Industry & Regulation

Dec. 20, 2024: Industry & Regulation

Bankers Associations, Financial Entities File Lawsuit Against CFPB To Block Overdraft Rule

Dave Kovaleski, Financial Regulation News

The Consumer Bankers Association (CBA) is among a group of entities taking legal action against the Consumer Financial Protection Bureau’s (CFPB) final rule on overdraft services.

The American Bankers Association (ABA), America’s Credit Unions, Mississippi Bankers Association, and banks directly affected by the rule are also part of the suit.

The rule in question amends Regulations E and Z to update regulatory exceptions for overdraft credit provided by very large financial institutions. The CFPB said the overdraft rule seeks to adhere to consumer protections required of similarly situated products, unless the overdraft fee is a small amount that only recovers estimated costs and losses. Further, the CFPB says the rule allows consumers to better comparison shop across credit products.

However, CBA and the other entities say that the CFPB exceeds its regulatory authority with this new rule. Further, they say the CFPB fails to appropriately consider how its actions will harm the consumers who most benefit from the access to the liquidity enabled by overdraft services.

“The CFPB’s rule on overdraft services harms Americans who need it most – including the 26 million Americans who don’t have access to credit and thus stand to lose the most if overdraft services are restricted,” CBA President and CEO Lindsey Johnson said. “Overdraft services are an essential lifeline for consumers when they experience unexpected expenses. Research shows that overdraft services provide much-needed liquidity during a short-term budget shortfall so consumers can put food on the table, keep the lights on, and make other important payments on time. Without overdraft services, consumers on the margins are more likely to turn toward worse, less-regulated non-banking services to fill the gap.” Read more

The Banking Industry Should Take the Lead on Modernizing Regulation 

Eugene Ludwig, American Banker

The incoming administration has already made several public statements suggesting a desire to reduce financial services regulation. And many in the industry have specific regulations or regimes they’d like to see eliminated.

The incoming administration’s influence over Congress, at least over the next two years, presents a unique opportunity for those who want to modernize bank regulation.

But what does this mean in practice? Having modernized regulation during my time in government, I suggest steps that, when taken responsibly, can benefit all stakeholders, including the regulatory agencies. Some regulations are redundant. Some outdated. Others miss the mark entirely.

By streamlining and refining current regulations, we can create a less-burdensome regulatory environment without compromising essential safeguards. A responsible approach to regulatory modernization can be durable. “Deregulation” can often lead to unintended consequences and invite the swing of the pendulum in years to come. Instead, a modern, simplified regulatory framework can be of lasting benefit to all stakeholders.

First, the industry itself should take the lead in this effort. By collaborating through its trade associations, the industry can define specific parameters for regulatory modernization, compiling a list of the rules it most wants to see streamlined or eliminated. For rules that cannot or should not be just eliminated, each trade association should establish or enhance its existing regulatory modernization group to suggest refinements. Ideally, each financial institution and trade association should designate a “regulatory modernization czar” to identify areas for improvement, draft specific proposals and present them to the relevant agencies, where appropriate. Read more

Corporate Transparency Act Update – Effect of Recent Court Action

Hill Ward Henderson, National Law Review

The Corporate Transparency Act (together with its implementing regulations, “CTA”) is a federal law that became effective at the beginning of this year. The CTA imposes new reporting duties on most companies and their owners.

On December 3, 2024, a United States District Court in Texas temporarily enjoined enforcement of the CTA and stayed the January 1, 2025 reporting deadline for companies formed prior to 2024. It determined that the preliminary injunction should apply nationwide.

The court concluded that plaintiffs had shown a substantial likelihood of success on the merits with respect to their claim that the CTA facially violates the federalism principle enshrined in the Tenth Amendment to the U.S. Constitution.

On December 5, 2024, the Department of Justice, on behalf of the Department of the Treasury, filed a notice of appeal. The Department of Justice is also seeking a stay of the preliminary injunction pending appeal. If the stay is granted, the CTA could once again become enforceable while the appeal is pending.

On December 9, 2024, FinCEN released a statement on its website acknowledging that in light of the preliminary injunction, reporting companies are not currently required to file beneficial ownership information (“BOI”) reports with FinCEN and are not subject to liability if they fail to do so while the injunction remains in force. However, a reporting company may choose to voluntarily submit beneficial ownership information reports during this time. Read more

FDIC Authorizes Potential Legal Action Against Former SVB Executives

Pymnts.com

The Federal Deposit Insurance Corporation (FDIC) board of directors reportedly votedunanimously to authorize potential legal action against six former officers and 11 former directors of Silicon Valley Bank (SVB).

This authorization was approved by both Democrats and Republicans on the board, Reuters reported Tuesday (Dec. 17). In past legal actions taken against executives at failed banks, the FDIC recovered $4.48 billion between 2008 and 2023, according to the report.

The failure of SVB cost the Deposit Insurance Fund an estimated $23 billion, FDIC Chairman Martin J. Gruenberg said in a statement released Tuesday in conjunction with the board meeting. The request for authority to sue SVB followed the FDIC’s investigation of the bank’s failure, Gruenberg said.

The FDIC found that the former directors and officers of the bank mismanaged its held-to-maturity securities portfolio by purchasing long-dated securities when interest rates were rising, allowed an over-concentration of these assets, mismanaged the bank’s available-for-sale securities portfolio by removing interest rate hedges, and permitted an “imprudent payment” of a dividend to the bank’s holding company while the bank was experiencing financial distress, according to the statement.

“As a result of the mismanagement of the held-to-maturity securities portfolio, the termination of interest-rate hedges on the available for sale securities portfolio, and the issuance of the bank-to-parent dividend, SVB suffered billions of dollars in losses for which the FDIC as Receiver has both the authority and the responsibility to recover,” Gruenberg said.

Gruenberg added that he supported the request for authority to sue because “it is vital that Bank leadership be held accountable for their failures.”

SVB was taken over and closed by a California state financial regulator in March 2023 after customer withdrawals and plummeting stock prices beset the bank amid investor concerns about its liquidity. The regulator then appointed the FDIC as the bank’s receiver. Read more

Dec. 13, 2024: Industry & Regulation

New Scorecard Demonstrates Federal Financial Regulators’ Progress in Addressing Climate Risk

A new scorecard shows how 10 federal financial regulators have implemented hundreds of actions in the last 18 months to address the systemic financial risks of climate change.

Credit Union Connection

However, U.S. regulators have much more work to do to address these risks as the frequency and severity of weather disasters continue to increase.

The 2024 Climate Risk Scorecard: Assessing U.S. Financial Regulator Action on Climate Financial Risk found most of the assessed regulators have made meaningful strides in producing research and data on climate risk and incorporating these risks into their oversight of regulated entities. However, urgent action is required to improve climate-related disclosures, increase transparency in climate-related risk management practices, including within regulatory frameworks, implement climate-related scenario analysis, and assess climate risks on financially vulnerable communities.

Among those assessed include the Federal Reserve Bank (the Fed), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), the U.S. Securities and Exchange Commission (SEC), the Municipal Securities Rulemaking Board (MSRB), the Public Company Accounting Oversight Board (PCAOB), the Commodity Futures Trading Commission (CFTC), the Federal Housing Finance Agency (FHFA), and the U.S. Department of the Treasury.

Notable progress in this year’s scorecard includes:

  • The Federal Reserve System (Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) published the final interagency guidance Principles for Climate-Related Financial Risk Management for Large Financial Institutions.
  • The three banking regulators adopted a historic interagency update to the Community Reinvestment Act (CRA) regulations, incorporating climate resiliency and disaster preparedness provisions for the first time, and representing the most significant changes to the CRA in 20 years. Read more
The NGFS’s New Climate Damage Function: A Flawed Analysis with Massive Economic Consequences

Bank Policy Institute

The Network of Central Banks and Supervisors For Greening the Financial System (NGFS) is a supranational consortium of central banks and financial regulators; the United States is represented by the Federal Reserve, the OCC, the FDIC and the FHFA. The NGFS develops climate scenarios that are then used by its members to measure the resiliency of the banking system to climate risks. Thus, the Federal Reserve employed NGFS climate scenarios in its 2023 climate scenario exercise for large U.S. banks, and the ECB employed NGFS scenarios in its 2022 climate risk stress test of the Eurosystem balance sheet.

In early November this year, the NGFS updated the “damage function” component of its climate scenario, which projects the effect of rising temperatures and precipitation on global real income. The new damage function was based entirely on an academic paper published this year in the journal Nature.

The updated damage function predicts that global real income will be 19 percent lower by 2050 than it would have been with no climate change, regardless of whether current CO2 emission trends improve or worsen. The damage function projects 60 percent lower global real income by 2100 if current CO2 emission trends worsen. Going forward, these extreme economic assumptions in the scenarios would be used in climate stress tests of banks, practically ensuring that those tests will conclude that all global banks face material climate risks that would require higher capital levels.

This paper reviews the new damage function in the Nature paper and finds no basis for its projections. The statistical procedure used to justify the new damage model is arbitrary and could easily have produced a damage function that would have predicted much smaller losses of global real income. Those much smaller loss projections should not be taken seriously either. In our assessment of the damage function, we found very limited statistical evidence for any causation between the climate variables and material economic damage and no statistical evidence for the purported influence of the temperature variables that drive almost all the economic damage. Read more

Federal Lawmaker Aims to Stall FinCEN’s Ability to Enforce BOI Reporting Requirements

Kim Riley, Financial Regulation News

Though a federal court previously issued a preliminary injunction against the beneficial ownership information (BOI) reporting requirements issued in January, a newly proposed bill in Congress would prohibit enforcement of the rule until the Financial Crimes Enforcement Network (FinCEN) meets specific criteria.

FinCEN on Jan. 1 launched its BOI E-Filing website so that companies may report their information digitally to comply with the Corporate Transparency Act. However, while an online method works well for many companies across the United States, the system alienates the many rural businesses unable to access a reliable broadband connection, according to U.S. Sen. Jerry Moran (R-KS), who on Dec. 3 sponsored the currently unnamed S. 5414.

“Kansans have voiced their concerns regarding the new federal reporting requirements for businesses, particularly in rural areas,” said Sen. Moran on Thursday. “This legislation would help provide additional time, clarity and flexibility for businesses in Kansas to comply with federal standards without facing burdensome and unnecessary penalties.”

If enacted, S. 5414 would prohibit federal funds being used to enforce the BOI reporting requirement until the effective date for all BOI requirements is delayed by a minimum of one year, according to a bill summary provided by the lawmaker.

