June 24, 2022

House Panel Removes Markup Of Overdraft Bill From Agenda

A bill that would limit the number of overdraft fees that a bank could charge per month and per year did not move forward in the House Financial Services Committee this week. H.R. 4277 was scheduled for markup in the committee Thursday but was removed from the agenda.  In addition to limiting overdraft fees, it would impose limits on the amounts charged for overdrafts and insufficient funds and expand marketing, disclosure, and credit reporting requirements. In a memo to the committee, the American Bankers Association highlighted the misguided attempt to limit consumers’ choice to opt-in to these programs.

SAFE Banking Act Removed From Legislation

Legislators removed the SAFE Banking Act — a bill allowing banks to legally serve marijuana businesses in states like Missouri — from another package of bills called the America COMPETES Act.  The COMPETES Act is intended to strengthen the domestic supply chain and increase the production of computer chips.

The SAFE Banking Act has now passed the House six times but remains stalled in the Senate.  Some legislators are concerned about the conflict that would be created within federal law by approving financial services to the marijuana industry while it is still a scheduled drug under the Controlled Substances Act. However, a resolution between state-legal marijuana and federal law prohibiting banking services is desperately needed to reduce crime, increase transparency and ease the regulatory burden on banks.

House Advances Proposal To Expand Credit Unions’ Membership

The U.S. House of Representatives advanced a proposal to expand credit unions’ field of membership to include “banking deserts” as part of H.R. 2543, the Federal Reserve Racial and Economic Equity Act. The bill now moves on to the Senate for consideration. 

Supporters claim it will allow credit unions to operate in underserved areas.  In reality, it will not improve service to the unbanked but will instead unnecessarily expand credit union markets and open a business lending loophole.

This legislation contradicts the mission of credit unions to serve well-defined communities and small groups of modest means by allowing out-of-market expansions and increasing their business lending. It would allow credit unions to make commercial loans in these areas that do not affect their business lending cap. This means they could lend to the largest commercial customers, from Home Depot to Kroger, if they are in a so-called banking desert, with no guardrails.

And while the supposed purpose of the bill is to serve the underserved, there is no component to ensure they actually do it. The bill has no requirement that credit unions prove they are adhering to their mission, unlike banks that must follow the Community Reinvestment Act. If they are allowed to operate like banks, they should at least follow the same regulatory requirements, especially given their federal tax exemption.

ABA, States To Agencies: Protect Banks’ Freedom To Make Business Decisions

As environmental, social and governance guidance and disclosures from regulators proliferate, banks must remain free to lend to, invest in and do business without government interference, the American Bankers Association and the 51 state bankers associations said in a letter to financial regulators.

“There is growing concern from our member banks about the impact those efforts may have on their continued ability to provide critical financial services to the customers and the communities they currently serve,” the associations said.

‌The associations noted that disclosures, standards and guidance related to environmental, social responsibility and governance factors are “often cast as flexible, non-binding or targeted to certain segments of the market, while allowing for long transitions. In reality, the individual and cumulative effects of these agency actions have the potential to be acute, widespread and anything but neutral.”

The groups cautioned policymakers not to use financial institutions as “proxies” to achieve their policy goals on climate change, social issues or other concerns. They also added that ESG-related risks should not be considered as separate from the overall risks that banks already monitor and manage and that disclosure requirements—such as climate risk disclosures proposed by the Securities and Exchange Commission—should “not be decoupled from longstanding concepts of materiality or imposed on banks unnecessarily.”

CFPB Targets Credit Card Fees

The Consumer Financial Protection Bureau announced an advance notice of proposed rulemaking focusing on credit card late fees. The ANPR reopens a rule that the Federal Reserve Board enacted in 2010 that provides banks with a safe harbor on the amount they can charge when a cardholder pays late and which provided for annual adjustments based on inflation.

In remarks that suggested that he views current fees as “excessive,” CFPB Director Rohit Chopra indicated that CFPB would scrutinize how banks that rely on that safe harbor set their fees and how banks are immunized from enforcement when following the government’s rule. This review could potentially lead to a revision in Regulation Z, which implements the CARD Act and Truth in Lending Act.

