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CFPB and Fed adjust dollar thresholds for Regulation CC
On May 13, the CFPB and the Fed announced inflation-adjusted changes to Regulation CC, which governed the availability of customer funds from bank deposits. The final rule altered the minimum amounts that must be made available for withdrawal by the next business day for certain types of check deposits and modified the funds from certain checks deposited into new accounts that are subject to next-day availability. Mandated by Dodd-Frank, these adjustments were based on the five-year change in the CPI for Urban Wage Earners and Clerical Workers from July 2018 to July 2023. The updated thresholds will go into effect on July 1, 2025.
New York Fed reports on community development financial institutions
On May 8, the New York Fed released a report examining both the origination and sale of loans by community development financial institutions (CDFIs) and found that loans of both types more than doubled from 2018 to 2022. According to the report, in 2022, CDFIs originated $67 billion and sold $14 billion of loans, which was a major increase since 2018, where CDFIs originated $29 billion and sold $6 billion of loans. This doubling also contributed to some market concentration: The 10 most active CDFIs in 2022 originated over 25 percent of the total origination volume and 75 percent of the total sold loan volume. The report stressed “nearly all loan sales to Ginnie Mae and life insurance companies” were sold from the most active sellers.
On breakdown, the New York Fed found residential (single family) loans as the highest volume collateral data type, far outpacing lines of credit, multifamily, commercial real estate, and business. There were also a high number of CDFI originations in California and Florida, and credit unions were the most active originators over banks, thrifts, or loan funds.
On May 14, a member of the Fed Board of Governors Lisa Cook spoke on how CDFIs impact communities positively and some of the challenges CDFIs face. Cook noted specifically that CDFIs often “continue their work with borrowers even after loans are made… helping them through rough spots, should borrowers experience difficulty repaying loans,” which were unique among the CDFI borrower-banking relationship. On challenges, Cook noted how demand for capital was outpacing the current supply: Federal funding tied to past pandemic relief programs have dried up, leading to the challenge of building out long-term capital sources for future CDFI demand. She closed by emphasizing the importance of the CDFI industry and her continued support of CDFIs.
Agencies issue NPRM on incentive-based compensation
On May 6, the FDIC, OCC, NCUA and the FHFA issued a NPRM (proposed rule) on incentive-based compensation, pursuant to Dodd-Frank’s Section 956 (Section 956), which required federal regulators to prescribe regulations or guidelines regarding incentive-based compensation at covered financial institutions. Regulators first proposed a rule to implement Section 956 in 2011, and again in 2016. Now, regulators are reproposing the 2016 version without change, albeit with certain alternatives. The current proposal, however, will be published without involvement from the Fed or SEC.
Section 956 defined “covered financial institutions” as institutions with at least $1 billion in assets and include the following: depository institutions or depository institution holding companies, registered broker-dealers, credit unions, investment advisers, Fannie Mae, and Freddie Mac (or any other financial institution that federal regulators determined should be treated as a covered financial institution). Dodd-Frank required regulators to prohibit incentive-based compensation arrangements that encouraged “inappropriate risks.” The proposed rule included prohibitions intended to make these compensation arrangements more sensitive to risk, such as a ban on incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, or forfeiture and clawback provisions. In addition, the proposed rule set forth recordkeeping and disclosure requirements to help federal regulators monitor potential issues.
The agencies will review both new comments and those received in 2016 for the prior proposed rule. The agencies invited those who previously submitted comments and resubmit their comments to explain how their viewpoint may have changed from their prior comments. The agencies also requested comments on the compliance date and disclosures, like the recordkeeping and clawback requirements. Comments will be due no later than 60 days following publication in the Federal Register.
Fed, OCC, and FDIC release third-party risk management report for community banks
On May 3, the Fed, OCC, and FDIC (the regulators) released a report to help community banks assess their third-party relationship risk exposure. The report discusses key considerations in three areas: risk management, third-party relationship life cycle, and governance. In addition, the regulators’ report contained an appendix with additional resources, such as FFIEC interagency guidance and CISA cybersecurity protocols. With respect to risk management, the report suggested community banks apply more rigorous risk-management practices for third parties that support critical bank activities, such as those that could have a significant customer impact or have a significant impact on the bank’s financial condition. In describing the third-party relationship life cycle, the report identified five key stages of the life cycle – planning, due diligence, contract negotiation, ongoing monitoring, and termination. With respect to governance, the report described three key pillars: oversight and accountability, independent review, and documentation and reporting.
Fed releases April SLOOS on bank lending practices from Q1 2024
On May 6, the Fed released its quarterly survey of the Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices for the first quarter of the year which revealed tightened lending standards and a decrease in demand across loans. Regarding business lending, the survey asked banks about commercial and industrial lending (C&I) and commercial real estate lending (CRE). For C&I loans, banks reported stricter standards and a decline in demand from firms of all sizes. Banks reported tightening due to a less favorable economic outlook, reduced tolerance for risk, and a worsening of industry-specific problems. For CRE loans, banks reported a tightening of standards for all types of loans. A significant share of banks reported weaker demand for nonfarm nonresidential and multifamily residential lending. For household lending, banks also tightened residential real estate (RRE) loan standards, while demand for all RRE loan types declined. Home equity lines of credit also faced stricter standards. Banks also tightened consumer lending standards for credit card, auto, and other consumer loans. Demand for these loans decreased as well, with a significant drop in auto loan inquiries.
