Happy Holidays to all clients, referral sources and potential clients.
Instead of sending printed holiday cards, Bryan Cave Leighton Paisner is making donations to a number of our charity partners.
On Thursday, December 12, 2019, the OCC and the FDIC issued a notice of proposed rulemaking (NPR) in an effort to modernize the regulatory framework behind the Community Reinvestment Act (CRA). Last autumn, renewed deliberations began when the OCC published an advanced notice of proposed rulemaking (ANPR) that solicited answers to 31 questions about the CRA. In response, national and state-chartered banks, trade associations, community advocates, government representatives, and others submitted nearly 1,500 individual comments. Thursday’s NPR is the culmination of the regulators’ review of these comments and proposed recommendations.
The proposed rule has received support from the OCC and the FDIC. However, the Federal Reserve has been unwilling to sign on to draft plan, leading some to speculate about prospective, competing CRA regimes. Disharmony among the regulators as to how they examine institutions under the CRA would be unprecedented, as the three prudential regulators have implemented the CRA and examined financial institutions in substantially similar manners since the law’s promulgation in the 1970s.
The proposed changes in the NPR to the CRA’s regulatory framework are significant. Key components of the revamped CRA and the NPR include:
On Tuesday, December 3, 2019, U.S. federal banking regulators issued an interagency statement supporting the evaluation of alternative data when assessing consumers’ creditworthiness. Recognizing that the use of alternative data may improve the speed and accuracy of credit decisions, the agencies hope to address the difficulty facing consumers who are often unable to obtain credit from traditional credit sources. According to FinRegLab, a nonprofit research organization, an estimated 45 million to 60 million consumers lack the credit history needed to generate satisfactory credit scores. Further, millions more do not have access to affordable credit due to low scores and low incomes. The use of alternative data in the rendering of credit decisions may improve credit opportunities, as firms may choose to use these alternatives for those applicants who would otherwise be denied credit.
One such data source is a borrower’s cash flow as an alternative to the traditional credit-evaluation system. Although not an entirely novel concept, and an already well-established part of the underwriting process, some firms are now automating the use of cash flow data to determine a borrower’s ability to repay loans. These newer automation methods have been found to improve the measurement of a borrower’s income and expenses. Most importantly, the automation of a borrower’s cash flow better illustrates income patterns over time from multiple sources as opposed to evaluating a single income source; the borrower information gleaned from these alternative sources is more robust and comprehensive than the information relied upon by traditional credit-evaluation companies. As the regulators highlight in their interagency statement, “cash flow data are specific to the borrowers and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy.”
To the extent firms are using or contemplating using alternative data, the agencies encourage responsible use of such consumer data. As the sources of alternative data grow, both banks and non-banks will need to determine which types of alternative data might carry more risk to consumers – and do their best to minimize or justify the use of such data sources. Although cash flow data provides a relatively unbiased predictor of loan repayment ability, some lenders have garnered fair lending scrutiny for their use of certain alternative data such as borrower occupation, education and information from social media. As the agencies made clear in their statement, lenders considering the use of alternative data must take steps to ensure consumer protection risks are “understood and addressed.” Accordingly, it will remain vitally important for lenders leveraging alternative data to do so within a well-developed fair and responsible lending program that includes, among other things, periodic fair lending testing.
On November 25, 2019, the Securities and Exchange Commission voted to propose a new rule regarding the regulation of the use of derivatives by registered investment companies, including mutual funds, exchange-traded funds (ETFs) and closed-end funds, as well as business development companies. See the Press Release.
Under the new proposed rule the General Statement of Policy (Release 10666) would be withdrawn after a one-year transition period.
The new rule is in some regards similar to the Commission proposal made in 2015 with respect to the use of derivatives by funds, particularly with respect to its Value at Risk or VaR approach.
On November 18 and 19 of this week, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued Advanced Notices of Proposed Rulemaking (ANPRs) to clarify how state interest rate caps should apply when loans are sold across state lines.
The proposal from the OCC reaffirms the “valid when made” doctrine, on which many marketplace lenders have relied and which was central to the Second Circuit’s 2015 decision in Madden v. Midland Funding LLC, 786 F.3d 246 (2nd Cir. 2015). The Second Circuit’s decision contradicted the “valid when made” theory, whereby an obligation is considered valid under the law that applied at the time of origination. The Second Circuit held that a loan’s interest rate was no longer valid when resold to an entity in a state with a lower interest rate cap than where the loan was originally issued. In its proposed rule, the OCC “has concluded that when a bank sells, assigns, or otherwise transfers a loan, interest permissible prior to the transfer continues to be permissible following the transfer.” The OCC’s proposed rule would cut against Madden, allowing the interest rates attached to bank loans to remain valid once transferred to a bank’s fintech partner of investors.
