Industry and Regulation

Sept. 22, 2023: Industry and Regulation

Senators Push to Pass Cannabis Banking Bill After Marijuana Rescheduling

Courtesy of Aris Folley and Taylor Giorno, The Hill

A bipartisan coalition of senators behind a cannabis banking bill is pushing for a markup and working to clear key hurdles on both sides of the aisle to lock down support.

As advocates work to drum up momentum for the Secure and Fair Enforcement (SAFE) Banking Act, some proponents in the upper chamber have expressed hopes the bill could advance out of committee in the coming weeks.

“We hope to be able to announce something in the next few days,” Senate Banking Committee Chairman Sherrod Brown (D-Ohio) told reporters this week.

The SAFE Banking Act would give federally regulated banks and credit unions legal cover to take cannabis dispensaries and growers as customers. Financial institutions have been hesitant to serve state-legal cannabis businesses because of the federal ban on the drug.

Democrats say excitement has been building after the Department of Health and Human Services (HHS) recommended that marijuana, which is classified as a Schedule I drug, be moved to the Schedule III category.

“What happened on Schedule III was good, another potential breakthrough,” Sen. Ron Wyden (D-Ore.) said, adding: “We’re moving to finally end the days of ‘Reefer Madness.’ The federal government just been behind on pot.” Read more

FDIC Fights Suit by Minnesota Bankers Over NSF Fee Guidance

Courtesy of Orla McCaffrey, American Banker

The Federal Deposit Insurance Corp. is defending regulatory guidance warning banks about fees that customers can be charged when their transactions get rejected due to a lack of sufficient funds.

In a court filing this week, the FDIC asked a federal judge to dismiss a lawsuit filed by Minnesota banks in July. The plaintiffs in the suit, the Minnesota Bankers Association and one of its member banks, lack standing to challenge the agency’s guidance, the FDIC said.

The FDIC’s motion to dismiss is the latest development in a battle between banks and their regulators over so-called nonsufficient funds fees.

The lawsuit’s plaintiffs contend that the FDIC overstepped its authority by issuing the supervisory guidance, which tells FDIC-supervised banks that under certain circumstances, charging multiple NSF fees qualifies as an unfair practice. But the FDIC is arguing that its August 2022 guidance does not create new obligations for banks. Read more

FinCEN Issues Compliance Guide to Help Small Businesses Report Beneficial Ownership Information

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a Small Entity Compliance Guide to assist the small business community in complying with the beneficial ownership information (BOI) reporting rule.  Starting in 2024, many entities created in or registered to do business in the United States will be required to report information about their beneficial owners—the individuals who ultimately own or control a company—to FinCEN.  The Guide is intended to help businesses determine if they are required to report their beneficial ownership information to FinCEN.

“This guide is the latest in our ongoing efforts to educate the public about these important new requirements,” said Andrea Gacki, Director of FinCEN.  “We are committed to making this process as simple as possible, particularly for small businesses.”

“This is also a critical step towards implementing the Corporate Transparency Act, which will help the Treasury Department and FinCEN expose bad actors abusing the U.S. financial system by hiding their identity behind opaque corporate structures,” said  Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson.

The Guide is now available on FinCEN’s beneficial ownership information reporting webpage.

Among other things, the Guide:

  •  Describes each of the BOI reporting rule’s provisions in simple, easy-to-read language;
  •  Answers key questions; and
  •  Provides interactive checklists, infographics, and other tools to assist businesses in complying with the BOI reporting rule.

The requirements become effective on January 1, 2024, and companies will be able to begin reporting beneficial ownership information to FinCEN at that time.  FinCEN will provide additional guidance on how to submit beneficial ownership information soon.  Small businesses can continue to monitor FinCEN’s website for more information or subscribe to FinCEN updates.

NCUA Board Meeting Summary

After a break in August, the NCUA held its eighth open meeting of 2023. The Board agenda consisted of two items for discussion: the second quarter briefing on the National Credit Union Share Insurance Fund and a final rule amending NCUA’s regulations 12 CFR Parts 701 and 714, Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions. 

Share Insurance Fund Second Quarter Briefing

The meeting began with a briefing on the Share Insurance Fund and the status of the equity ratio. It was reported the fund saw a net income of $37.1 million for Q2 2023, and the equity ratio remained at 1.27 percent. The NCUA staff projects the equity ratio to stay at 1.27 percent for December 1, 2023. 

The briefing also showed an increase in the number of composite CAMELS code 4 and 5 credit unions, up from 127 to 134 at the end of the second quarter. Assets for these credit unions also increased from $5.6 billion to $6.3 billion. The number of composite CAMELS code 3 credit unions decreased slightly from the previous quarter, from 779 to 771. However, assets from these credit unions increased to $91 billion from $80 billion. 

During his remarks after the fund briefing, Chairman Harper stressed that while the credit union system and fund remain strong, credit union executives and their boards of directors must stay ahead of trends and warning signs, such as increases in delinquency on loans and credit cards as identified in the Q2 quarterly call report data. Also, credit union leadership must diligently manage risks on their balance sheets and continue to monitor economic conditions and the interest rate environment. 

Also noted in the briefing were two federally insured credit union failures in 2023, with the cost to the fund of $1.2 million in losses. Fraud was not identified as a contributing factor in the two failures.  

Final Rule on Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions

The Board also unanimously approved a long-anticipated final rule clarifying the NCUA’s current regulations. The final rule amends NCUA rules and regulations Part 710 and 714 to include:

  • Relocation and clarification of the NCUA’s indirect lending and leasing provisions.
  • Providing credit unions with additional flexibility to participate in loans acquired through indirect lending arrangements, allowing federally insured credit unions to use advanced technologies and opportunities offered by the fintech sector, and
  • Remove certain restrictions and other qualifying requirements relating to eligible obligations and provide credit unions additional flexibility to purchase eligible obligations for their members. 

 The adoption of the final rule removes limits previously found in the NCUA’s regulations and replaces them with policy, due diligence, and risk-management requirements that can be tailored to match each credit union’s risk levels and activities. Credit unions are reminded that they must ensure appropriate third-party due diligence and vendor management policies and programs are updated accordingly. NASCUS will be issuing a summary of the final rule, which will be found here.

Sept. 15, 2023: Industry and Regulation

U.S. Judge Rules Against Consumer-Watchdog Anti-Discrimination Effort

Courtesy of Jody Godoy, Reuters

A federal judge has ruled that the U.S. Consumer Financial Protection Bureau (CFPB) does not have broad authority to tackle discriminatory banking practices, handing a win to financial industry groups that sued the regulator. The American Bankers Association, the U.S. Chamber of Commerce and several other industry groups in a lawsuit filed in federal court in Texas in September argued that Congress had not authorized the agency to root out discrimination.

U.S. District Judge J. Campbell Barker ruled in favor of the groups on Friday, saying the Dodd–Frank Act, which created the CFPB, treats discrimination and unfairness as distinct concepts. The ruling bars the CFPB from enforcing the policy against the trade groups’ members.

The CFPB via a spokesperson on Monday said it was reviewing the decision and considering options for an appeal. Federal law prohibits unfair acts and practices that cause consumers “substantial and unavoidable harm,” the CFPB said in a statement. “In our view, it is common sense that discrimination can meet that standard, regardless of whether it affects people due to their race, their national origin or the exercise of their religious liberties,” the agency said.

Rob Nichols, head of the American Bankers Association, in a statement said the group hopes that the ruling sends a “message” to the agency. “Unfortunately, this CFPB has too often chosen to ignore the law and the will of Congress, forcing us to seek relief in court,” he said.

The CFPB in March 2022 announced that it would examine consumer financial institutions’ practices for illegal discrimination as part of its broader mandate to combat unfair practices. The industry groups said the CFPB unlawfully stretched that mandate to include discrimination, expanding its authority beyond existing fair lending laws. The agency directed its examiners to review financial firms’ policies that exclude individuals from products or services, or those that offer products or services in an unfairly discriminatory manner. Read more

HEARING NOTICE: Subcommittees on Capital Markets & Financial Institutions and Monetary Policy “A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences”
  • Time: 2:00 PM ET
  • Date: Tuesday, September 19, 2023
  • Place: 2128 Rayburn House Office Building

Additional information regarding the hearing—including the livestream, committee memo, and witness list—can be found here and will be updated as the hearing date approaches.

Federal Reserve Bank of New York Survey: Households Less Optimistic about their Financial Situations

The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the August 2023 Survey of Consumer Expectations, which shows that inflation expectations were largely stable, rising slightly at the short- and longer-term horizons, and falling slightly at the medium-term horizon. Income growth perceptions declined in August, and job loss expectations rose sharply to its highest level since April 2021. Perceptions about current credit conditions and expectations about future conditions both deteriorated. Households’ perceptions about their current financial situations and expectations for the future also deteriorated.

The main findings from the August 2023 Survey are:

Inflation

  • Median one- and five-year-ahead inflation expectations rose slightly in August, both increasing by 0.1 percentage point to 3.6% and 3.0%, respectively. Conversely, three-year-ahead inflation expectations declined by 0.1 percentage point to 2.8%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased at the one-year-ahead horizon and decreased at the three- and five-year-ahead horizons.
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—was unchanged at the one-year-ahead horizon and decreased at the three- and five-year-ahead horizons.
  • Median home price growth expectations increased by 0.3 percentage point to 3.1%, its highest reading since July 2022. The increase was most pronounced for respondents under the age of 60 and those with a high school education or less.
  • Year-ahead commodity price expectations rose across the board in August, increasing by 0.4 percentage point for gas (to 4.9%), 0.1 percent point for food (to 5.3%), 0.8 percent point for the cost of medical care (to 9.2%), and 0.2 percentage point for the cost of college education (to 8.2%) and rent (to 9.2%).

View the complete survey data: https://www.newyorkfed.org/microeconomics/sce#/
Read more

NCUA to Distribute $76 Million Under Corporate System Resolution Program

The National Credit Union Administration, in its role as liquidating agent, announced a $76 million distribution to paid-in capital shareholders of the former U.S. Central corporate credit union.

“This distribution represents the latest example of the NCUA staff’s highly successful efforts to resolve the corporate crisis and return funds to capital holders,” Chairman Todd M. Harper said. “With this distribution, like the others before it, the NCUA encourages recipients to use these funds to increase access to safe, fair, and affordable financial products and services, especially in under-resourced communities. Credit unions can also use these funds to assist members experiencing economic hardship.”

As liquidating agent of the former corporate credit unions’ asset management estates, the NCUA has previously made six rounds of distributions. In 2020, 2021, 2022, and earlier in 2023, capital holders of Southwest, Members United, Constitution, and U.S. Central received distributions. This current distribution is scheduled to occur before the end of September 2023. With this seventh distribution, the NCUA will have returned $2.8 billion to former membership and paid-in capital shareholders and more than $360 million in dividends to shareholders.

The Corporate System Resolution Program is a landmark initiative established by the NCUA Board to stabilize, resolve, and reform the corporate credit union system in the wake of the 2008 financial crisis. The program allowed the credit union system to absorb the failures of U.S. Central, Western, Southwest, Members United, and Constitution corporate credit unions over time.

Information on the Corporate System Resolution Program, including projections for the Corporate Asset Management Estates Recoveries and Claims, as well as the process for determining the timing of distributions to member capital account holders, is available on the NCUA’s website.

Investors Can’t Get Enough U.S. Debt as Treasury Bills Are Bought at A Record Pace

Courtesy of Filip De Mott, BusinessInsider

  • In just the past three months, over $1 trillion in new Treasury bills have been purchased.
  • Noncompetitive bidders bought a record-high $2.898 billion of six-month bills in mid-August, Bloomberg said.
  • That suggests smaller investors are increasingly jumping into the market for short-term US debt.

Investors are scrambling to buy up US debt as the Treasury Department unleashes a flood of short-term bills on the market.

In the past three months, more than $1 trillion in new T-bills have been snapped up as federal deficits have exploded, and smaller investors are increasingly jumping into the market as yields surge past 5%.

At a weekly auction in mid-August, so-called noncompetitive bidders, meaning those who don’t submit competitive bids and instead take the yield offered, bought a record $2.898 billion of six-month bills at 5.29%, according to Bloomberg.

That volume was five times more than what was seen before the Federal Reserve launched its rate-hiking campaign in March 2022, which put upside pressure on borrowing costs.

Demand for short-term US debt is so high that the balance sheets of primary dealers, who serve as bond market middle men, have tumbled from a record high of $116 billion in July to about $45 billion in August, Bloomberg said.

Robust demand for T-bills comes as the Fed stopped buying bonds last year and has been shrinking its balance sheet, leaving others in the market to pick up the slack.

In fact, the US debt binge may force the Fed to halt its quantitative tightening campaign so the financial system doesn’t become unstable, according to economists at the St. Louis Fed. Read more

Sept. 8, 2023: Industry and Regulation

CFPB Takes Aim at Apple Over NFC Chip Access

Courtesy of FinExtra

The Consumer Financial Protection Bureau (CFPB) has fired a shot across Apple’s bows over the tech giant’s policy of restricting access to the NFC chip technology that enables iPhone users to make payments.

Apple Pay is the only mobile payment service that may access the NFC ‘tap and go’ technology embedded on iOS mobile devices for payments in stores, a process that has been damned by banks and other payment providers in a number of jurisdictions for preventing competition from their own proprietary apps. Last year, the EC charged Apple with restricting access to the NFC chip technology in a move that could eventually lead to fines worth billions of euros.

In an “Issue Spotlight” report, the CFPB has hinted at its own stance on the area, contrasting Apple’s policy with the more open approach taken by Google and placing it within the context of America’s shift towards open banking and the importance of platform interoperability. The report notes that usage of tap-to-pay options in the US is predicted to hit $179 billion this year across Apple Pay, Samsung Pay, and Google Pay. Nearly half of iOS users – 55.8 million – made an in-store payment using Apple Pay in April 2023.

The restrictions on other firms’ access the NFC chip is therefore significant. Banks, retailers and the likes of PayPal and Square have a strong incentive to develop tap-to-pay apps for Apple devices, says the CFPB. “But Apple’s NFC restriction policy prevents them from doing so, and ultimately eliminates the possibility of consumer choice in tap-to-pay on Apple devices.”

Apple having to compete head-to-head “could incentivise all of the providers to innovate, to develop new features and services that would keep their customers from switching,” says the report. The CFPB dismisses Apple’s long-stated claim that its restrictive policy is needed to ensure privacy and security, saying that the firm could simply mandate that a third-party payment app seeking access to the NFC chip provide at least the same level of privacy as Apple Pay.

The report argues that any frictions on NFC access could “impede the shift towards open banking and, ultimately, negatively impact consumers — e.g. by reducing competition, innovation, choice, and ease of access”. In addition: “Policies that impose restrictions on competition and raise consumer switching costs must be carefully scrutinised.”

Credit Union Assets, Lending, and Delinquencies Rise in 2nd Quarter

Courtesy of National Credit Union Administration

According to the latest financial performance data released today by the National Credit Union Administration, total assets in federally insured credit unions increased $82 billion, or 3.8 percent, over the year ending in the second quarter of 2023, to $2.22 trillion.

During the same period, total loans outstanding rose $175 billion, or 12.6 percent, to $1.56 trillion. Insured shares and deposits also grew $31 billion, or 1.8 percent, to $1.72 trillion, from one year earlier.

The NCUA’s Quarterly Credit Union Data Summary provides an overview of the financial performance of federally insured credit unions based on information reported to the agency in the second quarter of 2023. As of June 30, 2023, there were 4,686 federally insured credit unions with 137.7 million members.

Additional highlights from the NCUA’s Credit Union Data Summary for the second quarter of 2023 include:

  • Net income for federally insured credit unions in the first half of 2023 totaled $17.4 billion at an annual rate, down $0.4 billion, or 2.1 percent, from the first half of 2022.
  • Interest income rose $28.8 billion, or 45.3 percent, over the year to $92.3 billion at an annual rate in the first half of 2023. Non-interest income grew $1.2 billion, or 4.9 percent, to $24.5 billion annualized, largely due to an increase in other non-interest income.
  • The credit union system’s provision for loan and lease losses or credit loss expenses increased $5.8 billion, or 169.5 percent, to $9.2 billion at an annual rate in the first half of 2023.
  • The delinquency rate at federally insured credit unions was 63 basis points in the second quarter of 2023, up 15 basis points, or 31 percent, compared with the second quarter of 2022. The credit card delinquency rate rose to 154 basis points from 107 basis points one year earlier. The auto loan delinquency rate increased 22 basis points over the year to 67 basis points in the second quarter. The net charge-off ratio for all federally insured credit unions was 53 basis points in the second quarter of 2023, up 24 basis points compared with the second quarter of 2022.
  • Total shares and deposits rose by $23.0 billion, or 1.2 percent, over the year to $1.88 trillion in the second quarter of 2023. Regular shares declined by $75.1 billion, or 10.9 percent, to $614.1 billion. Other deposits increased by $97.5 billion, or 12.5 percent, to $879.9 billion, led by share certificate accounts, which grew $164.5 billion, or 68.6 percent, over the year to $404.5 billion.
  • The credit union system’s net worth increased by $13.2 billion, or 5.9 percent, over the year to $235.9 billion. The aggregate net worth ratio — net worth as a percentage of assets — stood at 10.63 percent in the second quarter of 2023, up from 10.42 percent one year earlier. Beginning in the first quarter of 2023, this ratio excludes the CECL transition provision.

Read the entire release here.

GOP ESG Bills Await US House Floor Consideration

ESG Activity in The House Financial Services Committee (HFSC)

Courtesy of K & L Gates, National Law Review, Volume XIII, Number 249

Prior to departing for the August recess, Chairman Patrick McHenry (R-NC) wrapped up the month-long series of hearings considering digital assets and environmental, social, and governance (ESG) legislation. In tandem markups held on 26 July and 27 July, HFSC advanced several bills on these issues, both on a bipartisan basis (digital assets and stablecoin) and along party lines (anti-ESG bills). Prior to the ESG markup, HFSC Republicans had released 18 bills that would be under consideration. However, these bills were then bundled into a few larger packages, which was done in a way that largely precluded Democratic support, as they were then tied to provisions that only Republicans would support.

More information on the legislation advanced during the 27 July ESG-related markup, as well as the vote outcomes, is detailed below.

Looking Ahead
Chairman McHenry will likely push for full House consideration of these bills now that Congress has returned from the August recess. The top Congressional priorities are consideration of the FY2024 appropriations bills, the FY2024 National Defense Authorization Act, the Federal Aviation Administration reauthorization, and the Farm Bill. However, given Chairman McHenry’s standing with the House leadership, we expect the Republican-led House may consider and pass the HFSC bills. In a narrowly divided House and an even narrower Senate, it is possible there will be room for bipartisan agreement on some of these issues going forward, though that may prove more difficult as we get closer to the 2024 presidential election.

Another factor involved in the Congressional focus on ESG is the Securities and Exchange Commission’s (SEC) long-awaited final rule on climate risk disclosures and proposed rule on human capital disclosures. Both rulemakings are listed on the SEC’s Unified Regulatory Agenda with potential actions in October 2023. However, the timing remains unclear and these rulemakings could slip into 2024 given the ongoing controversy and threat of litigation. When the respective proposed and final regulations are issued, it is likely to spur increased attention and oversight, particularly by House Republicans. Regardless, we should expect a continuing focus on ESG in Congress as a proxy battle for more fundamental political and policy differences on the role of government. Read more

Analysis: US Banks Hold $3.3 Trillion Cash Amid Banking Crisis, Slowdown Worries

Courtesy of Saeed Azhar and Ann Saphir, Reuters

U.S. lenders are holding onto large piles of cash as insurance against a slowing economy, continuing deposit outflows and looming tougher liquidity rules that could particularly impact mid-sized banks.

Courtesy of Reuters

The buildup is another example of a risk-averse approach from a sector still trying to regain its footing after a string of springtime bank failures, one which could result in restrained lending.

“This is a logical response to a slowing economy and particularly to a scenario, where you’re seeing deposit outflows and you need to conserve cash,” said David Fanger, senior vice president at Moody’s rating agency. “What happened in March was a big wake-up call.”

The collapse of Silicon Valley Bank and Signature Bank in March triggered massive deposit withdrawals and placed renewed focus on lenders’ financial health. More recently, the sector was hit by ratings downgrades when S&P last month cut credit ratings and revised its outlook for multiple U.S. banks, following a similar move by Moody’s.

Overall U.S. banks’ cash assets were $3.26 trillion as of Aug. 23, up 5.4% from the end of 2022. That was well above typical pre-pandemic levels, though down from the weeks immediately following the bank failures in March, Federal Reserve data shows. Read more

 

CFPB Reaches Settlement with Credit Repair Firms Over Violations

The Consumer Financial Protection Bureau (CFPB) reached a settlement with the largest credit repair companies in the country for violations related to telemarketing and collecting advanced fees.

Courtesy of Dave Kovaleski, Financial Regulation News 

Specifically, the settlement agreement follows a ruling from the court that two of the largest in this space — Lexington Law and CreditRepair.com, and related entities — collected illegal advance fees for credit repair services through telemarketing in violation of federal law. If approved, the settlement would impose a $2.7 billion judgment against the companies and would ban them from telemarketing credit repair services for 10 years.

“Americans across the country looking to improve their credit scores have turned to companies like CreditRepair.com and Lexington Law. These credit repair giants used fake real estate and rent-to-own opportunities to illegally bait people and pad their pockets with billions in fees,” CFPB Director Rohit Chopra said. “This scam is another sign that we must do more to fix the credit reporting and scoring system in our country.”

Lexington Law and CreditRepair.com market their credit repair services through a web of related entities in the Salt Lake City area, including PGX Holdings, Progrexion Marketing, and John C. Heath, Attorney-at-Law PC law firm. During the time period relevant to the lawsuit, the companies operated nationwide and had more than 4 million customers who were subjected to telemarketing. In 2022, the defendants had combined annual revenues of approximately $388 million.

Previously, the CFPB sued the companies to halt their illegal conduct and seek redress and other relief. In March of this year, the district court ruled that the defendants violated the advance fee provision of the Telemarketing Sales Rule. This rule requires credit repair companies to wait until six months after they provide the consumer with documentation reflecting that the promised results were achieved, before they request or receive payment from the consumer. Read more 

Aug. 25, 2023: Industry and Regulation

OPINION: What Can Be Done About the Drought of New Credit Union Charters?

Courtesy of Chip Filson, CUSO Magazine

There are financial deserts in towns and cities across America; there is also an absence of new credit union charters. Since December 2016, the number of federally insured credit unions has fallen from 5,785 to 4,780, at year end 2022. This is a decline of over 165 charters per year. In this same six years, fourteen new charters were granted.

Expanding fields of membership (FOMs) to “underserved areas” or opening an out-of-area credit union branch, is not the same solution as a locally inspired and managed charter.

Obtaining a new charter has never been more difficult for interested groups. Through its insurance approval, the NCUA has the final say on all new applications whether for a federal or state charter.

Today, credit union startups are as rare as __________. (You fill in the blank.)

At the 2023 GAC convention,q an NCUA board member announced the agency’s latest new chartering enhancement: the provisional charter phase. This approach does not address the fundamental charter barriers. Could an example from the movement’s history suggest a solution?

The chartering record of the first Federal regulator
Looking at the record of Claude Orchard demonstrates what is possible for an individual government leader. He was the first federal administrator/regulator managing a new bureau within the Farm Credit Administration to create a federal credit union system. He was recruited for this startup role by Roy Bergengren, who, along with Edward Filene, founded the credit union movement. Read more

US FDIC to Propose New Bank Resolution, Long-Term Debt Rules on Aug. 29

Courtesy of Michelle Price, Reuters

U.S. bank regulator the Federal Deposit and Insurance Corporation (FDIC) will on Aug. 29 propose new rules overhauling how large regional banks prepare for their own failure, according to a notice published late on Tuesday.

U.S. regulators are seeking to strengthen oversight of the banking system, particularly in light of a string of collapses this year that included three of the largest in U.S. history.

The proposal will likely require banks of $100 billion or more in assets to issue long-term debt that could absorb bank losses before depositors and the FDIC’s deposit insurance fund do, FDIC Chair Martin Gruenberg said in a speech this month.

It will also require bank recovery and resolution plans, also known as “living wills,” to give the FDIC more options when overseeing a failed bank’s receivership, including by identifying parts of the lender that could be sold separately.

NAIC Adopts Update to Its Guide To Understanding Cannabis Insurance

Courtesy of Dave Kovaleski, Financial Regulation News

At its Summer National Meeting last week, the National Association of Insurance Commissioners (NAIC) adopted the Regulatory Guide to Understanding the Market for Cannabis Insurance: 2023 Update.

The white paper – produced by the NAIC’s Cannabis Insurance Working Group – looks at the insurance issues related to the cannabis industry, as well as the state of cannabis regulation in the United States.

This new update to the NAIC’s original cannabis white paper published in 2019 discusses how the cannabis industry has become more sophisticated with its rapid expansion. This expansion has driven new product development, infrastructure changes, and the need for businesses to provide ancillary services. It also dives into the ways that cannabis regulation, specifically at the state and local levels, has evolved significantly.

Among the key findings in the paper, NAIC found that capacity has improved since 2019, however, most of the commercial insurance for cannabis-related businesses is in the non-admitted market. Also, smaller industry players are most impacted by the lack of admitted options since the non-admitted market doesn’t offer the “off-the-shelf” insurance solutions typically available in the admitted market.

In addition, it revealed that insurance gaps are most prevalent in the emerging areas of the cannabis industry, such as ancillary services, cannabis-infused products, and social consumption lounges. Further, among the potential structures being explored to facilitate cannabis-related business coverage are the use of state-based commercial insurance programs, risk retention groups, captives, and joint underwriting associations.

Banks Need Data Providers to Grapple with the Changes in ‘Know Your Business’ Compliance

Courtesy of PUMNTS.com

Charles Zhu, vice president of product at Enigma, said “know your business” (KYB) mandates can be onerous on financial institutions (FIs) building an in-house compliance process. 

But for forward-thinking FIs, the benefits of harnessing data can extend well beyond the confines of satisfying compliance mandates.  That same data, he said, can help banks serve their small enterprise clients more effectively, with innovative new products and services. 

Rapidly Changing Regulatory Environment
As he noted, the foundational regulation of KYB “is relatively recent.” Know-your-customer initiatives can be traced back to the Patriot Act, passed by Congress and signed into law in the wake of the 9/11 attacks, and so have had more than 20 years to evolve.  

But KYB efforts and mandates were formed in the wake of the publishing of the Panama Papers just seven years ago. Legislators and regulators passed KYB legislation to try to close loopholes where individuals have been able to hide fraud or other illicit activities masked by various companies here and abroad.  

Much more recently, the INFORM Consumers Act has dictated that online marketplaces need to collect and analyze more data about just who’s selling on their platforms. Moreover, new rules, he said, are in the offing from the Financial Crimes Enforcement Network (FinCEN) that will include details on the data that must be collected regarding ultimate beneficial owners – or anyone with more than a 25% stake in a business. 

