STATE GOVERNMENT RELATIONS
Probate Code Commission Votes Down 2 Drafts of Proposed Legislation
The Interim Committee on Probate Code Study Commission voted to include in its final report eight of the 10 proposed pieces of legislation included in the commission's Tuesday meeting agenda. The pair of preliminary drafts omitted from the commission's final report – preliminary drafts 3100 and 3110 – can still be considered by the General Assembly.
INPRS Says China Divestments 'Ahead of Schedule'
Indiana's Public Retirement System says it's "ahead of schedule" in pulling out of its Chinese investments after lawmakers approved a ban in May. INPRS is also putting together a compliance strategy for a separate ban on controversial ESG investment strategies. At the beginning of the year, the Indiana Public Retirement System had $1.2 billion invested in China, with $486 million falling under a new ban in Senate Enrolled Act 268. The system must divest from 50% of any holding within three years of discovering a banned connection to China, 75% within four years and 100% within five years.
FEDERAL GOVERNMENT RELATIONS
Watchdog Report Finds Flaws in Fed's Supervision of SVB
Federal Reserve supervisors failed to adjust their approach to Silicon Valley Bank as the institution grew in size, and they failed to scrutinize the risk of rising interest rates on the bank's investment portfolio, the Fed's Office of Inspector General concluded in a new report on the central bank's handling of SVB in the leadup to its failure.
The OIG cited several factors leading to SVB's failure, including a large concentration in uninsured deposits, weak risk management and ineffective public communications. However, it noted that the San Francisco Fed and Fed itself had conducted several examinations of SVB and identified various weaknesses in its business model. Despite their findings, neither downgraded the bank's CAMELS (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk) composite and certain component ratings until August 2022, the OIG said. The report also noted that Fed senior officials considered removing former SVB CEO Greg Becker from the San Francisco Fed board after discussions to downgrade the bank's ratings, but decided against it "to avoid revealing confidential supervisory information and potentially signaling to the market the bank's declining condition."
The report identified three issues with the Fed's supervision. First, its supervisory approach did not evolve as SVB grew and increased in complexity. Second, the Fed failed to transition SVB from a regional bank supervisory portfolio to a large bank portfolio. Third, examiners didn't closely scrutinize the risk of rising interest rates on SVB's investment securities portfolio.
The report included seven recommendations for how the Fed could improve its supervisory processes. Among them, the OIG suggested the central bank assess its current regional bank supervision framework and determine whether adjustments need to be made based on a supervised institution's size and complexity. Also, the Fed should take measures to tailor supervisory plans for regional banks to better promote "a timely focus on salient risks" and develop a means to more quickly transition institutions from regional bank supervision to large bank supervision, the OIG said.
Gruenberg Sees Little Chance of Deposit Insurance System Changes
Federal Deposit Insurance Corp. Chairman Martin Gruenberg said Wednesday there is little likelihood of any changes being made to the U.S. deposit insurance system in the foreseeable future, as interest among lawmakers has waned since the bank failures earlier this year.
Speaking at a conference in Boston, Gruenberg highlighted an FDIC report from May on possible deposit insurance reforms, which was drafted in response to Silicon Valley Bank and Signature Bank failures. The agency concluded that a "targeted" deposit insurance system in which additional coverage would be extended to business payment accounts would be the best option for balancing financial stability and depositor protection relative to its costs. However, Gruenberg noted that any changes would require legislation, and lawmakers have not expressed much interest in further exploring the topic.
"While there was considerable interest in the immediate aftermath of the bank failures earlier this year, that has dissipated with time," Gruenberg said. "At this point, there does not seem to be any imminent likelihood of changes to deposit insurance coverage in the U.S."
Senate Committee Advances Cannabis Banking Legislation
A proposed rewrite of a cannabis banking bill cleared the Senate Banking Committee by bipartisan vote Wednesday. The committee voted 14-9 to advance the SAFER Banking Act to the full Senate for consideration, with only a technical amendment made to clean up the bill's text. The legislation, a revised version of the SAFE Banking Act, would enable financial institutions to serve legitimate cannabis businesses in states where it is legal.
Committee Chairman Sherrod Brown, D-Ohio, told senators that regardless of how they feel about the legalization of marijuana, the bill was necessary to make it safer for businesses and service providers to operate in states that have legalized cannabis. "Cannabis policies look different in different states, but legal cannabis small businesses and their employees are running into many of the same issues," he said. "One of these issues is access to financial services."
