June 25, 2020

MBA Podcast Episode Explores Missouri Hospital Response To COVID-19

The latest episode of "Our Two Cents with MBA" podcast features Herb Kuhn, president and CEO of the Missouri Hospital Association. MHA has been at the center of the COVID-19 response for Missouri. Early on, MHA developed a COVID-19 dashboard for state leadership that was updated daily with data on COVID-19 spread, PPE availability and ICU/hospital bed availability, among others. These reports are now migrating to a weekly dashboard with regional information on these same topics. 

In this interview, Kuhn discusses how the COVID-19 crisis grew in Missouri, how MHA and hospitals across the state responded and what the next six months may hold. Kuhn also discuss the ongoing trend of closure of rural hospitals and the impacts that may have on the communities in which banks operate. 

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

ABA, Industry Groups Call For Five-Member, Bipartisan CFPB Commission

The American Bankers Association joined a broad coalition of financial and housing industry groups in a letter of support for a recent bill, S. 3990, that would replace the Consumer Financial Protection Bureau’s sole director with a bipartisan, five-member commission. In a letter to Sen. Deb Fischer, R-Neb., the bill’s sponsor, the groups noted that this structure “will provide a balanced and deliberative approach to supervision, regulation and enforcement by encouraging input from all stakeholders.”
They added that there has long been bipartisan support in Congress for a CFPB five-member commission, with several bills passed by the House with both Democratic and Republican support in recent years. In addition, the House version of the Dodd-Frank Act that passed in 2009 also envisioned a commission governance structure for the bureau, the groups said.

The letter came as the Supreme Court prepares to render a verdict in Seila Law v. the Consumer Financial Protection Bureau, where the question of the bureau’s governance structure is under review. 

ABA: House Bill Would Undermine Usefulness Of Credit Reports

In a letter to House leadership, the American Bankers Association expressed its opposition to H.R. 5332, the Protecting Your Credit Score Act of 2020. Although well-intentioned, ABA noted, the current text of the bill would “make credit reports less predictive and useful by promoting the elimination of negative but accurate information that will weaken the underwriting process and thus increase borrowers’ costs and reduce people’s ability to get loans.”
ABA added that the bill would allow courts to award injunctive relief, which could lead to questionable lawsuits and inconsistent interpretations. The association noted that the Fair Credit Reporting Act already provides consumers with strong dispute rights and a framework for promptly resolving such disputes.
“H.R. 5332 will make it even easier than it is today for individuals to flood consumer reporting agencies and furnishers of information with false claims of inaccuracies that must be resolved in a timely fashion or deleted,” the association wrote. “The resulting degradation of the reports will reduce the ability of lenders to evaluate an applicant’s creditworthiness and ability to repay, which in turn will increase what consumers pay for credit and make it harder for many consumers, especially the underserved, to get credit.”

Fed: Most Banks Remain ‘Sufficiently Capitalized’ In COVID Stress Scenarios

All 33 banks participating in the Federal Reserve’s 2020 supervisory stress tests would remain above minimum regulatory capital levels under three COVID-related downside scenarios, and “the large majority of banks remain sufficiently capitalized over the entirety of the projection horizon in all scenarios,” the Fed said today.

“The banking system has been a source of strength during this crisis,” commented Fed Vice Chairman for Supervision Randal Quarles. “The results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”

With the economic situation triggered by the coronavirus pandemic and public health response substantially more adverse than the 2020 stress tests’ “severely adverse” scenario on several dimensions, the Fed added a sensitivity analysis to this year’s tests examining bank performance in three potential COVID-19 scenarios. In the aggregate, minimum common equity Tier 1 capital ratios would be 9.5% (for a so-called V-shaped recovery), 8.1% (U-shaped) and 7.7% (W-shaped, with a second COVID surge in late 2020). The sensitivity analysis did not incorporate the effects of government supports, such as economic impact payments, expanded unemployment coverage or the Paycheck Protection Program.

“The Federal Reserve’s latest stress test results affirm that the nation’s largest banks continue to be a source of strength for the economy and remain well prepared to handle a range of potential economic shocks,” said ABA President and CEO Rob Nichols. “As the results make clear, even under the most adverse hypothetical scenarios banks will continue to help the nation overcome the economic challenges posed by the pandemic.”