“This is a really rapid pace of regulation,” Zhu said. Many banks are spending as much as 5% of revenues — and even more — to remain in compliance, and the cut of the top line is growing. The regulation is gaining ground in a financial services arena where many businesses have gone digital and supply chains have grown increasingly complex. 

“The ability to hide fraud, to be a sanctioned entity or individual and hide inside a company, is easier than ever before,” he said. Read more

Aug. 18, 2023: Industry and Regulation

N.Y. Federal Judge Muddies CFPB Enforcement Authority Even More

Courtesy of David Baumann, CUCollaborate

Another federal judge has created uncertainty over the CFPB’s current ability to enforce consumer protection laws. Judge Jennifer Rearden of the Southern District of New York this week issued a stay in a suit filed by the agency and the New York attorney general’s office against a company facing allegations of making predatory auto loans to vulnerable consumers.

Backstory and Context
The stay follows an injunction issued by U.S. District Judge Randy Crane of the Eastern District of Texas blocking a rule that would require financial institutions to report their lending to women- and minority-owned businesses. While the injunction only covers the plaintiffs that filed the suit—members of the American Bankers Association, members of the Texas Bankers Association and Rio Bank—other banking trade groups, and now credit union trade groups, are asking the judge to expand the injunction to include all credit unions and banks.

The stay and injunction both cited the pending Supreme Court case challenging the way the CFPB is funded. On Oct. 3, the high court is scheduled to hear oral arguments in the case, which centers on whether the CFPB’s funding scheme is unconstitutional, since it is not funded through the annual appropriations process. The court is likely to issue its decision in the summer of 2024; at issue is the legality of all rules the agency has issued along with all enforcement actions it has taken since it was created in the Dodd-Frank Act.

Suit in Question
In the New York case, the CFPB and the state attorney general charged that Credit Acceptance Corp. saddled borrowers with exorbitant interest rates and fees, while providing auto dealers with incentives to sell cars at inflated prices. Judge Rearden said that although the stay will delay the litigation, the Supreme Court case will clarify the legal issues surrounding the CFPB. “Any potential harm to the public caused by delaying this action is outweighed by the benefit to consumers in proceeding in a streamlined fashion,” she said.

Letter From Credit Union Groups
Meanwhile, CUNA and NAFCU have requested CFPB Director Rohit Chopra to delay enforcement of the agency’s small business lending rule, citing the Texas case. “While the Court determined that a limited injunction was appropriate based on the facts offered by plaintiffs, we ask that you consider a broader set of circumstances that prioritizes consistency in the implementation of this rule as the collection of reliable data regarding small business lending requires consistent reporting among covered financial institutions to ensure fair and accurate peer comparisons,” Ann Petros, NAFCU’s vice president of regulatory affairs, and Alexander Monterrubio, CUNA’s deputy chief advocacy officer and managing counsel, wrote in a letter to the bureau director. Read more

Sen. Brown Leads Group of Senators Asking Fed to Review Approach To Bank Mergers

Courtesy of Dave Kovaleski, Financial Regulation News

A group of Democratic senators are urging the Federal Reserve to review its approach to big bank mergers following the collapse of several large banks this year – including Silicon Valley Bank, Signature Banks, Credit Suisse and First Republic.

Led by U.S. Sen. Sherrod Brown (D-OH), chairman of the Senate Banking, Housing and Urban Affairs Committee, the legislators sent a letter to Federal Reserve Chairman Jerome Powell and Vice Chair for Supervision Michael Barr, urging them to examine the agency’s framework for evaluating a bank merger’s impact on financial stability. The senators said that the Fed must consider a merger’s risk to financial stability in a more rigorous and thoughtful way.

“We are concerned that the Federal Reserve has still not issued any rules or guidance indicating the types of bank mergers that would implicate financial stability concerns,” the senators wrote. “We hope that, following the failures of SVB, Signature Bank and First Republic Bank, and the acquisition of Credit Suisse by UBS, we will see real changes to the bank merger process to protect financial stability and ensure that we have a fair and competitive banking system that serves all communities. We cannot perpetuate a banking system that favors the largest, most complex institutions and puts consumers, smaller institutions, and our financial system at risk.”

Along with Brown, the letter was signed by U.S. Sens. Jack Reed (D-RI), Elizabeth Warren (D-MA), and John Fetterman (D-PA).

“We hope that, following the failures of SVB, Signature Bank and First Republic Bank, and the acquisition of Credit Suisse by UBS, we will see real changes to the bank merger process to protect financial stability and ensure that we have a fair and competitive banking system that serves all communities. We cannot perpetuate a banking system that favors the largest, most complex institutions and puts consumers, smaller institutions, and our financial system at risk,” they concluded in the letter.

Consumers’ Struggle to Pay Bills Reaches New Volatility in 2023

Courtesy of PYMTS

Consumers financial lifestylesThis year’s financial lifestyle improvements for the individual consumer were all but wiped out between May and June.

Broadly speaking and only looking at year-over-year numbers, it can seem like there is only good news when it comes to the number of consumers struggling to make ends meet.

As noted in July’s “New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS and LendingClub collaboration, the rate of those surveyed living paycheck to paycheck with issues paying bills has declined year over year. The 0.3 percentage point drop between June 2022 and June 2023, represents a relatively marginal 1.4% dip in the share of consumers falling into this financial lifestyle.

The numbers may paint an optimistic picture, especially given inflation’s relentless price increases on essentials such as clothing and shelter, but they may be glossing over more recent struggles. Consumers’ financial lifestyles are experiencing a sharp turn downward, with the latest month-over-month numbers suggesting improvements since the start of the year have effectively been erased. This deeper data dive for the same consumer segment broken down by month, from proprietary research created for the same “New Reality Check” report, clarifies that what could seem like general progress has been much more of a financial security roller coaster.

Regardless of income, the shares of consumers living paycheck to paycheck and struggling to pay bills rose from May to June. PYMNTS’ data finds that 33% of those earning less than $50,000 annually fell into this financial lifestyle, as did 19% of those earning between $50,000 and $100,000 and 12% of those earning more than $100,000 per year. For all but two months for those earning more than $100,000 annually, each of these shares represents the highest rates for each income demographic in 2023.

Related Reading: Credit Card, Car Loan Delinquencies Surpass Pre-Pandemic Levels

Congress Turns Up the Heat on ESG And Climate-Related Disclosures

Courtesy of Barnes & Thornburg LLP; National Law Review, Volume XIII, Number 227

Political divisiveness has perpetuated dueling realities in Congress over ESG and climate-related disclosures. While the rest of the world is moving forward to require such disclosures, this politicization has slowed parallel efforts in the U.S. If Congress cannot find common ground to support climate-related disclosures that align with those already approved by others, the U.S.’ global leadership position in capital markets may be undermined. The U.S. needs to move quickly and act decisively to maintain its place on the world stage.

House Republicans and Democrats’ Polarization Continues
Republicans on the U.S. House Financial Services Committee recently wrapped up their “ESG Month” that included a series of hearings on environmental, social, and governance (ESG) issues in July. The committee had more than a half-dozen hearings and advanced four pieces of legislation in opposition to ESG practices, policies and proposed rules. According to reports quoting the committee’s GOP ESG working group, the bills are designed, in part, to prevent the Securities and Exchange Commission (SEC) from issuing regulations outside of the agency’s scope.

One of the bills sent to the full House, H.R. 4790, the Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act, would displace the Securities and Exchange Commission’s (SEC) proposed climate-related disclosure rules and limit the type of disclosures the SEC can compel. The bill would amend both the Securities Act of 1933 and the Securities Exchange Act of 1934 by inserting statutory language directly into both acts saying an “issuer is only required to disclose information in response to disclosure obligation adopted by the Commission to the extent the issuer has determined that such information is material with respect to a voting or investment decision regarding the securities of such issuer.”

In response to ESG Month, House Democrats’ message was that attacks on ESG are attacks on capitalism and free markets. They emphasized the importance of access to ESG data in planning for long-term challenges and making prudent investment decisions. They also pointed to the record breaking July temperatures to highlight the need to hold corporations accountable for their climate impacts. Read more

 

Aug. 4, 2023: Industry and Regulation

HSBC Discloses HUD Investigation of Redlining Allegations

The National Community Reinvestment Coalition filed a complaint this year spotlighting the bank’s lending practices in majority-Black and Hispanic neighborhoods in six metro areas.

Courtesy of Dan Ennis, BankingDive

The Department of Housing and Urban Development is investigating whether HSBC’s U.S. unit engaged in redlining majority-Black and -Hispanic neighborhoods in six metropolitan areas between 2018 and 2021, the bank disclosed in a filing Tuesday. The review stems from a complaint filed this year by the National Community Reinvestment Coalition, which identified the areas as New York City, Los Angeles, San Francisco, Oakland, Seattle and Orange County, California.

“Lending redlining is a violation of the Fair Housing Act,” Alan Pyke, an NCRC spokesperson, told American Banker. An HSBC spokesperson declined to comment to the publication. HUD did not respond to a request for comment.

It is likely that the branches involved are no longer under HSBC. The bank greatly reduced its U.S. footprint in 2021 — selling 10 West Coast locations to Los Angeles-based Cathay Bank, and transferring 80 mostly East Coast branches to Citizens Bank. HSBC said at the time it planned to repurpose 20 to 25 locations as international wealth centers, and close the remaining 35 to 40.

Nonetheless, the Justice Department, Office of the Comptroller of the Currency and Consumer Financial Protection Bureau have ramped up their focus on perceived lending discrimination, reaching seven settlements over redlining allegations since 2021.

The investigation disclosed Tuesday wouldn’t mark the first time HSBC has landed in hot water over its mortgage lending policies. The bank, in February 2016, agreed to pay $470 million to HUD, the CFPB, and the attorneys general of 49 states and the District of Columbia over violations in mortgage origination, servicing and foreclosure. The Federal Reserve, at the same time, handed down a $131 million penalty of its own. Read more

FDIC Starts Selling $18.5 Billion of Signature Bank Loans

Courtesy of Dan Primack, Axios

The Federal Deposit Insurance Corp. (FDIC) announced that it’s seeking buyers for $18.5 billion in private equity-linked loans from Signature Bank, which collapsed in March.

Why it matters: This is a reminder that it can take less time for banks to fail than for bank regulators to dispose of the wreckage.

Details: The sealed-bid process is split into four pool and is being managed by Newmark, with closing anticipated by October.

  • Bidders must be FDIC-insured depository institutions or commercial banks that don’t compete with the borrowers.
  • Bloomberg reports that “the portfolio comprises 201 performing capital-call loans tied to firms including Starwood Capital Group, Carlyle, Blackstone, Thoma Bravo and Brookfield Asset Management.”
EBA Plans on Ad-hoc ESG Data Collection and Climate Scenario Exercise

Courtesy of Moody’s Analytics, Regulatory News

The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks. The European Banking Authority (EBA), the banking regulator in European Union, has instituted a sequenced and comprehensive approach to integrate ESG considerations into the regulatory framework for banks. As part of this strategy, EBA recently initiated an ad-hoc data collection from larger banks for better monitoring of ESG risks and proposed the draft templates and associated guidance for collecting climate-related data from banks, as part of the one-off Fit-for-55 climate risk scenario analysis.

These recent developments are part of the ESG roadmap, which the EBA had published in December 2022. The roadmap outlined the objectives and timelines for delivering ESG mandates and tasks for the years to come. As indicated in the roadmap, in addition to the ESG-related stress testing and disclosures, the EBA initiatives include incorporating ESG considerations into the prudential framework for banks and investment firms, addressing greenwashing, understanding market practices on green retail loans and mortgages, and enhancing availability of ESG data and quantification of ESG risks.

Proposed templates for one-off climate risk scenario analysis
In line with the priorities stated in the ESG roadmap, in the third week of July 2023, the EBA issued draft templates and the associated guidance for collecting data from banks for a one-off climate scenario analysis exercise. The EBA will conduct this exercise with the other European Supervisory Authorities (ESAs) and with the support of the European Central Bank (ECB) and the European Systemic Risk Board (ESRB). The draft templates are designed to collect climate-related and financial information on credit, market, and real estate risks. Banks are expected to report aggregated and counterparty level data as of December 2022. Among others, the aim is to assess concentration risk of large climate exposures, capture amplification mechanisms, and assess second-round effects. The feedback period for this exercise will end on October 11, 2023. The one-off Fit-for-55 climate risk scenario analysis is expected to start by the end of 2023, with the publication of results envisaged by the first quarter of 2025. Nearly 70 banks will take part in this exercise (same banks as those included in the 2023 EU-wide stress test). However, the competent authorities might request other banks in their respective jurisdictions to participate. Read more

Federal Judge Halts CFPB’s Small-Business Data Collection Rule

Courtesy of Kate Berry, American Banker

A federal judge agreed to halt the Consumer Financial Protection Bureau’s small-business data collection rule until after the Supreme Court decides next year on whether the bureau’s funding is constitutional. On Monday, U.S. District Court Judge Randy Crane granted a preliminary injunction to members of two trade groups and a private bank that had sued the CFPB to keep a rule that required lenders to collect data on small businesses from going into effect.

The Texas Bankers Association, the American Bankers Association and Rio Bank, an $814.7 million-asset private bank in McAllen, Texas, had argued that they should not have to comply with the rule because the 5th Circuit Court of Appeals found last year that the CFPB’s funding is unconstitutional.

“The 5th Circuit disagreed with the decisions of other courts that found the Bureau’s funding structure was constitutionally sound,” wrote Judge Crane in the 17-page order.

However, the judge did not grant a nationwide injunction, which means that nonbanks are not covered. The vast majority of banks that are members of the two trade groups will not have to comply with the rule pending a Supreme Court decision in mid-2024 on the constitutionality of the CFPB.

Banks and lenders oppose the rule because the data can be used to identify which financial institutions are doing a poor job of lending to Black and Hispanic-owned small businesses. CFPB Director Rohit Chopra has called the rule a “small-business loan census” that will “ensure that banks and nonbanks are serving small businesses fairly.” Read more

July 21, 2023: Industry and Regulation

Mastercard Moves to Ban Cannabis Purchases on Its Debit Cards

Courtesy of Niket Nishant and Tanay Dhumal, Reuters

Mastercard has told financial institutions to stop allowing marijuana transactions on its debit cards, dealing a blow to an industry already on the fringes of the financial system in the United States. Most banks in the country do not service cannabis companies as marijuana remains illegal at the federal level despite several states legalizing its medicinal and recreational use.

“As we were made aware of this matter, we quickly investigated it. In accordance with our policies, we instructed the financial institutions that offer payment services to cannabis merchants and connects them to Mastercard to terminate the activity,” a spokesperson for the company said on Wednesday.

“The federal government considers cannabis sales illegal, so these purchases are not allowed on our systems,” the spokesperson added. Sunburn Cannabis CEO Brady Cobb said in a statement that “this move is another blow to the state-legal cannabis industry and patients/consumers who want to access this budding category.”

Pot firm Verano’s President, Darren Weiss, said “We will continue to advocate for cannabis reform in Washington through further dialogue with elected officials and stakeholders to advance conversations supporting the growth of safe, legal cannabis across the U.S.”

Earlier this month, Republican Senator John Cornyn said Majority Leader Chuck Schumer’s plan to pass a marijuana banking bill was “wishful thinking”. The SAFE Banking Act is a crucial legislation that would make it easier for the cannabis industry to access banking services. Mastercard’s decision was first reported by Bloomberg News.

Why Insurance Companies Are Pulling Out of California and Florida, and How to Fix Some of the Underlying Problems

Courtesy of Melanie Gall Assistant Professor and Co-Director, Center for Emergency Management and Homeland Security, Watts College, Arizona State University, theconversation.com

When the nation’s No. 1 and No. 4 property and casualty insurance companies – State Farm and Allstate – confirmed that they would stop issuing new home insurance policies in California, it may have been a shock but shouldn’t have been a surprise. It’s a trend Florida and other hurricane- and flood-prone states know well.

Insurers have been retreating from high-risk, high-loss markets for years after catastrophic events. Hurricane Andrew’s unprecedented US$16 billion in insured losses across Florida in 1992 set off alarm bells. Multibillion-dollar disasters since then have left several insurers insolvent and pushed many others to reevaluate what they’re willing to insure.

I co-direct the Center for Emergency Management and Homeland Security at Arizona State University, where I study disaster losses and manage the Spatial Hazard Events and Losses database (SHELDUS). As losses from natural hazards steadily increase, research shows it’s not a question of if insurance will become unavailable or unaffordable in high-risk areas – it’s a question of when.

Reinsurers are worried
Insurance is a vehicle to transfer risk. When an individual buys an insurance policy, that person pays to transfer the risk of expensive repairs to the insurer if the home is damaged by a covered event, like a fire or thunderstorm. Most policyholders don’t experience major disasters, so insurance companies make money. Read more

Fed, FDIC, OCC Propose 19% Boost in Held Capital for Biggest Banks

The 1,089-page proposal also would force banks with $100 billion in assets to account for unrealized gains and losses on some securities and alter the way banks calculate risk-weighted assets.

Courtesy of Dan Ennis, Banking Dive

The U.S.’s eight global systemically important banks would see a roughly 19% increase in the amount of capital they’d have to hold under rules proposed Thursday by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.

By comparison, banks with between $250 billion and $1 trillion in assets face about a 10% uptick, while banks with $100 billion to $250 billion would see a 5% jump in the holdings. Under the plan, banks with more than $100 billion in assets — a group that includes 36 institutions — would have to account for unrealized gains and losses on available-for-sale securities and adhere to a stricter leverage requirement.

That requirement would be new for the $100 billion-to-$250 billion crowd, which has seen relaxed rules since 2019. But supporters of the change assert it would have forced Silicon Valley Bank, for example, to earlier face its ballooning losses as interest rates climbed and holding values fell.

The proposed rules also alter the way banks calculate risk-weighted assets. Regulators want banks to use two different methodologies to obtain the figure: the standard methodology currently used in the U.S., which considers general credit and market risk; and a separate methodology that takes into account operational risk and credit valuation adjustment. Banks, when figuring their capital ratios would have to use whichever methodology calculated a higher level of risk-weighted assets. Read more

FCA Finds Banks Have a Mountain to Climb to Meet New Consumer Duty

Courtesy of FinExtra

With the new Consumer Duty set to come into effect next week, the Financial Conduct Authority has found that 7.4 million people unsuccessfully attempted to contact one or more of their financial services providers in the 12 months before May 2022. The figure comes from the FCA’s latest Financial Lives survey with over 19,000 respondents.

Although 3.6 million were able to contact one of their providers, they could not get the information or support they wanted, and 4.3 million said they received the information they asked for but could not understand it or were sent it too late. The regulator’s findings come only days away from the introduction of the Consumer Duty. The Duty will require firms to act to deliver good outcomes for consumers through helpful and responsive customer service, enabling people to make good decisions through communications people can understand.

The watchdog has promised to come down hard on firms that fail to meet their obligations, holding out the threat of “robust” enforcement action and disciplinary sanctions. Sheldon Mills, executive director, consumers and competition comments: “Our Consumer Duty will guide our ongoing work to improve the way firms provide customer support – getting through to your provider is the starting point for receiving help, so we will be working with them to improve in this area.”

The FCA’s survey also found that an increasing number of people are choosing to use digital banking, payments and other online services, with almost nine in ten adults (88% or 42.9 million) banking online or using a mobile app in 2022, up from 77% in 2017.

OCC Details Bank Civil Money Penalty

Courtesy of Douglas Clark, Financial Regulation News

The Office of the Comptroller of the Currency (OCC) has detailed a $15 million civil money penalty against American Express National Bank (American Express). 

The OCC alleged the financial institution failed to govern and oversee a third-party affiliate and committed regulation violations regarding certain efforts to retain small business customers. According to the OCC’s allegations, the agency determined American Express failed to ensure that its third-party affiliate had appropriate call monitoring controls and appropriate mechanisms to document and track customer complaints.

American Express also failed to collect necessary consumer information and properly maintain and produce records showing compliance with Customer Identification Program regulations, the OCC alleged. According to the OCC, the bank neither admits nor denies the agency’s findings.

The OCC indicated the Order represents a settlement of the civil money penalty proceedings against the bank contemplated by the OCC, based on what the OCC alleged to be unsafe or unsound practices and violations of law or regulation described in the Comptroller’s findings set forth in Article II of the Order.

The Order is not a contract binding on the United States, the U.S. Treasury Department, the OCC, or any officer, employee or agent of the OCC, the OCC indicated, adding neither the Bank nor the OCC intends the Order to be a contract.

July 21, 2023: Industry and Regulation

Fed Banking Regulator Warns A.I. Could Lead to Illegal Lending Practices Like Excluding Minorities

KEY POINTS

  • Michael S. Barr, the Fed’s vice chair for supervision, said AI technology has the potential to get credit to “people who otherwise can’t access it.”
  • “While these technologies have enormous potential, they also carry risks of violating fair lending laws and perpetuating the very disparities that they have the potential to address,” he added.

—

The Federal Reserve’s top banking regulator expressed caution Tuesday about the impact that artificial intelligence can have on efforts to make sure underserved communities have fair access to housing. Michael S. Barr, the Fed’s vice chair for supervision, said AI technology has the potential to get credit to “people who otherwise can’t access it.”

However, he noted that it also can be used for nefarious means, specifically to exclude certain communities from housing opportunities through a process traditionally called “redlining.” “While these technologies have enormous potential, they also carry risks of violating fair lending laws and perpetuating the very disparities that they have the potential to address,” Barr said in prepared remarks for the National Fair Housing Alliance.

As an example, he said AI can be manipulated to perform “digital redlining,” which can result in majority-minority communities being denied access to credit and housing opportunities. “Reverse redlining,” by contrast, happens when “more expensive or otherwise inferior products” in lending are pushed to minority areas.

Barr said work being done by the Fed and other regulators on the Community Reinvestment Act will be focused on making sure underserved communities have equal access to credit. Read more

Related Reading: Federal Reserve announces that its new system for instant payments, the FedNow Service, is now live
U.S. House of Representatives Committee on Financial Services Hearing to Examine the Potential Consequences of FinCEN’s Beneficial Ownership Rulemaking

The House Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions, led by Chairman Blaine Luetkemeyer (MO-03), is holding a hearing entitled “Potential Consequences of FinCEN’s Beneficial Ownership Rulemaking.”

Read Chairman Luetkemeyer’s opening remarks as prepared for delivery:

“Today’s hearing focuses on Beneficial Ownership, and the Financial Crimes Enforcement Network, otherwise known as FinCEN’s, rulemaking required by the Corporate Transparency Act. Beneficial ownership information reporting has been touted as one of the most important national security tools. Yet no one knows anything about it. 

“It is my hope that today’s hearing will not only inform our constituents of this forthcoming rule but will shine light on the ways the Treasury Department and FinCEN have distorted the purpose of this rulemaking.

“However, before we dive into the weeds, it is important to set the stage. 

“Some of my colleagues across the aisle today may insinuate that Committee Republicans never supported Beneficial Ownership, and our actions since the passage of the CTA were carried out to undermine the legitimacy of the final rule. Read more

US Bank Mergers Frozen by Capital Rules, Regulatory Uncertainty

Courtesy of Tatiana Bautzer and Saeed Azhar, Reuters

U.S. banks will probably hold off on striking deals until the end of next year at the earliest as they await clarity on new rules on capital requirements, according to deal advisers and industry experts.

Potential buyers and sellers are also being deterred by the long wait for deal approvals by regulators, the experts said. “Everyone’s frozen in place until they know what the rules of the road are,” said Timothy Adams, CEO of the Institute of International Finance, an industry group that represents about 400 members from more than 60 countries.

Adams expects deals to be stalled through 2026 as the U.S. implements standards that were agreed by the Basel Committee on Banking Supervision after the 2008 financial crisis but then took years to be finalized. Global regulators agreed to give banks a transition period to meet the new requirements and set the beginning of 2025 as the target for full implementation.

At the same time, banks are also waiting to fund a potential increase in capital requirements signaled by the Federal Reserve’s vice chair for supervision, Michael Barr, in the aftermath of a U.S. regional banking crisis this year. Read more

NCUA Deputy Executive Director Jones Testifies Before the U.S. House Subcommittee on Financial Institutions and Monetary Policy 

Thank you for inviting the National Credit Union Administration (NCUA) to discuss the agency’s activities regarding climate-related financial risk. As a regulator and insurer, the NCUA is responsible for examining and supervising for credit union resilience against all material risks. As the NCUA’s 2022–2026 Strategic Plan notes, credit unions should consider how climate-related financial risks may affect their membership and institutional financial performance. The agency’s current work in this area aims to enhance its understanding of these risks.

The agency believes credit unions are best positioned to assess various risks and opportunities within their specific fields of membership. Climate change presents several conceptual and practical challenges for credit unions and the NCUA. Just as credit unions must continue to adapt to account for climate-related financial risks, among other risks, the NCUA must evolve its understanding of the impact on credit unions, credit union members, the credit union system, and the National Credit Union Share Insurance Fund (Share Insurance Fund).

In my testimony, I will summarize NCUA’s climate-related financial risk activities, including the recent voluntary request for information (RFI) from stakeholders, and reiterate the agency’s legislative priorities.

Climate-related Activities: Interagency Involvement
The NCUA is engaged in interagency efforts to study and address climate-related financial risks. On May 21, 2021, the Financial Stability Oversight Council (FSOC), of which the NCUA is a voting member, was asked to assess climate-related financial risks, both physical and transition risks, concerning the stability of the financial system. Read more

July 14, 2023: Industry and Regulation

FinCEN Provides Key Updates on Rulemaking Agenda Timeline

Courtesy of Kaley Schafer, BallardSpahr, MoneyLaunderingNews.com 

Without much fanfare, the Financial Crimes Enforcement Network (FinCEN) published in June its Spring 2023 Rulemaking Agenda, which provides proposed timelines for upcoming key rulemakings projected throughout the rest of 2023.  FinCEN continues to focus on issuing rulemakings required by the Anti-Money Laundering Act of 2020 (the “AML Act”) and the Corporate Transparency Act (“CTA”).  FinCEN has been criticized for being slow in issuing regulations under the AML Act and the CTA, but Congress has imposed many obligations upon FinCEN, which still is a relatively small organization with a limited budget.

Here are the six upcoming rulemakings and their expected timing.  All of these issues are critical. We also discuss the issues for which FinCEN has not provided a proposed timeline.

