Compliance Newshub
Federal Legislation

Ballard Sparh, LLP--Barbara S. Mishkin

A memorandum issued by the Office of Management and Budget entitled “Guidance on Compliance with the Congressional Review Act” imposes a new review process on final rules issued by the CFPB and other independent regulatory agencies such as the Federal Reserve, the FCC, the FDIC, the FTC, and the OCC.  The new process will take effect on May 11, 2019.

The CRA provides a mechanism for Congress to overturn federal regulations by enacting a joint resolution of disapproval.  (A recent notable example is Congress’ use of the CRA to override the CFPB’s arbitration rule.)  The CRA requires “major” rules to be accompanied by a GAO report and have a delayed effective date of at least 60 days to give Congress additional time to consider whether to overturn a major rule before it goes into effect.  The CRA defines a major rule as a rule determined by the Administrator of the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget to meet certain criteria such as that the rule “is likely to result in an annual effect on the economy of $100,000,000 or more.”  The CRA does not, however, specifically require agencies to submit their rules to OIRA for such a determination to be made.

Pursuant to Executive Order 12866, agencies must submit a list of their planned regulatory actions to OIRA and indicate which actions, if any, an agency believes is a “significant regulatory action.”  OIRA must then review the list to determine whether any actions that the agency has not designated as “significant” should be considered a “significant regulatory action.”  The Executive Order defines a “significant regulatory action” to include an action that is likely to result in a rule that may “have an annual effect on the economy of more than $100 million or more.”  A “significant regulatory action” is subject to certain requirements set forth in the Executive Order.  According to a 2016 Congressional Research Service (CRS) report, in most cases, a rule determined to be ‘economically significant’ under the Executive Order will also be major under the CRA, and vice versa.”  (The CRS prepares reports for members of Congress and Congressional committees.)

Most notably, the requirement for OIRA review does not apply to independent regulatory agencies.  The CRS report states that because the Executive Order exempts independent agencies but “OIRA is still tasked [by the CRA] with determining whether an independent regulatory agency’s rule is major…it is not clear whether and how rules issued by the independent regulatory agencies should be designated as major under the CRA.”  The report then notes that “recent accounts suggest…that at least some of the independent agencies no longer appear to be acknowledging a role for OIRA in the determination of rules as major.  Rather, these agencies appear to be making the determination themselves.”

The exemption of independent agencies from the Executive Order’s requirements for “significant regulatory actions” has been criticized for removing independent agency rules from Presidential control, because the President, through OMB, does not have direct influence over such rules.  It is this criticism that the new OMB memo is intended to address.

The memo applies to all final “rules” subject to the CRA.  For purposes of the CRA, a “rule” can include agency guidance.  (The GAO determined that CFPB’s indirect auto finance guidance was a “rule” subject to the CRA.  The guidance was subsequently disapproved by Congress pursuant to a joint CRA resolution.)

The memo provides that for rules submitted for review pursuant to Executive Order 12866, OIRA “will continue to incorporate the CRA major determination into its standard process.”  For “rules that would not be submitted to OIRA under Executive Order 12866”  (i.e. rules of independent agencies), the memo sets forth a process for determining whether such rules are major.  This process includes the following requirements:

• An independent agency must provide a recommended designation of whether a rule is major. If the agency has designated a rule as not major, OIRA must inform the agency within 10 days wither it agrees with the agency’s designation.  Otherwise, the rule becomes subject to the major rule determination process using the “regulatory analysis principles” set forth in the memo.
• If a rule is considered major by an agency or OIRA does not agree with an agency’s determination that a rule is not major, the agency must submit the rule and an analysis to OIRA for a CRA determination at least 30 days before the agency publishes the rule in the Federal Register or otherwise publicly releases the rule.
• Once OIRA makes a designation, the agency can publish the rule in the Federal Register or otherwise publicly release the rule.  If the rule is designated major, the agencies must delay the effective date for 60 days from the date of the rule’s submission to Congress or its publication in the Federal Register, whichever is later (subject to applicable CRA exceptions.)

The memo indicates that OIRA anticipates that it will designate certain categories of rules “as presumptively not major” and therefore not subject to the major determination process set forth in the memo.

The Washington Post-- Damian Paletta

The White House on Thursday for the first time said it was requiring the Federal Reserve and other independent agencies to submit new guidelines for review, a controversial step that has long been a goal of conservative groups.

