InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Fed releases report on banking supervision and regulation
On November 10, the Fed released its biannual Supervision and Regulation Report ahead of congressional oversight hearings next week. The report covers banking system conditions, regulatory developments, and supervisory developments. The report stated that “[t]he banking sector remains sound overall.” After learning from the recent bank failures last spring, the Fed’s report aims to improve its supervision of “liquidity and interest rate risks by conducting targeted reviews… as well as conducting focused training and outreach… for banks and examiners.” Proposed regulatory developments include the Basel III endgame, long-term debt, and discount window preparedness. For supervisory developments, the Fed created the Novel Activities Supervision Program (previously covered by InfoBytes here) in August to supervise novel banking activities such as “crypto-assets, distributed ledger technology, and complex, technology-driven partnerships with nonbanks.”
HUD seeks comments on update to HECM policy
On November 9, FHA posted a proposed update to its Home Equity Conversion Mortgage (HECM) policy. According to FHA, the proposal “enables certain categories of… HECMs that were previously ineligible for assignment to be assigned to HUD… This change will support servicer liquidity and strengthen the HECM market for senior homeowners.” Under current HECM policy, mortgage servicers can assign a HECM to HUD “when the mortgage reaches 98 percent of the Maximum Claim Amount and… an eligible borrower or non-borrowing spouse is residing in the property.”
The draft mortgage letter “proposes to expand the assignment eligibility criteria to include HECMs that are due and payable resulting from the death of all borrowers and non-borrowing spouses.” A redline of the proposed language of the updated HECM Assignment Eligibility can be found here. FHA seeks comments on its proposal through December 11, 2023, using the Feedback Response Worksheet download here, and can be sent to sffeedback@hud.gov.
FHFA releases advisory bulletin for pilot and voluntary programs
On November 13, FHFA released an advisory bulletin on the FHLBank Framework for Pilot and Voluntary Programs. The desire for FHFA to develop innovative pilot programs is to support “affordable housing, equity advancement, and community development for underserved and financially vulnerable populations.” The pilot programs would be implemented and then analyzed to determine if they should continue, be expanded, or stop altogether. Some pilot programs may be to “test and learn” while some end because they do not meet FHLBank objectives. What the FHFA disallows from its pilot programs are “[p]roducts, programs, and services implemented under established FHFA statutory and regulatory authorities.” However, voluntary programs have included “grants, down payment assistance programs, and special purpose credit programs.”
The FHFA guidance recommends that FHLBank’s board of directors establish specific parameters for pilot and voluntary programs by March 29, 2024. This bulletin was a result of public input phases of the “FHLBank System at 100: Focusing on the Future” initiative, as previously covered by InfoBytes here. Stakeholder feedback claimed that “FHLBanks should do more to support the affordable housing and community development components of their mission, especially in addressing the needs of underserved or financially vulnerable populations.”
CFPB and Fed release updated thresholds for Regulations Z and M
On November 13, the CFPB and the Fed released updated dollar thresholds for whether certain credit and lease transactions are subject to Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) requirements for 2024. The thresholds for both regulations were increased from $66,400 to $69,500, an increase of 4.6 percent. Transactions at or below the 2024 threshold of $69,500 will be “subject to the protections of the regulations.” The CFPB derives its thresholds from the June 1, 2023, report on the Consumer Price Index for Urban Wage Earnings and Clerical Workers (CPI-W). The thresholds for 2023 were previously increased at a rate of 8.8 percent, a larger increase given the rate of inflation during the previous year.
SEC and DOJ charge two co-CEOs operating a $100 million fraud scheme
On November 9, the SEC and DOJ charged two co-CEOs of a tech investment firm for allegedly directing a $100 million fraud scheme. The two individuals were the founders of a failed Fresno-based technology company and were charged with “conspiring to commit wire fraud and taking more than $100,000,000 from various businesses and individuals” under U.S.C. § 1349. The two founders allegedly misled investors through falsified documents, bank records, auditing reports, and accounting statements.
The DOJ alleges that, as recently as January 2022, “[the two individuals lied] to board members, investors, lenders, and others about [the company’s] finances to obtain investments, loans, and other funding… Much of the money went towards paying payroll, including the [co-CEOs’] $600,000 per year salaries.” Authorities discovered the alleged fraud scheme back in May 2023 when the company failed to make payroll and then terminated all its 900 employees. If convicted, the two founders face a maximum statutory penalty of 20 years in prison each and a $250,000 fine.
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.