  • July 2023: Notice of Proposed Rulemaking (NPRM) implementing section 6314 of the AML Act and the Anti-Money Laundering Whistleblower Improvement Act regarding whistleblower incentives and protections. As a reminder, qualifying whistleblowers are entitled to awards between 10 and 30 percent of the value of “monetary sanctions” above $1 million collected through an enforcement action regarding certain violations of the Bank Secrecy Act (BSA) and U.S. economic sanctions. A whistleblower also may be awarded additional monies for related actions. In addition, the Department of Treasury will administer the newly created Financial Integrity Fund to pay whistleblower awards. We previously have blogged about section 6314 here, here and here.
  • August 2023: NPRM regarding real estate transaction reports and records. The release of the NPRM was pushed back by several months. FinCEN released an advanced NPRM in December 2021, which sought comments on potential BSA/AML requirements for persons involved in real estate transactions, particularly non-financed transactions. Critical issues will include the scope of the proposed BSA requirements, and the type of real estate transactions to which they will apply (E.g. Any monetary threshold?  Nationwide application?  Only residential deals, or commercial deals as well?  Who is responsible for any reporting requirements? Etc.)
  • September 2023: Final Rule regarding beneficial ownership information (BOI) access and safeguards and the use of FinCEN Identifiers. The final rule will establish the framework for authorized recipients’ access to BOI as well as instances where reporting companies can use FinCEN Identifiers.  As we previously blogged, there was strong push back by the financial services industry, partly because the proposal limited financial institutions’ ability to use BOI, thereby contradicting the CTA’s objectives.
  • November 2023: Final Rule implementing section 6212 of the AML Act that establishes a pilot program permitting financial institutions to share suspicious activity reports (SARs) with their foreign branches, subsidiaries, and affiliates. This final rule has been delayed by several months from FinCEN’s prior rulemaking agenda. Read more

Related: The U.S. House Financial Services Committee Announced the Following Hearing on July 18: National Security, Illicit Finance, and International Financial Institutions Subcommittee Hearing Entitled: “Potential Consequences of FinCEN’s Beneficial Ownership Rulemaking”

Bank Regulator Steps in to Deter Banks from Extending Mortgages to As-Long-As 90 Years

Earlier this week, the Office of the Superintendent of Financial Institutions proposed changes that would force banks to build reserves to address risks posed by ‘forever mortgages.’

Courtesy of Dhriti Gupta, Toronto Star

As interest rates continue to increase, some variable-rate-mortgage borrowers are seeing their amortization periods extend to 60, 70, even 90 years. Canada’s federal regulator is now acting to reduce the risk posed by such “forever mortgages.” On July 11, the Office of the Superintendent of Financial Institutions (OSFI) proposed changes that would make banks hold onto more money to address risks “related to mortgages with growing balances.”

This can happen with variable-rate, fixed-payment mortgages, for which the monthly payment doesn’t change, said mortgage broker Victor Tran of Ratesdotca. “In a rising rate environment, more of your payment will be going toward interest and less towards principal,” he said, explaining that this extends the amortization period.

Tran said the reallocation can reach a point where your payment isn’t enough to cover interest, so even when you pay, your balance will continue to grow — resulting in negative amortization. The issue is top of mind for OSFI, which wants banks to retain “adequate capital buffers” that absorb this risk. “We believe these incremental changes add necessary resilience to Canada’s mortgage finance system,” said OSFI superintendent Peter Routledge in a Tuesday news release.

The regulator’s announcement came just before the Bank of Canada’s latest rate hike on Wednesday morning, bringing the key interest rate to five per cent. Before the bank’s aggressive rate hike campaign, negative amortization wasn’t really a widespread problem, according to mortgage broker Ron Butler. “Rates have never gone up this far, this fast,” he said. “But this is a unique moment in time.”

In 2020 and 2021, Butler said, borrowers with a variable-rate fixed payment had an average interest rate of around 1.65 per cent — they’re now paying more than six per cent. “We’re talking about a 300 per cent increase. It’s absolutely massive.” Read more

Credit Card Delinquency: Here Comes the Wave

Courtesy of Brian Riley, PaymentsJournal

You may have called me Chicken Little when I said in late 2022 that 2023 would be a rugged year for credit card issuers, and the risk will likely bleed into 2024. But here is a news flash: credit card delinquency is deteriorating rapidly. Our expectation is on point. Look at yesterday’s Financial Times, where the headline screams, “Big US banks to post the largest rise in loan losses since pandemic.”

  • This week, the largest U.S. banks are set to report the biggest jump in loan losses since the onset of the coronavirus pandemic, as rising interest rates pile mounting pressure on borrowers across the economy.
  • The publication of second-quarter results is set to show that banks have benefited from higher interest rates to some degree, by boosting lending and investment income. But after three years of relatively low defaults, partly fueled by pandemic-era stimulus cash and other government assistance, lenders are also starting to see the negative effects of higher rates and inflation on borrowers.
  • The nation’s six largest banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley—are predicted to have written off a collective $5 billion tied to defaulted loans in the second quarter of this year, according to the average estimates of bank analysts, as compiled by Bloomberg.
  • The six lenders will set aside an estimated additional $7.6 billion to cover loans that could go bad, analysts estimate.

Step Back a Moment: $5 Billion Loses + $7.6 Billion in Additional Reserves 
No wonder Goldman Sachs (GS) is trying to drop the Apple Card like a hot potato. However, what top experienced credit card issuers like American Express, Bank of America, Citi, Capital One, Chase, Discover, and Wells Fargo are doing is playing the long game instead. Building loss reserves ahead of charge-off reduces current net income, making life much more palatable as delinquency surges in coming months. A little pain now will temper an upcoming storm.

Credit card issuers follow loan loss accounting rules under CECL, instead of waiting to realize that low FICO Scores lead to surging delinquency when the economy burps, strong credit policy groups squirrel loan loss reserves ahead of the ensuing risk. This way, credit card issuers can smooth out their losses. Read more

NCUA Issues Annual Cybersecurity & Credit Union System Resilience Report

Courtesy of Dave Kovaleski, Financial Regulation News

The National Credit Union Administration (NCUA) released a report to Congress this week that outlines steps taken to strengthen cybersecurity within the federally insured credit union system and the NCUA.

The NCUA’s annual Cybersecurity & Credit Union Resilience Report, which was submitted to the House Financial Services Committee and the Senate Banking Committee, contains information on the policies and procedures to address cybersecurity risks as well as activities to ensure effective implementation. Further, it discusses current or emerging threats.

“The actions outlined in this comprehensive report demonstrate the NCUA’s commitment to promoting a secure and resilient environment for credit unions and their members,” NCUA Chairman Todd Harper said. “Recent agency efforts to address cybersecurity risks, including implementation of the scalable Information Security Examination procedures at credit unions, training and support programs, and the cyber incident notification rule, are described in the report. Additionally, the report to Congress details the significant risks and challenges facing the credit union system and the financial system because of the NCUA’s lack of authority over third-party vendors. I continue to call on Congress to close this growing regulatory blind spot.”

The report is required by the Consolidated Appropriations Act of 2021. For the remainder of 2023, the NCUA will continue to promote cybersecurity best practices in credit unions. Further, reviews of credit union information systems and assurance programs will remain a supervisory priority for the agency. In addition, the NCUA will continue to provide guidance and resources to assist credit unions with strengthening their cyber defenses.

The agency funded cybersecurity grants as part of its 2023 grant initiative, which closed on June 30.

June 30, 2023: Industry and Regulation

FFIEC Announces Availability of 2022 Data on Mortgage Lending

The Federal Financial Institutions Examination Council (FFIEC) today announced the availability of data on 2022 mortgage lending transactions reported under the Home Mortgage Disclosure Act (HMDA) by 4,460 U.S. financial institutions, including banks, savings associations, credit unions, and mortgage companies.

The HMDA data are the most comprehensive publicly available information on mortgage market activity. The data are used by industry, consumer groups, regulators, and others to assess potential fair lending risks and for other regulatory and informational purposes. The data help the public assess how financial institutions are serving the housing needs of their local communities and facilitate federal financial regulators’ fair lending, consumer compliance, and Community Reinvestment Act examinations.

The Snapshot National Loan-Level Dataset released today contains the national HMDA datasets as of May 1, 2023. Key observations from the Snapshot include the following:

  • For 2022, the number of reporting institutions increased by about 2.63 percent from 4,338 in the previous year to 4,460.
  • The 2022 data include information on 14.3 million home loan applications. Among them, 11.5 million were closed-end and 2.5 million were open-end. Another 287,000 records are from financial institutions making use of Economic Growth, Regulatory Relief, and Consumer Protection Act’s partial exemptions and did not indicate whether the records were closed-end or open-end.
  • The share of mortgages originated by non-depository, independent mortgage companies has decreased and, in 2022, accounted for 60.2 percent of first lien, one- to four-family, site-built, owner-occupied home-purchase loans, down from 63.9 percent in 2021.
  • In terms of borrower race and ethnicity, the share of closed-end home purchase loans for first lien, one- to four-family, site-built, owner-occupied properties made to Black or African American borrowers rose from 7.9 percent in 2021 to 8.1 percent in 2022, the share made to Hispanic-White borrowers decreased slightly from 9.2 percent to 9.1 percent, and those made to Asian borrowers increased from 7.1 percent to 7.6 percent. Read more
Related Reading: House Passes Middle-Class Borrower Protection Act
NCUA Releases Annual Cybersecurity & Credit Union System Resilience Report

The National Credit Union Administration released today its Report to the Committee on Financial Services of the House of Representatives and to the Committee on Banking, Housing, and Urban Affairs of the Senate on Cybersecurity and Credit Union System Resilience. The report provides an explanation of the measures taken to strengthen cybersecurity within the federally insured credit union system and the NCUA.

“The actions outlined in this comprehensive report demonstrate the NCUA’s commitment to promoting a secure and resilient environment for credit unions and their members,” NCUA Chairman Todd M. Harper said. “Recent agency efforts to address cybersecurity risks, including implementation of the scalable Information Security Examination procedures at credit unions, training and support programs, and the cyber incident notification rule, are described in the report. Additionally, the report to Congress details the significant risks and challenges facing the credit union system and the financial system because of the NCUA’s lack of authority over third-party vendors. I continue to call on Congress to close this growing regulatory blind spot.”

The Cybersecurity & Credit Union Resilience Report is required by the Consolidated Appropriations Act, 2021 and provides:

  • Information on the policies and procedures to address cybersecurity risks,
  • Activities to ensure effective implementation, and
  • Current or emerging threats.

For 2023, the NCUA will continue to promote cybersecurity best practices in credit unions, and reviews of credit union information systems and assurance programs remain a supervisory priority for the agency. Building upon its industry outreach efforts, the NCUA will continue to provide guidance and resources to assist credit unions with strengthening their cyber defenses throughout the year. The agency is also funding cybersecurity grants as part of its 2023 grant initiative, which closes on June 30.

 Warren Slams Yellen, Bank Regulators for Learning the ‘Wrong Lessons’

Courtesy of Tobias Burns, The Hill

Bank regulators and the Treasury Department are learning the “wrong lessons” from the most recent spate of bank failures that nearly crashed the economy earlier this year, according to financial firebrand Sen. Elizabeth Warren (D-Mass.).

Warren wrote to Treasury Secretary Janet Yellen and top banking regulators telling them not to go soft on the issue of bank mergers and to keep banks competing against each other in the interest of consumers.

“Allowing additional bank consolidation would be a dereliction of your responsibilities, hurting American consumers and small businesses, betraying President Biden’s commitment to promoting competition in the economy, and threatening the stability of the financial system and the economy,” she wrote in a letter dated Monday.

The letter to Yellen and top officials reveals divisions among Democrats about how best to deal with the banking sector following the interconnected bank failures that started in March and posed a “systemic risk” to the U.S. economy.

Acting Comptroller of the Currency Michael Hsu testified to Congress last month that his office was “committed to being open-minded when considering merger proposals and to acting in a timely manner on applications.” Read more

Agencies Finalize Policy Statement on Commercial Real Estate Loan Accommodations and Workouts
  • Board of Governors of the Federal Reserve System
  • Federal Deposit Insurance Corporation
  • National Credit Union Administration
  • Office of the Comptroller of the Currency

Federal financial institution regulatory agencies today jointly issued a final policy statement on commercial real estate loan accommodations and workouts. The updates reinforce and build on existing supervisory guidance calling for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.

The statement is substantially similar to a proposal issued last year and includes minor changes in response to comments. The statement updates and supersedes the previous guidance on commercial real estate loan workouts issued in 2009.

The statement includes a section on short-term loan accommodations that was not included in the previous guidance. An accommodation includes an agreement to defer one or more payments, make a partial payment, or provide other assistance or relief to a borrower who is experiencing a financial challenge. Additionally, the statement addresses recent accounting changes for estimating loan losses and provides examples of how to classify and account for loans affected by workout activity.

The statement applies to all financial institutions supervised by the agencies.

 

June 23, 2023: Industry and Regulation

Powell Says U.S. Fed Will Make “Judgment Call” on Costs of New Regulations

Courtesy of Pete Schroeder, Reuters

Raising U.S. bank capital requirements to guard against future losses could increase the cost of credit but that may be justified to ensure the U.S. banking system is safe, Federal Reserve Chair Jerome Powell told Congress on Wednesday.

Testifying before the House Financial Services Committee, Powell was grilled by Republican lawmakers who worry the central bank may overreact to a March banking crisis with stringent new rules which they say could stifle lending and hurt the economy.

Powell was at pains to strike a balanced tone, arguing strong capital is of “central importance,” particularly for large global banks, but acknowledging increases come with tradeoffs that must be considered.

“Strong capital requirements means we have a stronger banking system…yet we also know that at the margin, as the costs of capital for banks goes up, the costs of credit goes up,” he said. “You just have to make a judgment call on that, and that’s what we’ll be doing.”

Fed Vice Chair for Supervision Michael Barr is undertaking a holistic review of existing capital requirements and is expected to make several proposals strengthening bank rules after three lenders failed in March, forcing the government to backstop deposits. Read more

Banks Are Seeking New Approaches to Level Up Sustainable Strategies

Courtesy of Finextra

In the panel ‘Sustainable finance: Assessing shades of green across payments and banking’, hosted by Finextra’s own Madhvi Mavadiya, speakers explored how the European banking landscape is adopting sustainable strategies.

Panelists included Ines Alonso Rodriguez, executive director of Advisory GTB Global at BBVA, Andrea Giuliani, head of payment solutions at NTT Data Italia, Stephen King, vice president of sustainability solutions at Visa, and Ainsley Ward, vice president of payments solutions at CGI.

King opened the conversation by saying that sustainability is an economic and industrial shift, significant in size and speed, meaning that there will be plenty of opportunities for disruption. He added that the consumers are trying to express their values for how they shop at an increasing rate, and companies are facing regulation or an opportunity to differentiate themselves in the public eye.

Ward mentioned that surveys conducted by CGI found that banks list sustainability as a top priority, but it should have been a priority a decade ago as well. The quicker institutions move on initiatives and make the change, the easier it will be to put the brake on global climate issues, however gathering data and reporting correctly is also an issue in the banking space. Read more 

Related Reading Federal Reserve Bank of New York: Understanding the Linkages between Climate Change and Inequality in the United States
US Bank Regulator Says Tougher Rules Coming for Banks Over $100 Billion

Courtesy of Pete Schroeder, Reuters

The head of the Federal Deposit Insurance Corporation said Thursday that bank regulators are considering applying an upcoming set of stricter capital rules to banks with over $100 billion in assets.

FDIC Chairman Martin Gruenberg said in a speech the spring turmoil in the banking sector showed firms of that size pose a risk to the financial system and merit stricter oversight. Three banks failed during the spring, requiring regulators to step in and backstop deposits.

“If we had any doubt that the failure of banks in this size category can have financial stability consequences, that has been answered by recent experience,” he said in prepared remarks. “The lesson to take away is that banks in this size category can pose genuine financial stability risks.”

He added agencies will propose new capital rules to implement an international bank rule agreement in the near future, but will likely not complete the rules before the middle of 2024.

The so-called Basel III “endgame” rules are already a focus of intense criticism by the banking industry, who are arguing to regulators and lawmakers that overly strict requirements could hinder banks and the broader economy. Read more

PODCAST: A Look at the Treasury Department’s April 2023 Report on Decentralized Finance or “DeFi”

Courtesy of Peter D. Hardy & Lisa Lanham, Ballard Spahr

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Finance Monitor podcast series, A Look at the Treasury Department’s April 2023 Report on Decentralized Finance or “DeFi.”

In this episode, we follow up and expand upon our blog post regarding the U.S. Department of the Treasury’s April 6, 2023 report examining vulnerabilities in decentralized finance (“DeFi”), including potential gaps in the United States’ anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) regulatory, supervisory, and enforcement regimes for DeFi.

In the podcast, we discuss how Treasury tries to define DeFi, the report’s findings regarding the use of DeFi services in transferring and laundering illicit proceeds, the BSA’s potential application to DeFi services, and the report’s recommendations. We then discuss state efforts to regulate digital assets and federal enforcement actions against crypto mixers and tumblers, including a lawsuit challenging OFAC’s authority to designate Tornado Cash. We conclude by discussing the focus of state regulators on BSA/AML policies and procedures, and steps businesses in the digital asset space can take to mitigate compliance risk.

 

June 16, 2023: Industry and Regulation

McHenry Demands FSOC Reverse Course on Nonbank Financial Institution Supervisory Guidance

The Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), sent a letter to U.S. Treasury Secretary Janet Yellen in her capacity as Chair of the Financial Stability Oversight Council (FSOC). In the letter, Chairman McHenry demands FSOC revisit its April decision to evaluate risks posed by non-bank financial entities based on size, rather than the activities they undertake. Chairman McHenry also expresses concern that allowing FSOC to extend its supervisory reach beyond prudential institutions to nonbank entities in this way could pose significant regulatory consequences for our financial system. Read the full letter here 

OCC Report Identifies Key Risks Facing Federal Banking System

The Office of the Comptroller of the Currency (OCC) today reported the key issues facing the federal banking system in its Semiannual Risk Perspective for Spring 2023.

The OCC reported that the overall strength of the federal banking system is sound. The OCC has closely monitored the condition of the institutions it supervises throughout the market stress this spring and has engaged directly with its banks to ensure they are appropriately managing their risks and restoring confidence in the banking system.

The banking system faced increased volatility due to a liquidity crisis in the first quarter of 2023. Banks are focused on stabilizing liquidity and maintaining confidence in the banking system. Banks should remain diligent and maintain effective risk management practices over critical functions to continue to withstand current and future economic and financial challenges.

The OCC highlighted liquidity, operational, credit, and compliance risks, among the key risk themes in the report. Highlights from the report include:

  • Liquidity levels have been strengthened in response to the failures of several banks and investment portfolio depreciation. Rising long-term rates caused significant depreciation in investment portfolios, focusing attention on banks’ liquidity risk profiles.
  • Credit risk remains moderate in aggregate, but signs of stress are increasing, for instance in certain segments of commercial real estate. Overall, credit markets and loan portfolios remain resilient, and problem loan levels remain manageable. The persistent drag from high inflation and rising interest rates, however, is causing credit conditions to deteriorate.
  • Operational risk is elevated. Cyber threats persist. Digitalization of banking products and services is expanding, especially as banks increase use of third parties. This expansion presents both opportunities and risks.
  • Compliance risk is elevated. Banks continue to operate in a dynamic environment in which compliance management systems are challenged to keep pace with changing products, services, and delivery channel offerings developed in response to customer needs and preferences.

Read more

US House of Representatives Committee on Financial Services Legislation to Bring Transparency and Accountability to FinCEN, Protect Small Business Data Introduced

Today, the Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), introduced two pieces of legislation, the Accountability Through Confirmation Act and the Protecting Small Business Information Act, to reform the Financial Crimes Enforcement Network (FinCEN). These bills will bring much-needed transparency and accountability to the agency, while ensuring small businesses’ sensitive information and Americans’ privacy are protected in its beneficial ownership reporting regime.

“The degree of regulatory authority and volume of Americans’ sensitive information amassed by FinCEN would make the Intelligence Community blush,” said Chairman McHenry. “They have done this with little transparency and accountability, and a disregard for Americans’ privacy rights. In response, Republicans on the House Financial Services Committee are working to comprehensively reform the agency. As part of that effort, I am introducing two bills to boost transparency at FinCEN and ensure it is accountable to the American people. I’m proud to stand with my colleagues to fight back against government overreach and protect the privacy of our constituents.”

Background: The Accountability Through Confirmation Act of 2023 will ensure FinCEN is accountable to Congress and the American people by requiring the director of FinCEN to be appointed by the President and with the advice and consent of the Senate.

The Protecting Small Business Information Act of 2023 will protect small businesses’ sensitive information and Americans’ privacy by delaying the effective date for the upcoming beneficial ownership information (BOI) reporting requirements, which is currently January 1, 2024, until FinCEN finalizes both the Access Rule, and the CDD Congruence Rule. This legislation builds on Chairman McHenry’s work to ensure that beneficial ownership rulemaking adheres to Congressional intent, ensuring reporting companies cannot avoid transparency and preventing FinCEN from instituting an overly burdensome compliance regime on small businesses or infringing on Americans’ privacy rights.

FINRA Seeks Comment on Concept Proposal for a Liquidity Risk Management Rule

FINRA is soliciting comment on a concept proposal to establish liquidity risk management requirements. The concept proposal describes a potential rule, labeled Rule 4610, that is intended to ensure that members have sufficient liquid assets to meet their funding needs in both normal and stressed conditions. Broadly, the proposal outlines three areas where a potential rule might address liquidity risk, including liquidity stress testing, contingent funding plans and a requirement to maintain sufficient liquidity on a current basis at all times. FINRA is issuing this concept proposal so that any feedback received can be taken into account as FINRA considers a proposed rule; any proposed rule would need to be reviewed and approved by the FINRA Board of Governors, and then filed with and approved by the Securities and Exchange Commission. FINRA welcomes comment on all aspects of the concept proposal, including comment on alternatives to the proposed approach.

The draft text of potential Rule 4610 is included as Attachment A.

Treasury Secretary Janet Yellen Says to Expect a Gradual Decline in The Dollar’s Share of Global Reserves, But Greenback Remains Dominant

Courtesy of Filip De Mott, Markets Insider

KEY POINTS

  • Treasury Secretary Janet Yellen said to expect a gradual decline in the dollar’s share of global reserves.
  • Her comments were in response to de-dollarization questions during a congressional hearing.
  • She also said the dollar will remain dominant as most countries have no alternative.

The US should expect the dollar’s share of global reserves to slowly decline, but no alternatives exist that could completely displace the greenback, Treasury Secretary Janet Yellen said on Tuesday. Her comments came during a Housing Financial Services Committee in response questions about the risk of de-dollarization.

Asked by Rep. Warren Davidson, R-Ohio, on whether US sanctions could impact dollar transactions, Yellen acknowledged that their use has motivated some countries to look for currency alternatives.

“But the dollar plays the role it does in the world financial system for very good reasons that no other country is able to replicate, including China,” she said. “And that is we have deep liquid open financial markets, strong rule of law and an absence of capital controls that no country is able to replicate. It will not be easy for any country to devise a way to get around the dollar.”

Later, Rep. Vicente Gonzalez, D-Texas, further inquired whether the US should slow down the use of sanctions, noting that even traditionally allied nations, such as France, had recently made non-dollar transactions. “I would say there is virtually no meaningful workaround for most countries for using the dollar as a reserve currency,” Yellen replied.

Asked whether the dollar’s international status is diminishing, she noted growing diversification within reserve assets, something that can be anticipated in a growing global economy. “We should expect over time a gradually increased share of other assets in reserve holdings of countries — a natural desire to diversify,” she said. “But the dollar is far and away the dominant reserve asset.” Read more

 

June 9, 2023: Industry and Regulation

Agencies Propose Interagency Guidance on Reconsiderations of Value for Residential Real Estate Valuations
  • Board of Governors of the Federal Reserve System
  • Consumer Financial Protection Bureau
  • Federal Deposit Insurance Corporation
  • National Credit Union Administration
  • Office of the Comptroller of the Currency

Five federal regulatory agencies today requested public comment on proposed guidance addressing reconsiderations of value (ROV) for residential real estate transactions. The proposed guidance advises on policies that financial institutions may implement to allow consumers to provide financial institutions with information that may not have been considered during an appraisal or if deficiencies are identified in the original appraisal. ROVs are requests from a financial institution to an appraiser or other preparer of a valuation report to reassess the value of residential real estate. An ROV may be warranted if a consumer provides information to a financial institution about potential deficiencies or other information that may affect the estimated value.

The proposed guidance shows how ROVs intersect with appraisal independence requirements and compliance with applicable laws and regulations. The proposed guidance describes how financial institutions may create or enhance their existing ROV processes while remaining consistent with safety and soundness standards, complying with applicable laws and regulations, preserving appraiser independence, and remaining responsive to consumers.

Additionally, the proposed guidance would describe the risks of deficient residential real estate valuations and how financial institutions may incorporate ROV processes into established risk management functions. Deficient collateral valuations can contain inaccuracies due to errors, omissions, or discrimination that affect the value conclusion. The proposed guidance would also provide examples of ROV policies and procedures that a financial institution may establish to help identify, address, and mitigate valuation discrimination risk.

Comments must be received within 60 days of the proposed guidance’s publication in the Federal Register.

Board memo (PDF)

Federal Register notice: Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations (PDF)

Agencies Issue Final Guidance on Third-Party Risk Management
  • Board of Governors of the Federal Reserve System
  • Federal Deposit Insurance Corporation
  • Office of the Comptroller of the Currency

Federal bank regulatory agencies today issued final joint guidance designed to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.

The final guidance describes principles and considerations for banking organizations’ risk management of third-party relationships. The final guidance covers risk management practices for the stages in the life cycle of third-party relationships: planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination.

The final guidance includes illustrative examples to help banking organizations, particularly community banks, align their risk management practices with the nature and risk profile of their third-party relationships. The agencies plan to engage with community banks immediately and develop additional resources in the near future to assist them in managing relevant third-party risks.

The final guidance replaces each agency’s existing general third-party guidance and promotes consistency in the agencies’ supervisory approaches toward third-party risk management. The final guidance reflects streamlined language and improved clarity based on the agencies’ consideration of public comments on the proposed guidance released in July 2021.

Interagency Guidance on Third-Party Relationships: Risk Management (PDF)

Money20/20: HSBC to Take SVB Global

Courtesy of FinExtra

Photo courtesy of Reuters, Brendan McDermid

Money20/20 afternoon sessions began with a fireside chat between HSBC UK CEO Ian Stuart and Arjun Kharpal, senior technology reporter at CNBC. They discussed HSBC’s acquisition of Silicon Valley Bank (SVB) and what the future holds.

With many in the audience looking for an update on the status of SVB, Stuart revealed the bank is working to “migrate SVB off of the US systems and bring it onto the UK system. We’ve had a very limited time to be able to do that, so it has been quite frenzied to try and get that done.”

He added that they are “not quite there yet” with this project, but remained positive about current progress. HSBC stepped in to take over the UK arm of SVB in March 2023, and although they “hadn’t planned for it,” the bank prevailed. “That’s the big thing. So suddenly you’re trying to get enough resources to do this.”

Given that HSBC has the reputation as a bank with a limited risk appetite and SVB, being built betting on startups, Kharpal raised the question of whether HSBC was the right bank for this acquisition.

In response, Stuart argued that when it came to signing the documents they “were quite convinced that this was going to be good for all parties. So our challenge over the next few years is to prove that we are the right bank for this. I can assure you SVB a very good bank in the UK. We did our due diligence. We believe we have very talented people.” Read more

Big Banks Could Face 20% Boost to Capital Requirements

Those relying on fees might need larger buffers to absorb losses under planned rules

Courtesy of Andrew Ackerman, WSJ

U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year.

The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses.

Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases. Capital is the buffer banks are required to hold to absorb potential losses.