Given the uncertainty of the paths of both the economy and the pandemic, the Fed board required large banks to preserve capital in the third quarter by suspending share repurchases (an action voluntarily taken by the eight U.S. global systemically important banks in March), capping dividends and basing future dividends on an income-based formula.

All participating banks will be required to resubmit their capital plans later this year, the Fed said, adding that the Fed will evaluate bank performance on a quarterly basis. The Fed added that the results of its pre-coronavirus stress test scenarios, which showed banks remaining strongly capitalized, would be used to set the stress capital buffer for covered firms.

FDIC Finalizes Rule Codifying ‘Valid When Made’ Principle

The Federal Deposit Insurance Corporation finalized a rule codifying that permissible interest on loans made by state-chartered banks and insured branches of foreign banks remains valid when a loan is transferred or sold. The Office of the Comptroller of the Currency finalized a similar rule earlier this year ensuring that the “valid when made” principle is codified for both national and state-chartered banks.

“The FDIC’s Federal Interest Rate Authority rule will restore the efficiency and effectiveness of primary and secondary loan markets, protecting the ability of state banks and loan purchasers to diversify their holdings while facilitating loan origination,” said American Bankers Association President and CEO Rob Nichols.

The so-called “Madden fix” addresses a Second Circuit Court of Appeals ruling in Madden v. Midland Funding, which held that a nonbank buyer of a loan issued by a national bank could not export the originated interest rate into another state. The U.S. Supreme Court declined to take up an appeal of Madden, resulting in conflicting precedent around the country and increasing the urgency of regulatory or legislative action.

Agencies Adopt Volcker Reforms On Covered Funds, Affiliate Transactions

The federal banking agencies today approved an interagency final rule amending the Volcker Rule’s treatment of covered funds and transactions with affiliates. The final rule revises the “covered funds” regulatory provisions of the Volcker Rule, which places significant restrictions on financial institutions’ ability to have certain interests in, or relationships with, hedge funds and private equity funds, and the so-called “Super 23A” provision, which restricts certain transactions with affiliates that apply to those types of relationships.

“Providing for covered fund exclusions and affiliate transaction reforms under the Volcker Rule will bolster capital formation, customer choice and community development efforts, while preserving traditional banking services,” said American Bankers Association President and CEO Rob Nichols.

ABA has long advocated for exclusions from the Volcker Rule for venture capital funds, credit funds, family wealth management vehicles and customer facilitation funds to help promote economic growth and job creation. The agencies adopted these covered fund exclusions among others, as well as ABA-advocated Super 23A reforms. The agencies also adopted additional ABA recommendations, including an express exclusion from the Volcker Rule for public welfare investments and for qualified opportunity funds.

Agencies Finalize Rule To Amend Initial Margin Requirements For Inter-Affiliate Swaps

Five federal financial regulatory agencies today finalized a rule that removes the requirement for covered swap entities to collect initial margin from affiliates — a change that fosters systemic risk mitigation and allows swap entities to better manage liquidity. 

“Removing the margin requirement for banks and their affiliates recognizes that inter-affiliate swaps help financial institutions centralize risk management, which promotes increased safety and soundness,” said American Bankers Association President and CEO Rob Nichols.

Under the final rule, inter-affiliate swaps remain subject to variation margin requirements, and initial margin is required if a bank’s total exposure to all affiliates exceeds 15 percent of its Tier 1 regulatory capital. The rule also will facilitate an orderly transition away from the London Interbank Offered Rate, which is frequently used in derivatives contracts, by ensuring that legacy interest swaps do not lose their legacy status if the rate is changed from Libor to an alternate reference rate.

To facilitate compliance for smaller covered swap entities, the final rule includes a sixth compliance phase for inter-affiliate margin requirements for counterparties with average daily aggregate notional amounts from $8 billion to $50 billion. 

“Extending the compliance time for Phases 5 and 6 of the Swaps Margin Rule is a welcome step as it provides market participants with more time to comply,” Nichols added.

