OCC

OCC Halts Publication of Fair Access Rule

 

On January 28, the Office of the Comptroller of the Currency (OCC) announced that it would halt publication of its “fair access” rule, which would have prevented national banks from denying services to any individual customer unless justified by that customer’s documented failure to meet quantitative, impartial risk-based standards established by the bank. The rule, which was finalized by the OCC on January 14 and would have gone into effect on April 1, will be set aside for review by the next confirmed Comptroller of the Currency under the current administration. Release.

OCC, FDIC and CFPB Issue Final Rule on Role of Supervisory Guidance

 

On January 19, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (CFPB) published a final rule regarding the role of supervisory guidance for regulated institutions. The final rule provides that unlike a law or regulation, supervisory guidance does not have the force and effect of law, and that the Agencies will not take enforcement actions or issue supervisory criticisms based on non-compliance with supervisory guidance. The final rule provides that the proper role of supervisory guidance is to outline supervisory expectations and priorities, or articulate views regarding appropriate practices for a given subject area. FDIC Release. OCC Release. Final Rule.

OCC Issues Final Rule Regarding Regulatory Capital Treatment of Total Loss-Absorbing Capacity Investments

 

On January 6, the OCC issued a final rule that applies to Category I and II banking organizations (advanced approaches banks), which include banking organizations and their subsidiary banks that have at least $700 billion in total consolidation assets, or $100 billion or more in total consolidated assets and $75 billion or more in cross-jurisdictional activities. The final rule requires deduction from advanced approaches banks’ regulatory capital for investments in certain unsecured debt instruments issued by bank holding companies subject to the Federal Reserve Board’s total loss-absorbing capacity and long-term debt requirements. Bulletin.

OCC Reports Decline in Mortgage Performance

 

On December 16, the Office of the Comptroller of the Currency (OCC) reported that the performance of first-lien mortgages in the federal banking system declined during the third quarter of 2020, which accounts for 27% of all residential mortgage debt outstanding in the United States. The percentage of seriously delinquent mortgages was 5.8% in the third quarter of 2020, compared to 6.8% in the prior quarter and 1.5% a year ago. In the third quarter of 2020, servicers initiated 48.2% more foreclosures than in the previous quarter and completed 14,097 mortgage modifications. Release.

Agencies Announce Threshold for Smaller Loan Exemption from Appraisal Requirements for Higher-Priced Mortgage Loans

 

On November 18, the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC) (collectively, the “Agencies”) announced that the threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans during 2021 will remain at $27,200, as it was in 2020. Release.

OCC Submitted Final Rule Clarifying When Bank is a “True Lender”

 

On October 27, the Office of the Comptroller of the Currency (OCC) submitted a final rule for publication to determine when a national bank or federal savings association makes a loan to a third party and is the “true lender.” The rule clarifies that a bank is a “true lender” if, as of the date of origination, the bank (1) is named as the lender in the loan agreement or (2) funds the loan. OCC Bulletin.

Federal Banking Agencies Exempt Premium Finance Lending from BSA/AML Customer Identification Program Requirements

 

On October 9, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA), with approval from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), issued a revised order exempting premium finance loans (loans made to facilitate a borrower’s purchase of property and casualty insurance policies) from the customer identification program requirements applicable to a lender’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program. Order.

Banking Regulatory Agencies Finalize Rules on Real Estate Appraisals and Regulatory Treatment of Emergency Capital Facilities

 

On September 29, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC), together with the OCC and the Federal Reserve (the “Agencies”), published final rules temporarily deferring real estate appraisal requirements for financial institutions and mitigating the regulatory capital and liquidity effects for banks that participate in certain COVID-related Federal Reserve liquidity facilities. The final rules are identical or substantially similar to interim final rules currently in effect that were issued earlier this year. The final rule on real estate appraisals temporarily allows financial institutions to defer completion of appraisals and evaluations on certain residential and commercial real estate transactions for up to 120 days after closing. The final rule on the Federal Reserve liquidity facilities provides that banking organizations that participate in the Federal Reserve’s Money Market Mutual Fund Liquidity Facility and Paycheck Protection Program Liquidity Facility are permitted to exclude exposures acquired through their participation in such programs when determining their compliance with the Agencies’ regulatory capital rule and/or liquidity coverage ratio rule. OCC ReleaseFederal Reserve ReleaseFDIC Release