The plan to ratchet up capital is expected to be the first of several steps to beef up rules for Wall Street, a shift from the lighter regulatory approach taken during the Trump administration. The industry says more stringent requirements aren’t needed, could force more banks to merge to stay competitive and could make it harder for Americans to get loans from banks. Read more

June 2, 2023: Industry and Regulation

Credit Union Loan Account Balances Rising; Fewer Members Making Payments Above Monthly Minimums

Courtesy of TransUnion

TransUnion report explores the current state of consumer credit and its impact on credit unions

The newly released Q2 Credit Union Market Perspectives Report from TransUnion shows that stubbornly-high inflation continues to put pressure on the monthly budgets of consumers, credit union members among them. This has led to increasing reliance on credit cards and personal loans as borrowers seek ways to make ends meet.

“Credit union members are facing many of the same inflation-driven economic challenges as the overarching market,” said Sean Flynn, senior director of community financial institutions at TransUnion. “As a result, credit unions are seeing increased balances across the board when looking at credit cards, auto loans, mortgages, HELOCs and personal loans. HELOCs and personal loans are seeing particularly high balance growth, up more than 39% and nearly 26% respectively year-over-year (YoY).”

While balances have increased among each of the aforementioned product lines, it’s more of a mixed bag when it comes to originations. Originations from Q4 2022, the most recent quarter available for origination data, were generally flat for bankcard and auto loans, while they were down 33% YoY for mortgages. HELOCs and personal loans, on the other hand, saw YoY increases. The 13% YoY growth in HELOC originations indicates that, in the face of increasingly high-interest rates, credit union members are electing to tap into their home equity to help pay down higher-interest debt. Similarly, many credit union members likely sought personal loans, up 12% YoY, to consolidate higher-interest debt. Read more

Related reading: Dow Falls 130 Points After FDIC Reveals Record Plunge in Bank Deposits

JPMorgan to Close 21 First Republic Bank Branches

Courtesy of By Nupur Anand, Reuters

JPMorgan Chase & Co will shut 21 branches of First Republic Bank by the end of the year as it integrates the failed lender into its operations, a JPMorgan spokesperson said on Thursday.

The locations account for about a quarter of First Republic’s 84 branches across eight states. The lender, which was the largest to collapse since the 2008 financial crisis, was seized by regulators in May and sold to JPMorgan.

“These locations have relatively low transaction volumes and are generally within a short drive from another First Republic office,” the spokesperson said.

About 100 employees who are affected by the branch closures will be offered six-month transition assignments. After that, they will be eligible to apply for other roles at JPMorgan, which currently has 13,000 vacancies.

Last week, nearly 1,000 employees were notified that they would lose their jobs, according to a source familiar with the situation, while some others have been offered temporary roles for periods ranging from three months to a year.

JPMorgan is the largest U.S. lender, with more than 296,000 employees and 4,800 branches. It plans to invest in opening more locations while also expanding its digital offerings, executives told investors last month.

Agencies Request Comment on Quality Control Standards for Automated Valuation Models Proposed Rule 

Courtesy of NCUA

Six federal regulatory agencies (CFPB, FDIC, Federal Reserve, FHFA, NCUA, and OCC) today requested public comment on a proposed rule designed to ensure the credibility and integrity of models used in real estate valuations. In particular, the proposed rule would implement quality control standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers in valuing real estate collateral securing mortgage loans.

Under the proposed rule, the agencies would require institutions that engage in covered transactions to adopt policies, practices, procedures, and control systems to ensure that AVMs adhere to quality control standards designed to ensure the credibility and integrity of valuations. The proposed standards are designed to ensure a high level of confidence in the estimates produced by AVMs; help protect against the manipulation of data; seek to avoid conflicts of interest; require random sample testing and reviews; and promote compliance with applicable nondiscrimination laws.

AVMs are used as part of the real estate valuation process, driven in part by advances in database and modeling technology and the availability of larger property datasets. While advances in AVM technology and data availability have the potential to contribute to lower costs and reduce loan cycle times, it is important that institutions using AVMs take appropriate steps to ensure the credibility and integrity of their valuations. It is also important that the AVMs institutions use adhere to quality control standards designed to comply with applicable nondiscrimination laws.

Comments must be received within 60 days of the proposed rule’s publication in the Federal Register.

Attachment: Federal Register Notice

CU Trades Support NCUA’s Changes to ‘Archaic’ FOM Requirements

Some changes to the FOM rule include making it easier for CUs to expand into underserved areas.

Courtesy of By Michael Ogden, CreditUnionTimes

Officials with the credit union trade organizations, CUNA and NAFCU, threw their support behind the NCUA’s proposed reforms of the field of membership (FOM) definitions and requirements that the agency announced in February.

NCUA’s proposal would make nine changes to the Chartering and FOM Manual “to enhance consumer access to financial services, while reducing duplicative or unnecessary paperwork and administrative requirements.” It would also make four changes on underserved areas that multiple common bond federal credit unions may seek to add to their FOMs. The agency believes these “changes would streamline existing application requirements and clarify the role of data and criteria that other federal agencies provide relating to underserved areas.”

According to comments filed by CUNA and NAFCU on Tuesday, the comment deadline, both groups supported the proposals laid out by the NCUA. In a 10-page letter, CUNA Senior Director of Advocacy and Counsel Luke Martone wrote, “CUNA’s federal and state-chartered credit union members have expressed concern that the federal charter is falling behind many state charters and thus has become a barrier to the flexibility needed to operate dynamic and efficient cooperative financial institutions.” Read more

 

May 26, 2023: Industry and Regulation

Opinion: Midsize Bank Panic to Test Regulators’ Skepticism of Mergers

Some banking experts say the best way to shore up depositors’ and investors’ confidence is for more lenders to buy each other

Courtesy of Andrew Ackerman, Wall Street Journal

Bank regulators have been loath to let big lenders buy each other. They might have to reassess and allow more mergers as a way out of the current midsize-bank turmoil.

Those lenders are under pressure after several of their peers failed in recent months. Some analysts and banking experts say the best way to shore up depositors’ and investors’ confidence is for more banks to merge without government assistance—and they say regulators should get out of the way or even encourage the tie-ups.

“If the stress continues, the banking regulators are going to have to permit M&A,” said Jonathan McKernan, a Republican on the board of the Federal Deposit Insurance Corp. He said regulators should also consider letting private-equity firms take positions in banks.

Any move to embrace greater consolidation would mean a shift at federal banking agencies, including at the FDIC. The agency plays an outsize role as the federal regulator of thousands of banks, including two of the three midsize banks to fail in recent months.

Martin Gruenberg became chairman of the FDIC last year after putting pressure on a Republican-appointed agency chief seen by Democrats as moving too slowly to impose hurdles on merger activities. She ultimately resigned more than a year before her term ended. Read more

Related Reading: Yellen — Greater Concentration Among Largest Banks Not Desirable

US Prosecutors Probe Trading by First Republic’s Former Employees

Courtesy of Manya Saini, Reuters

U.S. prosecutors are reviewing stock trading by some of First Republic Bank’s employees during the lender’s recent collapse, Bloomberg Law reported on Wednesday, citing people familiar with the matter.

The Justice Department is looking at whether anyone working at the firm used inside information in transactions as it was crumbling, the report added.

Regulators seized First Republic and sold its assets to JPMorgan Chase & Co in early May, in a deal to resolve the largest U.S. bank failure since the 2008 financial crisis.

The probe, which is at an early stage, is also scrutinizing the company’s financial disclosures, Bloomberg Law reported.

In late March, Massachusetts regulators also opened an investigation into sales of company stock by top executives at First Republic in the weeks leading up to the recent banking turmoil.

Spokespersons for the Justice Department and JPMorgan declined to comment.

Cayman Islands Regulator Exploring Legal Options After FDIC Seized SVB Deposits

Government official meets with Chinese depositors whose accounts were drained after SVB’s collapse

Courtesy of Frances Yoon, Wall Street Journal

The Cayman Islands Monetary Authority has engaged lawyers to assess its legal options after deposits at Silicon Valley Bank’s branch in the territory were seized by the Federal Deposit Insurance Corp., a government official told affected depositors.

André Ebanks, the Cayman Islands’ minister of financial services and commerce, met in person last week with some of SVB’s depositors in Hong Kong. He told them the financial regulator has retained lawyers and is looking for ways to help them, according to meeting attendees.

Chinese and other Asian investment firms that banked with SVB’s branch in the Cayman Islands were left out in the cold following the U.S. bank’s collapse in March, The Wall Street Journal previously reported. All of SVB’s U.S. depositors were made whole when the FDIC intervened in mid-March to prevent the lender’s failure from destabilizing the U.S. banking system. The FDIC said at the time that its action was “designed to protect all depositors of Silicon Valley Bank.” It subsequently arranged a sale of most of SVB’s U.S. deposits and loans to First Citizens Bancshares.

The FDIC, however, took the deposits of the failed lender’s Cayman Islands branch and informed those depositors that they would be treated as general unsecured creditors in SVB’s receivership. It also reiterated that the bank’s foreign deposits weren’t covered by U.S. deposit insurance, and said depositors at the branch could file claims seeking compensation. Read more

‘Turbulence Ahead’: Nearly 4 In 10 Americans Lack Enough Money To Cover A $400 Emergency Expense, Fed Survey Shows

Courtesy of Will Daniel, Fortune

It’s no secret that stubborn inflation and aggressive Federal Reserve interest rate hikes have weighed on Americans’ finances for over a year now, but new data from the central bank shows just how many consumers are feeling the pain.

According to the Fed’s 2022 Economic Well-Being of U.S. Households survey released Monday, some 37% of Americans lack enough money to cover a $400 emergency expense, up from 32% in 2021. That means nearly one in four consumers would have to use credit, turn to family, sell assets, or get a loan in order to cover any major unexpected cost. And when asked about non-emergency expenses, 18% of Americans said the largest expense they could cover using only their savings was under $100.

“The 2022 survey found that self-reported financial well-being was among the lowest levels observed since 2016,” the central bank’s researchers wrote of the data, noting that “higher prices have negatively affected most households.”

While a record 35% of Americans said they were doing worse off financially than a year ago in the Fed’s latest household survey, there were also some bright spots due to the low unemployment rate. Despite consistent recession predictions from Wall Street, the U.S. unemployment remained at a 54-year low of 3.4% in April. And the Fed found that one-third of U.S. adults received either a raise or a promotion in 2022 amid the strong labor market.

The only problem is those raises weren’t enough for most Americans to keep up with inflation. Between April 2022 and April 2023, real average hourly wages fell 0.5%, according to the Bureau of Labor Statistics. And the Fed’s latest survey found that “more adults experienced spending increases than income increases” in 2022—44% of Americans spent more, while just 33% made more.

May 12, 2023: Industry and Regulation

Fed Governor Waller Casts Doubt on Need to Conduct Climate-Change Tests for Banks

Courtesy of Jeff Cox, CNBC

Federal Reserve Governor Christopher Waller on Thursday cast doubt on the need for special focus on how banks are preparing for climate change risks.

While acknowledging the risks that climate change poses, he said catastrophic events like hurricanes and floods don’t generally reverberate across the U.S. economy. Thus, he said that conducting special tests for how banks are preparing for such events probably shouldn’t fall under the Fed’s purview.

“I don’t see a need for special treatment for climate-related risks in our financial stability monitoring and policies,” Waller said in the prepared remarks for a speech in Madrid. “Based on what I’ve seen so far, I believe that placing an outsized focus on climate-related risks is not needed, and the Federal Reserve should focus on more near-term and material risks in keeping with our mandate.”

Nevertheless, the Fed already has directed the nation’s six largest banks to show plans for how they would respond to climate-related events. While separate from the stress tests the Fed conducts on systemically important institutions, the exercises bear similarities. The stress tests focus on how banks would respond to financial and economic crises.

“Climate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States,” Waller said. “There is no need for us to focus on one set of risks in a way that crowds out our focus on others.” Read more

Senate Holds First Hearing on Bill to Help Marijuana Businesses Access Financing

Courtesy of Chelsey Cox and Stephan Sykes, CNBC

  • The Senate is held its first hearing Thursday on the Secure and Fair Enforcement (SAFE) Banking Act.
  • Last month, a group of bipartisan lawmakers reintroduced the SAFE Banking Act in the House and Senate.
  • The legislation will free up banking services for the cannabis industry.

The Senate Banking Committee is holding its first-ever hearing Thursday on a bipartisan bill that would allow the cannabis industry to access traditional banking services — which marijuana businesses see as critical to their survival.

The meeting, titled “Examining Cannabis Banking Challenges of Small Businesses and Workers,” will hear testimony from lawmakers on both sides of the aisle, including Sens. Jeff Merkley, D-Ore., and Steve Daines, R-Mont., who reintroduced the standalone bill last week. The committee will also hear from witnesses including the Cannabis Regulators of Color Coalition, Drug Policy Alliance and the United Food and Commercial Workers International Union.

Related Reading: Federal Transportation Agency Finalizes New Marijuana Testing Policies To Reduce False Positives

Thursday’s hearing will determine next steps in getting the bill to the Senate floor for a vote, as Senate Majority Leader Chuck Schumer and other key lawmakers express support for it. It comes as the marijuana industry, which is facing a downturn even as more states approve legal markets, has pushed Congress to take action on the issue.

“Without full access to the banking and payments system, legal cannabis businesses are forced to operate in the shadows,” said Sen. Sherrod Brown, an Ohio Democrat and chairman of the committee, during opening remarks.

Many business owners also rely funds from friends and family in lieu of small business and bank loans because “they might go through all the cost and effort, only to be denied,” Brown said. Read more

Cramer, Warren Lead Reintroduction of Bill to Modernize, Improve Banking Security Regulations

U.S. Senators Kevin Cramer (R-ND) and Elizabeth Warren (D-MA), members of the Banking Committee, reintroduced the Bank Service Company Examination Coordination Act, legislation they led in the 116th and 117th Congresses. The bipartisan bill would define states’ authority to examine third-party Technology Service Providers (TSPs), improve information sharing and oversight mechanisms, and reduce regulatory inefficiencies.

“This legislation will enable better information sharing and exam coordination between state and federal regulators. Addressing risks to the banking system is more efficiently done when regulators work together. I appreciate this bi-partisan effort to ensure better coordination between regulators and the recognition that state regulators have a seat at the table,” said North Dakota Department of Financial Institutions Commissioner Lise Kruse.

Banks use TSPs to outsource services like loan and deposit taking, payment processing, IT security and testing, and call center operations. Similarly, partnerships with fintech firms allow them to provide investment and personal finance services through mobile apps. While common, these relationships can expose banks and consumers to unique compliance and data security risks.

The Bank Service Company Act (BSCA) authorizes federal regulators to evaluate TSPs, but is silent on the role of state regulators, resulting in duplicative supervision. Senator Cramer’s Bank Service Company Examination Coordination Act would amend the BSCA to address this.

Joining Senators Cramer and Warren are Senators Cynthia Lummis (R-WY), Mazie Hirono (D-HI), John Boozman (R-AR), and Mike Rounds (R-SD). The bill has also garnered support from stakeholders on the state and national levels. Read more

CFDI Oversight Legislation Introduced, Credit Union Industry in Full Support

Courtesy of Michael Ogden, Credit Union Times 

Proposed changes include an annual testimony from the U.S. Treasury in front of the House and Senate committees.

Representatives from Tennessee and Colorado introduced bipartisan legislation Tuesday to provide more transparency to the Community Development Financial Institutions (CDFI) Fund. The bill, from Reps. John Rose (R-Tenn.) and Brittany Pettersen (D-Colo.), has the full backing of officials from NAFCU and CUNA.

According to a statement from CUNA, the association is pleased the bill includes the following items:

  • Requires an annual testimony, at the discretion of the chair, before the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs Committee.
  • Provides further discretion to the chair to convene such a hearing at the subcommittee level or full committee level.
  • Requires the Treasury Secretary, or their designee, to appear before the hearing.

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After Dimon’s First Republic Purchase, Tougher Banking Regulations Loom

New rules forcing the big banks to increase their capital reserves are in the works, along with changes for regional banks.

Courtesy of David J. Lynch, Washington Post

When regulators earlier this month needed someone to take the failed First Republic Bank off their hands, they chose Jamie Dimon, the chief executive of JPMorgan Chase, putting him in position to boost his company’s annual profits by half a billion dollars.

That may be the last thing they do that makes Dimon happy.

The Federal Reserve within weeks is expected to require banks to increase their capital reserves, an idea that Dimon, who heads the nation’s largest financial institution, already has publicly disparaged as “bad for America.” Regulators also are likely to toughen banks’ annual stress tests and to change the accounting rules for low-risk government securities, such as the kind that fueled the collapse of Silicon Valley Bank.

“This could be a bit of a calm before the storm,” said Ian Katz, managing director of Capital Alpha Partners. “Regulators are still going to put into effect tougher standards, including capital requirements. JPMorgan and other big banks are going to push back on that.”

Indeed, the new requirements could increase the amount of capital that banks are required to hold by 20 percent, representing the “most consequential change to US banking regulation” since passage of the Dodd-Frank legislation after the 2008 financial crisis, according to a new report by PwC, one of the big four accounting firms. Read more

May 5, 2023: Industry and Regulation

OCC, FDIC Flag ‘Unfair, Deceptive’ Overdraft Practices

Courtesy of Anna Hrushka, BankingDive

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. on Wednesday warned banks about certain overdraft practices that could put them at risk of violating prohibitions against unfair or deceptive practices.

The notices follow the Biden administration’s push to rein in surprise charges, or “junk fees,” across several industries, including the financial services sector. The OCC bulletin highlighted several overdraft practices that could result in violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as Section 5 of the Federal Trade Commission Act.

The regulator cautioned banks against assessing overdraft fees on “authorize positive, settle negative” or APSN debit card transactions, instances in which a transaction is authorized when a consumer’s balance is positive but later post to the account when the available balance is negative. Such transactions are unfair, the OCC said, because consumers are “unlikely to be able to reasonably avoid injury.” Read more

KMPG’s Auditing Scrutinized After Trio of Bank Failures

Courtesy of PYMNTS.com

America’s biggest bank auditor is reportedly under fire after a trio of high-profile banking failures.

KPMG, one of the “Big Four” accounting firms, was the auditor for Silicon Valley Bank (SVB), Signature Bank and First Republic Bank, all of which were taken over by federal regulators in the last eight weeks.

And with KPMG having signed off on the health of the banks shortly before their downfall, questions are now being raised about the quality of its work, the Financial Times (FT) reported Wednesday (May 3).

“It’s a three-fer,” Francine McKenna, a former KPMG auditor who now lectures at the University of Pennsylvania’s Wharton School, told the FT. “It’s a dubious achievement . . . and we need tough action to back up tough talk from regulators.”

Related Reading: How JPMorgan Won the First Republic Deal

“You can’t expect auditors to know a bank run is coming,” said Kecia Williams Smith, a former auditor and regulator turned assistant professor of accounting at North Carolina A&T State University. “What is fair is to ask about an auditor’s risk assessment and whether they had the right audit procedures.”

PYMNTS has reached out to KPMG for comment but has not yet received a reply. As noted here last month, KPMG concluded its audit of SVB 14 days before its collapse. Signature’s number received a clean bill of health March 1, less than two weeks before it was taken over by the Federal Deposit Insurance Corp. (FDIC). Read more

US Supreme Court to Examine Whistleblower Claims Against Financial Firms in UBS Case

Courtesy of By Daniel Wiessner, Reiters

The U.S. Supreme Court on Monday agreed to examine how difficult it should be for financial whistleblowers to win retaliation lawsuits against their employers as the justices took up a long-running case involving Switzerland’s UBS Group AG.

The justices will hear an appeal by Trevor Murray, a former UBS bond strategist, of a lower court’s decision to throw out his 2021 lawsuit that accused the company of unlawfully firing him for refusing to publish misleading research reports and complaining about being pressured to do so.

The appeal involves a technical but important issue – whether whistleblowers who sue their employers for retaliation under the federal Sarbanes-Oxley Act must prove that companies acted with “retaliatory intent.”

The New York-based 2nd U.S. Circuit Court of Appeals last year decided that Murray was required to meet that bar and failed, creating a split with four other federal appeals courts. Those courts have said that defendants in Sarbanes-Oxley cases can raise the lack of intent as a defense, but that plaintiffs do not have to prove employers acted with intent. Read more

FinCEN Updates: Statement of FinCEN Acting Director before House Committee on Financial Services (PDF)

I know that there have been several changes in the Committee’s membership since I last testified in April 2022, so I want to begin by explaining FinCEN’s role. FinCEN is the primary U.S. Government regulator responsible for implementing the Bank Secrecy Act (BSA) and is also the Financial Intelligence Unit (FIU) of the United States. In these roles, FinCEN’s mission is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national
security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. Clearly, this is a broad mission.

The foundation of our work is two-fold. We receive information from financial institutions and others
pursuant to the BSA — Suspicious Activity Reports (SARs), Currency Transaction Reports (CTRs), and
other types of reports and financial intelligence — that assist law enforcement and the intelligence
community with detecting and ultimately combating illicit financial flows. Over the years, as
wrongdoers have found new ways to attempt to exploit our financial system, Congress has updated the
BSA to provide law enforcement and regulatory agencies with the critical tools needed to combat
money laundering and counter the financing of terrorism.

We also work to ensure that financial institutions, such as depositary institutions, money services
businesses, casinos, and others, maintain effective, risk-based AML/CFT compliance programs that allow
them to effectively detect and report suspicious activity involving financial crime. In doing so, we work
with law enforcement, the Federal functional regulators, national security agencies, and foreign
counterparts to implement an effective AML/CFT regime. Read more

 

Apr. 28, 2023: Industry and Regulation

U.S. Treasury Looks to Curb ‘De-risking’ at Banks

The practice of broadly avoiding customers with perceived links to illicit activities—or de-risking—can end up denying banking services to law-abiding nonprofits, money-transmitting firms, and underserved communities, the Treasury said

Courtesy of Mengqi Sun, Wall Street Journal

The Biden administration is looking to address actions taken by U.S. banks to unbank certain customers and groups over their perceived connections to higher money-laundering risks. Banks’ decisions to limit exposure to certain categories of customers over increased illicit finance risks could hurt those communities and pose a national security risk by driving financial activities out of the regulated banking system, the U.S. Treasury Department said.

“Broad access to well-regulated financial services is in the interest of the United States,” Deputy Treasury Secretary Wally Adeyemo said in a statement.

In a report published Tuesday, the Treasury Department spelled out the problems de-risking poses and offered policy recommendations to address the issue, among them setting clear supervisory guidance while keeping the effects of de-risking in mind.

De-risking has long been a problem to some banking customers operating in industries or regions perceived as having an elevated risk of money-laundering. The term refers to when a financial institution indiscriminately terminates or restricts business relationships with broad categories of customers over compliance concerns, avoiding rather than managing the specific risks associated with these customers.

The report, mandated by the Anti-Money Laundering Act of 2020, found that de-risking undercuts U.S. government objectives and the Biden administration’s priority of shaping a more transparent and accessible financial system. De-risking can also drive financial activities out of regulated channels, hamper remittances, prevent the smooth transfer of humanitarian aid and disaster relief, and deny low- and middle-income communities easy access to financial resources, the report said.

Here’s What We Know About First Republic Bank

Courtesy of Nicole Goodkind, CNN

First Republic Bank has been teetering on the edge for weeks. It may be finally falling. The San Francisco-based lender could be next in the line to collapse, following in the footsteps of former competitors Silicon Valley Bank and Signature Bank.

It certainly fits the bill: First Republic (FRC), like SVB, is a mid-sized regional bank with a highly concentrated customer base, outsized amounts of uninsured deposits and loads of unrealized losses on the bonds and treasuries it holds.

Rumors swirled on Wednesday as publications rushed out reports from unnamed sources saying that the bank was looking to cut a deal to sell assets, that the White House wasn’t interested in facilitating a bailout (there were also reports that it is) and that the Federal Deposit Insurance Corporation is considering downgrading the bank’s debt, which would limit its access to essential Federal Reserve loans.

The FDIC, Federal Reserve, White House and First Republic did not respond to requests for comment about those reports. But the damage has been done. Shares of the stock fell by nearly 30% on Wednesday, after plunging by 49% on Tuesday. The stock’s trading was halted numerous times both days as its rapid decline triggered volatility-triggered timeouts by the New York Stock Exchange.

But what’s actually happening here?

The reality of the situation: What we do know for certain is that First Republic reported on Monday that its total deposits fell 41% in the first quarter of 2023 to $104.5 billion, even after a consortium of banks stepped in with $30 billion to prevent the lender from failing. Without that cash infusion, deposits would have fallen by over 50%.

Fourth Circuit Holds GAP Coverage Financed with Vehicle Purchase Is Exempt From MLA

Courtesy of Brian Turetsky, BallardSpahr, ConsumerFinanceMonitor.com

In a highly anticipated decision regarding the treatment of Guaranteed Asset Protection (“GAP”) under the Military Lending Act (“MLA”), a federal appellate court has ruled that a hybrid loan that finances GAP coverage along with a motor vehicle purchase is exempt from the MLA’s restrictions.  The 2-1 decision on April 12, 2023 by the U.S. Court of Appeals for the Fourth Circuit in Davidson v. United Auto Credit Corporation includes a vigorous dissent, which argues that the majority ignored the Congressional intent behind the MLA in arriving at their decision.  While the decision is only binding in the Fourth Circuit, it provides a degree of clarity – for now – as to the MLA’s coverage of such hybrid loans, an issue that has been the subject of mixed messages from federal regulators over the past several years.

The dispute in Davidson involved the MLA’s definition of “consumer credit.”  Under the MLA, the term “consumer credit” specifically excludes “(A) a residential mortgage, or (B) a loan procured in the course of purchasing a car or other personal property, when that loan is offered for the express purpose of financing the purchase and is secured by the car or personal property procured.” 10 U.S.C. §987(i)(6)(emphasis added).  Accordingly, while a loan to finance the purchase of a car is clearly not “consumer credit” and therefore excluded from MLA coverage, the parties in Davidson sought clarity as to whether financing something in addition to  a car purchase – here, GAP coverage  – rendered the exclusion inapplicable. Read more

NCUA: Comment Period for Climate-Related Financial Risks to Credit Unions RFI Now Open

The NCUA Board approved on April 20 a request for information seeking comments on current and future climate and natural disaster risks to federally insured credit unions, related entities, their members, and the National Credit Union Share Insurance Fund.

The comment period is now open, and comments are due by June 26, 2023.

The NCUA is seeking input that would strengthen its ability to identify and assess credit unions’ current and future climate and natural disaster risks. The NCUA is also seeking stakeholder comments on opportunities to enhance its supervision and regulation of each regulated entity’s management of such risks.

In addition to seeking stakeholders’ views and experiences on the current and future climate and natural disaster risks faced by federally insured credit unions, commenters are encouraged to provide comments on any and all relevant issues they believe the Board should consider with respect to the financial risks associated with climate change. This includes, but is not limited to, risks posed to, or stemming from, field of membership, lending, investments, other assets, deposits, underwriting standards, insurance coverage, liquidity, and capital.