The Fed and other agencies already have to publicly issue proposals, guidelines and rules, but they have not been required to first submit all of their regulatory guidelines and even “general statements of policy” to the White House. Importantly, the new restrictions would not apply to the Fed’s actions as it pertains to setting interest rates, but it would apply to many of its other functions, particularly bank regulation.

The step could have the effect of nullifying or blocking a range of new regulatory initiatives, and it could have blocked guidelines issued by the Fed and other bank regulators in 2013 that sought to limit the amount of risky corporate loans issued by banks.

The increased scrutiny would also apply to other agencies and issues, including the Securities and Exchange Commission, the Consumer Product Safety Commission, the Federal Election Commission and the Commodity Futures Trading Commission.

Although the chairmen of these agencies are often appointed by the president and confirmed by the Senate, their policies are established by the vote of a commission with bipartisan membership. And, unlike agencies such as the Treasury Department whose leadership reports directly to the president, historically the White House has not had authority over their actions.

But in a memo on Thursday, Russell Vought, the acting director of the White House Office of Management and Budget, instructed all federal agencies to submit a range of proposals to the White House so that a determination could be made as to whether they are “major” or “minor.”

If the proposals or guidance are deemed “major,” they will also need to be submitted to Congress for review, which would slow the process down significantly and give Congress the power to vote to block any plan, under powers granted through the Congressional Review Act.

“In our system of separation of powers, agencies may prescribe rules only insofar as they have statutory authority delegated to them by Congress,” Vought wrote.

A regulation is considered “major” if it has an annual impact on the economy of $100 million or more, could increase costs for consumers or businesses, or adversely impact competition. If a regulation is determined to be “minor,” then it would not be subject to congressional review.

Previously, Congress was only able to apply the CRA to rules, not guidance, but the OMB memo would attempt to change that.

Regulators enforce rules through a variety of mechanisms. The most formal approach is by proposing and writing rules, which often seek public feedback. Rules are typically already subject to the CRA, and Republicans moved in 2017 to invalidate a number of rules with votes in the House and Senate. Regulators can also issue guidance, which stops short of a formal “rule” but is viewed as a powerful step. The Fed has issued guidance a number of times, seeing it as an effective way to send signals to banks and other companies about expectations.

Giving the White House the power to subject an agency’s guidance to congressional review would give the Trump administration much more influence over how the Fed and other agencies interact with businesses.

Vought’s letter describes the new White House requirements as being consistent with its powers under the CRA.

While the letter doesn’t single out any particular agency for particular scrutiny, the Fed could be one of the most controversial government institutions to face oversight.

A Fed spokesman declined to comment.

The Fed is the United States’ central bank, a government agency that has broad powers to set interest rates and regulate banks. Even though the Fed’s chairman and governors are nominated by the White House and confirmed by the Senate, they often try to escape politics and avoid congressional interference.

Trump, however, has taken a much more adversarial approach to the Fed in recent months, attacking Fed Chair Jerome H. Powell and saying he would nominate two political supporters — Herman Cain and Stephen Moore — to the Fed’s board.

While the new OMB review has been in the works for a long period of time, it coincides with a push by the White House to dramatically increase pressure on the central bank and make it more accountable to political leaders.

Conservatives have sought for the White House, through its Office of Information and Regulatory Affairs, to crack down on independent and other federal agencies for years. Vought is a veteran of the Heritage Foundation, which has played a lead role in calling for this change. Their view is that regulators are given too much power to impose restrictions that harm economic growth, among other things, and there should be political curbs on this power.

Vought’s memo appears to stop short of the most sweeping proposal that some conservatives have long sought, which would give the White House the singular power to block any proposal from the Fed and other agencies if political leaders didn’t like it. But the memo could be seen as a step in that direction.

The 15-page memo doesn’t stipulate what would happen if a federal agency refused to submit proposed guidelines to the White House for review.

“What we don’t know is what happens if regulators don’t” comply with the memo, said Douglas Holtz-Eakin, former director of the Congressional Budget Office and a Republican economist. “What if they tell the White House to pound sand?”

Guidance that the Fed, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency issued in 2013 regarding risky corporate lending has proved particularly controversial and could become a target of the White House’s efforts. Banks and Republicans have already tried to nullify it amid a push to originate more risky loans.