Regulatory Agencies Finalize Changes to Covered Fund Provisions of the Volcker Rule

 

On July 31, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the U.S. CFTC, the Federal Deposit Insurance Corporation (FDIC), and the U.S. Securities and Exchange Commission (SEC) published a final rule amending the regulations that implement Section 13 of the Bank Holding Company Act (the “BHC Act”), commonly known as the Volcker Rule. The final rule, which goes into effect on October 1, is intended to improve and streamline the covered fund provisions of Section 13 of the BHC Act. The final rule aims to accomplish this by, among other things, permitting the following activities: qualifying foreign excluded funds; revising the exclusions from the definition of “covered fund” for foreign public funds, loan securitizations, public welfare investments, and small business investment companies; creating new exclusions from the definition of covered fund for credit funds, qualifying venture capital funds, family wealth management vehicles, and customer facilitation vehicles; modifying the definition of “ownership interest”; and providing that certain investments made in parallel with a covered fund, as well as certain restricted profit interests held by an employee or director, need not be included in a banking entity’s calculation of its ownership interest in the covered fund. OCC Bulletin. Federal Register Final Rule.

Amendments to the Volcker Rule are Adopted but Leave Much to be Done

 

On September 18, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (the Board), the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission  (collectively, the Agencies) adopted amendments to the 2013 rules (the 2013 Rules) under Section 13 of the Bank Holding Company Act (BHC), commonly known as the Volcker Rule (the 2019 Amendments).

The Volcker Rule and the 2019 Amendments.  The Volcker Rule imposes complex restrictions on the ability of a “banking entity” and a “nonbank financial company” supervised by the Board to engage in proprietary trading and to have certain interests in, or relationships with, non-registered, private funds, such as hedge funds and private equity funds (each, a Covered Fund).[i] As stated in the Release adopting the 2019 Amendments (the Release),[ii] the “amendments are intended to provide banking entities with clarity about what activities are prohibited and to improve supervision and implementation of section 13.”   The Release provides that banking entities must comply with the final amendments by January 1, 2021 and that the 2013 Rules will remain in effect until their compliance date. Alternatively, the Release provides that a banking entity may voluntarily comply, in whole or in part, with the 2019 Amendments prior to the compliance date, “subject to the agencies’ completion of necessary technological changes.”

The 2019 Amendments are based upon the amendments proposed by the Agencies in May 2018 (the 2018 Proposal). As was the case with respect to the 2018 Proposal, the most significant aspects of the 2019 Amendments relate to the proprietary trading provisions of the Volcker Rule, and specifically the definition of “trading account.”[iii]  An analysis of the trading provisions is beyond the scope of this overview. The following is a brief summary of the provisions of the 2019 Amendments that relate specifically to “Covered Funds.”

Covered Fund Provisions. As noted in the Release, the restrictions imposed on banking entities with respect to a Covered Fund are “designed to ensure that banking entities do not rescue investors in those funds from loss, and do not guarantee nor expose themselves to significant losses due to investments in or other relationships with these funds.”[iv] The 2019 Amendments, however, are a work-in-progress; they do not cover any aspects of the Covered Fund provisions of the 2018 Proposal for which specific rule text was not proposed.