The FDIC’s proposed rule parallels that of the OCC, but focuses on Madden’s relation to state-chartered banks. The FDIC’s proposed rule clarifies that the legal interest rate on a loan originated by a state bank remains legal even after the loan is sold to a non-bank. Speaking in a statement on Tuesday, FDIC Chairwoman Jelena McWilliams said “This proposed rule would correct the anomaly by establishing in regulations … that the permissibility of interest would be determined when a loan is made and is not impacted by subsequent assignment, sale, or transfer.” The draft regulations issued on Tuesday by the FDIC affirm that state banks are not bound by the interest rate caps of other states in which they operate. Further, the validity of the loans’ interest rates would be fixed at the time of origination.
As I have repeatedly written on this site, without regard to other benefits associated with the Troubled Asset Relief Program (such as avoiding a further collapse of the global financial system), the TARP program, and particularly the Capital Purchase Program, was profitable for the U.S. Taxpayer. As a banking lawyer and son and grandson of community bank presidents, I’ll concede that I’m biased. But the numbers speak for themselves.
Even ProPublica acknowledges that TARP was profitable.
Overall, the TARP remains in the black, though just barely.
What does ProPublica means by “barely” profitable? Apparently, “a narrow profit of about $1 billion.”
I hate it when I only have a billion dollars in profit. That’s $1,000,000,000.00 to put it in context.
Whenever discussing bank charter types, I’m reminded of a comparison made by Walt Moeling. Walt would always say that the bank charter choice is like choosing between a Ford and a Chevy truck. There are strong, die-hard advocates for the superiority of one over the other. But either one is functionally adequate, and will enable you to get from location a to b. Of course, neither is going to be confused for a Lamborghini or a Maserati either.
Looking at the breakdown of charters as of the beginning of 2019, while the majority of all U.S. banks are state, non-member banks (i.e. with primary federal supervision by the FDIC), each charter choice appears to continue to have its advocates.
The Office of the Comptroller of the Currency, the primary federal prudential regulator for national banks, has earned a reputation as the regulator of the largest banks, but the underlying data doesn’t necessarily support that viewpoint. While all of the four largest U.S. banks are national banks, in all asset classifications, there remains a variety of bank charter, showing that no one charter type is necessarily better based purely on asset size.
Director Kraninger and the Consumer Financial Protection Bureau have been busy this month. Summer is over, and back to school it is.
In addition to convening a symposium and two Director speeches, the Bureau released ten plus statements this month spanning enforcement activity, no action letter policy, innovation, and consumer data enhancements. Not to be overlooked, the Director also announced her position that the Bureau’s structure is unconstitutional. In this relatively short article, we cannot dive deeply into the specifics of each new development, but we can offer some highlights to help keep you abreast of Bureau changes. Definitely, more to come.
Enforcement: Two actions. One stipulated judgment. The Bureau’s actions assert (a) violations of Consumer Financial Protection Act of 2010 and Reg O in connection with allegedly deceptive and abusive mortgage assistance services and (b) violations of the Fair Credit Reporting Act, Regulation V and the CFPA in connection with allegedly improper debt collection practices. The former included a proposed stipulated judgment, which if entered, would resolve the matter by imposing civil money penalty and other relief. See September 6 and September 25 case announcements here.
The increasing number of banks selling to credit unions has been a hot topic at investor conferences, within the trade press, amongst clients, at trade associations events, and in conversations with investment bankers. To that end, I’ll be on the main stage at BankDirector’s 2020 Acquire or Be Acquired Conference discussing the new players in the bank M&A game.
And the numbers would appear to support that conversation…
The landscape of the banking industry in the United States continues to be highly concentrated when looking at asset sizes, but with the vast majority of the depository institutions continuing to be smaller institutions. As of June 30, 2019, approximately 84% of the assets held by depository institutions are held by less than 3% of U.S. banks.
85% of the banks in the United States, or 4,511 institutions, have less than $1 billion in total assets. 73% (or 3,855 institutions) have less than $500 million in total assets. 53% (or 2,799 institutions) have less than $250 million in total assets. 23% (or 1,230 institutions) have less than $100 million in total assets.
The concepts reflected above aren’t new. We showed the same thing in our Landscapes as of the end of 2016 and the end of 2017. In both of those reports, we attempted to look at the historical trends of consolidation (and that trend certainly continues). But this year, we’re taking a different tack and trying to dig deeper into the FDIC data. All of the data presented is based on the underlying data in the FDIC’s Statistics on Depository Institutions as of June 30, 2019.
As with all statistical reports, I’m well aware that all statistics can be massaged, with relatively innocuous adjustments, to tell different stories. Certainly, extremes can disrupt averages and otherwise minimize the value of the outcomes (or suggest that median or modal outcomes are more important than mean outcomes). Even if you never took a statistics class or have blocked all statistics concepts from your mind, I encourage you to check out Planet Money’s Modal American episode. The modal U.S. bank would have total assets of between $100 million and $250 million, would be taxed as a C-corporation, have a holding company and be a state-chartered, non-member bank. By comparison, the “average” bank would be $3.4 billion and the media bank would be the $228 million Bank of the Lowcountry, in Walterboro, South Carolina.
I am also reminded that no bank desires to be “average,” nor are investors generally looking for an “average” return. That said, I believe there is value in understanding what average is, and recognizing that expectations should be different for different institutions.