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  • Hsu says OCC focused on fairness in banking

    On March 30, acting Comptroller of the Currency Michael J. Hsu commented that the safety and soundness of the federal banking system continues to be a top agency priority, as is improving fairness in banking. Speaking at a conference, Hsu discussed several measures taken by the OCC to elevate and advance fairness, particularly for the underserved and financially vulnerable. Explaining that OCC examiners are encouraging bank management to review existing overdraft protection programs and consider adopting pro-consumer reforms, Hsu referred to CFPB guidance issued last October to address unfair, deceptive, and abusive practices associated with “so-called ‘surprise overdraft’ fees.” (Covered by InfoBytes here.) He also commented that both the Federal Reserve Board and the FDIC have cited the risk of violating UDAP in connection with the certain overdraft practices. Hsu noted that not all overdraft practices are equal, stating that “authorize positive, settle negative” and “representment” fees both present heightened risks.

    Recognizing the recent decline in banks’ reliance on overdraft fees, Hsu emphasized that most bankers he has spoken to “understand the importance of treating their customers fairly and have been open to learning about best practices.” He noted that “[t]hese bankers are committed to being there for their customers and providing them with short-term, small dollar liquidity when it is needed most. Many customers tell their banks, as well as groups that have studied overdraft practices, that this banking service helps them meet payments when they come due.” Hsu added that the OCC’s intended goal is to “improve the fairness of these programs by making them more pro-consumer, not to eliminate them,” and that “[m]ore fairness means more financially healthy communities, which means more trust in banking.” Hsu also discussed efforts taken by the OCC to combat discriminatory lending practices, including working to enhance supervisory methods for identifying appraisal discrimination.

    Bank Regulatory Federal Issues OCC Overdraft Examination Discrimination Supervision Appraisal Consumer Finance CFPB Federal Reserve FDIC

  • OCC establishes Office of Financial Technology

    On March 30, the OCC announced the establishment of the Office of Financial Technology, and selected Prashant Bhardwaj to lead the office as Deputy Comptroller and Chief Financial Technology Officer beginning April 10. As previously covered by InfoBytes, last October the OCC said the new office will build on and incorporate the agency’s Office of Innovation (established in 2016 and covered by InfoBytes here), and will strengthen the OCC’s expertise and ability to adapt to a rapidly evolving banking landscape. The Office of Financial Technology will “enhance the OCC’s expertise on matters regarding digital assets, fintech partnerships, and other changing technologies and business models within and that affect OCC-supervised banks,” the OCC said in its announcement, noting that Bhardwaj will lead a team responsible for analyzing, evaluating, and discussing relevant fintech trends, emerging and potential risks, and the potential implications for OCC supervision.

    Bank Regulatory Federal Issues OCC Fintech Innovation Supervision Digital Assets

  • CFPB scrutinizes discharged private student loan billing and collection practices

    Federal Issues

    On March 16, the CFPB released a compliance bulletin discussing student loan servicers’ practice of collecting on private student loans discharged in bankruptcy. The bulletin also notified regulated entities on how the Bureau intends to exercise its enforcement and supervisory authorities on this issue. Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts addressed the treatment of certain private student loans following bankruptcy discharge. The Bureau explained that in order to secure a discharge of a qualified education loan in bankruptcy, a borrower must demonstrate that the loan would impose an undue hardship if not discharged. Loans that do not meet this qualification (“non-qualified student loans”) can be discharged under standard bankruptcy discharge orders, the Bureau said.

    Bureau examiners found, however, that several servicers failed to determine whether a borrower’s loan was qualified or non-qualified. As a result, non-qualified student loans were returned to repayment after a bankruptcy concluded, wherein servicers continued to bill and collect payments on the loans even through the borrower was released from this debt through the bankruptcy discharge. According to the Bureau, many borrowers, when faced with collection activities in violation of a bankruptcy court order, continued to make payments on debts they no longer owed.

    The Bureau explained that servicers who collected on student loans that were discharged by a bankruptcy court violate the prohibition on unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act. The bulletin described unfair practices observed by examiners, such as servicers relying entirely on loan holders to distinguish among the loans and not ensuring that such holders had in fact done so. The bulletin also provided examples of student loans that are eligible for standard bankruptcy discharge, including loans made to students attending schools that are ineligible for federal student aid and loans made to students attending school less than half time. Bureau examiners instructed servicers to immediately stop collecting on discharged loans and take remedial action, including conducting a multi-year lookback and issuing refunds to affected borrowers.

