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CFPB report on credit bureaus hints at rulemaking
On January 3, the CFPB released its annual report, pursuant to Section 611(e)(5) of the FCRA, on information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). According to the report, the Bureau received 488,000 consumer complaints about the CRAs from October 2021 through September 2022. The Bureau’s analysis revealed that 93 percent of consumers reported having previously attempted to fix their problem with the company. The report also noted that the use of problematic response types has decreased, and most complaints now receive “more substantive and tailored” responses. The report found that most responses from the CRAs describe the outcomes of consumers’ complaints. The Bureau highlighted areas that the CRAs should prioritize given the “challenges facing market participants and policy makers,” including: (i) considering consumer burden when implementing automated processes; (ii) recognizing how current processes will need to evolve in light of new technologies that can generate similar-sounding complaints that are in fact unique; and (iii) considering how to transition the market from control and surveillance to consumer participation. According to CFPB Director Rohit Chopra, the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.”
Fannie, Freddie announce LIBOR transition plans
On December 22, GSEs Fannie Mae and Freddie Mac announced replacement indices based on the Secured Overnight Financing Rate (SOFR) for their legacy LIBOR indexed loans and securities (see here and here). The announcement follows the Federal Reserve Board’s final rule setting forth recommended replacement rates for financial contracts based on LIBOR (covered by InfoBytes here). For single-family mortgage loans and related mortgage-backed securities, the GSEs selected the relevant tenor of CME Term SOFR plus the applicable tenor spread adjustment, as published and provided by Refinitiv Limited (also known as “USD IBOR Cash Fallbacks” for “Consumer” products). The transition to the replacement indices will occur the day after June 30, 2023, which is the last date on which the Intercontinental Exchange, Inc. Benchmark Administration Limited will publish a representative rate for all remaining tenors of U.S. dollar LIBOR. The GSEs also published replacement indices for multifamily mortgage loans and related mortgage-backed securities, single family and multifamily collateralized mortgage obligations and credit risk transfer securities, and derivatives.
FSOC annual report highlights digital asset, cybersecurity, and climate risks
On December 16, the Financial Stability Oversight Council (FSOC or the Council) released its 2022 annual report. The report reviewed financial market developments, identified emerging risks, and offered recommendations to mitigate threats and enhance financial stability. The report noted that “amid heightened geopolitical and economic shocks and inflation, risks to the U.S. economy and financial stability have increased even as the financial system has exhibited resilience.” The report also noted that significant unaddressed vulnerabilities could potentially disrupt institutions’ ability to provide critical financial services, including payment clearings, liquidity provisions, and credit availability to support economic activity. FSOC identified 14 specific financial vulnerabilities and described mitigation measures. Highlights include:
- Nonbank financial intermediation. FSOC expressed support for initiatives taken by the SEC and other agencies to address investment fund risks. The Council encouraged banking agencies to continue monitoring banks’ exposure to nonbank financial institutions, including reviewing how banks manage their exposure to leverage in the nonbank financial sector.
- Digital assets. FSOC emphasized the importance of enforcing existing rules and regulations applicable to the crypto-asset ecosystem, but commented that there are gaps in the regulation of digital asset activities. The Council recommended that legislation be enacted to grant rulemaking authority to the federal banking agencies over crypto-assets that are not securities. The Council said that regulatory arbitrage needs to be addressed as crypto-asset entities offering services similar to those offered by traditional financial institutions do not have to comply with a consistent or comprehensive regulatory framework. FSOC further recommended that “Council members continue to build capacities related to data and the analysis, monitoring, supervision, and regulation of digital asset activities.”
- Climate-related financial risks. FSOC recommended that state and federal agencies should continue to work to advance appropriately tailored supervisory expectations for regulated entities’ climate-related financial risk management practices. The Council encouraged federal banking agencies “to continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions.”
- Treasury market resilience. FSOC recommended that member agencies review Treasury’s market structure and liquidity challenges, and continue to consider policies “for improving data quality and availability, bolstering the resilience of market intermediation, evaluating expanded central clearing, and enhancing trading venue transparency and oversight.”
- Cybersecurity. FSOC stated it supports partnerships between state and federal agencies and private firms to assess cyber vulnerabilities and improve cyber resilience. Acknowledging the significant strides made by member agencies this year to improve data collection for managing cyber risk, the Council encouraged agencies to continue gathering any additional information needed to monitor and assess cyber-related financial stability risks.
- LIBOR transition. FSOC recommended that firms should “take advantage of any existing contractual terms or opportunities for renegotiation to transition their remaining legacy LIBOR contracts before the publication of USD LIBOR ends.” The Council emphasized that derivatives and capital markets should continue transitioning to the Secured Overnight financing Rate.
