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Wilson to resign as FTC commissioner
On February 14, FTC Commissioner Christine Wilson announced plans to leave the agency. Wilson penned a Wall Street Journal op-ed, in which she took issue with a number of FTC Chair Lina Khan’s initiatives, including Khan’s antitrust policy and rulemaking efforts to ban the use of noncompete clauses in employee contracts. Wilson accused Khan of willfully disregarding congressionally imposed limits on agency jurisdiction, defying legal precedent, and abusing power to achieve desired outcomes. Chair Khan and Commissioners Rebecca Slaughter and Alvaro Bedoya issued a brief statement following Wilson’s announcement wishing “her well in her next endeavor.” The FTC is headed by five commissioners, each serving a seven year term, with no more than three commissioners coming from the same political party. With Wilson’s resignation, there are now two open seats on the Commission.
Agencies reiterate illegality of appraisal discrimination
On February 14, CFPB Fair Lending Director Patrice Ficklin joined senior leaders from the FDIC, HUD, NCUA, Federal Reserve Board, DOJ, OCC, and FHFA in submitting a joint letter to The Appraisal Foundation (TAF) urging the organization to further revise its draft Ethics Rule for appraisers to include a detailed statement of federal prohibitions against discrimination under the Fair Housing Act (FHA) and ECOA.
This is the second time the agencies have raised concerns with TAF. As previously covered by InfoBytes, last February, the agencies sent a joint letter in response to a request for comments on proposed changes to the 2023 Appraisal Standards Board Ethics Rule and Advisory Opinion 16, in which they noted that while provisions prohibit an appraiser from relying on “unsupported conclusions relating to characteristics such as race, color, religion, national origin, sex, sexual orientation, gender, marital status, familial status, age, receipt of public assistance income, disability, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value,” the “provisions do not prohibit an appraiser from relying on ‘supported conclusions’ based on such characteristics and, therefore, suggest that such reliance may be permissible.” The letter noted that the federal ban on discrimination under the FHA and ECOA is not limited only to “unsupported” conclusions, and that any discussions related to potential appraisal bias should be consistent with all applicable nondiscrimination laws.
In their second letter, the agencies said that the fourth draft removed a detailed, unambiguous summary covering nondiscrimination standards under the FHA and ECOA, and instead substituted “a distinction between unethical discrimination and unlawful discrimination.” The letter expressed concerns that the term “unethical discrimination” is not well established in current law or practice, and could lead to confusion in the appraisal industry. Moreover, the letter noted that “the term ‘ethical’ discrimination, and reference to the possibility of a protected characteristic being ‘essential to the assignment and necessary for credible assignment results,’ appears to resemble the concept of ‘supported’ discrimination that the agencies previously disfavored and whose removal and replacement with a summary of the relevant law significantly improved the draft Ethics Rule.” The agencies further cautioned that “[s]uggesting that appraisers avoid ‘bias, prejudice, or stereotype’ as general norms” would grant individual appraisers wide discretion in applying these norms and likely yield inconsistent results. The agencies advised TAF to provide a thorough explanation of these legal distinctions.
U.S.-EU release statement on Joint Financial Regulatory Forum
On February 7-8, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S.-EU Joint Financial Regulatory Forum to continue their ongoing financial regulatory dialogue. According to a joint statement issued by the participants, the matters discussed focused on six themes: “(1) market developments and financial stability risks; (2) sustainable finance and climate-related financial risks; (3) regulatory developments in banking and insurance; (4) operational resilience and digital finance; (5) regulatory and supervisory cooperation in capital markets; and (6) anti-money laundering and countering the financing of terrorism (AML/CFT).”
The joint statement acknowledged that the Russia/Ukraine conflict, coupled with global economic uncertainty and inflationary pressures, have exposed “the financial system to downside risk both in the EU and in the U.S,” with participants stressing the importance of international coordination in monitoring vulnerabilities and building resilience against stability risks. During the forum, participants discussed recent developments related to sustainability-related financial disclosures, climate-related financial risks, cross-border bank resolution coordination, the transition away from LIBOR, digital finance operational resilience, and progress made in strengthening their respective AML/CFT frameworks.
States support DOE’s overhaul of IDR plans
On February 13, a coalition of state attorneys general led by California and Massachusetts submitted a letter in support of the Department of Education’s (DOE) proposed changes to income-driven repayment plans (IDR) for federal student loan borrowers. As previously covered by InfoBytes, last month the DOE announced a notice of proposed rulemaking (NPRM) designed to reduce the cost of federal student loan payments. According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan, and is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income-Contingent Repayment and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrower otherwise makes the monthly payments, and would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed.
