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Washington Wrap — FSOC passes nonbank SIFI regs; CRA rewrite on tap at FDIC

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital. Send tips and ideas to polo.rocha@spglobal.com, david.hood@spglobal.com and declan.harty@spglobal.com.

At FSOC

The Financial Stability Oversight Council, or FSOC, approved final guidance for the way the body of top U.S. financial regulators will designate nonbank institutions as too big to fail.

The nine-month effort by the council culminated in a proposal that fundamentally changes how nonbank companies such as insurers, asset managers and Fannie Mae and Freddie Mac are labeled systemically important financial institutions, or SIFI.

The guidance shifts the onus of monitoring systemic risk onto the primary regulators of those institutions. If FSOC determines that a company's activities are risky, the primary regulator will step in and help de-risk the portfolio. If the regulator cannot resolve the issue, or the activity is deemed too risky, then FSOC would complete a cost-benefit analysis of designating the company as a SIFI, with a clear "off-ramp" from the designation.

The FSOC voted unanimously to approve the guidance on Dec. 4.

On the same day, the council also released its annual report detailing the risks FSOC's member regulators are monitoring in the U.S. financial system. The list of risks did not change from 2018's annual report, senior Treasury officials told reporters during a briefing before the meeting. The document concluded that those risks are "moderate" and recommended that regulators continue to track them.

The report highlighted the growth of nonbank financial companies underwriting mortgages as well as increased borrowing activity by nonfinancial businesses.

While roughly half of all mortgage originations were underwritten by nonbanks in 2019, the report only recommended that regulators continue to carefully watch the issue. The annual report also said despite the high amount of debt nonfinancial companies are incurring, the default rates remain relatively low. The report cautioned that this could change in the event of an economic downturn.

At the FDIC

The Federal Deposit Insurance Corp. is due to vote Dec. 12 on a proposal overhauling regulators' enforcement of the Community Reinvestment Act, according to an FDIC board agenda released Dec. 5.

For months, federal banking regulators have been considering a plan to update how they enforce CRA, and the Office of the Comptroller of the Currency is expected to propose its plan soon.

FDIC Chair Jelena McWilliams said at a House hearing on Dec. 4 that she was inclined to join the OCC in its proposal.

However, the plan currently seems unlikely to gain the support of the Federal Reserve, which has disagreed with the OCC on the agency's approach to modernizing CRA regulations.

At the same hearing, Fed Vice Chairman for Supervision Randal Quarles downplayed the disagreement between the agencies. He said it is "premature to say that we are parting ways" given that the discussions remain at the proposal stages, adding that the goal should be for the three agencies to come together once they adopt a final rule.

The FDIC board meeting will also include a vote on a proposal to adjust its rules surrounding the ability of banks to access brokered deposits.

In Congress

The House Financial Services Committee has named Rep. Brad Sherman, D-Calif., as chair of the committee's Investor Protection, Entrepreneurship and Capital Markets Subcommittee.

Sherman replaces outgoing Rep. Carolyn Maloney, D-N.Y., who stepped down from the post to chair the powerful House Oversight and Reform Committee. After the death of former chair, Rep. Elijah Cummings, D-Md., the House Democratic leaders named Maloney to the post.

"My colleagues are already giving me good ideas for hearings and legislation," Sherman said in a statement. "I am committed to defending investor protections, improving access to capital and maintaining the Wall Street reforms that have helped fuel our economy."

Sherman has been a vocal critic of the Financial Accounting Standards Board's current expected credit loss accounting standard, once calling the organization a "constitutional travesty."

In testimony before the Senate Banking Committee on Dec. 5, McWilliams reaffirmed the notion that clarifying the "valid-when-made" doctrine is not a blanket blessing of the rent-a-bank model. In November, the OCC and the FDIC proposed a rule to clarify that when a national bank or savings association sells, assigns or transfers a loan, the original interest rate allowed before the transfer continues to apply after the loan changes hands.

Former FDIC Chairman Martin Gruenberg voted against the proposal, arguing that it could spur "rent-a-charter arrangements" in which fintechs partner with national banks to avoid state-specific regulations.

"We actually specifically said in the preamble to our rule that we look unfavorably upon the so-called 'rent-a-bank charter,'" McWilliams said. "The purpose here is not to evade the law, and we are not going to allow banks to evade the law."

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