Following an inquiry from Sen. Patrick J. Toomey (R-Pa.) in early 2017, the Government Accountability Office ruled that the 2013 guidance should have instead been issued as a rule, making it subject to CRA.

After that, the bank regulators said they would not enforce the guidance against banks in a formal manner, and banks responded by dramatically increasing the amount of “leveraged loans” they issued to corporate borrowers.

Now, a number of regulators and even some bankers have said the large levels of leveraged loans in the economy could pose a risk and make the next recession more damaging.

The leveraged lending guidance was the focus of a Washington Post front-page article on Sunday.

The Fed and other regulators have issued guidance on other matters in recent years as a way to alert banks to expectations for behavior. These include accounting rules, compliance with stress tests and other measures for gauging risky behavior.

The Washington Post--Renae Merle

The Federal Reserve Board on Monday proposed easing key post-crisis regulations for the country’s biggest banks, despite concerns from one member that the proposal goes too far.

Under the plan, big banks such as JPMorgan Chase and Bank of America would have to submit their full “living wills” — plans for their closure during another economic crisis — every four years instead of every year. Slightly smaller banks, including Capital One and Deutsche Bank, would have to file their complete plans once every six years.

The proposal comes as the Trump administration continues to look for ways to curtail the regulatory burden faced by the banking industry, a decade after the global financial crisis. The industry has complained many of the strictest rules are too cumbersome and costly.

The industry has specifically targeted the yearly “living wills,” a requirement that banking institutions have a plan to close their doors in an emergency without harming the economy or requiring a taxpayer bailout. Industry officials have said banks are healthier today than before the financial crisis and that the frequent check-ins are unnecessary.

Fed officials have reviewed banks’ living wills for seven years and say the change is warranted. Despite the yearly requirement, reviewing a single “living will” submission for the biggest banks typically takes two years already, the officials said.

“The proposal seeks to increase the efficiency of firms without compromising the strong resiliency of the financial sector,” Randy Quarles, the Fed vice chair for supervision, said in a statement.

Under the proposal, big banks would submit a slimmed-down version of “living wills” in between the traditional one they file every four or six years. Most U.S. banks with less than $250 billion in assets, such as American Express and M&T Bank, would be exempt from the living-will requirement.

The change for the smallest banks was called for under a law passed last year rolling back key regulations. But the help being offered to the biggest banks goes beyond the legislation, and some critics say the banking industry is already reporting record profits without a rollback of the rules.

Lael Brainard, a member of the Fed’s Board of Governors and an Obama-era appointee, said she would support easing the rules but the proposal could “leave the system less safe.”

“We saw clearly in the crisis that the failure of one or more large banking organizations may lead to severe stress in the financial system,” Brainard said in a statement. “I am concerned the proposals . . . would weaken the important safeguard put in place to address vulnerabilities that proved extremely damaging in the crisis.”

The Federal Reserve also proposed easing regulatory requirements for some foreign banks with U.S. operations. Those banks would face roughly the same level of scrutiny as their U.S.-based competitors, under the proposal.

The public can submit comments on the proposed changes until June. It is unclear when the Fed would finalize them.

Summary

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 (collectively, the agencies) are issuing a notice of proposed rulemaking that would be applicable to advanced approaches banking organizations. The OCC’s proposed rule would apply to national banks and federal savings associations (collectively, banks) that have or that are subsidiaries of banking organizations that have at least $250 billion in total consolidated assets or at least $10 billion in total consolidated foreign financial exposures (advanced approaches banks). 

Highlights

• This proposed rule would increase the capital requirements applicable to an advanced approaches bank that invests in a long-term debt (LTD) instrument that is issued by a bank holding company or intermediate holding company that is subject to the Federal Reserve’s total loss absorbing capacity (TLAC) requirements, or that is issued by a foreign banking organization identified as a global systemically important banking organization (GSIB) by the Basel Committee on Banking Supervision.
• The increased capital requirements would be subject to limited exceptions for LTD instruments held for a short period in connection with market making or underwriting activities.
• Advanced approaches banks would be required to treat an investment in an LTD instrument as an investment in a tier 2 regulatory capital instrument. Therefore, under the capital regulations, an advanced approaches bank would be required to deduct from tier 2 capital significant investments in covered LTD instruments (i.e., investments where the bank owns 10 percent or more of the issuing organization’s common stock), any reciprocal cross-holdings, and any direct, indirect, or synthetic investments in the bank’s own covered debt instruments.
• Additionally, any non-significant investments in covered LTD instruments (i.e., investments where the advanced approaches bank owns less than 10 percent of the issuing entity’s common stock) would be subject to deduction to the extent the advanced approaches bank holds such investments, in the aggregate, in excess of 10 percent of the advanced approaches bank’s common equity tier 1 capital.