Under the CARD Act, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment, unless the bank instead relied on a safe harbor limit set by regulators. In 2010, the Federal Reserve approved implementing regulations for the CARD Act that set fees at $30 for a late payment and $41 for each subsequent late payment within the next six billing cycles, subject to an annual inflation adjustment. In the years since, CFPB has adjusted the safe harbor amount based on annual changes in the weighted Consumer Price Index.

‌The ANPR focuses in particular on the 2010 rule, and the CFPB signaled that it intends to “determine whether adjustments are needed to address late fees.” Comments on the proposal are due Friday, July 22.

The American Bankers Association panned this action by the bureau, noting that, consistent with the CFPB’s “misguided public relations campaign against so-called ‘junk fees,’” its action attempts to sensationalize a standard, highly regulated fee, creating the false impression that credit card issuers are pushing the bounds of the law.”

ABA emphasized that late fees have already been capped by federal regulation, and that banks issuing credit cards are routinely supervised for compliance.

“Despite that regulatory reality, Director Chopra has declared these fees ‘excessive,’ suggesting he has already made up his mind before the rulemaking process even begins,” the association said.

CFPB Moves To Scrutinize Banks’ Overdraft Programs

As part of a pilot supervision effort, the Consumer Financial Protection Bureau has requested information on overdraft and nonsufficient funds practices from “over 20 institutions” that it has identified as having a higher share of frequent overdraft users or higher average fees. The bureau signaled in a blog post that it intends to “use this information for further examination and review” and to “share this information with other regulators” but not make the information public.

Specifically, the CFPB is asking the institutions to provide data on:

• the total annual dollar amount consumers receive in overdraft coverage compared to the amount of fees charged
• the annual dollar amount of overdraft fees charged per active checking account
• the annual amount of NSF fees charged per active checking account
• the prevalence of frequent users of overdraft
• the share of active checking accounts that are opted into overdraft programs for ATM and one-time debit transactions

This marks the latest effort by the bureau under Director Rohit Chopra’s leadership to target legitimate bank overdraft programs, which are already subject to robust disclosure and regulatory requirements. In an op-ed published this past April, American Bankers Association President and CEO Rob Nichols strongly condemned the bureau’s efforts to attack overdraft offerings and other fee-based bank products and services. In addition, recent ABA/Morning Consult research found that consumers want access to overdraft, with 89% saying they find their bank’s overdraft protection valuable, and three in four who have paid an overdraft fee in the past year saying that they were glad their bank covered the payment rather than returning or declining it.

Powell Doesn’t See Recession In Near Term

Turning to the economy, Federal Reserve Chair Jerome Powell stayed on message during his testimony at a Senate Banking Committee hearing Wednesday. Responding to lawmaker questions that mostly focused on inflation and the rising price of gas and food, Powell didn’t veer far from the central bank’s mandate of promoting maximum employment and keeping high inflation in check.

The Fed last week made its largest interest rate hike in 28 years in an attempt to curtail inflation. When asked if rapid rate hikes could trigger a recession, Powell said “it’s certainly a possibility” but that it’s obviously not the agency’s “intended outcome.” He added that he does not foresee one in the near term, emphasizing that the economy remains strong and businesses are “in good shape.”

Powell also noted that the housing market is beginning to slow following its recent pandemic surge.

“You're actually seeing demand move down significantly,” he said, meaning that housing prices and demand will begin to flatten out. “You’re going to see a moderation in housing demand, you’re going to see declining, slower increases, at least in housing prices.”

Fed Closely Tracking Crypto, Powell Tells Senate Banking Committee

During a Senate Banking Committee hearing Wednesday, Federal Reserve Chair Jerome Powell said his agency is tracking the “volatility” of the cryptocurrency market. He said that while the Fed is not directly involved in regulating cryptocurrency, its bank supervisory and regulatory role, it has input on what banks do with crypto assets on their balance sheets.