Banking Groups Warn That National Fee Cap Would Harm Consumers
A proposed Senate amendment to limit the fees and interest charged on consumer loans through a national fee and interest rate cap of 36% would make it more difficult for many consumers to access credit, thereby hurting the very people it is meant to protect, according to a letter signed by eight banking sector trade associations.
The amendment by Sens. Jack Reed, D-R.I., and Jeff Merkley, D-Ore., would attach the 36% cap to an unrelated military construction appropriations bill. In a joint letter to the two senators, the associations said the cap would have ramifications far beyond the payday lenders at which it is targeted, as financial institutions would be unable to profitably offer small-dollar loans to consumers. "Many consumers who currently rely on credit cards or personal loans would be forced to turn elsewhere for short-term financing needs, including pawn shops, or worse – loan sharks, unregulated online lenders and the black market," they said.
Credit card customers would also be harmed by the cap, the groups said. "Including annual and other fees in the calculation will cause credit cards to exceed the cap, resulting in the elimination or reduction of popular and valued credit card features like cash back and other rewards. Such a cap will also inhibit innovative credit cards with non-credit features designed to attract underserved groups because even a nominal annual fee will result in an all-in rate that exceeds 36%."
CFPB: Higher Interest Rates Erode Mortgage Affordability
Higher interest rates led to a significant reduction in overall mortgage affordability in 2022, according to the Consumer Financial Protection Bureau’s annual report on residential mortgage lending activity and trends released Wednesday. The bureau reported that the total number of applications and originations dropped significantly last year, with applications decreasing by about nine million, or 38.6%, and originations decreasing by 6.6 million, or 44.1%. The median total loan costs for home purchase loans in 2022 was $5,954, up 21.8% from $4,889 the year before.
Lenders reported approximately 6.7 million closed-end site-built single-family originations in 2022, a 50.9% decrease from 13.7 million originations in 2021, according to the CFPB. The decline occurred in both home purchase and refinance activities but was more prominent in refinance. The refinance originations for these homes fell from 8.3 million in 2021 to 2.2 million in 2022, a reduction of 73.2%.
Most of the refinance originations left in the market were a small number of cash-out refinance loans, the CFPB said. Meanwhile, the total number of HELOC originations among reporters in both 2021 and 2022 increased by 33.3%. The increase is most likely due to some consumers using HELOCs instead of cash-out refinance loans in a high-interest rate environment, the bureau added.
Fed: Representment NSF Fees are 'Unfair'
In a "compliance spotlight" issued last Friday, the Federal Reserve stated that it has cited banks for unfairness, under section 5 of the Federal Trade Commission Act, for charging multiple nonsufficient fees when a transaction is presented multiple times against insufficient funds in the customer's account.
Institutions have mitigated unfair or deceptive acts or practices, or UDAP, risk by ceasing to charge representment fees and by ensuring that their disclosures were "accurate and consistent with the bank's policy and any systems limitations," the Fed said in the document. The agency also said that for institutions that used a third party to identify representments, the institution should monitor the third party's system settings for compliance with UDAP regulations. "Examiners also found it helpful when institutions informed their Federal Reserve contact if a third party was unable to comply with their directions related to representments," according to the publication.
Earlier this year, the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency issued guidance documents stating that those regulators have cited banks for unfairness UDAP violations for charging representment fees. Under guidance issued by those agencies and the Fed, a bank's clear disclosures of multiple representment fees are not sufficient to avoid negative exam findings.
Fed's Bowman Says Further Rate Hikes Likely
The Federal Open Market Committee will likely need to continue raising the federal funds rate to meet its goal of returning inflation to its 2% target, Federal Reserve Governor Michelle Bowman said last Friday. Speaking at a conference in Colorado, Bowman noted that the FOMC held off raising the rate at its most recent meeting, but she added that further rate hikes would probably be appropriate given that inflation remains too high. She pointed to recent data showing that inflation rose, partly because of higher oil prices.
"Given the mixed data releases – strong spending data but a decline in inflation and downward revisions to jobs created in previous months – I supported the FOMC's decision to maintain the target range for the federal funds rate," Bowman said. "But I continue to expect that further rate hikes will likely be needed to return inflation to 2% in a timely way."
Bowman also encouraged bankers to provide input on several policy proposals before the Fed and other banking agencies, including proposed capital standards for banks with more than $100 billion in assets. "I recognize that in some instances, multiple, interrelated proposals out for comment at the same time may complicate or even frustrate the ability to provide meaningful comment," she said. "Even so, I strongly encourage your participation to inform the rulemaking process."