Background

In 2017, the Federal Reserve published a final a rule to require the largest and most systemically important domestic and foreign-owned bank holding companies operating in the United States to maintain a minimum amount of TLAC. The Federal Reserve’s rule is generally consistent with international standards published by the Basel Committee on Banking Supervision.

Under the Federal Reserve’s regulations, a covered entity’s TLAC consists of its common equity tier 1 capital (excluding minority interest), additional tier 1 capital (excluding minority interest), and eligible LTD. Covered bank holding companies (BHC) and intermediate holding companies (IHC) must meet a portion of their TLAC requirements with a minimum amount of eligible LTD. 

To qualify as eligible LTD, an instrument must be issued directly by the BHC or IHC, be unsecured, “plain vanilla,” and governed by U.S. law. Additionally, the instrument must have a remaining maturity of greater than one year. Debt with a remaining maturity between one and two years will be subject to a 50 percent haircut.

The Federal Reserve’s TLAC regulations became effective on January 1, 2019. Under the regulations, a covered organization that does not meet the minimum TLAC requirement will face limitations on its ability to make capital distributions and discretionary bonus payments.

The OCC’s current capital regulations do not impose any special requirements for holdings of LTD instruments. Under the generally applicable risk-based capital rules, an investment in an LTD instrument issued by a BHC or IHC generally would be treated as an investment in a corporate bond, which is subject to a risk weight of 100 percent. This proposal would increase the capital requirements for an advanced approaches bank that invests in an LTD instrument issued pursuant to the Federal Reserve’s TLAC requirements and, therefore, would reduce incentives for an advanced approaches bank to invest in such instruments.

Further Information

Please contact David Elkes, Senior Risk Expert, Capital Policy Division, at (202) 649-6370; or Carl Kaminski, Special Counsel, Chief Counsel’s Office, at (202) 649-5490.

Jonathan V. Gould Senior Deputy Comptroller and Chief Counsel

Related Link

• “Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations” (PDF)

The Federal Deposit Insurance Corporation (FDIC) today issued its list of state nonmember banks recently evaluated for compliance with the Community Reinvestment Act (CRA). The list covers evaluation ratings that the FDIC assigned to institutions in January 2019.

The CRA is a 1977 law intended to encourage insured banks and thrifts to meet local credit needs, including those of low- and moderate-income neighborhoods, consistent with safe and sound operations. As part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Congress mandated the public disclosure of an evaluation and rating for each bank or thrift that undergoes a CRA examination on or after July 1, 1990.

A consolidated list of all state nonmember banks whose evaluations have been made publicly available since July 1, 1990, including the rating for each bank, can be obtained at www.fdic.gov or from the FDIC's Public Information Center, 3501 Fairfax Drive, Room E-1002, Arlington, VA 22226 (877-275-3342 or 703-562-2200).

A copy of an individual bank's CRA evaluation is available directly from the bank, which is required by law to make the material available upon request, or from the FDIC's Public Information Center.

Read the List

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's banks and savings associations, 5,406 as of December 31, 2018. It promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars—insured financial institutions fund its operations.

FDIC press releases and other information are available on the Internet at www.fdic.gov, by subscription electronically (go to www.fdic.gov/about/subscriptions/index.html) and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 703-562-2200). PR-32-2019

Summary

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the National Credit Union Administration (collectively, the agencies) are publishing additional frequently asked questions (FAQ) to assist financial institutions and examiners with the new accounting standard, Accounting Standards Update (ASU) 2016-13, Topic 326, “Financial Instruments–Credit Losses” (ASU 2016-13), issued by the Financial Accounting Standards Board (FASB) on June 16, 2016. The agencies published 23 FAQs on December 19, 2016, and published 14 additional questions on September 6, 2017. Today, the agencies are publishing nine additional questions, updating responses to four existing questions, and adding an appendix with links to relevant resources that are available to banks to assist with implementation of the current expected credit losses methodology (CECL).

