July 14, 2022 

Parson To Call Special Session

Today is the deadline for Gov. Mike Parson to take action on legislation passed by the General Assembly in the 2022 regular session. Parson signed 37 policy bills and vetoed four. He also vetoed $644 million from this year’s $47.5 billion budget, which includes a large amount of federal COVID response funds.

State and local tax (SALT) parity for certain businesses, increased protection of private property rights, trust decanting and several workforce and economic development measures are included in the bills that received the governor’s signature. They are effective Aug. 28.

The approved budget includes increased funding for broadband expansion, workforce development and infrastructure.

Two controversial vetoes will likely be revisited later this year. House Bill 1720, an agriculture package containing two-year extensions on certain tax credit programs, ag sales tax exemptions and updates to the Family Farms Act, was denied because Parson prefers a six-year tax credit extension. He stated applicants need at least 24 months to secure the investments and equity needed for projects, so the two-year extensions are insufficient. He also nixed House Bill 2090, a one-time income tax refund for some Missourians, saying he prefers permanent tax cuts for all taxpayers.

To address his concerns, the governor is planning a special session. It’s expected Parson will call on lawmakers to amend House Bill 1720 to include a six-year sunset, as well as to pass legislation to create permanent income tax relief rather than a one-time income tax refund. The special session will likely take place in September when lawmakers are scheduled to return to Jefferson City for the annual veto session.

MBA’s These Laws Effect You will be provided ahead of the Aug. 28 bill effective date.

Missouri Supreme Court Issues Ruling On Enforcement Of Arbitration Clauses

On June 12, the Missouri Supreme Court in Bridgecrest Acceptance Corp. v. Donaldson (No. SC99269) and Bridgecrest Acceptance Corp. v. Jones (No. SC99270) reversed the circuit court’s ruling and found that the arbitration agreement was legally valid, conscionable and not precluded by collateral estoppel. The court remanded for further proceedings consistent with the opinion. The opinion contains language that will be extremely helpful instruction for the lower courts in assessing future similar standalone arbitration agreements incorporated by reference into retail installment contracts. Banks that finance dealer retail installment contracts will be benefited by this decision. MBA was represented in a friend of court brief by one of its associate member firms, Husch Blackwell.

ABA Calls For Changes To CRA Modernization Proposal In Statement For Record

Ahead of a House Financial Services subcommittee hearing on the joint agency proposal to update the Community Reinvestment Act, the American Bankers Association cautioned lawmakers that certain aspects of the proposal are unlikely to accomplish the goals of regulatory modernization, and that “if not calibrated appropriately, the final rule could result in outcomes that are contrary to the agencies’ intent, particularly as it relates to expanding access to credit for residential mortgages, small-business loans and community development financing.”

ABA called for agencies to rethink one aspect of the proposal that would require “large banks” (which the proposal defines as those with more than $2 billion in assets) to delineate creation of “retail lending assessment areas” where the bank has concentrations of home mortgage or small-business loans where it does not have a physical presence. Among other things, ABA noted that the loan volumes that would trigger a RLAA are “not sufficiently material,” and could unintentionally incentivize banks to “curtail retail lending in locations that are incidental to the bank’s business strategy and where the bank does not actively market its loan products.”

The association further recommended that regulators:

  • rethink the proposed benchmarks and rating methodology
  • provide an adequate transition period once the rule is finalized
  • offer additional time for the industry to provide feedback on the proposal

ABA also emphasized that credit unions and other nonbank financial firms should be subject to CRA-like requirements.

Trade Groups To Lawmakers: Don’t Raise Taxes On Small, Family-Owned Businesses

As households and businesses face a possible recession, decades-high inflation levels and other economic challenges, a broad coalition of trade groups, including the American Bankers Association, representing a wide range of industries urged lawmakers to reject policy proposals that would raise taxes on small, individually and family-owned businesses.

Lawmakers are currently considering two possible tax increases that would fall on these businesses, which include banks operating as Subchapter S corporations — approximately one-third of all banks in the U.S. The first proposal would expand the 3.8% net investment income tax to individuals and families who actively participate in their business. The second would limit the ability of these businesses to fully deduct their losses during an economic downturn.

