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DOE moves to empower student loan oversight for better borrower support
On November 9, the DOE announced it is outlining a framework for how it will increase borrower support and ensure student loan servicers are accountable for errors. Richard Cordray, Federal Student Aid (FSA) Chief Operating Officer, noted, “The landscape of loan servicing has substantially changed since the Department began collaboration with multiple servicers in 2009. FSA is dedicated to evolving servicing contracts to meet borrower requirements. As we approach the Direct Loan program’s unprecedented return to repayment, our upcoming transition to new contracts in 2024 will bring updated servicer obligations and increased avenues to ensure borrowers receive adequate support.”
The DOE has implemented various strategies to bolster oversight and monitoring of servicers:
- Direct Servicer Monitoring: FSA staff actively evaluate the quality of customer service provided by loan servicers, which involves scoring interactions between servicers’ representatives and borrowers, reviewing calls and chats, and conducting secret shopper calls to assess the accuracy of servicers’ responses to borrower inquiries.
- Partnership with Federal and State Regulators: The DOE collaborates with agencies like the CFPB and state attorneys general responsible for enforcing consumer financial laws. Updates in the interpretation of federal preemption provide clear guidance for the ability of states to enforce state consumer protection laws and allow for coordination between the DOE and state partners.
- Utilizing Borrower Complaints: The DOE leverages complaints filed through the FSA’s Office of the Ombudsman, which collaborates with the oversight team to discern if complaints signal wider servicer issues. The DOE also monitors social media and news stories to identify broader patterns of complaints, which allow the DOE to discern isolated instances from systemic errors affecting multiple borrowers. These listening tools serve as mechanisms for borrowers to report issues impacting their repayment directly.
The DOE and the Biden administration wield several measures to ensure servicers meet their obligations and maintain standards. The announcement highlighted that the DOE could withhold payments from servicers failing to serve borrowers adequately, as exemplified by the recent $7.2 million withheld from a Missouri servicer for delayed billing statements to 2.5 million borrowers. The DOE also has the authority to suspend or re-allocate borrowers to other servicers, which impacts the financial compensation of underperforming servicers. In addition, Contractor Performance Reports assess servicer performance and influence future contract awards, while Corrective Action Plans demand remedies for servicing errors to ensure borrower satisfaction and prevent reoccurrence. The DOE also safeguards borrowers from servicer errors by instructing servicers to grant affected borrowers a temporary administrative forbearance during error resolution. Additionally, the DOE directs servicers to count these periods as qualifying for loan forgiveness and adjusts accrued interest to zero when errors might impede borrowers’ progress toward forgiveness.
Finally, the DOE mentioned it is gearing up to transition to the USDS, a new loan servicing system, by spring 2024. This shift aims to enhance accountability, transparency, and performance evaluation for over 37 million federally managed student loan borrowers with a focus on rewarding good performance and ensuring servicers meet higher standards. By incentivizing servicers to maintain borrowers’ repayment status and improving tracking mechanisms, the DOE will prioritize borrower success and aim for a smoother repayment experience.
Regulators release final principles for climate-related financial risk management
On October 25, the Fed, OCC, and FDIC issued final interagency guidance titled Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The principles are intended to help the largest institutions supervised by the Federal banking agencies, i.e., those with over $100 billion in assets, manage climate-related risk.
These climate-related risks include both physical and transition risks. Physical risks include “hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, etc.,” while transition risks “refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes… [towards] a lower carbon economy.”
These climate-related risks affect the values of assets of liabilities and damage property, leading to a loss of income, defaults, and liquidity risks. The agencies created these principles to direct board of directors and managers make sound business practices with making progress toward mitigating climate-related financial risks.
CFPB Director Rohit Chopra, a member of the FDIC Board of Directors, shared remarks on the final principles, noting that climate change poses a dual challenge to protect infrastructure and fortify the financial system. He also stressed the need for regulatory guidance to convey clear and practical rules. FDIC Chairman Gruenberg also shared a statement on the final principles, highlighting the FDIC’s focus on the financial aspects of climate change, clarifying its role in managing risks rather than setting climate policy and encouraging cooperation among federal banking agencies to ensure consistency in addressing climate-related financial risks.
