May 23, 2022

Luetkemeyer, Wagner: CFPB Must Undo Changes To UDAAP Enforcement, Adjudications

Missouri Reps. Blaine Luetkemeyer and Ann Wagner are among House Republicans who slammed recent changes made by the Consumer Financial Protection Bureau to its supervision examination manual for unfair or deceptive acts and practices and its rules of practice and procedure regarding administrative adjudication procedures, noting that these actions “deviate significantly from past practices” and were taken outside of the notice and comment process.

In a letter to CFPB Director Rohit Chopra, the GOP lawmakers called for the CFPB to “rescind these measures immediately and adhere to the appropriate notice and comment paradigm.” The letter was led by Luetkemeyer, ranking member of Subcommittee on Consumer Protection and Financial Institutions, and House Financial Services Committee Ranking Member Patrick McHenry, R-N.C.

The bureau’s recent changes to its administrative adjudication process greatly expanded the powers of the already-powerful CFPB director—something the American Bankers Association and other financial trades called “a significant step in the wrong direction” in an April comment letter. ABA President and CEO Rob Nichols also raised concerns about the bureau under Chopra’s leadership in a hard-hitting op-ed last month published in American Banker.

‌“It sounds like harmless bureaucratic paper pushing, but in reality these changes allow Director Chopra to make decisions in enforcement actions that should be made by an impartial administrative law judge,” Nichols said of the administrative adjudication procedure changes. “He would play both prosecutor and judge in those cases.”

GOP lawmakers raised similar alarms.

“Our concerns with the new UDAAP policy are heightened even more by the changes recently made to the rules governing CFPB administrative adjudications,” they wrote. “The rules of practice were effective immediately and provide significant new powers to the CFPB Director, limit due process rights, and will contribute to the formation of partisan, and not durable, jurisprudence. This action is disturbing.”

House Committee Advances Misguided CU Expansion Bill On Party-Line Vote

By a 27-22 party line vote, the House Financial Services Committee voted to advance legislation that would allow credit unions to expand their membership and business lending capacity — the credit union industry’s latest attempt at charter enhancement. MBA, the American Bankers Association and the state associations had vigorously opposed H.R. 7003, emphasizing that it “will not deliver on the purported objective of improving banking access to underserved communities but instead expand taxpayer subsidies of business lending.”

During the committee's debate over the bill, Rep. Andy Barr, R-Ky., expressed opposition to the bill, emphasizing that “there’s not a clear need for this bill, and it will actually have more unintended consequences if enacted.” Barr added that credit unions already “have an advantage, and their advantage is that they don’t pay taxes — they are a tax-exempt organization. ... This bill would give larger, more prosperous credit unions more preferential treatment in underserved areas at the expense of other community financial institutions and rural banks.” 

As H.R. 7003 moves to the full House for consideration, MBA continues to call on bankers to contact their lawmakers and urge them to oppose this bill.

Bipartisan Group Of 24 Senators Urges Passage Of SAFE Banking Act

As lawmakers attempt to reconcile the House and Senate versions of the America Competes Act, a bipartisan group of 24 senators led by Sens. Jeff Merkley, D-Ore., and Jacky Rosen, D-Nev., advocated for the SAFE Banking Act to be included in the final version of the bill. The provision, which would enable banks to serve legitimate cannabis businesses in states where it is legal, was included in the House version of the Competes Act.

“Allowing cannabis businesses operating legally and in compliance with state law to access financial services without federal reprisal would address public safety and compliance challenges, helping communities reduce cash-motivated crimes,” the senators wrote. “Enacting the SAFE Banking Act via the jobs and competitiveness legislation before us would support a rapidly growing industry that creates jobs, fosters innovation, supports small businesses, and raises revenue in states that have chosen to legalize cannabis, while reducing safety risks to industry employees and the public alike.”

All bankers are encouraged to write to their members of Congress and urge them to support the inclusion of the SAFE Banking Act.

Barr: Fed’s Authority ‘Narrow, Limited’ Regarding Transition To Low-Carbon Economy

Testifying before the Senate Banking Committee, Michael Barr — President Biden’s nominee to serve as Federal Reserve vice chairman for supervision — said the “Fed’s authorities are quite limited [and] narrow” with regard to accelerating the transition to a lower carbon economy.

“I think the Federal Reserve is not able to allocate credit, [and] should not be in the business of telling financial institutions to lend to a particular sector or not to lend to a particular sector,” Barr told Ranking Member Pat Toomey, R-Pa.

When asked about climate-related scenario analysis, Barr added that “the only purpose of the Fed’s scenario analysis or other measures should be to understand risks that climate might pose to the financial system and to work with financial institutions on measures to manage those risks.”

