May 6, 2021

New MBA Podcast Episode Examines SAFE Banking Act

The latest Our Two Cents with MBA podcast episode takes a look at the SAFE Banking Act that the U.S. House of Representatives passed April 19. This bill would allow banks to provide financial services to cannabis businesses or cannabis-related businesses, something that is currently a point of contention because of the conflict between state and federal drug classifications. Interestingly, this bill bypassed the House Financial Services Committee and moved straight to the House floor, where it quickly passed with wide bipartisan support. James Ballentine, executive vice president of congressional relations and political affairs for the American Bankers Association, joined MBA for a discussion focusing on why and how this legislation moved so quickly and what to expect as it begins its journey in the Senate.

Our Two Cents with MBA podcast is available on iTunesApple PodcastsGoogle Podcasts and Spotify.

Fed Proposes Guidelines For Payments System Access

In a significant move, the Federal Reserve proposed new guidelines that it will use when evaluating requests for master accounts with the Fed or access to the agency’s financial services. The proposal comes amid growing requests from fintech firms and other providers to gain access to the payments system. Comments on the proposal are due 60 days after publication in the Federal Register.

Under the proposed guidelines, the Fed will consider the following. 

  • if the institution is legally eligible to maintain an account at a Federal Reserve Bank and has a “well-founded, clear, transparent and enforceable legal basis for its operations”
  • if the provision of an account and services would present or create undue credit, operational, settlement, cyber or other risks to the Reserve Bank or to the broader payments system
  • if the provision of an account and services would create undue risk to U.S. financial stability
  • if the provision of an account and services would create undue risk to the economy by facilitating illicit activities
In the event the Fed decides to grant an access request, “it may impose (at the time of account opening, granting access to service, or any time thereafter) obligations relating to, or conditions or limitations on, use of the account or services as necessary to limit operational, credit, legal, or other risks posed to the Reserve Banks, the payment system, financial stability or the implementation of monetary policy or to address other considerations,” according to the proposal.

ABA, Trade Groups Urge OCC To Formally Withdraw 2020 CRA Rule

The American Bankers Association and nine other financial trade groups called for the Office of the Comptroller of the Currency to formally withdraw or delay its June 2020 Community Reinvestment Act rule, following speculation that the OCC will likely pursue a different CRA modernization course under a new comptroller.

The groups urged the OCC to announce publicly that it will coordinate with the Federal Reserve and the Federal Deposit Insurance Corporation on a joint CRA rulemaking. In support of this joint rulemaking, they said the OCC should withdraw the rule or delay the compliance date of the 2020 CRA rule for at least two years before significant funds and resources are committed to re-tool existing CRA programs.

“Banks, community advocates, and policymakers overwhelmingly agree that the OCC should undertake CRA modernization jointly with the Federal Reserve and the FDIC,” the groups said. “With this request, we reaffirm our commitment to engaging in a constructive dialogue and to engaging with the banking agencies to develop an updated CRA framework that benefits communities, banks, and regulators alike.”

ABA Recommends Standards For FinCEN Beneficial Ownership Registry

As the Financial Crimes Enforcement Network prepares to create a new beneficial ownership registry, the American Bankers Association made several recommendations that should guide the agency as it develops the database, including that FinCEN ensure usability and ease of access for reporting companies, law enforcement and financial institutions.

In a comment letter to FinCEN, ABA said it supports the creation of the registry and that reporting should build on existing requirements in FinCEN’s customer due diligence rule. The association also recommended that FinCEN take steps to verify the information submitted by reporting companies, that definitions for terms such as “beneficial ownership” be clear and simple and that FinCEN take appropriate steps to notify reporting companies about the requirements.

ABA also emphasized that banks should have simple and comprehensive access to the registry to support their anti-money laundering efforts and that reporting companies should submit information electronically to avoid errors that can occur when transcribing data from paper forms.