ASU 2016-13 introduces CECL for estimating allowances for credit losses. The effective date of ASU 2016-13 depends on the financial institution’s characteristics. For U.S. Securities and Exchange Commission filers, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Rescissions

This bulletin rescinds the following:

• OCC Bulletin 2016-45, “Current Expected Credit Losses: Interagency Frequently Asked Questions on the New Accounting Standard on Financial Instruments–Credit Losses.”
• OCC Bulletin 2017-34, “Additional Interagency Frequently Asked Questions on the New Accounting Standard on Financial Instruments—Credit Losses.”

Highlights

The nine additional FAQs address

• consideration of stress testing models, scenarios, and forecast periods when forecasting future economic conditions for CECL.
• accounting implementation issues related to
  • expected future changes in collateral when using the collateral-dependent practical expedient.
  • borrower payment behaviors as a risk characteristic for credit card portfolios.
• internal control considerations for CECL implementation.
• clarification of the agencies’ use of the term “smaller and less complex” related to the scalability of CECL.
• concepts in existing interagency policy statements related to the allowance for loan and lease losses that remain relevant. These interagency policy statements include the December 2006 “Interagency Policy Statement on the Allowance for Loan and Lease Losses” (conveyed by OCC Bulletin 2006-47)¹ and the July 2001 “Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions” (conveyed by OCC Bulletin 2001-37).²

The four updated responses

• pertain to existing questions 4, 18, 34, and 35.
• reflect the new effective date for nonpublic business entities as announced in the FASB’s issuance of ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” issued in November 2018, and reflect the final rule that modifies regulatory capital rules.

The appendix in the interagency FAQs contains links to resources, including the agencies’ resources and webinars, the FASB’s Transition Resource Group web page, and the FASB’s Staff Q&A “Topic 326: No. 1: Whether the Weighted-Average Remaining Maturity Method Is an Acceptable Method to Estimate Expected Credit Losses,” issued in January 2019, on the use of the weighted average remaining maturity (WARM) method and illustrative examples of WARM in accordance with CECL.

Further Information

Refer to BankNet for additional resources, including the OCC’s CECL Call Report Effective Date Decision Tree; the OCC’s CECL Webinar Series; the OCC’s CECL Roadmap: Implementation Considerations; and Topic 12, “Credit Losses,” of the OCC’s Bank Accounting Advisory Series.

Please contact the OCC at CECL@occ.treas.gov with CECL questions. For questions about this bulletin, contact Joy Palmer, Deputy Chief Accountant, or Sarah Nawrocki, Professional Accounting Fellow, Office of the Chief Accountant, at (202) 649-7076.

Grovetta N. Gardineer Senior Deputy Comptroller for Bank Supervision Policy

Related Links

• “Frequently Asked Questions on the New Accounting Standard on Financial Instruments—Credit Losses” (PDF)
• Bank Accounting Advisory Series (PDF)

Printable Format:

FIL-19-2019 - PDF (PDF Help)

Summary:

The attached document describes examiner observations about gaps in financial institutions' contracts with technology service providers that may require financial institutions to take additional steps to manage their own business continuity and incident response.

Statement of Applicability to Institutions under $1 Billion in Total Assets: This FIL applies to all FDIC-supervised institutions.

Highlights:

• Financial institution boards of directors and senior management are responsible for managing risks related to relationships with technology service providers.
• Effective contracts are an important risk management tool for overseeing technology service provider risks, including business continuity and incident response.
• Recent FDIC examination findings noted that some financial institution contracts with technology service providers lack sufficient detail regarding the contract parties' respective rights and responsibilities for business continuity and incident response.
• When contracts do not adequately address such risks, financial institutions remain responsible for assessing those risks and implementing appropriate mitigating controls.
• Financial institutions have a responsibility under Section 7 of the Bank Service Company Act to notify their FDIC regional office of contracts or relationships with technology service providers that provide certain services to the institution.

Continuation of FIL-19-2019

Distribution:

• FDIC-Supervised Financial Institutions and their Service Providers

Suggested Routing:

• Chief Executive Officer
• Chief Information Officer
• Chief Information Security Officer

Related Topics:

• FFIEC IT Outsourcing Technology Services Booklet
• FFIEC IT Business Continuity Planning Booklet
• FFIEC IT Information Security Booklet
• FIL 44-2008, Guidance for Managing Third-Party Risk
• FIL 19-2016, Technical Assistance Video on Outsourcing Technology Services
• FIL 50-2001, Bank Technology Bulletin on Outsourcing
• FIL 49-99, Bank Service Company Act

Attachment:

• Notification of Performance of Bank Services

Contact:

• Donald Saxinger, Chief, IT Supervision, DSaxinger@fdic.gov or (202) 898-3864
• Robert A. Kahl, Sr. Examination Specialist (IT) RKahl@fdic.gov or (402) 397-0142

Note:

FDIC Financial Institution Letters (FILs) may be accessed from the FDIC's website at www.fdic.gov/news/news/financial/index.html.

