Federal Reserve Announces Results From the Review of the Supervision and Regulation of SVB

Regulatory Developments

Federal Reserve Announces Results From the Review of the Supervision and Regulation of SVB

On April 28, the Federal Reserve released its report analyzing SVB’s failure (Report). The Report discusses in detail the management of SVB and the supervisory and regulatory issues surrounding the failure, including a wide range of supervisory material that is typically treated as confidential.

 The Report contains four key takeaways:

1. Silicon Valley Bank's board of directors and management failed to manage their risks;
2. Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity;
3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough; and
4. The Federal Reserve's tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

In addition to analyzing SVB, the Report details lessons learned that could enhance the supervisory and regulatory framework to prevent future failures.

“We need to develop a culture that empowers supervisors to act in the face of uncertainty. In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing. This meant that supervisors did not force SVB to fix its problems, even as those problems worsened.

-  Michael Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve System

Bank Failure Knowledge Center Updates: 

• First Republic Bank FAQ
  On May 1, First Republic Bank was placed in receivership, and the deposits and substantially all the assets of First Republic Bank were acquired by JPMorgan Chase Bank, N.A. (FAQ last updated 3 pm EST on May 1)
• FDIC Pass-Through Coverage
  Since the failure of SVB in March of this year, there has been a renewed focus on FDIC deposit insurance coverage, including arrangements that provide so-called “pass-through” deposit insurance coverage for bank deposits. Pass-through deposit insurance covers funds in deposit accounts at FDIC-insured depository institutions where the funds are owned by a principle but held by a nominal depositor in a fiduciary capacity (typically, as an agent or custodian).

FDIC Releases Comprehensive Overview of Deposit Insurance System, Including Options for Deposit Insurance Reform 

On May 1, the FDIC released a report providing a comprehensive overview of the deposit insurance system, the role of deposit insurance in promoting financial stability as well as outlining policies and tools to complement changes to deposit insurance coverage. Notably, the report also provides three options for FDIC deposit insurance reform in order to address financial stability concerns stemming from recent bank failures:

• Limited Coverage: maintaining the current deposit insurance framework, with a possibly higher coverage limit than the current $250,000 limit.
• Unlimited Coverage: extending unlimited deposit insurance coverage to all depositors.
• Targeted Coverage: offering different deposit insurance limits across account types; business payment accounts would receive significantly higher coverage than other accounts.

All of these options would require Congressional action to achieve full implementation; however, certain proposals and aspects of the report are within the scope of the FDIC’s rulemaking authority.

CFPB Proposes New Consumer Protections for Homeowners Seeking Clean Energy Financing

On May 1, the CFPB issued a proposed rule to implement Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act to prescribe ability-to-repay rules for Property Assessed Clean Energy (PACE) loans and to apply the civil liability provisions of the Truth in Lending Act (TILA) for violations  The proposed rule would require lenders to assess a borrower’s ability to repay a PACE loan and would provide a framework for how PACE loans will be treated under TILA, including adjustments to disclosure requirements to better fit PACE loans and to help consumers understand the loans’ impact on their property tax payments. The CFPB also published a report on residential PACE loans, concluding that the loans cause an increase in borrowers falling behind on their mortgage payments, along with other negative credit outcomes, including higher property taxes, higher interest rates, and increased credit card balances. Public comments on the proposed rule are due by the later of July 26, 2023, or 30 days after publication in the Federal Register.

CFPB Issues Updated Rule to Facilitate Orderly Wind Down of LIBOR

On April 28, supported by a blog post and updated FAQ, the CFPB amended its 2021 LIBOR transition rule with an interim final rule, effective May 15, 2023, that conforms Regulation Z with the Adjustable Interest Rate Act and the Board of Governors of the Federal Reserve Board System’s implementing regulation. The interim final rule adds references to the SOFR-based replacement for the 12-month LIBOR index but does not modify the CFPB’s determination in the 2021 LIBOR Transition final rule in relation to the prime rate as a replacement index. The changes apply to any LIBOR contracts that do not otherwise specify a replacement rate fallback provision or method for selecting a fallback rate. Comments on the interim final rule must be received no later than 30 days after publication in the Federal Register. LIBOR is set to expire on June 30, 2023.