EBA report recommends environmental and social risk enhancements for financial sector
On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.
Yellen announces principles for net-zero financing & investment
On September 19, Secretary of the Treasury, Janet L. Yellen, discussed Treasury’s efforts to facilitate the net-zero transition, support the momentum of private-sector financial institutions that are already taking into account market demand and supporting the transition, and share emerging best practices around commitments to the transition, through the introduction of its Principles for Net-Zero Financing and Investment.
In discussing the role of private-sector financial institutions in the net-zero transition, Secretary Yellen noted that “more than 650 institutions representing roughly 40 percent of global financial assets have made commitments to support the goal of net-zero greenhouse gas emissions by 2050 or sooner” and “more than 100 U.S. financial institutions have voluntarily done so.” Yellen also emphasized the commitments of research and civil society groups to engage in technical work in support of the principals, as well as monetary support from philanthropic institutions that have pledged $340 million in support of net-zero transition and work related to the Principles.
Secretary Yellen noted that the principles are designed to be flexible to accommodate differences in entity size as well as other factors such as business model, client base, products and services and jurisdictions, but affirmed the importance of net-zero commitments aligning with the goal of limiting the increase in global average temperature to 1.5 degrees Celsius. To that end, the agency recommends that institutions develop transition plans that clearly articulate practices, targets and metrics for reaching their net-zero commitments.
The principles also encourage private-sector financial institutions to support net-zero commitments by providing transition finance to clients that are focused on their own initiatives that align with those of the institutions, and by investing in cutting-edge clean energy technologies.
Agencies propose new capital requirements for biggest banks
On July 27, the FDIC’s Board of Directors unveiled proposed interagency amendments to the regulatory capital requirements for the largest and most complex banks in the United States. The notice of proposed rulemaking (NPRM), issued jointly by the FDIC, OCC, and the Federal Reserve Board (and passed by an FDIC Board vote of 3-2 and a Fed vote of 4-2), would revise capital requirements for large banking organizations with at least $100 billion in assets, as well as certain banking organizations with significant trading activity. (See also FDIC fact sheet here.) The proposed changes would implement the final components of the Basel III agreement—recent changes made to international capital standards issued by the Basel Committee on Banking Supervision—as well as modifications made in response to recent bank failures in March, the agencies said.
Specifically, the NPRM would implement standardized approaches for market risk and credit valuation adjustment risk by amending the way banks calculate their risk-weighted assets. According to FDIC FIL-38-2023, the new “expanded risk-based approach” would incorporate a standardized approach for credit risk and operational risk, a revised internal models-based approach, a new standardized measure for market risk, and a new revised approach for credit valuation adjustment. Banks subject to Category III and IV standards would also be required “to calculate their regulatory capital in the same manner as banking organizations subject to Category I and II standards, including the treatment of accumulated other comprehensive income, capital deductions, and rules for minority interest.” Additionally, the supplementary leverage ratio and the countercyclical capital buffer would be applied to banks subject to Category IV standards.
The agencies said the proposed modifications are intended to:
- Better reflect banks’ underlying risks;
- Increase transparency and consistency by revising the capital framework in four main areas: credit, market, operational, and credit valuation adjustment risk;
- Strengthen the banking system, by applying consistent capital requirements across large banks by requiring institutions to (i) include unrealized gains and losses from certain securities in capital ratios; (ii) comply with the supplementary leverage ratio requirement; and (iii) comply with the countercyclical capital buffer, if activated.
The agencies predict that these changes will “result in an aggregate 16 percent increase in common equity tier 1 capital requirements for affected bank holding companies, with the increase principally affecting the largest and most complex banks.” The impact would vary by bank based on activities and risk profiles, the agencies stated, noting that most banks currently have enough capital to meet the proposed requirements. The NPRM would not amend capital requirements for smaller, less complex banks or for community banks. The agencies propose a three-year phased-in transition process beginning July 1, 2025, to provide banks sufficient time to accommodate the changes and minimize potentially adverse impacts. The changes would be fully phased in on July 1, 2028.