“Combined, these would increase revenues by more than $400 billion over ten years, shouldered entirely on the backs of small, individually, and family-owned businesses,” the groups wrote. “Raising taxes on small and family-owned businesses with the economy on the brink of a recession, a situation which is compounded by the other post-pandemic challenges they face, harms not only the businesses but the families and communities who rely on them.

The groups warned that expanding the NIIT in particular “would raise taxes on small and family-owned businesses when they are profitable, while extending and expanding the ‘excess loss limitation’ rules would hurt them in the next downturn,” and urged lawmakers to “reject these or any tax hikes on America’s small and family-owned businesses in any legislation considered this year.”

Senate Confirms Barr As Fed Vice Chairman For Supervision

By a bipartisan 66-28 vote, the Senate confirmed Michael Barr to serve a four-year term as vice chairman for supervision at the Federal Reserve. Barr also was confirmed by a 66-28 vote to serve the 10-year balance of a term on the Fed board of governors, bringing the board to full strength for the first time in nearly a decade.

Barr, who is currently a law and public policy professor at the University of Michigan, served in the Treasury Department during President Obama’s administration and was a chief negotiator during the drafting of the Dodd-Frank Act.

American Bankers Association President and CEO Rob Nichols congratulated Barr on his confirmation in a statement following the vote, noting that “he joins the board at a critically important moment for our economy with families and businesses facing rising inflation and other challenges. We look forward to working with him and his colleagues at the Fed to ensure that America's banks can continue to provide support to the economy while meeting the financial needs of their customers and communities.”

Financial Trade Groups Urge Congress To Include SAFE Act In Defense Bill

The American Bankers Association joined the Independent Community Bankers of America, the Credit Union National Association and National Association of Federally Insured Credit Unions in a letter to House leaders urging them to include the SAFE Banking Act as an amendment to the 2023 National Defense Authorization Act. The SAFE Banking Act, a bill long advocated by ABA that has passed the House multiple times with bipartisan majorities, would enable financial institutions to serve legitimate cannabis businesses in states where it is legal.

“The SAFE Banking Act puts in place necessary protections to bring revenue from state-sanctioned cannabis businesses into the financial services mainstream,” the groups said. “Legal cannabis businesses would no longer be forced to deal exclusively in cash, which makes them vulnerable to violent robbery and puts customers, employees, and the public at risk.”

ABA Pans Postal Service Check-Cashing Pilot Program

A pilot program by the U.S. Postal Service to offer check cashing services is inconsistent with congressional intent and inappropriately stretches the definition of “postal services,” the American Bankers Association said in a letter to the Postal Regulatory Commission. ABA emphasized that the USPS cannot offer the pilot program pursuant to the Postal Accountability and Enhancement Act, which repealed the postal service’s authority to offer “special non-postal or similar services.”

“As a threshold matter, any policy changes to the postal service’s mission, including any entrance into financial services, should follow express congressional direction, not increasingly strained and unsupported interpretations of what is a ‘postal service,’” ABA said. “We urge that commission to take a more active role in regulating new product offerings by the postal service, including requiring the postal service to provide advance notice and seek approval before offering a new product.”

ABA Supports Bill To Enhance Retirement Savings

The American Bankers Association sent a letter to Senate Finance Committee leaders in support of the Enhancing Retirement Now Act, which would significantly improve retirement savings for Americans.

“In particular, we welcome the helpful enhancement of investment options for participants in 403(b) plans, such as teachers, public servants and nonprofit workers, to include bank-maintained collective investment trusts,” ABA said. “CITs have cost advantages relative to other types of funds, while providing more design and administrative flexibility specific to retirement plan investors.”

The association urged lawmakers to include in the 403(b) plan provision “the necessary amendments to not only the Internal Revenue Code, but also the Investment Company Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934,” ABA said. “Without amendments to all four of these laws, participants in 403(b) plans may not have the advantages of CIT investment options.”

Fed Minutes: Additional 75 Basis Point Rate Hike Possible

A tight labor market, inflation running well above the Federal Reserve’s 2% target and a deteriorating near-term inflation outlook prompted the Federal Open Market Committee to move ahead with a 75 basis point rate-hike in June — the highest rate increase in 28 years — according to minutes released July 6. Looking ahead to future meetings, FOMC members noted that “an increase of 50 or 75 basis points would likely be appropriate at the next meeting.”