ABA Supports Bill To Encourage De Novo Bank Formation

The American Bankers Association submitted a letter of support for H.R. 2561, the Promoting Access to Capital in Underbanked Communities Act of 2021, which would establish a three-year phase-in period for new banks to comply with federal capital standards, among other provisions designed to promote de novo banking. 

“By facilitating the formation of new banks in urban and rural areas, this legislation expands banking access for both individuals and small- and medium-sized businesses,” ABA said. “The bill would unlock economic opportunity, growth, and investment in communities most in need, while also promoting competition. The temporary regulatory adjustments provided in this bill are a reasonable step to encourage de novo formation of banks that will be well-equipped to serve and respond to the pressing banking and financial needs of their local communities.”

Fed: Banks Demonstrated Financial, Operational Resilience During COVID-19

Throughout the COVID-19 crisis, “the benefits of a resilient banking system have been evident” as banks’ “strong capital and liquidity positions” have enabled the pandemic recovery, the Federal Reserve said in its supervision and regulation report. During the crisis, banks were able to build additional capital and end the year with capital ratios at most firms remaining well above regulatory minimums, the Fed said. Liquidity also strengthened from an influx of deposits.

The report also found that large firms showed operational resilience through the pandemic. In particular, “digitization of banking activities allowed firms to continue these operations in the remote work environment,” the Fed said. Meanwhile, community and regional banks “are generally addressing the risks arising from the COVID event within their loan portfolios and operations,” according to the report. Given the increased reliance on technology during the pandemic, the Fed said it expects these firms to remain vigilant about cyber threats and ensure sound third-party risk management practices.

Although the banking system remains healthy overall, the Fed did note that bank lending activity has been slow outside of Paycheck Protection Program loans. The report also flagged a slight increase in delinquency rates, which it observed most significantly in residential real estate and commercial real estate loans, and continued loan modification activity as borrowers continue to face COVID-related challenges. Bank net interest margins also continued to trend downward in 2020, although they recovered slightly toward the end of the year after a sharp drop in the first three quarters.

Banks See Rising Demand For Jumbo Mortgages As Broader Credit Market Stabilizes

Rising home prices in many U.S. markets appear to have pushed up demand for — and banks’ offering of — jumbo mortgage loans, according to the Federal Reserve’s senior loan officer survey. Meanwhile, the market for commercial and industrial and commercial real estate loans continued to stabilize as the economic outlook improved, although banks’ standards were still tighter on net for both business and personal loans than they were compared to the end of 2019, even for investment-grade or prime borrowers.

  • Mortgages — Almost all banks kept standards unchanged for conforming and government mortgage loans in the first quarter, with just 5% of banks reporting easing standards in these categories. However, with housing prices spiking across the country in the first quarter, 19% eased standards for Qualified Mortgage-designated jumbo loans, 18% eased standards on non-QM jumbos and 16% eased on non-jumbo, nonconforming QMs. After demand for mortgages cooled in the fourth quarter on the heels of a Federal Housing Finance Agency refinance fee, double-digit shares of banks on net saw growing demand for jumbo loans. One in six banks eased standards on home equity lines of credit.
  • C&I — A substantially larger share of banks reported easing standards for business loans, reversing the trend seen in the final quarter of 2020. On net, 15% of banks eased terms for large and midsize firms while 13% eased standards for small businesses. More than three-quarters kept standards unchanged. Banks that eased standards cited more aggressive bank and nonbank competition and the improving economic outlook as the most important reasons. C&I loan demand was mixed, with four in 10 banks reporting unchanged demand and the remainder split between seeing more or less demand, but the share reporting weaker demand declined from the prior quarter. Banks seeing stronger C&I demand said the most important factors were growing client M&A and inventory financing needs.
  • CRE — The CRE market continued to stabilize in the first quarter, with roughly three-quarters of banks keeping standards unchanged for construction and land development loans and multifamily CRE loans. On net, 9% of banks saw stronger demand for construction and land development loans and 17% saw stronger demand for multifamily loans while a net 10% saw weaker demand for nonfarm CRE loans.
  • Personal Loans — The late 2020 trend in easing standards for consumer credit accelerated, with 27% of banks on net easing standards on credit card loans, 18% on net easing standards on auto loans and 17% reporting eased standards on other consumer loan types. The third quarter pattern of eased standards for auto loans also continued. Demand was mixed for credit cards and was moderately stronger for car loans.