To receive FILs electronically, please visit www.fdic.gov/about/subscriptions/fil.html.

Paper copies may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E 1002, Arlington, VA 22226 (877-275-3342 or 703-562-2200).

Press Release

Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation Office of the Comptroller of the Currency

Agencies Propose Rule to Limit Impact of Large Bank Failures

The federal banking agencies on Tuesday proposed a rule to limit the interconnectedness of large banking organizations and reduce the impact from failure of the largest banking organizations.  The proposal would complement other measures that the banking agencies have taken to limit interconnectedness among large banking organizations.

Global systemically important bank holding companies, or GSIBs, are the largest and most complex banking organizations and are required to issue debt with certain features under the Board’s “total loss-absorbing capacity,” or TLAC, rule.  That debt would be used to recapitalize the holding company during bankruptcy or resolution if it were to fail. 

To discourage GSIBs and “advanced approaches” banking organizations—generally, firms that have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure—from purchasing large amounts of TLAC debt, the proposal would require such banking organizations to hold additional capital against substantial holdings of TLAC debt.  This would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure.

The proposal from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency would also require the holding companies of GSIBs to report publicly their TLAC debt outstanding.  Comments will be accepted for 60 days following publication in the Federal Register. 

Proposed Rule

Media Contacts: 

Federal Reserve Board         Eric Kollig                         (202) 452-2955 

FDIC                                   Julianne Fisher Breitbeil     (202) 898-6895 

OCC                                    Bryan Hubbard                   (202) 649-6870

FDIC: PR-30-2019

Delay of Effective Date; Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations

AGENCY:

Office of the Comptroller of the Currency, Treasury; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation.

ACTION:

Final rule, delay of effective date.

SUMMARY:

On February 14, 2019, the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) published in the Federal Register a final rule to address changes to credit loss accounting under U.S. generally accepted accounting principles, including banking organizations' implementation of the current expected credit losses methodology (CECL) (final rule). The final rule had an effective date of April 1, 2019, and provides that banking organizations may early adopt the final rule prior to that date. The agencies have determined that adelay of the effective date to July 1, 2019, is appropriate.

DATES:

The effective date of the final rule published February 14, 2019 (84 FR 4222) is delayed until July 1, 2019. Banking organizations may early adopt this final rule prior to that date.

FOR FURTHER INFORMATION CONTACT:

OCC: Kevin Korzeniewski, Counsel, Office of the Chief Counsel, (202) 649-5490; or for persons who are hearing impaired, TTY, (202) 649-5597.

Board: Constance M. Horsley, Deputy Associate Director, (202) 452-5239; Juan C. Climent, Manager, (202) 872-7526; Andrew Willis, Senior Supervisory Financial Analyst, (202) 912-4323; or Noah Cuttler, Senior Financial Analyst, (202) 912-4678, Division of Supervision and Regulation; or Benjamin W. McDonough, Assistant General Counsel, (202) 452-2036; David W. Alexander, Counsel, (202) 452-2877; or Asad Kudiya, Counsel, (202) 475-6358, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC: Benedetto Bosco, Chief, bbosco@fdic.gov; Richard Smith, Capital Markets Policy Analyst, rismith@fdic.gov; David Riley, Senior Policy Analyst, dariley@fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, regulatorycapital@fdic.gov, (202) 898-6888; Michael Phillips, Counsel, mphillips@fdic.gov; or Catherine Wood, Acting Supervisory Counsel, cawood@fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

On February 14, 2019, the agencies published in the Federal Register a final rule to amend the capital rule to address changes to credit loss accounting under U.S. generally accepted accounting principles, including banking organizations' implementation of the current expected credit losses methodology (CECL).[1] The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In addition, the final rule revises the agencies' regulatory capital rule, stress testing rules, and regulatory disclosure requirements to reflect CECL, and makes conforming amendments to other regulations that reference credit loss allowances.

