This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

Fed proposes revised framework for determining bank control. The Federal Reserve Board of Governors on April 23 unanimously approved a proposal to revise its criteria for determining control of a banking organization. In its notice of prosed rulemaking, intended to "simplify and increase the transparency" of its rules on control, the Fed is seeking to "significantly expand the number of presumptions" in its "determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the Bank Holding Company Act or the Home Owners' Loan Act." The proposal would revise the Fed's Regulations Y and LL by implementing a tiered framework to incorporate the major factors and thresholds that the Fed has historically viewed as presenting controlling influence concerns, along with some "targeted adjustments." The tiered presumptions, summarized in a chart provided by the Fed, would be based on share ownership of any class of voting securities (below five percent, five to 9.99 percent, 10 to 14.99 percent, and 15 to 24.99 percent), and the presumption would be triggered if any relationship exceeds the amount on the table. Presumption of control would be based on factors such as voting and nonvoting equity investments, director representation, proxy solicitations, management interlocks, contractual rights that influence or restrict management policies or operations, and business relationships. The proposal also would include a new presumption of noncontrol. "The proposal is structured so that, as an investor's ownership percentage in the target company increases, the additional relationships and other factors through which the investor could exercise control generally must decrease in order to avoid triggering the application of a presumption of control," the proposed rule states.

  • An April 16 memo prepared by Fed staff acknowledges "frustration with the Board's control framework" on the part of investors and financial institutions, adding, "This is a particular issue for community banking organizations, which may need to rely on substantial investments from a few significant investors to raise capital." Randal Quarles, the Fed's vice chair for supervision, also noted in his opening statement that the "control regime has developed over many decades through a common law process and has become one of the more ad hoc and complicated areas of the Board's regulatory administration," and stressed that the goal of the new proposal is to establish "a broadly applicable and uniform set of rules to address the large majority of control fact patterns."
  • Comments will be accepted for 60 days after publication of the proposal in the Federal Register.

OCC announces fintech Innovation Pilot Program. OCC is seeking public comment on its proposed Innovation Pilot Program, a voluntary initiative to provide financial institutions an opportunity to conduct trial runs of potentially promising new products, services and delivery systems under OCC supervision. The proposal, released on April 30, comes at a time of rapid changes in industry practices and customer expectations fueled by new technologies. "As digital banking, big data, and the use of technology expand, many financial institutions look to their regulators for information on how innovation can be done in an effective and responsible manner," the OCC stated, noting that many firms are particularly concerned with "how novel products and the use of technology may fit within existing rules and supervisory expectations." Pilot programs would be "small-scale, short-term tests to determine feasibility or consider how a large-scale activity might work in practice," the OCC explained. Eligibility for the program would extend to institutions working with third parties, though the third parties themselves may not participate, and firms could propose a pilot individually or as a collaborative effort such as a consortium or utility. Beyond creating a space for innovative proposals to be tested, another objective of the program is "to further the OCC's understanding of, and ability to supervise, innovative activities and their related risks." In a list frequently asked questions, OCC notes that the innovation proposal is separate from the specialized bank charters announced last year for fintech firms that do not take deposits, and that participation in the innovation program "would not provide an entity an expedited path toward an OCC charter." Comments on the proposed program should be sent to [email protected] by June 14, 2019.

OCC proposes changes to OREO regs. The Office of the Comptroller of the Currency has issued a proposed streamlining and clarification of "other real estate owned" (OREO) activities for national banks and an update of the regulatory framework for federal savings associations. In an April 24 notice of proposed rulemaking, the OCC is inviting comment on a proposed rule that would establish a regulatory framework for the OREO activities of FSAs "generally consistent" with the framework provided by the former Office of Thrift Supervision, whose responsibilities OCC assumed under Dodd-Frank. The proposal would represent the first major revision to national bank OREO rules in more than 20 years. Under the proposal, an initial five-year holding period for FSAs would be maintained, with associations being able to request approval for an additional five years if the OREO has not been disposed of, consistent with the rules that apply to national banks. The proposal also includes provisions governing the methods by which institutions may dispose of OREO, applicable appraisal requirements and permissible OREO expenditures and notification requirements. The OCC is also proposing to remove outdated capital rules for national banks and FSAs, which include provisions related to OREO, and to make conforming edits to other rules that reference those capital rules. Comments on the proposal must be received by June 24, 2019.