CFPB Director Rohit Chopra issued a statement following the report’s release, flagging risks posed by the financial sector’s growing reliance on big tech cloud service providers. “Financial institutions are looking to move more data and core services to the cloud in coming years,” Chopra said. “The operational resilience of these large technology companies could soon have financial stability implications. A material disruption could one day freeze parts of the payments infrastructure or grind other critical services to a halt.” Chopra also commented that FSOC should determine next year whether to grant the agency regulatory authority over stablecoin activities under Dodd-Frank. He noted that “[t]hrough the stablecoin inquiry, it has become clear that nonbank peer-to-peer payments firms serving millions of American consumers could pose similar financial stability risks” as these “funds may not be protected by deposit insurance and the failure of such a firm could lead to millions of American consumers becoming unsecured creditors of the bankruptcy estate, similar to the experience with [a now recently collapsed crypto exchange].”
FinCEN’s Das discusses agency’s priorities
On December 6, FinCEN acting Director Himamauli Das spoke before the ABA/ABA Financial Crimes Enforcement Conference about how FinCEN is addressing new threats, new innovations, and new partnerships, in addition to its efforts to implement the AML Act. Das first began by speaking about beneficial ownership requirements of the Corporate Transparency Act (CTA). He noted that a final rule was issued in September, which implemented the beneficial ownership information reporting requirements (covered by InfoBytes here). He also stated that a second rulemaking, concerning access protocols to the beneficial ownership database by law enforcement and financial institutions, may be released before the end of the year, and that work is currently underway on a third rulemaking concerning revisions to the customer due diligence rule. With regard to anti-corruption, Das noted that the agency has been working with the Biden administration, and highlighted three alerts issued by FinCEN in 2022 that highlight “the risks of sanctions and export controls evasion by Russian actors, including through real estate, luxury goods, and other high-value assets.” Das explained that the alerts “complement ongoing U.S. government efforts to isolate sanctioned Russians from the international financial system.”
Transitioning into discussing effective AML/CFT programs, Das said that the “AML Act’s goal of a strengthened, modernized, and streamlined AML/CFT framework will ultimately play out over a series of steps as we implement all of the provisions of the AML Act.” He then described how the AML Act requires FinCEN to work with the FFIEC and law enforcement agencies to establish training for federal examiners in order to better align the examination process. He further noted that the AML/CFT priorities and their incorporation into risk-based programs as part of the AML Program Rule are “crucial” for providing direction to examiners on approaches that improve outcomes for law enforcement and national security.
Das also highlighted the digital asset ecosystem as a key priority area for FinCEN and acknowledged that the area has seen “continuing evolution” since 2013 and 2019, when the agency released its latest related guidance documents on the topic. Das explained that FinCEN is taking a “close look” at the elements of its AML/CFT framework applicable to virtual currency and digital assets to determine whether additional regulations or guidance are necessary, which “includes looking carefully at decentralized finance and its potential to reduce or eliminate the role of financial intermediaries that play a critical role in our AML/CFT efforts.”
CFPB releases spring 2022 semi-annual report
On December 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2021 and ending March 31, 2022. The report, which is required by Dodd-Frank, addresses several issues, including complaints received from consumers about consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) conducted an assessment of significant actions taken by state attorneys general and state regulators related to federal consumer financial law; (ii) initiated 21 fair lending supervisory activities to determine compliance with federal laws, including ECOA, HMDA, and UDAAP prohibitions, and engaged in interagency fair lending coordination with other federal agencies and states; (iii) “encouraged lenders to enhance oversight and identification of fair lending risk and to implement policies, procedures, and controls designed to effectively manage HMDA activities, including regarding integrity of data collection”; and (iv) launched a new Diversity, Equity, Inclusion, and Accessibility Strategic Plan to increase workforce and contracting diversity.
In regard to supervision and enforcement, the report highlighted the Bureau’s public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information, and proposed and final rules. These include rules and orders related to the LIBOR transition, fair credit reporting, Covid-19 mortgage and debt collection protections for consumers, small business lending data collection, and automated valuation model rulemaking.
Fed solicits feedback on proposed climate-related risk principles
On December 2, the Federal Reserve Board issued a notice requesting public comments on proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The proposed principles would provide a high-level framework for the safe and sound management of exposures to climate-related financial risks for the largest financial institutions (those with over $100 billion in total consolidated assets), as well as address the physical and transition risks associated with climate change. Notably the notice acknowledged that all financial institutions, regardless of size, can have material exposures to climate-related financial risks. Intended to support large financial institutions’ efforts in addressing climate-related financial risk management, the proposed principles cover six major areas related to: (i) governance; (ii) policies, procedures, and limits; (iii) strategic planning; (iv) risk management; (v) data, risk measurement, and reporting; and (vi) scenario analysis. The Fed noted that the proposed principles are substantially similar to those issued by the OCC and FDIC (covered by InfoBytes here and here), and said that the agencies intend to issue final interagency guidance to promote consistency. Comments on the proposed principles are due 60 days after publication in the Federal Register.