Additionally, FinCEN would have to first finalize all outstanding BOI rulemakings, and allow rural businesses to file their information via mail, the summary says. Read more

The New Administration’s Impact on Banking Begins to Take Form

Steve Cocheo, The Financial Brand

Republicans will be painting the nation’s capital red for at least the next two years. But, as one observer says, Democrats and Republicans don’t stay in their traditional boxes anymore, and while the new Trump administration will be pro-business, it might not always be pro-banking. Key areas to watch will include BaaS, chartering, enforcement, and crypto.

The volume of news, speculation and conjecture about the presidential transition rivals the flow of Niagara Falls. But as far as experts in financial services’ status in Washington are concerned, the biggest initial shift will be a major … pause.

Prudential banking regulators already put it on the record during a post-election hearing of the House Financial Services Committee hearing that they would not be pushing anything new through before the second Trump administration takes office. But experts expect the pause to last beyond that.

There’s a good deal of change that banks, credit unions and fintech companies expect to see in at least two years of a Republican White House and a Republican Congress that just isn’t going to happen very quickly, in spite of all the noise from Washington and Florida and the anticipation of the industry.

Further, expectations may not take a straight line from point A to point B. Lurking in the background is the incoming Trump administration’s populist streak. This may produce regulatory and legislative twists that rival some of the nominations made to major federal posts for unexpectedness — and even audacity.

There’s also a degree of intrigue worthy of an old-fashioned political novel. The announced nominee for Treasury Secretary, Scott Bessent, was quoted by Barron’s regarding the continuing role of Jerome Powell as Federal Reserve Board chairman. Bessent said that Powell could be left in to finish his term — he’s already established that he will put up a fight against removal — but that a “shadow chairman” pick, announced, would render Powell’s role increasingly moot. Read more

Dec. 6, 2024: Industry & Regulation

New Year, New AML and Compliance Approach for Financial Institutions

PYMNTS.com

It’s almost 2025, but many businesses are still facing the same old anti-money laundering (AML) and know your customer (KYC) concerns, among other compliance requirements.

With the news that Wise, the money transfer giant, has implemented a European regulator’s recommendations to bolster its AML programs, AML is emerging not merely as a regulatory obligation but as a strategic priority for the year ahead.

Particularly as financial services become increasingly faster and more accessible through technology, the risks of financial crimes are growing just as quickly, and regulators are demanding heightened vigilance.

Against this backdrop, AML which has traditionally been viewed as a cost center — a necessary burden to satisfy regulators — is becoming a cornerstone of competitive differentiation for financial institutions (FIs) in an era where trust is increasingly a marketable asset.

After all, Wise is far from alone. TD Bank reportedly is working to select compliance monitors to track its progress on risk and controls and report to regulators, as ordered by the U.S. government in October; while the U.S. Office of the Comptroller of the Currency (OCC) this past September signed a formal agreement with Wells Fargo to rectify deficiencies in its anti-money laundering (AML) and financial crimes risk management practices.

As a result of its past compliance failures, TD Bank is expected to pay a roughly $3 billion penalty and agree to limits on its growth in the U.S. And government agencies are reportedly also investigating Citigroup’s AML policies and its ties to a sanctioned Russian official.

With 2025 approaching, among the best ways for businesses to avoid penalties that erode both the bottom line and end-user trust is to embrace a proactive approach to AML/KYC. And next-generation technologies and artificial intelligence (AI) tools can help financial institutions detect and prevent AML anomalies better and faster than they ever could before. Read more

Trump Is In: Will Pro-Cannabis Reform Be In or Out?

Noelle Skodzinski, Cannabis Business Times

What will the new administration and a Republican-controlled Congress mean for cannabis policy? Could we see movement on SAFER Banking before the transition? National Cannabis Roundtable Policy Director David Mangone shares his insights.

President-elect Donald J. Trump’s recent campaign positions on adult-use cannabis legalization present a stark contrast from his first term in the Oval Office. And what a Trump administration and Republican-controlled Congress will mean for the still federally illegal U.S. cannabis industry is the question on the minds of many business owners, patients and advocates around the country, especially as the fate of cannabis rescheduling still hangs in the balance, and after the SAFER Banking Act finally saw some movement in the U.S. Senate.

During Trump’s first term, he appointed a staunch cannabis prohibitionist, Jeff Sessions, as U.S. attorney general­­. Sessions’ anti-cannabis remarks while serving as a U.S. senator became well-known throughout the fledgling cannabis industry. “We need grown-ups in charge in Washington who say that marijuana is not the kind of thing that ought to be legalized. … This drug is dangerous,” Sessions said during a 2016 Caucus on International Narcotics Control hearing, adding that “Good people do not smoke marijuana.”

And when Sessions became Trump’s attorney general, he rescinded the Cole Memo, written by former President Barack Obama’s Deputy Attorney General James M. Cole, directing all U.S. attorneys to essentially leave state-legal cannabis businesses alone, despite federal law.

Prior to his 2016 presidential campaign, Trump himself voiced support for medical cannabis but opposition to adult-use cannabis legalization. “At the Conservative Political Action Conference in March 2015, Trump said he was leery of legalizing marijuana for recreational use, but ‘medical marijuana is another thing,’” Reason reported. “He said he was ‘100 percent’ in favor of medical use.” Read more

Why Community Banks Are Struggling to Expand Loan Portfolios

Jim Dobbs, American Banker

Community banks barely grew loans in the third quarter — and the struggle for momentum could drag into 2025, despite interest rate cuts and post-election clarity on regulation.

Median sequential loan growth for banks under $10 billion of assets was 1.2% in the third quarter, down from 1.7% the previous quarter and 1.9% a year earlier, according to S&P Global Market Intelligence data. Total gross loans and leases for the group reached $2.45 trillion as of Sept. 30.

Of the 20 largest community banks, however, 13 posted declines in quarter-over-quarter loan balances, the S&P data show. While inching ahead, the overall pace of growth has slowed throughout 2024. It fell below 1% for the current quarter through mid-November, weekly data from the Federal Reserve showed. “Bank lending has been a chronic disappointment for the past several periods,” Piper Sandler analyst Scott Siefers said.

He noted that, with the Fed cutting rates twice this fall, lower borrowing costs could boost demand, especially if policymakers follow through with more reductions early in 2025. What’s more, the incoming Trump Administration promises lower corporate taxes and deregulation. With a “more business-friendly backdrop,” Siefers said, “we’re hopeful that customers will feel emboldened to re-engage and resume borrowing.”

All of that noted, analysts say headwinds linger and new challenges lurk. Many community bankers said during the recently culminated third-quarter earnings season they are seeing signs of increased commercial loan demand as business owners prepare for a New Year in which costs could decline or at least hold steady across taxes, regulation and debt. Read more

Agencies Issue Statement on Elder Financial Exploitation

Five federal financial regulatory agencies, the Financial Crimes Enforcement Network (FinCEN), and state financial regulators issued a statement today to provide supervised institutions with examples of risk management and other practices that may be effective in combatting elder financial exploitation.

Older adults who experience financial exploitation can lose their life savings and financial security and face other harm. A FinCEN financial trend analysis of Bank Secrecy Act reports over a one-year period ending in June 2023 found that about $27 billion in reported suspicious activity was linked to elder financial exploitation.

Banks, credit unions, and other supervised institutions play an important role in combatting elder financial exploitation and supporting their customers who experience these crimes. The statement provides examples of risk management and other practices that supervised institutions may use to help identify, prevent, and respond to elder financial exploitation, including but not limited to:

  • Developing effective governance and oversight, including policies and practices to protect account holders and the institution
  • Training employees on recognizing and responding to elder financial exploitation
  • Using transaction holds and disbursement delays, as appropriate, and consistent with applicable law
  • Establishing a trusted contact designation process for account holders
  • Filing suspicious activity reports to FinCEN in a timely manner
  • Reporting suspected elder financial exploitation to law enforcement, Adult Protective Services, and other appropriate entities
  • Providing financial records to appropriate authorities where consistent with applicable law
  • Engaging with elder fraud prevention and response networks
  • Increasing awareness through consumer outreach

Attachment: Interagency Statement on Elder Financial Exploitation

Nov. 22, 2024: Industry & Regulation

We Can’t Give Up Paper Checks, and That’s a Gold Mine for Scammers

Oyin Adedoyin and Justin Baer, Wall Street Journal

Suspected fraudsters congregate anonymously on message boards and social media, figuring out which banks to target with altered checks

Key Points

  • Americans’ continued reliance on paper checks has created a lucrative opportunity for fraudsters, who are exploiting banks’ requirements to make customer money available before fully verifying checks.
  • The fraudsters’ social media messages suggest there are always potential new “glitches” to exploit. They move quickly from bank to bank, telling others of their latest targets, and their successes.
  • Banks are racing to stay ahead of the check fraud scheme, but the fragmented and slow-to-change U.S. banking system continues to cater to businesses, government offices, and individuals that prefer checks.

Americans can’t quit paper checks. Fraudsters are cashing in. A message appeared this month on an app where people often congregate to trade tips on committing check fraud. It named some of the largest banks: “TD. PNC. CITI. NOWWWWW.”

That same week, anonymous posters sent photos to the same app showing ATM deposits from banks including PNC. One slip showed a deposited check for $47,351.04. Scammers are altering checks, depositing them and quickly withdrawing cash before banks flag the payments as suspicious, according to bank executives and their antifraud consultants.

Fraudsters frequent Telegram, a popular messaging app, Facebook and TikTok to promote the low-tech check scheme. The scams exploit banks’ requirements to make customer money available before fully verifying checks. They have spread rapidly in the past few years, turning into a major headache for the financial industry.

Mentions of nearly every large bank, credit union and brokerage spiked this year on Telegram channels where suspected fraudsters post tips, according to an analysis by Frank McKenna, chief strategist at Point Predictive, a fraud-technology company. Read more 

Nearly Half of Americans Say They Live Paycheck to Paycheck

Kamaron McNair, CNBC

Achieving nearly any financial goal, from saving for retirement to buying a car, comes down to spending less than you earn.

In recent years, that’s become especially difficult for consumers as prices for essentials like rent and groceries have grown faster than wages can keep up. As a result, the share of Americans saying they live paycheck to paycheck has been growing fairly steadily for the past two years, a recent Bank of America survey found.

Nearly half of Americans at least somewhat agree with the statement, “I am living paycheck to paycheck,” as of the third quarter of 2024. The share shrank slightly between the second and third quarters of this year, but in 2022, less than 40% of Americans felt this way, Bank of America reports.

Importantly, how each respondent defines living paycheck to paycheck may vary. So, for the purposes of the study, Bank of America set a threshold — households spending at least 90% of their income on necessities could be considered living paycheck to paycheck.

