Fed proposes simplified and tailored approach to Volcker Rule

By Andrew A. Turner, J.D.

The Federal Reserve Board has proposed rulemaking that would 1) tailor the requirements of the regulation, implementing the Volcker Rule, to focus on entities with large trading operations; and 2) streamline and simplify regulatory requirements by eliminating or adjusting certain requirements and focus on quantitative, bright-line rules where possible to provide clarity regarding prohibited and permissible activities. There will be a 60 day comment period.

 

The proposed amendments to regulations implementing Volcker Rule restrictions on the ability of banking entities to engage in proprietary trading and have relationships with a hedge fund or private equity fund were developed jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Specifically, the proposal would, among other changes:
 

• create categories of banking entities based on the size of their trading assets and liabilities that would be used to tailor certain requirements of the rule;
• clarify restrictions related to certain proprietary trading activities, revise and define terms relevant to proprietary trading activity, and reduce and tailor the criteria that apply when a banking entity seeks to rely on exemptions from the proprietary trading prohibitions;
• clarify the prohibitions on a banking entity’s ability to acquire an ownership interest in, and maintain certain relationships with, a hedge fund or private equity fund; and
• tailor compliance programs and amend the CEO attestation requirement.

 

After five years of experience in applying the Volcker Rule, Federal Reserve Board Chair Jerome Powell views the proposal as a way to tailor requirements so firms that do modest amounts of trading will face fewer demands. “The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance,” according to Powell.

 

Similarly, Fed Vice Chair Randal K. Quarles emphasized that categorization of three tiers of firms based on trading activity levels in the proposal will align compliance requirements with the level of trading activity. “By focusing the application of the rule on those firms with the highest levels of activity covered by the statue, and by clarifying and simplifying the compliance regime, we can promote safety and soundness while reducing unnecessary burdens,” Quarles said.

 

“Rather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review,” Fed Governor Lael Brainard added.

Two information collections were issued with the proposal—Information Schedules and a Quantitative Measurements Daily Schedule.
 

The recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act made several changes to the statutory Volcker Rule provisions. Among other things, the Act exempted community banks—firms with less than $10 billion in total consolidated assets and with total trading assets and liabilities that are not more than five percent of total consolidated assets—from the Volcker Rule restrictions. Formal implementation of the Volcker Rule-related changes contained in the Act will occur in a separate rulemaking by the agencies.
 

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Senators urge regulators to strengthen credit access for low-income communities

By J. Preston Carter, J.D., LL.M.

Senator Mark R. Warner (D-Va) and 15 other senators sent a letter to Joseph M. Otting, Comptroller of the Currency, Jerome H. Powell, Chairman of the Federal Reserve Board, and Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, urging them to take steps that would strengthen access to credit for low- and moderate-income (LMI) communities under the Community Reinvestment Act. The letter is in response to reports that the agencies are considering  significant updates to the CRA.

According to the legislators, the CRA expanded homeownership to more Americans, financed more small businesses, and helped local economies by providing LMI communities with access to credit. In the letter, the senators urged the agencies to strengthen the CRA by expanding its applicability to regions and institutions that are not currently covered by the CRA and avoid proposals that could undermine the effectiveness of the law. In addition, the senators emphasized the need to reflect the impact of digital banking in any new regulations.

"When the CRA became law in 1977, a bank’s geographic footprint and the areas surrounding it was a good proxy for the communities served by the bank," the senators wrote in a press release. "That no longer holds true. A bank should be examined under the CRA for how it serves LMI communities where it has a physical footprint and in areas where the bank accepts deposits and does substantial business, and it should receive CRA credit for qualifying loans and investments made in those areas."

In addition to Warner, the letter was signed by Sens. Tim Kaine (D-Va), Cory Booker (D-NJ), Sherrod Brown (D-Ohio), Catherine Cortez Masto (D-Nev), Elizabeth Warren (D-Mass), Doug Jones (D-Ala), Amy Klobuchar (D-Minn), Bob Menendez (D-NJ), Kirsten Gillibrand (D-NY), Dianne Feinstein (D-Calif), Brian Schatz (D-Hawaii), Chris Van Hollen (D-Md), Gary Peters (D-Mich), Ron Wyden (D-Ore), and Debbie Stabenow (D-Mich).

For more information about access to credit under the Community Reinvestment Act, subscribe to the Banking and Finance Law Daily.

CFPB lists companies, organizations offering free credit scores

By Thomas G. Wolfe, J.D.