The agencies also issued an interim final rule extending the compliance date of the initial margin requirements to Sept. 1, 2021, for swap entities and counterparties with average annual notional swap portfolios of $50 billion to $750 billion, and to Sept. 1, 2022, for counterparties with average annual notional swap portfolios of $8 billion to $50 billion. The IFR takes effect 61 days after it is published in the Federal Register, and comments will be accepted for 60 days after its publication.

ABA Urges FHFA To Revisit FHLB Ban On Captive Insurers

As the Federal Housing Finance Agency weighs a rulemaking process on Federal Home Loan Bank membership eligibility, the American Bankers Association provided the banking industry’s perspective on potential changes and how they might affect the FHLB system. The association emphasized that FHFA should continue to defer to Congress on eligible members — for example, not making entities deemed eligible by statute ineligible in regulation, as was done in 2016 for captive insurers.
ABA urged FHFA to revisit its rule on captive insurers. 

“Instead, FHFA should be guided by congressional intent to allow these insurance companies membership in the system, but FHFA should limit each individual captive insurer’s ability to access the system based upon its potential to impact the safety and soundness of the system,” considering for example whether a captive insurer’s parent is prudentially regulated. “Similarly, we recommend that FHFA establish clear, consistent, and risk-based member access standards that account for differences in prudential regulation such as for less stringently regulated credit unions and for non-depository CDFIs.”
ABA also recommended that FHFA guard against “back door” access to the FHLB system by urging FHFA not to prohibit membership to classes of otherwise eligible members based on these concerns but instead make case-by-case determinations. “If an otherwise ineligible member lacking regulation, oversight and capital attempts to use an eligible member as a conduit, safety and soundness considerations must dictate that the FHLB and the FHFA restrict access by the eligible member to protect the system,” the association said. 

OCC’s Brooks Plans To Unveil ‘Payments Charter 1.0’ This Fall

The Office of the Comptroller of the Currency is planning to unveil what Acting Comptroller Brian Brooks called “payments charter 1.0” as soon as this fall, Brooks said on the latest episode of the ABA Banking Journal Podcast. Version 1.0 would be a “national version of a state money transmission license” offering nonbank payment providers a “national platform with preemption,” but not access to the Federal Reserve's payments system. After about 18 months of operating under version 1.0, Brooks said, the agency would roll out version 2.0, which he anticipates would include direct Fed access. In recent interviews, Brooks has touted the idea of using the OCC’s authority to grant special-purpose national bank charters to charter payments companies. He provided more details about the financial inclusion requirements these charters would entail to provide consistency across depository and nondepository institutions.

Brooks also noted that banks have faced challenges adopting artificial intelligence and machine learning technologies in part because “regulators have been slow to provide guidance.” He said the OCC is working to evaluate advanced technologies that can improve financial inclusion such as AI-based underwriting.

As part of the agency’s financial inclusion efforts, the OCC’s Office of Innovation is “in the process of standing up an evaluation unit, where for the first time the OCC will analyze specific technologies, look at risk frameworks, engage in model validation and give banks guidance about what we think is good and what we think is risky. We’ve never done that before.”

In addition to the payments charter and innovation in underwriting, Brooks addressed:
  • changing credit bid rules for real estate owned to incentivize homeownership and renovation in distressed neighborhoods 
  • the need to update vendor risk management rules to support innovation
  • the role of core processors in supporting bank innovation in a time of technological unbundling in the fintech marketplace

CFPB Updates Small Entity Compliance Guide On Remittance Rule

The Consumer Financial Protection Bureau has updated its compliance guide for small entities on the remittance rule to reflect recent changes, including one that will permanently allow depository institutions to estimate certain fees and exchange rates when making disclosures to their customers about the cost of remittance transfers. The changes also increased the threshold for identifying which banks are subject to the remittance rule’s requirements.

CFPB Proposes Changes To QM Rule, Extension For Temporary ‘GSE Patch’

The Consumer Financial Protection Bureau took a significant step to revise its Qualified Mortgage rule, issuing a proposal to replace the use of the 43% debt-to-income ratio as a QM qualification standard with a price-based approach. The bureau concluded that such an approach, which would compare the loan’s annual percentage rate to the average prime offer rate for a comparable transaction, provides “a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.” 