By that measure, around 30% of American households are living paycheck to paycheck, according to Bank of America’s internal data. Further, 26% of households spend 95% or more of their income on necessities, the bank reports. Read more 

CFPB’s Chopra Urges Deposit Insurance Reform

Rajashree Chakravarty, Banking Dive

Following a recent Oklahoma bank failure, the CFPB director said it is time for Congress to remove or “at least dramatically increase” the limits of federal deposit insurance.

Consumer Financial Protection Bureau Director Rohit Chopra has called for a review of the deposit insurance threshold following the failure of a community bank in Oklahoma last month.

While speaking at a closed meeting of the Federal Deposit Insurance Corp. board of directors last week, Chopra, who holds a spot on the board, urged Congress to remove or “dramatically increase” the limits on federal deposit insurance for payroll and other non-interest bearing operating accounts.

On Oct. 18, the Office of the Comptroller of the Currency shut down Oklahoma-based First National Bank of Lindsay, saying the bank was in “an unsafe or unsound condition to transact business” and appointed the FDIC as receiver. The OCC also identified “false and deceptive bank records and other information suggesting fraud that revealed depletion of the bank’s capital.” The FDIC said it would make 50% of uninsured funds available to depositors.

“As a result of the failure, some depositors in this rural area of Oklahoma are expected to take a loss, since their account balances exceeded federal deposit insurance limits,” Chopra said in a statement. Deposit insurance is integral to the U.S. banking system, but the FDIC deposit insurance cap has not increased since the 2008 financial crisis. Read more 

Things Are Quiet in Consumer Credit. Too Quiet.

Telis Demos, Wall Street Journal

Credit-card delinquencies seem to have peaked, for now

Lenders are open for business. But there might not be a ton of borrowers walking through the door. That can be a formula for trouble.

It should be a pretty good time to be lending money to people. Interest rates on credit cards have been at the highest levels since at least the 1990s, while the risk of card lending is subsiding. For the first time since 2021, the rate at which new delinquencies were forming actually declined in the third quarter from the prior quarter, according to the Federal Reserve Bank of New York. The four-quarter moving sum of the percentage of balances becoming 30-plus-days past due fell 0.26 percentage point from the second quarter to the third, to 8.79%.

Early data show the trend continuing into the fourth quarter. Jefferies analysts’ tracking of monthly reports on card loans shows that in October, delinquencies were still rising year-over-year, but at a slower pace than the prior month. This is a trend that needs to continue “in order to revert back to historical [delinquency] levels,” the analysts wrote.

Yet there is a missing ingredient, and that is borrowers. By many measures, Americans are hardly gorging on debt right now, as they are often thought to be doing. Moody’s Ratings pointed out that household debt in the third quarter grew slower than nominal gross-domestic product, at 3.8% debt growth from a year earlier versus 4.9% nominal GDP growth.

On an inflation-adjusted basis, total household debt remains more than a trillion dollars below the record high hit at the end of 2008, according to figures calculated by WalletHub. With population growth factored in, it is even relatively lower. Credit-card debt for the average household, for example, is almost 13% off its peak level. Read more 

Nov. 15, 2024: Industry & Regulation

US Regulators Warn Bankers About Intensified Focus on Financial Crime

Nupur Anand, Reuters

U.S. regulators warned bankers on Wednesday that the government will continue to beef up efforts to fight money laundering and enforce know-your-customer rules.

One week after Donald Trump’s presidential election victory, banking industry experts gathered in New York and were focused on his leadership picks and plans for deregulation. But financial crimes would stay in focus as a bipartisan issue, attendees said.

Blocking criminals from using banks for financial crimes “has been a priority area and you are going to see enforcement actions” that highlight compliance with the Bank Secrecy Act, said Whitney Case, associate director of the enforcement and compliance division at the Treasury Department’s Financial Crimes Enforcement Network.

“In the BSA/AML universe, we have a broad remit so we are going to continue to see a variety of actions against a variety of financial institutions,” she added.

Officials have heightened scrutiny of banks’ operations and risk management practices, while also taking more disciplinary action against lenders for their programs to detect and prevent money laundering, regulatory and bank sources said.

Weaknesses are emerging in these areas and require attention, Greg Coleman, senior deputy comptroller for large banks at the Office of the Comptroller of the Currency. Read more

Elder Fraud Is Rising. So Is the Pressure on Banks to Catch It.

Penny Crosman, American Banker

When Janine Williamson’s uncle Larry Cook, a retired Navy commander living in Herndon, Virginia, died, she was appointed administrator to his estate and began receiving his mail. Williamson, a financial planner, saw some unusual activity in his monthly statements from Navy Federal Credit Union.

She asked the credit union for 12 months’ worth of statements and soon realized that 74 wire transfers of exactly $49,500 each had been sent to individuals in Thailand over the course of six months. (As it turns out, that is just shy of the amount that triggers a government transaction reporting requirement in Thailand.) She subpoenaed Navy Federal for the cover sheets for the wires and saw they all went to different addresses.

“One of the addresses was ‘165 alley behind the old Phraya Karai Temple Wat,'” Williamson said in an interview. A bank employee had dutifully written in that address and allowed the wire to be sent, as with the 71 others, she said. All told, Cook’s estate was drained of $3.6 million.

Cook had had a stroke two years before his death at 72, and Adult Protective Services had told the credit union he had diminished mental capacity and was in need of a conservatorship, according to Williamson.

She sued Navy Federal and the case was dismissed. She is appealing the decision. Read more

Rule Could Dampen Merger Activity, Nudge Reluctant Retirees from CU Boards

Tyfone

The NCUA’s proposed rule on succession planning could have a two-pronged effect – putting a chill on mergers and forcing older credit union directors to consider stepping down. A lack of succession planning might be driving more mergers than even the National Credit Union Administration realizes.

The NCUA in July approved a rule that would require federally-insured credit unions to establish succession planning for key positions in their organizations.

Part of the impetus for the rule was that an NCUA analysis found a lack of succession planning was either a primary or secondary cause for almost a third of consolidations. But some credit union leaders told Tyfone they think that number is much higher.

“Many CEOs of smaller institutions plan to merge as part of their retirement and get a payout,” one Ohio CEO said. “I would estimate at least 60% of the older CEOs of credit unions under $500 million (of assets) plan to merge as part of their retirement strategy.”

At the NCUA board’s July 18 meeting, Chairman Todd Harper said the regulator has found that 25% of credit unions either lacked any plan or had an inadequate plan. Another CEO, this one based in Texas, said he wonders if some of the larger credit unions that “do things right” don’t want the smaller institutions to have succession plans “because they are easy pickings without one.”

But many executives believe that one area the rule could help in is forcing reluctant board members to step down. An Arizona CEO told Tyfone it is incredibly difficult to make some of the older, long-time board members talk about when they plan to relinquish their seat let alone discuss who is going to replace them or have the board as a whole plan for their departure. Read more

Federal Reserve Financial Services’ New FedDetect Offering Tackles Commercial Check Fraud

Federal Reserve Financial Services helps financial institutions detect duplicate activity at no additional cost

Business Wire

Federal Reserve Financial Services (FRFS) today announced the expansion of FedDetect Duplicate Notification for Check Services to include commercial checks, alongside its existing Treasury check notification service. Financial institutions can now see deposit information and images of potential duplicate items for commercial checks, supplementing their existing check fraud mitigation tools.

According to a 2024 survey of treasury practitioner members and prospects by the Association for Financial Professionals, 65% reported checks as the payment method most susceptible to fraud. Despite this, among those organizations using checks, 70% report no immediate plans to discontinue their use.

“Commercial checks remain a critically important form of payment, but they’re also vulnerable to fraud,” said Shonda Clay, FRFS executive vice president and chief of product and relationship management. “With the expansion of our FedDetect service, we are providing financial institutions of all sizes another powerful tool in their risk mitigation toolkit. Even better, we are now offering this service at no cost as part of our commitment to supporting depository institutions in the collective, industry-wide mission to combat fraud.”

FedDetect Duplicate Notification underscores the Federal Reserve’s purposeful investment to support banks and credit unions as they fight fraud related to check clearing. Despite reductions in check volume, a recent FRFS study of financial institution risk officers found that check fraud had the largest year-over-year increase, up 12% in 2023. The FedDetect service helps financial institutions mitigate loss of funds due to fraud or deposit capture errors by sending notices of potential duplicate Treasury or commercial checks across multiple payment channels and financial institutions. Read more

Nov. 8, 2024: Industry & Regulation

Six Regulatory Moves, People Whose Days Are Numbered Under Trump

Caitlin Mullen & Dan Ennis, Banking Dive

With another Trump presidency set to kick off in January, the clock has turned against several Democratic appointees and agenda items.

A second Donald Trump presidency is likely to have major ramifications for the bank regulatory world. Maybe chief among them: an about-face on the contentious capital requirements hike.

Change is also expected to occur quickly: Trump’s transition team is more experienced and knowledgeable than that of his previous administration, said Peter Dugas, executive director of financial services consulting firm Capco, so Trump is likely to act swiftly to implement policy changes related to the Basel III endgame, mergers and acquisitions, artificial intelligence and ESG.

Additionally, Trump’s second term is almost certain to mean changes at regulatory agencies. The Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the Consumer Financial Protection Bureau are all expected to see exits of high-profile leaders.

“Regardless of Trump’s actions, we may see some current appointees decide they would prefer not to serve out their terms in a Trump Administration,” Michele Alt, co-founder and managing director at financial services advisory and investment firm Klaros Group, wrote in an email.

Here are a few of the efforts and people whose time may be waning — at least in their current capacity. Read more 

Banks’ Gripes with Big Credit Unions Are Gaining Momentum

Ebrima Santos Sanneh, American Banker

Consumer advocates and banks often disagree on financial regulation, but both groups and their allies in recent months have renewed calls for federal policymakers to apply greater scrutiny towards credit unions, especially as the tax-exempt firms continue to buy banks.

“Credit union acquisitions of community banks diminish tax revenues, consolidate the industry though tax subsidies, grow the publicly subsidized sector of the financial services industry, and increase the portion of the industry exempt from Community Reinvestment Act oversight,” said Michael Emancipator, senior vice president and senior regulatory counsel at the Independent Community Bankers of America. “A Congressional hearing is necessary to ensure that the tax exemption is still being used as intended.”

The sector enjoys exemption from key financial regulations applied to banks — as well as tax-free status — premised on the unique nature of credit unions.

However, over the last decade credit unions have grown larger and more concentrated, have loosened restrictions on membership and acquired dozens of tax-liable institutions. Banks and their allies — including at least one member of Congress — have since called for Congress to review credit union regulation and taxation.

Speaking to a crowd at the American Bankers Association annual convention in late October, New York Congresswoman Claudia Tenney expressed support for Congress holding a hearing on the disparate regulation and tax burdens between banks and credit unions. Read more

12 Lessons in Predictive Modeling for Enhanced Credit Risk Assessment

Ben O’Brien, FinExtra

Modern credit risk management now leans significantly on predictive modelling, moving far beyond traditional approaches. As lending practices grow increasingly intricate, companies that adopt advanced AI and machine learning gain a sharper edge in understanding and managing risk.

