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On March 25, CSBS President and CEO John W. Ryan sent a letter to Federal Reserve Board Governor Jerome Powell and Treasury Secretary Steven Mnuchin encouraging the agencies to create a liquidity facility under Section 13(3) of the Federal Reserve Act to support mortgage servicers “in anticipation of widespread borrower payment forbearance.” According to the letter, CSBS members—state regulatory agencies responsible for regulating bank and nonbank financial companies—have expressed concerns regarding liquidity and solvency in the mortgage servicing sector, and are particularly focused on monitoring the financial condition of nonbank mortgage servicers. Without a liquidity facility, CSBS warned that “mortgage servicers will experience a severe liquidity shortage that may threaten their continued viability, and by extension, the health of the nation’s housing finance market.”
On March 18, Senator Mitch McConnell (R-KY) proposed relief legislation which, among other things, would temporarily allow fintechs to offer “small business interruption loans” for as long as the Covid-19 national emergency is in effect. The “CARES Act” or Corornavirus Aid, Relief and Economic Security Act, would provide nearly $300 trillion in additional funds to the SBA in order to provide emergency government-backed loans. Under the proposal, small businesses eligible for the SBA Section 7(a) loans with 500 or fewer employees, could use the loans to fund, such things as (i) paid sick, medical, or family leave; (ii) group health care benefits; (iii) employee salaries; (iv) mortgage payments; and (v) utilities. In addition, the proposal provides for loan deferment for a year and loan forgiveness for loans used to cover payroll expenses.
On February 19, the FDIC issued a notice and request for comment regarding modernizing “its signage and advertising requirements to better reflect how banks and savings associations currently operate and how consumers use banking services.” The Request for Information (RFI) solicits input on how the agency “can revise and clarify its sign and advertising rules related to FDIC deposit insurance.” Major changes to these rules have not been made since 2006, and the agency states that “the rules do not reflect evolving banking channels and operation.” Accordingly, the RFI also requests suggestions about how the FDIC can use technology or other solutions to help consumers distinguish FDIC-insured entities from nonbanks, and to prevent consumers from being harmed by non-insured entities’ potentially misleading or fraudulent representations. The RFI lists 21 questions to focus the public input. Comments must be received by March 19.
On February 19, the Conference of State Bank Supervisors announced the launch of a technology platform called the State Examination System (SES) to increase transparency and collaboration with regulated entities. State regulators, who are the primary regulators of non-bank and fintech firms, can use the system for investigations, enforcement actions and complaints. According to the press release, “state regulators will be able to enhance supervisory oversight of nonbanks while making the process more efficient for regulators and companies alike.” Among other things, SES is designed to: (i) “[s]upport networked supervision among state regulators”; (ii) “[s]tandardize workflow, business rules and technology across states”; (iii) [f]acilitate secure collaboration between licensees and their regulators”; (iv) allow examiners to “focus…on higher risk cases”; and (v) promote efficiency by “[m]ov[ing] state supervision towards more multistate exams and fewer single-state efforts.” SES will be managed by the State Regulatory Registry, which also manages the Nationwide Multistate Licensing System.
On February 10, the FDIC issued FIL-8-2020, which incorporates Procedures for Deposit Insurance Applications from Applicants that are Not Traditional Community Banks into its Deposit Insurance Application Procedures Manual (manual). In addition to the updating the manual, the agency also issued a handbook, entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions (handbook), advising that the updated manual together with the handbook provide comprehensive instructions for completing deposit insurance applications. According to the letter, the updated manual and the handbook contain mostly “technical edits and clarifications” and are meant to “provide transparency and clarity” for applicants. The letter also supplies the definitions of “non-bank” and “non-community bank.”
On February 5, Federal Reserve Governor Lael Brainard spoke at the “Symposium on the Future of Payments” to discuss benefits and risks associated with the digitalization of payments and currency. Noting that some of the new players in this space are outside financial regulatory guardrails and offer new currencies that “could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission,” Brainard stressed the importance of assessing new approaches and redrawing existing parameters. Emphasizing, however, that no federal agency has broad authority over the payments systems, Brainard stated that Congress should review how retail payments are regulated in the U.S., given the growth in ways that money is able to move around without the need for a financial intermediary. Banking agencies may oversee nonbank payments “to the extent there is a bank nexus” or bank affiliation, Brainard noted, however, she cautioned that “this oversight will be quite limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when technology firms develop payments services connected to digital wallets rather than bank accounts and rely on digital currencies rather than sovereign currencies as the means of exchange.” According to Brainard, “a review of the nation’s oversight framework for retail payment systems could be helpful to identify important gaps.”
