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Agencies issue host state loan-to-deposit ratios
On May 31, the FDIC, Fed, and OCC (the agencies) released the current host state loan-to-deposit ratios for each state or territory, which the agencies used to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). Under the Interstate Act, banks were prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies were also subject to the same restriction. Determining compliance with Section 109 required a comparison of a bank’s estimated statewide loan-to-deposit ratio to the annual host state loan-to-deposit ratios. If a bank’s statewide ratio was less than one-half of the published state ratio, an additional review would be undertaken by the appropriate agency, which would involve a determination on whether the bank’s interstate branches were reasonably helping to meet the credit needs of the communities. A bank that failed in both the ratio and assessment would violate Section 109 and subjected to sanctions by the appropriate agency.
FDIC publishes its 2024 Risk Review
On May 22, the FDIC published its 2024 Risk Review which summarized emerging risks in the U.S. banking system in 2023 across five broad categories: credit risk, market risk, operational and cyber risks, climate-related financial risk, and crypto-asset risk. The risk review paid particular attention to risks that may affect community banks. Among other issues to be aware of, the report noted banks continue to be targeted by ransomware threat actors. These cyber threats require banks to continuously improve cybersecurity and other internal controls to effectively combat cyber threats and mitigate the risk of a significant service disruption. The FDIC also reported that economic conditions were strong, and despite a period of stress in early 2023, the banking industry demonstrated resilience. By the end of the year, “overall asset quality metrics were favorable, and liquidity stabilized.” The report also noted that credit risk differed across loan categories, with commercial real estate and consumer loans seeing more asset quality decline. While the commercial real estate sector stayed strong overall, office and retail mall markets struggled. The FDIC remarked that the ability to refinance commercial real estate loans remained a challenge to the industry due to high interest rates, softening property values, and emerging credit weakness.
FINRA study examines trust in AI for financial advice
On June 4, the FINRA Investor Education Foundation published a new study which revealed consumers may be more likely to trust personal finance advice from AI-generated sources over financial professionals.
The report emphasized the importance of understanding consumer perceptions of AI, particularly in the context of financial decision-making. The findings suggested while financial professionals are generally trusted more than AI, there are certain areas like savings, where some consumers showed a preference for AI-generated advice. The study surveyed over 1,000 U.S. adults and compared the perceived trustworthiness of AI-generated financial advice to that of human financial professionals across four areas: homeownership, future performance of stocks and bonds, portfolio allocation, and savings and debt.
The main insights from the report were:
- Reliance on AI for financial guidance is low currently.
- Information about homeownership was generally trusted regardless of the source; however, trust was higher when the advice was attributed to financial professionals.
- About one-third of all participants trusted AI-generated predictions of stock and bond performance.
- Individuals with higher self-rated financial knowledge showed a greater tendency to trust AI over a financial professional.
- Regarding portfolio allocation advice, information from financial professionals was trusted more than from AI.
- Savings and debt advice was trusted in general, whether it came from AI or a financial professional; a larger proportion of Black respondents trusted a financial professional over AI.
CFPB sues student loan servicer over discharged student loan collections
On May 31, the CFPB announced its lawsuit against a Pennsylvania-based student loan servicer (the defendant) for allegedly collecting on discharged loans. According to the complaint, the defendant lacked policies and procedures for identifying serviced loans that were discharged by bankruptcy courts. The CFPB alleged that the defendant continued to collect on discharged non-qualified education loans by making misrepresentations to consumers through repayment schedule letters and billing statements. Furthermore, the Bureau alleged that the defendant’s failure to establish policies for private student loans that were discharged resulted in its furnishing inaccurate information to consumer reporting agencies. The Bureau added that even if consumers did not continue to pay on their discharged loans, they were not reasonably able to avoid the defendant’s collection attempts and the credit information it furnished. The CFPB also claimed that consumers were unable to protect their interests because they could not choose their loan servicer and had no control over its collection practices. The defendant’s actions were in violation of the CFPA based on several violation of Regulation V. The defendant allegedly violated the FCRA, too. The Bureau sought injunctive relief, consumer redress, a civil money penalty, and other relief.
CFPB cautions against unenforceable contract terms and conditions
On June 4, the CFPB issued Circular 2024-03, which cautioned covered persons under the CFPA against contracts for consumer financial products or services, including illegal or non-binding clauses. The Bureau said that such clauses may mislead consumers into thinking they have forfeited legal rights, which would violate the CFPA. Specifically, consumer contracts that falsely claim to restrict consumer rights (including liability waivers and mandatory arbitration clauses) can violate the prohibition on deceptive acts. CFPB Director, Rohit Chopra, said in an accompanying press release that the Bureau will address companies that “deceptively slip these terms into their fine print.” The Bureau reiterated prior guidance that disclaimers in a contract such as “subject to applicable law” do not cure misrepresentations caused by an unenforceable contract term. Past CFPB actions have addressed “deceptive contract terms” in various consumer finance areas, including mortgages, bank accounts, remittance transfers, and auto loans. The CFPB said it will continue to ensure fair consumer interactions with financial institutions, including efforts to regulate nonbank companies' contract terms and uphold the right to post honest online reviews. The Bureau also said it supported servicemembers' rights to challenge unlawful contract terms through legal action.
VA announces its targeted foreclosure moratorium on VA loans
On May 29, the VA announced a targeted foreclosure moratorium on VA-guaranteed loans, which will give servicers time to implement the Veterans Affairs Servicing Purchase (VASP) program. Servicers can implement the VASP program beginning May 31, and the VA expects servicers to fully implement VASP no later than October 1.