Separately, the Fed also issued an NPRM on a proposal that would modify certain provisions relating to the calculation of the capital surcharge for the largest and most complex banks in order to “better align the surcharge to each bank’s systemic risk profile. . .by measuring a bank’s systemic importance averaged over the entire year, instead of only at the year-end value.”
Comments on both NPRMs are due November 30.
FDIC Chairman Martin Gruenberg stressed that “[e]nhanced resilience of the banking sector supports more stable lending through the economic cycle and diminishes the likelihood of financial crises and their associated costs.” Also voting in favor of the NPRM was CFPB Chairman and FDIC Board Member Rohit Chopra who expressed interest in feedback from the public on ways to simplify the methodologies used to calculate the requirements. Acting Comptroller of the Currency Michael also voted in favor and encouraged commenters “to include assumptions about capital distributions and competition from banks and other financial institutions in their analyses of the impacts of the proposal on lending and economic growth.”
Voting against the new standards, FDIC Vice Chairman Travis Hill argued that while he supports strong capital requirements, he has several “concerns with the impact of excessive gold plating of international standards.” He stressed that the “proposal rejects the notion of capital neutrality and takes a starkly different path, ‘gold plating’ the new Basel standard in a number of ways and dramatically increasing capital requirements for banks with certain business models.”
Fed vice chair calls for higher capital for large banks
On July 10, Federal Reserve Board Vice Chair for Supervision Michael S. Barr delivered remarks at the Bipartisan Policy Center outlining proposed updates to capital standards. As part of his holistic review of capital standards for large banks, Barr concluded that the existing approach to capital requirements—including risk-based requirements, stress testing, risk-based capital buffers, and leverage requirements and buffers—was sound. He stated that the changes he proposes are intended to build on the existing foundation. Barr’s proposed updates include: (i) updating risk-based requirement standards to better reflect credit, trading, and operational risk, consistent with international standards adopted by the Basel Committee; (ii) evolving the stress test to capture a wider range of risks; and (iii) improving the measurement of systemic indicators under the global systemically important bank surcharge. Barr stated that at this time he was not recommending changes to the enhanced supplementary leverage ratio.
Barr also proposed implementing changes to the risk-based capital requirements, referred to as the “Basel III endgame,” which are intended to ensure that the U.S. minimum capital requirements require banks to hold adequate capital against their risk-taking. These proposed changes include: (i) with respect to a firm’s lending activities, the proposed rules would terminate the practice of relying on banks’ own individual estimates of their own risk and would instead adopt a more transparent and consistent approach; (ii) regarding a firm’s trading activities, the proposed rules would adjust the way that the firm measures market risk, better aligning market risk capital requirements with market risk exposure and providing supervisors with improved tools; and (iii) for operational losses, such as trading losses or litigation expenses, the proposed rules would replace an internal modeled operational risk requirement with a standardized measure.
Barr recommended that these enhanced capital rules apply only to banks and bank holding companies with $100 billion or more in assets. He emphasized that the proposed changes would not be fully effective for some years due to the notice and comment rulemaking process, and that any final rule would provide for an appropriate transition.
CFPB releases regulatory agenda
The Office of Information and Regulatory Affairs recently released the CFPB’s spring 2023 regulatory agenda. Key rulemaking initiatives that the agency expects to initiate or continue include:
- Overdraft fees. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation Z with respect to special rules for determining whether overdraft fees are considered finance charges.
- FCRA rulemaking. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. In January, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). CFPB Director Rohit Chopra noted that 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.” (Covered by InfoBytes here.)
- Insufficient funds fees. The Bureau is considering whether to engage in pre-rulemaking activity in November regarding non-sufficient fund (NSF) fees. The Bureau commented that while NSF fees have been a significant source of fee revenue for depository institutions, recently some institutions have voluntarily stopped charging such fees.
