- New Federal Guidance Issued on Customer Due Diligence and Risk Management
- Fed Proposes Rule to Mandate LIBOR-Replacement Benchmark Rates in Contracts
- CFPB Clarifies Permissible Purposes for Furnishing, Using, and Obtaining Consumer Reports
- FDIC Issues Updated Guidance on Brokered Deposit Reporting Requirements
- Other Developments: Minority Depository Institutions and Cryptocurrency
1. New Federal Guidance Issued on Customer Due Diligence and Risk Management
The federal banking agencies along with FinCEN and the NCUA have published a joint statement on the risk-based approach to assessing customer relationships and conducting customer due diligence. The joint guidance released on July 6 reinforces the agencies’ stance that “no customer type presents a single level of uniform risk or a particular risk profile related to money laundering, terrorist financing, or other illicit financial activity.” The joint guidance reminds banks that customer relationships present varying levels of risk for illicit financial activity that depend on the presence or absence of numerous factors specific to each customer. The agencies stressed that banks that effectively manage and mitigate the risks specific to each customer relationship in compliance with applicable BSA/AML requirements are not prohibited or discouraged from providing banking services to any type of customer. According to the joint guidance, the agencies are encouraging banks to manage and mitigate risks based on customer relationships, rather than declining to provide banking services to entire categories of customers. Click here for a copy of the joint guidance.
Nutter Notes: The federal banking agencies’ joint guidance references the FFEIC Bank Secrecy Act/Anti-Money Laundering Examination Manual, which includes information and considerations that may indicate the need for bank policies, procedures, and processes to address potential risks related to certain types of customers, such as independent automated teller machine owners or operators, nonresident aliens and foreign individuals, charities and nonprofit organizations, and cash intensive businesses. The joint guidance clarifies that the inclusion in the examination manual of information about certain customer types is not intended to signal that these customer types should be considered uniformly higher risk. While not aimed at a particular type of customer, the federal banking agencies’ joint guidance is reminiscent of a 2014 policy statement issued by the Financial Crimes Enforcement Network (“FinCEN”), which advised banks not to terminate the accounts of money transmitters indiscriminately in an effort to comply with BSA/AML requirements. According to that 2014 policy statement, which was issued in response to concerns that banks then were denying services to money transmitters as a class, banks were reminded to assess the risk of serving a money services business based on customer due diligence reviews conducted to establish the risk that each potential customer poses.
2. Fed Proposes Rule to Mandate LIBOR-Replacement Benchmark Rates in Contracts
The Federal Reserve has published for comment a proposed rule that would provide benchmark replacements for contracts governed by U.S. law that reference the overnight and one-, three-, six-, and 12-month tenors of LIBOR. The proposed rule released on July 19 would apply to contracts that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate for LIBOR, which will be discontinued after June 30, 2023. In a statement accompanying the proposed rule, the Federal Reserve said that, despite efforts to prepare for the discontinuation of LIBOR, there are a significant number of existing contracts that reference LIBOR and cannot be easily amended. The proposed rule would provide for separate replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. Each proposed replacement rate is based on the Secured Overnight Financing Rate (SOFR). Click here for a copy of the proposed rule.
Nutter Notes: The proposed rule would implement the Adjustable Interest Rate (LIBOR) Act, enacted on March 15, 2022 as part of the Consolidated Appropriations Act, 2022, which authorized the Federal Reserve to establish a benchmark replacement rate that is based on SOFR to replace the overnight and one-, three-, six-, and 12-month LIBOR rates in existing contracts that do not provide for a LIBOR replacement. Consistent with the requirements of the LIBOR Act, all of the proposed benchmark replacement rates would incorporate spread adjustments for each specified tenor of LIBOR. According to the Federal Reserve, the spread adjustments are intended to address certain differences between SOFR and LIBOR, such as “the fact that LIBOR is unsecured and therefore includes an element of bank credit risk which may cause it to be higher than SOFR.” In proposing different benchmark replacement rates for derivative transactions and other transactions, the Federal Reserve adopted the view of the Alternative Reference Rates Committee (ARRC), a group of private-sector firms convened by the Federal Reserve Board and the Federal Reserve Bank of New York in 2014. ARRC previously identified SOFR as its recommended replacement for LIBOR and developed a plan to support the transition from LIBOR to SOFR.
3. CFPB Clarifies Permissible Purposes for Furnishing, Using, and Obtaining Consumer Reports
The CFPB has issued an advisory opinion warning that businesses, including banks, that use and share credit reports and background reports must have a permissible purpose under the Fair Credit Reporting Act (FCRA), and that users of credit reports have specific obligations to protect data privacy. The advisory opinion released on July 7 clarifies that the permissible purposes listed in FCRA are specific to the consumer who is the subject of the report. The advisory opinion warns that insufficient matching procedures used by consumer reporting companies or by users of consumer reports can cause a violation of FCRA if they result in the delivery of information about the wrong consumer to a user that did not have a permissible purpose to receive information about that person. For example, if a lender’s employee initiates a credit application for the wrong consumer by incorrectly inputting consumer information into the lender’s application system or by selecting the wrong consumer from a list of possible consumers identified in the system, the lender may receive a credit report about a consumer for whom the lender does not have a permissible purpose under FCRA. The advisory opinion also warns that FCRA strictly prohibits a user of consumer reports from obtaining credit report information about a consumer without a permissible purpose, so that the receipt of information about the wrong consumer by the user of the credit report could cause the user to be in violation of FCRA. Click here for a copy of the advisory opinion.
