June 10, 2021
Trade Groups Caution Lawmakers On Enhanced Reporting Requirements For Banks
Ahead of today’s House Ways and Means subcommittee hearing on shrinking the tax gap, the American Bankers Association and 10 other financial trade associations cautioned lawmakers about creating new reporting requirements for banks that would “impose cost and complexity that are not justified by the potential, and highly uncertain, benefits.” Such a proposal was included in President Biden’s American Families Plan, which called for financial institutions to report information on account flows, including earnings from investments and business activity.
The groups noted that although only limited details were provided in the recently released “Green Book,” which contains information on the tax changes that the Biden administration is proposing to help fund the budget for the coming fiscal year, “the limited additional information … suggests that this new regime could be exceptionally expansive and comprehensive, covering the accounts of most Americans, rather than only the ‘wealthiest,’ as described in the American Families Plan.”
The groups emphasized that financial institutions already have robust reporting responsibilities and that creating a new reporting structure would be a complex undertaking. They also raised concerns about whether the benefits of the new reporting framework would outweigh the significant compliance burdens and privacy and data protection challenges that could arise.
They added that “strengthening IRS funding to facilitate targeted auditing of questionable tax returns is a much more efficient and effective approach” to closing the tax gap. “We support efforts to increase compliance so that all taxpayers meet their responsibilities,” the groups concluded. “But putting financial institutions in the position of reporting more information on their account holders is not the answer.”
ABA To Lawmakers: CBDCs Could ‘Reshape’ Banking System
As central banks around the globe explore whether to issue central bank digital currencies, there is a growing recognition that CBDCs involve very significant real-world trade-offs. While recognizing that CBDC proposals are often driven by laudable goals, the American Bankers Association cautioned that the introduction of a CBDC could “fundamentally change the role of the central bank in the United States and reshape the banking system.”
In a statement for the record of a Senate Banking subcommittee hearing, ABA noted that choosing between the various CBDC designs requires “serious and complex policy tradeoffs” and that too often CBDC proponents take a “highlight reel” approach to describing CBDC, “cherry picking all the perceived benefits while downplaying the serious risks to consumers and our financial system.”
ABA pointed out that the U.S. already has a robust and well-functioning financial system, with banks already providing lending, deposit-taking and payments services to consumers. After carefully reviewing the benefits and risks of various proposals to implement a CBDC, ABA concluded that “it does not appear that a CBDC is well-positioned to enhance underlying financial capabilities or extend the reach of financial services in well-developed markets.” Should policymakers decide to move ahead with its development of a CBDC, the association urged them to do so with caution and carefully consider the risks and benefits of various CBDC designs.
“Given the additional complexity, delay, and transition costs involved in creating a new form of money, there are strong efficiency interests that suggest CBDC should only be pursued as a final option to meet clearly-defined public policy goals that cannot be achieved through payments innovations that leverage existing digital dollars. As of today, those use cases have not emerged,” ABA said. “If a viable use case for CBDC in the United States does emerge in the future, design choices must be carefully considered to ensure that the benefits as well as the risks of introducing a CBDC are fully appreciated.”
ABA Opposes Resolution To Invalidate OCC's 'True Lender' Rule
The American Bankers Association and a coalition of financial trade groups wrote in opposition to a resolution that would invalidate the Office of the Comptroller Currency’s “true lender” rule that established a test to determine when a bank is considered the true lender on a loan made in a partnership with a nonbank entity.
In a letter to House leaders, the groups urged lawmakers to oppose the measure, noting that although changes should be made to the rule, invalidating it through a joint resolution issued under the Congressional Review Act would prohibit the OCC from reissuing a substantively similar rule and would “remov[e] the opportunity to create a more fulsome true lender framework.”
The groups said that the next comptroller of the currency should analyze the rule and consider whether to initiate a new rulemaking to create a more robust true lender framework for providing safe and affordable credit to consumers.
“The True Lender Rule has provided clarity for determining which entity originates a loan in a bank-nonbank partnership,” they wrote. “That legal certainty has tangible benefits for borrowers seeking affordable credit and for market participants, which will promote economic growth. We are concerned that using a CRA resolution of disapproval would reduce access to affordable credit, harming consumers and the communities in which they live.”
ABA, Groups Urge Regulators To Maintain QRM, QM Alignment
As the federal banking agencies undertake a mandated review of the “qualified residential mortgage” definition and related provisions of the credit risk retention rule, the American Bankers Association and several other financial and housing groups this week emphasized their strong support for the “continued alignment of the QRM and [Qualified Mortgage] frameworks,” in light of the CFPB’s recently finalized QM rule, noting that not doing so would unnecessarily restrict credit, particularly to low-to moderate-income borrowers.