FOMC members noted that inflation risks “were skewed to the upside,” including ongoing supply chain issues and rising energy and commodity prices. Some members also noted that “conflicting signals” from GDP and gross domestic income have made it difficult to properly gauge the pace of economic growth. The committee identified several downside risks to economic growth, including the potential for additional tightening of financial conditions, as well as geopolitical factors such as the war in Ukraine and COVID-related lockdowns in China.

Given the current state of inflation, FOMC members noted that “moving to a restrictive stance of policy was required to meet the committee’s legislative mandate to promote maximum employment and price stability.” They also acknowledged that there was a “significant risk” that elevated inflation “could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted.”

Kansas City Fed’s George Warns On ‘Oversteering’ On Rates

Speedy rises in the federal funds rate “raises the prospect of oversteering” the management of monetary policy, Federal Reserve Bank of Kansas City President Esther George said recently at an industry conference in Missouri. She cautioned that “communicating the path for interest rates is likely far more consequential than the speed with which we get there.”

George was the sole Federal Open Market Committee member to vote against the Fed’s 75 basis point rate increase in June, instead preferring a 50 basis point increase — and the FOMC meeting minutes envision another 75 basis point hike later this month.

“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed’s ability to deliver on the higher path of rates communicated,” George said. “Along these lines, I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year. Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.”

Yellen Reiterates Need For Consistent Regs On Stablecoins

After several weeks of upheaval in the cryptocurrency market, including prominent stablecoins like TerraUSD and USDD breaking their U.S. dollar pegs, Treasury Secretary Janet Yellen reiterated her call for a regulatory framework for stablecoins.

According to a Treasury readout after a meeting of the President’s Working Group on Financial Markets, “Secretary Yellen emphasized how recent events have underscored the urgent need to ensure that stablecoin arrangements are subject to a federal framework on a consistent and comprehensive basis.” The meeting also included the heads of the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau, Treasury said, adding that Yellen “commended the steps that individual agencies have taken within the scope of their mandates and authorities.”

According to the readout, Yellen “highlighted the need to continue to constructively engage in serious legislative efforts to promptly put in place a regulatory framework for stablecoins that would address current and future risks, such as those related to runs, safety and soundness, consumer protection, the payment system and the concentration of economic power, while complementing existing authorities with respect to market integrity, investor protection, and illicit finance.”

The American Bankers Association has called on policymakers to address gaps in federal regulation of stablecoins and to ensure consistent treatment of banks and nonbanks that engage in stablecoin activity.

“ABA believes that customers who choose to access digital asset markets, including stablecoins, will be best served when they can do so through fully regulated banks where they are afforded robust consumer protection,” the association said in statement for the record to the House Financial Services Committee in February.

ABA: Digital Asset Regulation Must Support, Not Hinder Private-Sector Innovation

As U.S. policymakers consider how to regulate digital asset technologies, the American Bankers Association called on them to “remain vigilant and deliberate” to “ensure that our regulatory environment supports innovation rather than overregulating or replacing private sector innovators” in a comment letter to the Commerce Department.

Specifically, ABA cautioned that guidance including the Securities and Exchange Commission’s Staff Accounting Bulletin 121, which requires an SEC registrant to record an obligation to safeguard cryptoassets it holds for platform users, effectively bringing the value of cryptoassets a bank holds in custody on behalf of its clients on the balance sheet, could hinder banks’ ability to compete in the digital asset market.

ABA also reiterated its longstanding view that banks, working with regulators and private-sector partners, are already working to build and enhance digital payments channels, emphasizing that “the dollar is already digital” and that the creation of a central bank digital currency is therefore unnecessary.

“Digital assets represent a rapidly developing marketplace, and banks are actively evaluating ways to safely and responsibly compete,” ABA noted. “We believe that ensuring regulatory clarity and a level playing field is critical to enhancing innovation and competitiveness in the space. Further, we believe that a U.S. CBDC presents risks that are not overcome by the potential benefits, and moreover those benefits are better achieved in other ways.”

Fed’s Brainard: Time Is Right For Crypto Regulation

Recent volatility has uncovered “serious vulnerabilities” in the crypto financial system that may require new regulation, Federal Reserve Vice Chair Lael Brainard said July 8 during a speech in the United Kingdom.