The final rule was published with an effective date of April 1, 2019, and provides that banking organizations may early adopt the final rule prior to that date. When the agencies submitted the final rule for publication in December 2018, this effective date satisfied all applicable statutory requirements. However, due to the partial government shutdown, the final rule was not published until February 14, 2019. Due to this delay in publication, the agencies have determined that a delay of the effective date of the final rule to July 1, 2019, is necessary to provide a sufficient review period under the Congressional Review Act [2] and to satisfy the requirements of the Small Business Regulatory Enforcement Fairness Act of 1996, Riegle Community Development and Regulatory Improvement Act, and Administrative Procedure Act.[3] Notwithstanding this delay in effective date, banking organizations subject to the final rule may comply with it as of January 1, 2019.

Dated: March 21, 2019.

Joseph M. Otting,

Comptroller of the Currency.

By order of the Board of Governors of the Federal Reserve System, acting through the Secretary of the Board under delegated authority, March 15, 2019.

Ann E. Misback,

Secretary of the Board.

Dated at Washington, DC, on March 13, 2019.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Valerie Best,

Assistant Executive Secretary.

Footnotes

1.  84 FR 4222 (February 14, 2019). Back to Citation

2.  5 U.S.C. 801 et seq. Back to Citation

3.  5 U.S.C. 601 et seq.; 12 U.S.C. 4801 et seq.; 5 U.S.C. 551 et seq. Back to Citation

[FR Doc. 2019-06011 Filed 3-28-19; 8:45 am]

BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P]

insideARM--Stephanie Eidelman, CEO, insideARM

On Friday March 21, 2019, as all of Washington awaited delivery of Robert Mueller’s report, The White House issued an executive order about promoting free and open debate on college campuses… and about students’ ability to repay their federal loans .

The six page order has exactly two paragraphs about free speech; the rest is about increasing transparency around the cost of an education at any given school, a student’s likelihood of being able to pay back loans required to get the education, and what happens when they can’t.

The premise is that better information will help students and their families to choose the right level of education - and the right institution to provide it - based on outcomes experienced by prior students. The ideas presented would force schools to actively participate in a value-based return on investment discussion. Because money to pay students’ tuition virtually grows on trees as far as the schools are concerned, this is a discussion that most don’t have to participate in today.

The broad goals of the order are to:

• Align incentives of institutions with those of students and taxpayers to ensure that institutions share the financial risk associated with Federal student loan programs.
• Help borrowers avoid defaulting on their Federal student loans by educating them about risks, repayment obligations and repayment options
• Supplement efforts by states and institutions by disseminating information to assist students in completing their degrees faster and at a lower cost

Specifically, the order directs the Secretary of Education (Secretary) to:

• Make available, by January 1, 2020, through the Office of Federal Student Aid, a secure and confidential website and mobile application that informs Federal student loan borrowers of how much they owe, how much their monthly payment will be when they enter repayment, available repayment options, how long each repayment option will take, and how to enroll in the repayment option that best serves their needs;
• Expand and update annually the College Scorecard with program-level data for each certificate, degree, graduate, and professional program, for former students who received Federal student aid. Data would include things like estimated median earnings, median Stafford or PLUS loan debt, student loan default and repayment rates. (emphasis added)
• Expand and update annually the College Scorecard with institution-level data, providing the aggregate for all certificate, degree, graduate, and professional programs, for former students who received Federal student aid. Data would include things like: student loan default and repayment rates, and Graduate PLUS and Parent PLUS default and repayment rates. (emphasis added)
• Provide appropriate statistical studies and compilations regarding program-level earnings, consistent with section 6108(b) of title 26, United States Code, other applicable laws, and available data regarding programs attended by former students who received Federal student aid.

The White House suggests that “Access to this information will increase institutional accountability and encourage institutions to take into account likely future earnings when establishing the cost of their educational programs.”

The order also directs the Secretary to make available by January 1, 2020 a secure and confidential website and mobile application that informs borrowers of how much they owe, how much their monthly payment will be when the enter repayment, available repayment options, how long each repayment option will take, and how to enroll in the repayment option that best services their needs.

And, the order specifically calls out collections:

“By January 1, 2020, the Secretary… shall submit to the President… policy recommendations for reforming the collections process for Federal student loans in default.”