Specifically, loans would meet the general QM loan definition only if the APR exceeded APOR for a comparable transaction by less a than 2 percentage points as of the date the interest rate is set, the bureau noted. Creditors would still be required to consider the consumer’s income or assets, debt obligations and DTI ratio or residual income, as well as verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling that secures the loan and the consumer’s current debt obligations, alimony and child support. The proposal would also remove Appendix Q.

In addition, the CFPB issued a second proposal that would extend the temporary “GSE patch,” which grants QM status to loans eligible to be purchased or guaranteed by Fannie Me or Freddie Mac, until the QM rule changes are finalized and take effect. The CFPB will accept comments on the proposed changes to the QM rule for 60 days after publication in the Federal Register. The GSE patch extension proposal will have a 30-day comment period.

CFPB Updates Process For Determining ‘Underserved’ Counties

In an interpretive rule, the Consumer Financial Protection Bureau provided guidance on how it will determine which counties qualify as “underserved” for a given calendar year, as required by Regulation Z. A list of rural and underserved counties is published annually on the CFPB website based on certain Home Mortgage Disclosure Act data from the preceding calendar year.

The existing commentary to Regulation Z references several data elements that have since been modified or eliminated as a result of the 2015 amendments to the HMDA rules. The interpretive rule supersedes that outdated interpretation.

Fed Publishes New Standardized Framework For Understanding Payments Fraud

The Federal Reserve published a new framework that banks and other payment providers can use to classify and understand payments fraud. The FraudClassifer model, which was developed by the Fed’s Fraud Definitions Working Group, gives institutions the ability to classify fraud independently of payment type, payment channel or other payment characteristics.

The model presents a series of questions, beginning with who initiated the payment, to differentiate payments initiated by authorized or unauthorized parties. Each of the classifications is supported by definitions that allow for consistent application of the FraudClassifier model across the industry. By adopting this framework, the Fed said payments providers will be able to facilitate consistent fraud information and tracking, improve customer education, understand fraud across payment types and fraud methods and develop a common language to help fight payments fraud.

ABA Core Platforms Committee To Host Webinar On Emerging Providers

Members of ABA’s Core Platforms Committee will discuss new core players entering the market in a free webinar at 1 p.m. Wednesday, July 8. Speakers will review who the new core players are, how they stack up to existing core providers, their plans for the future and how banks can evaluate a new core provider.

Newly Redesigned FDIC Website Includes Banker Resource Page

The Federal Deposit Insurance Corporation’s newly redesigned website includes a new dedicated “resource center” page for banks. The page includes links to various supervisory topic pages, along with a general information section where bankers can find information on educational programs, publications, forms, financial data and other information.

Agencies Release 2019 HMDA Data

The Federal Financial Institutions Examination Council released the 2019 Home Mortgage Disclosure Act data on mortgage lending transactions at 5,508 financial institutions. The data encompasses 15.1 million mortgage applications, 9.3 million of which resulted in loan originations. Of these, 7.9 million were the closed-end loans and 1.1 million were open-end loans, such as home equity lines of credit. There also were 335,000 records that did not indicate loan type, pursuant to an exemption granted by the S. 2155 regulatory reform law.
The total number of originated closed-end loans rose 26% from 2018 to 2019. Refinances increased 78%, and home purchase loan originations rose by 4%. The HMDA data showed that low-to-moderate-income borrowers accounted for 28.6% of single-family, owner-occupied home purchases, up from 28.1% in 2018. LMI borrowers also accounted for 23.8% of single-family refis, down from 39% in 2018.
Overall, loans backed by the Federal Housing Administration, Department of Veterans Affairs or federal farm programs accounted for 33.4% percent of all new mortgages in 2019, up slightly from 33% the year before. FHA and VA market share both increased. The FHA market share for refinances fell slightly while VA shares of refinances increased. Meanwhile, nondepository lenders held 56.4% market share in 2019, down slightly from 57.2% the year before.

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