In their letter, the states expressed support for the DOE’s NPRM, but urged the department to take further steps to support struggling borrowers. The states urged the DOE to expand the scope and reach of the proposed reforms by, among other things, creating a simple path for borrowers in default to enroll in IBR or REPAYE, counting all past forbearance and repayment periods and certain deferment periods towards borrowers’ loan forgiveness, making Parent PLUS loans eligible for REPAYE, and expanding the reach of its reforms to “provide more retroactive relief” to borrowers impacted by widespread servicing errors that prevented them from enrolling in IDR. According to the letter, the DOE should also raise the discretionary income threshold to make debt more manageable for borrowers with the greatest need, eliminate the reverse amortization of IDR loan balances, shorten the period in which borrowers must make payments to receive forgiveness under REPAYE, provide viable repayment options, and automatically enroll delinquent borrowers in IDR plans before they face negative credit reporting and default, among other measures.
Agencies cite need to update bank merger evaluation framework
On February 10, OCC Senior Deputy Comptroller and Chief Counsel Ben W. McDonough spoke before the OCC Banker Merger Symposium about the future of bank merger policy. Acting Comptroller of the Currency Michael J. Hsu’s prepared remarks, which were delivered on his behalf by McDonough, stressed the need to update the framework used for analyzing bank mergers. Hsu commented that without necessary enhancements, “there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks,” but cautioned that imposing a moratorium on bank mergers would inhibit growth and improvements that could benefit communities and increase competition. Hsu observed that “many experts have raised questions about the ongoing suitability of the current bank merger standards at a time of intense technological and societal change.” He noted that federal bank regulators currently use the Herfindahl–Hirschman Index (HHI) to assess market concentration—which, while transparent, empirically proven, and efficient—may not be as relevant since the bank merger guidelines were last updated in 1995. Hsu reflected that HHI—which is based solely on deposits—may now be “a less effective predictor of competition across product lines” due to the offering of other banking products, including online and mobile banking. Hsu also said that “the current framework for assessing the financial stability risks of bank mergers bears examining,” as “there is a resolvability gap for large regional banks in that our resolution tools may not be up to the task.” Additionally, Hsu pointed out that it is also critical to analyze a merger’s effects on the communities a bank serves, and that assessing each bank’s Community Reinvestment Act performance and ratings are just a starting point.
Separately, Federal Reserve Governor Michelle W. Bowman touched upon the topic of bank mergers during a speech before the American Bankers Association Community Banking Conference. Bowman discussed topics related to the Fed’s independence in bank regulation, predictability in bank merger applications, and tailoring of regulations and supervision. Among other things, Bowman commented that while the bank merger review framework is the same for all applications, each case varies widely, which “necessitates an in-depth review of each transaction on its own merits.” According to Bowman, “these reviews are most effective when the expectations of the regulators are clear in advance and the parties can reasonably anticipate the application review process.” She pointed to a recent increase in average processing times in the merger review process and expressed concerns about how delays may lead to increased operation risk, as well as fears that “the increase in average processing times will become the new normal.” Bowman said she believes that transparency between regulators and applicants can help to ensure clear expectations about certain potential delays.
CFPB finds 33 percent decline in collections tradelines on credit reports
On February 14, the CFPB released a report examining debt collection credit reporting trends from 2018 to 2022. The Bureau’s report, Market Snapshot: An Update on Third-Party Debt Collections Tradelines Reporting, is based on data from the agency’s Consumer Credit Panel—a nationally representative sample of roughly five million de-identified credit records maintained by one of the three nationwide credit reporting companies. According to the report, from Q1 2018 to Q1 2022, the total number of collections tradelines on credit reports declined by 33 percent, from 261 million tradelines in 2018 to 175 million tradelines in 2022. The Bureau determined that this decline was driven by contingency-fee-based debt collectors (responsible for primarily furnishing medical collections tradelines), who furnished 38 percent fewer tradelines during this time period. The total number of unique contingency-fee-based debt collectors also declined by 18 percent (from 815 to 672).
