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New UDAP/UDAAP booklet from OCC

OCC Bulletin 2020-65, issued yesterday, announced a new "Unfair or Deceptive Acts or Practices and Unfair, Deceptive, or Abusive Acts or Practices" booklet for the Comptroller's Handbook. This booklet is part of the Consumer Compliance series of the Handbook.

The booklet contains information for examiners regarding supervision of a bank's practices related to section 5 of the Federal Trade Commission (FTC) Act, which prohibits banks from engaging in unfair or deceptive acts or practices (UDAP), and sections 1031 and 1036 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which prohibit unfair, deceptive, or abusive acts or practices (UDAAP).


OCC report on key risks for banking system

An OCC press release has reported the agency's publication of its Semiannual Risk Perspective for Spring 2020, listing the key issues facing the federal banking system and the effects of the COVID-19 pandemic on the federal banking industry.

Banks entered the national health emergency related to COVID-19 in sound condition but face weak economic conditions resulting from the economic shutdown in response to the pandemic that will stress financial performance in 2020. The OCC reported weak financial performance, and increasing credit, operational, and compliance risks, among the key risk themes in the report.

Highlights from the report include:

  • Financial performance will be affected by higher credit losses, overhead expenses, and lower net interest income.
  • The onset of the national health emergency created an uncertain credit environment that will test the resiliency of commercial and retail loan portfolios. Credit risk management practices will need to be flexible and proactive to meet the challenges of the current environment.
  • Operational risk is heightened as banks amended business processes and engaged third parties to support widespread remote work capabilities, increased technological capacity, and solutions to maintain operations under elevated operational volumes.
  • Compliance risk is elevated because of a combination of altered operations, employees working remotely, and several new federal and state programs designed to support consumers such as the CARES Act, Paycheck Protection Program, and a variety of forbearance and deferred payment programs. Among other challenges, these conditions complicate the compliance responsibilities associated with managing high volumes and various programs of consumer and business lending in a weakened economy.


FinCEN guidance on due diligence for hemp-related customers

FinCEN has issued Guidance FIN-2020-G001 to address questions related to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulatory requirements for hemp-related business customers. The guidance:

  • Explains how financial institutions can conduct due diligence for hemp-related businesses
  • Identifies the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA regulatory requirements
  • Is intended to enhance the availability of financial services for, and the financial transparency of, hemp-related businesses in compliance with federal law
  • Supplements the December 3, 2019, interagency statement on providing financial services to customers engaged in hemp-related businesses
  • Does not replace or supersede FinCEN’s previous guidance on the BSA expectations regarding marijuana-related businesses

Join Deborah Crawford on July 20, 2020, for a special one-hour update on FinCEN's new guidance to address questions related to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulatory requirements for hemp-related business customers.


SCOTUS rules on CFPB constitutionality

The Supreme Court, in a 5-4 decision delivered by Chief Justice John G. Roberts, Jr., has ruled that the CFPB's leadership by a sole director removable only for cause violates the separation of powers rule under the U.S. Constitution.

The Court ruled that the Bureau can continue operating, because the provision of the law providing for removal only for cause is severable, but the director must be removable by the president "at will." The earlier judgment of the Ninth Circuit Court of Appeals (in Seila Law LLC v. Consumer Financial Protection Bureau) that the CFPB's structure did not violate the separation of powers was vacated and remanded. The Ninth Circuit must now revisit the case but analyze it in light of the Supreme Court's decision.

Justice Kagan filed an opinion concurring in the judgment with respect to severability and dissenting in part, in which Justices Ginsburg, Breyer and Sotomayor joined.


Proposed updates to flood insurance Q&As

The federal regulators on Friday requested public comment on new and revised Interagency Questions and Answers Regarding Flood Insurance. The Q&As, which provide information addressing technical flood insurance-related compliance issues, were last updated in 2011. The proposed revision of the Q&As incorporates new questions and answers in several areas, including:

  • The escrow of flood insurance premiums;
  • The detached structure exemption to the mandatory purchase of flood insurance requirement; and
  • Force-placement procedures.