The Release notes that: “the [A]gencies intend to issue an additional notice of proposed rulemaking that would propose additional, specific changes to the restrictions on covered fund investments and activities and other issues related to the treatment of investment funds under the regulations implementing section 13 of the BHC Act.”[v]

For example, the 2018 Proposal sought comment on the Volcker Rule’s general approach to defining the term “Covered Fund,” as well as the existing exclusions from the Covered Fund definition and potential new exclusions from this definition.” However, “[i]n light of the number and complexity of issues under consideration,” the Agencies did not take definitive action on those  issues and merely stated their intent “to address these and other comments received on the covered fund provisions in a subsequent proposed rulemaking.”[vi]

Notwithstanding this vacillation, the Agencies did adopt as proposed the few specific Covered Funds changes in the 2018 Proposal, including:

Risk-Mitigating Hedging: The 2019 Amendments permit banking entities to acquire and retain ownership interests in Covered Funds to hedge certain customer-driven transactions, including for fund-linked products. The Agencies also adopted without change the elimination of the requirement that a risk mitigating hedging transaction “demonstrably” reduces or otherwise significantly mitigates the relevant risks.[vii]

Market Making and Underwriting: The Agencies eliminated the aggregate fund limit and the capital deduction requirement for the value of ownership interests in third-party Covered Funds acquired or retained in accordance with the underwriting or market-making exemption (i.e., Covered Funds that the banking entity does not advise or organize and offer. The Agencies stated that they believe that this change will better align the compliance requirements for underwriting and market making involving Covered Funds with the risks those activities entail.[viii]

Solely Outside the United States: The 2013 Rule imposed several conditions on the availability of the exemption that permits foreign banking entities to acquire or retain an ownership interest in, or act as sponsor to, a Covered Fund, provided that those activities and investments occur solely outside of the United States and certain other conditions are met. Those conditions included that “no financing for the banking entity’s ownership or sponsorship is provided, directly or indirectly by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.”  The Agencies adopted without change the proposal to remove the financing condition.[ix]

More to Come, But When? As noted above, the amendment of the Volcker Rule with respect to the Covered Fund issues is a work-in-progress without any deadline for completion. In the meantime, banking entities and their counterparties having relationships and holding interests in a Covered Fund must continue to proceed cautiously taking into consideration the complex provisions of the 2019 Amendments.

Please do not hesitate to contact Edward G. Eisert, Senior Counsel, at [email protected] with any questions that arise.


[i] As defined in the 2013 Rules, a “covered fund” includes:  “an issuer that would be an investment company, as defined in the Investment Company Act of 1940 . . . but for section 3(c)(1) or 3(c)(7) of that Act . . . .” and certain commodity pools under the Commodity Exchange Act.

[ii] A copy of the entire Release can be found here

[iii] As stated in the Release: “The definition of ‘trading account’ is a threshold definition that determines whether the purchase or sale of a financial instrument by a banking entity is subject to the restrictions and requirements of section 13 of the BHC Act and the 2013 rule.”  The BHC, in turn, provides a complex definition of “trading account” to mean: “any account used for acquiring or taking positions in [certain securities and instruments] principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements), and any such other accounts as the [A]gencies, by rule determine.”  IV. Section by Section Summary of the Final Rule,  Subpart B—Proprietary Trading Restrictions.

[iv] Section I. Background.

[v] Section III.  Overview of the Final Rule and Modifications from the Proposal, A. The Final Rule.

[vi] IV. Section by Section Summary of the Final Rule, Subpart C – Covered Fund Activities and Investments, 1. Overview of Agencies’Approach to the Covered Fund Provisions.

[vii] IV. Section by Section Summary of the Final Rule, Subpart C – Covered Fund Activities and Investments,  3.  Section __.13:  Other Permitted Covered Fund Activities, a. Permitted Risk-Mitigating Hedges.

[viii] IV. Section by Section Summary of the Final Rule, Subpart C – Covered Fund Activities and Investments, 2.  Section _.11 Permitted Organizing and Offering, Undeerwriting and Market Making with Respect to a Covererd Fund.

[ix] IV. Section by Section Summary of the Final Rule, Subpart C – Covered Fund Activities and Investments, 3.  Section __.13:  Other Permitted Covered Fund Activities, b. Permitted Covered Fund Activities and Investments Outside the United States.