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On June 1, the Small Business Administration (SBA) issued an announcement on the closure of the Paycheck Protection Program (PPP) to new loan guaranty applications. The PPP has provided over $798 billion in economic relief to over 8.5 million small businesses and nonprofits across the nation, and was among the first Covid-19 economic disaster relief programs to provide small businesses affected by the pandemic with emergency funds. According to the announcement, the PPP supported the “smallest of small businesses with 32 percent of the loans going to Low-and-Moderate Income (LMI) communities.” Additionally, Community Financial Institutions played a role in PPP lending to underserved communities by providing 1.5 million loans, which totaled around $30 billion. SBA Administrator Isabella Casillas Guzman pointed out, “in 2021, 96 percent of PPP loans went to small businesses with fewer than 20 employees. Moving forward, [the SBA] will continue to prioritize equity in all SBA programs and services.”
On May 26, the OCC announced a series of examiner-led virtual workshops for the boards of directors of community national banks and federal savings associations. The workshops will focus on emerging issues regarding compliance risk, and will provide training and guidance on implementing effective compliance risk management programs, as well as guidance on regulations such as the Bank Secrecy Act and ECOA. A schedule of the upcoming workshops is available here.
On May 25, Senators Cynthia Lummis (R-WY) and Kyrsten Sinema (D-AZ), along with several other bipartisan Senators, announced the creation of the U.S. Senate Financial Innovation Caucus to highlight “responsible innovation in the United States financial system, and how financial technologies can improve markets to be more inclusive, safe and prosperous for all Americans.” The Senate will use the caucus “to discuss domestic and global financial technology issues, and to launch legislation to empower innovators, protect consumers and guide regulators, while driving U.S. financial leadership on the international stage.” The press release notes that the caucus is timely because of the “growing regulatory focus on digital assets,” which includes efforts by the Federal Reserve Board, SEC, and other foreign governments to create digital currencies. The caucus will focus on critical issues pertaining to the future of banking and U.S. competitiveness on the global stage, including: (i) distributed ledger technology (blockchain); (ii) artificial intelligence and machine learning; (iii) data management; (iv) consumer protection; (v) anti-money laundering; (vi) faster payments; (vii) central bank digital currencies; and (viii) financial inclusion and opportunity for all.
On May 24, the Federal Reserve Board announced its approval of the application of a Dutch- based payment company to establish a federally-licensed branch in San Francisco. According to the order, since the company currently does not have a U.S. banking presence, its U.S. payment processing business will rely on third-party banks. Upon establishment of the San Francisco branch, the company’s operations would be transferred to the branch, and it would be eligible to engage in a wide range of payments processing and related banking activities in the U.S., thus reducing its dependence on third-party banks. Through the establishment of the branch, “the company proposes to bring its U.S. activities and operations in line with those conducted under its European Central Bank (ECB) license,” the Fed noted. The order also pointed out that “managerial and other financial resources of the company are considered consistent with approval, and the company appears to have the experience and capacity to support the proposed branch.” In addition, the company has initiated controls and procedures for its proposed branch to guarantee compliance with U.S. law and for its operations in general.
On May 27, the House Financial Services Committee held a hearing entitled “Holding Megabanks Accountable: An Update on Banking Practices, Programs and Policies.” During the hearing, chief executive officers from the six largest U.S. banks testified on their banks’ activities during the Covid-19 pandemic, as well as various issues related to safety and soundness, consumer protection, diversity and inclusion, risk management, compensation, climate risk, and the use of emerging technology. Several proposed bills containing provisions that would impact the banks if enacted were also discussed, including those that would (i) require the banks to publicly disclose and pay damages to harmed consumers within a short timeframe when more than 50,000 consumers are affected or potential remediation exceeds $10 million; and (ii) require federal regulators to design strategic plans to hold the banks accountable for compliance failures resulting in extensive consumer harm. The Committee’s memorandum focused on several areas discussed during the hearing including the following:
- Pandemic response. The Committee expressed concerns over allegations that some of the banks prioritized Paycheck Protection Program (PPP) loans for wealthier clients over smaller borrowers, including small and minority-owned businesses, and that certain banks allegedly inappropriately charged overdraft fees.
- Banking deserts. The Committee reported that the number of branches in the U.S. is down from ten years ago, noting that the existence of communities lacking adequate access to a bank branch makes it more difficult to reduce the number of unbanked and underbanked consumers.
- Diversity and inclusion. The Committee suggested that lack of diversity within the banks continues to be an issue, pointing out that shareholder proposals at certain banks for racial equality audits were not supported by the banks. However, the Committee noted that all six banks made commitments in 2020 to invest millions into supporting minority depository institutions and community development financial institutions to support communities of color during the pandemic.
- Fintech. The Committee discussed the increased use of artificial intelligence and machine learning to assist in digital banking, customer relations, fraud detection, and underwriting. Some of the banks, the Committee noted, have “acknowledged the competitive threat of fintech’s growth” and have asked regulators to “create a level playing field.” With respect to cryptocurrency custody services and the use of distributed ledger technology to perform payment activities, the Committee observed that while the banks do not yet provide these services, a few of them recently announced that they are considering the idea of offering funds to select investors allowing bitcoin ownership, while others may offer bitcoin investments in the near future.