    Federal Issues CFPB Student Lending Student Loan Servicer Consumer Finance UDAAP Supervision Examination Unfair

  • CFPB report looks at junk fees; official says they remain agency focus

    Federal Issues

    On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:

    • Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
    • Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
    • Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
    • Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
    • Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.

    CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.

    Federal Issues CFPB Consumer Finance Junk Fees Overdraft Supervision Examination Mortgages Student Lending Payday Lending Student Loan Servicer NSF Fees Title Loans UDAAP Auto Finance

  • Hsu presses for global supervision of crypto

    On March 6, acting Comptroller of the Currency Michael J. Hsu commented that the collapse of a major cryptocurrency exchange has underscored a need for consolidated supervision of global cryptocurrency firms. Speaking before the Institute for International Banker’s Annual Washington Conference, Hsu offered thoughts on how to build and maintain trust in global banking. “To be trustworthy, global crypto firms need a lead regulator who has authority and responsibility over the enterprise as a whole,” Hsu said. “Until that is done, crypto firms with subsidiaries and operations in multiple jurisdictions will be able to arbitrage local regulations and potentially play shell games using inter-affiliate transactions to obfuscate and mask their true risk profile.” Hsu pointed out that in order to conduct business in the U.S. foreign banks must be supervised by a home country via “a lead regulator with visibility and authority over the entirety of the bank’s global activities.” In contrast, not a single crypto firm is currently subject to consolidated supervision, Hsu said.

    Hsu drew comparisons between a now-defunct international bank that led to significant changes in how global banks are supervised and the collapsed crypto exchange, arguing that there are “striking similarities” between the two, including that both (i) “faced fragmented supervision by a combination of state, federal, and foreign authorities”; (ii) “lacked a lead or ‘home’ regulator with authority and responsibility for developing a consolidated and holistic view of the firms”; (iii) “operated across jurisdictions where there was no established framework for regulators to share information on the firms’ operations and risk controls”; and (iv) “used multiple auditors to ensure that no one could have a holistic view of their firms.” To close the gap in the crypto sector, Hsu said action “will have to take place outside of bank regulatory channels,” but noted that the Financial Stability Board and other international bodies have already “recognized the need for a comprehensive global supervisory and regulatory framework for crypto participants.”

    Bank Regulatory Federal Issues Digital Assets OCC Cryptocurrency Supervision Of Interest to Non-US Persons

  • CFPB publishes HMDA review

    Federal Issues

    On March 3, the CFPB published findings from a voluntary review of the 2015 HMDA Final Rule issued in October 2015, as well as subsequent related amendments that eased certain reporting requirements and permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit (covered by InfoBytes here). Under Section 1022(d) of Dodd-Frank, the Bureau is required to conduct an assessment of each significant rule or order adopted by the agency under federal consumer financial law. The Bureau noted that it previously determined that the 2015 HMDA Final Rule “is not a significant rule for purposes of section 1022(d)” and said the decision to conduct the review was voluntary.

    The Report on the Home Mortgage Disclosure Act Rule Voluntary Review found, among other things, that (i) “[c]onsistent with the 2015 HMDA Final Rule’s increase in the closed-end reporting threshold for depository institutions, HMDA coverage of first lien, closed-end mortgages decreased between Q1 of 2017 and Q1 of 2018, from 97.0 percent to 93.8 percent”; (ii) for all financial institutions originating closed-end mortgages, “the share of those institutions reporting HMDA data decreased between 2015 and 2020, with the largest decreases observed in 2017 and 2020” after the reporting threshold rose from 25 loan originations to 100 loan originations; (iii) revising data points to include the age of applicant and co-applicant race, ethnicity, gender, and income, increased the amount of compiled data; and (iv) analyzing data assists in detecting fair lending risk and discrimination in mortgage lending. “HMDA’s expanded transactional coverage improved the risk screening used to identify institutions at higher risk of fair lending violation by improving the accuracy of analysis and thus reducing the false positive rate at which lenders were mistakenly identified as high risk,” the report said.