Below, my colleague Nick Sime, Director of Fraud & Credit Risk Modelling, has shared essential tips from his experience. These insights are designed to help risk managers harness predictive modelling for smarter and more secure lending decisions.

1. Machine Learning models consistently outperform
Machine learning (ML) models reliably outperform traditional linear models when tested on independent samples. While the level of improvement may vary, ML models typically deliver a 10-15% uplift in Gini compared to newly developed logistic regression models. In credit risk terms, this can mean a potential 20% reduction in the bad rate at a given cut-off point.

2. Sample size matters
The larger the sample, the more ML models can identify complex, non-linear patterns, resulting in a performance boost. However, material improvements are still achievable even with smaller, low-default portfolios. Read more

Changing Conditions May Drive More Community Bank Mergers in 2025

Steve Cocheo, The Financial Brand

After a triple whammy of high rates, underwater portfolios, and an administration skeptical of mergers, community banks may see improved prospects for building scale through M&A next year. What could derail their chances? Three regulators and a Justice Department who have all decided to follow their own roadmaps.

Could community bank merger and acquisition activity accelerate in 2025 after a multi-year lull? A special report from Fitch Ratings says it’s quite possible, with the pace of that acceleration depending on how many factors that could favor M&A pan out.

On the eve of the presidential election, it would be tempting to put all the chips on the future of bank mergers on who wins the White House. And although that is a factor, it’s not that simple.

Broadly, the Federal Reserve’s plan to reduce interest rates, which began with a 50-basis point cut in September, has started a positive shift in the value of both banks’ investment portfolios and their loan holdings, according to Fitch.

This comes on top of the urgent need felt by many institutions to catch up or keep up with banking technology. From improved mobile banking apps to new core processing systems, many institutions have to gain tech ground to compete. Spreading costs over a bigger bank via merger eases the pain, Fitch points out in its late October report.

At the same time, a potential wild card — a handful of wild cards, in a sense — arises in the regulation and supervision of banking mergers at the federal level. Read more

Nov. 1, 2024: Industry & Regulation

Is the U.S. Facing a Credit Invisibility Crisis?

Tamas Kadar, Credit Union Times

Learn what can be done to improve a challenging situation that may be causing growing rates of financial exclusion.

Over the past few decades, the shift of financial services to online platforms, the introduction of new payment methods and the digitization of various services have dramatically reshaped our financial lives. Despite these advancements, certain aspects have stayed the same. One of these constants is the ongoing significance of credit. Just as in the past, maintaining “good” credit continues to be essential for individuals looking to access a broad range of financial products.

In the United States alone, according to MoneyGeek, approximately 26 million people are classified as “credit invisible,” meaning they lack sufficient credit history to be scored by traditional credit reporting systems. Additionally, another 21 million have unscorable credit, either due to insufficient information or outdated credit activity. This growing problem is affecting U.S. citizens across numerous demographics and regions. If measures aren’t implemented to rectify the situation, then we risk individuals finding themselves “excluded” from the financial system. If this were to occur, more people would be unable to access essential services, hindering economic growth, deepening poverty and limiting full participation in the modern economy, ultimately leading to greater inequality.

The Misalignment Challenge
A closer examination of the United States’ credit invisibility crisis reveals several key factors driving this shift. The most important is the growing misalignment between the financial behaviors of U.S. citizens and the criteria upon which traditional credit assessment systems are based.

For context, despite the many changes we’ve witnessed, the criteria used by traditional credit assessment systems have remained largely unchanged since the 1970s. There is a rationale behind this; credit providers have a strong incentive to ensure they are lending capital only to those who can reliably and responsibly repay it. Read more

What the Election Means for the Future of the CFPB

Kate Berry, American Banker 

The Consumer Financial Protection Bureau once again faces an uncertain future, with the outcome of the presidential election potentially taking the agency in radically divergent directions.

If former President Donald Trump wins on Nov. 5, some experts think the agency would change direction and dramatically slow down in a second Trump administration, as it did in the first. Others suggest that no one can really predict what Trump would do as president — and that he likely also can’t predict what he plans to do. Any changes would come from whomever he appoints to lead the agency.

If Vice President Kamala Harris wins, the CFPB would continue to be a major enforcer under CFPB Director Rohit Chopra, who likely would be more emboldened to enact regulations including added guidance that impacts banks, Big Tech companies and the financial services industry generally.

What has changed since the first Trump administration is that the president now has the power to fire the CFPB’s director at any time, following a 2020, Supreme Court decision.

Isaac Boltansky, managing director and director of policy research at BTIG, said that if Trump wins, “Chopra will be fired on Day 1,” which will shift the bureau’s supervisory and enforcement postures. Read more

CFPB Finalizes Personal Financial Data Rights Rule to Boost Competition, Protect Privacy, and Give Families More Choice in Financial Services

Rule will help lower prices on loans and empower people to more easily fire financial companies that provide bad service.

The Consumer Financial Protection Bureau (CFPB) finalized a rule that will give consumers greater rights, privacy, and security over their personal financial data. The rule requires financial institutions, credit card issuers, and other financial providers to unlock an individual’s personal financial data and transfer it to another provider at the consumer’s request for free. Consumers will be able to more easily switch to providers with superior rates and services. By fueling competition and consumer choice, the rule will help lower prices on loans and improve customer service across payments, credit, and banking markets.

Today’s rule ensures consumers will be able to access and share data associated with bank accounts, credit cards, mobile wallets, payment apps, and other financial products. It aims to address market concentration that limits consumer choice over financial products and services. Consumers will be able to access, or authorize a third party to access, data such as transaction information, account balance information, information needed to initiate payments, upcoming bill information, and basic account verification information. Financial providers must make this information available without charging fees. Read more

NCUA Posts 2025–2026 Proposed Budget, Sets Nov. 22 Public Briefing 

Agency Accepting Comments and Budget Briefing Presentation Requests

The National Credit Union Administration’s staff draft budget for 2025–2026 is now available on the agency’s website for review and comment. The NCUA has also submitted the proposed budget for publication in the Federal Register, and the comment period remains open until November 27.

The proposed combined 2025 budget is $433.0 million, a 12.2 percent increase from the 2024 budget. The 2025 combined staff draft budget is $0.3 million lower than the 2025 funding level previously approved by the NCUA Board as part of the two-year 2024–2025 budget.

The NCUA’s 2025–2026 staff draft budget justification includes three separate budgets. The proposed operating budget is $419.3 million, which is 12.0 percent higher than in 2024. The proposed 2025 capital budget is $8.2 million, or 32.6 percent higher than in 2024. The proposed Share Insurance Fund administrative budget is $5.5 million, or 7.0 percent higher than in 2024. The proposed budget summary and detailed budget justifications can be found on the Budget and Supplementary Materials page on NCUA’s website.

The agency will hold a public budget briefing at its Central Office on Friday, November 22, beginning at 10 a.m. Eastern. The meeting will be livestreamed on NCUA.gov.

To comment on the proposed budget:

  • Submit comments on Docket # NCUA-2024-0135 at the Federal eRulemaking Portal by November 27.
  • Comments should provide specific, actionable recommendations.

To request to present at the November 22 budget briefing:

  • Email your request to [email protected] by November 13.
  • Include the presenter’s name, title, affiliation, mailing address, email address, and telephone number.
  • The Board Secretary will notify approved presenters and give them their allotted presentation times.
  • Email a copy of your presentation to [email protected] by 1 p.m. Eastern on November 18.

The NCUA Board will consider the 2025–2026 budget at its December meeting.

Oct. 18, 2024: Industry & Regulation

U.S. Anti-Money Laundering Laws Are Outdated. Regulators Are Struggling with How to Modernize Them.

Dylan Tokar, Wall Street Journal

When lawmakers passed legislation intended to modernize the U.S.’s anti-money-laundering rules, many banks hoped the changes would make complying with the rules less burdensome, allowing them greater flexibility in how they allocate resources when screening for suspicious activity by customers.

As the adage goes, “Be careful what you wish for.”

Banks for years have struggled to maintain programs to effectively manage money laundering risks. Such programs are expensive and the costs of failing to maintain them can also be high. Last week, TD Bank agreed to pay $3 billion in penalties and limit its U.S. growth for failing to properly monitor and prevent cash deposits by Chinese criminals tied to the sale of fentanyl and other illicit drugs.

In charging documents, prosecutors alleged TD had maintained an anti-money laundering program that looked adequate on paper but failed in a number of crucial areas. TD executives enforced a “flat cost paradigm,” according to the Justice Department, which prevented its anti-money-laundering budget from growing despite an increase in both profit and risk.

For years, banks have looked for more guidance from regulators about how to best allocate resources toward stopping financial crime. This year, the U.S. Treasury Department took a long-awaited step toward updating the patchwork of rules and regulations designed to keep dirty money out of the financial system. The department’s financial crimes bureau has been under instruction to update its regulations since Congress passed the Anti-Money Laundering Act of 2020. Read more

On the Road to 2035, Banking Will Walk One of These Three Paths

Garret Reich, The Financial Brand

The banking landscape of 2035 could take dramatically different shapes, according to a recent Economist Impact report. Three scenarios emerge: traditional banks reinventing themselves to regain trust, climate action reshaping the entire financial sector, and a fragmented world with competing regional financial systems. Each future presents unique challenges and opportunities for banks, from integrating AI and blockchain to funding the green transition or navigating geopolitical complexities. As digital transformation accelerates and global dynamics shift, banks must adapt to survive and thrive.

The report: Banking in 2035: Three Possible Futures Source: Economist

Why we picked it: Understanding the possible futures of the banking industry is vital for strategic planning and long-term decision-making. The scenarios outlined below — from digital transformation and rebuilding trust, to climate-driven changes and global fragmentation — highlight the complex challenges and opportunities that lie ahead. By exploring these potential outcomes, bankers can better prepare their institutions to adapt and thrive in an uncertain future. Moreover, the report emphasizes the expanding role of banks in addressing global challenges, suggesting that financial institutions may need to redefine their purpose and value proposition in the coming decades.

Executive Summary
Economist Impact’s latest report walks through three different potential scenarios that the banking sector will zero in on by 2035. Each paints a vivid picture of how technological advancements, shifting consumer expectations and evolving global dynamics could reshape the financial world as we know it. Read more 

CFPB Says Buy Now, Pay Later Firms Must Comply with U.S. Credit Card Laws

Hugh Son, CNBC

Key Points

  • The Consumer Financial Protection Bureau declared on Wednesday that customers of the burgeoning buy now, pay later industry have the same federal protections as users of credit cards.
  • The agency unveiled what it called an “interpretive rule” that deemed BNPL lenders essentially the same as traditional credit card providers under the decades-old Truth in Lending Act.
  • The BNPL market is dominated by fintech firms like Affirm, Klarna and PayPal.

