grant in part and deny in part DBNTC’s motion to dismiss the amended complaint. While Judge Stein found that NCUA had stated a claim for breach of contract, he found that NCUA’s negligence and breach of fiduciary duty claims were barred by the economic loss doctrine. Further, Judge Stein stayed NCUA’s claims regarding DBNTC’s use of trust funds for indemnification, finding that DBNTC may be required to return the trust funds if there is a negligence finding against it, pursuant to the terms of the governing agreements. Opinion & Order.

FHFA Instructs Federal Home Loan Banks to Transition Away From Purchase of LIBOR-Tied Assets

 

On September 27, the Federal Housing Finance Agency (FHFA) instructed the Federal Home Loan Banks to stop practice of purchasing any investments with assets tied to LIBOR with maturities beyond December 31, 2021, as part of the transition away from LIBOR. As of March 31, 2020, according to the FHFA policy, Federal Home Loan Banks will be restricted from entering into all other LIBOR-based transactions, subject to certain limited exceptions. Release.

U.S. Treasury Issues Guidance on the Transition from Interbank Offered Rates to Other Reference Rates

 

The U.S. Department of the Treasury issued proposed regulations that provide guidance on the transition from LIBOR. One set of such regulations provides that substituting a “qualified rate,” such as the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, for an interbank offered rate in a debt instrument or certain other instruments will not result in a re-issuance under Section 1001 of the U.S. Internal Revenue Code. The proposed regulations can be viewed here. Comments and requests for a public hearing must be received by November 25.