The Dodd-Frank Act required the CFPB to write a QM rule and for the banking agencies to establish QRM standards. The QRM standard is focused on investor protection and requires securitizers to retain no less than 5% of the credit risk when they create, sell or transfer asset-backed securities to third parties — except for securities wholly comprised of QRMs, which are deemed to be safe enough to not require credit risk retention. The agencies established an equivalency between QRM and QM in 2014, effectively codifying that loans that carry QM status are also considered QRMs, and no risk retention is required.
“We firmly believe that alignment between the QRM and QM frameworks facilitates a stable housing market and ensures access to conventional mortgage credit for borrowers across the country, including low‐ and moderate‐income and underserved households, and first‐time homebuyers,” the groups wrote. “In addition, alignment will preserve high-quality, empirically sound underwriting, borrower-friendly product features, and robust investor confidence.”
Quarles: COVID-19 Proved Forward-Looking Capital Framework ‘Works Effectively’
Given the strong performance of banks throughout the COVID-19 pandemic and resulting economic downturn, regulators should not need to employ “ad hoc and roughly improvised limitations” on the restrictions of capital distributions going forward, Federal Reserve Vice Chairman for Supervision Randal Quarles said at a recent industry event.
Quarles emphasized that the pandemic proved that “our rigorous, forward-looking capital framework, which includes the stress capital buffer, works effectively,” and that while regulators required large banks to resubmit their capital plans and placed restrictions on capital distributions during the height of the crisis, “we now know that we can have particular confidence in the stress capital buffer framework, as it is informed by a real-time stress testing regime.”
Although he noted the particular strength of the banking system during COVID-19, Quarles also acknowledged that other areas of the financial system experienced challenges, such as a “concerning” run on prime money market funds and commercial paper that required government intervention to stabilize money markets. “Addressing the shortcomings we saw among non-banks continues to be a focus of both domestic policymakers and the international community, particularly under my chairmanship of the Financial Stability Board,” he said. “We cannot afford to allow the same things to happen again.”
Freddie Announces New Cap For Purchase Of Certain Single-Family Homes
Freddie Mac announced plans to cap its purchase of single-family mortgages secured by investment properties and second homes to comply with recent changes to the stock purchase agreement governing the GSE’s federal conservatorship.
For the month of July, for sellers that sell more than five loans secured by second homes and/or investment properties in a month, such loans may not exceed 6.5% of their total monthly unpaid principal balance. After July, the cap will be set at 6%.
Freddie noted that any loans submitted after the cap is exceeded and subsequently found to be ineligible will be subject to remedies including but not limited to repurchase. Freddie noted the cap “is intended to be temporary and may be revised as needed.” The GSE also issued a set of frequently asked questions
on the cap.
CFPB Issues FAQs On Electronic Fund Transfer Act, Reg E, Reg X Escrow Accounts
The Consumer Financial Protection Bureau released a set of frequently asked questions
that address the unauthorized transfer and error resolution provisions under the Electronic Fund Transfer Act and Regulation E. The FAQs also address situations when a consumer is fraudulently induced by a third party to provide their account information or private network rules conflict with the regulation.
CFPB also released a set of frequently asked questions that provide an overview of the escrow account provisions under Regulation X. The FAQs address deficiencies, shortages and surpluses.
CFTC Recommends Transition Date For Interdealer Swap Market Trading Conventions
With certain tenors of Libor set to sunset at the end of 2021, the Commodity Futures Trading Commission’s Interest Rate Benchmark Reform Subcommittee announced that it has voted to recommend that beginning July 26, interdealer brokers replace trading of Libor linear swaps with trading of U.S. dollar linear swaps tied to the Secured Overnight Financing Rate, the Alternate Reference Rates Committee’s preferred Libor alternative.
The CFTC also recommended keeping interdealer broker Libor linear swap screens available for informational purposes but not trading purposes until Oct. 22, 2021, after which they should be turned off altogether. The ARRC noted that once this convention switch is in place, it “expects that its market indicators for a SOFR term rate will have been met, allowing the ARRC to formally recommend the CME SOFR term rates very shortly thereafter.”
“This important step will increase the volume of transactions quoted in SOFR, and thus fulfill the final market indicator for the implementation of a term rate for SOFR,” said Federal Reserve Vice Chairman for Supervision Randal Quarles. “As a result, term SOFR will be available upon implementation of the change in quoting conventions, removing the last obstacle to using SOFR as a replacement reference rate. There is now no excuse to delay transition as the path that leads beyond Libor could not be clearer.”