Earlier in the week, the same CEOs discussed pandemic responses during the Senate Banking Committee’s hearing on the “Annual Oversight of Wall Street Firms.” The CEOs addressed challenges with building out digital platforms to facilitate PPP loan applications and forgiveness programs, as well as challenges to distributing funds quickly and in a manner that would prevent fraud from entering the system. The CEOs also emphasized their continued commitment to helping borrowers still facing financial hardships as federal foreclosure and eviction moratoriums begin to expire. One CEO noted during the hearing that his bank intends to continue to assist borrowers find loan modifications “irrespective of the deadline passing.”
On May 27, the CFPB published a blog post discussing the Bureau’s 5th Research Conference held earlier in the month. During the conference, academics and policymakers presented research covering several consumer finance areas, addressing topics including (i) racial disparities in homeownership, bankruptcy outcomes, and access to credit; (ii) the need to improve the industry’s understanding of the Community Reinvestment Act; (iii) the evolution of credit scores across economic cycles; (iv) the impact of the Covid-19 pandemic on consumer finances and credit markets; (v) credit use and spending patterns among the economically vulnerable—one of the areas where the Bureau hopes to expand its research and policy agenda; and (vi) disclosures and consumer decision-making. Recorded videos of the event as well as links to most of the research papers are available on the blog post.
On May 24, Federal Reserve Governor Lael Brainard spoke at the Consensus by CoinDesk 2021 Conference about the Fed’s exploration of central bank digital currencies (CBDCs) and cross-border payments. Brainard noted that a CBDC may address concerns regarding the lack of federal deposit insurance and banking supervision for nonbank issuers of digital assets, and that “new forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks.” She highlighted that “introducing a safe and accessible central bank money to households and businesses in digital payments systems. . .would reduce counterparty risk and the associated consumer protection and financial stability risks.” Brainard noted that a Fed-backed digital currency could cause payment transactions to be cheaper, faster, and more efficient by improving processes for sending and receiving money internationally, encouraging private-sector competition in retail payments, and increasing financial inclusion.
Brainard discussed how CBDCs could affect central banks’ ability to manage the economy, saying a digital dollar would need to be designed with safeguards to “protect against disintermediation of banks and to preserve monetary policy transmission more broadly.” She cautioned that the design should complement, not replace, existing currency and bank deposits and emphasized the need for regulators to work together “to ensure that banks are appropriately identifying, monitoring, and managing risks associated with digital assets.”
As previously covered by InfoBytes, last week Chairman Jerome Powell stated that an important step in engaging the public about CBDCs involves “publishing [a] paper this summer to lay out the Fed’s current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context.”
On May 21, the CFPB announced a settlement with a California-based auto-loan lender to resolve allegations that the company engaged in unfair practices with respect to its Loss Damage Waiver (LDW) product, in violation of the Consumer Financial Protection Act. The CFPB alleged that the company engaged in unfair practices by illegally charging interest for late payments on its LDW product without customers’ knowledge. According to the consent order, if consumers had insufficient insurance coverage for their vehicles, the company would add the LDW product to their accounts. For these consumers, the cost of the LDW product was added to the principal of the loan, resulting in an increase to the total loan balance and the amortized loan payment. The company allegedly disclosed the increase in the consumer’s monthly payment as an LDW fee but failed to disclose to consumers that interest accrues on late payments of that fee. The Bureau alleged that the company’s practice of charging consumers interest for late LDW fee payments without their consent caused “substantial injury that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.”
Under the terms of the consent order, the company is required to provide $565,813 of relief to 5,782 impacted consumers, as well as pay a $50,000 civil money penalty. The order also permanently enjoins the company from charging interest on LDW fees without “clearly and conspicuously disclosing the material terms and conditions to consumers.”
On May 24, the FDIC, Federal Reserve Board, and the OCC published a joint notice and request for comments on information collections published last December and this February (covered by InfoBytes here). The proposed reporting changes would revise and extend three versions of the Call Report—FFIEC 031, FFIEC 041, and FFIEC 051—as well as FFIEC 002, “Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks,” and FFIEC 002S, “Report of Assets and Liabilities of a Non-U.S. Branch that is Managed or Controlled by a U.S. Branch or Agency of a Foreign (Non-U.S.) Bank.” After considering comments received on the information collections, the agencies announced their intention to proceed with the proposed revisions and will submit a request to Office of Management and Budget for approval. The proposed revisions to the reporting forms, along with revised instructions related to FDIC amendments to the deposit insurance assessment system, will be effective with the June 30, 2021, report date. Additionally, the agencies noted that the exclusion of sweep deposits and certain other deposits from reporting as brokered deposits will be effective with the September 30, 2021, report date. Comments on the joint notice must be received by June 23.
On May 20, President Biden ordered financial regulators to take steps to mitigate climate-related risk related to the financial system. The executive order, among other things, directs the Secretary of the Treasury to work with Financial Stability Oversight Council (FSOC) members to consider “assessing, in a detailed and comprehensive manner, the climate-related financial risk . . . to the financial stability of the federal government and the stability of the U.S. financial system,” and to facilitate climate-related risk information sharing between FSOC member agencies and other federal departments and agencies. Under the executive order, Treasury is also required to issue a report to the president within 180 days on current efforts taken by FSOC members to incorporate climate-related financial risk into their policies and programs. The executive order directs the report to include recommendations on (i) “actions to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk”; (ii) current approaches for incorporating climate-related financial risk considerations into regulatory and supervisory activities, as well as a discussion of any impediments faced when adopting these approaches; (iii) processes for identifying climate-related financial risks; and (iv) how “identified climate-related financial risks can be mitigated, including through new or revised regulatory standards as appropriate.” The executive order also states, among other things, that federal financial management and reporting should be modernized to incorporate climate-related financial risk, especially risk related to federal lending programs.