According to the circular, which went into effect immediately, the VA is urging servicers to put in place a targeted foreclosure moratorium for VA-guaranteed loans through December 31. During this period, servicers should refrain from initiating, advancing or completing the foreclosure process unless an exception applies. Exceptions include when a property is vacant or abandoned, a borrower has clearly expressed no interest in maintaining homeownership or preventing foreclosure, no mortgage payment has been received for at least 210 days and the borrower is nonresponsive, or after determining no possible home retention option, including VASP, is feasible for the borrower. Additionally, during the targeted moratorium, servicers will be expected to continue loss mitigation efforts for delinquent loans and offer workable solutions to borrowers, as detailed in the VA Servicer Handbook. Servicers are also encouraged to avoid negative credit reporting on affected loans. For borrowers affected by Covid-19, servicers should offer loan deferments, disaster extend modifications, and Covid-19 refund modifications until they implement VASP or through September 30, whichever is sooner.
U.S. Supreme Court vacates decision on interest for escrow accounts, orders further review
On May 30, the U.S. Supreme Court vacated and remanded for further proceedings a 2022 decision by the Second Circuit that held that the National Bank Act preempted a New York state law requiring the payment of interest on mortgage escrow accounts. The plaintiff borrowers obtained home mortgage loans from a national bank and were required to make monthly deposits into escrow accounts for the payment of property taxes and insurance. New York law required the payment of interest on such accounts. When the national bank, relying on federal preemption, did not pay such interest, the borrowers sued. The district court rejected the bank’s preemption argument, but the 2nd Circuit reversed, holding that the state law significantly interfered with the bank’s exercise of its authorized power to create and fund escrow accounts (covered by InfoBytes here). The Supreme Court granted certiorari to resolve a split between the 2nd Circuit’s decision and an earlier decision of the 9th Circuit (covered by InfoBytes here).
The Supreme Court held that the 2nd Circuit did not properly apply the applicable preemption standard created by the Dodd-Frank Act. The Dodd-Frank Act preempts state law “only if” the state law (i) discriminates against national banks as compared to state banks; or (ii) “prevents or significantly interferes with the exercise by the national bank of its powers,” as determined “in accordance with the legal standard for preemption in the Supreme Court’s decision in Barnett Bank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al.”
Because the state law did not discriminate against national banks, the Court focused its analysis on the Barnett Bank/significant interference test. The Court held that “Barnett Bank did not purport to establish a clear line to demarcate when a state law ‘significantly interfere[s] with the national bank’s exercise of its powers[,]’” but instead “analyzed the Court’s precedents on that issue.” Stating that those precedents “furnish content to Barnett Bank’s significant interference test—and therefore also to Dodd-Frank’s preemption standard,” the Court then proceeded to analyze those same precedents, identifying cases that illustrate the types of state laws that do and do not constitute a “significant interference” with national bank powers. The Court ultimately concluded that a “court applying [the] Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law.” In a footnote, the Court added that in “Barnett Bank and each of the earlier precedents, the Court reached its conclusions about the nature and degree of the state laws’ alleged interference with the national banks’ exercise of their powers based on the text and structure of the laws, comparison to other precedents, and common sense.”
Because the 2nd Circuit had not analyzed the preemption issue “in a manner consistent with Dodd-Frank and Barnett Bank,” the Court vacated its decision and remanded the case for further proceedings.
OCC releases enforcement actions for May 2024
On May 23, the OCC released a list of recent enforcement actions against national banks, federal savings associations, and individuals affiliated with such entities (defined as institution-affiliated parties, or IAPs). The actions against two individual banks include two formal agreements in which the OCC alleged that the banks engaged in unsafe or unsound practices related to risk governance and internal controls for one bank; and capital planning, strategic and succession planning, and liquidity risk management for the other bank. The announcement also included five enforcement actions against IAPs to “deter, encourage correction of, or prevent violations, unsafe or unsound practices, or breaches of fiduciary duty.” Specifically, the announcement included four prohibition orders and one notice of charges against IAPs, mainly individuals, for criminal activity. More information on the OCC’s enforcement action types can be found here.
FHA issues reporting requirements on significant cybersecurity incidents
On May 23, HUD issued Mortgagee Letter (ML) 2024-10 titled “Significant Cybersecurity Incident (Cyber Incident) Reporting Requirements” which required FHA-approved mortgagees to notify HUD when a “Cyber Incident” occurs. A Cyber Incident would be any unauthorized event that could harm information or computer systems, breaching security rules, and affecting a mortgagee’s ability to meet FHA program requirements. It also would include actions that threaten data confidentiality, integrity, or availability, potentially disrupting mortgage operations. Mortgagees must report all suspected Cyber Incidents to HUD's FHA Resource Center and Security Operations Center within 12 hours of detection. The report must include several details, including the mortgagee's name and ID, contact information, a description of the incident (including the date, cause, and impact to PII, login credentials, and IT systems), any affected subsidiary or parent companies, and the status of the mortgagee’s incident response, including whether law enforcement has been notified. The provisions of this ML are effective immediately and will be reflected in a forthcoming update to the HUD Handbook 4000.1.
CSBS seeks comments on its 2025 NMLS fee increases proposals
On May 20, CSBS requested public feedback on a proposal to raise NMLS fees for the first time since the registry’s launch in 2008. This proposed fee increase will ensure NMLS remains functional and up to date while balancing the need for cost-effectiveness for its 600,000 users. The proposed fee hikes will impact companies, individual licensees, and branches, across industries like mortgage, debt, consumer finance, and money services. For example, the annual processing fee for state licensure would increase from $100 to $120 for companies, from $20 to $25 for branches, and from $30 to $35 for individuals. NMLS fees for federal registration will experience similar price hikes. The proposed fee structure will also include adjustments for initial set-up fees, annual processing fees, and fees associated with changes in sponsorship or employment.