(May 28, 2021) Discussion of digital currency and if (or when) the Federal Reserve will begin issuing its own version of the new money was ramped up over the last week following comments by the agency board’s chair and the board member who watches over the nation’s payments system.
First up was Fed Chair Jerome H. (“Jay”) Powell, who last week said the development and enablement of a central bank digital currency (CBDC) for use by the general public is among the technological advances being explored by the Federal Reserve. Further, he revealed, the agency plans to publish a “discussion paper” this summer that will delve into the implications of digital payments – including possibly a U.S.-issued digital currency.
The key focus for the Fed, Powell said, is whether or how a CBDC could improve on what he called the existing “already safe, effective, dynamic, and efficient U.S. domestic payments system” in serving households and businesses. In any event, he said the Fed does not see digital currencies as a replacement for cash and coin – at least for now.
“We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks,” Powell said. “The design of a CBDC would raise important monetary policy, financial stability, consumer protection, legal, and privacy considerations and will require careful thought and analysis—including input from the public and elected officials.”
This week, Fed Gov. Lael Brainard (who chairs the Fed’s payments committee) said this summer’s paper on digital money will be used to solicit public comment on a range of questions related to the use of the new currency, including payments, financial inclusion, data privacy and information security.
She also said that a digital dollar would be a new type of central bank money issued in digital form for use by the general public. “By introducing safe central bank money that is accessible to households and businesses in digital payments systems, a CBDC would reduce counterparty risk and the associated consumer protection and financial stability risks,” she said. She added that introducing a CBDC may provide an “important foundation” for beneficial innovation and competition in retail payments in the U.S.
LINKS:
Transcript of Chair Powell’s Message on Developments in the U.S. Payments System
(May 28, 2021) Speaking of safe digital money – and cybersecurity in general — NASCUS has developed a new portal on its website dedicated to helping the state system stay abreast of the latest resources and alerts about developments in the area. The portal features updates from the FFIEC, ransomware protection guidance and resources, and cybersecurity alerts from the federal Cybersecurity and Infrastructure Security Agency (CISA)., as well as the FBI and other agencies (updated regularly).
LINK:
NASCUS Cybersecurity Alerts & Resources
(May 28, 2021) The delay to Oct. 1, 2022 of the mandatory compliance date of the general qualified mortgage (QM) final rule is the subject of a regulatory alert issued by NCUA this week and sent to all federally insured credit unions.
The letter details action taken by CFPB in late April, which moved compliance with the QM rule to Oct. 1 of next year from July 1 of this year. The bureau said in April that the delay was made to “help ensure access to responsible, affordable mortgage credit, and preserve flexibility for consumers affected by the COVID-19 pandemic and its economic effects.”
The final rule making the change was titled “April 2021 Amendments to the ATR/QM Rule” (ATR stands for “ability to repay”).
In its alert, NCUA notes the two categories that the compliance date delay affects: General QMs and temporary GSE QMs (referring to QMs issued by government-sponsored enterprises Fannie Mae and Freddie Mac).
The alert notes that, under the general GM category, a lender can use either the original underwriting process (with the 43 percent DTI limit) or the new underwriting process (with price-based thresholds) for applications received from March 1, 2021, to Sept. 30, 2022. Lenders must use the revised General QM loan definition for applications received on or after Oct. 1, 2022.
Under the GSE category, the Alert states, the temporary GSE QM loan definition expires upon the earlier of Oct. 1, 2022, or the date the applicable GSE exits federal conservatorship (rather than on the original mandatory compliance date of July 1, 2021, or the date the applicable GSE exits federal conservatorship).
(May 28, 2021) Comment letters on NCUA’s interim final rules on asset thresholds for reporting purposes, and for conforming existing NCUA’s Central Liquidity Facility rules with new statutes, were submitted by NASCUS this week. The state system supported both interim rules.
Under the asset threshold rule, NCUA set March 31, 2020, as the date for determining the applicability of regulatory asset thresholds for such things as capital planning and stress testing at larger credit unions for the remainder of this year and all of next. The new rule affects about 10 large credit unions, NCUA said in March when it issued the interim rule, including those with state charters. It is meant to mitigate the impact of the influx of savings to credit unions, particularly larger ones, during the coronavirus crisis, according to the agency.
Even though it was an interim final rule, NCUA called for comments, which NASCUS and others supplied by this week’s deadline. NASCUS wrote that the March 31, 2020 date is an appropriate measurement date to use. “Many credit unions have experienced a surge in deposits during the pandemic and some level of post-pandemic run-off is expected,” NASCUS wrote. “Utilizing March 2020 data is a practical way to avoid subjecting credit unions to the additional compliance costs associated with the stress testing tiers that would, but for the pandemic inflation of their balance sheets, not otherwise have qualified for stress testing under Part 702 (of NCUA rules) at this time.