Although new technology often holds the promise of system-wide benefits, Brainard noted that new products are “often fraught with risks, including fraud and manipulation” and it can be difficult “to distinguish between hype and value.” Industry needs to be vigilant about new forms of risks, she added, because of how novel crypto technological innovations are. Current market turbulence and losses emphasize the need to ensure compliance with existing regulations and to “fill any gaps,” Brainard said.

Financial resilience will be “greatly enhanced” if regulation “encompasses the crypto financial system and reflects the principle of same risk, same disclosure, same regulatory outcome,” she said, adding that doing so would allow regulators to more effectively address the risks posed to the broader financial system.

“Strong guardrails for safety and soundness, market integrity and investor and consumer protection will help ensure that new digital finance products, platforms and activities are based on genuine economic value and not on regulatory evasion,” she said.

Rather than stifle innovation, a strong regulatory framework would help investors and developers build “a resilient digital native financial infrastructure” and help banks, payments providers and fintech companies “improve the customer experience, make settlement faster, reduce costs and allow for rapid product improvement and customization,” Brainard explained. The crypto system is not yet too large or interconnected with the traditional financial system to pose a systemic risk, she said, making it “the right time” to ensure that “like risks are subject to like regulatory outcomes and like disclosure” to help investors distinguish between genuine innovation and risky easy returns.

FSB Calls For Parity In Crypto Market Regulation

In response to current volatility in the cryptocurrency market, the Basel, Switzerland-based Financial Stability Board called for “an effective regulatory framework” to ensure that crypto activities that pose similar risks to traditional financial activities are “subject to the same regulatory outcomes, while taking account of novel features of crypto assets and harnessing potential benefits of the technology behind them.”

The board’s statement had four main takeaways.

  • Crypto-assets and markets must be subject to effective regulation and oversight equal to the risks they pose domestically and internationally.
  • Cryptocurrency service providers must ensure compliance with existing legal obligations in the jurisdictions in which they operate.
  • Crypto market turmoil highlights the importance of ongoing work by the FSB and international standard-setting bodies to address the potential financial stability risks posed by crypto assets.
  • Stablecoins should be subject to “robust” regulations and supervision of relevant authorities if they are to be adopted as a widely used means of payment or play an important role in the financial system.

FSB said member authorities will implement applicable international standards into national regulatory and supervisory frameworks “to the extent not already reflected and will adopt guidance, recommendations and best practices of international standard-setting bodies, as appropriate.” The board will report to G20 finance ministers and central bank governors in October on regulatory and supervisory approaches to stablecoins and other crypto assets.

Earlier this year, the FSB published a report warning that crypto-asset markets are evolving quickly and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.

Treasury Solicits Public Input On Digital Asset Development

The Treasury Department is seeking public comment about potential opportunities and risks presented by digital assets. The request follows an executive order issued by President Biden in March directing relevant agencies to report on the implications of the development and adoption of digital assets, as well as changes in financial market and payment infrastructures for U.S. consumers, investors and businesses.

As part of the request, Treasury also is seeking feedback on potential risks associated with digital asset markets and how digital assets may benefit or pose risk to vulnerable populations. Comments must be received by Monday, Aug. 8.

Interagency Statement Reiterates Due Diligence Expectations

The federal banking agencies and the Financial Crimes Enforcement Network issued a statement reminding banks of the risk-based approach to assessing customer relationships and conducting customer due diligence. The statement, which does not alter existing regulatory requirements or establish new supervisory expectations, emphasizes that “no customer type presents a single level of uniform risk or a particular risk profile related to money laundering, terrorist financing, or other illicit financial activity” and that institutions operating in compliance with BSA/AML rules “are neither prohibited nor discouraged from providing banking services to customers of any specific class or type.”

“The agencies continue to encourage banks to manage customer relationships and mitigate risks based on customer relationships, rather than decline to provide banking services to entire categories of customer,” the statement noted. “In addition, the agencies recognize that banks choose whether to enter into or maintain business relationships based on their business objectives and other relevant factors, such as the products and services sought by the customer, the geographic locations where the customer will conduct or transact business, and banks’ ability to manage risks effectively.”