The Consumer Financial Protection Bureau has provided an updated list of credit card issuers, financial institutions, nonprofit credit providers, financial counseling providers, and other companies and organizations that offer free credit scores to customers or the general public. The list is based on voluntary responses to the Bureau’s November 2017 Federal Register notice asking companies whether they wanted to be included on the updated list of entities offering consumers free access to their credit scores. Further, as communicated in its May 16, 2018, release, the Bureau seeks to help consumers understand “how they can access and use their credit scores” to manage their finances.

As observed by the CFPB, while a consumer may request a credit report from each of the three national credit reporting agencies once every 12 months for free, that free credit report currently does not include a free credit score as well. In addition, the Bureau explains that a consumer’s credit score may vary depending on the applicable scoring model, the date on which the score was computed, the type of financial product involved, and the underlying data from a credit reporting company that was used to make the calculation. Consequently, a credit score that a consumer obtains from a company “may or may not be different from the one that company, and other businesses, later use to make credit decisions” about the consumer.

Updated list. Generally, the CFPB has organized its updated list by: (i) credit card issuers stating they offer free credit scores to certain customers; (ii) companies stating they offer free credit scores to customers using some of their other financial products besides credit cards; (iii) nonprofit credit and financial counseling providers stating they offer free credit scores to their clients; and (iv) companies stating they offer free credit scores to the general public.

While the Bureau accentuates the benefits of its updated list, the agency also states that the “accuracy of third-party information is not guaranteed and listing a company does not constitute an endorsement.”

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CFPB spring 2018 rulemaking agenda shows change in direction under new leadership

By Andrew A. Turner, J.D.

 

The Consumer Financial Protection Bureau’s Spring 2018 rulemaking agenda shows a change in direction under Acting Director Mick Mulvaney with updated information for actions in pre-rule, proposed rule, final rule, long-term, and inactive stages. With the Bureau under interim leadership pending the appointment and confirmation of a permanent director, Bureau leadership is prioritizing during coming months meeting specific statutory responsibilities, continuing selected rulemakings that were already underway, and reconsidering two regulations issued under the prior leadership, as explained in the preamble.

 

Business lending data. The Dodd-Frank Act amended the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses. At the pre-rule stage in spring 2018, the Bureau is seeking public comment on the business lending data that should be collected while minimizing the regulatory burdens on lenders.

 

Proposed rules. According to the agenda, the Bureau has a number of rules at the proposal stage, including: 

 

• The CFPB is working with the Federal Reserve Board to jointly issue a proposal for implementing the statutory requirement to adjust for inflation the dollar amounts in the Expedited Funds Availability Act.
• The Bureau is preparing a proposed rule focused on debt collectors that will address issues such as communication practices and consumer disclosures. 
• The Bureau is considering amendments to various aspects of the 2015 final rule that amended Regulation C implementing the Home Mortgage Disclosure Act. The reconsideration could involve such issues as the institutional and transactional coverage tests and the rule’s discretionary data points.
• Reconsideration of the Bureau’s 2017 rule concerning payday, vehicle title, and certain high-cost installment loans. Lenders would not need to comply with the provisions of that rule until August 2019.

 

Inactive rulemakings. The Bureau has also reclassified as inactive certain other rulemakings that had been listed in previous agendas in the expectation that final decisions on whether and when to proceed with such projects would be made by the Bureau’s next permanent director. Inactive rulemakings include regulations relating to Regulation D, the consumer financial civil penalty fund, overdraft services, and student loan servicing.

 

Long-term rulemakings. The Bureau also publishes a portion of the Unified Agenda focusing on potential long-term actions beyond the immediate next 12-month period. The Bureau has moved to that list a review of subparts B and G of Regulation Z, which implement the Truth in Lending Act with respect to open-end credit generally and credit cards in particular. The Bureau had announced in 2017 that it had decided to engage in a series of such reviews of existing regulations inherited from other agencies through the transfer of authorities under the Dodd-Frank Act. Because of timing and resource considerations, the Bureau has reclassified its review of subparts B and G of Regulation Z (the first review in the Bureau’s planned series of reviews) as a long-term action.

 

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Gemini receives New York DFS approval to trade additional virtual currencies

By J. Preston Carter, J.D., LL.M.

New York Financial Services Superintendent Maria T. Vullo has announced that the state’s Department of Financial Services has authorized Gemini Trust Company, LLC to offer custody services and trading of Zcash, Litecoin, and Bitcoin Cash on its virtual currency exchange based in New York City. According to the announcement, Gemini may begin Zcash trading immediately.