“Under the IFR, NCUA would only use the March 31, 2020 date to determine whether a credit union qualifies for stress testing and capital planning in 2022. We agree that providing this regulatory relief initially for one year is a prudently measured approach,” NASCUS told NCUA.
The second letter looks at the agency final interim rule updating its regulations for the agency’s Central Liquidity Facility (CLF). The changes grew out of the passage in December of the Consolidated Appropriations Act, 2021. That legislation extended several enhancements to the CLF (such as more flexible memberships) made in last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. The new rule amends the NCUA’s CLF regulation to reflect these extensions. NCUA also sought comments (even though the rule is already in effect).
The state system told the federal regulator that it supports the interim rule, and noted that NCUA should “interpret its own authority broadly to make as many of the CLF changes permanent that it can and seek Congressional action for other changes as needed.
“A more flexible, responsive, and robust CLF is good for the credit union system,” NASCUS wrote. “It is also sound public policy.”
LINKS:
NASCUS Comments: Interim final rule, asset thresholds
NASCUS Comments: Interim final rule, Central Liquidity Facility
(May 28, 2021) An overview of the letter to credit unions on the future of the LIBOR reference rate is the latest summary to be posted by NASCUS; it is available to members only.
Last week, NCUA issued the letter (21-CU-03) essentially telling credit unions stop using LIBOR (the London Interbank Offered Rate) as soon as possible. Failure by credit unions to prepare for disruptions of LIBOR “could undermine a federally insured credit union’s financial stability, and safety and soundness,” the NCUA letter stated. “The LIBOR transition is a significant event that credit unions should manage carefully.”
The agency last week also issued on the same subject its first “Supervisory Letter” of the year, which NCUA said “provides the supervision framework examiners will use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR.”
The supervisory letter outlines the background, potential LIBOR exposure for credit unions, and examination considerations – but offers no endorsement of a specific replacement for USD LIBOR.
LINK:
NASCUS Summary, Evaluating LIBOR Transition Plans (members only)
(May 28, 2021) Consumers borrowing to buy manufactured homes face higher interest rates, and ultimately barriers to credit through limited refinancing options, CFPB contends in a report released Thursday, which it said is based on new information collected beginning in 2018 under the Home Mortgage Disclosure Act (HMDA).
The bureau claimed that manufactured housing is “one of the one of the most affordable types of housing available to low-income consumers” and makes up 13% of the housing stock in small towns and rural areas. However, the bureau said, the loans are often coupled with higher interest rates and limited opportunity to refinance.
For example, the bureau said less than 30% of manufactured home loan applications are approved, compared to more than 70% of loan approvals for “site-built” homes. The agency noted that around 42% of manufactured home purchase loans are “chattel” loans, which are secured by the home but not the land. In general, the bureau asserted, chattel loans have higher interest rates and fewer consumer protections than mortgages.
Less than 4% of chattel loan originations were for refinancing, the bureau said.
Hispanic, Black and African American, American Indian and Alaska Native, and elderly borrowers are more likely than other consumers to take out chattel loans, even after controlling for land ownership, CFPB said. Black and African American borrowers are the only racial group that are underrepresented in manufactured housing lending overall compared to site-built, the bureau said, but overrepresented in chattel lending compared to site-built.
(May 28, 2021) The reserves-to-deposits-insured ratio of the FDIC’s Deposit Insurance Fund (DIF) slipped four points in the first quarter, to 1.25%, the lowest point in nearly four years. The minimum required level of the DIF is 1.35%; in September of last year, the FDIC published a restoration plan for the fund that provided for continued monitoring, but no change in assessment rates. The designated reserve ratio (DRR) for the fund is 2%, which the agency defines as the “the minimum level needed to withstand future crises of the magnitude of past crises.” The FDIC attributed the first quarter 2021 DIF reserve ratio drop to strong deposit growth (even though the fund’s reserves grew by $1.5 billion, to a total of $119.4 billion) … Also this week, the FDIC announced that bank net interest margins (a key profitability indicator) dropped to record lows in the first quarter – driven mostly by larger institutions … The first NASCUS 101 for 2021 will be June 24 – a change from the date published in last week’s NASCUS Report (June 10); mark your calendars accordingly! … Have a terrific (and safe) Memorial Day Holiday! (NASCUS’ offices will be closed that day)
LINKS:
FDIC-Insured Institutions Reported Net Income of $76.8 Billion In First Quarter 2021