NATIONWIDE: An Introduction to USA - Nationwide

Chambers USA 2019 

Nationwide: Financial Services Regulation

Contributed by Sidley Austin LLP 

Consumer Lending 

CFPB  

In 2018, the Consumer Financial Protection Bureau (CFPB) underwent significant changes to its policies, operations, and internal structure, including Senate confirmation of Kathy Kraninger as Director.

Two areas of particular change at the CFPB are fair lending and payday lending. The CFPB under its initial leadership pursued fair lending enforcement actions, particularly against indirect auto lenders, in reliance on a controversial proxy analysis method used to assess disparate impact discrimination. In 2018, Congress overturned the CFPB’s prior guidance on indirect auto lending and the CFPB announced it was reconsidering its approach to disparate impact analysis. Also, under its initial leadership, the CFPB issued a Payday Lending Rule. In February 2019, the CFPB proposed to rescind portions of the Payday Lending Rule.

Payments 

Federal Reserve Request for Comment on Potential Actions to Support Interbank Settlement of Faster Payments

On October 3, 2018, the Board of Governors of the Federal Reserve System (Board) issued a request for comment on two potential actions that the Board could take to promote faster payments: (1) developing a real-time gross settlement service, including related auxiliary services; and (2) a related liquidity management tool.

Prepaid Cards 

On April 1, 2019, the CFPB’s final rule will go into effect to extend the consumer protections of Regulation E to most prepaid accounts (the Prepaid Rule). The Prepaid Rule requirements include: (1) the pre-acquisition delivery of specific disclosures; (2) accountholder access to transaction history and related information; (3) liability limitations and error resolution requirements; (4) submission of prepaid agreements to the CFPB and posting agreement on issuer websites; and (5) the extension of credit card protections to prepaid accounts that have certain linked credit features.

Cryptocurrencies and ICOs 

Driven in part by a booming market for “initial coin offerings” or “ICOs,” the Financial Crime Enforcement Network (FinCEN), the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) all have become more active in asserting a regulatory interest in cryptocurrencies and in ICOs in particular. For example, in November 2018, the SEC reached settlements with two companies, Carriereq, Inc. and Paragon Coin, Inc., for failing to appropriately register their ICOs. Also, in an August 2018 speech, FinCEN Director Kenneth Blanco stated that FinCEN is working closely with the SEC and the CFTC for coordinated policy development and regulatory approaches. At the state level, regulation of virtual currency is dynamic and rapidly evolving and the varied approach among states’ regulation of virtual currency lacks consistency. Also, states have used a variety of anti-fraud and other authorities to challenge a number ICOs and virtual currency investment schemes around the country.

Fintech Charters 

In July 2018, the OCC announced that it would begin accepting applications for special purpose national bank (SPNB) charters to engage in FinTech activities without accepting deposits. The OCC stated that it will apply the same high standards to SPNB applicants that it applies all national bank applicants and that SPNBs generally will be subject to national bank standards of ongoing supervision and regulation. The Conference of State Bank Supervisors and the New York Department of Financial Services have sued the OCC, claiming that issuance of the SPNB charter exceeded the OCC’s authority.

Structure

In May 2018, the most significant financial reform legislation since the Dodd-Frank Act – the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) – became law. EGRRCPA reduced the burdens imposed by some of Dodd-Frank’s more onerous requirements. The federal agencies have been proposing regulations to reflect these modified statutory requirements. Shepherding these changes are a number of new appointees to banking agency leadership posts, including Jelena McWilliams, who was confirmed as Chairman of the FDIC.

Volcker Rule

The Volcker Rule prohibits banks and their affiliates from engaging in proprietary trading and investing in, sponsoring, or having certain relationships with “covered funds.” During 2018, there were two proposed rulemakings related to the Volcker Rule. The first included significant changes to the substance of the Volcker Rule. While the proposal would leave in place the rule’s core restrictions, it would reduce the burdens associated with compliance and ease the requirements to qualify for certain exemptions. The second proposal would exempt small institutions with limited trading operations from the Volcker Rule and limit the Volcker Rule’s name sharing restrictions.

Supervision and Governance

In November 2018, the Board finalized its new rating system for large financial institutions. Under the new system, ratings are assigned for capital, liquidity, and governance and internal controls. The changes do not apply to smaller institutions.

The Board also requested public comment concerning supervisory guidance, including supervisory expectations for boards of directors and risk management expectations. However, in September 2018, the Board, along with the CFPB, OCC, FDIC, and National Credit Union Administration, issued a joint statement confirming that supervisory guidance does not have the force of law, and that regulatory agencies will not take enforcement actions based upon guidance.

Prudential Requirements, Capital, and Liquidity 

In 2018, the Board, the OCC, and the FDIC proposed modifications to their capital rules, including to implement the definition of high volatility commercial real estate exposure, to set new standards for assessing counterparty credit risk posed by derivative contracts, and to simplify regulatory capital requirements for qualifying community banking organizations through the use of a simple leverage ratio.

The banking agencies also proposed significant revisions that would tailor the application of many capital, liquidity, and other prudential standards to institutions based on various size and risk indicators. The proposal sets out four categories of standards applicable to U.S. banking organizations based on these criteria. These proposed standards align with many of the new standards set out in the EGRRCPA.

In June, the Board approved a final rule implementing single-counterparty credit limits. These restrictions reduce interconnectedness between the largest institutions, and thus reduce the risk of contagion in adverse market conditions.

Finally, in late 2018, the banking agencies finalized a rule implementing the current expected credit losses methodology to account for credit losses, mirroring changes made to accounting standards. To account for how these changes affect an institution’s regulatory capital, the agencies are permitting institutions that experience a hit to retained earnings to elect a three-year phase-in.

Stress Testing 

The EGRRCPA changed the thresholds for, and frequency of, company-run and supervisory stress testing. Going forward, generally only the largest banks will be required to engage in both company-run and supervisory stress tests annually. The Board also took steps recently to tailor the application of the Comprehensive Capital Analysis and Review (CCAR), including by exempting many firms from the requirements to participate in the “qualitative” component of the test.

The Board also finalized a proposal in February 2019 to increase the transparency of its stress testing program, including by providing additional public information about the models and economic scenarios the Board uses in the stress testing process.

Living Wills 

Following passage of the EGRRCPA, the Board and FDIC jointly stated that, consistent with the statute, the requirement to submit a resolution plan would not be enforced against banks with fewer than $100 billion in total consolidated assets. The Board and FDIC also continue to release guidance regarding living wills, including recent guidance applicable to the eight largest and most complex domestic banks for the 2019 planning cycle.