Tyler Winklevoss, chief executive officer of Gemini, commented, "We are proud be the first licensed exchange in the world to offer Zcash trading and custody services and look forward to providing customers with a safe, secure, and regulated place to buy, sell, and store Zcash, an incredible new form of digital cash."

The announcement describes Zcash as the digital cryptography-based asset of the Zcash network. The network supports two kinds of transactions: transparent and shielded. Transparent transactions operate similarly to Bitcoin in that the balance and the amounts of the transaction are publicly visible on the blockchain, while shielded transactions utilize z-addresses and do not appear on the public blockchain.

Gemini was also approved for potential future offerings of Litecoin and Bitcoin Cash.

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Atlanta Fed article stresses the advantages of a bank holding company framework

By Thomas G. Wolfe, J.D.

 

In her ViewPoint article for the Federal Reserve Bank of Atlanta’s issue of “Economy Matters: Banking & Finance,” author Madeline Marsden underscores the advantages of a bank holding company (BHC) framework. Marsden’s article, titled “The Costs and Benefits of the Bank Holding Company Structure,” outlines the advantages of the BHC framework, the Fed’s efforts to reduce the regulatory and supervisory burden for BHCs, and common misconceptions about BHC dissolutions.

 

Marsden is a senior financial policy analyst in the Atlanta Fed’s Supervision and Regulation Division.

 

BHC advantages. In the April 19, 2018, article, Marsden observes that 76 percent of all commercial banks headquartered in the Atlanta Fed’s Sixth District maintain a BHC structure. Whether a bank uses a BHC structure is “solely a business decision,” the author emphasizes. According to Marsden, the BHC framework offers banks a number of options “to facilitate growth and diversify and manage risks in ways that a bank charter alone does not.” Among other things, the article notes that BHCs:

• can issue debt, the proceeds of which may improve a depository institution’s capital position;
• are permitted to purchase problem assets from bank subsidiaries, which may serve to support those banks;
• can purchase stock in other financial institutions, providing BHCs with additional options for managing company acquisitions;
• have various tax advantages available to them, including certain deductible expenses;
• may, under specified circumstances, engage in a range of activities, including investing, stock repurchasing, broker-dealer operations, insurance underwriting, and merchant banking;
• can diversify risk—for example, by using captive insurance companies; and
• may explore innovation—for example, by investing up to 5 percent in any class of voting securities without prior regulatory approval.

BHC regulation, supervision. The article indicates that the Fed has taken steps to reduce the regulatory and supervisory burden on BHCs. For instance, Marsden points out that smaller BHCs are relieved from certain consolidated capital requirements and reporting requirements imposed on larger BHCs. Also, to reduce duplicative supervisory efforts by regulators as well as reduce the burden on BHCs, the Fed relies heavily on the insured depository institution’s “primary regulator” and coordinates its supervisory planning schedule with other federal regulators. Further, Fed examiners seek to tailor their supervision and guidance by taking into account, where applicable, a financial institution’s “unique scope and complexity of activities.” 

 

BHC dissolutions. Asserting in her article that there are certain “misconceptions associated with BHC dissolutions,” Marsden attempts to clear those up by explaining that:

• there is not a governmental expectation that there be two sets of boards of directors for a holding company and its subsidiary bank—the respective boards may be identical;
• although banks are generally exempt from Securities and Exchange Commission registration and reporting requirements, some of those requirements would shift from the SEC to the bank’s primary regulator if the BHC were to be dissolved; and
• while the Fed is exploring ways to streamline the pertinent application process, there are in-built challenges associated with a new holding company being formed when financial stress, statutory considerations, or other conditions are present.

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Fed’s Brainard says time is now to update Community Reinvestment Act regulations

By Andrew A. Turner, J.D.

The Community Reinvestment Act needs to be updated to reflect changes in technology and encourage investment in underserved communities, Federal Reserve Board Governor Lael Brainard told an audience at a Baltimore Community Development Gathering. “I have seen the value of the [CRA] as a vital tool to address the credit needs of low- and moderate-income communities, and I believe the time is ripe for a refresh to make it even more relevant to today’s challenges,” she said in her speech.

 

The Treasury Department has already begun outreach efforts to update CRA regulations with a report providing recommendations to modernize the law that was sent to the Office of the Comptroller of the Currency, Federal Reserve Board, and Federal Deposit Insurance Corporation and the Fed.