“We're tracking those events carefully,” Powell responded to Sen. Kyrsten Sinema, D-Ariz., regarding the crypto market’s recent crash, adding that the central bank really isn’t seeing “significant macroeconomic implications” thus far.

Powell called crypto an “innovative new space” but said it needs a better regulatory framework. He said Congress needs to establish which agencies have authority over crypto and stablecoins.

“The same activity should have the same regulation no matter where it appears, and that isn’t the case right now because a lot of the digital finance products, in some ways, are quite similar to products that have existed in the banking system or the capital markets, but they're just not regulated the same way,” he said. “So, we need to do that.”

FDIC Proposes Significant Increases In Deposit Insurance Assessments

The Federal Deposit Insurance Corporation signaled an intent to aggressively raise deposit insurance assessment rates, proposing a two basis-point increase beginning in the first quarterly assessment period of 2023. The proposed increase, which would remain in effect until the Deposit Insurance Fund reserve ratio meets the FDIC’s long-term goal of 2%, would amount to a 54% increase in the current average assessment rate.

In a memo regarding the assessment rate increase, FDIC staff noted that “for the industry as a whole, staff estimate that the estimated annual increase in assessments would average 1% of income, which includes an average of 0.9% for small banks and an average of 1% for large and highly complex institutions.”

The FDIC in 2020 had approved a DIF restoration plan to restore the reserve ratio to the statutory minimum of 1.35% in 2028. However, a sustained increase in insured deposits due to the pandemic and major unrealized losses in its securities portfolio caused the reserve ratio to decline to 1.23% as of March 31. The FDIC staff concluded that raising the assessment rate as proposed would provide a buffer to ensure that the DIF achieves the 2028 target and accelerate capitalization of the fund toward the long-term 2% goal.

The proposed amended restoration plan will be open for public comment until Aug. 20.

Fed Report: Banks Resilient In Face Of Financial Market Pressures

Banks appear to be weathering the current mix of financial market pressures well, according to the Federal Reserve’s semiannual monetary policy report to Congress.

“Financial market stresses do not appear to have exacerbated the negative effects on broader economic activity or created substantial pressure on key financial intermediaries, including banks,” the report noted.

“Despite experiencing a series of adverse shocks — higher-than-expected inflation, the ongoing supply disruptions related to COVID-19 and Russia’s invasion of Ukraine — the financial system has been resilient,” according to the Fed. The growth of bank loans to businesses picked up and business credit quality has remained strong, reflecting stronger loan originations as well as a moderation in loan forgiveness associated with the Paycheck Protection Program, the report said.

Bank credit expanded in the first quarter due to strong loan demand. Growth was “broad based,” the Fed said, with balance growth accelerating for most major loan categories. Growth was strongest for commercial, industrial and credit card loans. Loan growth moderated somewhat in May amid higher rates and a more uncertain economic outlook but remained strong. Bank profitability also remained strong but fell somewhat in the first quarter, in part, from declines in investment banking revenue. In the near term, the Fed said, higher interest rates and strong loan demand are expected to support bank profitability, adding that delinquency rates on bank loans remained low.

Large-bank capital ratios dipped in the first quarter, but overall leverage in the financial sector appears “moderate and little changed” this year, the Fed reported, noting that funding risks at domestic banks are low and that banks relied “modestly” on short-term wholesale funding and the share of high-quality liquid assets at banks remained historically high. 

OCC Risk Report: Banks Well-Positioned For Economic Headwinds

Banks’ financial condition is strong and they are well-positioned to “deal with the economic headwinds arising from geopolitical events, higher interest rates and increased inflation,” according to the Office of the Comptroller of the Currency’s Semiannual Risk Perspective report for spring 2022. The report addresses key topics facing banks, focusing on those that pose threats to safety and soundness and compliance with laws and regulations.

This year’s report presents data in five main areas: operations, bank performance, special topics, trends in key risks and supervisory actions. The report noted that bank financial performance faces challenges from inflation, a rising interest rate environment and other factors related to the pandemic and geopolitical events. Operational risk is elevated as banks respond to an evolving and increasingly complex operating environment, and geopolitical tensions have elevated cyber risks globally.