‌Barr also offered his assessment that “capital and liquidity in the [financial] system today is quite strong,” and offered support for “tiering” financial regulation based the size and risk profiles of supervised institutions. He also told senators that he would “commit to being evidence-driven and data driven in my approach to capital and liquidity regulation, and in regulation more broadly.”

While several senators brought up Barr’s previous disagreement with certain aspects of S. 2155, the bipartisan financial regulatory reform law that passed in 2018, he emphasized that “a number of concerns I had were addressed” through amendments prior to the bill’s passage, and that “overall, I thought it was quite admirable the way Democrats and Republicans worked together on that legislation.”

GOP Lawmakers Skeptical On Merits of CBDC In Letter To Fed

A group of Republican lawmakers led by House Financial Services Committee Ranking Member Patrick McHenry, R-N.C., urged the Federal Reserve to carefully examine whether the benefits of creating a central bank digital currency would outweigh the risks of doing so.‌

As the Fed considers its course of action on CBDC, the lawmakers urged the agency to focus on the following.

  • identifying inefficiencies in the U.S. payments system and whether a CBDC would solve them; ensuring that the private sector leads the way on innovation
  • considering the effects of a CBDC on monetary policy implementation and the role of the Fed
  • ensuring privacy and security for consumers

As policy conversations continue regarding the creation of a U.S. CBDC, the American Bankers Association has raised concerns that the creation of such a currency could compete with bank deposits and limit banks’ ability to power economic growth.

Fed Finalizes Reg J Amendments Governing FedNow Service

The Federal Reserve issued a final rule designed to help the agency implement the instant FedNow payments service, scheduled to go live in 2023. The rule creates a new subpart C in Regulation J that will apply solely to FedNow transactions, and it makes changes to subpart B, which governs Fedwire, to reflect the addition of a new payment service, plus technical updates to subpart A. The new rules take effect in the first calendar quarter after they are published in the Federal Register.

‌In issuing the final rule, the Fed agreed with the request in ABA’s comment letter that the definition of “immediately” in Reg J remain undefined, at least until the Fed conducts a technical assessment of what would be reasonable. “As the instant payment industry evolves, the time period of what is considered immediate may continue to evolve and not specifying a particular time frame in the regulation will allow necessary flexibility in the future,” the Fed said.

‌In response to recommendations that the Fed strives toward interoperability with the Clearing House’s RTP network, the Fed reiterated that it “is committed to working towards compatible standards and operating procedures with the existing private-sector instant payment service, and has already advanced that effort by using the widely accepted ISO 20022 standard for FedNow payment messages and aligning the implementation of the standard very closely to that of the private-sector service.”

Hsu: Banks Should Focus On Counterparty Credit, Concentration Risk 

As high inflation and economic uncertainties persist, Acting Comptroller of the Currency Michael Hsu said that “now is the time for banks to take a fresh look at their exposures and take actions to adjust their risk positions — to ‘trim their sails,’ so to speak — ahead of potential uncertainty and volatility.”

“Just as the banking system stepped up and provided invaluable support to the economy as part of the pandemic response, the banking system can be a source of strength to communities, individuals, and businesses, if banks are disciplined in their risk management and fully prepared for the tide going out,” Hsu added during an industry event.

In particular, Hsu noted banks should be carefully monitoring counterparty credit risk and “pay special attention to where risk limits, margin practices escalation procedures, and client onboarding have been relaxed.” He also flagged concentration risk as another area that warrants scrutiny — in particular, he noted that firms with concentrations in non-depository financial institution lending and commercial real estate lending could be especially vulnerable in the event of a downturn.

ABA Publishes Guide To Help Banks Respond To FDIC Climate Risk Proposal

With the Federal Deposit Insurance Corporation’s comment June 3 deadline on its draft principles for how large banks should identify and manage climate-related risk fast approaching, the American Bankers Association has created a comment letter writing guide to help banks craft their responses. Given the heightened regulatory focus on climate-related risk, the association is urging all banks of all sizes to respond to the proposal, offering specific examples about how the proposal could affect their bank, customers and local economy.

The guide highlights several key points that banks may choose to emphasize in their original letters, including recommendations:

  • that the FDIC not expand the guidance to smaller banks
  • that banks of all sizes are already incorporating climate risk into their risk management practices
  • that any guidance should remain flexible and iterative in order to allow for adjustments and changes in approach as the climate risk management discipline evolves

ABA, Trades Urge DOL To ‘Abandon Or Postpone’ Overtime Rulemaking

The American Bankers Association joined 92 other trade associations in urging the Department of Labor to “abandon or postpone” issuance of a proposed rule to modify existing overtime regulations.