The President wants annual updates on the progress towards implementation of the policies in the order starting July 1, 2019.

insideARM Perspective

This is… so interesting. I’ll say upfront that I’m not an expert on Executive Orders. But I’m fascinated by this. I have three immediate thoughts:

First, the timing. The President specifically calls out the collections process for Federal student loans, literally in the midst of a contentious case about the collections process for Federal student loans at the Court of Federal Claims. It seems that this crazy saga has even reached the White House, and the President feels the need to send a message to the Department of Education: Get your act together.

Second, the pairing of free speech and the financing of education. I’m all for free and open debate on college campuses but I’m not sure why it’s mentioned in this order.

Third, as a parent, a taxpayer, and a former student, I really like the idea of the program and institution-level data about outcomes. I love that there would be an apples-to-apples comparison from one school to the next.

The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council¹ (FFIEC) recently developed interagency examination procedures for

• Truth in Lending Act (TILA), implemented by Regulation Z.
• Electronic Fund Transfer Act (EFTA), implemented by Regulation E.

These procedures reflect Consumer Financial Protection Bureau amendments to Regulations Z and E published in the Federal Register on November 22, 2016, April 25, 2017, and February 13, 2018.² The changes to the procedures relate to the creation of comprehensive consumer protections for prepaid accounts. This bulletin makes available on the Office of the Comptroller of the Currency’s (OCC) website the revised interagency procedures for the new and amended requirements for Regulations Z and E, which go into effect April 1, 2019. OCC examiners will use these procedures for examinations beginning on or after April 1, 2019. The OCC is in the process of incorporating these revised interagency procedures into the “Truth in Lending Act” and “Electronic Fund Transfer Act” booklets of the Comptroller's Handbook, which will supplant the interagency procedures once the updates are completed.

Highlights

• The FFIEC task force developed these examination procedures to promote consistency in the examination process and communication of supervisory expectations.
• These interagency procedures reflect
  • new requirements under Regulation E that concern prepaid accounts and that govern disclosures, limited liability and error resolution, periodic statements, and posting of account agreements.
  • amendments to Regulation Z that cover certain overdraft credit features that may be offered in conjunction with prepaid accounts.
• These new and amended regulatory requirements go into effect on April 1, 2019.

Further Information

Please contact your supervisory office or Paul R. Reymann, Director for Consumer Compliance Policy, at (202) 649-5470.

 Grovetta N. Gardineer Senior Deputy Comptroller for Bank Supervision Policy

Related Links

• Electronic Fund Transfer Act
• Truth in Lending Act

FDIC’s Consumer Compliance Examination Manual CEM provides supervisory information to FDIC examination staff that conduct consumer compliance examinations, Community Reinvestment Act performance evaluations, and other supervisory activities.  It includes supervisory policies and examination procedures for evaluating financial institutions’ compliance with federal consumer protection laws and regulations.  The CEM is designed to promote consistency and efficiency in the examination process and compliance with applicable laws and regulations.  Financial institutions can use the CEM to obtain more information about the FDIC’s examination process.

March 2019 Updates

The FDIC updated several sections of the CEM: 

• SOURCE Violation Codes (II-14.1): Some SOURCE violation codes were updated to reflect current references to the United States Code (U.S.C.) and to update verbiage.  No new violation codes were added or deactivated in this release.   
• Truth in Lending Act (V-1.1): The TILA chapter was updated to incorporate the CFPB’s amendments to Regulation E and Regulation Z related to Prepaid Accounts, effective April 1, 2019. The chapter was also updated to reflect several annual threshold changes.  The escrow exemption and the appraisal exemption thresholds for higher priced mortgages and the credit card penalty fee safe harbor amount were increased.
• Home Mortgage Disclosure Act (V-9.1): The asset size exemption thresholds were updated.  
• Consumer Leasing Act (V-10.1): The exemption threshold for consumer credit and lease transactions were increased.
• Electronic Fund Transfer Act (VI-2.1): The EFTA chapter was updated to incorporate the CFPB’s amendments to Regulation E and Regulation Z related to Prepaid Accounts, effective April 1, 2019.
• Community Reinvestment Act (XI-1.1): Asset-based definitions for Small Banks and Intermediate Small Banks were updated.

CRA Data Review Timeframes and Sampling Guidelines (XI-11.1): The chapter was updated to provide updated examination instructions on review timeframes and sampling procedures for CRA evaluations.

View this Manual