The Consumer Financial Protection Bureau declared on Wednesday that customers of the burgeoning buy now, pay later industry have the same federal protections as users of credit cards. The agency unveiled what it called an “interpretive rule” that deemed BNPL lenders essentially the same as traditional credit card providers under the decades-old Truth in Lending Act.

That means the industry — currently dominated by fintech firms like Affirm, Klarna and PayPal — must make refunds for returned products or canceled services, must investigate merchant disputes and pause payments during those probes, and must provide bills with fee disclosures.

“Regardless of whether a shopper swipes a credit card or uses Buy Now, Pay Later, they are entitled to important consumer protections under long-standing laws and regulations already on the books,” CFPB Director Rohit Chopra said in a release. Read more

ABA Letter to NCUA on Credit Union Transparency

The American Bankers Association (ABA) commends the National Credit Union Administration (NCUA) for its renewed focus on credit union transparency. As credit unions grow and become more complex, proper disclosure of pertinent information to credit union member-owners and the public gains importance. In addition to recent reporting changes for credit unions with more than $1 billion in assets regarding fee practices, a new proposal on executive compensation transparency for federal credit unions will provide greater accountability within the credit union system. With the White House Office of Management and Budget indicating that the NCUA may issue a Notice of Proposed Rulemaking as soon as this month, we urge the NCUA to implement additional transparency requirements relating to the increasingly complex and concerning activities of some credit unions, namely merger transactions involving banks. Specifically, we urge the NCUA to require such credit unions to receive membership approval, disclose financial terms, and demonstrate how combinations with banks might impact consumers, communities, and taxpayers.

In 2007, the NCUA organized an Outreach Task Force in response to inquiries from Congress – and a subsequent report by the Government Accountability Office – on credit unions. Among other topics, the Task Force examined NCUA policies and procedures on senior executive compensation. Although state-chartered credit unions disclose compensation data for key employees through IRS Form 990 like most other nonprofit organizations, federal credit unions are exempt from doing so given their status as federal instrumentalities. In its 2008 report to the NCUA Board, the Task Force concluded that disclosure of senior executive compensation would be “consistent with prevalent public policy and should enhance accountability to the [credit union] members,” and align with “federal credit unions’ member-owned, democratically-controlled status.” Read more

Oct. 11, 2024: Industry & Regulation

OPINION: The Case for The Multiple Common Bond Credit Union Charter 

Sam Brownell, CUCollaborate/tyfone

The landscape of credit union chartering has evolved, and one charter type stands out for its performance, growth potential, and strategic advantages: the Multiple Common Bond (MCB) charter. While community charters have traditionally been favored for their seemingly expansive reach, MCB credit unions are proving themselves as a better, more adaptable option. In fact, most of the largest and fastest-growing credit unions in the country operate under this charter, capitalizing on its unique benefits.

This article explores why credit unions with a multiple common bond charter are outperforming community charters and how they offer unparalleled opportunities for organic and inorganic growth.

Multiple Common Bond vs. Community Charters: A Performance Edge
Data from 2010 to 2020 reveals a clear trend: multiple common bond credit unions consistently outperform their community charter counterparts across several key metrics.

  • Growth
    MCB credit unions have shown higher growth rates than community charters. Adjusted for mergers, MCBs grew at an average rate of 6.4%, compared to 6.0% for community charters. When adjusted for inflation, the difference becomes more pronounced, with MCBs growing at 4.7% versus 4.2% for community charters. This suggests that MCBs are more effective at expanding their reach and services to their communities.
  • Loans and Member Service
    MCB credit unions are more engaged in lending, with 65.1% of their assets allocated to loans, compared to 62.3% for community charters. This means MCBs are better at meeting the credit needs of their members, offering more loan products, and at better rates than both banks and community charter credit unions. Read more
Mortgage Bankers Associations Leads Effort to Close Racial Home Ownership Gap

Dave, Kovaleski, Financial Regulation News

The Mortgage Bankers Association (MBA) along with 13 other leading industry groups formed a new organized charged with developing solutions to close the racial home ownership gap in America.

The initiative, called the CONVERGENCE Collaborative, will deploy more than $1 million annually over the next three years to build on the existing network of CONVERGENCE sites focused on expanding minority homeownership. The current CONVERGENCE cities – Memphis, Tennessee, Columbus, Ohio, and Philadelphia – are part of a major initiative launched by MBA in 2019.

“The barriers to minority homeownership require a collective effort. In recognition of this challenge, we believe the approach embodied in the CONVERGENCE framework can have a greater impact with this new industry partnership,” Bob Broeksmit, MBA’s president and CEO, said. “By working together, we can produce more and faster results that will reduce the racial homeownership gap.”

Along with MBA, the collaborative consists of the American Land Title Association (ALTA), DHI Mortgage, Fannie Mae, Fifth Third Bank, Freddie Mac, Lennar Mortgage, National Association of Realtors (NAR), Navy Federal Credit Union, Pulte Financial Services, Taylor Morrison Home Funding, U.S. Mortgage Insurers (USMI), and Wells Fargo Home Lending.

The national homeownership rates of Blacks and Hispanics have lagged that of Whites by well over 20 percent, on average, over the years. Despite significant public, private, and non-profit investments, these gaps have remained stubbornly high. Read more

As the Fed Trims Rates Banks Must Adjust Both Deposit and Credit Strategies

Vincent Clevenger, Darling Consulting Group/The Financial Brand

The common wisdom may be that falling short-term rates will ease funding pressures and eventually expand margins. But there’s much more going on. Banks will see significant shifts on both sides of the balance sheet and must be nimble. Key decisions on loan repricing and refinancing of existing loans are on the horizon.

The long-awaited Federal Reserve easing cycle started with a 50 basis point cut at the September policy meeting. Chairman Jerome Powell asked observers to view the “50 basis point move today as a commitment to us not falling behind.” Did the “us” — the Federal Open Market Committee — finally grant bankers their wish?

Well, maybe. Or maybe not.

Let’s not forget that back in July 2021, Powell remarked that inflation was “transitory.” By the fall, he acknowledged that the word was no longer appropriate. Clearly, a lot can change quickly.

While the recently updated FOMC “Dot Plot” indicates the direction of future rates, the pace and degree to which the FOMC reduces rates are fodder for great debate. Might the FOMC thread the needle and orchestrate the desired “soft landing”? Or will history repeat itself with a recession as it did the last two times the FOMC started an easing cycle with the “outsized” 50 basis point cut (2001 & 2007)?

What happens from here is anyone’s guess. For most community banks, an easing cycle from the Federal Reserve is a welcome development. Read more

FHFA Publishes Credit Risk Management Guidance

Orrick, Herrington & Sutcliffe LLP, JD Supra

On September 27, the FHFA published Advisory Bulletin AB 2024-03 which provided guidance to FHLBanks on establishing and maintaining a member credit risk management framework. The bulletin highlighted the importance of FHLBanks’ underwriting and credit decisions being based on a member’s financial condition rather than relying on the collateral securing the member’s credit obligations. The guidance was divided into four key components to ensure sound credit risk management practices.

Credit risk governance: Requires the board of directors or a designated board-level committee to approve policies that ensure staff appropriately assess and manage member creditworthiness. The FHFA suggested these policies must emphasize that a member’s financial health and capacity to repay are the primary determinants for extending credit.

Member credit assessment: Involves a process of risk identification, measurement and methodologies to generate credit scores complemented by risk-based credit reviews. Quantitative factors for depositories should address all Uniform Financial Institutions Rating System (UFIRS) components, including, among other things, capital position, asset quality, income performance, liquidity and financial trends. Qualitative factors should include management character, corporate structure complexity, business models with concentrations in high-risk products, and industry conditions. Read more

Oct. 4, 2024: Industry & Regulation

U.S. Home Insurance Rates Are Rising Fast – Hurricanes and Wildfires Play A Big Role, But There’s More To It

Andrew J. Hoffman, Professor of Management & Organizations, Environment & Sustainability, and Sustainable Enterprise, University of Michigan

Millions of Americans have been watching with growing alarm as their homeowners insurance premiums rise and their coverage shrinks. Nationwide, premiums rose 34% between 2017 and 2023, and they continued to rise in 2024 across much of the country. To add insult to injury, those rates go even higher if you make a claim – as much as 25% if you claim a total loss of your home.

Why is this happening?
There are a few reasons, but a common thread: Climate change is fueling more severe weather, and insurers are responding to rising damage claims. The losses are exacerbated by more frequent extreme weather disasters striking densely populated areas, rising construction costs and homeowners experiencing damage that was once more rare.

Parts of the U.S. have been seeing larger and more damaging hail, higher storm surges, massive and widespread wildfires, and heat waves that kink metal and buckle asphalt. In Houston, what used to be a 100-year disaster, such as Hurricane Harvey in 2017, is now a 1-in-23-years event, estimates by risk assessors at First Street Foundation suggest. In addition, more people are moving into coastal and wildland areas at risk from storms and wildfires. Just a decade ago, few insurance companies had a comprehensive strategy for addressing climate risk as a core business issue. Today, insurance companies have no choice but to factor climate change into their policy models.

Rising damage costs, higher premiums
There’s a saying that to get someone to pay attention to climate change, put a price on it. Rising insurance costs are doing just that. Increasing global temperatures lead to more extreme weather, and that means insurance companies have had to make higher payouts. In turn, they have been raising their prices and changing their coverage in order to remain solvent. That raises the costs for homeowners and for everyone else. Read more

Credit Unions Buying Banks to Get Added Scrutiny in FDIC Reviews

Evan Weinberger, Bloomberg Law

  • Credit union-bank deals make up growing part of M&A market
  • Banks say credit unions have fewer regulatory, tax mandates

A key US financial regulator is planning to take a closer look at credit unions snatching up community banks as those M&A deals reach a record high in 2024.

The Federal Deposit Insurance Corp., in bank merger guidelines issued Sept 17., said it may for the first time require credit unions to provide more information on proposed bank deals so the agency can assess whether they serve community needs. Credit unions aren’t subject to the Community Reinvestment Act, a 1977 anti-redlining law that measures banks’ lending and investments in low- to moderate-income communities.

The result is likely to be a “longer regulatory approval process for some of these deals that they’re going to take a little bit harder look at,” said Cole Schulte, a director at Wilary Winn, a Minnesota advisory firm that provides M&A services to banks and credit unions. The FDIC said it’s also going to include credit unions and other nonbank competitors when considering competition factors in bank deals, particularly in rural areas.