- Amendments to FIRREA concerning automated valuation models. On June 1, the Bureau issued a joint notice of proposed rulemaking (NPRM) with the Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations to implement quality control standards mandated by the Dodd-Frank Act concerning automated valuation models used by mortgage originators and secondary market issuers. (Covered by InfoBytes here.) Previously, the Bureau released a Small Business Regulatory Enforcement Fairness Act (SBREFA) outline and report in February and May 2022 respectively. (Covered by InfoBytes here.)
- Section 1033 rulemaking. Section 1033 of Dodd-Frank provides that covered entities, such as banks, must make available to consumers, upon request, transaction data and other information concerning consumer financial products or services that the consumer obtains from the covered entity. Over the past several years, the Bureau has engaged in a series of rulemaking steps to prescribe standards for this requirement, including the release of a 71-page outline of proposals and alternatives in advance of convening a panel under the SBREFA and the issuance of a final report examining the impact of the Bureau’s proposals to address consumers’ personal financial data rights. (Covered by InfoBytes here.) Proposed rulemaking may be issued in October.
- Property Assessed Clean Energy (PACE) financing. The Bureau issued an NPRM last month to extend TILA’s ability-to-repay requirements to PACE transactions. (Covered by InfoBytes here.) The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement.
- Supervision of Larger Participants in Consumer Payment Markets. The Bureau is considering whether to engage in pre-rulemaking activity next month to define larger participants in consumer payment markets and further the scope of the agency’s nonbank supervision program.
- Nonbank registration. The Bureau announced its intention to identify repeat financial law offenders by establishing a database of enforcement actions taken against certain nonbank covered entities. (Covered by InfoBytes here.) The Bureau anticipates issuing a final rule later this year.
- Terms and conditions registry for supervised nonbanks. At the beginning of the year, the Bureau issued an NPRM that would create a public registry of terms and conditions used in non-negotiable, “take it or leave it” nonbank form contracts that “claim to waive or limit consumer rights and protections.” Under the proposal, supervised nonbank companies would be required to report annually to the Bureau on their use of standard-form contract terms that “seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce or exercise their rights” and would appear in a publicly accessible registry. (Covered by InfoBytes here.) The Bureau anticipates issuing a final rule later this year.
- Credit card penalty fees. The Bureau issued an NPRM in February to solicit public feedback on proposed changes to credit card late fees and late payments and card issuers’ revenue and expenses. (Covered by InfoBytes here.) Under the CARD Act rules inherited by the Bureau from the Fed, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. A final rule may be issued later this year.
- LIBOR transition. In April, the Bureau issued an interim final rule, amending Regulation Z, which implements TILA, to update various provisions related to the LIBOR transition. Effective May 15, the interim final rule further addresses LIBOR’s sunset on June 30, by incorporating references to the SOFR-based replacement—the Fed-selected benchmark replacement for the 12-month LIBOR index—into Regulation Z. (Covered by InfoBytes here.)
CFPB highlights borrower risk as suspension on student loans nears end
On June 7, the CFPB released updated figures on risks facing student loan borrowers when payments paused during the pandemic are set to resume 60 days after June 30. Examining a deidentified sample of credit records, the Bureau studied roughly 32 million borrowers whose federal student loans will soon start accruing interest again. Findings found that:
- “More than one-in-thirteen student loan borrowers are currently behind on their other payment obligations. These delinquencies are higher than they were before the pandemic, despite a small seasonal decrease in the most recent data.”
- “About one-in-five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume.”
- “Median scheduled payments on other debt obligations have increased by 24 percent for student loan borrowers likely returning to repayment. In percentage terms, these increases are especially large for younger borrowers (252 percent, or $65 to $229).”
- “More than four-in-ten borrowers in [the] sample will return to repayment with a new student loan servicer.”
