THIS WEEK: Path for economic recovery uncertain; Summary outlines BSA rule changes; Small institutions pay more for BSA compliance; Joint statements outlined; ‘Seasoned’ QM summarized; Fed opens its own reform of CRA rules
Economy recovering slowly,
but outlook remains uncertain
The impact on consumers and financial institutions of the coronavirus has become more apparent over the last several weeks, but the path forward remains uncertain as indicated in both mid-year numbers issued by regulators and public statements offered by policy makers.
In testimony this week before the House Financial Services Committee, Federal Reserve Board Chair Jerome H. (“Jay”) Powell asserted that the U.S. economy has improved since last spring when the coronavirus crisis and its impact on the economy first became apparent, but also said the path forward remains “highly uncertain.” He said household spending has regained about three-fourths of its earlier decline from the initial impact of the crisis on the economy. He attributed that improvement partly to federal stimulus payments and expanded unemployment benefits; that housing has rebounded; and that business fixed investment shows signs of improvement.
As for jobs, he said about half of the 22 million payroll jobs lost in March and April have been regained as people return to work.
However, he said, employment and economic activity still lags behind pre-pandemic levels – and the path forward remains highly uncertain. “The downturn has not fallen equally on all Americans; those least able to bear the burden have been the most affected,” he said. “The rise in joblessness has been especially severe for lower-wage workers, for women, and for African-Americans and Hispanics. This reversal of economic fortune has upended many lives and created great uncertainty about the future.”
Powell emphasized that a full economic recovery can only come when the public is confident that health conditions make it safe to reengage in a broad range of activities.
“The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government,” he said.
Meanwhile, numbers released by NCUA last week underscore that credit unions and their members have felt the pandemic’s impact. In releasing state-by-state financial performance results for federally insured credit unions (FICUs) at mid-year, the agency noted that median asset growth over the year ending in the second quarter of 2020 was 10%, compared to 1.7% during the year ending in the second quarter of 2019.
However, the agency pointed out, the median growth rate of loans outstanding was 0.2% over the year ending in the second quarter of 2020, compared to 4.6% over the same period in 2019.
Additionally, NCUA stated, 81% of FICUs had positive net income at mid-year – compared to 88% of all FICUs at mid-year 2019. Those results were reflected in return on average assets (ROAA) at mid-year for the FICUs – which was 39bp during the first half of 2020, compared to 63 bp the year before.
Also this week, the OCC released its report on mortgage metrics at banks for the second quarter, showing that the portion of first-lien mortgages that were current and performing fell from 96.1% of all mortgages at mid-year 2019 to 91.1% at mid-year 2020. The national bank regulator also reported that the percentage of seriously delinquent mortgages increased 5.4% from the previous quarter and 5.3% from a year ago. “Seriously delinquent mortgages” are those that are 60 or more days past due and all mortgages held by bankrupt borrowers whose payments are 30 or more days past due, according to the OCC.
Reflecting the bank results, seriously delinquent loans backed by Fannie Mae and Freddie Mac that are 60 or more days past due jumped from 0.92% to 4.08% at the end of the second quarter, which is being attributed to the COVID-19 pandemic and the forbearance programs being offered to the affected borrowers, the Federal Housing Finance Agency (FHFA) said. The industry average, the agency said, is 4.26%.
Proposed BSA regulatory changes outlined in new summary
A proposal to make substantial changes to the BSA regulatory framework with the potential to provide institutions greater flexibility in administering their anti-money laundering programs has been summarized by NASCUS and posted on the association website. The summary is available to members only.
In its advance notice of proposed rulemaking (ANPR) issued Sept. 16, the Treasury’s financial crimes law enforcement unit said it was seeking public comment on amendments to its rules for BSA enforcement – in particular, requiring “effective and reasonably designed” anti-money laundering (AML) programs maintained by all financial institutions subject to the rule’s requirements.
FinCEN stated in the ANPR that the amendments under consideration “are intended to modernize the regulatory regime to address the evolving threats of illicit finance, and provide financial institutions with greater flexibility in the allocation of resources, resulting in the enhanced effectiveness and efficiency of anti-money laundering programs.”
Specifically, FinCEN said its proposed amendments would clarify that an “effective and reasonably designed” AML program would assess and manage risk according to the institution’s own risk assessment process; provide for compliance with BSA requirements; and provide for the reporting of information with a high degree of usefulness to government authorities.
The proposal would also create a mechanism to establish a set of national law enforcement priorities to help guide financial institutions with their risk assessments and resource allocation.
GAO: Small institutions pay more for BSA compliance
Costs for smaller credit unions and other financial institutions for complying with Bank Secrecy Act/anti-money laundering (BSA/AML) requirements generally tend to be proportionally greater than the larger ones, the Government Accountability Office (GAO) said in a report issued this week.
Touching on a variety of BSA/AML issues, the GAO report asserted that such costs related to BSA compliance comprised about 2% of the operating expenses for each of the three smallest financial institutions (out of the 11 it reviewed, of varying sizes) in 2018, but less than 1% for each of the three largest financials reviewed.
“At the same time, costs can differ between similarly sized banks (e.g., large credit union A and B), because of differences in their compliance processes, customer bases, and other factors,” the agency said.
In addition, GAO said requirements to verify a customer’s identity and report suspicious and other activity generally were the costliest areas – accounting for 29% and 28%, respectively, of total compliance costs on average for the 11 selected financial institutions.
“Federal banking agencies routinely examine banks for BSA compliance,” GAO said. “FinCEN data indicate that the agencies collectively cited about 23% of their supervised banks for BSA violations each year in their fiscal year 2015–2018 examinations. A small percentage of these violations involved weaknesses in a bank’s BSA/anti-money laundering compliance program, which could require the agencies by statute to issue a formal enforcement action.”
