This week’s Alternative Commercial Finance Update is dedicated to current events in banking law. Now we know what you are probably thinking: my business is not a bank; I’m not regulated by the federal bank agencies; and alternative commercial finance is the opposite of bank lending…so why should I care about banking law? Hear us out.
Regulatory shifts in banking can have a significant ripple effect, impacting how banks interact with and manage risks associated with their nonbank partners and business customers. Whether you partner with banks to provide alternative financing solutions or hold an operating account or otherwise rely on banking services for your business operations, staying informed about these changes can help you navigate the evolving landscape and better manage your financial relationships. For these reasons, we decided to do the heavy lifting for you and bring the most relevant information to your inbox.
There continues to be a focus on modernizing banking laws, which we’ve seen with the updates to the FDIC Official Signs and Advertising Rules and the Community Reinvestment Act. Most recently, the federal bank agencies appear to focus on modernizing Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) compliance—in alignment with FinCEN’s recently proposed rule, third-party arrangements, and deposit management. And while bank governance has also seen recent activity, we will save that update for another day.
AML/CFT Updates
On June 28, 2024, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a proposed rule aimed at strengthening and modernizing AML/CFT Programs. The proposed rule expressly requires financial institutions to establish, implement, and maintain an effective, risk-based, and reasonably designed AML/CFT program, which includes a mandatory risk assessment process. While most banks conduct a risk assessment as part of their AML/CFT program, the current rules do not explicitly have a formal risk assessment requirement. Under the proposed rule, a bank’s risk assessment process must identify, evaluate, and document the financial institution’s risks, and it must include the following considerations: (1) FinCEN’s AML/CFT Priorities, as appropriate; (2) the money laundering and terrorist financing (ML/TF) risks of the bank, based on a periodic evaluation of its business activities, including products, services, channels, customers, intermediaries, and geographic locations; and (3) reports filed by financial institutions pursuant to FinCEN regulations found at 31 CFR chapter X.
On July 19, 2024, four federal financial institution regulatory agencies issued an AML/CFT Proposed Rule to align with the proposed FinCEN changes. While most alternative commercial financing companies are not subject to these FinCEN rules, these rules may still impact the industry. Most notably, alternative commercial financing companies may become the subject of stricter scrutiny from their partner bank, which could require increased reporting or due diligence to maintain a banking relationship. For those alternative commercial financing companies that partner with banks, these rules could have a trickle-down effect, requiring the alternative commercial financing company to develop its own AML/CFT program in order to maintain the bank partnership.
Third-party arrangements
The continued use and growth of innovative services through bank-fintech arrangements continues to be a concern of the federal bank agencies, which is not surprising, with the rapid growth and acceptance of technology versus the snail-paced movement of government. On July 25, 2024, the federal bank regulatory agencies issued a joint statement “reminding banks of potential risks associated with third-party arrangements to deliver bank deposit products and services,” and a request for information (RFI) relating to third-party arrangements.
The federal bank agencies take the time in their joint statement to remind banks of safety and soundness risks and risk management practices relating to third-party arrangements. The RFI invites interested members of the public to comment on questions relating to bank-fintech arrangements and risks. Nonbank partners should review the joint statement to better understand how to effectively partner with banks and review and respond to the RFI to ensure the federal bank agencies are not only guided by responses from banks.
Deposit management
How banks handle deposits will continue to be a focus, especially considering recent bank failures and the failures of certain nonbanks and fintech companies. On July 30, 2024, the FDIC announced a notice of proposed rulemaking to amend Section 29 regulations (the safety and soundness rule on brokered deposits). The FDIC also approved a RFI seeking comments on deposit data—including uninsured deposit data—not reported in the Call Report or other regulatory reports. The goal of the deposit data RFI is to assess whether additional reporting should be implemented and assess deposit insurance coverage amounts and pricing.
News and views
Community Banks and Ag Lending
Last week, Small Business Finance Insights posted an article about the recent decline in community bank agricultural lending. Because community banks tend to be “deeply embedded in local economies,” they are often best positioned to understand farming needs and challenges. However, the banking regulatory environment has “made it more expensive and risky for smaller banks to maintain large agricultural loan portfolios.” Noting the decrease in community bank agricultural lending, the Small Business Finance Insights article recognizes that alternative finance companies may be best equipped to fill the financing gap because they can offer flexible terms that align with the cyclical nature of farming and unique challenges that arise during a given crop cycle.
Register for Husch Blackwell Dodd Frank Section 1071 Webinar
Small business finance companies will soon have to comply with new data collection and reporting rules under Dodd-Frank Section 1071. Compliance will pose numerous challenges and additional risk—especially for fintechs and alternative commercial finance companies that have not previously had to comply with similar legal regimes.
During this webinar, we will discuss key methods and strategies for complying with the new rules and reducing litigation and reputational risk. Click the link above to register today!
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