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EU-U.S. releases statement from Joint Financial Regulatory Forum
On December 8, participants in the EU-U.S. Joint Financial Regulatory Forum met, including officials from the Treasury Department, Fed, CFTC, FDIC, SEC, and OCC, and issued a joint statement. The statement regarded ongoing dialogues from December 4-5 and focused on six themes: “(1) market developments and financial stability; (2) regulatory developments in banking and insurance; (3) anti-money laundering and countering the financing of terrorism…; (4) sustainable finance; (5) regulatory and supervisory cooperation in capital markets; and (6) operational resilience and digital finance.”
The joint statement acknowledged how risks to the EU and U.S. financial sectors have been mitigated in recent months, e.g., inflation risks, although lingering concerns remain regarding the impact of increased interest rates, high levels of private and public sector debt, and the ongoing geopolitical situations. Participants reaffirmed the significance of strong prudential standards for banks, effective resolution frameworks—particularly across borders—and robust supervisory practices, along with effective macroprudential policies. Finally, the conversations covered recent cryptoasset market changes and updates on regulatory and enforcement initiatives in the U.S.
House Financial Services Committee questions financial agency representatives on technological implementations
On December 5, the U.S. House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing on “Fostering Financial Innovation: How Agencies Can Leverage Technology to Shape the Future of Financial Services.” The Committee invited representatives to testify from the SEC, OCC, FDIC, CFPB, NCUA, and the Federal Reserve. The representatives fielded an array of questions focused on artificial intelligence, cryptocurrencies, and central bank digital currencies (CBDCs), and broadly focused on the need to balance technological innovation within the financial sector with managing risk.
On cryptocurrencies, congressional representatives posed questions on the nature of criminal activity among other risks. The discussion addressed bank risks related to crypto assets—while banks do not hold crypto assets, the representative from the Federal Reserve noted how banks may face liquidity risks when holding deposits from crypto-related companies. On CBDCs, the Committee asked for an update on the U.S. CBDC; the Federal Reserve representative mentioned the Fed’s current research on CBDC technologies but noted that the agency is still “a long way off from thinking about the implementation of anything related to a CBDC.”
On the topic of artificial intelligence, agency representatives discussed how banks are using the technology for fraud monitoring and customer service. The discussion addressed how artificial intelligence technology can create deepfakes using generative models to mimic an individual’s appearance or voice, and thus help scammers bypass traditional security checks. In response, some countries have implemented a secure digital ID that biometrically syncs to one’s smartphone, and the NCUA noted that it is currently evaluating this technology.
NY AG and others demand cooperation and accountability from big banks; write to CFPB and OCC
On December 7, the Attorney General for the State of New York, Letitia James, led a group of 20 attorneys general in submitting letters to the OCC and the CFPB urging the agencies to ensure that national banks cooperate with state attorneys’ general investigations into violations of state laws. The letters state that in the beginning of the 2000s, banks began to claim immunity from state oversight. The attorneys general argue that this position was furthered by a 2002 OCC advisory letter directing states to refer potential violations of state law to the OCC, and a 2004 rule which expanded the test for when national banks were exempted from state laws. The attorneys general allege that states’ have been limited “in their ability to address a wide range of unfair and deceptive practices that affect their citizens, including bait-and-switch practices and the failure to clearly and conspicuously disclose rate changes, late fees and overdraft fees.” As a result, the attorneys general ask the OCC to “issue supervisory guidance… advising that it is unsafe and unsound, and that it creates a material risk of unfair or abusive acts or practices, for any [b]ank to refuse to cooperate with State AG information requests that seek to further enforcement of applicable state laws.”
OCC issues guidance on BNPL loans
On December 6, the OCC posted Bulletin 2023-37 to provide banks with guidance on Buy Now, Pay Later (BNPL) loans. The OCC defined BNPL as point-of-sale or “pay-in-4” installment loan products. The OCC noted that, if BNPL products are used responsibly, they “can provide consumers with a low-cost, short-term, small-dollar financing alternative to manage cash flow.”
The OCC emphasized that the banks should offer BNPL loans in accordance with standards for safety and soundness, treat customers fairly, provide fair access to financial services, and act in compliance with applicable laws and regulations. In the bulletin, the OCC highlighted the risks to banks associated with offering BNPL lending, including credit, compliance, operational, strategic, and reputational risks to banks. In particular, the bulletin also underscores the risks that borrowers may not fully understand their BNPL repayment obligations, the challenges of underwriting BNPL applicants who have limited or no credit history, the lack of standardized disclosure language, and the risks of merchant disputes, among other risks.
The OCC recommended banks consider risk management practices, such as maintaining “underwriting, repayment terms, pricing, and safeguards that minimize adverse customer outcomes” tailored to the unique characteristics and risks of BNPL loans. The bulletin also advised banks to pay close attention to “the delivery method, timing, and appropriateness of marketing, advertising, and consumer disclosures,” in particular to ensure that all such documents clearly disclose the borrower’s obligations and any fees that may apply.