 

Technology was the first focus of Brainard’s comments, particularly its impact on defining a bank’s reach for CRA-eligible activities. She pointed out that when the regulations first came about in 1995, physical branches were required in order for banks to serve any community. Today, she said, banks can reach customer much farther away than their local branch, including through websites and mobile applications. Such clients, she implied, may not always qualify for CRA consideration.

 

Brainard also emphasized the need to eliminate credit “hot spots” that have resulted in the CRA’s emphasis on major markets. The major market emphasis has led banks to concentrate efforts, at the cost of smaller markets. She called on new regulations to open up capital for areas that have become underserved. “No matter how we define a bank’s assessment area in the future, new regulations need to be designed and implemented in a way that encourages banks to spread their community investment activities across the areas they serve,” said Brainard.

 

Updates to the law also need to reflect both nuance in determining what qualifies for CRA credit, and consistency in how those activities are evaluated. Though Brainard called for greater consistency in evaluation criteria, she also advocated for evaluating financial institutions within the context of their size and mission. Failing to do so, she said, risked "undermining CRA’s greatest attribute—its recognition that banks are uniquely situated to be responsive to … community and economic development needs in communities."

 

Any revision, Brainard said, should reinforce CRA roles along with other laws in creating an “inclusive” financial system. She warned that any changes should not open up the possibility for discriminatory lending practices, though she did not cite any specific proposal or existing regulation that might create that situation.

 

Treasury revamp. The Treasury Department report explained that regulatory and performance expectations under the CRA have not kept pace with the organizational and technological changes in the banking industry over the past four decades. Treasury reviewed the CRA, with the focus on identifying modifications to align banks’ CRA activities with the needs of the communities they serve. 

 

“Forty years since the passage of CRA, it is time for modernization to fit today’s banking landscape and community needs,” said Treasury Secretary Steven T. Mnuchin. “Our recommendations will improve the effectiveness of CRA by enhancing the assessment and examination process, enhancing the ability of banks to deliver services in the communities they serve while considering technological advances in the financial industry.”

 

The recommendations are based on meetings with close to 100 stakeholders representing community and consumer advocates, academics and think tanks, financial institutions, trade associations, and law firms, all three CRA regulators, and a review of a wide range of data, research, and published material from both public and private sector sources. 

 

The recommendations are focused in four major areas:

• updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors;
• increasing clarity and flexibility of CRA examinations to increase transparency and effectiveness of CRA rating determinations;
• improving the examination process to increase timeliness of evaluations and increasing accountability for banks’ planning of their CRA activity; and
• incorporating performance incentives to better serve the CRA’s intended purpose of encouraging banks to meet the credit and deposit needs of their communities. 

Trade associations approve. A number of groups weighed in. The American Bankers Association noted with approval that Treasury recognized that the CRA needs to be updated to reflect mobile technology and other modern banking methods. The Consumer Bankers Association welcomed the recommendations, again focusing on the need for banks to have the flexibility to use mobile, online, and other digital technologies to serve communities. The Financial Services Roundtable also welcomed the report, stating that it includes common-sense recommendations that should allow financial institutions to more easily serve low to moderate income customers. The FSR also urged the OCC, FRB, and FDIC to pursue a unified interagency initiative to achieve the goals specified in the report.

 

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Goldman Sachs to pay $110 million for alleged FX violations

By J. Preston Carter, J.D., LL.M.

Bank holding company Goldman Sachs Group, Inc., has agreed to pay $54.75 million civil penalties to the U.S. government and to the state of New York to settle allegations that it engaged in unsafe and unsound practices in its foreign exchange trading business. According to the Federal Reserve Board, the company failed to detect that its traders were using electronic chatrooms to discuss trading positions with competitors and that they were disclosing customers’ confidential information. Goldman Sachs did not admit any wrongdoing as part of the settlements.

The New York Department of Financial Services offered more information about the allegations against Goldman Sachs. According to DFS, the company’s traders shared confidential customer information, and they discussed coordinating their trading activities and other ways to manipulate currency prices. This allowed the traders to increase their trading profits, sometimes to customers’ detriment. The consent order details portions of several of the conversations and reveals that at least 13 traders were involved.

DFS noted that Goldman Sachs had policies in place that were intended to prevent such activity. However, those policies were not adequately enforced. In fact, one individual described as "a senior member of Goldman Sachs’ Foreign Exchange Sales Division" told a supervisor about the violations, but there was no evidence the supervisor passed the information on to the company’s compliance group.

The Fed’s consent order relates to the period of 2008 to 2012, while the conduct described by the DFS order reaches into 2013. Both orders include compliance provisions, and both have bans on further employment of at least some of the traders (although none of the individuals are named).

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