Compliance risk also is heightened as banks navigate the current operational environment, geopolitical risks, regulatory changes and policy initiatives. Credit risk remains moderate, with some areas of weakness and potential longer-term implications resulting from the pandemic as well as direct and indirect effects of the Russian invasion of Ukraine.

Across all key risk areas, staffing is a big issue, with banks experiencing challenges retaining and replacing staff, especially employees with specialized experience.

“During this period of increasing volatility, these staffing challenges present increased risks,” according to the report.

The OCC “will continue to monitor the development of climate-related financial risk management frameworks” at large banks, which are “in the early stages” of building their frameworks, the report noted. “OCC large-bank examination teams will integrate the examination of climate-related financial risk into supervision strategies and continue to engage with bank management to better understand the challenges banks face in this effort, including identifying and collecting appropriate data and developing scenario analysis capabilities and techniques.”

ABA Report: Farm Banks’ Ag Lending Ticks Up In 2021

Agricultural lending by U.S. farm banks increased 5.5% in 2021 to $99.6 billion, according to the American Bankers Association’s Farm Bank Performance Report. The change is based on a 7.5% increase in outstanding loans secured by farmland and a 2.9% increase in agricultural production loans.

‌The annual report examines the performance of the 1,553 banks specializing in agricultural lending. In 2021, farm banks provided access to Paycheck Protection Program funds, originating 538,154 PPP loans worth $14.6 billion, distributed by more than 7,500 branches in rural America. Farm banks continue to be a major source of credit to small farmers, holding more than $43.8 billion in small farm loans ($500,000 or less), including $9.9 billion in micro farm loans ($100,000 or less) at the end of 2021.

In 2021, 98% of farm banks were profitable, with 73.2% reporting an increase in earnings. Farm banks also served as job creators, adding more than 1,600 jobs in 2021, a 2.1% increase, and employing 80,000 rural Americans. Farm banks also have built strong, high-quality capital reserves and are well-insulated from risks associated with the agricultural sector. Equity capital at farm banks increased 6.5% to $53.3 billion in 2021 while tier 1 capital increased by $4.5 billion to $46 billion.

At the end of 2021, all banks — not just farm banks — held $179 billion in farm and ranch loans. Small loans continue to make up almost half of banks’ farm and ranch lending, with $69 billion in small and micro farm and ag loans at the end of 2021, including more than 737,000 microloans worth more than $16 billion.

ABA Calls For Significant Changes To SEC Climate Risk Disclosure Framework

Warning that the agency is going far beyond its mandate, the American Bankers Association urged the Securities and Exchange Commission to significantly revise — or withdraw altogether and repropose — its extensive climate risk disclosure framework for public companies. The proposal requires disclosure of a registrant’s direct GHG emissions (scope 1), indirect emissions from purchased energy (scope 2) and indirect emissions from activities upstream and downstream in a registrant’s “value chain,” if material (scope 3, which would include “financed emissions” in a bank’s lending portfolio).

‌In a comment letter responding to the proposal, ABA noted that “these requirements go far beyond the SEC’s mandate to protect investors,” and emphasized that “new standards for climate-related disclosures and accounting must conform to the long-held definition of materiality and also be scalable to the size and complexity of the registrant.” ABA added that given the nascent state of climate risk management, existing greenhouse gas accounting guidance, practices and metrics are limited. With this in mind, “a final rule must limit disclosure requirements for Scope 3 emissions ... and sufficient safe harbors and transition time must be provided,” the association said.

ABA urged the SEC to replace its proposed framework with one that is “principles-based and scalable” depending on a company’s size, business model, industry, how its products or services fit into its value chains and the climate risks it faces.

“Only with this flexibility will new, prospective and existing registrants be able to comply without significantly impairing their ability to compete in the marketplace,” ABA said.

Basel Committee Finalizes Principles For Managing Climate-Related Financial Risks

The Basel Committee on Banking Supervision issued a final set of principles in its consultation on the effective management and supervision of climate-related financial risks by large, globally active banks. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued virtually identical principles earlier this year, with the Fed expected to follow shortly.