OCC’s Fall 2023 report highlights risks in banking system
On December 7, the OCC reported key issues facing the federal banking system in its Semiannual Risk Perspective for Fall 2023. In evaluating the overall soundness of the federal banking system, the OCC emphasized the need for banks to maintain prudent risk management practices. The key themes that the OCC underscored in the report included (i) credit risk due to high interest rates, commercial real estate lending, and inflation; (ii) market risks from rising deposit rates, liquidity contraction, and reliance on wholesale funding; (iii) operational risks from cyber threats, increased digitization, and fraud; and (iv) compliance risks from equal access to credit, fair treatment of consumers, fintech partnerships, and BSA/AML risk. The OCC noted that deposit and liquid asset trends stabilized in the latter half of 2023, and the stability was sustained through a greater dependence on wholesale funding.
The report included a special discussion of emerging risks linked to artificial intelligence (AI) in banking. The OCC noted the potential benefits of widespread AI adoption, which could reduce costs, improve products, strengthen risk management, and expand access to credit. At the same time, the OCC cautioned that AI use can create risk and banks must manage its use carefully.
OCC approves bank to surpass Section 23A thresholds
The OCC recently published redacted Interpretive Letter #1181, in which the OCC granted a national bank’s application for exemption from the quantitative limits under Section 23A to allow the bank to purchase an affiliate LLC that owns the premises on which the bank’s headquarters and main office are located. According to the letter, the affiliate transaction would exceed ten percent of the bank’s capital stock and surplus and would cause the aggregate amount of the bank's covered transactions with all affiliates beyond 20 percent of the bank’s capital stock and surplus. Exceeding either of these thresholds would requires an exemption, but the OCC believed a waiver was appropriate given the anticipated reduction in the bank's operating costs. Moreover, the OCC reasoned that the exemption would fortify the bank's financial standing, enhancing its ability to improve the services it provides to customers and communities. The FDIC agreed and determined that an exemption would not pose an unacceptable risk to the Deposit Insurance Fund. For these reasons, the OCC approved the exception and permitted the purchase to move forward.
OCC Acting Deputy Comptroller Murphy testifies on OCC’s Office of Financial Technology
On December 5, the Acting Deputy Comptroller of the OCC’s Office of Financial Technology, Donna Murphy, testified before the U.S. House Subcommittee on Digital Assets, Financial Technology and Inclusion. Her testimony focused on the OCC’s supervision and regulation of new and emerging fintech products.
Created in October 2022, the Office of Financial Technology regulates and supervises all aspects of fintech innovation in the federal banking system, including bank-fintech partnerships, artificial intelligence, and digital assets. Murphy testified that a strong risk management plan against third parties is essential. She referenced the joint guidance issued earlier this year by the OCC, Federal Reserve, and FDIC (previously covered by InfoBytes, here).
Murphy also discussed the use of artificial intelligence and algorithms in banking, highlighting the many ways they can strengthen safety and soundness, enhance consumer protection, improve compliance, address financial crime, and increase fairness and access to the banking system. However, Murphy highlighted the need for banks to focus on software design, testing, security, and data management when implementing artificial intelligence. Lastly, Murphy iterated the OCC’s commitment to reducing inequality in banking and increasing access to financial services for all.
Supreme Court hears oral argument in case challenging SEC ALJ use
On November 29, the Supreme Court heard oral argument in the SEC’s request to appeal the 5th Circuit’s decision in Securities and Exchange Commission v. Jarkesy. As previously covered by InfoBytes, the 5th Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. At oral argument, Justice Kavanaugh stated in his questioning of Principal Deputy Solicitor General Brian Fletcher (representing the SEC) that given the severity of the potential outcome of cases, the SEC’s decision-making process fully being carried out in-house could be “problematic,” and that it “doesn’t seem like a neutral process.” Meanwhile, Fletcher mentioned that the boundaries and “outer edges” of the public rights doctrine can be “fuzzy.” Justices’ questions also centered around Atlas Roofing v. Occupational Safety and Health Review Commission—a Supreme Court case that held that “Congress does not violate the Seventh Amendment when it authorizes an agency to impose civil penalties in administrative proceedings to enforce a federal statute.”
OCC releases enforcement actions
On November 16, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included is a cease and desist order against an Indiana bank for allegedly engaging in unsafe or unsound practices, related to corporate governance and enterprise risk management, credit underwriting and administration, liquidity risk management, and interest rate risk management. The order requires the bank to, among other things, (i) provide quarterly reports detailing corrective action and efforts to comply with the order; (ii) develop a written strategic plan; (iii) maintain specified capital ratios; (iv) engage an independent third party to review board and management supervision; (v) submit a written concentration risk management program and a written liquidity risk management program; (vi) adopt a credit underwriting and administration program; (vii) submit and adopt a written adequate allowance for credit losses; and (viii) adopt a written credit derivatives program.
HUD increases inspection fee limits for single-family homes
On November 15, HUD increased its fee limits for property inspections for single-family homes. HUD requires federal mortgage holders to perform property inspections to determine “occupancy status, ascertain property condition and to maintain property preservation.” For example, according to the Mortgage Letter, the cost for an initial occupancy inspection increased from $20 to $30, with the cost per additional unit increased from $15 to $20, to “align with industry standards,” as found in the FHA Single Family Housing Policy Handbook 4000.1. Deputy Assistant Secretary for Single Family Housing Sarah Edelman called this the “first step in updating our policies governing property and preservation fees,” and will help prevent blight from poorly maintained homes.