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District Court approves $3.65 mil. settlement against student loan servicer
On June 24, the U.S. District Court for the Western District of Pennsylvania approved a class action settlement involving student loan borrowers brought against a student loan servicer. The class alleged that from December 2018 to October 2023, the defendant assessed improperly certain convenience fees to process Perkins loan payments from student borrowers by telephone, IVR, or over the internet. The settlement fund of $3.65 million represents 25 percent of the total processing fees collected from hundreds of thousands of borrowers over roughly five years. The parties agreed that, in the event any funds remain after the first distribution, a second distribution will be made to class members.
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.
FHFA requests information on its FHLBank Affordable Housing Program
On June 20, FHFA released its request for input (RFI) on the application process for the Federal Home Loan Banks’ (FHLBanks) Affordable Housing Program (AHP). FHFA invited input on all aspects of the AHP application process, with a deadline for submissions no later than August 19. The AHP housing program was designed to provide funding to purchase, construct, and rehabilitate housing for very low-, low-, and moderate-income households. Each FHLBank provides funding through either a competitive application program that funds both rental and homeownership projects or a homeownership set-aside program that supports owner-occupied housing for income-eligible households. The RFI focused on the competitive application programs and posed eight questions related to the AHP application process, including the use of consultants to apply for AHP funds, and opportunities for improvements to the application process.
Agencies finalize new standards for AVMs
On June 20, the CFPB, OCC, Fed, FDIC, NCUA and FHFA (the financial services regulators) issued a final rule implementing new provisions governing the use of automated valuation models (AVMs), which are commonly used by mortgage originators and secondary-market issuers to estimate a property’s value for loan underwriting and portfolio monitoring. The rule, which was proposed in June 2023 (covered by InfoBytes here), had mortgage servicers adopt policies and procedures ensuring that AVMs operate with certain quality control standards, designed to operate with a high level of confidence. These estimates should be produced to protect against data manipulation and avoid conflicts of interest. The rule included requirements to conduct random sampling testing and reviews, and to comply with nondiscrimination laws. The financial services regulators noted that despite comments that lending institutions have little control over how AVMs were created, the rule “will allow the implementation of the standards to evolve along with changes in AVM technology and minimize compliance costs.”
In announcing the final rule, FDIC Chairman Martin Gruenberg emphasized that the rule created an independent requirement “to ensure that AVMs used in connection with making credit decisions or covered securitization determinations adhere to quality control standards designed to comply with applicable nondiscrimination laws,” and that the “new requirement would further mitigate potential discrimination risk in lenders’ use of AVMs.” In its announcement, the OCC stated that the rule “supports Acting Comptroller of the Currency Michael J. Hsu’s priority to reduce inequality and elevate fairness in banking.”
The final rule will go into effect the first day of the calendar quarter 12 months after its publication in the Federal Register.
CFPB extends its small business lending rule and opens comment period
On June 25, the CFPB released its formal action to extend the compliance dates for its small business lending rule, section 1071 (covered by InfoBytes here). The extension of 290 days represented the time elapsed between the Texas court’s first issuance of a stay last year and the Supreme Court’s decision in CFPB v. CFSA last month. As previously covered by InfoBytes, the CFPB notified the public of these changes in May but has now issued its interim final rule with a request for public comment. The new rule will implement section 1071 by adding subpart B to Regulation B of the rule, and the CFPB estimated this rule will affect at most 1,900 banks, savings associations and credit unions with $10 billion or less in total assets.
Under the new rule, the following dates will go into effect:
- Tier 1 institutions (highest volume lenders): The new compliance date will be July 18, 2025, and the first filing deadline will be June 1, 2026.
- Tier 2 institutions (moderate volume lenders): The new compliance date will be January 16, 2026, and the first filing deadline will be June 1, 2027.
- Tier 3 institutions (lowest volume lenders): The new compliance date will be October 18, 2026, and the first filing deadline will be June 1, 2027.
The CFPB also included the previous rule’s 12-month grace period wherein the Bureau would not assess penalties for errors made in good faith in data reporting. To add clarity to these changes, the Bureau issued an unofficial redline of its final changes. The new rule will go into effect 30 days following its publication in the Federal Register.
FDIC approves final rule to adjust resolution plan requirements
On June 20, the FDIC adopted its final rule amending the resolution planning requirements for large banks. The amended rule will amend 12 C.F.R. Part 360 “Resolutions and Receivership Rules,” and, among other components, require a covered institution’s full resolution submission to include:
- Identified Strategy – resolving issues in the event of a failure.
- Failure Scenario – proof of assets in the event of a failure.
- Executive Summary – summarizing the identified strategy with descriptions and discussions.
- Organizational Structure – legal entities, core business lines, and branches.
- Methodology for Material Designation
- Separation from Parent – demonstrate the ability to operate separately from parent org.
- Overall Deposit Activities – including foreign deposits, sweep arrangements, etc.
- Critical Services – ensure continuity of the institution’s critical services in resolution.
- Key Personnel – identified by title, function, location, core business line, etc.
- Franchise Components – ensure that franchises are marketable in resolution.
Under the rule, depository institutions with more than $100 billion in total assets must submit a full resolution plan either biennially or triennially (most will file triennially, with the “largest and most systematic and interconnected” institutions required to file biennially). Depository institutions with at least $50 billion but less than $100 billion in total assets must submit more limited informational filings – which would not include an identified strategy for the institution’s resolution or proof of assets in the event of a failure – on a triennial basis. The FDIC noted that because such institutions will file less information, “the FDIC expects the engagement and capabilities testing [] will be a key component of its resolution planning for such firms and expects to conduct engagement and capabilities testing with most [of these institutions] in each cycle.” Failure to submit a full resolution submission, and address adequately a material weakness identified by the FDIC may lead to enforcement actions against non-compliant institutions. The rule will go into effect on October 1 and the FDIC will notify institutions of the date when their first full resolution submissions or interim supplements are due under the final rule (The FDIC will set a date for Group A Filers at least 270 days after the effective date, and the FDIC will set a date for Group B Filers at least a year after the effective date).
In an OCC news release, the Acting Comptroller of the Currency stated his support for the FDIC’s resolution plan rule, noting that when such plans are lacking, “consequences can include not just disorderly failure and the need for extraordinary government action, but also a broader loss of trust in banks and their regulators.” The Director of the CFPB, Rohit Chopra, also released a statement and noted that the sale of a failed bank to an even larger institution can result in substantial costs to the Deposit Insurance Fund. Chopra expressed support that rules requiring banks to demonstrate how they might be wound down would help the FDIC pursue alternative dissolution strategies for large banks, such as breaking up the bank into smaller components or reprivatizing it through an initial public offering.
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.