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Colorado’s DIDMCA opt-out blocked by preliminary injunction
On June 18, U.S. District Court of the District of Colorado granted a motion for preliminary injunction filed by several financial services trade associations, enjoining Colorado from enforcing Colo. Rev. Stat. § 5-13-106 with respect to any loan made by the plaintiffs’ members, to the extent the loan is not “made in” Colorado. As previously covered by InfoBytes, the enjoined provision, contained in Section 3 of Colorado HB 23-1229 and scheduled to become effective on July 1, opted Colorado out of Section 521 of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) which allowed state-chartered banks to export rates of their home state across state borders. Trade groups sued before this law went into effect (covered here), with the FDIC writing a brief in support of the Colorado Attorney General (here).
The court’s decision turned on its interpretation of DIDMCA Section 525, which allowed states to enact laws opting loans “made in” the enacting state out of Section 521, the provision granting insured state banks the same rate exportation authority as national banks. In support of their motion, the plaintiff trade associations argued that loans to Colorado residents by insured state banks located in other states were “made in” the bank’s home state or the state where key loan-making functions occur. Colorado disagreed, contending that a loan was “made in” both the borrower’s state and the state where the lender is located for purposes of applying the DIDMCA opt out provision.
In granting the preliminary injunction, the court found the argument that only a bank “makes” a loan was “more consistent both with the ordinary colloquial understanding of who ‘makes’ a loan, and, more importantly, with how the words ‘make’ and ‘made’ are used consistently throughout the text of the Federal Deposit Insurance Act, including the [DIDMCA] amendments.” The court explained that “the answer to the question of where a loan is ‘made’ depended on the location of the bank, and where the bank takes certain actions, but not on the location of the borrower who ‘obtains’ or ‘receives’ the loan.” Although the court noted that agency interpretations did not address directly how to apply Section 525 of DIDMCA, it found that “[t]o the extent the agency interpretations are helpful, they support the conclusion that in common parlance, a loan is ‘made’ by a bank and therefore where the bank is located and performs its loan-making functions” (italics omitted).
Colorado has 30 days to appeal the district court’s decision to the Tenth Circuit.
OCC report outlines key risks in the federal banking system
On June 18, the OCC published its Semiannual Risk Perspective for Spring 2024, a report assessing the health and risks of the federal banking system focusing on threats to the safety and soundness of banks and their compliance with applicable laws and regulations. In its release about the report, the OCC stated that the banking system remains sound, but recognized potential consumer difficulties due to a slowing labor market, high interest rates, and “sticky” inflation. The report encouraged financial institutions to improve continuously risk management processes, stating that it was “crucial that banks establish an appropriate risk culture that identifies potential risk, particularly before times of stress.” The information in the report was based on data up to December 31, 2023, and included a special topic, operating environment, bank performance, and trends in key risks.
According to the report, key risk themes included:
- Credit Risk: There was an increase in credit risk, particularly in the commercial real estate sector. The office sector and some multifamily properties were under stress from higher interest rates and structural changes. Loans in these sectors, especially interest-only loans due for refinancing in the next three years, pose a heightened risk.
- Market Risk: Banks were experiencing pressure on net interest margins due to deposit competition, which “may be nearing a peak.” There were challenges in risk management from potential future interest rate changes and unpredictable depositor behavior. The use of wholesale funding was growing, though more slowly, and banks face elevated unrealized losses in their investment portfolios, despite improvements.
- Operational Risk: The operational risk was high due to the evolving nature of the banking environment and cyber threats, including ransomware, were a continued threat. Digitalization and the adoption of new products and services, along with third-party engagement, increased complexities and risks. Fraud incidents and the importance of fraud risk management were also emphasized.
- Compliance Risk: Banks must navigate a dynamic environment with evolving customer preferences, and compliance risk management frameworks need to be adequate and adaptable to changes in banks' risk profiles. Fraud remained a significant risk, with check and wire fraud, and peer-to-peer transaction scams becoming more common. The OCC will continue to evaluate banks' CRA performance.
The report emphasized that these risks can be interrelated, noting that a “stress event could manifest through operational and/or financial events and have institution-specific or sector-wide impacts,” and that “[e]ach stress event may vary (e.g., operational, liquidity, credit, compliance, and other) and resiliency implications need to be proactively considered.”