The tougher look at credit union-bank deals sets up potential splits between banking regulators and the National Credit Union Administration, which oversees federal credit unions, as the Biden-Harris administration ratchets up its scrutiny of bank tie-ups across the board.

“There could be disagreement there,” said Mickey Marshall, assistant vice president and regulatory counsel at the Independent Community Bankers of America. An NCUA representative declined to comment for this story.

Booming Business
Credit unions began buying banks around 14 years ago, said Michael Bell, the leader of Honigman LLP’s financial institutions practice, who worked on that first deal. Since then, Bell says he’s represented credit unions in 70 mergers with banks. “The pace is outrageous,” Bell said. There were 14 credit union-bank deals worth around $8.24 billion in total target assets from Jan. 1 through Aug. 19, according to S&P Global. That compares with 11 transactions totaling $1.88 billion in assets last year and 14 deals in 2022 worth $5.15 billion in assets, S&P Global said. Read more

Corporate Transparency Act Litigation Update: Eleventh Circuit Hears Argument, and District of Oregon Rejects Preliminary Injunction Enjoining CTA Enforcement

Peter D. Hardy, Chesley Burruss & Siana Danch, Ballard Spahr/Money Laundering News

Various industry groups have filed lawsuits in multiple federal districts challenging the constitutionality of the Corporate Transparency Act (“CTA”). The first such suit, filed in the Northern District of Alabama, resulted in a ruling by the District Court that the CTA was unconstitutional because Congress lacked the authority to enact the CTA. The government appealed this ruling, and the Eleventh Circuit heard oral argument on Friday, September 27. As we discuss below, the tenor of the argument suggests, although hardly compels, the conclusion that the Eleventh Circuit will reverse the holding of the District Court.

Further, one week prior to the oral argument, on September 20, the District of Oregon rejected a motion for preliminary injunction to enjoin enforcement of the CTA, finding in part that plaintiffs had failed to show a likelihood of success on the merits in regards to a broad spectrum of constitutional claims. Although the District of Oregon did not issue a dispositive ruling on the merits, given the particular procedural posture of the case, the tenor of the opinion strongly suggests that plaintiffs’ lawsuit faces an uphill battle, at best.

Given the importance of the CTA and the existence of several other similar lawsuits in other federal districts challenging the CTA, both of these developments have been watched closely. FinCEN has estimated that over 30 million existing entities need to file reports regarding their beneficial owners (“BOs”) under the CTA by January 1, 2025. FinCEN also has indicated that, to date, only a small percentage of covered entities have done so. To the extent that entities may have been waiting to file their reports until a more clear picture of the CTA litigations materializes, they presumably should stop waiting.

Although it is possible that a circuit split could develop, and that the U.S. Supreme Court ultimately could address and resolve the constitutionality of the CTA, the CTA still remains in force—with the current exception of entities affected by the District of Alabama ruling—and presumably will remain in force past January 1, 2025. Read more

House Reps. Introduce Bill to Help Improve Credit Scores

Dave Kovaleski, Financial Regulation News

U.S. Reps. Don Bacon (R-NE) and Marie Gluesenkamp Perez (D-WA) recently introduced bipartisan legislation that seeks to reverse federal law to report medical payments on credit reports.

Currently, medical debt negatively affects credit scores, but making payments on this debt does not improve credit scores. This bill, the Reporting Medical Debt Payments as Positive Consumer Credit Information Act of 2024 (H.R. 9890), will reverse those limitations in federal law by accepting medical payments positively to improve an individual’s credit score.

“Medical bills shouldn’t affect an individual’s credit score,” Bacon said. “I do not support individuals getting penalized for medical bills being paid through payment plans. Some medical bills can cost thousands of dollars, if not more. Healthcare is one of the most unaffordable insurances for individuals.”

It is designed to help Americans with debt build their credit. In addition, credit companies, health insurance, hospitals, and patients agree that this bill will help Americans by relieving medical expenses.

“If you’re working hard to pay off your medical bills, you should be able to see it reflected in your credit score,” Gluesenkamp Perez said. “Reporting positive progress on medical debt will help working families across Southwest Washington build credit for the future in spite of the financial strain of unexpected medical expenses.”

Sept. 27, 2024: Industry & Regulation

House Advances Bill Package That Seeks to Adopt Changes to Financial Regulations

The U.S. House of Representatives advanced legislation last week that targets changes to financial regulations.

The Prioritizing Economic Growth Over Woke Policies Act (H.R. 4790), is a package of bills spearheaded by Rep. Bill Huizenga (R-MI), the chairman of the Republican ESG Working Group Subcommittee within the Financial Services Committee.

Huizenga, along with Reps. Bryan Steil (R-WI), Ralph Norman (R-SC), and Barry Loudermilk (R-GA) introduced the package of bills, which include Huizenga’s GUARDRAIL Act, Steil’s Protecting Retirement Savings from Politics Act, Norman’s Businesses Over Activists Act, and Loudermilk’s American FIRST Act.

Huizenga’s bill seeks to prevent regulators from mandating the disclosure of non-material ESG information.

“House Democrats have proposed legislation to require public companies to disclose non-material information—including information related to climate and emissions, human capital, and ‘equity’—none of which have a substantial impact on a given firm’s financial performance. None of these proposals were enacted into law,” Huizenga said. “More recently, Chair Gensler’s rogue SEC has overstepped its authority by pursuing rulemakings to mandate similar non-material disclosures. This includes finalizing the disastrous Climate Disclosure Rule earlier this year. Let me be clear, if this information is material to a business’ financial performance, it’s already required to be disclosed under the materiality standard.”

Loudermilk’s American Financial Institution Regulatory Sovereignty and Transparency (American FIRST) Act will mandate enhanced reporting requirements for Federal banking regulators, while Steil’s Protecting Americans’ Savings from Politics Act will regulate proxy advisors. Read more

Banks Most at Risk of Failing Share These Three Red Flags

Allissa Kline, American Banker

Bank failures are remarkably predictable, and the banks that have collapsed historically — including those that failed during the latter part of the 19th century — typically show the same warning signs, according to a new academic paper.

Failures are overwhelmingly the result of three factors: deteriorating solvency over several years, increasing reliance on costly non-core funding and rapid growth during the decade before the failure, co-authors Sergio Correia, Stephan Luck and Emil Verner state in the study, published this month by the National Bureau of Economic Research.

Correia and Luck are economists at the Federal Reserve Board and the Federal Reserve Bank of New York, respectively. Verner is an associate professor of finance at the Massachusetts Institute of Technology’s Sloan School of Management and a faculty research fellow at NBER.

Taken together, the three factors imply that it’s possible to predict which banks are at the highest risk of failure, Verner said in an interview. That data should help mitigate that risk, he said.

The trio’s research, which includes data going back to 1865, is the latest contribution to the discourse on bank failures, which has been a hot topic since the spring of 2023, when Silicon Valley Bank, Signature Bank and First Republic Bank became three of the four largest bank failures in U.S. history. Each of those banks experienced a massive deposit run prior to failing, but as the paper points out, runs tend to be a consequence of weaker fundamentals. Read more

OPINION: Regulators Aren’t Enabling Risk by Reproposing Basel – They’re Following the Law.

Francisco Covas, Banking Policy Institute

A recent Bloomberg editorial criticized bank regulators for mitigating a proposal to require larger banks to significantly increase their capital levels. The editorial argues that the current capital requirements are insufficient, arguing that banks historically held much higher equity ratios and that academics recommend funding at least 15 percent of assets with equity.

This post rebuts the editorial by making four key points. First, it clarifies the difference between risk-based capital ratios and leverage ratios, which the editorial conflates or misunderstands. Second, it demonstrates that current capital levels are adequate by citing data showing U.S. banks’ capital ratios have doubled since the financial crisis and fall within the optimal range suggested by academic studies. Third, it explains that industry opposition to the Basel proposal stems from procedural concerns and lack of evidence justifying the increase in capital requirements. Finally, it notes that while the industry supports removing the AOCI filter to address issues similar to those in recent bank failures, most of the Basel proposal is not related to the causes of these failures.

Issue #1: Conflating Different Capital Requirements
The editorial appears to confuse leverage ratios with risk-based capital ratios, though it does not cite any specific requirement. These two kinds of capital requirements have an important distinction. A leverage ratio treats all assets equally, while a risk-based ratio assigns different weights to assets based on their perceived risk. For example, risk-based ratios assign a risk weight of zero to banks’ deposits at the Federal Reserve — which are riskless, fully liquid assets — whereas leverage ratios would assign a risk weight of 1, requiring the bank to hold the same amount of capital as it would for a subprime loan.

Currently, risk-based requirements vary by the size, risk, complexity and systemic importance of a bank, ranging between 7 percent and 18.4 percent of risk-weighted assets. Read more

Related Reading: Lawmakers Fret Over Capital Requirements Uncertainty
FinCEN Publishes Beneficial Ownership Reporting Outreach and Education Toolkit

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued another resource to familiarize small business owners with beneficial ownership reporting requirements. These reporting requirements are mandated by the Corporate Transparency Act, a bipartisan law enacted to curb illicit finance by supporting law enforcement efforts. This law requires many small businesses to report basic information to the Federal government about the real people who ultimately own or control them.

The toolkit contains templates and sample content that has been structured to allow private, public, and non-profit organizations to share and amplify this important information. The toolkit includes general background on the reporting requirements, as well as templates for newsletters, websites, and emails; sample social media posts and images; and information on how to contact FinCEN.

The toolkit furthers FinCEN’s outreach efforts to inform small businesses of the reporting requirements. To date, FinCEN has issued guidance, FAQs, videos, and other materials to make compliance as easy as possible. In addition, senior FinCEN officials continue to meet with small business owners and other key stakeholders nationwide to help small businesses fulfill their reporting requirements.

Filing is quick, secure, and free of charge. It is not an annual requirement—unless a company needs to update or correct information, it only needs to file once. FinCEN expects that most companies will be able to file without the help of an attorney or accountant, and that the filing process for those with simple ownership structures may take 20 minutes or less. Companies that existed before 2024 have until January 1, 2025 to file, while companies created or registered in 2024 must file within 90 days of receiving creation/registration notice. More information, along with FinCEN’s E-Filing System, is available at https://www.fincen.gov/boi.

 

Sept. 20, 2024: Industry & Regulation

Unlocking Climate Solutions at Scale Through Blended Finance

Luis Alvarado, Yvonne Leung, & Pak Yin Choi; World Economic Forum

  • Blended finance connects interests across the capital stack to achieve climate goals by leveraging private sector investment.
  • Public-private-philanthropic partnerships can unlock untapped capital and accelerate green market transformations.
  • Philanthropies play a critical role in reducing risk, enhancing market incentives, and advocating for policy changes.

