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Client Alert: A Little Relief for Financial Institutions

Signed by President Barack Obama on December 4, 2015, the Fixing America’s Surface Transportation (FAST) Act contains a number of regulatory relief provisions for financial institutions. Several trade associations representing the interests of banks, credit unions, and other financial entities are working to reduce the regulatory burden its members experience as a result of the numerous laws passed in the last few years. These new measures include changes to privacy disclosure notices, rural community designation, and the examination cycle for highly rated banks.

GLBA Privacy Disclosures
Under this Act, Section 503 of the Gramm-Leach-Bliley Act (GLBA) was slightly amended to add an exception to the Annual Notice Requirement. If an institution provides non-public personal information (NPPI) only in accordance with the statutory exceptions (circumstances that do not require an opt-out notice to be provided to consumers) and has not changed its policies and practices with regard to disclosing NPPI from those in its most recent disclosure to consumers, the institution is not required to provide an annual disclosure notice. If the institution changes its policy or practices or provides NPPI outside the exception, an annual disclosure is required. This amendment is effective immediately. 

This is the second change in just over one year on streamlining the methods that institutions can deliver its privacy notices. In October 2014, the Consumer Financial Protection Bureau (CFPB) issued a rule that allows financial institutions that meet certain criteria to deliver their annual privacy notice via an alternative online delivery system. Taken together with the latest amendment, the goal is to reduce the number of mailings to consumers and lower the costs that institutions incur when providing redundant disclosures. 

It is recommended that financial institutions closely track its privacy policies and practices to ensure that if any changes are made or information is shared that does not fall into the exceptions, the annual disclosure is sent to consumers.

Designation of Rural Communities
The Helping Expand Lending Practices (HELP) in Rural Communities Act of 2015 authorizes the CFPB to establish an application process to allow persons living or conducting business within an area that has not been designated rural for the purposes of a federal consumer financial law, to apply to have the area designated as such. The CFPB recognizes that its original approach on defining “rural” was too narrow and did not adequately meet the goal of increasing credit in rural areas. The federal government has at least fifteen definitions of “rural” across its many agencies. 

There are several evaluation criteria the CFPB can take into consideration when considering a person’s or business’ application to declare an area rural:

  1. Criteria used by the Director of the Bureau of the Census for classifying geographical areas rural or urban. 
  2. Criteria used by the Director of the Office of Management and Budget to designate counties as metropolitan or micropolitan or neither.
  3. Criteria used by the Secretary of Agriculture to determine whether a property is eligible for rural development programs.
  4. The Department of Agriculture rural-urban commuting area codes. 
  5. A written opinion provided by the State’s bank supervisor as defined by Section 3(r) of the Federal Deposit Insurance Act. 
  6. Population density.

The Bureau will not be required to consider a previous determination of an area as non-rural by a Federal agency that used the criteria stated above. 

There will be an opportunity for the public to comment on the application prior to the Bureau’s final decision. After a ninety day comment period, the Bureau will render a decision on the application. If denied, the applicant may appeal the decision within ninety days of the date the denial was published. 

The application process must be established no later than March 3, 2016. This act contains a sunset provision and will cease to have force or effect at the end of a two-year period beginning on December 4, 2015.

The definition of “rural” plays a critical role in the services and products institutions provide to their surrounding communities. Section 1026.43 of the Truth in Lending Act exempts certain loans from the qualified mortgage (QM) rule of the Dodd-Frank Act. When the qualified mortgage rules went into effect on January 10, 2014, any small creditor could make a balloon-payment qualified mortgage, regardless of where the small creditor operated. Balloon loans are used frequently by rural customers to finance their homes. Beginning April 1, 2016, in order for a small creditor to make a balloon-payment QM, more than half of an institution’s first-lien covered transaction during the preceding calendar year must have been secured by properties in rural areas. 

The process that will be established to designate additional rural communities is another step taken by the CFPB to ensure that credit is available to rural and underserved areas. A new rule, set to take effect on January 1, 2016, expanded the definition of rural to include census blocks that are not in an urban area as defined by the Census Bureau and added two safe harbor provisions for determining whether a property location meets the definition of rural. An institution will be able to rely on the automated look-up tool available on the Census Bureau website or the one that will be provided on the CFPB’s website.

Small Bank Exam Cycle Reform
The number of banks who qualify for an 18-month examination cycle increased under the FAST Act. Section 10(d) of FDIC Act was amended by increasing the asset threshold to qualify for the 18-month cycle from $500 million to $1 billion. In addition to meeting the asset threshold, a bank, in its most recent exam, must have been found to be well capitalized (the bank significantly exceeds the required minimum level for each relevant capital measure), well managed and highly rated. A highly rated institutions is generally considered one that has a CAMELS score of 1 or 2. The increase in the number of banks that qualify for a longer exam cycle will reduce the burden of yearly exams. This amendment is effective immediately.

Credit Unions and the Federal Home Loan Board
A drafting error that occurred when the Federal Home Loan Bank (FHLB) Act was enacted was corrected under the FAST Act. In the newly amended Section 4(a) of the FHLB Act, privately insured credit unions are now authorized to become a member of Federal Home Loan Bank. This membership will allow the credit unions access to additional liquidity, allowing them to better meet the needs of its membership. Any advances made from the FHLB must be fully collateralized and subject the strict uniformly applied standards of the FHLB.

State Licensing Efficiency Act
The S.A.F.E. Mortgage Licensing Act of 2008 (SAFE Act) sets the minimum standards for the licensing and registration of state-licensed mortgage loan originations who work for an insured depository (or its subsidiary) that is regulated by a federal banking agency or the Farm Credit Administration. The new enacted State Licensing Efficiency Act of 2015 amends Section 1511(a) of the SAFE Act to include other financial service providers when it comes to access to records for the background checks of potential licensees. This expansion will allow for the use of the Nationwide Multistate Licensing System and Registry (NMLS) to investigate the background of those who work for non-bank financial services industries regulated by the state including money transmitters, check cashers, payday lenders, consumer finance lenders, and debt collectors. This change will reduce some of the regulatory burden placed on these industries by providing them access to the efficient process NMLS established to provide background information on license applicants. 

The push for regulatory relief continues. There are several other initiatives still in discussion to reduce the burden faced by financial institutions such as a QM safe harbor for mortgage held in portfolio; the establishment of an Office of Independent Examination Review; and a short form Call Report based on size and complexity of an insured depository institution.

Wolf’s Regulatory Compliance team has reviewed the newest legislation and updated its audit programs to ensure your institution remains in compliance. For further information about our services please contact Stephen R. King, JD, AMLP, Director of Regulatory Compliance Services, at 617-428-5448 or, or Brian Shea, CRCM, CAMS, Regulatory Compliance Senior Manager, at 617-261-8133 or