When developing a risk-based approach to CDD, banks should adopt procedures that:

  • enable them to understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile
  • conduct ongoing monitoring to identify and report suspicious transactions
  • maintain and update customer information

CFPB Advisory Opinion Warns Of Liability For Consumer Report Users

The Consumer Financial Protection Bureau issued an interpretive rule related to the Fair Credit Reporting Act’s provisions regarding companies that use and share consumer reports. Although much of the document focuses on the responsibilities of consumer reporting agencies, it also addresses responsibilities of users of consumer reports, which include banks.

Specifically, the interpretive rule noted that consumer report users must ensure they do not violate a person’s privacy by obtaining or using a report without a permissible purpose, and that it is illegal for consumer reporting companies to provide “possible matches” to users.

The CFPB cautioned that a user who incorrectly inputs consumer information when obtaining a report can result in that user obtaining a report without a “permissible purpose” and violating consumer privacy rights. The bureau further emphasized its position that that there is strict liability for obtaining or using a consumer report without a permissible purpose and also included a reminder about criminal liability for knowing or willful violations of the FCRA provisions.

ARRC Publishes Playbook To Support Transition From Legacy Libor Cash Products

The Alternative Reference Rates Committee released a playbook to help support the transition away from legacy Libor cash products. The playbook provides tools and resources, including a compilation of best practice recommendations and reference materials. It is not intended to provide legal advice.

The guide lays out several recommended steps to navigate the successful implementation of fallbacks for various cash products. These steps include the following.

  • thoroughly assessing the fallbacks that are embedded in every U.S. dollar Libor contract
  • remediating those contracts where feasible to reference the Secured Overnight Financing Rate before June 30, 2023
  • adopting plans to communicate each contract’s fallback with affected parties for remaining USD Libor contracts
  • making sure sufficient resources are allocated to ensure that rate changes are successfully put into effect

In related news, Refinitiv, the ARRC’s chosen provider to publish fallback rates for cash products based on SOFR, announced it will begin publishing ARRC-recommended fallback rates based on the CME Group’s Term SOFR rates in September 2022. ‌

Consumers Expect Short-Term Inflation, Bearish On Home Prices, Spending

More U.S. consumers believe inflation is on the horizon in the short term but are more optimistic about an economic downturn in the medium and longer terms, according to the Federal Reserve Bank of New York’s monthly Survey of Consumer Expectations. According to the report, consumers’ belief that home prices will grow dipped sharply along with expectations for spending growth. Credit access perceptions and expectations continued to deteriorate, as did expectations for current and future financial situations.

Median one-year-ahead inflation expectations increased to 6.8% from 6.6% in May, a new series high. In contrast, median three-year-ahead inflation expectations decreased to 3.6% from 3.9%. The increase in short-term expectations was driven by respondents over age 60 and respondents with at least some college education. Median five-year ahead inflation expectations declined to 2.8% from 2.9%. The expected change in home prices one year from now dropped sharply to 4.4% from 5.8%, which is the lowest reading of the series since February 2021.

Expected growth in household income increased by 0.2 percentage point in June to 3.2%. Year-ahead household spending growth expectations retreated from its series high in May, declining by 0.6 percentage point to 8.4% but remaining well above its 2021 average of 5%. Respondents also were more pessimistic about their financial situation in the year ahead, with fewer respondents expecting their financial situation to improve a year from now.

NFIB: Small Business Optimism Remains At All-Time Low

The National Federation of Independent Business’ Small Business Optimism Index fell 3.6 points in June to 89.5, marking the sixth consecutive month the index has been below the 48-year average of 98. The share of small business owners expecting the economy to improve in the next six months plunged seven points to a net negative 61%, the lowest reading in the survey’s history. Expectations for better conditions have worsened every month this year, NFIB reported.

Thirty-four percent of business owners reported that inflation was the single most important problem in operating their business, up six points from May and reaching the highest level since the fourth quarter of 1980, and a net 44% said they plan price hikes in the future.

ABA To Host Webinar On Fair, Responsible Banking In 2022

The American Bankers Association will present a free webinar at 1 p.m. Wednesday, July 20, on fair and responsible banking. The webinar will be an interactive discussion on the latest developments in fair and responsible banking and the steps banks can take to be more proactive from a compliance perspective while navigating new challenges and serving their communities more effectively.

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