OCC’s Liang discusses bank vulnerabilities and floats policies
On June 24, the U.S. Under Secretary for Domestic Finance, Nellie Liang, delivered a speech at the 2024 OCC Bank Research Symposium addressing depositor behavior, bank liquidity, and run risk. Liang discussed the spring 2023 bank runs that led to exposures in financial vulnerabilities, and highlighted how technologies and social media “amplified” these vulnerabilities as depositors withdrew their monies rapidly. When discussing the evolution of the banking model, Liang shared that, despite the spring 2023 events, deposits have steadily grown relative to GDP over the past 40 years, displaying banks’ continued benefit to provide liquidity services. Nonetheless, loans and credit lines to non-bank financial intermediaries (NBFIs) have increased.
Among other things, Liang stressed the need for supervisors and regulators to effectively monitor core vulnerabilities, like those that were the “key drivers” of recent runs and called for banks to have the operational capacity to borrow from the discount window. She further highlighted the need to increase transparency of Federal Home Loan Bank (FHLB) practices, noted how the proposal for pre-positioned collateral requirements at the discount window was promising, but raised ultimately questions regarding the type and amount of collateral required, and raised the need to re-examine deposit insurance coverage.
New York Fed releases paper on nonbanks reliance on banks
On June 20, the New York Fed released an article highlighting a recent study that revealed nonbank financial institutions (NBFIs) growth was reliant on banks for funding and liquidity insurance. The article observed that while this relationship between banks and NBFIs may result in overall growth and a wider access to financial services, it could add risks seen during financial strains like the 2007-2008 financial crisis and the Covid-19 pandemic. In response to these stressful periods, NBFIs have turned to banks, and later government agencies, for liquidity. And because the asset holdings of banks and NBFIs have become similar, any forced asset sales by NBFIs could trigger a chain reaction leading to market disruptions. According to the authors of the study, a holistic approach to the bank-NBFI relationship will be necessary to manage systemic risk and maintain financial stability.
OCC proposes revisions to its recovery planning guidelines
On June 24, the OCC proposed revisions to its recovery planning guidelines—plans for how to respond quickly and effectively to, and recover from, the financial effects of severe stress on large financial institutions. Considering the increase in withdrawals of uninsured deposits in March 2023, the OCC will expand the application of its guideline requirements to insured national banks, federal savings associations and federal branches with average total consolidated assets of $100 billion or more.
The proposed revisions also change “average total consolidated assets” as defined in the guidelines to clarify that the calculation would be based on the “total assets” line of the Call Report, not the “average total consolidated assets” line of the Call Report. The OCC said this may affect the quarter in which a bank becomes a covered bank.
The OCC further proposed to incorporate a yearly, risk-based testing standard of recovery plans to include stress scenarios that ensure “the plan’s triggers appropriately reflect the covered bank’s particular vulnerabilities and will, in practice, provide the covered bank with timely notice of a continuum of increasingly severe stress, ranging from warnings of the likely occurrence of severe stress to the actual existence of severe stress.” Testing should ensure that management and the board can confirm the bank's readiness to execute identified strategies under stress. The OCC will require that a covered bank’s recovery plan will consider appropriately both financial risk and non-financial risk (including operational and strategic risks), as well as be integrated into its risk governance functions.
Covered banks will have one year from the effective date of the amendments to comply with the new requirements. Comments must be received 30 days after publication in the Federal Register.
OCC announces enforcement actions for June 2024
On June 17, the OCC released a list of recent enforcement actions against national banks, federal savings associations, and individuals affiliated with such entities (defined as institution-affiliated parties, or IAPs). In its enforcement actions against national banks, the OCC alleged that one bank had deficient anti-money laundering (AML) and BSA controls; another pertained to a bank’s alleged unsafe or unsound practices related to the bank’s board and management oversight, including strategic planning, liquidity and interest risk management, and audit management, among other issues identified.
The announcement included two other enforcement actions against IAPs, which were generally used to “deter, encourage correction of, or prevent violations, unsafe or unsound practices, or breaches of fiduciary duty.” One was for accessing customer accounts improperly and providing information on those accounts to a third-party individual; the other was for embezzlement. Lastly, the release reported the termination of an enforcement action against a bank for unsafe or unsound practices since the bank demonstrated compliance with “all articles of an enforcement action.” More information on the OCC’s enforcement action types can be found here.