NASCUS Summary: Joint Statement on Completing the LIBOR Transition

The NCUA issued Letter to Credit Unions (LTCU) 23-CU-03. The letter directs credit unions to the Joint Statement on Completing the LIBOR Transition, issued by NCUA together with four federal financial institution regulatory agencies, and the state bank and credit union regulators.  The joint statement reminds supervised institutions that U.S. Dollar (USD) LIBOR panels will end on June 30, 2023.

NCUA directs credit unions to contact their appropriate NCUA Regional Office or state supervisory authority for any assistance.

Additional guidance on the LIBOR Transition Plans can be found in NCUA LTCU 21-CU-03.

Release: Joint Statement on Completing the LIBOR Transition

Apr. 21, 2023: Industry and Regulation

CFPB Staffer Forwarded Data On 250K Consumers to Personal Account

Courtesy of Stephen Neukam, The Hill

A now-former Consumer Financial Protection Bureau (CFPB) employee sent the personal information of over 250,000 individuals to their personal email account, the agency said, calling the privacy breach “completely unacceptable.”

The data sent by the employee, who was cleared to access the information in their day-to-day duties, included two spreadsheets with transaction-specific account numbers for around 256,000 individuals at a single institution, according to the CFPB.

The bureau clarified that the account numbers were for internal use only, and couldn’t be used to access an individual’s personal accounts or bank account numbers. There was also no evidence that the information had been disseminated by the now-fired employee.

“The CFPB takes data privacy very seriously, and this unauthorized transfer of personal and confidential data is completely unacceptable,” the agency said in a statement to The Hill. “We have referred the matter to the Office of the Inspector General, and we are taking appropriate action to address this incident.”

The bureau said it has identified information that included customers of at least seven different institutions, but said the scale of the information breached for the other institutions is much smaller. The data from other firms included account numbers, loan numbers and demographic information. Read more

NASCUS Summary: NCUA Research Examines Credit Union Exposure to Climate-Related Physical Risks

By Sarah Stevenson, Vice President, Regulatory Affairs, NASCUS

The NCUA’s Office of the Chief Economist (OCE) released a Research Note examining credit union exposure to climate-related physical risks. 

OCE utilized year-end 2021 Call Report data and the Federal Emergency Management Agency’s (FEMA) National Risk Index (NRI) to estimate credit union exposure to climate-related physical risks. The research found 25 percent of all federally insured credit unions are in communities classified as having a relatively high or very high risk of experiencing adverse effects due to natural hazards. Twenty-five percent accounts for one-third of assets in the credit union system. 

The study also revealed that minority depository institutions (MDIs) are at a significantly greater risk than the credit union system. More than 50% of MDIs were found to be at a relatively high or very high risk of suffering adverse consequences from natural disasters.

The research includes analyses of the exposure of credit union assets to natural hazard risk by state, highlighting the areas for the highest related weather and climate-related risks to credit unions located along the coasts, notably California, Texas, and Florida. The research also looked at the exposure to the ten most costly natural disasters, finding roughly half of credit union assets are in areas at relatively high or very high risk of experiencing tornados, the fourth most expensive disaster type. 

According to the OCE, the assessment of climate-related risks is still in its preliminary stage, and they suggest that gathering more data would enhance the accuracy of their analysis. The Federal Reserve Board (FRB) is currently examining scenario analysis, and the OCE will keep a watchful eye on their progress. As new information concerning climate and weather events becomes available, the OCE plans to conduct additional analysis of credit union-specific data.

The NCUA Board will consider a request for information and comment on climate-related financial risk during their April 20, 2023, Board meeting. 

 

U.S. Treasury Injects $226M Into Puerto Rico’s Credit Unions

Courtesy of Michelle Kantrow-Vázquez, NimB

The U.S. Department of the Treasury has announced the allocation of $226 million to benefit 69 credit unions in Puerto Rico through its Community Development Financial Institutions (CDFIs) Fund’s Equitable Recovery Program. The funds are intended to expand the capacity of these cooperatives to respond to the economic and community development needs of the towns they serve.

Cathie Mahon, CEO of Inclusiv, together with Aurelio Arroyo, chair of the Puerto Rico Association of Credit Union Executives (ASEC, in Spanish), and Mabel Jiménez, executive president of the Cooperatives Supervision & Insurance Corp. (Cossec, in Spanish), made the announcement.

“This historic and unprecedented investment by the U.S. Treasury in the island’s credit union network represents a validation of its community initiatives, its role as an engine of economic development, and its financial and managerial soundness,” said Mahon. Read more

As Outstanding Credit Card Debt Hits New High, The CFPB Is Focusing on Ways To Increase Competition and Reduce Costs

Courtesy of Rohit Chopra, CFPB

Credit cards are one of the most common financial products in our country, providing the bulk of short-term credit for families. Interest rates on credit cards have risen substantially, with average interest rates going over 20% . Given the trends for the 175 million Americans with credit cards, the CFPB estimates that outstanding credit card debt may continue to set records and could even hit $1 trillion.

As credit card issuers hike rates, the CFPB is working across the board to make sure that Americans can shop in a competitive market and reduce their costs.

We’ve proposed reforms to credit card penalty fees. In a competitive market, credit card companies will compete upfront on the interest rates they charge, rather than building a business model on back-end fees. In February, we announced a proposal to amend a rule provision put into place by the Federal Reserve Board of Governors in 2010 that credit card issuers have used to sidestep a Congressional prohibition on unreasonable or out of proportion penalty fees.

This loophole has allowed some credit card issuers to charge big fees even when a borrower is just a day late. The proposal would permit credit card issuers to charge a penalty of $8 or an amount that is in line with their costs.

We have extended the comment period on the proposed credit card late fees rule to give the public 90 days to provide feedback. Read more

Apr. 14, 2023: Industry and Regulation

Is It Just Me, or Is The Treasury Department Firing Warning Shots At DeFi?

Seems like crypto may be in for a new wave of enforcement.

Courtesy of Elizabeth Lopatto

All kinds of unwanted users — ransomware gangs, thieves, scammers, and North Korea — are merrily transacting in decentralized finance and even laundering funds, according to a new report from the Treasury Department. That’s because DeFi doesn’t comply with anti-money laundering and anti-terrorism finance laws.

Poor compliance with anti-money laundering as well as poor cybersecurity puts DeFi users at risk of theft and fraud, the Treasury says.

Related links

In the US, the Bank Secrecy Act — and some other regulations — mean that financial institutions have to help the government detect money laundering. In this paper, the Treasury notes that a DeFi service might well be a financial institution under the BSA, even if it’s decentralized, and will have to comply with the law. Uh-oh! That sounds like a warning shot. If I worked in DeFi, I would be worried that a crackdown is coming; the Treasury is essentially saying that DeFi services are vulnerable under existing laws.

The report finds that “many” DeFi services don’t comply with the BSA, which is not exactly a surprise given, you know, the whole history of Bitcoin being a currency-based way to hate the government. In some cases, the paper notes, DeFi services purposefully decentralize what they’re doing to try to avoid anti-money laundering enforcement. Unfortunately, the Treasury says, that is not at all how the law works.

There’s a second warning shot in the paper: it recommends “stepping up engagements with foreign partners to push for stronger implementation” of anti-money laundering laws, which sounds an awful lot like the US leaning real hard on other countries where DeFi might be established. Read more

Will SVB’s Collapse And Credit Suisse’s Bailout Result In Increased Spend On Risk Management?

Courtesy of Madhvi Mavadiya, FinExtra

SVB UK has been sold to HSBC and continues to exist as a legal entity. For technology companies and their investors, now is the time for reflection and preparing for any future risk of a similar collapse. According to Allen & Overy, the “collapse of SVB at the heart of the global tech ecosystem was a surprise to many in the industry. It highlighted the concentration of banking functions within the tech sector and gave tech companies little time to work out their contingency plans in the event of a liquidity crunch following an insolvent collapse of their primary banking provider.

This is an excerpt from The Future of Fintech in the UK 2023: An Innovate Finance Global Summit and UK Fintech Week special edition’ report. Allen & Overy stated that technology companies and their investors should ask themselves the following questions:

  • Can the business diversify its banking relationships, to reduce the risk of being over-reliant on one banking partner for their cash deposits and access to credit?
  • Does the business have an emergency liquidity “Plan B” in place, in the event its banking or credit provider fails?
  • Does management have a strategy as to how they will react? Which advisers will they engage to help navigate the crisis?
  • How might the business source emergency liquidity to plug any funding gap? Consider any contractual restrictions on incurring emergency liquidity, understand what consents the business will need, and build a picture of what sort of debt or equity instrument might be the best way of getting emergency liquidity into the business and capital structure at short notice.
  • Is an emergency funding provision within the company’s constitutional documents necessary or desirable? If so, what consents are required to make that change?
  • Is the business able to articulate its risk strategy convincingly for future fundraising exercises? We expect banking arrangements to have renewed focus in due diligence questionnaires.
  • When considering new investors, will they be willing to support the company should a crisis arise?

The collapse of SVB will “have a long-term impact on fundraising terms and the oversight that investors will demand when it comes to the cash that is invested in tech companies. In particular, it is possible that covenants will be included in subscription documents that require that cash is held in a designated list of well-capitalised banks,” Allen & Overy revealed. Read more

FinCEN Requests Comments on Renewal of OMB Control Number for MSB Registration Regulations & FinCEN Form 107

On April 11, 2023, the Financial Crimes Enforcement Network (FinCEN) published in the Federal Register a 60-day notice to renew the Office of Management and Budget (OMB) control number assigned to existing Bank Secrecy Act regulations at 31 CFR 1022.380 and FinCEN Form 107 (RMSB). Specifically, the regulations require money services businesses to register with FinCEN using FinCEN Form 107, renew their registration every two years, and maintain a list of their agents. The notice is required to give the public an opportunity to comment on existing regulatory requirements and burden estimates. The notice requests feedback from industry on or before June 12, 2023. FinCEN encourages the public to review this notice and provide comment.

Federal Register Notice

The FDIC’s ‘Special’ Fee to Make Banks Pay for SVB Cleanup

Courtesy of By Douglas Gillison and Hannah Lang, Reuters

The Federal Deposit Insurance Corp is expected to propose next month how to make the U.S. banking sector pay for an estimated $23 billion hole in its insurance fund by the collapse of Silicon Valley Bank and Signature Bank in March. The agency has broad authority in setting the terms of what is known as a “special assessment” to fill the gap and precisely what this will look like is still an open question.

Banking trade organizations tell Reuters they have yet to hear specifics about the assessment. The FDIC declined to comment. Here is what is known about the assessment and the insurance fund:

What is the Deposit Insurance Fund?
The Deposit Insurance Fund (DIF) is a pot of cash that the FDIC maintains to guarantee up to $250,000 of depositors’ money. As an insurance premium, banks ordinarily pay a quarterly “assessment” based on a set methodology drawing on financial data and risk determinations.

To stop the spread of panicked withdrawals throughout the banking system last month, the FDIC guaranteed all deposits at SVB and Signature Bank, even those over $250,000. Such losses require the FDIC to impose a “special assessment” to replenish the DIF.

The law does not define the “assessment base” for the special assessment or which banks will pay it. There is not a time frame for recouping the funds. Echoing the testimony of FDIC Chair Martin Gruenberg, former FDIC Chair Sheila Bair told Reuters on April 6 the agency has “a lot of latitude” in designing the special assessment.

What happened the last time? Currently, the law requires the FDIC to maintain $1.35 in the fund for every $100 of insured deposits. By the end of December, DIF’s balance stood at $128.2 billion, meaning the bank failures in March could account for about 18% of the fund. Read more

 

Apr. 7, 2023: Industry and Regulation

High & Dry: Banking Crisis to Further Choke Funding For Cannabis Sector

Courtesy of Mrinalika Roy, Reuters

The global banking turmoil threatens to squeeze U.S. cannabis companies already struggling with meager funding sources by drying up support from regional lenders and tightening fundraising from alternative avenues.

Most U.S. banks do not service cannabis companies as marijuana remains federally illegal despite several states legalizing its medicinal and recreational use and is a Schedule 1 drug. Only about 10% of all U.S. banks and about 5% of all credit unions provide cannabis banking, as per analysts’ estimates.

“What this crisis means is probably the duration of the capital tightness in our space (will continue) because we’re seeing risk-off mentality,” said Morgan Paxhia, co-founder of cannabis hedge fund Poseidon Investment Management.

“We’re expecting banks to become more restrictive with lending and that’s going to have implications.”

The collapse this month of two U.S. mid-sized lenders — the Silicon Valley Bank and Signature Bank (SBNY.O) — and the Swiss government-brokered deal for UBS (UBSG.S) to buy Credit Suisse (CSGN.S) have sparked fears of a contagion and shredded investor confidence. Read more

Senate Banking Chairman Says ‘We Need’ To Pass Marijuana Banking Bill ‘This Year,’ Disclosing White House Support

Courtesy of Mrinalika Roy, Reuters

The chairman of a key Senate committee says lawmakers need to act on marijuana banking legislation “this year,” and his Republican counterpart on the panel agrees that the issue will “come to a conclusion likely in this Congress.”

On the House side, the GOP chairman of that chamber’s committee of jurisdiction says that the cannabis banking problem is “not a priority for me” while adding that he is “not closed off” to the issue altogether.

Senate Banking Committee Chairman Sherrod Brown (D-OH) also reiterated that leadership was prepared to “move” on the cannabis reform just before the collapse of a bank this month distracted members, and he disclosed that “the White House wants this fixed,” as far as he’s been told.

Smaller banks, regional lenders and credit unions that typically extend credit to the cannabis sector have been flagged by analysts as facing higher risk from the current turbulence.

U.S. cannabis borrowers could also see their already higher interest rates go up further due to the crisis. Read more

Analysis: Social Media-Driven Bank Runs Burden Regulators With a Bigger Problem

Courtesy of Hannah Lang, Reuters

The speed at which depositors fled Silicon Valley Bank this month – withdrawing $42 billion in 24 hours – has left authorities confronting a new risk: the social media-driven bank run. Gone are the days when lines of people outside banks served as the defining image of a lender on the brink. In today’s turbocharged digital age, customers can withdraw cash through a few taps on their phone.

Reports on social media during the week of March 6 that some venture capital firms, including influential investor Peter Thiel’s Founders Fund, were advising companies to pull cash from tech-focused SVB snowballed into a stock rout and sent customers scrambling for the exit. Authorities shut SVB on March 10.

Switzerland’s Credit Suisse, which on Sunday had to be rescued by archrival UBS  in a government-engineered takeover following a collapse in investor confidence, knows only too well the dangers of social media. Last year it breached liquidity requirements at some of its entities after an unsubstantiated social media report sparked client exits.

Billionaire hedge fund manager William Ackman warned a few days after SVB’s collapse that “no bank is safe from a run” in a world with online bank accounts and social media unless the government gives depositors an explicit guarantee of “complete access” to all of their cash. Read more

House Representatives Send Bipartisan, Bicameral Letter Demanding Proposed Beneficial Ownership Reporting Regime Reflect Congressional Intent

The Chairman of the House Financial Services Committee, Patrick McHenry (R-NC), Senator Sheldon Whitehouse (D-RI) and a bipartisan, bicameral group of lawmakers sent a letter to Treasury Secretary Janet Yellen and Financial Crimes Enforcement Network (FinCEN) acting Director Himamauli Das regarding the Treasury Department’s Notice of Proposed Rulemaking (NPRM) on Beneficial Ownership Information Reporting Requirements. The lawmakers are demanding FinCEN amend the proposed rule to adhere to Congressional intent and ensure reporting companies cannot avoid transparency.

In addition to Chairman McHenry and Senator Whitehouse, the letter was signed by: Senators Sherrod Brown (D-OH), Ron Wyden (D-OR), Mike Crapo (R-ID), Elizabeth Warren (D-MA), Bill Cassidy (R-LA), and Representatives Roger Williams (R-TX), Blaine Luetkemeyer (R-MO), Steve Womack (R-AR), Maxine Waters (D-CA), and Joyce Beatty (D-OH).

Read the House Letter Here:  “We write to express our concerns about the Department of the Treasury’s Notice and Request for Comments titled “Agency Information Collection Activities; Proposed Collection; Comment Request; Beneficial Ownership Information Reports” (‘Notice’), released on January 17, 2023. While we understand that the Department may be altering the form referenced in this Notice and Request for Comment, the following concerns should be at the forefront of any future discussions. Read more

U.S. Senate Committee on Banking, Housing, and Urban Affairs: Legislation to Incentivize Whistleblowers to Report Consumer Fraud Introduced

U.S. Senator Catherine Cortez Masto (D-Nev.) introduced the Financial Compensation for CFPB Whistleblowers Act to authorize the Consumer Financial Protection Bureau (CFPB) to award financial compensation to whistleblowers who report wrongdoing to the Consumer Bureau. The bill is cosponsored by Senators Sherrod Brown (D-Ohio), Richard Blumenthal (D-Conn.), Elizabeth Warren (D-Mass.), Tina Smith (D-Minn.), Dick Durbin (D-Ill.), Jeff Merkley (D-Ore.), and Bernard Sanders (I-VT). Companion legislation is being introduced in the U.S. House of Representatives by Congressman Al Green (D-Texas-09).

“Whistleblowers are essential to our democracy,” said Senator Brown, Chairman of Senate Committee on Banking, Housing, and Urban Affairs. “Whistleblowers risk their career and their reputation to reveal corruption and bad actors seeking to exploit consumers and our government. We must do more to protect whistleblowers so they feel safe coming forward to expose corporate malfeasance. This legislation does just that by protecting whistleblowers from retaliation and incentivizing them to come forward with their information.”

Financial rewards and assured protection both help push potential whistleblowers to comeforward. The Financial Compensation for CFPB Whistleblowers Act would encourage reporting by allowing the Consumer Bureau to reward whistleblowers financial compensation from the Civil Penalty Fund. The legislation would also allow whistleblowers to retain independent counsel and protect a whistleblower’s identity. In addition, it would ensure that pre-dispute arbitration agreements wouldn’t prevent a whistleblower from contacting the Consumer Bureau with a concern. Read more

Mar. 31, 2023: Industry and Regulation

Federal Reserve Board Fines Wells Fargo $67.8 Million for Inadequate Oversight of Sanctions Risk at Its Subsidiary Bank

The Federal Reserve Board on Thursday announced that it has fined Wells Fargo & Co., of San Francisco, California, $67.8 million for the firm’s unsafe or unsound practices relating to historical inadequate oversight of sanctions compliance risks at its subsidiary bank, Wells Fargo Bank, N.A. Wells Fargo & Co.’s deficient oversight enabled the bank to violate U.S. sanctions regulations by providing a trade finance platform to a foreign bank that used the platform to process approximately $532 million in prohibited transactions between 2010 and 2015.

The Board’s action is being taken in conjunction with an action by the U.S. Department of the Treasury’s Office of Foreign Assets Control, which is imposing a separate penalty on Wells Fargo Bank for these violations. The total penalty announced by both agencies is approximately $97.8 million. Learn more

Yellen Takes Aim at Deregulation

Banks were a “pillar of strength” at the onset of the COVID-19 pandemic, the treasury secretary said, but recent bank failures “demonstrate that our business is unfinished.”

Courtesy of Gabrielle Saulsbery, BankingDive

The recent banking crisis, punctuated by the failures of Silicon Valley Bank and Signature Bank, have revealed “cracks in the regulatory perimeter” that must be addressed, Treasury Secretary Janet Yellen said Thursday, noting that deregulation “may have gone too far.”

Yellen’s remarks at the National Association for Business Economics conference in Washington, come a day after officials from the Federal Reserve, Federal Deposit Insurance Corp. and Treasury testified to lawmakers on their understanding of the bank collapses.

“Regulatory requirements have been loosened in recent years,” Yellen said Thursday. “I believe it is appropriate to assess the impact of these deregulatory decisions and take any necessary actions in response.”

Trump-era rollbacks of Dodd-Frank Act provisions, particularly by the Federal Reserve, have drawn criticism from several Democratic lawmakers.  It’s “important that we reexamine whether our current supervisory and regulatory regimes are adequate for the risks that banks face today,” Yellen said Thursday. Read more

Credit Union Leaders Taking Steps to Keep Clear Of The Bank Crisis

Courtesy of Frank Gargano and Ken McCarthy, American Banker

Credit union leaders are closely monitoring member deposit levels and ramping up information campaigns after a wave of regional bank failures has left many consumers questioning which institutions are secure.

Following the self-liquidation of Silvergate Bank in La Jolla, California, on March 8, industry-wide concerns surrounding a liquidity shortage proved true when regulators from state chartering organizations shut down Silicon Valley Bank in Santa Clara, California, and Signature Bank in New York — the second and third-largest bank failures by assets in U.S. history, according to data from the Federal Deposit Insurance Corp.

Although credit unions generally cater to a narrower client base with less exposure to the startup and cryptocurrency markets, their members can just as quickly lose confidence and pull their deposits. To address fears, credit unions are taking multiple approaches to avoid being swept up in the current crisis. Read more

Wyoming May Still Become First State to Have Official Stablecoin

Courtesy of CUToday.info

Gov. Mark Gordon has allowed the Wyoming Stable Token Act to become law without his signature, the Sheridan Press reported. Gordan said that after vetoing a similar bill following last year’s legislative session, the sponsors worked to resolve many of his concerns.

“Nevertheless, I continue to harbor some reservations about the potential impact this program may have on Wyoming’s hard-fought reputation as a thoughtful and strong leader in the world of digital assets,” Gordon said in a letter to Secretary of State Chuck Gray.

‘Nurture Reputation’
Gordon said he recognized that the success of a Wyoming stable token could be a great achievement that could “nurture Wyoming’s reputation as a leader in the digital asset world.” Read more

FinCEN Updates: FinCEN Issues Initial Beneficial Ownership Information Reporting Guidance

The Financial Crimes Enforcement Network (FinCEN) published its first set of guidance materials to aid the public, and in particular the small business community, in understanding upcoming beneficial ownership information (BOI) reporting requirements taking effect on January 1, 2024. The new regulations require many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners—the persons who ultimately own or control the company—to FinCEN.

“The Corporate Transparency Act, through its beneficial ownership reporting requirements, provides the historic opportunity to unmask shell companies and protect the U.S. financial system from abuse by money launderers, drug traffickers, sanctioned oligarchs, and other criminals,” said Himamauli Das, Acting Director of FinCEN. “We are committed to making this transparency process as simple as possible, particularly for small businesses who may have never heard of or interacted with FinCEN before.”

The following materials are now available on FinCEN’s beneficial ownership information reporting webpage, www.fincen.gov/boi:

Additional guidance will be published at www.fincen.gov/boi in the coming months, to include a Small Entity Compliance Guide. Please check back often for more information.

FinCEN will not be accepting any beneficial ownership information before January 1, 2024. Information on how to submit beneficial ownership information to FinCEN will be forthcoming.

 

Mar. 24, 2023: Industry and Regulation

CFPB Independent Funding Constitutional, Second Circuit Rules

Courtesy of Evan Weinberger, Bloomberglaw

The Consumer Financial Protection Bureau’s independent funding through the Federal Reserve is constitutional, the Second Circuit ruled ahead of a US Supreme Court case challenging the agency’s funding. The unanimous Thursday ruling from a three-judge panel of the US Court of Appeals for the Second Circuit came in a case where a New York debt collection law firm, the Law Offices of Crystal Moroney PC, is attempting to escape a civil subpoena the CFPB issued in June 2017. A lower court ruled in the CFPB’s favor in August 2020.

The law firm argued in part that the CFPB’s funding through the Fed and outside of the Congressional appropriations process violates the Constitution’s Appropriations Clause and nondelegation doctrine. The Second Circuit panel rejected that argument. The Supreme Court is set to hear arguments in its upcoming October term in the CFPB’s appeal of an October 2022 ruling in the US Court of Appeals for the Fifth Circuit that the CFPB’s funding violates the Constitution and the agency should be subject to Congressional appropriations. Read more

‘How did this happen?’: The Fed’s Powell on SVB and Where the Economy is Headed

Courtesy of Victoria Guida, Politico

Federal Reserve officials on Wednesday announced another quarter-point increase in interest rates, shaking off concerns about the financial system’s stability after the collapse of two regional banks. The decision was one of the riskiest in years for the Fed, coming shortly after the stunning failure of Silicon Valley Bank and Signature Bank sparked a major government intervention.

Fed Chair Jerome Powell at a press conference following the decision said the banking system is strong and resilient but underscored that the central bank’s regulatory chief, Michael Barr, is undertaking a review of what went wrong. “The question we were all asking ourselves over the first weekend was, ‘How did this happen?’” Powell said.

In a statement following two days of meetings, the central bank’s rate-setting committee said borrowing costs could still rise further but cautioned that the failure of the two banks will likely lead other lenders to pull back, cutting into economic growth. The implication: that might mean less work for the Fed in its fight against inflation. Its goal is to slow spending and investment as a means to tamp down the worst price spikes in four decades.

OFR Paper Finds Digital Currency May Increase Household Welfare, Lower Volatility but Pose Risks to Banks

Courtesy of Gregory Phelan and William Chen, Office of Financial Research

According to a recent working paper published by the Office of Financial Research, banking-sector stability may suffer, yet household welfare may improve should a digital currency be fully integrated into the financial system. In Digital Currency and Banking-Sector Stability, the authors modeled a financial sector where digital currencies coexist with bank deposits, and households hold both forms of liquidity. This model allowed the authors to identify the financial stability consequences of digital currency should it become fully integrated into the financial sector.

The theoretical results suggest that financial frictions may limit the potential benefits of digital currencies, whether issued publicly as a central bank digital currency (CBDC) or privately as stablecoins. In addition, the authors found that financial system volatility decreases when digital currencies are fully integrated, and household welfare improves, yet banking-sector stability suffers.

Specifically, with the full integration of digital currency:

  • The probability of a banking sector crisis increases – A decline in deposit spreads is the primary reason a crisis’s probability increases with digital currency issuance. A fully-integrated digital currency depresses bank deposit spreads, particularly during crises, which limits banks’ ability to recapitalize following losses. In addition, because banks are less able to rebuild equity after adverse shocks, banks, on average, have lower equity. Accordingly, bank valuations decrease significantly. As a result, the probability the banking sector is in crisis or a distressed state can grow significantly.
  • Household welfare can improve – Fully integrating digital currency into the financial sector would increase household welfare, and these welfare consequences are potentially large. For example, household welfare could increase by 2% in terms of consumption, even though at this level of digital currency, the probability of crises doubles.
  • System volatility decreases – Financial system volatility declines with the full integration of digital currency. This decline is primarily reflected in a decrease in the volatility of asset prices. While financial markets improve with lower volatility and higher prices, the financial sector suffers because the banking sector is at greater risk of insufficient capital levels.

Click here to read more

Banks Rush To Borrow Record-Breaking $165 Billion From Fed After SVB Failure

Courtesy of Nicholas Reimann, Forbes

Banks worried about liquidity in the wake of Silicon Valley Bank’s collapse took out a combined $164.8 billion in loans from the Federal Reserve over the past week, according to Fed statistics released Thursday, topping a record set during the 2008 financial crisis.