The failure to solve the climate crisis so far is not the result of a lack of resources. While the trillions of dollars needed for low emission, climate resilient development drastically exceeds that of all international aid funding in the world – amounting to approximately 20 times the budgets – this level of capital exists in the private sector and institutional investors. Market conditions, however, create obstacles and restrictions that make it unfeasible for these actors alone to achieve the impact required for systemic transformation.

The right collaborations, on the other hand, can break through these barriers and open new pathways that unlock untapped capital for climate and nature solutions. Partnering with philanthropic organisations that provide catalytic capital can bring new fresh ideas, remove obstacles for market players, unlock stalled processes, convene communities, mobilise civil society, and in occasions use de-risking tools or participate in capital stacks (though this is rare due to the scarce nature of such capital).

By combining the diverse tools that philanthropy offers with government policy instruments and corporate purchasing power and value chain signals, we can stand a chance at sector-side transformations, in shorter periods of time. These types of public-private-philanthropic constructs can act as “acupuncture points” to put pressure to help pave an enabling environment to crowd in institutional investors, who are the ones with the ability to turn these green market transformations, into the new realities. Read more

What to Know About Rule 1033 as Open Banking Continues to Evolve

Pymnts.com

Open banking — relatively well-entrenched in Europe, nascent here in the United States — is taking shape largely by directive, through regulations and standards that give a roadmap to how financial data is permissioned by consumers and shared with financial services providers.

At the center of it all in the U.S. is a proposed rule offered up last year by the Consumer Financial Protection Bureau (CFPB). And though the rule is known, variously as “Rule 1033” or as “Section 1033,” the scope and ultimate aims of the rule-making might be a bit murky, so it all requires a deep dive.

Simply put, financial institutions (FIs) must offer the technological interfaces for third parties to access consumers’ data, and by extension enhance the competitive playing field as providers seek to keep customers on board while broadening their reach.

What It Is
The CFPB rule traces its beginnings to the aftermath of the financial crisis and the Great Recession, and the Dodd-Frank Act that sought to reform Wall Street and financial services regulation. That act created the CFPB and it also contained language tied to Section 1033, which at a high level dictates that, per the CFPB, “consumer financial services provider[s] must make available to a consumer information in the control or possession of the provider concerning the consumer financial product or service that the consumer obtained from the provider.” The data that can be permissioned, and made available span everything from credit cards to deposits to transaction level data. Read more

U.S. Watchdog Warns Banks About Customer Consent for Overdraft Fees

Douglas Gillison, Reuters

The top U.S. regulator for consumer finance on Tuesday published legal guidance that it said would help stop banks from charging overdraft fees to customers who had not genuinely consented to the practice. Federal law prohibits charging overdraft fees on ATM and one-time debit card transactions unless consumers have given express consent, but the agency has found instances of “phantom opt-in” agreements, according to the U.S. Consumer Financial Protection Bureau.

THE TAKE
The new guidance, which is not a regulation but explains the agency’s reading of existing laws, marks the CFPB’s latest effort to rein in the consumer banking industry’s myriad fees and costs to depositors and borrowers.

KEY QUOTE
“The CFPB has found instances where banks have no evidence that they obtained consent for overdraft,” CFPB Director Rohit Chopra said in a statement. “No Americans should be hit with bank account fees that they never agreed to.”

CONTEXT
The CFPB has played a central role in the Biden administration’s drive to tackle “junk fees” and alleged corporate price gouging at a time when Republicans have hammered Biden over increases in the cost of living. The agency has also moved to limit late fees on credit card payments, prompting stiff industry opposition, and punished major banks over fees charged to customers and the misreporting consumer credit data.

Cannabis Giant Green Thumb Secures $150M Credit Facility, ‘Strengthens Our Already Clean Balance Sheet’

Jelena Martinovic, Benzinga

Key Points

  • Green Thumb, the owner of RISE Dispensaries announced Thursday that it has closed on a $150 million 5-year syndicated credit facility.
  • Green Thumb plans to use proceeds along with existing cash to retire its $225 million senior secured debt due April 30, 2025.

Green Thumb Industries Inc. GTII GTBIF, the owner of RISE Dispensaries announced on Thursday it has closed on a $150 million 5-year syndicated credit facility led by Valley National Bank, the principal subsidiary of Valley National Bancorp.

What Happened: The notes have a maturity date of Sept. 11, 2029 and will bear interest from the date of issue at a secured overnight financing rate (SOFR) + 500 basis points, payable quarterly. The company said the transaction did not involve the issuance of any Green Thumb equity to any of the participating banks.

Why It Matters: The Chicago-based cannabis consumer packaged goods company plans to use proceeds along with existing cash to retire its $225 million senior secured debt due April 30, 2025.

Ben Kovler, the company’s founder, chairman and CEO called the financing deal “a first-of-its-kind credit facility for the U.S. cannabis industry.” “This new capital funding further strengthens our already clean balance sheet for another five years,” he said. Read more

Sept. 13, 2024: Industry & Regulation

FinCEN Issues In-Depth Analysis of Check Fraud Related to Mail Theft

Financial Institutions Reported More Than $688 Million in Suspicious Activity in the Six Months Following FinCEN’s Alert on Mail Theft-Related Check Fraud

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis (FTA) on mail theft-related check fraud incidents based on Bank Secrecy Act (BSA) data filed in the six months following FinCEN’s issuance of its 2023 alert on this same topic. During the review period, FinCEN received 15,417 BSA reports from 841 financial institutions on mail theft-related check fraud, amounting to more than $688 million in reported suspicious activity.

“Financial institutions responded to FinCEN’s alert on mail theft-related check fraud by providing BSA filings that are critical to curtailing this egregious fraud that is affecting communities across the United States,” said FinCEN Director Andrea Gacki. “FinCEN values its ongoing collaboration with the United States Postal Inspection Service (USPIS) to raise awareness of this criminal activity impacting innocent Americans across the country.”

“The U.S. Postal Inspection Service welcomes FinCEN’s latest FTA and continuing collaboration with FinCEN to identify the perpetrators of these crimes,” said Chief Postal Inspector Gary R. Barksdale. “The FTA demonstrates the severity of mail theft-related check fraud and why fraud is a high priority, while also highlighting the important role that financial institutions play in reporting information pursuant to the Bank Secrecy Act to assist in bringing fraudsters to justice. Suspicious Activity Reports are a valuable tool utilized by Postal Inspectors for not only targeting criminal networks and their illegally derived assets, but they also aid in the identification of victims. Postal Inspectors are committed to helping financial crime victims using all available resources and aim to ultimately make these victims whole through restitution.” Read more

FDIC Takes Hard Look at ‘For Benefit Of’ Accounts

The ties that bind banks and FinTechs will be more closely watched by the Federal Deposit Insurance Corporation (FDIC), and a formal proposal/rule from the regulatory agency, governing accounts in banking-as-a-service relationships, may come sooner rather than later.

As reported this week by news outlets including Bloomberg, the focus will be on “for benefit of accounts” that are typically set up as pooled accounts that allow FinTech companies to manage funds on behalf of their users. In the meantime, the FinTechs do not wind up assuming legal ownership of the account.

The banks linking with the FinTechs are likely to be mandated to set up ledgers to more accurately track where the money is, and how much end-customer funds are on the books. And in doing so — in a bid to avoid the pitfalls and shocks of the Synapse collapse this year, where customers were locked — the banks will access that third-party ledger and reconcile data on a daily basis.

FDIC Readying for Regulation?
In a press briefing accompanying the FDIC’s latest deep dive into the second-quarter banking industry performance, FDIC Chairman Martin Gruenberg noted on Thursday (Sept. 5) that though he was not in a position to comment on any specific proposals, “the Synapse failure really illustrated the risks to banks and depositors when banks rely on third parties to be the conduit for deposits and the need for adequate record-keeping so that the banks know who the ultimate depositors are … and who is actually covered by deposit insurance is really a very important issue.”

He stressed that the record keeping and the issue of deposit insurance remain “matters of attention for the FDIC and we may consider regulatory proposals in this regard.” Read more

FHFA Releases Mortgage Loan and Natural Disaster Dashboard

Agency unveils online tool using existing information to estimate county-level damages and mortgage loan concentrations in disaster-prone areas, and to identify U.S. communities most vulnerable to natural hazards.

The Federal Housing Finance Agency (FHFA) released an online risk analysis tool that provides geographic estimates for physical risks from various types of natural disasters as well as nationwide data on housing and the mortgage market.

The tool — known as the Mortgage Loan and Natural Disaster Dashboard— is intended to give property owners, community leaders, financial institutions, policymakers, and other stakeholders better insight into which areas of the country are most likely to incur greater damages from hurricanes, flooding, wildfires, and other types of natural hazards.

Users can combine FHFA’s Public Use Database (PUDB) with data on previous disasters and other analysis from the Federal Emergency Management Agency (FEMA). They can identify areas of the country with elevated disaster risk based on several factors, and which of those areas have concentrations of properties financed with loans acquired by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Scientists widely attribute more intense storm seasons — along with higher human and financial costs — in recent years to climate risks. Tools such as FHFA’s new dashboard provide stakeholders with greater visibility of communities already facing economic challenges that are susceptible to natural disasters.

“Climate risks, especially natural disasters, pose a serious threat to housing and other critical infrastructure, particularly in vulnerable communities,” said FHFA Director Sandra L. Thompson. “Providing geographic information on disasters as well as concentrated exposures of loans acquired by our regulated entities can help policymakers and the industry develop solutions to better safeguard those communities from the impact of future catastrophes.”  Read more 

OPINION: 4 Key Considerations on ‘Evolving Bank Supervision’

Jeremy Newell, Bank Policy Institute

Last week, Acting Comptroller Michael Hsu gave a speech describing the OCC’s evolving views on bank supervision. That supervision is the focus of any policymaker’s public remarks is a welcome development; as we have described at length elsewhere, bank examination has expanded significantly in scope in recent years and is now focused largely on immaterial matters as opposed to material financial risk, and frequently works in opposition to regulatory policies established by the banking agencies’ senior leaders. Four aspects of the Acting Comptroller’s speech warrant scrutiny and further discussion.

1. Prioritizing Risk-based Supervision
In discussing the nature of supervision and the OCC’s own evolving practices, Acting Comptroller Hsu stresses the importance of a risk-based approach to supervision that eschews box-checking and checklists, focuses supervisory attention “where it is needed most” and maintains “perspective and proportionality.” As we have described elsewhere, this type of approach to bank supervision is exactly right, and, if practiced, would ensure that bank examiners’ time, attention and demands are focused on real and material sources of risk rather than on immaterial issues and process for process’s sake.