DOL has stated its intention to issue a proposed rule this spring that would revisit the salary level at which an employee could be exempted from federal overtime and minimum wage requirements, as well as revisit other aspects of the overtime regulatory regime. In 2019, with ABA’s support, DOL under President Trump’s administration issued a final rule that set the salary level at $684 per week, or $35,568 per year. The trade groups’ letter comes after the groups participated in “listening sessions” held by DOL where industry expressed concern with DOL’s plans to re-open existing overtime regulations.

“Due to significant concerns with supply chain disruptions, workforce shortages, inflationary pressures, and the shifting dynamics of the American workforce following the COVID-19 pandemic, any rule change now would be ill-advised,” said the trade groups.

ABA Urges CFPB To Balance Concerns, Benefits Of AVMs In Rulemaking

The American Bankers Association offered feedback to the Consumer Financial Protection Bureau on a recent outline of proposals under consideration for a joint agency rulemaking to develop quality control standards for the use of computer models, known as automated valuation models. The Dodd-Frank Act requires the bureau, the banking agencies, the National Credit Union Administration and the Federal Housing Finance Agency to write a rule to strengthen oversight of the models to “ensure a high level of confidence in the estimates; protect against the manipulation of data; avoid conflicts of interest and require random sample testing and reviews.”

‌In the letter, ABA questioned the benefits of a quality control factor for fair lending, noting that banks’ use of AVMs is already heavily regulated by the banking agencies and that banks are subject to regular supervision for fair lending compliance. ABA also urged the CFPB to keep the scope of the rule tailored only to AVMs used for underwriting decisions, exempt banks’ use of AVMs for appraisal waivers and otherwise ensure that regulatory burden is minimized so as not to discourage banks from using AVMs.

ABA also urged the CFPB to balance concerns about AVMs with the benefits, emphasizing that “AVMs provide benefits to consumers and the industry by reducing origination costs, easing issues caused by appraiser shortages, including in rural areas, and providing objectivity that may address concerns about individual appraisers’ bias.”

ABA's Thurlow: Don’t Mess With FHLB System’s Success

When it comes to the Federal Home Loan Bank system, “don’t mess with success,” wrote American Bankers Association Vice Chair Julieann Thurlow in an American Banker op-ed. Noting that some critics have “decided to take aim” at the FHLB system and call for changes, Thurlow said that the 11 regional home loan banks play a “critical” role in supporting the economy with liquidity as a lender during difficult and normal economic cycles.

“Since the home loan banks are not well understood to those who don’t regularly work with them — for the last nine decades, they have been an invaluable and often behind-the-scenes partner for banks and other regulated financial institutions invested in making communities better and ensuring access to credit for all Americans,” Thurlow wrote, acknowledging the 90th anniversary of the FHLB system this year. “As member-owned and capitalized institutions, they have quietly fulfilled an essential need … no matter what economic conditions or crisis may have seized the larger economy.”

Thurlow said calls for FHLB change usually come in times of abundant liquidity, characterizing that point of view as “shortsighted” and akin to removing a home’s furnace in the summer.

“When economic conditions change — as they are sure to do, member financial institutions will need the home loan banks,” she said, citing the system’s support of regional banks and their understanding of local institutions’ unique needs.

DOJ Issues Guidance For Employers On Use Of AI, Algorithms In Hiring

The Department of Justice issued guidance on the use of algorithms and artificial intelligence in hiring processes and employers’ responsibilities under the Americans with Disabilities Act. DOJ noted that “while these technologies may be useful tools for some employers, they may also result in unlawful discrimination against certain groups of applicants, including people with disabilities,” and that “when designing or choosing hiring technologies, employers must consider how these tools could impact different disabilities.”

According to the guidance, firms should avoid using technologies — including third-party technologies — that discriminate against people with disabilities and ensure that they are not unfairly screening out individuals with disabilities. Additionally, firms should ensure that technologies used to administer tests as part of the hiring process measure “only the relevant skills and abilities of an applicant, rather than reflecting the applicant’s impaired sensory, manual, or speaking skills that the tests do not seek to measure.”

The guidance provides several illustrative examples of how an employer could use algorithmic or artificial intelligence technologies in a manner that could violate Title I of the ADA, which is enforced by the Equal Employment Opportunity Commission for private employers. DOJ also reminded employer firms that they are required to provide reasonable accommodations to job applicants with disabilities.