The document includes 18 high-level principles; 12 of which provide banks with guidance while the rest are intended for prudential supervisors. Among other things, the bank-related principles address how banks should incorporate climate-related financial risk in their overall risk framework, including corporate governance, internal controls, and capital and liquidity adequacy.

The principles were not substantially changed from the earlier version released for public comment in November 2021. The committee did make some clarifications with respect to the roles of board and senior management and added a new term — “climate-related financial risks – measurement methodologies” — to help clarify and differentiate between “stress testing” and “scenario analysis.” The committee also added language emphasizing that capital and liquidity planning incorporate physical and transition risks “that are relevant to a bank’s business model, exposure profile and business strategy, and are assessed as material over relevant time horizons.”

ABA, Trade Groups Cite ‘Serious Concerns’ With Privacy Bill

The American Bankers Association and a group of financial trade associations shared “serious concerns” about the American Data Privacy and Protection Act with the House Subcommittee on Consumer Protection and Commerce. While underscoring their full support for consumer data privacy and security, they noted that their members have been subject to “extensive federal privacy and data protection laws” for several decades and pointed out several provisions of the legislation should be reconsidered. The trade groups also noted the “rushed pace” at which the legislation is moving through the committee process, which hasn’t allowed for “adequate” stakeholder input.

Left unchanged, ADPPA would lead to “duplicative and conflicting requirements” for financial institutions, which already are subject to consumer financial data privacy and security protections under Title V of the Gramm-Leach Bliley Act, the groups said. “This framework will be disruptive to the financial system, consumers and the economy,” they wrote, recommending that ADPPA be amended to exempt all GLBA-regulated institutions.

The groups also cited need for the legislation to be consistent from state to state. “By allowing enforcement by private rights of action … it will only be a short matter of time before different judicial interpretations of the law mean that different states have different interpretations of the law,” they explained. State-by-state variations “inhibit national training and consumer understanding of privacy rights” as well as “encourage frivolous litigation for minor compliance infractions,” the groups wrote, noting that ADPPA should amended to create a “clear and direct preemption of all state privacy and data protection provisions,” eliminating “the continued patchwork” of requirements.

CFPB Finalizes Rule On Credit Reporting Protections For Human Trafficking Survivors

The Consumer Financial Protection Bureau issued a final rule implementing the Debt Bondage Repair Act, which was included as part of the National Defense Authorization Act that was passed last December. The bill prohibits credit reporting agencies from providing credit reports that contain any negative item of information about a survivor of trafficking that resulted from the trafficking. The final rule, effective July 25, updates the Fair Credit Reporting Act’s implementing regulation to ensure it meets DBRA’s credit reporting requirements and that survivors’ credit information is reported fairly.

Specifically, the final rule provides guidance to survivors on the documentation they need to provide to consumer reporting agencies (including credit reporting agencies), in addition to how to report their status as having experienced a form of trafficking. The rule also requires consumer reporting agencies to block adverse information in credit reports. Agencies will have four business days to block adverse information once it is reported to them and 25 business days to make a final determination as to the completeness of the documentation.

Consumer reporting agencies may only decline to or rescind a block if the identity of the survivor cannot be confirmed, the survivor cannot provide proof of a victim determination or the adverse items cannot be identified.

Fed Stress Tests Confirm Banks Could Continue Lending During A ‘Severe Recession’

Large banks continued to maintain strong capital levels under a hypothetical severe global recession and substantial stress in commercial real estate and corporate debt markets, according to the results of Dodd-Frank Act-mandated stress tests, the Federal Reserve said.

“Yesterday’s stress test results from the Federal Reserve show that the nation’s largest banks remain well positioned to absorb a range of potential economic shocks while continuing to support their customers, clients and communities,” said American Bankers Association President and CEO Rob Nichols. “The industry’s strong balance sheets and high capital levels ensure banks can make the loans that drive our economy even if they face substantial headwinds.”