In another aspect of the report, GAO said law enforcement agencies could be doing much more with the AML information and reports produced by the Treasury’s financial law enforcement unit (the Financial Crimes Enforcement Network [FinCEN]), and that unit should develop better policies and procedures to let them do that.
According to the report, some law enforcement agencies without direct access to reports of the FinCEN may be underutilizing the reports “to the detriment of their investigations,” according to the GAO report.
“The Director of FinCEN should develop and implement written policies and procedures to help promote the greater use of BSA reports by law enforcement agencies that do not have direct access to the BSA database,” the GAO recommendation stated. “Such policies and procedures could include outreach strategies and educational or training materials.”
Cluster of joint statements summarized
Three summaries of joint statements from NCUA and federal banking regulators – on loan accommodations related to the COVID-19 pandemic, supervisory practices related to dealing with hurricanes and California wildfires, BSA due diligence requirements for customers who may be considered politically exposed persons – have been posted by NASCUS this week. All are available to members only.
The summaries address:
- A joint statement (from early August) from the FFIEC outlining prudent risk management and consumer protection principles for borrowers nearing the end of accommodation periods due to the impact of the coronavirus crisis. The statement also addressed issues relative to accounting and regulatory reporting, as well as internal control systems. The statement encouraged financial institutions to the accommodations that are: based on an understanding of the credit risk of the borrower; consistent with applicable laws and regulations; and, can ease cash flow pressures on affected borrowers, improve their capacity to service debt, and facilitate a financial institution’s ability to collect on its loans.
- A statement (from later in August) from FinCEN and federal financial institution regulators that aimed to clarify how banks and credit unions can apply a risk-based approach to politically exposed persons (PEPs, or foreign individuals) in their customer due diligence under the Bank Secrecy Act. The statement is not interpreted to include U.S. public officials. According to the statement, “the level of risk associated with PEPs, however, varies and not all PEPs are automatically higher risk,” the agencies wrote. They added that PEPs “should not be confused with the term ‘senior foreign political figure’ (SFPF) as defined under the BSA private banking regulation, a subset of PEPs.”
- An interagency message (released this month) advising credit unions and banks on the impact of Hurricane Laura and the California wildfires on their members and customers; the statement highlighted several areas where credit unions and banks can respond in their members’ and customers’ interests in the face of the catastrophes.
‘Seasoned’ qualified mortgage outlined
The CFPB’s proposal for a “seasoned” qualified mortgage (QM) that would apply to portfolio loans meeting certain performance requirements over a three-year period, including having limited delinquencies, is the latest subject of a summary posted by NASCUS to its website, and available to members only.
Within a day of NASCUS posting the summary, the agency announced that the comments-due date had been extended to Oct. 1 (rather than Sept. 28), to accommodate the Yom Kippur Jewish holiday.
Under the proposal, mortgages considered “seasoned” are first-lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month “seasoning period.” Further, a seasoned QM would only be available for covered transactions that have no more than two 30-day delinquencies and no delinquencies of 60 or more days at the end of the seasoning period.
Transactions covered by the proposal would also have to be: held on a creditor’s portfolio during the seasoning period; comply with general restrictions on product features and points and fees; and meet certain underwriting requirements.
For a loan to be eligible to become a seasoned QM, the proposal also requires that the creditor consider and verify the consumer’s debt-to-income ratio (DTI) or residual income at origination.
Fed sets in motion changes to CRA rules
A proposal to modernize rules implementing anti-redlining laws were released this week by the Federal Reserve, which the agency’s point person on the issue called an effort to build a foundation for a “consistent approach” among federal agencies.
The Fed Board issued the advance notice of proposed rulemaking (ANPR) on a vote of 5-0 with a 120-day comment period. The approach contemplated in the proposal, the Fed said in a release, is aimed at “strengthening, clarifying, and tailoring” rules implementing the Community Reinvestment Act (CRA) to reflect the current banking landscape and better meet the core purpose of the underlying statute. The proposal highlighted the Fed’s desire for feedback on ways to evaluate how banks meet the needs of low- and moderate-income (LMI) communities and address inequities in credit access.
Gov. Lael Brainard, who leads the Fed’s effort on reform of CRA rules, said the agency wants to build “broad support among stakeholders” for the proposal. ““It has been 25 years since the last significant revision to the CRA regulation, so it is important to get reform right,” Brainard said in remarks delivered this week to a virtual conference. She added that the long comment period, along with stakeholder views, would allow the Fed and the other banking agencies to “come together on a stronger, transparent, and tailored approach to the CRA that will benefit LMI (low- to moderate-income) communities across the country for years to come.”
In advancing what she called “the core of purpose of the CRA,” Brainard said the Fed proposal sought to do three things: promote financial inclusion, meet the needs of LMI individuals and communities, and address changes in the banking industry.
In May, the OCC acted alone in issuing rewritten CRA rules, with neither the FDIC nor the Fed joining (even though all three agencies have roles in enforcing the CRA through their rules). The OCC rule is designed to create more descriptive and expansive criteria for the types of activities that qualify for CRA credit. Among other things, it is designed to provide “defined criteria” that identify the types of activities that meet the credit needs of banks’ communities and, thus, can be considered qualifying activities.
Acting Comptroller of the Currency Brian Brooks said his agency welcomed the Fed’s ANPR “on how to improve the CRA framework for state-chartered, Fed-member banks,” which the Fed supervises.
“Public input and discourse fuels continuous improvement, and we look forward to reviewing the comments for potential insight into our own rulemaking that applies to national banks and savings associations,” Brooks said in his statement.