Senator Warren urges Fed vote on Basel III requirements
On June 17, in a letter to Fed Chair, Jerome Powell, Senator Elizabeth Warren (D-MA) requested information regarding discussions of potentially cutting the Basel III capital requirements in half.
Warren highlighted reports that Powell was considering reducing Basel III capital requirements and was allegedly influenced by lobbying efforts. Warren also referenced Powell's public comments suggesting significant changes or elimination of these requirements. She cited a news article detailing the Fed's alleged plan to lessen the mandated capital increase for major U.S. banks and reports of lobbying efforts, bypassing the Fed's Vice Chair for Banking Supervision, Michael Barr.
Warren expressed concern that such a move could compromise the financial stability and security of middle-class and working families, while benefiting wealthy investors and CEOs. She argued that this contradicted the purpose of the Basel III rules, which were designed to prevent financial crises.
Warren also discussed ongoing risks in the banking and financial sector, including reports of potential regional bank failures due to troubled commercial real estate loans. She challenged the arguments made by large banks against increasing capital reserves and accused Powell of taking lucrative deals following bank failures, suggesting that Powell's actions undermined the role of the Vice Chair for Banking Supervision.
Acting Comptroller Hsu addresses AI integration risks and advocates for consumer financial health measures
On June 6, Acting Comptroller of the Currency, Michael J. Hsu, delivered two statements addressing distinct concerns regarding both artificial intelligence (AI) and consumer financial health.
In the first statement at the 2024 Conference on Artificial Intelligence and Financial Stability, Hsu said that AI was capable of being a tool for innovation or a weapon that could undermine the financial system. Hsu detailed potential risks arising from AI’s deployment, such as rapid adoption without adequate controls. He advocated taking a cautious approach, with “risk management control gates” at different stages of AI integration to ensure innovations are beneficial rather than harmful. Hsu stressed the need for a shared responsibility model for AI, where accountability would be defined clearly across different stakeholders, particularly in cases of AI-enabled fraud and cyberattacks.
In the second statement, made at the Financial Health Network Emerge Conference, Hsu discussed the OCC’s engagement in enhancing consumer financial health as part of its broader goal to foster a fair and inclusive economy. Comptroller Hsu described three possible results given “clear and objective measures of consumers’ financial health”: (i) product offerings could better align with consumer needs; (ii) banks that support their customers’ efforts to improve their financial health would have better customer relationships and build trust; and (iii) improvements in mental well-being for individuals and communities.
Hsu presented the concept of Financial Health Vital Signs (FHVS) as a set of metrics—positive cash flow, liquidity buffers, and on-time payments—that could indicate consumer financial health. The OCC’s report, “Community Development Insights: How Banks Can Measure and Support Customer Financial Health Outcomes,” was introduced as a resource for banks to understand and improve their customers’ financial well-being. Hsu encouraged banks to pilot these metrics, which could lead to better product alignment with customer needs, improved financial decision-making, and reduced financial stress among consumers.
Fed seeks to renew TILA, Regulation Z information collection
On June 4, the Fed published a request for comment on a proposal to extend the “Recordkeeping and Disclosure Requirements Associated with CFPB’s Regulation Z” for three years without revision. According to the notice, the Fed’s request would support the CFPB’s Regulation Z by ensuring consumers receive detailed information about credit terms and costs, particularly in the context of residential real estate transactions, to promote informed credit use. As part of this request, the Fed will invite public comments to address the efficacy of the information collection requirements and seek ways to enhance the quality of collected information, among other things. Comments must be received by August 6.
OCC releases May CRA evaluations for 19 institutions
On June 3, the OCC released its Community Reinvestment Act (CRA) performance evaluations for May. The OCC evaluated 19 entities including national banks, federal savings associations, and insured federal branches of foreign banks. The assessment framework incorporated four possible ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 19 evaluations reported by the OCC, eleven entities were rated “Satisfactory,” and eight entities were rated “Outstanding.” There were no institutions that received a rating of “Needs to Improve.” A full list of the bank evaluations is available here. In the FAQ section regarding the implementation of the CRA, the OCC detailed how it evaluated and rated financial institutions both on an institutional level and a community level. This explanation included an examination of institutional factors such as capacity, constraints, business strategies, competitors, and peers, as well as an analysis of the characteristics of the communities served by these institutions, which covered demographic particulars, economic data, and the availability of lending, investment, and service opportunities.