The stress test featured a scenario where unemployment rises by 5.75 percentage points, spiking to 10% and gross domestic product falls “commensurately,” along with a nearly 40% decline in CRE prices and a 55% decline in stock prices. Under the scenario, capital ratios at the participating banks would decline to a minimum 9.7%, which is still more than double their minimum requirements.

Results of these stress tests are used to help determine individual bank capital requirements.

Agencies Release HMDA Data For 2021

The Federal Financial Institutions Examination Council released the 2021 Home Mortgage Disclosure Act data on mortgage lending transactions at 4,338 financial institutions. The data encompasses 23.3 million mortgage applications. Of these, 21.1 million were closed-end loans and 1.8 million were open-end loans such as home equity lines of credit. There also were 350,000 records that did not indicate loan type.

The total number of originated closed-end loans increased by about 528,000 between 2020 and 2021. Refinance originations decreased by 1.4% from 8.5 million, and home purchase lending increased by 9.2% from 4.8 million. The share of mortgages originated by nonbanks continues to climb, accounting for 63.9% of home-purchase loans, up from 60.7% in 2020.

Closed-end first-lien loans to Black borrowers rose from 7.3% in 2020 to 7.9% in 2021. Loans to Hispanic white borrowers increased slightly from 9.1% to 9.2%, and those made to Asian borrowers increased from 5.5% to 7.1%. Denial rates have edged down slightly. In 2021, Black and Hispanic white applicants experienced denial rates of 15.7% and 9.8%, respectively, compared to 17.2% and 11.2% in 2020. Denial rates for Asian and non-Hispanic white applicants were 7.5% and 5.6%, respectively, compared with 9.1% and 6.1% in 2020.

The Federal Housing Administration-insured share of loans decreased slightly from 19.4% in 2020 to 17.2% in 2021. The overall government-backed share of loans, including FHA, VA, Rural Housing Service and Farm Service Agency loans, was 29.3% in 2021, down from 32.8% in 2020.The FHA-insured share of closed-end refinance mortgages increased to 6.9% in 2021 from 6.2% in 2020, while the VA-guaranteed share of such refinance loans decreased from 11.9% in 2020 to 10.2% in 2021. 

Agencies Update Spring Rulemaking Agendas

The federal regulatory agencies announced updates to their spring rulemaking agendas for 2022. Among the Consumer Financial Protection Bureau’s priorities are the Dodd-Frank Section 1071 final rule, which is projected for March 2023 and addresses the collection of small business lending data. The bureau also is in the early stages of its Section 1033 rulemaking, which addresses consumer access to financial records. The CFPB noted it intends to issue a Small Business Regulatory Enforcement Fairness Act outline for that rule in November.

Other CFPB rulemakings on the agenda include the following.

• a December proposed rule for implementing FIRREA amendments for quality control standards for automated valuation models
• a May 2023 proposed rule for Property Assessed Clean Energy financing
• a June 2022 final rule implementing a measure to prohibit adverse information on credit reports regarding human trafficking

A CFPB rulemaking on overdraft was moved to a list of “inactive” rulemakings.

‌Meanwhile, the Financial Crimes Enforcement Network’s agenda had a number of planned rulemaking activities, including final rules on requirements for certain transactions involving convertible virtual currency or digital assets (which is slated for March 2023) and Section 6212 of the Anti-Money Laundering Act of 2020, which would establish a pilot program to allow financial institutions to share suspicious activity report information with foreign branches, subsidiaries and affiliates. Several other AMLA provisions also are in the proposed rule stage.

The rulemaking agenda also noted that “further action” on the interagency Community Reinvestment Act rule is expected but lists a June 2022 date (though comments are not due until Aug. 5). In addition, the Department of Labor said it expects to propose its overtime rule in October.

ABA To Host Free Webinar On What’s Next For CECL

With many banks completing or nearly completing their CECL calculations, the American Bankers Association will host a free webinar at 1 p.m. Thursday,  June 30, on what comes next in the implementation process. The webinar will feature discussions about model validations and alternate controls to address risks.