Financial Trades Urge FHFA To Engage With Industry On Credit Scoring Proposal

As the Federal Housing Finance Agency considers how to transition to a new credit score model or models — as required by the 2018 S. 2155 law — the American Bankers Association and several other financial trade groups urged FHFA to provide the industry with “additional data, a detailed transition plan that is subject to stakeholder input and ample time for any transition.”

The groups emphasized that furnishers of credit must have “adequate insight to project performance” to ensure a highly liquid secondary mortgage market that ultimately benefits consumers.

“To advance these goals and achieve these outcomes, we urge FHFA to engage in careful communication and planning to maintain lender and investor confidence through the transition to any new score or system of scores,” they said.

In Change To Supervisory Appeals Process, FDIC Reinstates SARC

The Federal Deposit Insurance Corporation announced it will reinstate the Supervision Appeals Review Committee as the final level of review in the agency’s supervisory appeals process. The FDIC had previously established a new, independent Office of Supervisory Appeals that was intended to replace the SARC.

According to revised guidelines, the SARC will include one inside member of the FDIC’s Board of Directors (who will serve as chairperson); a deputy or special assistant to each of the other inside board members; and the general counsel as a nonvoting member. Institutions are encouraged to make good-faith efforts to resolve disputes with on-site examiners and/or with the appropriate regional office, the FDIC said.

FDIC Issues Small Bank Guide On Deposit Insurance Changes For Trust Accounts, MSAs

The Federal Deposit Insurance Corporation published a small entity compliance guide to help supervised depository institutions comply with a recent final rule that made changes to the deposit insurance regulations for trust accounts and mortgage servicing accounts.

The rule establishes a “trust accounts” category that governs coverage of deposits of both revocable trusts and irrevocable trusts using a common calculation. It also provides “consistent deposit insurance treatment” for all mortgage servicing account balances held to satisfy principal and interest obligations to a lender.

CFPB Issues Interpretive Rule On States’ Enforcement Authority

The Consumer Financial Protection Bureau issued an interpretive rule stating its view that state regulators and state attorneys general have enforcement authority with regard to all provisions of the Consumer Financial Protection Act, based on its interpretation of Section 1042 of the CFPA.

‌The interpretive rule also notes that while the CFPB’s enforcement authority is limited under Sections 1027 and 1029 of the CFPA, such limitations “do not extend to states exercising their enforcement authority under section 1042.” Among other things, the interpretive rule notes that “states can enforce [federal consumer financial laws] to the full extent authorized under those laws ... including against national banks and federal savings associations,” implying that the Chopra-led CFPB intends to interpret its preemptive authority as limited.

Additionally, the interpretive rule clarifies that states may pursue enforcement actions under Section 1042 “even if the bureau is pursuing a concurrent action against the same entity.”

In a press release on the interpretive rule, the CFPB also signaled that it “plans to consider other steps to promote state enforcement of federal consumer financial protection law, including ways to facilitate victim redress.

CFPB Blog Post Highlights Resources For Spanish-Language Customers

In a new blog post, the Consumer Financial Protection Bureau highlighted its resources available to help financial institutions serve their Spanish-speaking customers. Resources include Spanish translations of:

  • prepaid card model forms
  • adverse action sample notices
  • home mortgage origination documents and booklets
  • early intervention clauses for mortgage servicers
  • credit reporting notices
  • debt collection model validation notice

“Broad access to clear and relevant information helps promote competitive markets and strengthens relationships between financial services providers and their customers,” the bureau said in the blog post. “Sometimes, access to clear information is missing from interactions with customers who have limited proficiency in English. Competitive, transparent and fair markets are supported by providing translations of disclosures in the customer’s preferred language, along with the corresponding English-language disclosures.”

FDIC Establishes Process For MDI Designation

The Federal Deposit Insurance Corporation outlined a new process by which banks may apply for designation as a minority depository institution. According to the FDIC’s June 2021 policy statement on MDIs, the agency considers an MDI to be an insured depository institution where 51 percent or more of the voting stock is currently owned by minority individuals (including institutions collectively owned by a group of minority individuals, such as a Native American tribe) or an IDI where a majority of the board of directors is minority and the community that the institution serves is predominantly minority.

An FDIC-supervised institution or applicant for deposit insurance may submit a written request at any time to the appropriate regional office to be recognized as an MDI. Statements should “include a clear and concise statement describing the definition in the FDIC’s policy statement that institution management or the applicant believes that it meets, and contain sufficient supporting documentation for the FDIC to evaluate the request for the designation,” the FDIC said. Applications will be evaluated by FDIC staff and institutions and applicants will be notified by letter of the FDIC’s determination.

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