Unfortunately, and as we have also described elsewhere, the risk-based approach to supervision that the Acting Comptroller describes is exactly contrary to the lived experience of bankers today, who frequently encounter an examination culture and practices that are increasingly focused on process rather than substance, and on immaterial matters rather than material financial risk. Read more

Sept. 6, 2024: Industry & Regulation

The CFPB Asked for Public Feedback on Its Earned Wage Access Rule Proposal, and It Got an Earful.

Lynne Marek, Payments Dive

The Consumer Financial Protection Bureau was hit with a barrage of public comments last week regarding its earned wage access rule proposal ahead of a Friday deadline for that feedback.

Much of the commentary fell along the same battle lines that have been drawn for months, since before the federal agency issued its interpretive rule proposal in July labeling earned wage access payments as loans. Many companies in the industry have long argued that their services don’t constitute lending and therefore lending laws shouldn’t apply.

The federal agency took action after studying an array of on-demand pay tools that have emerged in the market, and said it aimed to help companies offering the services understand how the bureau would apply existing laws to the nascent industry.

“Paycheck advance products are often marketed to and designed for employers, rather than employees,” CFPB Director Rohit Chopra said when the rule proposal was issued. “The CFPB’s actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”

For their part, most earned wage access providers and their trade associations, including the American Fintech Council, have opposed the proposed rule. Some companies, including DailyPay, urged the CFPB in their comments to withdraw the rule. Others, including Wagestream, also criticized the agency for its rulemaking approach, saying it wasn’t meeting “fairness standards” for transparency and public comment.

The Fintech council also noted that the CFPB’s position now, under President Biden, diverged inappropriately from prior guidance issued during the Trump administration. Read more 

OCC’s Hsu: Agility and Teamwork Critical as Banks Confront New Risks

PYMNTS.com

Banks are confronting new, digital risks, and guarding against them demands a more agile, teamwork-focused approach.

Michael Hsu, acting Comptroller of the Currency, said in a Tuesday (Sept. 3) speech before the Joint European Banking Authority and European Central Bank International Conference that within financial services, “digitalization … has brought great benefits, but has also increased the risk surface for cyberattacks. At the same time, hackers, money launderers and fraudsters have become much more sophisticated. Controls and systems that were effective a couple of years ago may not be effective today.”

This week, Intellicheck CEO Bryan Lewis told PYMNTS: “We are at about four times the level of data that has been breached this year to date compared to last year. So, it is definitely a problem.”

The PYMNTS Intelligence report “Leveraging AI and ML to Thwart Scammers” found that 43% of the fraudulent transactions that financial institutions report are authorized fraud. Beyond the increased risk of cyberattacks, per Hsu, the “sheer breadth” of various banking relationships also leads to vulnerabilities.

Proliferation of Partnerships and Extended Risks
“Particularly challenging is the proliferation of bank partnerships and arrangements with nonbank third parties, who in turn often partner and rely on fourth parties,” said Hsu, adding that “the dynamic nature of interactions between banks and nonbank financial institutions and technology firms (FinTechs), which compete, support and rely on banks to varying degrees, has led to an increasingly complex nexus between banking and commerce.”

Against that backdrop, Hsu pointed to the practice of bank supervision as a “craft” — reliant on technology but also aided by a “nimble ‘team of teams’ approach” that examines liquidity, market and cyber risks across a cohort of banks. Read more

Banks Give Credit Risks an Ethical Makeover to Sell to ESG Investors

Lee Harris, Financial Times

Demand for specialised sustainable credit products has risen sharply but there is no agreed definition.

The big banks of the world have been using clever financial wheezes to offload credit risk for decades. Now they are giving some of these products a makeover in the hope of attracting ethically minded investors.

In significant risk transfers (SRTs), also known as credit risk transfers, investors assume some of the default risk on a portfolio of loans, in return for regular interest payments. This reduces the equity levels banks need to maintain against these loans, potentially enabling bigger cash payouts to shareholders or for more loans to be made.

Santander, Crédit Agricole, and Société Générale are among the banks that are now issuing SRTs with a sustainability or social impact dimension, such as using the extra lending capacity to invest in renewable energy projects.

In this way, they hope to tap demand from pension funds and other investors for products with an environmental, social, and governance (ESG) slant. However, while SRTs with ethical credentials have become more common, the industry is far from achieving a consensus on which products should count.

“There’s no standard. This is very much working with the banks on what is possible,” said Mascha Canio, head of credit and insurance-linked investments atDutch pension fund investor PGGM, one of the largest buyers of SRTs. Banks have been using SRTs since the 1990s, but issuance has grown in recent years as they have searched for new ways to offload risk in the face of stricter capital requirements. “SRT transactions done by banks, nowadays, will always have some ESG overlay, to the extent possible,” Dennis Heuer, a partner at White & Case, told the FinancialTimes.

Claims about sustainability and other ethical credentials in SRT transactions have really taken off in the past year, he added. Read more

Financial Regulators Update Examiner Guidance on Financial Institutions’ Information Technology Development, Acquisition, and Maintenance 

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The Federal Financial Institutions Examination Council (FFIEC) today issued a new booklet to help examiners assess information technology practices.

The “Development, Acquisition, and Maintenance” booklet provides examiners with fundamental examination expectations regarding entities’ development and acquisition planning and execution, governance and risk management, and maintenance and change management practices. It discusses the interconnectedness of an entity’s assets and processes and those of its third-party service providers along with information to help examiners assess whether management adequately addresses risks and complies with applicable laws and regulations.

The booklet reflects the changing technological environment and increasing need for security and resilience. It also highlights the importance of providing examiners with current information regarding safety and soundness, consumer protection, and provision of secure and resilient business services to customers. This new booklet replaces the “Development and Acquisition” booklet issued in April 2004.

The complete FFIEC Information Technology Examination Handbook is available at https://ithandbook.ffiec.gov/.

Aug. 29, 2024: Industry & Regulation

Judge Rejects Challenge to CFPB Small-Biz Data Collection Rule

Dan Ennis, Banking Dive

Trade groups argued the CFPB didn’t consider costs or bank comments regarding the rule. The rule may be ill-advised, the judge said, but that doesn’t make it unlawful.

A federal judge Monday rejected claims that the Consumer Financial Protection Bureau is overstepping its authority by requiring lenders that make at least 100 small-business loans a year to collect demographic data from borrowers, including their race and gender.

The American Bankers Association, Texas Bankers Association and McAllen, Texas-based Rio Bank had argued the CFPB’s data collection rule would increase loan costs for small businesses, failed to consider comments from banks, and was arbitrary and capricious, in violation of the Administrative Procedure Act.

“An agency does not fail to ‘consider’ a concern or suggestion simply because it reached a different conclusion,” Chief Judge Randy Crane of the U.S. District Court for the Southern District of Texas, wrote Monday. “It may well be that the final rule proves ill-advised as a policy matter, but that possibility does not itself make the final rule unlawful.”

The trade groups and Rio Bank on Monday indicated they would appeal Crane’s ruling. “Given the significant harm small business owners and financial institutions face from this rule, our legal fight challenging 1071 will not end here,” the plaintiffs said in a statement, referencing the rule’s numbered section in the Dodd-Frank Act.

The CFPB’s small-business data collection rule, issued in March 2023 to root out lending discrimination, has seen its share of pushback. The plaintiffs sued within a month, and Crane issued an injunction exempting Rio Bank and the trade groups’ members from the rule, pending the outcome of a Supreme Court case that questioned the constitutionality of the CFPB’s funding. Read more

What Hsu’s ‘Unprecedented’ Tenure at OCC Says About Banking Policy

Ebrima Santos Sanneh, American Banker

Michael Hsu has led the Office of the Comptroller of the Currency for over three years without being nominated for the permanent job, an arrangement that is unprecedented in its duration.

But some experts say it may also be an indicator that banking regulatory positions are more difficult to fill than they used to be because of heightened partisanship between parties and significant political disagreements even among members of the same party.

Todd Baker, managing principal at Broadmoor Consulting and a senior fellow at Columbia University, said the high value of Senate floor time, the OCC’s unique appointment structure and Hsu’s own political baggage go a long way toward explaining Hsu’s long term as acting Comptroller.

Hsu became Acting Comptroller of the Currency in 2021 after being appointed as the first deputy comptroller by Treasury Secretary Janet Yellen. Hsu appears to be the longest acting comptroller on record, according to the OCC website, having spent more than three years in the temporary position. The OCC did not respond to requests for comment by press time. Read more

FinCEN Issues Final Rules to Safeguard Residential Real Estate, Investment Adviser Sectors from Illicit Finance

Rules Address Critical Vulnerabilities in the U.S. Financial System, Protect National Security

Today, as part of ongoing efforts to combat illicit finance and protect U.S. national security, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued two rules to help safeguard the residential real estate and investment adviser sectors from illicit finance. Both rules deliver on key lines of effort outlined in the Biden-Harris administration’s U.S. Strategy on Countering Corruption.

The final residential real estate rule will require certain industry professionals to report information to FinCEN about non-financed transfers of residential real estate to a legal entity or trust, which present a high illicit finance risk. The rule will increase transparency, limit the ability of illicit actors to anonymously launder illicit proceeds through the American housing market, and bolster law enforcement investigative efforts.

The final investment adviser rule will apply anti-money laundering/countering the financing of terrorism (AML/CFT) requirements—including AML/CFT compliance programs and suspicious activity reporting obligations—to certain investment advisers that are registered with the U.S. Securities and Exchange Commission (SEC), as well as those that report to the SEC as exempt reporting advisers. The rule will help address the uneven application of AML/CFT requirements across this industry. Read more

Trade Groups Seek Extension on FDIC’s ‘Hot Money’ Rule

Rajashree Chakravarty, Banking Dive

Financial industry groups pushed for an extension of the comment period tied to a brokered deposit rule the Federal Deposit Insurance Corp. proposed in July.

A coalition of 11 trade groups called for an additional 60 days to provide comments on the request for information — on top of the 60-day comment period that’s typically part of the FDIC’s rulemaking process.

The comment period is meant to gather data influencing the stability and franchise value across various deposit types. The data would then be used to fine-tune deposit insurance calculations, enhance liquidity regulations and optimize other regulatory measures, the groups wrote Wednesday in a letter to the FDIC.

“It is essential then, that the FDIC have a robust and accurate data set from which to work, and that any additional reporting requirements be sensible and workable for banks of all sizes and their affiliates, particularly affiliated broker-dealers, and their customers,” the trade groups wrote. “Given the importance of the RFI and its implications for future changes … the Associations believe that an additional 60 days will provide the Associations and their members the requisite time to furnish responses and data that fulsomely address the questions and issues raised within the RFI,” the letter said. Read more