OCC seeks input on proposed rule changes for fiduciary capacity and non-fiduciary activities. OCC on April 29 published an advance notice of proposed rulemaking (ANPR) providing for revisions to its fiduciary regulations and its requirements for non-fiduciary custody activities of national banks, federal thrifts and federal branches of foreign banks. The proposal would amend the definition of "fiduciary capacity" to include trust-related activities allowed under state law that do not involve investment discretion, such in the capacities of trust protector, trust director and distribution trust adviser, "so that this term would be more consistent with how the role of bank fiduciaries has developed under State law." The OCC is also considering issuing regulations governing non-fiduciary custody activities, which are currently subject to non-regulatory guidance in agency handbooks and bulletins. Noting the increase in asset size and complexity of bank non-fiduciary custody activities since 1996, when OCC last updated its fiduciary regulation, and the attendant risks of this growth, OCC is looking to codify "the core standards for non-fiduciary custody activities." The rules would apply to all OCC-supervised institutions, including community banks. The ANPR has a comment deadline of June 28, 2019.

CFPB to provide more transparency on investigative demands. The Consumer Financial Protection Bureau announced changes to its policies on Civil Investigative Demands (CIDs) "to ensure they provide more information about the potentially wrongful conduct under investigation." In its April 29 announcement, CFPB said that, going forward, CIDs, investigational subpoenas issued by the bureau, will provide more information about the applicable provisions of law that may have been violated and specify the business activities subject to CFPB's authority. The bureau explained that the new policy came about as a result of adverse court decisions regarding the adequacy of its notifications of purpose, as well as a 2017 report from the agency's inspector general that called for improvements to the notification process. The new policy was also shaped by stakeholder feedback the bureau received in response to a request for information issued last year on its enforcement policies.

Relief from HDMA reporting requirements for smaller lenders proposed by CFPB. The CFPB on May 2 proposed raising the coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under the Home Mortgage Disclosure Act rules. CFPB's notice of proposed rulemaking would serve to exempt smaller lenders from HMDA's data reporting requirements, and would clarify partial exemptions from certain HMDA requirements enacted as part of the financial services regulatory relief law enacted last year. The proposed rule would raise the reporting threshold for lenders originating either 50 or 100 closed-end mortgages in the previous two years, up from the current coverage threshold of 25. The current temporary threshold of 500 open-end lines of credit would be extended for another two years, and then be set permanently at 200 open-end lines of credit. On the same day, the bureau also issued an ANPR seeking information on the costs and benefits of reporting certain data points under HMDA. "Today's proposed changes would provide much needed relief to smaller community banks and credit unions while still providing federal regulators and other stakeholders with the information we need under the Home Mortgage Disclosure Act," said CFPB Director Kathleen Kraninger. Enacted in 1974, HMDA requires certain financial institutions to provide mortgage data to the public to help show whether financial institutions are serving the housing credit needs of the communities in which they are located and to identify possible discriminatory lending patterns. HDMA rulemaking authority was transferred to CFPB from the Fed under Dodd-Frank. CFPB's new proposal is open for comment for 30 days.

CFPB plan to shut down HMDA search tool opposed by Senate Dems. In a related development, the planned "retirement" by the CFPB of its search tool for the HMDA database has met with opposition from a group of Senate Democrats. In an undated announcement on its website, CFPB indicated that it will be shutting down its tool for exploring the information and the Public Data Platform Application Programming Interface (API) that powers it "in the coming months" after a new query tool more compatible with the expanded number of data points is published. But nine Senate Democrats, led by Banking Committee ranking member Sherrod Brown (D-OH), have expressed concern that the bureau is retiring the current system "with no plan for a new, accessible source of critical HDMA data." In an April 29 letter to CFPB Director Kraninger, the senators said the HDMA search tool has "democratized" access to the data for a wider audience to monitor discrimination in lending and requested a detailed briefing on the matter by May 10.

Cain and Moore withdraw from Fed Board consideration. President Trump has announced that Herman Cain and Stephen Moore, both of whom the president had championed for the two open seats on the Federal Reserve Board of Governors, have withdrawn their names from further consideration for the nominations. The president announced on April 22 that Cain had asked that he not be nominated, and Cain said his withdrawal was due to ethics and conflicts rules that would have required him to give up his business interests, board memberships and advocacy work. And on May 2, Trump said Moore "has decided to withdraw from the Fed process," adding that "I've asked Steve to work with me toward future economic growth in our Country." In his letter to the president, Moore cited "unrelenting attacks on my character" as a major reason for his decision to withdraw. Neither Cain nor Moore had been formally nominated by the White House, but both potential nominations faced opposition from several key Senate Republicans, while Democrats were largely united in their opposition to seeing either one serving on the Fed Board.

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