Industry Developments

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.

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.

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.

SEC Announces Three New Rulemakings

 

On September 26, the Securities and Exchange Commission (SEC) announced three significant rulemakings. Summarized in a Public Statement by Chairman Jay Clayton, they are designed to achieve the following objectives.

  • The Modernization of the Approval Framework for ETFs. This new rule: “(1) sets forth a clear and consistent framework that will allow exchange-traded funds (ETFs) meeting certain standardized conditions to come to market without obtaining an individualized exemptive order, and (2) amends certain forms to enhance disclosures for investors.”
  • The Expansion of “Testing-the-Waters” Communications to All Issuers. This new rule: “will extend to all issuers the flexibility provided by the JOBS Act to communicate with institutional investors about potential IPOs and other registered offerings to better gauge market interest.”
  • The Enhancement of the Regulation of the OTC Markets. These proposed amendments to the rules governing the publication of quotations for over-the-counter (OTC) securities are “designed to better protect investors from fraud and manipulation, while at the same time facilitating more efficient OTC trading in certain well-capitalized issuers.”

Chairman Clayton emphasized that these rulemakings “share common themes.” Foremost, they “modernize decades-old regulations . . . taking account of our experience, advances in communications technology and changes in the operation of our markets.” Significantly, these “common sense actions better align our regulations with the preferences and investor protection interests of our long-term Main Street investors, while also facilitating capital formation.”

SEC Adopts New Rules and Amendments under Title VII of Dodd-Frank

 

On September 19, the SEC adopted new rules and amendments under Title VII of the Dodd-Frank Act establishing recordkeeping and reporting requirements for security-based swap dealers and major security-based swap participants, and amending those requirements for broker-dealers.  The new rules aim to allow the SEC to better monitor compliance and reduce risk to the market. Release.