    The report also noted that interest rate data “provides an important observation that enables data users, including government agencies, researchers, and consumer groups to analyze mortgage pricing in order to better serve HMDA’s purposes. In particular, interest rate information brings a greater transparency to the market and facilitates enforcement of fair lending laws.” The Bureau further noted that HMDA data is “crucial” to federal regulators when conducting supervisory examinations and enforcement investigations. The Bureau commented that the “requirement to report new HMDA data points greatly increased the accuracy of supervisory data since the additional data points are now used to assess fair lending risks and are subject to supervisory exams for accurate filing to HMDA,” adding that the data is “also used to estimate appropriate remuneration amounts for harmed consumers.”

    Federal Issues CFPB HMDA Mortgages Dodd-Frank Consumer Finance Fair Lending Supervision Examination

  • Fed revises Bank Holding Company Supervision Manual

    The Federal Reserve Board recently updated sections of the Bank Holding Company Supervision Manual. (Changes to the manual were last made in November 2021.) The manual provides guidance for conducting inspections of bank holding companies and their nonbank subsidiaries, as well as savings and loan holding companies. “The supervisory objectives of the inspection program are to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a holding company or its nonbanking subsidiaries and its subsidiary banks,” the Fed explained. Included among the changes are updates to sections on the supervision of savings and loan holdings companies; supervision of holding companies with less than $10 billion in total consolidated assets; liquidity planning and positions applicable to large financial institutions; holding company ratings applicability and inspection frequency; supervision of subsidiaries related to nondeposit investment products; control and ownership of bank holding company formations; asset securitization risk management and internal controls; retail-credit classification; supervision of savings and loan holding companies; and Bank Holding Company Act exemptions. A new section—“Formal Corrective Actions”—revises previous guidance to include entities against which the Fed has statutory authority to take formal enforcement actions. The section also provides additional information on enforcement actions for Bank Secrecy Act and anti-money laundering compliance failures, as well as details on interagency enforcement coordination. The section further clarifies that the Fed “does not issue an enforcement action on the basis of a ‘violation’ of or ‘non-compliance’ with supervisory guidance.” Minor technical changes were made throughout the manual as well. A detailed summary of changes is available here.

    Bank Regulatory Federal Issues Federal Reserve Bank Holding Companies Bank Holding Company Act Supervision Nonbank

  • Agencies cite need to update bank merger evaluation framework

    On February 10, OCC Senior Deputy Comptroller and Chief Counsel Ben W. McDonough spoke before the OCC Banker Merger Symposium about the future of bank merger policy. Acting Comptroller of the Currency Michael J. Hsu’s prepared remarks, which were delivered on his behalf by McDonough, stressed the need to update the framework used for analyzing bank mergers. Hsu commented that without necessary enhancements, “there is an increased risk of approving mergers that diminish competition, hurt communities, or present systemic risks,” but cautioned that imposing a moratorium on bank mergers would inhibit growth and improvements that could benefit communities and increase competition. Hsu observed that “many experts have raised questions about the ongoing suitability of the current bank merger standards at a time of intense technological and societal change.” He noted that federal bank regulators currently use the Herfindahl–Hirschman Index (HHI) to assess market concentration—which, while transparent, empirically proven, and efficient—may not be as relevant since the bank merger guidelines were last updated in 1995. Hsu reflected that HHI—which is based solely on deposits—may now be “a less effective predictor of competition across product lines” due to the offering of other banking products, including online and mobile banking. Hsu also said that “the current framework for assessing the financial stability risks of bank mergers bears examining,” as “there is a resolvability gap for large regional banks in that our resolution tools may not be up to the task.” Additionally, Hsu pointed out that it is also critical to analyze a merger’s effects on the communities a bank serves, and that assessing each bank’s Community Reinvestment Act performance and ratings are just a starting point.

    Separately, Federal Reserve Governor Michelle W. Bowman touched upon the topic of bank mergers during a speech before the American Bankers Association Community Banking Conference. Bowman discussed topics related to the Fed’s independence in bank regulation, predictability in bank merger applications, and tailoring of regulations and supervision. Among other things, Bowman commented that while the bank merger review framework is the same for all applications, each case varies widely, which “necessitates an in-depth review of each transaction on its own merits.” According to Bowman, “these reviews are most effective when the expectations of the regulators are clear in advance and the parties can reasonably anticipate the application review process.” She pointed to a recent increase in average processing times in the merger review process and expressed concerns about how delays may lead to increased operation risk, as well as fears that “the increase in average processing times will become the new normal.” Bowman said she believes that transparency between regulators and applicants can help to ensure clear expectations about certain potential delays.