In a related blog post, the Bureau estimated that while medical collections tradelines declined by 37 percent between 2018 and 2022, these tradelines still constitute a majority (57 percent) of all collections on consumer credit reports. The Bureau explained that the “decline may be partly explained by structural dysfunctions in medical billing and collections, which increase the risk that debt collectors will not meet their legal obligations” and can result in false and inaccurate information. The Bureau said it will continue to closely examine medical billing and collection practices and highlighted a bulletin published in January 2022, which reminded debt collectors and credit reporting agencies of their legal obligations under the FDCPA and the FCRA when collecting, furnishing information about, and reporting medical debts covered by the No Surprises Act. (Covered by InfoBytes here.)
OFAC sanctions more Bulgarian officials
On February 10, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Order 13818, against five current or former Bulgarian government officials for their alleged “extensive involvement in corruption in Bulgaria.” The designations build upon previous OFAC sanctions taken against three individuals and their networks (encompassing 64 entities) for their extensive roles in corruption in Bulgaria. (Covered by InfoBytes here.) As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. Additionally, “any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons unless authorized by a general or specific license issued by OFAC. “[F]inancial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action,” OFAC warned.
OFAC authorizes certain transactions to aid Syrian earthquake disaster relief
On February 9, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued Syria General License (GL) 23 to authorize, for 180 days, all transactions related to earthquake relief efforts that would ordinarily be prohibited by the Syrian Sanctions Regulations (SySR). Specifically, authorizations under GL 23 include “the processing or transfer of funds on behalf of third-country persons to or from Syria in support of” transactions related to earthquake relief efforts in the country. Additionally, “U.S. financial institutions and U.S. registered money transmitters may rely on the originator of a funds transfer with regard to compliance” for transactions related to earthquake relief efforts in Syria, provided that the financial institution does not know or have reason to know that the funds transfer is not related to such efforts. GL 23 does not permit any transactions prohibited under the SySR related to the importation of petroleum or petroleum products of Syrian origin into the U.S., or any transactions involving persons “whose property and interests in property are blocked pursuant to the SySR, other than persons who meet the definition of the term Government of Syria, as defined in section 542.305(a) of the SySR, unless separately authorized.” Additionally, OFAC advised financial institutions and others who may be engaged in disaster relief activities for Syria to contact OFAC directly to seek specific licenses or guidance should they believe their activities are not covered by existing authorizations or exemptions.
Fed cautions banks regarding crypto risks
On February 10, Federal Reserve Board Governor Christopher J. Waller gave a speech on the cryptocurrency ecosystem and digital assets before attendees at the Global Interdependence Center Conference: Digital Money, Decentralized Finance, and the Puzzle of Crypto. Waller provided a broad overview of digital assets and digital ledger technologies and briefly discussed the use of smart contracts in peer-to-peer trading, as well as their potential to automate the execution of certain transactions in non-crypto-assets such as securities transactions. He also highlighted risks associated with another emerging technology—tokenization—which, he explained, “when combined with data vaults to securely store personal information, can be used to trade objects in a way that protects one’s identity from being exploited for profit.” Waller commented that these potential applications could also “lead to substantial productivity enhancements in other industries” beyond the crypto ecosystem.
Waller went on to express support for prudent innovation but expressed concerns about banks engaging in activities that expose them to a heightened risk of fraud, scams, and legal uncertainties. “As with any customer in any industry, a bank engaging with crypto customers would have to be very clear about the customers’ business models, risk-management systems, and corporate governance structures to ensure that the bank is not left holding the bag if there is a crypto meltdown,” Waller stated. “And banks considering engaging in crypto-asset-related activities face a critical task to meet the ‘know your customer’ and ‘anti-money laundering’ requirements, which they in no way are allowed to ignore.”
Agencies release hypothetical scenarios for 2023 bank stress tests
On February 9, the Federal Reserve Board and the OCC released hypothetical economic scenarios for use in the upcoming stress tests for covered institutions. The Fed released supervisory scenarios, which include baseline and severely adverse scenarios. According to the Fed, the stress test evaluates large banks’ resiliency by estimating losses, net revenue, and capital levels under hypothetical recession scenarios that extend two years into the future. The Fed’s stress test also features for the first time “an additional exploratory market shock to the trading books of the largest and most complex banks” to help the agency better assess the potential of multiple scenarios in order to capture a wider array of risks in future stress test exercises. The OCC also released the agency’s scenarios for covered banks and savings associations, which will be used during supervision and will assist in the assessment of a covered institution’s risk profile and capital adequacy.