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

CFTC approves Volcker rule overhaul. Another one of the five agencies charged with oversight of the Volcker Rule restrictions on proprietary trading by banks has given its approval to the finalized modifications to the Dodd-Frank-mandated rule. At its September 16 commissioners' meeting, the CFTC agreed to support the rule changes in a 3-2 vote that broke down along party lines, with both Democratic commissioners voting no. As reported in the August 26 edition of Bank Regulatory News and Trends, the FDIC and the OCC have approved the new Volcker provisions. The Fed and the SEC have yet to act. CFTC Chairman Heath P. Tarbert called the Volcker rule "among the most well-intentioned but poorly designed regulations in the history of American finance" and said the amended version would "tailor the Volcker Rule to increase efficiency, right-size firms' compliance obligations and allow banking entities – especially smaller ones – to provide services to clients more efficiently." But Commissioner Dan Berkovitz said the revisions "will render enforcement of the rule difficult if not impossible by leaving implementation of significant requirements to the discretion of the banking entities, creating presumptions of compliance that would be nearly impossible to overcome and eliminating numerous reporting requirements."

  • Volcker dissents. Count former Federal Reserve Chairman Paul Volcker, for whom the rule is named, among those who oppose the changes. In an August 20 letter to current Fed Chairman Jerome Powell, Volcker wrote, "The new rule substantially narrows the proprietary trading prohibition, enabling banks to speculate freely for their own profit with financial instruments previously under the Volcker Rule's constraints," adding that the changes "appear far afield from the regulators' stated objective of mere simplification." In a September 5 response letter, Powell wrote that, while he supports the underlying principle of the rule, "It has been quite challenging to execute this sensible idea within the statutory framework." The letters were obtained by Politico.

CFPB issues no-action letter, sandbox and trial disclosure policies. The CFPB on September 10 issued its final guidance on three policies intended promote innovation by giving financial firms more opportunities and compliance flexibility to try new technologies, practices and methods. CFPB's new No-Action Letter (NAL) Policy will provide more certainty that the Bureau will not bring a supervisory or enforcement action against a company for providing a product or service under certain criteria and a streamlined review process focusing on the consumer benefits and risks of that product or service. The finalized Compliance Assistance Sandbox (CAS) Policy will evaluate a product or service for compliance with relevant laws and will offer approved applicants a safe harbor for certain specified conduct during the testing period, protecting them from liability under the Truth in Lending Act, the Electronic Fund Transfer Act, or the Equal Credit Opportunity Act. The bureau's Trial Disclosure Program (TDP) Policy creates the "CFPB Disclosure Sandbox," through issuance of its revised Policy to Encourage Trial Disclosure Programs. Under the new TDP policy, "entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the Bureau," consistent with Dodd-Frank provisions giving CFPB authority to provide certain legal protections for entities to conduct trial disclosure programs. The new policy also streamlines the application and review process.

  • CFPB issued its first NAL under the new policy to more than 1,600 housing counseling agencies that participate in a program at the Department of Housing and Urban Development, as requested by HUD.
  • On the same day, CFPB also announced a partnership with state regulators, the American Consumer Financial Innovation Network, to increase coordination to promote financial innovation. While all state regulators have been invited to join, the initial group of member states numbers eight. "ACFIN members intend to facilitate innovation that benefits consumers through greater competition, consumer access, or financial inclusion in markets for consumer financial products and services," the organization's charterstates.

Agencies propose new rule on initial margin requirements for inter-affiliate swaps. Five federal agencies have proposed a new rule that would amend regulations to remove the requirement for covered swap entities to collect initial margin from affiliates. The proposed rule and request for comment, announced September 17, would amend regulations that require swap dealers to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule). The proposed rule is intended to reduce regulatory burdens and also assist with an orderly transition away from the London Interbank Offered Rate (LIBOR), which is used frequently in derivatives contracts. The rule is being proposed by the FDIC, the Fed, OCC, FHFA and the Farm Credit Administration. The American Bankers Association supports the move, with CEO Rob Nichols stating, "This sensible change will ensure that US rules are consistent with international standards, which recognize that inter-affiliate swaps are used by banks to centralize risk management, further improving safety and soundness." Comments on the proposal will be due 30 days after publication in the Federal Register.

Simplified rules on capital requirements for community banks finalized. The FDIC on September 17 announced it has finalized a rule to simplify the community bank leverage ratio framework, pursuant to the Dodd-Frank partial rollback law enacted in May 2018. The final rule, promulgated by FDIC, the Fed and OCC, sets a 9 percent leverage ratio as the threshold for simplified capital requirements for community banks. Some smaller lenders had called for a threshold of 8 percent. To qualify for the CBLR framework, which was designed to reduce the compliance burden for community banks that opt in by removing the requirements for calculating and reporting risk-based capital ratios, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets and limited amounts of off-balance-sheet exposures and trading assets and liabilities. Qualifying community banks will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

CFPB will enhance consumer complaint database. The CFPB has announced an overhaul of its consumer complaints database. The bureau will continue to publish consumer complaints but will provide what it described as "modified disclaimers to provide better context to the published data," displaying more prominently disclosures that the database "is not a statistical sample of consumers' experiences in the marketplace." According to the bureau's September 18 announcement, the modifications reflect comments it received from nearly 26,000 stakeholders responding to the bureau's 2018 invitation for feedback on the database, which CFPB acknowledged "has not been without controversy" since it was launched in 2015. Other changes include highlighting the availability of answers to common financial questions to help inform consumers before they submit a complaint, information to assist consumers who wish to contact a financial company to get answers to their specific questions and enhanced features that include "dynamic visualization tools on recent complaint data." The American Bankers Association applauded some of the changes, which reflect positions advocated by ABA, including emphasizing that consumers can contact financial providers directly, providing common answers and resources and the disclaimers on the database. But ABA, in a September 18 statement, expressed disappointment that CFPB plans to continue publishing all previously disclosed fields, including consumer narratives, "despite ABA's strongly expressed concerns about privacy implications and the CFPB's statutory authority to publish individualized complaint data."