KEY FACTS

  • Banks took out $152.85 billion in loans using the Fed’s discount window—the central bank’s traditional backstop that provides loans for up to 90 days.
  • The staggering amount was a dramatic increase from the week prior, when banks took $4.58 billion in loans, according to the Wall Street Journal.
  • The borrowing shattered the previous weekly high of $111 billion recorded during the 2008 financial crisis, according to a Bloomberg analysis of Federal Reserve data.
  • Banks also took out another $11.9 billion in loans through the Fed’s new Bank Term Funding Program, which started Sunday and offers year-long loan terms.
  • The Federal Reserve did not identify the banks that took out loans, but the nation’s largest banks have given no indication they have any solvency issues, while President Joe Biden insisted this week that “Americans can have confidence that the banking system is safe.”
  • Larger banks are tightly regulated and control an immense amount of accounts that vary in deposits, while regional banks like SVB often rely on high-balance accounts—making them especially susceptible to bank runs if customers sense trouble.

Related Reading: SVB Financial Group Chapter 11 Case – Issues with the FDIC May Be Front and Center

 

Mar. 17, 2023: Industry and Regulation

The Political Fallout From The Silicon Valley Bank Mess

Analysis by Leigh Ann Caldwell and Theodoric Meyer with research by Tobi Raji, Washington Post

On Sunday night, the Biden administration announced an extraordinary intervention aimed at averting a banking crisis by reassuring SVB customers that all of their deposits would be protected, not just the $250,000 covered by the FDIC, our colleagues Jeff Stein, David J. Lynch, Tony Romm and Tyler Pager report.

Separately, the Federal Reserve announced it was creating a new lending facility for the nation’s banks, designed to buttress them against financial risks caused by Friday’s collapse of SVB. While many lawmakers — mostly Democrats — were pleased with the administration and the Fed’s actions, debate in Congress is most likely just beginning. This is what we’re watching:

  • Will there be a review of a 2018 law that eased Dodd-Frank capital requirements for midsize and small banks, which some critics have blamed for SVB’s troubles? Republicans led the effort to pass the law, which President Donald Trump signed, but 33 House Democrats and 17 Senate Democrats also voted for it.

Earlier this month, Sen. Tim Scott (S.C.), the ranking Republican on the Senate Banking Committee, sent a letter to Federal Reserve Chair Jerome H. Powell urging him to adhere to the 2018 law and not increase capital requirements — which dictate how much of a buffer banks should hold to guard against losses — for midsize banks. Read more 

SVB Crisis Spurs Greater Call for Bank Regulations, New Investigations

Courtesy of PYMNTS.com

New laws, and new investigations, often follow bank crises. And after the collapse of two banks and one self-liquidation in just five days, calls are growing both for a tightening of banking regulations, and investigations into the executives at the helm of the failed institutions: Silicon Valley Bank (SVB) and Signature Bank. 

This, as both the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are reportedly investigating SVB’s collapse, while lawmakers are revisiting the existing laws on the books and the Federal Reserve is weighing tougher rules for midsize banks. The probes by the DOJ and SEC are separate and still in their preliminary phases, and it is impossible to predict whether anything substantial will be unearthed by their efforts.  

What is more likely is that the current, comparatively lighter stress tests and capital and liquidity strictures for lenders with less than $250 billion in assets may be sunset or revamped in favor of stricter regulatory and supervisory oversight for banking institutions that are large but not large enough to be considered globally systemic under current regulations. Read more

March Fed Meeting Preview: Will the Fed Raise Rates After Silicon Valley Bank Blowup?

Courtesy of Sarah Foster, BankRate

The Fed’s Sunday announcement that it would loan cash to banks coupled with the FDIC’s decision to make all depositors whole “was the right move to avert a broader contagion,” says Greg McBride, CFA, Bankrate chief financial analyst. “That in and of itself should be enough to stabilize the system, as long as there aren’t any more monsters lurking around the corner.”

Here’s what to expect from the Fed’s March meeting, including whether officials will stick with combating inflation — or sideline hiking rates to avoid adding more fuel to the fire.

1. How much will the Fed raise rates in March — if at all?
Fed officials have two main choices when deciding how to fight inflation while also dealing with the U.S. bank blowups. They can either turn a blind eye to it and stay focused on price stability, continuing to fire away rate hikes despite the risk that it could add more tension to the banking sector. Or they can hold for now to give the financial system time to stabilize, even if it comes at the risk of keeping price pressures hot.

2. How did the two bank failures alter the Fed’s plans?
The Fed on Sunday created its first emergency lending facility since the coronavirus pandemic. Banks hoping to boost their capital to meet their depositors’ demands can now tap the Fed for extra liquidity by exchanging assets like mortgage-backed securities or Treasurys as collateral.

There’s just one major catch: The Fed will value those assets at their original value. It means banks don’t have to take the kind of losses SVB did when they sell those assets — a factor that contributed to the bank’s collapse. Read more

A Look At SVB’s New CEO, Tim Mayopoulos

The former Fannie Mae CEO on Tuesday urged clients who left SVB in the past week to return. The FDIC allegedly has targeted Mayopoulos since 2017 as someone who could steer a seized bank.

Courtesy of Anna Hrushka, BankingDive

Following a tumultuous week for the banking sector, regulators installed Tim Mayopoulos, a financial executive with a record of guiding firms through crisis events, to helm collapsed Silicon Valley Bank as it navigates an uncertain future.

“I look forward to getting to know the clients of Silicon Valley Bank,” Mayopolous wrote in a letter to clients Monday, according to Business Insider. “I come to this role with humility. I also come to this role with experience in these kinds of situations.”

Mayopoulos is expected to bring to SVB a level of calm he demonstrated during critical times at both Bank of America and Fannie Mae. Mayopoulos served as BofA’s general counsel from 2004 to 2008, before heading to Fannie Mae. He became CEO of the government-controlled mortgage insurer in 2012. Read more

Mar. 10, 2023: Industry and Regulation

SoFi Sues Over Student-Loan Pause To Force Borrowers To Resume Making Payments

Tens of millions of borrowers have had their student-debt payments paused. But one big fintech company disapproves and wants the payments resumed immediately.
Courtesy of Jillian Berman, MarketWatch

Some 40 million people have had their student-debt payments paused because the government thinks they need the help. But one big financial technology company, which refinances student loans, disapproves of the public policy and wants the payments resumed immediately to help its bottom line. SoFi Technologies, a financial technology company involved in the student loan refinancing business, is suing the Department of Education over the student loan payment pause.

In a suit filed in federal court late last week, the company alleges that the latest extension of the COVID-era pause on student loan payments, interest and collections “is unlawful on multiple grounds.” The company is asking the court to invalidate and set aside the pause, or at a minimum, require student loan borrowers who aren’t eligible for the Biden administration’s debt relief plan to start repaying their loans.

SoFi claims the payment pause has hurt the company’s profitability. As part of its business, the company offers to refinance borrowers’ federal student loans, theoretically at a lower interest rate. In its complaint, the company says that before the payment pause began in March 2020, SoFi originated $450 million to $500 million in refinanced federal student loans per month. In 2022, SoFi was originating about 10% of the volume in refinanced loans compared to 2019, according to court documents. The company lost as much as $400 million in total revenue since the payment pause started and up to $200 million in profits, SoFi claims. Read more

Readout of White House State Legislative Convening on Combatting Junk Fees

Last year, President Biden announced his commitment to take on “junk fees” – unfair, hidden fees that take real money out of the pockets of American families. During the State of the Union, the President called on Congress to pass the Junk Fee Prevention Act and crack down on some of the most frustrating fees consumers face, including ticket service, early termination, family seating, and resort fees. To date, federal agencies have taken a range of steps to crack down on harmful and deceptive fees, which have spurred additional private sector action, including:

  • This week, after the President called upon Congress to ban family seating fees, the Department of Transportation (DOT) published a dashboard of airline policies on family seating, and several major airlines have now already changed their policies. DOT previously published a dashboard on when flights are delayed or cancelled due to issues under the airlines’ control, resulting in up to ten airlines adopting more generous reimbursement policies.
  • In February 2023, the Consumer Financial Protection Bureau (CFPB) announced a proposed rule to cut most credit card late fees to no more than $8, which would save consumers an estimated $9 billion a year.
  • In November 2022, the Federal Communications Commission (FCC) finalized a rule to require cable and internet providers to list fees and services up front with an easy-to-read consumer friendly label.
  • In September 2022, the Department of Transportation (DOT) proposed a rule to require airlines and online booking services to show the full price of a plane ticket up front, including baggage and other fees.
  • In December 2021, the Consumer Financial Protection Bureau (CFPB) released reports on the banking industry’s excessive and unfair reliance on banking junk fees. Since then, fifteen of the twenty largest banks have ended fees for bounced checks, and today they issued a new Supervisory Highlights finding that banks the CFPB has examined thus far will refund roughly $30 million to about 170,000 account holders who were assessed surprise overdraft fees.

Read more

CFPB Uncovers Illegal Junk Fees on Bank Accounts, Mortgages, and Student and Auto Loans

Many companies are updating practices and making consumers whole based on supervisory findings

The Consumer Financial Protection Bureau (CFPB) released a special edition of its Supervisory Highlights that reports on unlawful junk fees uncovered in deposit accounts and in multiple loan servicing markets, including in mortgage, student, and payday lending. These unlawful fees corrode family finances, force up families’ banking and borrowing costs, and are not easily avoided – even by financially savvy consumers. As described in the Supervisory Highlights, the CFPB continues rooting unlawful fees out of consumer financial markets.

The CFPB’s examination and supervision program helps the agency identify illegal practices that are harming families, market competition, and law-abiding businesses. The CFPB publishes Supervisory Highlights reports to promote transparency and to stop potentially unlawful practices, as well as to help educate families, advocacy groups, and other law enforcement agencies about these practices.

The CFPB’s prior supervision work led the agency to issue guidance in October 2022, on the longstanding problem of surprise overdraft fees. As of today, after the CFPB’s focus on surprise overdrafts, at least 20 of the largest banks in the United States, which hold 62% of the volume of consumer deposit accounts subject to the CFPB’s supervisory authority, do not charge surprise overdraft fees. Additionally, banks that the CFPB has examined thus far will refund roughly $30 million to about 170,000 account holders who were assessed surprise overdraft fees. Read more

Credit Union Assets, Shares, and Deposits Grow in the Fourth Quarter

According to the latest financial performance data released today by the National Credit Union Administration, total assets in federally insured credit unions rose by $108 billion, or 5.2 percent, to $2.17 trillion over the year ending in the fourth quarter of 2022. Insured shares and deposits grew $50 billion, or 3.1 percent, to $1.68 trillion.

Highlights from the NCUA’s Quarterly Data Summary Report(opens new window) for the fourth quarter of 2022 include:

  • The credit union system’s net worth increased by $21.4 billion, or 10.1 percent, over the year to $232.9 billion. The aggregate net worth ratio — net worth as a percentage of assets — stood at 10.74 percent in the fourth quarter of 2022, up from 10.26 percent one year earlier.
  • Total shares and deposits rose by $61.3 billion, or 3.4 percent, over the year to $1.85 trillion in the fourth quarter of 2022.
  • The return on average assets for federally insured credit unions was 89 basis points in 2022, down from 107 basis points in 2021. The median return on average assets across all federally insured credit unions was 51 basis points, up 1 basis point from 2021.
  • Total loans outstanding increased $251 billion, or 20.0 percent, over the year to $1.51 trillion. The average outstanding loan balance in the fourth quarter of 2022 was $17,141, up $1,022, or 6.3 percent, from one year earlier.
  • The delinquency rate at federally insured credit unions was 61 basis points in the fourth quarter of 2022, up 12 basis points from one year earlier. The net charge-off ratio was 34 basis points, up 8 basis points compared with the fourth quarter of 2021.
  • The number of federally insured credit unions declined to 4,760 in the fourth quarter of 2022, from 4,942 in the fourth quarter of 2021. In the fourth quarter of 2022, there were 2,980 federal credit unions and 1,780 federally insured, state-chartered credit unions. The year-over-year decline is consistent with long-running industry consolidation trends.
  • Federally insured credit unions added 5.8 million members over the year, and credit union membership in these institutions reached 135.3 million in the fourth quarter of 2022.

Read more

Jerome Powell Says Fed Is Prepared to Speed Up Interest-Rate Rises

Chair says U.S. central bank likely to lift rates higher than previously thought to fight inflation.
Courtesy of Nick Timiraos, WSJ

Chair Jerome Powell said the Federal Reserve would consider raising interest rates by a larger half percentage point this month and was likely to lift rates higher than previously expected this year to cool an economy that has shown surprising strength.

Mr. Powell’s comments to lawmakers Tuesday laid the groundwork for a notable shift in tactics to reduce price pressures. He said hotter inflation and hiring could lead central bank officials to alter their recently adopted strategy of raising rates in smaller quarter-point increments.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Mr. Powell told the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Stocks slumped, with the Dow Jones Industrial Average dropping about 575 points, or 1.7%. The S&P fell 1.5%. The Nasdaq Composite retreated 1.25%. The yield on the two-year Treasury note climbed above 5% for the first time since July 2007. The yield on the 10-year Treasury slid to 3.974% from 3.981% Monday. Read more

 

Mar. 3, 2023: Industry and Regulation

*2023 CUNA GAC coverage will be featured in next week’s issue of NASCUS Report.

Supreme Court to Decide CFPB’s Validity

Courtesy of Bradley Arant Boult Cummings LLP; National Law Review, Volume XIII, Number 59

Less than three years after the U.S. Supreme Court reviewed the CFPB’s appointment structure, the bureau again finds itself before the Court in what could prove the most consequential case for the financial services industry in years. Four months ago, the Fifth Circuit Court of Appeals issued a decision in Community Financial Services Association of America v. CFPB (previously covered here) holding the CFPB’s proposed Small-Dollar Rule invalid on the ground that the bureau’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. The CFPB promptly filed a petition for writ of certiorari, and the Supreme Court granted the petition yesterday.

The case will present a two-part question. First, was the Fifth Circuit correct to hold the CFPB’s mechanism for funding (which comes from the Federal Reserve, rather than regular congressional bills, and is not subject to annual review by congressional committees), in violation of the Appropriations Clause? Second, if the CFPB’s funding mechanism is unconstitutional, did the Fifth Circuit grant the appropriate relief in ordering the Small-Dollar Rule to be vacated?

The Supreme Court declined to take up two questions raised in a cross-petition by the CFPB’s opponent, the Community Financial Services Association of America: (1) Should the Small-Dollar Rule be vacated because it was promulgated by a CFPB director while he was impermissibly shielded from removal by the president, and (2) was the rule invalid because it exceeded the CFPB’s authority to regulate unfair or abusive conduct? Also of note, the Supreme Court set the case for the fall calendar despite the CFPB’s request to fast-track the matter for decision by June 2023. Read more

FRB Governor Bowman Speaks on Bank Regulation and Supervision

Courtesy of Cadwalader, Wickersham & Taft LLP;
National Law Review, Volume XIII, Number 58

Federal Reserve Board (“FRB”) Governor Michelle Bowman gave remarks last week to the American Bankers Association (“ABA”) Community Banking Conference. Governor Bowman discussed the role of FRB independence, predictability and tailoring in the FRB’s Bank Regulatory and Supervision function, as opposed to its monetary policy function. Governor Bowman noted that Chair Powell recently discussed FRB independence as it pertains to supervision and regulation in his speech at the Swedish Central Bank in January that we also discussed at the time. She noted that while this independence is important, it is appropriately accompanied by accountability through mechanisms such as Congressional oversight. She noted, however, that accountability to Congress wasn’t enough, and that transparency to the public (including regulated institutions) was also a requirement.

Governor Bowman elaborated on her transparency point by saying that being transparent also means “conducting supervision in a way that is predictable and fair.” She noted that what FRB is “always looking to improve is the publication of clear, appropriate guidance, especially for community banks.” She noted that providing community banks with tools to predict their CECL exposures was an instance where she thought the FRB has “done a pretty good job.” She added that, for larger institutions, the FRB is likely to publish its supervision manual for institutions covered by the FRB’s Large Institution Supervision Coordinating Committee (“LISCC”).

Governor Bowman then turned to an area where she thought FRB transparency had room for improvement: bank mergers. While the factors that go into review of bank merger applications are fairly transparent and set by Congress, she noted her concern that “the increase in average processing times will become the new normal.” Read more

Rep. McHenry Introduces New Legislation to Modernize Financial Data Privacy Laws

Data Privacy Act Protects Consumers’ Personal Financial Information and Preserves Innovation
Today, the Chairman of the House Financial Services Committee, Patrick McHenry (NC-10), introduced the Data Privacy Act of 2023. This legislation modernizes financial data privacy laws and gives consumers more control over how their personal information is collected and used—without stifling innovation in the United States.
“Republicans are putting American consumers back in control of their financial data,” said Chairman McHenry. “As advances in technology bring greater access to our financial system, the amount of personal financial information collected on Americans also increases. The financial services sector is already highly regulated when it comes to consumer data. However, it’s critical that we bring our privacy guardrails into the 21st century to match the widespread adoption of financial technology. I’m proud to introduce this legislation to secure Americans’ private financial data, without strangling innovation.”
  • Read a one-page summary of the bill here.
  • Read a section-by-section summary here.
  • Read the text of the bill here.
Key Pillars of the Data Privacy Act:
  • Modernizes the Gramm-Leach-Bliley Act (GLBA) Using a Technology-Agnostic Approach
  • Puts Control Back in the Hands of the Consumer
  • Data Minimization
  • Informed Choice and Transparency
  • Preemption

Read more

Does the CRA Increase Household Access to Credit?

Courtesy of Erica Bucchieri, Jacob Conway, Jack Glaser, and Matthew Plosser
Federal Reserve Bank of New York Liberty Street Economic

Congress passed the Community Reinvestment Act (CRA) in 1977 to encourage banks to meet the needs of borrowers in the areas in which they operate. In particular, the Act is focused on credit access to low- and moderate-income communities that had historically been subject to discriminatory practices like redlining.

In a recent staff report, we assess the impact of the CRA on household borrowing since 1999 using the New York Fed/Equifax Consumer Credit Panel (CCP). We do so with a variety of empirical methods to compare the borrowing of individuals in CRA-target areas to the borrowing of similar individuals in nontarget areas. Across a range of methods, we consistently find little to no impact of the CRA on household credit.

To better understand this result, we examine the mortgage issuance and discover that banks increase their market share in CRA-target areas by acquiring existing loans, allowing them to satisfy the CRA without impacting the overall supply of credit. This does not necessarily mean that the CRA is ineffective. For instance, the CRA also incentivizes the provision of credit to small businesses which we do not consider; however, our results suggest reforms that could increase the efficacy of the CRA to ensure access to credit for consumers.

What Does the CRA Do?

Depository institutions, which include commercial banks and thrifts, are subject to the requirements of the CRA. Other financial institutions such as independent mortgage banks, credit unions, and payday lenders are not covered. Depository institutions receive a CRA-compliance grade on a four-point scale as part of their regular supervisory examinations by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Read more

Senate Sends Bill Nullifying Biden’s ESG Investing Rule To President’s Desk

Courtesy of Rachel Frazin, the Hill

The Senate approved a resolution on Wednesday that aims to reverse a Biden administration rule on environmental, social and governance (ESG) investing, setting up what could be the first veto of Biden’s presidency.

The Senate voted 50-46 to block the ESG rule, with two Democrats, Sens. Joe Manchin (W.Va.) and Jon Tester (Mont.), joining Republicans in opposing the Biden administration policy.

Feb. 17, 2023: Industry and Regulation

What To Expect After the Senate Banking Hearing On Crypto Crash

Courtesy of Nisa Amoils, Forbes

The stakes have never been higher for the crypto industry as the Senate Banking Committee met on crypto Tuesday, calling the Valentine’s Day hearing “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets.” This hearing covered the hot topics of the week, including stablecoin regulation, consumer protection, banking the crypto industry, whether a Self Regulatory Organization is needed, and how the Securities and Exchange Commission (SEC) should collaborate with the Commodity Futures Trading Commission (CFTC) to regulate digital assets.

In the testimony from Lee Reiners, policy director at Duke University’s Financial Economics Center, the law professor proposed a comprehensive new approach to regulation. Overall, the committee, chaired by Sherod Brown (D-Ohio) and Tim Scott (R-S.C.), aims to start work on a bipartisan regulatory framework for cryptocurrency. They heard testimonies from Georgetown University law professor Linda Jeng, J.D., who is also Chief Global Regulatory Officer at the Crypto Council for Innovation, and law professor Yesha Yadav from Vanderbilt Law School.

With regards to the testimony from Reiners, he argued that Congress should clarify that the SEC has the authority to draft rules governing DeFi applications, in addition to formal crypto businesses. Jeng and Yadav argued for innovation, financial inclusion, diversity of user base, and other countries taking the lead like China. Reiners argued for consumer protection, financial stability and whether this is really an asset class or just gambling. The Committee was clear to point out Gary Gensler’s absence and said he must appear before September – that is just too late. Read more or listen to the article here.

Related Links

‘Build a Better Mousetrap’: OCC Sets Out Stall on Mergers

Comments come as Canada’s TD Bank announces extension to First Horizon acquisition deadline

Courtesy of Banking Exchange staff

Existing metrics for assessing competition need updating in order to keep bank merger and acquisition rules fit for purpose, the Office for the Comptroller of the Currency has said. Introducing the OCC’s Bank Merger Symposium on Friday, Ben McDonough, senior deputy comptroller and chief counsel, warned that “without enhancements, there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks”.

“We need to build a better mousetrap so that healthy mergers get approved while unhealthy mergers get rejected,” McDonough said. “Importantly, this mousetrap needs to be not only theoretically sound and consistent with our values, but also capable of implementation within the statutory criteria for merger review.”

Standing in for acting comptroller Michael Hsu, McDonough explained that metrics such as the Herfindahl-Hirschman Index for market concentration “might have become less relevant” since they were last updated in 1995. The huge growth in online and mobile banking — now many consumers’ path of choice to engage with banks — has fundamentally shifted the landscape, introducing new non-bank players and allowing banks to expand their reach. McDonough indicated that this could require a new approach from federal regulators.

Regulators have been consulting on updated M&A rules for banks since President Biden issued an executive order on the subject in 2021. The OCC’s latest comments come as Canada’s TD Bank announced a potential delay to the completion of its acquisition of First Horizon. The two banks have extended the deadline for the deal to May 27, 2023, from February 27. The deal was first announced in February last year but has been awaiting regulatory approval for months.

Risk Panel Discusses Possibility of New Rules for Nonbanks

At least half of risk panel’s members support rolling back Trump-era curbs on regulation

Courtesy of Andrew Duehren and Andrew Ackerman, Wall Street Journal

The Biden administration’s top financial regulators discussed the possibility of stepping up oversight of financial firms operating outside the banking system, a sign they could move to ease or repeal Trump-era restrictions on regulating nonbank firms such as hedge funds or asset managers.

During a closed meeting of the Financial Stability Oversight Council on Friday, regulators heard a presentation from Treasury Department staff about the process for establishing new oversight of nonbanks, the department said in a statement. The panel, charged with detecting risks to the financial system and led by Treasury Secretary Janet Yellen, said that nonbank financial activity was among its priorities for the year.

While the Friday meeting is a signal of the Biden administration’s recent focus on nonbanks—financial firms that also include cryptocurrency firms, insurance companies and mortgage companies—the panel didn’t say whether it intended to alter Trump-era rules on the issue.

Those rules made it more difficult for the panel to label nonbanks as systemically important, a designation that imposes extensive oversight and currently applies only to the nation’s largest banks. Adopted in 2019 under the leadership of then-Treasury Secretary Steven Mnuchin, the current guidance requires the group to first conduct a lengthy review of activities in a potentially risky sector before targeting specific firms. Read more

OPINION: A Thoughtful Approach to Aligning Bank Deposit and Disclosure Activities

Courtesy of Karl Leslie and Jason Keller, Banking Exchange

In late 2022, the Consumer Financial Protection Bureau (CFPB) issued a consent order (“Order”) with a major U.S. bank (“Bank”) alleging numerous violations over many years — some of which the Bank ultimately discontinued. The alleged violations of the Consumer Financial Protection Act (CFPA) all involved unfair, deceptive, or abusive acts or practices (UDAAP).

The alleged violations crossed multiple lines of business including auto loan servicing, home mortgage servicing, and deposit accounts. It should be noted that this Bank consented to the issuance of the Order, but it did not admit or deny any of the findings of fact or conclusions of law relating to the specified violations.

While this article explores alleged deposit UDAAP violations at a large bank, financial institutions of all asset sizes should be aware of the findings. The Order identified other issues this article doesn’t address, but it provides a timely reminder to review the CFPB’s new guidance,[1] to reevaluate the effectiveness of one’s compliance management systems, and it’s an opportunity to consider some action steps for banks in helping promote adherence to UDAAP principles.

Service Fee Waivers

In this instance, the Bank had a policy of waiving monthly service fees on some of its checking accounts in certain circumstances. Specifically, its documentation stated that the fees would be waived if the consumer had 10 debit card transactions or other payments in a monthly cycle. However, according to the Order, the Bank only counted debit card transactions that posted during the statement cycle. Read more

 

Feb. 10, 2023: Industry and Regulation

U.S. Treasury Urges Financial Firms to Examine Cloud Services

Courtesy of Pete Schroeder and Susan Heavey, Reuters

U.S. Treasury Department officials highlighted several challenges facing financial firms that are increasingly turning to cloud computing services to support a range of their activities, warning in a report on Wednesday that failure to address them could leave lingering vulnerabilities.

The risk was particularly acute for small and medium-sized financial institutions, the department said.

Deputy Secretary of the Treasury Wally Adeyemo said while “there is no question that providing consumers with secure and reliable financial services means greater demand for cloud-based technologies,” there needed to be “safe and effective migration” as banks and other financial companies adopt cloud services.

“Treasury found that cloud services could help financial institutions become more resilient and secure, but that there were some significant challenges that could detract from these benefits,” department officials wrote in their report assessing current cloud adoption in the financial industry.

Those issues include financial firms’ exposure to potential cyber incidents, an industry-wide reliance on a small number of cloud providers and a lack of technology workers able to help financial institutions deploy cloud services, among other challenges, department officials said.

New York Governor’s 2024 Fiscal Budget Proposal Targets Overdraft and NSF Fees

Courtesy of Kristen Larson, ConsumerFinanceMonitor.com

On February 2, 2023, New York Governor Kathy Hochul released her 2024 fiscal budget proposal, which included banking policy to “Protect New Yorkers from Predatory Banking Fee” in the Executive Budget Briefing Book.  The Briefing Book states:

“The Executive Budget includes nation-leading legislation that comprehensively addresses abusive bank fee practices, which tend to disproportionally harm low- and moderate-income New Yorkers, including stopping the opportunistic sequencing of transactions in a way designed to maximize fees charged to consumers, ending other unfair overdraft and non-sufficient funds fee practices, and ensuring clear disclosures and alerts of any permissible bank processing charges.”

This policy statement contemplates legislation that would expand the NYDFS guidance issued this past summer discouraging banks from engaging in certain practices involving “authorize positive, settle negative” transactions that cause overdraft fees, multiple non-sufficient funds (NSF) fees on representments, and so-called “double” overdraft fees in connection with overdraft protection services (as we blogged about here).