The proposal also revises existing questions and answers to improve clarity and reorganizes questions and answers by topic to make it easier for users to find and review information related to technical flood insurance topics. The proposal is intended to help reduce the compliance burden for lenders related to the federal flood insurance laws. Comments will be accepted for 60 days after publication in the Federal Register.

PUBLICATION UPDATE: Published at 85 FR 40442 on July 6, 2020, with a comment period ending September 4, 2020.


2020 stress test results released

The Federal Reserve Board has released the results of its stress tests for 2020 and additional sensitivity analyses that the Board conducted in light of the coronavirus event.

In addition to its normal stress test, the Board conducted a sensitivity analysis to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, which could result from the coronavirus event. The scenarios included a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession. In the three downside scenarios, the unemployment rate peaked at between 15.6 percent and 19.5 percent, which is significantly more stringent than any of the Board's pre-coronavirus stress test scenarios. The scenarios are not predictions or forecasts of the likely path of the economy or financial markets.

In aggregate, loan losses for the 34 banks ranged from $560 billion to $700 billion in the sensitivity analysis and aggregate capital ratios declined from 12.0 percent in the fourth quarter of 2019 to between 9.5 percent and 7.7 percent under the hypothetical downside scenarios. Under the U- and W-shaped scenarios, most firms remain well capitalized but several would approach minimum capital levels. The sensitivity analysis does not incorporate the potential effects of government stimulus payments and expanded unemployment insurance.

In light of these results, the Board took several actions following its stress tests to ensure large banks remain resilient despite the economic uncertainty from the coronavirus event. For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.

All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.

During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings.


Swap Margin Rule amendments finalized

The Federal Reserve Board, Farm Credit Administration, FDIC, FHFA, and OCC have finalized changes to their swap margin rule to facilitate the implementation of prudent risk management strategies at banks and other entities with significant swap activities.

Under the interim final rule, entities that are part of the same banking organization generally will no longer be required to hold a specific amount of initial margin for uncleared swaps with each other, known as inter-affiliate swaps. Inter-affiliate swaps typically are used for internal risk management purposes by transferring risk to a centralized risk management function within the firm. The rule will give firms additional flexibility to allocate collateral internally and support prudent risk management and safety and soundness. Inter-affiliate swaps will remain subject to variation margin requirements, and initial margin will still be required if a depository institution's total exposure to all affiliates exceeds 15 percent of its Tier 1 capital.

The interim final rule will become effective 61 days after it is published in the Federal Register. The rule includes a phased compliance schedule. Comments on the rule will be accepted for 60 days following publication.

PUBLICATION UPDATE: Published July 1, 2020, at 85 FR 39464, with a 61-day comment period ending 8/31/2020, and an effective date of 9/1/2020. Accompanied at publication by a separate final rule at 85 FR 39754, adjusting the compliance dates and making certain other technical changes. This rule is effective 8/31/2020.


Volcker Rule modifications finalized

The Federal Reserve Board, FDIC, OCC, SEC, and Commodity Futures Trading Commission yesterday issued a final rule modifying the Volcker Rule's prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as covered funds. The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The final rule modifies three areas of the rule by:

  • Streamlining the covered funds portion of rule;
  • Addressing the extraterritorial treatment of certain foreign funds; and
  • Permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address.

The rule will be effective on October 1.

PUBLICATION UPDATE: Published at 85 FR 46422 in Federal Register on July 31, 2020.


OFAC targets Iranian metal companies and sales agents

Treasury announced yesterday that OFAC has designated four steel, aluminum, and iron companies operating within Iran’s metals sector, including one subsidiary of Mobarakeh Steel Company — Iran’s largest steel manufacturer. Also designated were one Germany-based and three United Arab Emirates-based sales agents for being owned or controlled by Mobarakeh Steel Company.

For identification information of the entities designated by OFAC, see BankersOnline's OFAC Update.


SG Americas pays $3.1M for blue sheet data errors

The SEC has announced it has issued an Order settling charges against broker-dealer SG Americas Securities LLC for failing to provide complete and accurate securities trading information known as "blue sheet data." SG Americas agreed to pay a $1.55 million civil penalty to resolve the SEC's charges and separately agreed to pay $1.55 million to the Financial Industry Regulatory Authority (FINRA) to resolve parallel charges.


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