OIG releases CFPB and Fed list of open recommendations
On April 22, the OIG, which oversees the CFPB and the Fed, released two audit and evaluation reports that noted previously identified recommendations to improve or correct issues that remain open as of March 31, including some recommendations that have been open for more than six months. With respect to the CFPB, the OIG identified 18 recommendations that remain open; with respect to the Fed, the OIG identified 65 open recommendations. The open recommendations made to the CFPB stem from OIG reports on strengthening its offboarding process in 2018, auditing the Bureau’s information security program in 2018, 2022, and 2023, and technical testing results for the Bureau’s legal enclave in 2020. The open recommendations to the Fed stem from OIG reports relating to, among others (i) information security; (ii) cybersecurity; (iii) security control of the Fed’s public website; (iv) the Fed’s Financial Market Utility Supervision Program; and (v) enterprise risk management. Notably, a small subset of the recommendations that remain open are nonpublic.
Fed’s Bowman discusses risk management and bank supervision
On April 18, Fed governor Michelle Bowman delivered opening remarks at the Regional and Community Banking Conference in New York. During her speech, Bowman acknowledged the recent challenges that have impacted the U.S. banking system. She pointed out that recent events, including the pandemic, a rapid rise in inflation and interest rates, market uncertainties, and bank failures, have brought traditional risks, such as liquidity and interest rate risks, to the forefront, while other risks, like cybersecurity and third-party risks, “continue to evolve and pose new challenges.”
Bowman emphasized the importance of banks having robust risk management frameworks to identify and control both existing and emerging risks. She also stressed the need for banks to innovate responsibly and adapt their risk management as new products and services are introduced, while cautioning that regulators must balance supervision and regulation so as not to stifle responsible innovation. In light of the recent bank failures, Bowman also underscored the need for banks to have of contingency funding plans in place, which may include borrowing from the Federal Home Loan Banks or the Fed’s discount window. While regulators can encourage banks to maintain and test these plans, she noted that they should not overstep their role and interfere with management decisions.
Highlighting that these evolving risks can be exacerbated by inadequate bank supervision and acknowledging the need for a review and potential adjustments in supervision following the recent bank failures, Bowman stressed that supervision should remain commensurate to a bank’s size, complexity, and risk profile, and should focus on core and emerging risks so as not to impair the long-term viability of the banking system, including mid-sized and smaller banks.
Fed releases enforcement action against Wyoming-based bank holding company
On April 4, the Federal Reserve released an enforcement action against a Wyoming-based bank holding company as part of a September 2023 inspection that found alleged deficiencies related to the “fintech business strategy, board oversight, capital, earnings, liquidity, risk management, and compliance.” The consent order with the bank holding company requires the holding company to: (i) serve as a source of strength to its bank subsidiary; (ii) submit a written plan to strengthen board oversight, including a staffing assessment and succession plan; (iii) submit a written plan to strengthen its risk management program, including adopting written policies and procedures to manage compliance and fraud risks; (iv) submit an enhanced liquidity risk management program, a capital plan, and a written business plan to improve earnings; and (v) ensure compliance with regulations governing affiliate transactions. The consent order additionally placed limits on the holding company’s fintech activities and required the holding company to submit a wind-down plan for fintech-related business. According to the consent order, following the September 2023 inspection, the holding company had voluntarily stopped pursuing its fintech business strategy and had been winding down all related activities.
Bank regulators respond to bankers’ motion to enjoin CRA final rule
On March 8, the Fed, OCC, and FDIC (the federal banking agencies, or “FBAs”) submitted a brief opposing the plaintiffs’ motion for a preliminary injunction to stop the CRA final rule from going into effect. As previously covered by InfoBytes, a group of trade, banking, and business associations filed a class-action complaint for injunctive relief against the bank regulators’ enforcement of the final rule to implement the CRA before it goes into effect on April 1. The FBAs assert that, in opposing the final rule, the plaintiffs are asking the court to “graft” two exclusions from the CRA’s purpose that are not actually in the statute: first, to exclude geographic areas where a bank conducts retail lending from the scope of the bank’s “entire community”; and second, to exclude a bank’s deposit activities from the assessment on whether a bank is meeting its entire community’s “credit needs.” The banking regulators also argued that the plaintiffs’ motion for preliminary relief should fail because the plaintiffs cannot show irreparable harm, in that they have failed to demonstrate that costs to comply with the CRA final rule, which would not apply until 2026 and 2027, were significant when considered in the context of the bank’s overall finances. Finally, the FBAs argued that the public interest and balance of equities favor allowing the final rule to proceed, as, among other factors, “the rule provides significant regulatory relief and lower compliance costs for smaller institutions by increasing the asset size thresholds that determine which performance tests apply to an institution.”
Senator Warren pens letter to banking regulators to check on their regulatory commitments following 2023 bank failures
On March 10, Senator Warren (D-MA) released a letter to Federal Reserve Vice Chair Michael Barr, FDIC Chairman Martin Gruenberg, and Acting Comptroller of the Currency Michael J. Hsu (the bank regulators) seeking information on any progress with their commitments to strengthen bank regulatory standards following the 2023 banking issues. Warren urged the bank regulators to reinstate the rules for banks with assets between $100 and $250 billion, including liquidity requirements and capital stress tests, that were rolled-back with the 2018 enactment of the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (EGRRCPA). She concluded her letter by posing several questions, including asking what efforts the bank regulators are taking to strengthen rules, when these rules are expected to be announced or implemented, how many banks will be subject to these rules, if the implementation process would include a comment period, and if lobbying by large banks against the Basel III capital rule has weakened the bank regulators’ resolve to strengthen rules for banks with more than $100 billion in assets. Sen. Warren has asked for a response by March 25.