Among other topics, Brainard stated that the Fed is currently reviewing nearly 200 comment letters concerning the proposed FedNow Service announced last summer, which would “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide.” (Covered by InfoBytes here.) Brainard also discussed the possibility of creating a central bank digital currency (CBDC). While noting that the “prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems,” Brainard stressed the importance of taking into account private sector innovations and considering whether adding a new form of central bank liability would improve the payment system and reduce operational vulnerabilities from a safety and resilience perspective. She noted that the Fed is “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.”
On December 4, the Financial Stability Oversight Council (FSOC) issued final interpretive guidance to revise and update 2012 guidance concerning nonbank financial company designations. According to Treasury Secretary Steven T. Mnuchin, the guidance “enhances [FSOC’s] ability to identify, assess, and respond to potential risks to U.S. financial stability. . . by promoting careful analysis and creating a more streamlined process.” Among other things, the guidance (i) implements an activities-based approach for identifying, assessing, and addressing potential risks and threats to financial stability in the U.S., allowing FSOC to work with federal and state financial regulators to implement appropriate actions when a potential risk is identified; (ii) enhances the analytic framework for potential nonbank financial company designations, which includes a cost-benefit analysis and a review of the likelihood of a company’s material financial distress determined by its vulnerability to a range of factors; and (iii) enhances the efficiency and effectiveness of the nonbank financial company designation process by condensing the process into two stages and increasing “engagement with and transparency to” companies under review, as well as their regulators, through the creation of pre- and post-designation off ramps.
FSOC also released its 2019 annual report to Congress, which reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. Key highlights include:
- Cybersecurity. FSOC states that “[g]reater reliance on technology, particularly across a broader array of interconnected platforms, increases the risk that a cybersecurity event will have severe consequences for financial institutions.” Among other things, FSOC recommends continued robust, comprehensive cybersecurity monitoring, and supports the development of public and private partnerships to “increase coordination of cybersecurity examinations across regulatory authorities.”
- Nonbank Mortgage Origination and Servicing. The report adds the increasing share of mortgages held by nonbank mortgage companies to its list of concerns. FSOC notes that of the 25 largest originators and servicers, nonbanks originate roughly 51 percent of mortgages and service approximately 47 percent—a notable increase from 2009 where nonbanks only originated 10 percent of mortgages and serviced just 6 percent. FSOC states that risks in nonbank origination and servicing arise because most nonbanks have limited liquidity as compared to banks and rely more on short-term funding, among other things. FSOC recommends that federal and state regulators continue to coordinate efforts to collect data, identify risks, and strengthen oversight of nonbanks in this space.
- Financial Innovation. The report discusses the benefits of new financial products and practices, but cautions that these may also create new risks and vulnerabilities. FSOC recommends that these products and services—particularly digital assets and distributed ledger technology—should be continually monitored and analyzed to understand their effects on consumers, regulated entities, and financial markets.
On November 14, the FDIC released its latest issue of the FDIC Quarterly, which analyzes the U.S. banking system and focuses on changes occurring since the 2008 financial crisis, particularly within nonbank lending growth. The three reports—published by the FDIC’s Division of Insurance and Research—“address the shift in some lending from banks to nonbanks; how corporate borrowing has moved between banks and capital markets; and the migration of some home mortgage origination and servicing from banks to nonbanks.”
- Bank and Nonbank Lending Over the Past 70 Years notes that total lending in the U.S. has grown dramatically since the 1950s, with a shift in bank lending that reflects the growth of nonbank loan holders as nonbanks have gained market share in residential mortgage and corporate lending. The report states that in 2017, nonbanks represented 53 percent of mortgages originated by HMDA filers, and originated a significant volume of loans for sale to the GSEs. Mortgage servicing also saw a shift from banks to nonbanks, with nonbanks holding “42 percent of mortgage servicing rights held by the top 25 servicers in 2018.” The report also discusses shifts in lending for commercial real estate, agricultural loans, consumer credit, and auto loans, and notes that bank lending to nondepository financial institutions has grown from roughly $50 billion in 2010 to $442 billion in the second quarter of 2019.
- Leveraged Lending and Corporate Borrowing: Increased Reliance on Capital Markets, With Important Bank Links examines the shift in corporate borrowing from banks to nonbanks, with nonfinancial corporations “relying more on capital markets and less on bank loans as a funding source.” The report also, among other things, discusses resulting risks and notes that “[d]espite the concentration of corporate debt in nonbank credit markets, banks still face both direct and indirect exposure to corporate debt risks.”