CFPB Deems Merchant Cash Advances to Be “Credit” Under ECOA

The CFPB’s adopting release for its small business data collection and reporting rule goes beyond that rule by including a discussion deeming merchant cash advances to be “credit” more generally for purposes of the Equal Credit Opportunity Act.

Read more about this update in a recent client alert.

Fintech Flash: Top Considerations for International Expansion

With more fintech’s looking to expand their businesses internationally, it can be daunting to navigate varying regulations across borders. Here are two articles covering the United States and United Kingdom regulatory considerations:

• Five Things You Need to Know about Launching Fintech Products in the U.S.
  Launching financial products and services in the United States requires careful consideration of federal laws and the laws of the 50 states and U.S. territories. Here are 5 key considerations you need to know and plan for before entering the U.S. payment, deposit or lending market. 
• Doing Fintech Business in the UK: Regulatory Q&A for US and Other Non-UK Businesses
  Offering services and products to customers in the UK will require a consideration of the regulatory requirements and risks connected with such services. These FAQs address the main types of questions that we receive from US and other non-UK fin tech service providers.

New Form PF Current and Quarterly Event Reporting and Expanded Large Private Equity Fund Adviser Reporting Adopted By SEC 

On May 3, the Securities and Exchange Commission (the SEC) adopted important amendments to Form PF, the systemic risk reporting form for private fund advisers registered with the SEC, that would require (i) new “quarterly event” reporting for all private equity fund advisers regarding certain events (including adviser-led secondary transactions), (ii) expanded reporting for “large private equity fund advisers,” and (iii) new “current” reporting for “large hedge fund advisers.”

Read more about these amendments in a recent client alert. 

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Enforcement and Litigation Updates

House Financial Committee Introduces CFPB Reform Bill In Response To Recent Court Decisions

Last fall, the United States Court of Appeals for the Fifth Circuit found that the CFPB’s independent funding through the Federal Reserve was in violation of the Appropriations Clause and the underlying separation of powers principles. Community Financial Services Ass’n of America, Ltd. v. CFPB, 51 F.4th 616 (5th Circ. 2022). The Supreme Court has since granted the CFPB’s petition for certiorari and will hear the case next term.

Continuing the saga, and in a radical departure from the decision reached by the Fifth Circuit, the Second Circuit ruled on March 23, 2023 that the current funding structure of the Consumer Financial Protection Bureau (CFPB) is constitutional. CFPB v. Law Offs. of Crystal Moroney, P.C., 63 F.4th 174, (2d Cir. 2023). Specifically, the Court held that CFPB’s independent funding through the Federal Reserve System was not in violation of the Appropriations Clause or the non-delegation doctrine. The Court explained that under the non-delegation doctrine’s lenient standard, Congress had plainly provided an intelligible principle to guide the CFPB in setting and spending its budget and that the Consumer Financial Protection Act explicitly authorized the CFPB’s funding, thus it was not in violation of the Appropriations Clause.

Earlier this week, the House Financial Services Committee held a markup session in which it reviewed H.R. 2798, the CFPB Transparency and Accountability Reform Act introduced by Representative Andy Barr (R-KY) on April 24, 2023. H.R. 2798 would change the leadership structure of the CFPB from a single director to a bipartisan five-member commission. It would also bring the CFPB under the regular appropriations process and create a dedicated Inspector General. The bill would create a new Office of Economic Analysis and require cost-benefit analysis for all guidance, orders, rules or regulations of the CFPB, including an analysis of the impact proposed rules would have on small businesses. Lastly, the bill would provide awards to whistleblowers who report original information relating to a violation of consumer financial law resulting in monetary sanctions exceeding $1 million.

Learn more about this update on Goodwin’s Consumer Finance Insights blog.

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Bank Failure Knowledge Center
Timely updates on important developments following the March 2023 US bank failures.

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