    Bank Regulatory Federal Issues OCC Federal Reserve Bank Mergers Supervision CRA

  • Barr says AI should not create racial disparities in lending

    On February 7, Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, delivered remarks during the “Banking on Financial Inclusion” conference, where he warned financial institutions to make sure that using artificial intelligence (AI) and algorithms does not create racial disparities in lending decisions. Banks “should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” Barr said, pointing to findings that show “significant and troubling disparities in lending outcomes for Black individuals and businesses relative to others.” He commented that “[w]hile research suggests that progress has been made in addressing racial discrimination in mortgage lending, regulators continue to find evidence of redlining and pricing discrimination in mortgage lending at individual institutions.” Studies have also found persistent discrimination in other markets, including auto lending and lending to Black-owned businesses. Barr further commented that despite significant progress over the past 25 years in expanding access to banking services, a recent FDIC survey found that the unbanked rate for Black households was 11.3 percent as compared to 2.1 percent for White households.

    Barr suggested several measures for addressing these issues and eradicating discrimination. Banks should actively analyze data to identify where racial disparities occur, conduct on-the-ground testing to identify discriminatory practices, and review AI or other algorithms used in making lending decisions, Barr advised. Banks should also devote resources to stamp out unfair, abusive, or illegal practices, and find opportunities to support and invest in low- and moderate-income (LMI) communities, small businesses, and community infrastructure. Meanwhile, regulators have a clear responsibility to use their supervisory and enforcement tools to make sure banks resolve consumer protection weaknesses, Barr said, adding that regulators should also ensure that rules provide appropriate incentives for banks to invest in LMI communities and lend to such households.

    Bank Regulatory Federal Issues Federal Reserve Supervision Discrimination Artificial Intelligence Algorithms Consumer Finance Fair Lending

  • Fed says limits on banking activities will apply regardless of insurance status

    On January 27, the Federal Reserve Board issued a policy statement providing guidelines on how the agency evaluates requests from supervised uninsured and insured banks seeking to engage in novel activities, such as those involving crypto assets. Recognizing that in recent years the Fed has received numerous inquiries, notifications, and proposals from banks seeking to engage in new or unprecedented activities, the Fed clarified that when evaluating such inquiries, uninsured and insured banks supervised by the Fed would be subject to the same limitations that are currently imposed on OCC-supervised national banks, including crypto-asset-related activities. According to a board memo published the same day, the Fed said it “will presumptively exercise its authority to limit state member banks to engaging as principal in only those activities that are permissible for national banks—in each case, subject to the terms, conditions, and limitations placed on national banks with respect to the activity—unless those activities are permissible for state banks by federal law.” This “equal treatment” is intended to “promote a level playing field and limit regulatory arbitrage,” the Fed said.

    The Fed reiterated that banks must be able to ensure that any activities they plan to engage in are permitted by law and conducted in a safe and sound manner. A bank should implement risk management processes, internal controls, and information systems that are “appropriate and adequate for the nature, scope, and risks of its activities,” the Fed noted. The Fed, however, explained that the policy statement does “not prohibit a state member bank, or prospective applicant, from providing safekeeping services, in a custodial capacity, for crypto-assets if conducted in a safe and sound manner and in compliance with consumer, anti-money laundering, and anti-terrorist financing laws.”

    The policy statement was issued the same day the Fed denied a request from a Wyoming-based digital asset firm to become a member of the Federal Reserve System. The Fed explained that the firm—a special purpose depository institution chartered by the state of Wyoming that “proposed to engage in novel and untested crypto activities that include issuing a crypto asset on open, public and/or decentralized networks…“ presented significant safety and soundness risks.” Additionally, the Fed determined that the digital asset firm’s risk management framework failed to sufficiently address heighted risk concerns, including its ability to mitigate money laundering and terrorism financing risks.

    Bank Regulatory Federal Issues Digital Assets Federal Reserve Supervision Cryptocurrency

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