Assembly Bill A2171 was introduced on January 23, 2023 and would create the “Consumer Overdraft Protection Act.” The bill, which was also introduced in the two prior legislative sessions, has been referred to Assembly Banks Committee. The legislation requires consent for check and debit overdraft coverage, restricts annual overdraft fees to $100, and restricts certain overdraft advertising practices. We will monitor this bill and any new bills related to Governor Hochul’s policy statement. Read more

NCUA Chief’s Top Worries: Deposit Pressure, Loan Pricing, and Fintech Partnerships

Courtesy of Steve Cocheo, The Financial Brand

As the credit union industry’s top regulator, NCUA Chairman Todd Harper has a lot on his mind. He cites some worrisome lending trends in the auto and mortgage sectors, growing interest rate and liquidity risk as deposit competition grows, and the lack of regulatory insight into the fintechs and other vendors that are working closely with so many credit unions these days. In this wide-ranging interview, he also talks about the need for scaled responses in an industry ranging from fairly traditional small players to comparative giants that require their own heightened regulatory approach.

Todd Harper, chairman of the National Credit Union Administration, recounts a story he heard not so long ago from a federal credit union examiner who came across a very small credit union still charging 1.9% on car loans. At the time the going rate was 4.5% or higher.

Harper, in his retelling, says the lending team had simply grown so used to years of low interest rates that it hadn’t thought to ratchet up with the Federal Reserve hikes. “Look, the market’s moved,” the examiner chided the credit union. “You should be moving with the market.”

The credit union — “a very small institution,” Harper emphasizes again — adjusted accordingly. “We wouldn’t expect to see that type of behavior in a larger one,” he adds. “And we would treat it very differently.” Read more

NCUA Board Member Hood Discusses Why Office was Created

Courtesy of CUToday.info

“Government” and “innovation” may be two words not often found in the same sentence, but NCUA Board Member Rodney Hood believes there is now reason to believe the two are compatible, following the creation of the agency’s new Office of Financial Technology and Access.

Hood, who has been championing such an office since he was chairman in 2019, is quick to note the new office isn’t just about technology and fintech, which may get the headlines; it’s about using those channels to also help credit unions expand financial inclusion—that’s the “access” piece.

As CUToday.info recently reported, a new milestone has been passed in the creation of the office with the hiring of Charles Vice to lead the effort. In announcing the hiring of Vice, who previously served as commissioner of the Kentucky Public Protection Cabinet’s Department of Financial Institutions and was also with the FDIC prior to that, NCUA said Vice will “serve as the principal advisor to the NCUA board on agency policy with respect to fintech, and fintech developments and transformation initiatives in the financial services sector, including cryptocurrency, blockchain, and distributed ledger technology. Read more

 

Feb. 3, 2023: Industry and Regulation

FedNow Says Features Will Help FIs ‘Raise the Bar’ on Fraud Management

Courtesy of Pymnts.com

The Federal Reserve’s FedNowsm Service, a new instant payments infrastructure for the nation’s financial institutions (FIs), is expected to catalyze broad access to instant payments for consumers and businesses. When it launches later this year, the 24/7 service will come equipped to support popular use cases such as account-to-account (A2A) transfers and bill pay, in addition to features that help mitigate fraud.

According to Nick Stanescu, senior vice president and FedNow business executive, Federal Reserve Financial Services, fraud management features are a high priority for FIs and are being tested along with transaction flows in the countdown to launch.

As of the end of January, the FedNow Service is in the testing and certification phase, which is the final phase before launch. Early adopters in the FedNow Pilot Program — FIs, processors and service providers among them — are now sending test payments messages to one another using the FedLine infrastructure.

Additional Anti-Fraud Measures in 2024

The Fed plans to roll out additional anti-fraud measures in 2024 and beyond. One feature under consideration, for example, would enable FIs to activate a control setting that rejects payments that exhibit unusual frequency patterns or cumulative value over a period of time. This could address fraudsters’ efforts to work around transaction limits by originating large numbers of low-value payments in a short window. Read more

Federal Reserve Board Issues Policy Statement to Promote a Level Playing Field for All Banks with a Federal Supervisor, Regardless of Deposit Insurance Status

The Federal Reserve Board on Friday issued a policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status. The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities.

The statement also makes clear that uninsured and insured banks supervised by the Board would be subject to the limitations on certain activities imposed on national banks, which are overseen by the Office of the Comptroller of the Currency. The equal treatment will promote a level playing field and limit regulatory arbitrage.

In addition, the statement reiterates that banks must both ensure that the activities they engage in are allowed under the law, and conduct their business in a safe and sound manner. For instance, a bank should have in place risk management processes, internal controls, and information systems that are appropriate and adequate for the nature, scope, and risks of its activities.

In recent years, the Board has received a number of inquiries, notifications, and proposals from banks regarding potential engagement in novel and unprecedented activities, including those involving crypto-assets. In response, the Board’s statement specifies how it will evaluate such inquiries, consistent with longstanding practice. Today’s action would not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws.

New York State Department of Financial Services (NYDFS) Adopts Updated Regulation for Disclosure Requirements for Commercial Financing

Regulation Ensures Small Businesses Have Adequate Information to Make Informed Decisions about Financing Offers
Rule Implements New York State’s Commercial Finance Disclosure Law

Superintendent of Financial Services Adrienne A. Harris announced today that the New York State Department of Financial Services has adopted a new regulation relating to disclosure requirements for commercial financing, pursuant to sections 801 to 811 of the New York Financial Services Law (the “Commercial Finance Disclosure Law” or “CFDL”).

To address the lack of standardized disclosures in small business lending, the New York State legislature passed a law, codified at Article 8 of the New York Financial Services Law (the “Commercial Finance Disclosure Law” or “CFDL”), mandating standardized disclosures for commercial financings below a certain principal amount.

The CFDL requires certain providers of commercial financing in amounts of up to $2,500,000 to provide standardized disclosures to potential borrowers at the time financing offers are extended. These standardized disclosures will help businesses and individuals understand and compare the terms of different commercial financing offers. The regulation implements the CFDL and provides specific instructions to commercial financing providers on how to comply with the CFDL. Read more

Change to HMDA’s Closed-End Loan Reporting Threshold

On September 23, 2022, the United States District Court for the District of Columbia issued an order vacating the portion of the Consumer Financial Protection Bureau’s (CFPB) 2020 Home Mortgage Disclosure Act (HMDA) Final Rule that amended the reporting threshold for closed-end mortgage loans. The decision means that the threshold for reporting data on closed-end mortgage loans is now 25 loans in each of the two preceding calendar years, which is the threshold established by the 2015 HMDA Final Rule, rather than the 100 loan threshold set by the 2020 HMDA Final Rule.

The NCUA recognizes that credit unions affected by this change may need time to implement or adjust policies, procedures, systems, and operations to achieve compliance with these reporting requirements. Accordingly, the NCUA intends to take a flexible supervisory and enforcement approach similar to the approach being taken by the CFPB, as communicated in its December 6, 2022 CFPB Blog post.

The NCUA will not initiate enforcement actions or cite HMDA violations for failures to report closed-end mortgage loan data collected in 2022, 2021, or 2020 for credit unions that meet Regulation C’s other coverage requirements and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years.

If you have questions about the information in this Regulatory Alert, please contact the NCUA’s Office of Consumer Financial Protection at 703.518.1140 or ComplianceMail@ncua.gov. You can also contact your NCUA regional office or your state supervisory authority.

Jan. 27, 2023: Industry and Regulation

NCUA Board Meeting Summary

Written by Sarah Stevenson, Vice President of Regulatory Affairs, NASCUS

On January 26 the NCUA Board held the first meeting of 2023. Chair Todd Harper, Vice Chair Kyle Hauptman, and Board Member Rodney Hood kicked off the meeting with a welcome to two new senior staff members, including former NASCUS Regulatory Board Treasurer, Charles Vice, Director of Financial Technology and Access.

The meeting agenda included two matters for consideration, the Federal Credit Union Loan Interest Rate Ceiling and NCUA’s 2023 Annual Performance Plan. The Board voted unanimously to extend the maximum loan interest ceiling to 18% from March 11, 2023, to September 10, 2024. If the Board had not voted to extend the rate would have reverted to the 15% maximum allowable under the Federal Credit Union Act (FCUA). It is important to note the FCUA permits the Board to adjust the ceiling under certain conditions and procedures, which were met in order to allow for the extension. The rate may only be extended for a period of 18 months without further action from the Board.

Nothing in the FCUA precludes the Board from acting prior to the 18-month window. The Board members addressed that upon approving the extension, they would commit to further review of the ceiling before the closure of the 18-month window. The Board noted this topic will be revisited at the April Board meeting as OGC reviews the Board’s capability to implement a potential variable rate ceiling or that of a higher ceiling.

The Board was also briefed on the agency’s annual performance plan for 2023. The 2023 plan establishes performance indicators and associated targets in support of the goals outlined in the agency’s Strategic Plan and implements a clear line from the agency’s mission to the strategic goals, objectives, performance goals, and performance indicators and targets. Transparency and accountability are important to NCUA and are a key focus as part of the annual performance plan.

Related links:

NCUA News

NASCUS Summary: Letter to Credit Unions (23-CU-01) NCUA’s 2023 Supervisory Priorities

On January 18, the NCUA issued Letter to Credit Unions 23-CU-01 outlining the agency’s Supervisory Priorities for 2023. The letter also includes updates to the agency’s examination program for 2023. Not unexpectedly the letter indicates the agency’s focus will be on the areas posing the highest risk to credit union members, the credit union industry, and, the National Credit Union Share Insurance Fund (NCUSIF). The letter also includes links to various NCUA resources applicable to each area of supervisory focus.

NCUA will continue a hybrid examination posture in which examiners will be both onsite and offsite, as appropriate with some examination activity remaining offsite as long as it can be completed “efficiently and effectively at credit unions that can accommodate offsite work.  The extended examination cycle for certain credit unions will also continue in 2023. Eligibility criteria for an extended exam cycle can be found here. NCUA will also continue its Small Credit Union Exam Program in most federal credit unions with assets under $50 million. Click here to read the NASCUS summary (log-in required)

Registration is Open for NCUA Webinar on 2023 Supervisory Priorities

The National Credit Union Administration on Jan. 31 will host a webinar discussing the 2023 Supervisory Priorities Letter to Credit Unions. Registration for this event is now open. Christel Orusede, from the NCUA’s Office of Examination and Insurance, will moderate a panel of NCUA subject matter experts who will discuss topics outlining NCUA’s supervisory priorities and other aspects of the agency’s examination program for 2023 to help credit unions prepare for their next NCUA examination.

The “2023 Supervisory Priorities” webinar is scheduled to begin at 2 p.m. Eastern and last approximately 60 minutes. There is no charge. There will be a question-and-answer period afterward.

Participants will be able to log into the webinar and view it on their computers or mobile devices using the registration link. They should allow pop-ups from this website. The webinar will be closed captioned and archived approximately one week following the live event.

Justice Department Secures Over $31 Million from City National Bank to Address Lending Discrimination Allegations

Largest Redlining Settlement Agreement in Department History; Department’s Combating Redlining Initiative Secured Over $75 Million for Neighborhoods of Color to Date

The Justice Department announced today an agreement to resolve allegations that City National Bank (City National) engaged in a pattern or practice of lending discrimination by “redlining” in Los Angeles County. City National is the largest bank headquartered in Los Angeles and among the 50-largest banks in the United States. This resolution will include over $31 million in relief to impacted individuals and communities. The agreement, which is part of the Department’s nationwide Combating Redlining Initiative that Attorney General Merrick B. Garland launched in October 2021, represents the largest redlining settlement in its history.

“Fifteen months after I vowed that the Justice Department would be aggressively stepping up our efforts to combat discriminatory practices in the housing market, we have today secured the largest redlining settlement in Department history,” said Attorney General Merrick B. Garland. “So far, the Combating Redlining Initiative has secured over $75 million dollars in relief for communities that have suffered from lending discrimination. The Justice Department will continue to build on our efforts to vigorously enforce federal fair lending laws and work to ensure that financial institutions provide equal opportunity for every American to obtain credit. In advance of what would have been Dr. Martin Luther King Jr.’s 94th birthday, it is a fitting time to reaffirm our commitment to that work, and to the pursuit of justice for all Americans.” Read more

U.S. Treasury Announces Second ECIP Application Round; Applications Due Jan. 31

The U.S. Department of the Treasury’s second application round of Emergency Capital Investment Program funding closes January 31, 2023. Treasury anticipates between $160 million and $340 million will be available for investment in qualified institutions in the second round. Applications are due January 31, 2023, at 11:59 p.m. Eastern. For more information, please visit the U.S. Treasury’s website.

Credit unions participating in the second round of ECIP funding and that meet the eligibility requirements under the NCUA’s Subordinated Debt rule may also apply for regulatory capital treatment under the pre-approval requirements outlined in the rule.

As in the ECIP’s first round, Treasury requires approved, qualified financial institutions to select a maturity of either 15 or 30 years during the closing process. Currently, the NCUA’s Subordinated Debt rule limits the maximum maturity of Subordinated Debt Notes to 20 years. Read more

OCC Solicits Research on Emerging Risks in the Banking System

The Office of the Comptroller of the Currency (OCC) is soliciting academic research papers on emerging risks in the banking system or related policy and supervisory issues for submission by March 3, 2023.

The OCC will invite authors of selected papers to present to OCC staff and invited academic and government researchers at OCC Headquarters in Washington, D.C., on June 12-14, 2023. Authors of selected papers will be notified by April 14, 2023, and will have the option of presenting their papers virtually.

Interested parties are invited to submit papers to EconomicsSymposium@occ.treas.gov. Submitted papers must represent original and unpublished research. Those interested in acting as a discussant may express their interest in doing so in their submission email.

Additional information about submitting a paper or research, and participating in the June meeting as a discussant, is available below and on the OCC’s website.

Related Link: Call for Papers (PDF)

Jan. 20, 2023: Industry and Regulation

The Role of Corporate Boards and Audit Committees In Mitigating ESG Fraud Risks

Courtesy of Natalie Runyon, Thomson Reuters Institute

The potential for fraud risk in companies’ ESG disclosures has grown as these initiatives have gotten more attention from stakeholders — and more corporate boards are becoming aware of this risk

According to a joint study by Deloitte and Center for Audit Quality, 42% of audit committee members at the corporate board level noted an increase in the risk of fraud in companies’ environmental, social & governance (ESG) disclosures. Indeed, the immature nature of some ESG data disclosed publicly over the last decade transpired with a lack of internal controls around it, which only increased the risk around ESG data.

To understand this more fully, the key components of fraud — pressure, opportunity, and rationalization (known as the fraud triangle framework) — must be better understood themselves, according to Carey Oven, National Managing Partner of Deloitte’s Center for Board Effectiveness.

All of these components come into play in fraud, Oven explains, adding that i) pressure is present around the increasing expectation that ESG data be released to the public; ii) the transparency, auditability, and nature of disclosed data are governed by the controls around that data, the estimates used for the data, and the data creation — all of which present additional opportunities for fraud; and iii) the immaturity in the data’s transparency, verifiability, and auditability “presents an opportunity for additional pressure and ultimately rationalization of fraud.” Read more

Priorities of the Newly Renamed Subcommittee on Financial Institutions and Monetary Policy

Courtesy of Esteban Camargo, CUSO MAGAZINE

In an announcement from Patrick McHenry (R-NC), the Chairman of the House Financial Services Committee, a new chairman for the newly renamed Subcommittee on Financial Institutions and Monetary Policy was shared.

Representative Andy Barr, a Republican from Kentucky’s 6th district, was chosen to lead the subcommittee, which was previously known as the Subcommittee on Consumer Protection and Financial Institutions.

The name change may represent posturing on the side of Committee Republicans who have recently taken heavy aim at the Consumer Financial Protection Bureau, which the Subcommittee on Financial Institutions and Monetary Policy will continue to govern. As recently as December, Rep. McHenry made remarks to CFPB Director Rohit Chopra chastising him for the bureau’s lack of transparency and warning him of changes to come in the new year: “I think you’ll wish you tried harder to play by the rules.”

As Chairman of the Subcommittee on Financial Institutions and Monetary Policy, Barr’s jurisdiction will extend to oversight of financial regulators, including the NCUA, the CFPB, and the Federal Reserve. Read more

Fed to Measure Banks’ Exposure to Climate Risk

Courtesy of Finextra.com

The six largest US banks have been tasked by the Federal Reserve to analyse the impact of trial scenarios for both physical and transition risks related to climate change on real estate assets in their portfolios.

The banks under scrutiny are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

The exercise – first signposted last year – will gather qualitative and quantitative information over the course of the pilot, says the central bank, including details on governance and risk management practices, measurement methodologies, risk metrics, data challenges, and lessons learned.

The pilot exercise includes physical risk scenarios with different levels of severity affecting residential and commercial real estate portfolios in the Northeastern United States and directs each bank to consider the impact of additional physical risk shocks for their real estate portfolios in another region of the country.

Related Reading: Federal Reserve Board Pilot Climate Scenario Release

Financial Markets Regulatory Outlook For 2023: Resilience, Vigilance, and Positioning for Change

Courtesy of David Strachan & Suchitra Nair, Deloitte

As financial services firms deal with an uncertain economy and other distractions, they might be wise to consider what regulators are seeing as important in 2023

A complex cocktail of high inflation, volatile interest rates, supply chain disruptions, and slowing economies is creating challenging operating conditions for the financial services industry. Regulators’ preoccupations are with ensuring that firms manage their own financial and operational resilience and continue to support their customers.

Against this background, boards and executive teams should ask themselves two broad sets of questions. The first concerns what steps are being taken to remain resilient and support customers through near-term economic pressures; and the second, whether their own strategic plans align with medium-term structural changes in their operating environment.

Indeed, a strong grasp of the ever-evolving regulatory environment must inform how financial services firms answer these questions. Read more

 

Jan. 13, 2023: Industry and Regulation

Oregon Division of Financial Regulation Warns of Fake Crypto Apps, Websites That Will Steal Your Money

The Oregon Division of Financial Regulation (DFR) warns cryptocurrency investors to do their homework before giving any money to a crypto trading platform.

Many crypto trading apps or websites are really just fake platforms set up by scammers to take investor money and give nothing in return. Investors are promised huge returns in a short amount of time and will see account balances increase rapidly, but will not be able to withdraw funds without having to deposit more money in “withdrawal fees” or “taxes.” The scammer will continue extorting these fees until an investor becomes suspicious. After that, the account is drained and the scammers are gone, along with the investor’s funds. Before transferring money to a crypto trading website or app, research the company and web address to make sure it is legitimate. Read more

Servicemember Reports About Identity Theft Are Increasing

Courtesy of the CFPB

Identity theft can quickly reverse a good credit report, filling it with unknown, maxed-out credit card accounts or collections accounts for mystery debts. It can spell trouble for anyone, but for servicemembers, identity theft resulting in negative information on a credit report can lead to the loss of a security clearance or even discharge.

In 2021, military consumers—who include active duty servicemembers, veterans, and military family members—reported nearly 50,000 cases of identity theft to the Federal Trade Commission (FTC). Between 2014 and 2022, military consumer complaints to the CFPB about debts they said resulted from identity theft increased nearly fivefold, from just over 200 annually in 2014, to more than 1,000 in 2022.

Nationwide consumer reporting companies (NCRCs) must be responsive to the identity theft and credit concerns of servicemembers, veterans, and military families. We also encourage financial institutions to consider how they can strengthen their protections against identity theft. The CFPB will continue to use its available tools to ensure that NCRCs and financial institutions take appropriate action when servicemembers report identity theft.

Read the full report here

Related Blog: What New Supervised Institutions Need to Know About Working with the CFPB

Six Takeaways from Jerome Powell’s Climate Stance

Courtesy of Dan Ennis, BankingDive.com

The Fed chair laid out his mantra Tuesday regarding the central bank’s responsibility toward climate risk, and gave five reasons for his boundaries.

When 2022 began, five of the Federal Reserve Board of Governors’ seven seats were subject to change. One constant through that: Each candidate, in their respective hearings on Capitol Hill, fielded questions regarding the central bank’s role and limitations concerning climate change and related risk.

As if to set the record straight at the start of 2023, Fed Chair Jerome Powell on Tuesday clarified his view of the Fed’s responsibility toward climate during a speech at a conference held by Sweden’s central bank.

Here is the crucial pull-quote from the event (and the first takeaway): “Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a ‘climate policymaker.’” Read more

A 1981-Level Mortgage Rate Shock Has the Housing Market in a Correction—These 7 Leading Research Firms Predict What’s Next for Rates

Courtesy of Yahoo.news, originally published by Lance Lambert, Fortune

The Federal Reserve eventually quelled the inflationary run that took off in the 1970s, but only after the central bank’s aggressive rate hikes saw mortgage rates top 18% in 1981 and the housing market slip into a sharp recession. At the time, homebuilders mailed lumber to the Fed as a means of protest while some renters assumed they’d never be able to afford a home.

Fast-forward to today, and the Fed’s ongoing inflation-fight has once again spurred a mortgage rate shock. This spike in mortgage rates, which are up from 3.22% to 6.48% over the past 12 months, has pushed the U.S. housing market into a full-blown housing correction.

On one hand, 6% mortgage rates are hardly historically abnormal. On the other hand, that 3.22 percentage point jump in mortgage rates over the past year has delivered an affordability shock that’s similar to the one dealt in 1981 when mortgage rates climbed 4.9 percentage points to 18%. Read more

 

Jan. 6, 2023: Industry and Regulation

The FTC Moves to Ban Noncompete Agreements

Courtesy of Taylor Hatmaker, TechCrunch

The Federal Trade Commission proposed a rule on Thursday that would block employers from using noncompete agreements to restrict workers from pursuing employment with competitors.

In its push to throw out noncompete agreements, the FTC cites Section 5 of the Federal Trade Commission Act, which prohibits “unfair methods of competition in or affecting commerce.” The agency will now open up the issue for public comment on the practice, which limits employment prospects for tens of millions of Americans.

The new FTC rule would prevent employers from entering into noncompetes with workers and block them from maintaining a noncompete agreement or representing to a worker that they are subject to a noncompete agreement. If the rule goes into effect, contractors and non full-time workers would also be protected from employers who would try to strong-arm them into one of the agreements. Employers would be forced to dissolve noncompete agreements currently in place and inform workers that they are no longer bound by those agreements. Read more

2022 Ties Record of 16 Proposed Acquisitions of Banks by Credit Unions

Courtesy of Rajashree Chakravarty, BankingDive

With $375 million in assets, Land of Lincoln is one of the smallest credit unions to acquire a bank.

“The acquisition is part of Land of Lincoln’s strategic growth plan, which includes adding branches and markets to better assist our members in Illinois,” Robert Ares, president and CEO of Land of Lincoln Credit Union, said in the December statement. “Colchester State Bank’s customers will become members of Land of Lincoln with full access to our wide array of products and services.”

Colchester, a full-service community bank, has around $82 million in assets, $74 million in deposits, and $27 million in loans. The bank will liquidate and distribute its remaining assets to its stockholders after the deal is complete.

The transaction will mark the 16th such proposed deal to be announced last year, creating a tie with 2019, which saw the maximum number of credit union-bank acquisitions. However, a couple of those deals did not go through, according to American Banker. Read more

Agencies Issue Joint Statement on Crypto-Asset Risks To Banking Organizations

Federal bank regulatory agencies (Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency) today issued a statement highlighting key risks for banking organizations associated with crypto-assets and the crypto-asset sector and describing the agencies’ approaches to supervision in this area.

In particular, the statement describes several key risks associated with crypto-assets and the crypto-asset sector, as demonstrated by the significant volatility and vulnerabilities over the past year. Given these risks, the agencies continue to take a careful and cautious approach related to current and proposed crypto-asset-related activities and exposures at banking organizations. The agencies continue to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that is safe and sound, legally permissible, and in compliance with applicable laws and regulations, including those designed to protect consumers.

The agencies will continue to closely monitor crypto-asset-related exposures of banking organizations, and, as warranted, will issue additional statements related to engagement by banking organizations in crypto-asset related activities. Read the full statement here

Coinbase Reaches $100M Settlement With New York Regulators

The U.S. crypto exchange will pay a $50 million fine for letting customers open accounts with few background checks and spend $50 million to improve compliance.

Courtesy of Matthew Goldstein and Emily Flitter, New York Times

Coinbase, a publicly traded cryptocurrency trading exchange based in the United States, agreed to pay a $50 million fine after financial regulators found that it let customers open accounts without conducting sufficient background checks, in violation of anti-money-laundering laws.

The settlement with the New York State Department of Financial Services, announced Wednesday, will also require Coinbase to invest $50 million to bolster its compliance program, which is supposed to prevent drug traffickers, sellers of child pornography and other potential lawbreakers from opening accounts with the exchange.

It’s the latest hit to the once-highflying global cryptocurrency trading business. Several cryptocurrency firms have filed for bankruptcy over the past year — most notably FTX, which was the world’s second-largest crypto exchange before it collapsed in November. Sam Bankman-Fried, the founder, and other top FTX executives now face federal criminal charges. Read more

Community Reinvestment Act: Revision of Small and Intermediate Small Bank and Savings Association Asset Thresholds

Today the Office of the Comptroller of the Currency (OCC) announces revisions to the asset-size threshold amounts used to define “small bank or savings association” and “intermediate small bank or savings association” under the Community Reinvestment Act (CRA) regulations. The thresholds—which apply to any national bank, federal savings association, or state savings association (collectively, bank)1—become effective on January 1, 2023. This bulletin adjusts the threshold amounts based on the annual percentage change in a measure of the Consumer Price Index.

Beginning January 1, 2023, a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.503 billion is a “small bank or savings association” under the CRA regulations. A “small bank or savings association” with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years is an “intermediate small bank or savings association” under the CRA regulations. Read more

Dec. 23, 2022: Industry and Regulation

CFPB Orders Wells Fargo to Pay $3.7 Billion for Widespread Mismanagement of Auto Loans, Mortgages, and Deposit Accounts

Company repeatedly misapplied loan payments, wrongfully foreclosed on homes and illegally repossessed vehicles, incorrectly assessed fees and interest, charged surprise overdraft fees, along with other illegal activity affecting over 16 million consumer accounts

The Consumer Financial Protection Bureau (CFPB) is ordering Wells Fargo Bank to pay more than $2 billion in redress to consumers and a $1.7 billion civil penalty for legal violations across several of its largest product lines. The bank’s illegal conduct led to billions of dollars in financial harm to its customers and, for thousands of customers, the loss of their vehicles and homes. Consumers were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed, and had payments to auto and mortgage loans misapplied by the bank. Wells Fargo also charged consumers unlawful surprise overdraft fees and applied other incorrect charges to checking and savings accounts. Under the terms of the order, Wells Fargo will pay redress to the over 16 million affected consumer accounts, and pay a $1.7 billion fine, which will go to the CFPB’s Civil Penalty Fund, where it will be used to provide relief to victims of consumer financial law violations.