FTC, DOJ convene with G7 on AI policy future
On November 8, the FTC and DOJ met with the G7 Competition Authorities and Policymakers’ Summit on how to better regulate AI while addressing its competitive concerns. The Summit took place in Tokyo, Japan, and both the FTC’s and the DOJ’s Antitrust Division participated with the international group. The G7 issued a statement on how generative AI can pose not only anti-competitive risks, but also risks in “privacy, intellectual property rights, transparency and other concerns.” All policymakers shared concerns on how to best enforce fair competition laws with AI, iterating that “existing competition law applies to [AI]” and that they were “prepared to confront abuses if AI becomes dominated by a few players with market power.” The G7 stated a need to enforce competition laws and “develop policies necessary to ensure that principles of fair competition are applied to digital markets.”
The G7’s report outlines its initiatives to promote and protect competition in digital markets, its commitment to address competition concerns, and its recognition of the need for internal cooperation on digital competition.
Minnesota amends health care provision in extensive new law
On November 9, the State of Minnesota enacted Chapter 70--S.F.No. 2995, a large bill to amend certain sections of its current health care provisions. The bill covers extensive changes to healthcare provisions, from prescription contraceptives, hearing aids, mental health, long COVID, and childcare, among many others.
One of the significant new laws requires a hospital to first check if a patient’s bill is eligible for charity care before sending it off to a third-party collection agency. Further, the bill places new requirements on hospitals collecting on a medical debt before it can “garnish wages or bank accounts” of an individual. The Minnesota law also outlines how a hospital wishing to use a third-party collection agency, must first complete an affidavit attesting that it has checked if the patient is eligible for charity care, confirmed proper billing, given the patient the opportunity to apply for charity care, and, under certain circumstances, if the patient is unable to pay in one lump sum, offered a reasonable payment plan instead.
2nd Circuit affirms dismissal of whistleblower lawsuit alleging FCA violations
On October 30, the U.S. Court of Appeals for the 2nd Circuit affirmed a district court order dismissing a whistleblower lawsuit alleging violations of the False Claims Act (FCA). The three-judge panel concluded that they did not need to “address the public disclosure bar because the [second amended complaint]… fails to state a claim for a violation of the FCA.” According to the panel, the plaintiff did not allege that the defendant knowingly made a misrepresentation material to the government’s decision and that “failure to adequately plead either of these requirements is fatal to a relator's claim."
The original whistleblower complaint, filed in 2014, alleged that the defendant covered losses on loans that it acquired by taking advantage of a shared loss agreement with the FDIC. The complaint also stated that the defendant knowingly reported write-downs on loans already paid off, sold, or irrelevant to the portfolio. The FDIC declined to intervene, and the case was dismissed. The plaintiff appealed and oral arguments were heard on October 12; however, the order found that the plaintiff failed to identify a false claim or false record and did not establish scienter or motive to commit fraud.
Fed Governor Michelle Bowman gives speech discussing banking regulatory reforms and concerns
On November 9, Federal Reserve Governor Michelle W. Bowman delivered a speech on the economy and prioritization of bank supervision and regulation. Governor Bowman highlighted recent developments in banking regulatory framework reform. Governor Bowman began by highlighting the proposed reforms to capital requirements for banks with more than $100 billion in assets. She mentioned the central concern raised is the potential inadequacy of the quantitative and analytical foundations of these reforms. Governor Bowman questioned whether Basel III reforms effectively address regulatory deficiencies and emphasized the need for a thorough understanding of both the benefits and costs of implementing such changes. Governor Bowman discussed the actions taken by the agencies, including an extended comment period and efforts to gather more information on the proposal's potential impact. Several areas are identified as necessary to address, such as redundancy in the capital framework, calibration of the Market Risk Capital Rule, the inefficiency of two standardized capital stacks, and the punitive treatment of fee income. Governor Bowman also highlighted the missed opportunity to review leverage ratio requirements, which could have implications for market functioning in times of stress.
Shifting the focus to the CRA, Governor Bowman acknowledged the importance of improving access to credit, especially in low- and moderate-income (LMI) communities. However, the Governor mentioned concerns raised about the new final rule implementing the CRA. She explained some criticism for it being unnecessarily complex, overly prescriptive, and disproportionately burdensome for banks, especially community banks. It applies the same regulatory expectations to small and large banks, failing to recognize the differences among banks in terms of size, risk, and business models, she added. Governor Bowman’s remarks underscore the need for a balanced, data-driven, and risk-focused approach to regulatory reforms.