New Survey Finds Banks Still Underprepared For Libor Transition

A new survey from financial services consulting firm Duff and Phelps finds 77% of financial institutions still do not have a comprehensive plan in place to transition away from the London Interbank Offered Rate, certain tenors of which are scheduled to sunset on Dec. 31, 2021.

Of the firms surveyed, 19% said they had not begun their Libor transition yet while 4% did not believe they had Libor exposures but had not conducted a formal review process. Meanwhile, 31% said they did find Libor exposures in their portfolio but had not yet catalogued transitioned provisions, and another 23% had catalogued their Libor exposure but weren’t sure what to do next.
“The results indicate that although the majority of firms have identified their Libor exposures, many have yet to formally catalogue the transition provisions,” said Duff and Phelps Managing Director Marcus Morton. “There is a real fear that many are pinning their hopes on fallback provisions written within existing contracts. The reality is that fallback language may not suit each and every party, and in some cases, contracts will fail if such provisions are inadequate. It will pay in the long term to properly assess exposure of each and every contract, even if firms are under the impression fallback language is sufficient.”

CFPB Reports Examine Mortgage Loans In Forbearance, Consumer Complaints

A recent analysis of mortgages by the Consumer Financial Protection Bureau found that an estimated 4.7% of owner-occupied properties were in forbearance as of March 2021 while about 0.5% of mortgages were 60 or more days delinquent. Loans in forbearance were more likely to have a high loan-to-value ratio — half of loans in forbearance have an LTV of 60% or higher, according to the bureau’s analysis.

The study analyzed demographics for a sample of nearly 662,000 loans for owner-occupied properties. The CFPB cautioned, however, that the demographic information reported in its analysis “should be interpreted with caution, because the representativeness of the sample may be different compared to other publicly available sources.”

The CFPB also issued a separate report on mortgage-related consumer complaints. The report found that mortgage complaint volume “has remained relatively steady since January 2020, averaging around 2,500 complaints per month,” although complaints did reach a peak in March 2021. The most common issue reported since January 2020 has been trouble during the payment process. In addition, the CFPB identified several topics commonly raised in complaint reports, including forbearance communications, account statements and notices and denials of partial claims and loan modifications. 

OCC Updates Comptroller’s Handbook

The Office of the Comptroller of the Currency issued a revised edition of the “Credit Card Lending” booklet of the Comptroller’s Handbook. The updated version reflects the adoption of the current expected credit loss methodology by some banks and the increased use of models in credit card originations and risk management. 

ABA Foundation To Host Webinar On Chronic Fraud Victimization

The American Bankers Association Foundation will host a free webinar at noon Wednesday, May 12, examining new research from the FINRA Foundation and AARP Fraud Watch Network on the drivers of chronic fraud victimization. The virtual panel will also feature a banker expert from Citi, who will discuss strategies to protect elders and other vulnerable customers from fraud.

FDIC To Host Virtual Innovation Office Hours

The Federal Deposit Insurance Corporation will host virtual innovation “office hours” during the week of June 14. These sessions are one-on-one, hour-long meetings with representatives from the FDIC's technology lab to discuss current and evolving technological innovations in the business of banking. In the first series of the meetings, the FDIC said it is particularly interested in attendees’ input and views on artificial intelligence and machine learning.

Institutions wishing to participate should request a session by Monday, May 24, and provide information on the topics they are interested in discussing. Request a time slot by emailing innovation@fdic.gov.

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