- Trends in Mortgage Origination and Servicing: Nonbanks in the Post-Crisis Period examines changes to the mortgage market post 2007, including the migration outside of the banking system of a substantive share of mortgage origination and servicing. The report also discusses trends within the mortgage industry, key characteristics of nonbank originators and servicers, potential risks posed by nonbanks, as well as potential implications the migration to nonbanks may pose for banks and the financial system. Specifically, the report lists several factors contributing to the resurgence of nonbanks in mortgage origination and servicing, including (i) crisis-era legacy portfolio litigation at bank originators; (ii) more aggressive nonbank expansion (iii) nonbanks’ technological innovations and mortgage-focused business models; (iv) large banks’ sales of crisis-era legacy servicing portfolios due to servicing deficiencies and other difficulties; and (v) capital treatment changes to mortgage servicing assets applicable to banks. The report emphasizes, however, that “[c]hanging mortgage market dynamics and new risks and uncertainties warrant investigation of potential implications for systemic risk.”
On September 11, Financial Crimes Enforcement Network (FinCEN) Deputy Director Jamal El-Hindi delivered remarks at the 2019 Money Transmitter Regulators Association’s annual conference. El Hindi’s remarks focused on innovation and reform pertaining to the Bank Secrecy Act (BSA), supervision in the non-bank financial institution sector and coordination with state supervisors, and “the importance of a strong culture of compliance and what it means in a national and global security context.” According to El-Hindi, the BSA/anti-money laundering system “is good; but it can always be improved,” including through innovations that can “help better detect and safeguard against illicit activity.” El-Hindi reiterated FinCEN’s policy statement from December 2018, which encouraged innovation in the banking sector. (Previously covered by InfoBytes here.)
El-Hindi also highlighted recent discussions related to the role artificial intelligence can play in reducing false positives to assist human analysis, and the potential for blockchain technology to enhance transparency through the understanding of customer identity or transaction profiles. He noted that these themes and others emerged from FinCEN’s recent “Innovation Hours Program,” which encourages fintech companies, regtech companies, and financial institutions to present to FinCEN new and innovative products and services for potential use in the financial sector. The program’s upcoming September meeting will focus on innovations in “know your customer” compliance, BSA reporting, and core inter-bank payment and messaging systems associated with industry anti-money laundering/combating the financing of terrorism efforts. Additionally, El-Hindi noted that FinCEN’s enhanced supervision of nonbank financial institutions involves “actively prioritizing and engaging in,” among other activities, (i) conducting examinations of “specialized, rapidly evolving” financial services providers (e.g., virtual currency exchangers and administrators); (ii) identifying sector data to support FinCEN's analytic endeavors; and (iii) developing a stronger framework for risk assessments of the nonbank financial sector “from both the compliance and illicit activity standpoints.” El-Hindi closed his remarks by encouraging FinCEN and other regulators to discuss with foreign counterparts “the concept of a culture of compliance in the United States and what underpins it, and explore with our counterparts concepts that could underpin a culture of compliance in their own jurisdictions.”
In July, the California Department of Business Oversight (DBO) issued a request for comment on the first draft of regulations implementing the state’s new law on commercial financing disclosures. As previously covered by InfoBytes, in September 2018, the California governor signed SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. Most notably, the act requires financing entities subject to the law to disclose in each commercial financing transaction—defined as an “accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes”—the “total cost of the financing expressed as an annualized rate” in a form to be prescribed by the DBO.
The draft regulation provides general format and content requirements for each disclosure, as well as specific requirements for each type of covered transaction. In addition to the detailed information in the draft regulation, the DBO has released model disclosure forms for the six financing types, (i) closed-end transactions; (ii) open-ended credit plans; (iii) general factoring; (iv) sales-based financing; (v) lease financing; and (vi) asset-based lending. Additionally, the draft regulation uses an annual percentage rate (APR) as the annualized rate disclosure (as opposed to the annualized cost of capital, which was considered in the December 2018 request for comments, covered by InfoBytes here). Moreover, the draft regulation provides additional information for calculating the APR for factoring transactions as well as calculating the estimated APR for sales-based financing transactions.
Comments on the draft regulations are due by September 9.
- Daniel R. Alonso to discuss "The international compliance situation and new challenges" at the World Compliance Association Covid Compliance Conference
- Benjamin W. Hutten to discuss "Understanding OFAC sanctions" at a NAFCU webinar
- Garylene D. Javier to discuss "Navigating workplace culture in 2020" at the DC Bar Conference