Community Banks – Week in Review
The biggest news last week was the CFPB's proposal to prohibit mandatory arbitration clauses that preclude class actions in consumer financial contracts. Because this action is rulemaking, the final regulation will apply to all community banks regardless of size. Elsewhere, the OCC today made public the guidance it provides to examiners in reviewing student loans. The New York Dep't of Financial Services approved the first virtual currency exchange under its new licensing regime. Large banks should be alert to several issuances at the Federal Reserve in the past week.
Please consider our annual financial services conference on May 18 in Washington, D.C. Discussion panels will address FinTech and marketplace lending. RSVP at /register/financialservices2016.
The full set of developments over the last week includes:
- April jobs report released (May 6).
- Total nonfarm employment increases by 160,000 new jobs.
- Unemployment rate unchanged at 5.0%.
- Average hourly earnings increase by 0.3% from March and by 2.5% over last 12 months.
- Report available at http://www.bls.gov/.
- CFPB proposes rule to ban mandatory arbitration clauses that prevent class actions in consumer contracts for financial products and services (May 5).
- Key elements of proposal:
- Proposal would reach all consumer credit contracts, including credit and debit cards, contracts for the storing of money, and money transmission.
- Proposal would not prohibit arbitration clauses altogether but would ban clauses that bar a consumer's participation in class action lawsuits.
- Proposal also would require companies with arbitration clauses to report claims, awards, and certain related materials to CFPB so that CFPB can monitor fairness of the arbitration process.
- Dodd-Frank prohibited mandatory arbitration clauses in residential mortgage loan products.
- Proposal based in part on finding in 2015 Arbitration Study that class actions are a more effective means for consumers to challenge problematic practices.
- Proposal available at http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-prohibiting-mandatory-arbitration-clauses-deny-groups-consumers-their-day-court/.
- Prepared remarks of Director Cordray available at http://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-richard-cordray-field-hearing-arbitration-clauses/.
- 2015 Study available at http://www.consumerfinance.gov/data-research/research-reports/arbitration-study-report-to-congress-2015/.
- Comment deadline: 90 days after publication in the Federal Register.
- Key elements of proposal:
- Agencies continue to roll out proposal on limits on incentive-based compensation under section 956 of Dodd-Frank.
- NCUA approves proposal at board meeting on Apr. 21.
- FDIC and OCC approve proposal on April 26.
- Federal Reserve approves proposal on May 2.
- Qualitative requirements apply to all banks, bank holding companies, and other financial institutions (collectively, "banks") regardless of size.
- New limits tiered by asset size:
- Less than $1 billion: no new restrictions in proposal.
- $1 billion or more to $50 billion: restrictions may apply if bank determined to have complexity of operations or compensation practices consistent with those of larger banks.
- $50 billion or more to $250 billion: restrictions slightly less onerous than those for larger banks.
- $250 billion or more: full set of restrictions.
- For C-level and other senior executives and for "significant risk-takers" at banks with $50 billion or more, deferral periods for portions of incentive-based compensation:
- For banks between $50 billion and $250 billion, 50% and 40%, respectively, for three years.
- For banks of $250 billion or more, 60% and 50%, respectively, for four years.
- Other deferral periods for long-term incentive plans.
- "Significant risk-takers" are individuals who receive one-third or more of annual compensation in incentive-based form and who either are among the most highly paid group at bank (definition of group varies by asset size) or may commit or expose 0.5% of bank's net worth or total capital.
- Forfeiture or bonus payment reductions for poor financial performance due to significant deviations from business plan, inappropriate risk-taking, material risk management or control failures, or any legal violation that results in an enforcement or other legal action or a restatement to correct a material error.
- Seven-year claw-back at banks of $50 billion or more.
- Other limits on increases in incentive-based compensation.
- Risk control, corporate governance, and practice and procedure requirements.
- Proposal available at http://www.federalreserve.gov/newsevents/press/bcreg/20160502a.htm.
- Comment deadline: July 22.
- FDIC requests comment on six strategies that it has identified for meeting consumer needs through mobile banking (May 3).
- Announcement, FIL-32-2016, and related materials available at https://www.fdic.gov/news/news/financial/2016/fil16032.html.
- Comment deadline: June 15.
- Federal Reserve to sponsor policy forum on May 10, "The Future of Rural Communities: Implications for Housing."
- Announcement and livestream available at https://www.federalreserve.gov/newsevents/conferences/ruralconf.htm.
Small Business Lending
- For National Small Business Week, FDIC provides list of agency guidance for potential small business borrowers (May 6).
- List available at https://www.fdic.gov/news/news/press/2016/pr16037.html.
- OCC hosts 2016 State Small Business Credit Initiative Conference (May 2).
- Remarks of Barry Wides, Deputy Comptroller for Community Affairs, available at http://www.occ.gov/news-issuances/index-news-issuances.html.
- OCC releases new "Student Lending" booklet as part of Comptroller's Handbook (May 9).
- Booklet makes public existing internal OCC guidance to examiners.
- Booklet memorializes applicability of fundamental principles of the Uniform Retail Credit Classification and Account Management Policy to student lending practices.
- Booklet available at http://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-15.html.
Too Big to Fail
- Federal Reserve, FDIC, and OCC complete approvals of proposed rule on net stable funding ratio (May 3).
- Sufficient "stable funding" to cover liquidity risks over a one-year time horizon.
- Measurement is ratio of "available stable funding" to "required stable funding."