CFPB says its own structure is unconstitutional. The CFPB has joined the Justice Department in a brief asking the US Supreme Court to determine whether the CFPB's structure is unconstitutional. In the brief filed September 17, DOJ and CFPB attorneys argued that the structure of the bureau violates the separation of powers doctrine by infringing on the president's authority to remove executive branch officials from their posts. The same day, CFPB Director Kathleen Kraninger informed Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi, in September 10 letters, that her agency has determined that the for-cause removal provision of the Consumer Financial Protection Act of 2010…is unconstitutional." Under Dodd-Frank, the CFPB director can be removed from office only "for cause," which is generally considered to be severe incompetence or misconduct. Critics of the CFPB have long sought to limit the agency's authority through lawsuits and legislation, arguing that the bureau had accrued excessive, unchecked power. The US Court of Appeals for the District of Columbia Circuit ruled in 2016 that the watchdog agency's structure was unconstitutional, but that decision, authored by current Supreme Court Justice Brett Kavanaugh, was overturned by the full court in 2018.

California state legislature approves interest rate cap for installment loans. The California Senate on September 13 approved legislation that would cap interest rates on loans of $2,500 to $9,999. The bill caps interest rates for payday and other loans at roughly 36 percent, with the cap fluctuating depending on a key interest rate set by the Fed. The legislation (AB-539) passed the Senate by a 35-5 vote, with the state Assembly, which had previously approved the measure, concurring in the Senate amendments by a 61-8 vote the same day. Supporters of the legislation say it is designed to reduce the impact of predatory lending practices. But opponents argue that it could prompt lenders to withdraw from the market or write fewer loans to borrowers with a negative or limited credit history. The bill now heads to the desk of Governor Gavin Newsom.

California regulator considering commercial financing disclosure regulations. The California Department of Business Oversight is in the process of developing regulations and sample disclosure forms to implement a state law requiring lenders, brokers and other providers to make certain disclosures in connection with offers for commercial financing. The law, SB 1235, enacted nearly a year ago, requires consumer-like disclosures to be made on certain commercial finance products, including small business loans and merchant cash advances. California's DBO is mandated to adopt regulations addressing details such as calculation methods and the time, manner and format of the new disclosures. DBO issued its second request for public comment on the regulations in July and the comment period was to have closed by September 9. A previous public comment round that concluded in January of this year generated comments from 34 financial firms.

Florida's governor announces fintech initiatives. Florida Governor Ron DeSantis has announced several initiatives to encourage financial technology companies to start, relocate and expand in the sunshine state. In a September 16 announcement, the governor said he is directing the state Department of Economic Opportunity and Enterprise Florida, Inc., to expedite the review of Florida Job Growth Grant Fund proposals that provide workforce training programs in the financial services industry, with a focus on fintech skills training. DeSantis and the state's CFO also said they plan to pursue legislation to create a regulatory sandbox for fintech companies in Florida, providing flexibility to provide new types of products and services by waiving certain licensing requirements and providing other opportunities for innovation. Finally, DeSantis announced that Florida is one of the states signing onto the ACFIN initiative launched by CFPB (see above).

Momentum builds for cannabis and hemp banking initiatives. The House of Representatives is poised to adopt legislation to allow banks to serve cannabis-related businesses and the Senate Banking Committee is also moving toward a vote on the measure. The bill, the SAFE (Secure and Fair Enforcement) Banking Act (HR 1595), which would give banks legal safe harbor to serve the cannabis industry in states where it has been legalized despite the ongoing federal prohibition, is gaining bipartisan and bicameral support – even as political divisions remain about the larger issues of legalization, decriminalization and de-scheduling. JPMorgan Chase CEO Jamie Dimon told journalists on September 18 that his bank, the nation's largest, would consider providing banking services for cannabis companies if there were a national law shielding banks from penalties.

  • NCUA issues update on serving hemp businesses. While the federal designation of marijuana as a controlled substance continues to be in effect, the 2018 Farm Bill, signed into law last December, removed that designation from hemp products that meet certain criteria, including limits on levels of THC, the psychoactive ingredient in marijuana. In August, the NCUA issued a regulatory update to federally insured credit unions to help explain the myriad cross-jurisdictional laws and regulations governing lawful lending to hemp-related business. NCUA's update to members includes a summary of the implications of 2018 Farm Bill, BSA/AML compliance concerns and NCUA's other regulations for lending.

Senate confirms Bowman to full Fed term. The Senate voted on September 12 to confirm Michelle Bowman for a full 14-year term on the Federal Reserve Board of Governors. Bowman took office last November and is serving the remainder of a partial term that expires at the end of January. The vote for Bowman, the former Kansas state banking commissioner who holds the Fed seat reserved for someone with community banking experience, was 60-31. There are still two vacancies on the seven-member Board.

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