Governor Bowman stated that while she voted in favor of seeking input on the proposed principles, she reserves the right to vote against its finalization. She also emphasized that excluding financial institution with less than $100 billion in assets from the guidance “is appropriate based not only on the size of such firms, but also in light of the robust risk management expectations already applicable to such firms.”
However, Governor Waller issued a dissenting statement: “Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States. The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient.”
Fed releases Supervision and Regulation Report
Recently, the Federal Reserve Board released its Supervision and Regulation Report, which summarizes banking system conditions and the Fed’s supervisory and regulatory activities. The current report noted that even though the “vast majority of firms maintained capital above regulatory minimums,” and loan delinquencies were historically low with liquidity levels generally remaining high, increasing economic uncertainty “may create new risks for firms to manage.” In response, firms increased credit loss provisions during the first half of 2022 and started taking measures to prepare for weaker economic conditions. The report also revealed that while the financial condition of large banks generally remains sound, firms should take steps to ensure their stress analyses, liquidity, and capital positions are able to adjust to developing market conditions. The report also highlighted recent regulatory actions, including supervisory guidance issued in August for banks seeking to engage in crypto-asset-related activities (covered by InfoBytes here). The Fed commented that it will continue to work with the OCC and FDIC on crypto-asset-related policy initiatives. The report also discussed operational risks related to the transition from LIBOR to an alternative interest rate benchmark and measures to address climate change implications for banks.
States launch investigation into banks’ ESG investing and banking
On October 19, a coalition of 19 state attorneys general, led by Missouri, Arizona, Kentucky, and Texas, announced that six large U.S. banks were served civil investigative demands (CIDs) asking for information related to their involvement with the U.N.’s Net-Zero Banking Alliance (NZBA). The Missouri AG’s office, which has led the opposition against ESG (environmental, social, governance) investing and banking practices, stated that NZBA-member banks are required to set emissions reduction targets in their lending and investment portfolios to reach net zero by 2050. According to the Missouri AG, the NZBA serves to “starve companies engaged in fossil fuel-related activities of credit on national and international markets” by requiring banks to cede authority to the U.N. The CIDs seek information from the banks on topics related to, among other things, (i) their involvement in affiliated global climate initiatives; (ii) how NZBA and Principles for Responsible Banking objectives have been incorporated into their operations; and (iii) the extent to which the banks have fulfilled their “commitment to ‘facilitat[e] the necessary transition in the real economy through prioritizing client engagement and offering products and services to support clients’ transition,’” as well as their “commitment to ‘engag[e] on corporate and industry (financial and real economy) action, as well as public policies, to help support a net-zero transition of economic sectors in line with science and giving consideration to associated social impacts.’”
FHA seeks comment on LIBOR transition
On October 19, FHA published a proposed rule in the Federal Register seeking public comment on transitioning existing FHA-insured forward and home equity conversion mortgage (HECM) adjustable rate mortgages (ARMs) from LIBOR to a spread-adjusted Secured Overnight Financing Rate (SOFR) index, after the one-year and one-month LIBOR indices cease to be published on June 30, 2023. The proposed rule also mentioned removing LIBOR and adding SOFR as an approved index for newly originated forward ARMs. According to the proposed rule, this change was made for HECM ARMs in Mortgagee Letter 2021- 08 and added to this proposed rule. As previously covered by InfoBytes, in March 2021, FHA issued ML 2021-08 announcing changes for adjustable interest rate HECMs as the market transitions away from LIBOR. Comments are due by November 18.
OCC releases strategic plan
On September 6, the OCC released its draft FY 2023-2027 strategic plan, which focuses on “the agency’s approach to achieve three strategic goals and fulfill its mission to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.” The OCC noted that it will invest in its people, operations, processes, and technology to meet strategic goals for FY 2023-2027 that focus on (i) agility and learning; (ii) credibility and trust; and (iii) leading on supervision in an evolving banking system. Other priorities outlined in the strategic plan include promoting an organizational culture that seeks workforce diversity inclusive of thought, experiences, and knowledge, bringing multiple perspectives on issues, and enhancing an adaptive mindset and culture of continuous learning. The OCC noted that the strategic plan will promote the strengthening and modernizing of community banks, with a focus on small businesses and underserved communities. In particular, the plan directs the agency to develop guidance and outreach to facilitate community banks’ digital transition, minimize the regulatory burden on banks as much as possible, and facilitate de novo community bank activity to reach unbanked and underbanked customers.