- Ratio must equal or exceed 1.0.
- ASF consists of risk-weighted amounts of equity and liabilities based on expected stability.
- RSF consists of risk-weighted amounts of assets, derivative exposures, and commitments based on liquidity characteristics.
- Liquidity characteristics include credit quality, tenor, encumbrances, counterparty type, and characteristics of the market in which an asset trades.
- Public disclosure requirements.
- Counterpart liquidity coverage ratio, with requirements over a 30-day window, has been in effect since Sept. 2014.
- Rule would apply to bank holding companies with $250 billion or more in total assets or $10 billion or more in foreign exposures and to banks with $10 billion or more in assets that are consolidated subsidiaries of such holding companies.
- Less onerous Federal Reserve rule for bank holding companies over $50 billion: RSF is 70% of RSF based on calculation for largest institutions.
- Proposal available at http://www.federalreserve.gov/newsevents/press/bcreg/20160503a.htm.
- Statement of FDIC Chairman Gruenberg available at https://www.fdic.gov/news/news/speeches/spapr2616.html.
- Statement of Comptroller Curry available at http://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-50.html.
- Comment deadline: August 5.
- Sufficient "stable funding" to cover liquidity risks over a one-year time horizon.
- Federal Reserve proposes rule that would require GSIBs (and U.S. operations of foreign GSIBs) to amend "qualified financial contracts" to prevent immediate cancellation of such contracts if firm enters bankruptcy or resolution process (May 3).
- Proposed rule would apply to bilateral, uncleared QFCs.
- Specific requirements for QFCs:
- Clarify that U.S. resolution regime applies.
- Restrict ability of counterparties to terminate contract, liquidate collateral, or exercise other default rights based on the resolution of an affiliate of the FSIB.
- GSIB also may comply by using QFCs modified by ISDA 2015 Resolution Stay Protocol.
- Proposal available at http://www.federalreserve.gov/newsevents/press/bcreg/20160503b.htm.
- Comment deadline: Aug. 5.
- Agencies continue to roll out proposed new rule on incentive-based compensation, primarily at banks, bank holding companies and certain other financial institutions with assets of $50 billion or more (May 3).
- More stringent requirements for institutions with $250 billion or more in assets.
- For details, see Incentive-based Compensation above.
- FDIC requests comment on strategies for using mobile banking to meet consumer needs (May 3).
- For details, see Mobile Banking above.
- NY Dep't of Financial Services authorizes Gemini Trust Company LLC to operate exchange for trading of "Ether," an emerging cryptocurrency (May 5).
- Ether to be traded over Ethereum network, a cryptocurrency and blockchain platform.
- Announcement available at http://www.dfs.ny.gov/about/press/pr1605051.htm.
- First Cornerstone Bank, King of Prussia PA (May 6).
- First-Citizens Bank & Trust Company, Raleigh NC, assumes all deposits and purchases essentially all assets in P&A transaction.
- Announcement available at https://www.fdic.gov/news/news/press/2016/pr16038.html.
Congressional Activity – Upcoming
- May 10
- Senate Banking Committee hearing, "Evaluating the Financial Risks of China."
- May 12
- House Financial Services Committee hearing, "The Future of Housing in America: A Comparison of the United Kingdom and United States Models for Affordable Housing."
- May 24
- Senate Banking Committee hearing, "Understanding the Role of Sanctions Under the Iran Deal."
- May 25
- Senate Banking Committee hearing, "Understanding the Role of Sanctions Under the Iran Deal: Administration Perspectives."
- May 10
- Federal Reserve Conference, "The Future of Rural Communities: Implications for Housing."
- May 17
- OCC Director Workshop, "Credit Risk: Directors Can Make A Difference," Corpus Christi TX.
- May 18
- OCC Director Workshop, "Operational Risk – Navigating Rapid Changes," Corpus Christi TX.
- May 19
- FDIC San Francisco Region Bankers' Forum teleconference, "Real Estate Settlement Procedures Act – Section 8."
- June 9
- FTC conference on FinTech.
- June 20-22
- OCC Director Workshop, "Building Blocks for Directors," Syracuse NY.
- June 23
- OCC forum on "responsible innovation" (FinTech), Washington DC.
- July 20
- FDIC Money Smart Train-the-Trainer Online Live Meeting.
Regulatory Comment Deadlines
- May 13 – OCC: changes to various regulations to remove undue burdens.
- May 26 – FDIC: recordkeeping requirements for banks with more than 2 million deposit accounts.
- May 31 – OCC: white paper on responsible innovation (FinTech).
- June 3 – Federal Reserve: single party credit exposures.
- June 12 – CFPB: Student Loan Payback Playbook.
- June 15 – FDIC: mobile financial services strategies to serve the underbanked.
- July 22 – Banking agencies et al.: incentive-based compensation limits.
- Aug. 5 – Federal Reserve/FDIC/OCC: net stable funding ratio.
- Aug. 5 – Federal Reserve: amendment of QFCs to prevent immediate cancellation in event of bankruptcy or other resolution.
- 90 days after publication in Federal Register – CFPB: ban on mandatory arbitration clauses.
For more information, contact Dwight Smith, email@example.com, or 202.545.2885.
The articles published in this newsletter are intended only to provide general information on the subjects covered. The contents should not be construed as legal advice or a legal opinion. Readers should consult with legal counsel to obtain specific legal advice based on particular situations.