Nutter Notes: The advisory opinion also clarifies that disclaimers will not cure a failure to take reasonable steps to ensure that the information contained in a credit report is only about the individual for whom the user has a permissible purpose. Credit reporting companies may not provide, and users should not accept, reports on multiple individuals where the user only has a permissible purpose to obtain a report on one individual. Therefore, credit reporting companies may not provide credit reports containing information about multiple people as “possible matches.” The advisory opinion explains that FCRA requires credit reporting companies to have adequate procedures to provide information only about the person who is the subject of the user’s request.
4. FDIC Issues Updated Guidance on Brokered Deposit Reporting Requirements
The FDIC has updated its guidance in form of answers to frequently asked questions (FAQs) on brokered deposits to clarify that deposits swept from broker-dealers with a primary purpose exception to unaffiliated banks must be reported as brokered if there are any additional third parties involved that qualify as a deposit broker. For example, the FAQs updated on July 15 explain that a third party involved in a sweep that is engaging in matchmaking activities would qualify as a deposit broker, and therefore the sweep deposits received from the associated broker-dealer must be reported as brokered deposits on the bank’s quarterly call report, even if the broker-dealer has a primary purpose exception for the relevant business line. The FAQs include examples of services that constitute matchmaking activities when provided by a third party to a broker-dealer in an unaffiliated sweep program. Click here for a copy of the updated FAQs.
Nutter Notes: The FDIC also explained that it will not require a bank to refile call reports that predate the issuance of the updated FAQs if, after good faith efforts, certain deposits were not previously reported as brokered by the bank due to a misunderstanding of how the deposit broker definition applies when additional third parties are involved. The FDIC also said that call report instructions have been updated accordingly. In 2020, the FDIC amended its brokered deposit regulations to identify several specific business relationships involving the placement of a customer’s funds on deposit at a bank by an agent of the customer as meeting the primary purpose exception—which applies to exclude a deposit from the definition of a brokered deposit when the primary purpose of the agent’s business relationship with its customers is not the placement of funds with banks. The amended regulations recognize a number of business relationships, known as “designated exceptions,” as meeting the primary purpose exception to the definition of a deposit broker. A broker-dealer or futures commission merchant that places customer funds into deposit accounts in compliance with certain SEC requirements qualifies for one of the designated exceptions. Under the FDIC’s amended regulations, a person is engaged in “matchmaking activities,” and therefore is engaged in brokering deposits, if the person “proposes deposit allocations at, or between, more than one bank based upon both the particular deposit objectives of a specific depositor or depositor’s agent, and the particular deposit objectives of specific banks, except in the case of deposits placed by a depositor’s agent with a bank affiliated with the depositor’s agent.”
5. Other Developments: Minority Depository Institutions and Cryptocurrency
OCC Publishes Updated Policy Statement on Minority Depository Institutions
The OCC has revised its policy statement for minority depository institutions (MDI) to update and streamline descriptions of its policies, procedures, and programs. The revised statement issued on July 27 also describes the range of programs the OCC has in place to preserve and support MDIs. Click here for a copy of the revised policy statement.
Nutter Notes: Among the initiatives to support MDIs highlighted in the policy statement is the OCC’s Roundtable for Economic Access and Change (Project REACh). According to the OCC, Project REACh convenes leaders from banking, business, technology, and national civil rights organizations to reduce specific barriers that prevent full, equal, and fair participation in the nation’s economy.
Federal Reserve Board Member Calls for Regulation of Cryptocurrencies
In remarks at the Bank of England Conference on July 8, Federal Reserve Vice Chair Lael Brainard called for regulation of cryptocurrencies and other digital assets by financial regulatory authorities. Vice Chair Brainard observed that digital assets are susceptible to the same risks that apply to other, traditional forms of finance, including leverage, settlement, opacity, and maturity and liquidity transformation. She also argued that regulation of cryptocurrencies and other digital assets should reflect “the principle of same risk, same disclosure, same regulatory outcome.” Click here for a copy of Vice Chair Brainard’s remarks.
Nutter Notes: Vice Chair Brainard’s remarks align with those of a number of financial policymakers who are calling for increased regulation of digital assets. In his July 25 remarks at the Brookings Institution Webcast on The Future of Crypto Regulation, CFTC Chairman Rostin Behnam voiced support for legislation to regulate the digital asset economy. In a July 27 letter to SEC Chairman Gary Gensler, the Ranking Member of the U.S. Senate Banking Committee, Pat Toomey, who would likely become the chair of that committee if control of the Senate changes parties as a result of the upcoming mid-term elections, criticized the SEC for what Senator Toomey characterized as “choosing to regulate by enforcement” and urged the SEC to provide “regulatory clarity” to businesses engaged in activities involving cryptocurrencies and other digital assets.