According to the enforcement action, Wells Fargo harmed millions of consumers over a period of several years, with violations across many of the bank’s largest product lines. The CFPB’s specific findings include that Wells Fargo:

  • Unlawfully repossessed vehicles and bungled borrower accounts: Wells Fargo had systematic failures in its servicing of automobile loans that resulted in $1.3 billion in harm across more than 11 million accounts. The bank incorrectly applied borrowers’ payments, improperly charged fees and interest, and wrongfully repossessed borrowers’ vehicles. In addition, the bank failed to ensure that borrowers received a refund for certain fees on add-on products when a loan ended early.
  • Improperly denied mortgage modifications: During at least a seven-year period, the bank improperly denied thousands of mortgage loan modifications, which in some cases led to Wells Fargo customers losing their homes to wrongful foreclosures. The bank was aware of the problem for years before it ultimately addressed the issue.
  • Illegally charged surprise overdraft fees: For years, Wells Fargo unfairly charged surprise overdraft fees – fees charged even though consumers had enough money in their account to cover the transaction at the time the bank authorized it – on debit card transactions and ATM withdrawals. As early as 2015, the CFPB, as well as other federal regulators, including the Federal Reserve, began cautioning financial institutions against this practice, known as authorized positive fees.
  • Unlawfully froze consumer accounts and mispresented fee waivers: The bank froze more than 1 million consumer accounts based on a faulty automated filter’s determination that there may have been a fraudulent deposit, even when it could have taken other actions that would have not harmed customers. Customers affected by these account freezes were unable to access any of their money in accounts at the bank for an average of at least two weeks. The bank also made deceptive claims as to the availability of waivers for a monthly service fee.
Cannabis-Banking Bill’s Last Chance For 2022 Just Went Up in Smoke

The SAFE Banking Act was excluded from a $1.7 trillion omnibus spending bill, and most likely will need to be reintroduced after Congress’ next session begins — with a Republican House majority.

Courtesy of Dan Ennis, BankingDive.com

The SAFE Banking Act was excluded from the $1.7 trillion government funding bill, sources told Bloomberg, Politico and Marijuana Moment on Monday — meaning the perennial cannabis banking reform measure will have to be reintroduced during the next congressional session, which begins Jan. 3.

This would mark the third time this year the SAFE Banking Act, which would protect financial institutions that provide services to legal cannabis businesses, has been left out of legislation to which it was attached.

The measure was dropped from the text of the National Defense Authorization Act (NDAA) this month, despite being included in the House’s version of the defense bill, which passed in July. SAFE Banking was also left out of the America COMPETES Act, a manufacturing and innovation bill aimed at boosting the U.S.’s competitiveness with China, in June.

Car Repossessions Are on the Rise in Warning Sign for The Economy

After auto repossessions tumbled during the pandemic, they are now approaching their pre-pandemic levels with industry analysts worried the trend will continue.

Courtesy of Shannon Pettypiece, NBC News

A growing number of consumers are falling behind on their car payments, a trend financial analysts fear will continue, in a sign of the strain soaring car prices and prolonged inflation are having on household budgets.

Repossessions tumbled at the start of the pandemic when Americans got a boost from stimulus checks and lenders were more willing to accommodate those behind on their payments. But in recent months, the number of people behind on their car payments has been approaching prepandemic levels, and for the lowest-income consumers, the rate of loan defaults is now exceeding where it was in 2019, according to data from ratings agency Fitch.

Industry analysts worry the trend is only going to continue into 2023 with economists expecting unemployment to rise, inflation to remain relatively high and household savings set to dwindle. At the same time, a growing number of consumers are having to stretch their budgets to afford a vehicle; the average monthly payment for a new car is up 26% since 2019 to $718 a month, and nearly one in six new car buyers is spending more than $1,000 a month on vehicles. Other costs associated with owning a car have also shot up, including insurance, gas and repairs.

Federal Reserve: Revised Federal Debt Collection Practices Act Examination Procedures

The Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council recently approved the attached examination procedures for the Fair Debt Collection Practices Act (FDCPA)1 and its implementing regulation, Regulation F.

The PDF below procedures reflect amendments to Regulation F published by the Consumer Financial Protection Bureau (CFPB) on November 30, 2020 and January 19, 2021 that became effective on November 30, 2021.2 The CFPB’s 2020 amendments address, among other things, communications in connection with debt collection and prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection. The CFPB’s 2021 amendments clarify the information that a debt collector must provide to a consumer at the outset of debt collection communications and provide a model validation notice containing such information; the amendments also address consumer protection concerns related to passive collections and the collection of debt that is beyond the statute of limitations.

Reserve Banks are asked to distribute this letter to the supervised institutions in their districts and to appropriate supervisory staff. Questions regarding this letter may be sent via the Board’s public website.3

Supersedes:
  • CA Letter 97-3, “Revised Examination Procedures for the Fair Debt Collection Practices Act” (June 12, 1997)
PDF:

Notes:

  1. 15 USC 1692 et seq. Return to text.
  2. See 85 Fed. Reg. 76734 (Nov. 30, 2020) and 86 Fed. Reg. 5766 (Jan. 19, 2021). Return to text.
  3. See http://www.federalreserve.gov/apps/contactus/feedback.aspx. Return to text.

Dec. 16, 2022: Industry and Regulation

FinCEN Issues NPRM Regarding Access to Beneficial Ownership Information & Related Safeguards

The Financial Crimes Enforcement Network (FinCEN) today issued a Notice of Proposed Rulemaking (NPRM) that would implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information. This NPRM proposes regulations that would govern the circumstances under which such information may be disclosed to Federal agencies; state, local, tribal, and foreign governments; and financial institutions, and how it must be protected.

The proposed regulations specify how government officials would access beneficial ownership information in order to support law enforcement, national security, and intelligence activities. They also describe how certain financial institutions and their regulators would access such information in order to fulfill customer due diligence requirements and conduct supervision. The proposed rule also sets forth high standards for protecting this sensitive information consistent with the goals and requirements of the CTA. The NPRM also proposes amendments to the final reporting rule to specify when reporting companies may report FinCEN identifiers associated with entities.

Notice of Proposed Rulemaking: https://www.federalregister.gov/public-inspection/2022-27031/beneficial-ownership-information-access-and-safeguards-and-use-of-fincen-identifiers-for-entities
Fact Sheet: https://www.fincen.gov/nprm-fact-sheet

U.S. Consumer Loan Delinquencies Seen Surging To 13-Year High In 2023

Courtesy of Saeed Azhar and Lananh Nguyen, Reuters

U.S. consumers will fall behind on their personal loan and credit card payments next year at the highest rates since 2010, according to forecasts from TransUnion, a major consumer credit rating agency.

Surging loan delinquencies will follow a year in which consumers loaded up on credit, TransUnion said in a study Wednesday. Americans took out a record 87.5 million in new credit cards and 22.1 million in personal loans in 2022, the report showed.

Consumers face significant financial challenges, including “rapidly increasing interest rates and stubbornly high inflation combined with recession fears,” said Michele Raneri, head of U.S. research and consulting at TransUnion. Despite the economic slowdown, more than half of the 2,800 Americans polled were optimistic about their finances for the next 12 months, TransUnion said. The youngest generations expressed the most confidence.

The Federal Reserve has raised interest rates aggressively this year to temper inflation, and is expected to increase the policy rate again later in the day. Against that backdrop, lenders are expected to apply tougher standards to borrowers. Credit card originations will probably slide in 2023 from this year’s levels, but delinquency rates could rise to 2.6% at the end of 2023 from 2.1% by year-end, TransUnion said. Read more here.

FTC Halts Debt Relief Scheme that Bilked Millions from Consumers While Leaving Many Deeper in Debt

The FTC has temporarily shut down a credit card debt relief scheme that allegedly took millions from people by falsely promising to eliminate or substantially reduce their credit card debt. “These defendants preyed on older Americans already struggling with credit card debt and caused them to fall into even worse debt, with lasting harm to their credit,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection.

In a complaint, the FTC alleged that Austin, Huffman, and Thompson engaged in several deceptive and unlawful tactics, including:

  • Deceptive telemarketing: The operators have violated the Telemarketing Sales Rule by using telemarketers to call consumers and pitch their deceptive scheme. The telemarketers often falsely claimed to be affiliated with a particular credit card association, bank, or credit reporting agency and promised they could greatly reduce or eliminate consumers’ credit card debt in approximately 12-18 months.
  • Making phony debt relief promises: In marketing their services, the scheme’s operators claimed to use several bogus methods to reduce or eliminate consumers’ credit card debt. For example, they falsely claimed that consumers may qualify for a federal debt relief program or that a consumer doesn’t owe the debt because it hasn’t been “validated.”
  • Charging deceptive upfront fees: Consumers who agreed to sign up for the debt relief program were charged an upfront enrollment fee of thousands of dollars depending on a consumer’s available credit, and they were falsely told it is part of the debt that will be eliminated as part of the program. Consumers were also charged monthly fees ranging from $20-$35 for “credit monitoring” services. Read more here.
State AGs, Federal Regulators Gather to Discuss Tech Competition, ESG, Privacy, and More

Courtesy of Keturah Taylor and Cozen O’Connor, Cozen O’Connor, JDSupra.com

Last week, the National Association of Attorneys General (NAAG) held its annual Capital Forum in Washington, DC, which provided AGs, AG staff, and private sector attendees the opportunity to engage with each other as well as federal officials, to discuss important policy issues and learn about the latest state and federal legal developments.

For three days, attendees debated and learned about wide-ranging topics of current interest to state and federal regulators during panels focused on global considerations in antitrust enforcement; ESG investment requirements; facial recognition technologies; strategies for multistate investigations; drug enforcement and the fentanyl crisis; veterans’ issues; and more. FTC Chairperson Lina Khan and CFPB Director Rohit Chopra also stopped by to discuss their respective agencies’ enforcement and regulatory priorities, and how they plan to work with AGs to protect consumers.

Consumer Protection and Privacy Concerns Surrounding Facial Recognition Technologies

Panel moderator Christopher Curtis, Chief of the Public Protection Division at the Vermont AG’s office, shared that facial recognition technology is a growing area of interest to the AG community. The application and uses of these technologies are growing exponentially, and present a number of issues that lie at the crossroads of consumer protection and privacy.

Panelist Clare Garvey, from the National Association of Criminal Defense Lawyers, noted that there is an inherent contradiction between the technology we want to use as consumers, and our interest in privacy. While consumers are eager to use these technologies to access products and services with ease, the average citizen may not understand the breadth or depth of these applications or how their data is used once collected.

That is why regulators are concerned about establishing appropriate guardrails for such technologies, either through new regulation or by reconsidering how existing regulatory frameworks may apply to such technologies and applications. Read more here.

Federal Reserve Board Proposes Climate-Related Financial Risk Management Principles

Courtesy of Cadwalader, Wickersham & Taft LLP, National Law Review

Last week, the Federal Reserve Board (“FRB”) proposed principles for climate-related financial risk management for large financial institutions. The proposed guidance is open for comment until 60 days after publication in the Federal Register.

The FRB’s proposed guidance is very much in line with guidance previously issued by the OCC and FDIC in December 2021 and March 2022, respectively. The FRB staff noted that they had worked with the staffs of the OCC and FDIC in this proposal with an eye toward all three agencies issuing interagency guidance. As we speculated in June when the Basel Committee on Banking Supervision issued its principles on climate-related financial risk management, the FRB may have been waiting for the Vice Chair of Supervision seat to be filled before issuing its version of the principles.

The proposed guidance/principles would cover six topic areas. They are: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis. Like the OCC and FDIC principles, the guidance is proposed to apply to institutions with over $100 billion in assets. Read more here.

Dec. 9, 2022: Industry and Regulation

Close the Shadow Banking Loophole Act: Senators Introduce Bill to Ensure a Fair Banking System

Sen. Sherrod Brown (D-OH), Chair of the Senate Committee on Banking, Housing, and Urban Affairs, along with Sen. Bob Casey (D-PA) and Sen. Chris Van Hollen (D-MD), introduced the Close the Shadow Banking Loophole Act, legislation to require companies that own an industrial loan company (ILC) to be subject to the same rules and consumer protections as traditional banks.

ILCs are state-chartered banking institutions whose holding companies are not subject to consolidated supervision by the Federal Reserve, as all other bank holding companies are, due to a loophole in ­­the Bank Holding Company Act. The result is that ILCs owned by tech companies like Square have a leg-up on traditional banks with regulatory safeguards.

The Close the Shadow Banking Loophole Act would close this loophole. The bill requires companies that acquire an ILC to be subject to the same supervision by the Federal Reserve as any other bank holding company under the Bank Holding Company Act. It would also provide a carve-out for existing ILCs.

A one-pager of the bill is available here. The bill text is available here.

Federal Reserve Board Invites Comment on Proposed Principles, Providing a High-Level Framework for The Safe And Sound Management of Exposures to Climate-Related Financial Risks for Large Banking Organizations

The proposed principles would apply to banking organizations with more than $100 billion in total assets and address both the physical risks and transition risks associated with climate change. The proposed principles would cover six areas: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis.

The proposed principles are substantially similar to proposals issued by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, and the Board intends to work with those agencies to promote consistency in the supervision of large banks through final interagency guidance. Comments will be accepted for 60 days. Learn More

Economists: A U.S. Housing Recession Has Already Arrived

Courtesy of Daniel De Vise, TheHill.com 

This has been a year of watershed moments in real estate, and not the good kind. The Housing Market Index, a closely watched industry metric that gauges the outlook for home sales, declined to 33 in November on a hundred-point scale, its lowest level in a decade, save for the first dystopian month of the pandemic. Anything under 50 spells trouble.

A month earlier, interest rates on a standard 30-year mortgage passed 7 percent, capping the largest single-year increase in at least 50 years. The difference between a 3 percent interest rate and a 7 percent rate amounts to $1,000 more in a monthly mortgage payment on a mid-priced American home, according to Nadia Evangelou, senior economist at the National Association of Realtors. Read More

Consumers Will Share In Experian’s $22.5 Million Class Action Settlement

The credit agency sent false information about consumers to third parties

Courtesy of Mark Huffman, ConsumerAffairs.com

Experian, one of the three credit reporting agencies, has agreed to pay $22.45 million to settle a class-action lawsuit stemming from incorrect information about consumers sent to third parties. Consumers eligible for compensation include those for whom Experian mischaracterized their place of residence as “high risk.” According to the settlement, those false credit reports were sent out between July 1, 2018, and July 31, 2021.

The problem apparently stemmed from Experian’s Fraud Shield, which is supposed to alert creditors to a consumer’s potential risk. The monetary portion of the settlement affects people who contacted Experian to dispute information in their report – specifically that they live in a high-risk area or that their address is not a residence. The plaintiffs contend that Experian failed to properly verify the information it put in affected consumers’ credit reports. Read More

Acting Comptroller Discusses Promoting Prudent Credit Risk Management and Diversity and Inclusion

Acting Comptroller of the Currency Michael J. Hsu today discussed the importance of continued prudent credit risk management and diversity and inclusion, two important safety and soundness topics, at the RMA Risk Management and Internal Audit Virtual Conference. The Acting Comptroller highlighted benefits to banks from the Current Expected Credit Losses standard, and the importance of bank commitments to meaningful diversity, equity and inclusion at every organizational level. Read the remarks here.

 

Dec. 2, 2022: Industry and Regulation

OCC May Stiffen Penalties with Revised Guidance

Courtesy of Dan Ennis, BankingDive

Updates to the agency’s policy manual make new categories with elevated fine totals for violations by the largest banks and change the factors that beget leniency.

Policy revisions the Office of the Comptroller of the Currency (OCC) unveiled Tuesday could indicate the agency will assess larger penalties against banks for misconduct and tie in restrictions on lenders’ business activities. Some of the most impactful changes come to the penalty “matrix” the regulator uses to assess the severity of a violation. For one, the OCC created new categories based on asset size. Read More

CPFB Raises Ceiling for Allowable Charges Under Fair Credit Reporting Act

Courtesy of CUToday

That threshold dictates what consumer reporting agencies are allowed to charge consumers who request their information file after their guaranteed free file disclosure in a 12-month period. The maximum allowable charge for the coming year is up $1 to $14.50. The Bureau has not yet released its annual changes to asset-size exemption thresholds under the Home Mortgage Disclosure Act and Regulation Z. Read More and Download the CFPB Supervisory Highlights, Issue 28, Fall 2022 Here

Sustainable Finance Live: Is Sustainable Finance Sustainable?

Courtesy of FinExtra

Decarbonization has become a hot topic in the fintech world, with many companies monitoring both their carbon emissions and energy usage to meet ESG goals. However, greenwashing has become more prevalent in the sector along with the onset of sustainable finance. In his Keynote presentation, Is sustainable finance sustainable? House of Lords Peer, Lord Christopher Holmes spoke on how the financial industry seeks to resolve gaps in ESG data and combat greenwashing in the sector. Read More

Biden Officials to Target Nonbanks for Tougher Oversight

Courtesy of Andrew Ackerman, Wall Street Journal

The Biden administration is laying the groundwork to target nonbank firms with stricter federal oversight as regulators grow concerned about financial threats from companies operating outside of the tightly supervised banking system. The aim, the people said, would be to make it easier to label nonbank firms as systemically important financial institutions, or SIFIs, a designation that currently applies only to the nation’s largest banks and imposes extensive oversight in an effort to rein in risks to financial stability.

The coming regulatory effort reflects the administration’s intensifying focus on potential systemic risks tied to nonbanks—financial firms that include hedge funds, asset managers, insurance companies, mortgage companies and cryptocurrency exchanges. Read More

Federal Reserve Releases the Beige Book

Summary of Commentary on Current Economic Conditions by Federal Reserve District

Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis. Read and Download Files Here

 

Nov. 18, 2022: Industry and Regulation

Some Credit Unions Still Don’t Want the NCUA to Dictate Succession Planning

Andrew Jaeger has no immediate plans to step down as the CEO of Credit Union of New Jersey in Ewing, but that doesn’t mean he hasn’t started thinking about who might take his place. “We’re all aging, so we’re starting to take a much closer look at building strength in the future leaders of the credit union,” said Jaeger, who has led the $423 million-asset credit union for more than 33 years.

The issue of succession planning was top of mind for many credit union leaders, including Jaeger, who spoke during the CrossState Credit Union Association’s CU Reality Check conference. Jaeger said it takes time and resources to identify the right people and put a plan in place, and many smaller institutions simply don’t have those two things in ample supply. Still, Jaeger said that cannot be used as an excuse. “You need to make time for it because it’s critical,” he said.

The National Credit Union Administration agrees. The agency in January approved by a vote of 2-1 a proposed rule that would require boards at federal credit unions to establish and adhere to processes for succession planning. The NCUA has not put the issue back on its agenda yet for a final vote. An NCUA spokesman said the regulator is reviewing comments. READ MORE

Marijuana Industry Hopeful for Federal Reform During Lame-Duck Congress

Marijuana industry entrepreneurs and investors, exhausted and eager to catch a break after a difficult year of declining sales, tumbling prices, and vanishing capital, believe relief is on its way from an unlikely quarter: the U.S. Congress.

Headed into the brief “lame duck” session of Congress – the period between this past Monday, when Congress reconvened after the midterms, and Jan. 3, when the new Congress is seated – there’s hope among industry insiders that this slim window offers the best opportunity during President Joe Biden’s first term to pass substantive federal marijuana reform.

Lobbyists and Washington DC insiders agree the lame-duck session represents the best opportunity. The problem: The chances are slim, and the votes might not be there in the Senate. Roughly 50 marijuana-related bills are circulating in Congress – including Democratic and Republican visions of federal legalization plus bills to lift restrictions on cannabis research and allow MJ to be shipped via the U.S. mail. READ MORE

New Survey Shows Gen Z Apprehensive About the Path to Homeownership

Homeownership continues to be something to strive for among “Generation Z,” the demographic cohort following Millennials, according to a new survey from Freddie Mac (OTCQB: FMCC). This survey of respondents finds that the attitudes of Gen Z adults (ages 18-25) are largely positive when it comes to the idea of homeownership, though they are increasingly leery of the obstacles they may face. One in three Gen Z adults (34%) say homeownership at any point seems out of reach financially—which rises slightly to 35% of Black respondents and more to 50% of Hispanic respondents. When this survey was last fielded in 2019, 27% of Gen Z adults said homeownership is out of reach financially.

Gen Z adults identified the following as the top five hurdles to homeownership:

  • Saving for a down payment (39%)
  • Not having a sufficient credit history (27%)
  • Unstable job situation (27%)
  • Student loan debt (22%)
  • Credit card debt (11%)

Like the 2019 survey, Gen Z adults prefer homeownership over renting and believe owning a home provides more privacy (96%), is something to be proud of (95%), and allows for more control and independence (92%). READ MORE

Credit Card Balances See Biggest Spike in More Than 20 Years

Credit card balances in the third quarter jumped 15% over the same period last year — the biggest annual increase in more than two decades, New York Fed researchers reported today.

Why it matters: The spike reflects feverish rebound spending during a period of decades-high inflation, as well as added pressure on younger borrowers and borrowers with lower income.

The big picture: The upswing points to yet another dataset reverting to pre-pandemic patterns.

Amid a still strong labor market with government assistance programs now largely gone, “it’s clear” that debt trends are shifting back to previous rates, New York Fed researchers said.

Two things to watch: The upcoming holiday season may boost balances even more this quarter.

  • And the status of the White House’s student loan forgiveness plan, which has been tied up in the courts.
  • If it goes through, the researchers expect student loan delinquencies to be lower than they were pre-pandemic. If payments resume, younger borrowers may see greater credit pressures than older borrowers. READ MORE
Total Household Debt Reaches $16.51 Trillion in Q3 2022; Mortgage and Auto Loan Originations Decline

The Federal Reserve Bank of New York’s Center for Microeconomic Data today issued its Quarterly Report on Household Debt and Credit . The Report shows an increase in total household debt in the third quarter of 2022, increasing by $351 billion (2.2%) to $16.51 trillion. Balances now stand $2.36 trillion higher than at the end of 2019, before the pandemic recession. The report is based on data from the New York Fed’s nationally representative Consumer Credit Panel.

Mortgage balances rose by $282 billion in the third quarter of 2022 and stood at $11.67 trillion at the end of September, representing a $1 trillion increase from the previous year. Credit card balances also increased by $38 billion. The 15% year-over-year increase in credit card balances represents the largest in more than 20 years. Auto loan balances increased by $22 billion in the third quarter, consistent with the upward trajectory seen since 2011. Student loan balances slightly declined and now stand at $1.57 trillion. In total, non-housing balances grew by $66 billion. READ MORE

 

Nov. 11, 2022: Industry and Regulation

Debt Financing Eclipses Equity in US Marijuana Cultivation and Retail Fundings

Cannabis Debt Financing in 2022: Lower equity prices and more financially stable cannabis companies are causing a shift to debt financing as the preferred method to raise funds in 2022. Capital raises in the U.S. marijuana industry are down nearly 65% this year versus 2021, but lower stock prices and more creditworthy cannabis companies mean debt financing is now the preferred method to raise funds for the first time in years.

Equity financing had dominated cannabis capital raises since at least 2018. But so far this year, debt funding has dominated, according to data collected by New York-based cannabis capital, M&A and strategic advisory firm Viridian Capital Advisors. To be sure, debt financing in the U.S. marijuana industry is down by 39.9% compared to last year from January to October, according to Viridian data. READ MORE

Wells Fargo Under Pressure from CFPB to Pay Over $1B Fine

Wells Fargo is under pressure from the U.S. Consumer Financial Protection Bureau (CFPB) to pay more than $1 billion to settle a slew of investigations into customer mistreatment, Bloomberg News reported, citing people familiar with the matter.

The fourth-largest U.S. bank declined to comment on the report, while the CFPB did not immediately respond to a Reuters request for comment. Last week, Wells Fargo revealed that it was in talks with CFPB to settle “a number” of probes, including for automobile and mortgage lending as well as consumer deposit accounts.

The regulator’s demand reflects its escalating frustration with the bank, the news report said on Friday. The potential fine comes after the bank posted $2 billion in operating losses related to litigation, customer remediation, and regulatory matters in the third quarter and took a 31% hit to its third-quarter profit last month. READ MORE

CFPB Issues Guidance to Address Shoddy Investigation Practices by Consumer Reporting Companies

When consumer reporting companies and furnishers fail to investigate disputed information, consumers are left paying higher interest rates and face greater difficulty finding housing, employment.

The Consumer Financial Protection Bureau (CFPB) issued a circular to affirm that neither consumer reporting companies nor information furnishers can skirt dispute investigation requirements. The circular outlines how federal and state consumer protection enforcers, including regulators and attorneys general, can bring claims against companies that fail to investigate and resolve consumer report disputes. The CFPB has found that consumer reporting companies and some furnishers have failed to conduct reasonable investigations of consumer disputes and to spend the time necessary to get to the bottom of inaccuracies. These failures can affect, among other things, people’s eligibility for loans and interest rates, for insurance, and for rental housing and employment. READ MORE

October Inflation Report: A Third of US Consumers Now Struggle to Pay Bills

Inflation has begun to show signs of slowing month after month but remains at levels not seen since 1981. Half of consumers say inflation has soured their outlook on their economic future, and nearly a third say paying bills is getting more difficult.

The impact of inflation has been detrimental to the recovery of an economy still reeling from COVID-19. Things once considered economic certainties, such as salaries keeping up with inflation and the ability to travel affordably from one part of the country to another, are now called into question. In “Consumer Inflation Sentiment: Inflation’s Long Consumer Spending Shadow,” an independently produced PYMNTS report, we surveyed 2,467 United States consumers to see how inflation is changing how Americans perceive their futures and examine the long shadows cast by inflation on the nation’s economy. READ MORE

One Woman’s Mission to Save Credit Unions by Championing Diversity

In March 2022, when Renée Sattiewhite sat on stage during a conference in Washington, D.C., she didn’t know who was in the audience — or how much her help meant to that person.

The woman in the audience had been trying to start a credit union in North Minneapolis, “in what we call Ground Zero for George Floyd and Philando Castile. For years we had been trying to do this, and because of the heart of one person on that stage it is closer to reality, and that would be Renée Sattiewhite,” the woman said. “I picked up the phone and called her and explained my journey. Ground Zero for this project is riddled with payday lenders and fringe bankers. There was no cavalry coming.” READ MORE

Federal Reserve Board Invites Public Comment on a Proposal to Publish a Periodic List of Depository Institutions That Have Access to Federal Reserve Accounts—Often Referred to as “Master Accounts”— and Payment Services

The Federal Reserve Board on Friday invited public comment on a proposal to publish a periodic list of depository institutions that have access to Federal Reserve accounts—often referred to as “master accounts”—and payment services. The proposal would result in a transparent and accessible source of this information for the public.

In August, the Board adopted final guidelines that establish a transparent, risk-based, and consistent set of factors for Reserve Banks to use in reviewing requests to access these accounts and payment services. The proposal issued today would build on the transparency of the guidelines by requiring Reserve Banks to periodically disclose which depository institutions have access to their accounts and payment services. READ MORE

Federal Reserve Supervision and Regulation Report

The report summarizes banking conditions and the Federal Reserve’s supervisory and regulatory activities, in conjunction with semiannual testimony before Congress by the Vice Chair for Supervision.