Bureau researchers found that the ebb and flow of the percent of delinquencies can be linked to the pause on student loan payments, pandemic stimulus payments, and other policy interventions. Attributing the slight decrease this March to an expected seasonal trend, the Bureau said the percentage is again rising as pandemic relief is expiring. This increase in delinquencies is not only specific to student loan borrowers, but also to all non-student loan borrowers, especially in the age range of 30-49, the agency reported. The research further found that “while borrowers in moderate- or higher-income Census tracts are less likely overall to have a non-student-loan delinquency than borrowers in lower-income Census tracts, these delinquencies grew faster for borrowers in higher-income areas over the last several months.” Without enrolling in income-driven repayment plans, the Bureau said it expects student loan borrowers with large balances relative to their income to have a higher risk of struggling to resume their payments.
The Bureau also explained that student loan borrowers’ non-student loan debts (which have increased by at least 10 percent) could also complicate the transition to repayment for millions of borrowers. Another concern flagged by the Bureau is that more than 44 percent of student loan borrowers will have to work with a new servicer as many servicers exited their contracts with the Department of Education over the past three years. The Bureau noted it plans to continue to monitor whether these risks materialize into financial distress.
OFAC announces new Sudan E.O., issues and amends several sanctions general licenses and FAQs
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) recently announced several sanctions-related actions, including President Biden’s new Executive Order (E.O.) Imposing Sanctions on Certain Persons Destabilizing Sudan and Undermining the Goal of a Democratic Transition. The E.O. expands the scope of a 2006 Executive Order following the determination that recent events in Sudan “constitute[] an unusual and extraordinary threat to the national security and foreign policy of the United States.” The E.O. outlines specific prohibitions and provides that all property and interests in property that are in the U.S. or that later come in the U.S., or that are in the possession or control of any of the identified U.S. persons must be blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in. Concurrently, OFAC issued a new FAQ clarifying which sanctions authorities are applicable to Sudan and the Sudanese government.
OFAC also issued Venezuela-related General License (GL) 42, which authorizes certain transactions related to the negotiation of settlement agreements with the IV Venezuelan National Assembly and certain other entities. The authorized transactions must relate to debt owed by the Venezuelan government, Petróleos de Venezuela, S.A., or any entity owned, directly or indirectly, 50 percent or more. GL 42 does not authorizes transactions involving the Venezuelan National Constituent Assembly convened by Nicolas Maduro or the National Assembly seated on January 5, 2021. OFAC also released three new related FAQs and one amended FAQ.
Additionally, OFAC released cyber-related GL 1C, which authorizes certain transactions with Russia’s Federal Security Service that would normally be prohibited by the Weapons of Mass Destruction Proliferators Sanctions Regulations, and issued three amended cyber-related FAQs. A few days later, OFAC issued Russia-related GL 8G, which authorizes certain transactions related to energy that would otherwise be prohibited by E.O. 14024, involving certain entities, including Russia’s central bank. OFAC clarified that GL 8G does not authorize prohibited transactions related to (i) certain sovereign debt of the Russian Federation; (ii) the “opening or maintaining of a correspondent account or payable-through account for or on behalf of any entity subject to Directive 2 under E.O. 14024, Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions”; and (iii) or “[a]ny debit to an account on the books of a U.S. financial institution of the Central Bank of the Russian Federation,” among others.
FHA implements provisions for transitioning LIBOR-based ARMs
On May 2, FHA published Mortgagee Letter (ML) 2023-09 to implement provisions of the Adjustable Rate Mortgages (ARM): Transitioning from LIBOR to Alternative Indices final rule that was published in the Federal Register at the beginning of March. (Covered by InfoBytes here.) The final rule replaces LIBOR with the Secured Overnight Financing Rate (SOFR) as the approved index for newly-originated forward ARMs, codifies HUD’s approval of SOFR as an index for newly-originated home equity conversion mortgages (HECM) ARMs, and establishes “a spread-adjusted SOFR index as the Secretary-approved replacement index to transition existing forward and HECM ARMs off LIBOR.” The ML provides interest rate transition directions for mortgagees and announces the availability of updated HECM model loan documents, which have been revised to be consistent with the final rule and the ML. The provisions in the ML have various effective dates.