STATE GOVERNMENT RELATIONS
State General Fund Revenue 8% Off Projections for October
Indiana’s state tax collections for October fell 8.4% below expectations in the first sizable monthly shortfall in more than a year. The state’s latest monthly revenue report showed collections coming in $134.7 million less than the April forecast that legislators used in putting together the current state budget. The nearly $1.5 billion in state general fund revenue was $187 million, or 11.3%, below the October 2022 collections. The State Budget Agency attributed the October shortfall to lower-than-expected individual income tax and sales tax collections.
FEDERAL GOVERNMENT RELATIONS
Report Highlights FHLB Affordable Housing Efforts in 2022
Federal Home Loan Banks awarded approximately $266.9 million in affordable housing funds in 2022 – approximately 24% less than in 2021 – to assist more than 25,000 low- or moderate-income households, including over 12,000 very low-income households, the Federal Housing Finance Agency said Thursday in its annual report on FHLBs’ targeted mission activities. At the same time, the report noted that FHLBs funded roughly $3.5 billion in targeted housing and economic development advances in 2022, or 113% more than the previous year.
The Community Investment Program assisted about 20,000 households in 2022, an increase of approximately 148% from 2021, driven by higher advance volumes at the Indianapolis, Chicago and San Francisco FHLBs, according to the agency. The funding for the Community Investment Cash Advance Program, which supports targeted economic development, was approximately $1.4 billion, or 36% higher than the previous year. Nine FHLBs purchased mortgages through the Acquired Member Assets program, and each met the mortgage purchase and community-based AMA user goals for the year.
At the end of 2022, 70 FHLB members were non-depository community development financial institutions, two more than in 2021, FHFA said. The FHLBs’ outstanding advances to these non-depository CDFIs were $272.4 million, a decrease from $289.6 million at the end of 2021.
FHFA Issues Federal Home Loan Bank Report
The Federal Housing Finance Agency Wednesday issued its long-expected report on the comprehensive review of the Federal Home Loan Banks, culminating a process that began last year in conjunction with the 100th anniversary of the FHLB system. Among other provisions, the agency said it will update the mission statement of the system to reflect the primary goals of providing stable liquidity to FHLB members and supporting housing and community development.
Regarding FHLB membership, the agency noted that authority lies with Congress, but if lawmakers decide to allow entities currently not allowed under existing law – such as nonbank mortgage companies – they should be held to the same requirements as most current members. At the same time, the FHFA said that it will consider harmonizing the manner in which membership eligibility requirements are applied to the different membership types. FHFA also indicated that it will propose a rule to impose an ongoing 10% mortgage asset test on “some members."
The report recommends several steps to better position FHLBs to perform their liquidity mission. They include enhancing the ability of FHLBs to maintain interest-bearing deposits with commercial banks to manage intra-day liquidity requests, as well as limiting the potential for an increase in debt issuance costs for all members following a large liquidity request from a single member.
The FHFA also said it will expand FHLBs’ housing and community development focus by, among other things, requiring FHLBs to establish mission-oriented collateral programs and improve their engagement with mission-oriented members, such as community development financial institutions. The report also indicates that FHFA will develop improved metrics and thresholds to oversee FHLBs and will incorporate mission performance in the supervisory rating and evaluation processes.
Finally, the report includes recommendations for changes that can only be made by Congress. Among them is a proposed doubling of the statutory minimum for the FHLBs’ affordable housing programs. The agency is recommending that lawmakers amend the Bank Act to authorize all CDFI and credit union members with assets below the statutory cap to pledge community financial institution collateral to secure FHLB advances. It also recommends that Congress provide more flexibility on who can serve on FHLB boards.
CFPB Proposes to Supervise Nonbank Payment Providers
The Consumer Financial Protection Bureau Wednesday took steps to regulate large nonbank firms that provide digital payments services, including P2P payments, mobile wallets and other payment apps. The bureau proposed a new rule that would establish its supervisory authority over certain nonbank covered persons participating in a market for “general-use digital consumer payment applications.”
The proposed rule would allow the bureau to examine nonbank payment providers to ensure compliance with applicable federal consumer financial protection laws and would provide a more consistent regulatory framework between non-depository and depository institutions, the CFPB said.
The proposed rule also has implications for an ongoing CFPB proposal to implement Section 1033 of the Dodd-Frank Act, which relates to personal financial data rights, as it would create a regulatory lever for the privacy and security requirements envisioned for the Section 1033 ecosystem, at least among some participants. Comments on the proposal are due by Jan. 8, 2024, or 30 days after publication in the Federal Register, whichever is later.
Fed’s Bowman: Community Reinvestment Act Rule Could Harm Banks
Federal Reserve Governor Michelle Bowman said Tuesday the proposed interagency Community Reinvestment Act modernization rule is unnecessarily complex, overly prescriptive and would result in a significantly greater regulatory burden for all banks, especially community. Bowman was the only member of the Fed board to vote against moving forward with the CRA final rule last month. Speaking Tuesday at an Ohio Bankers League conference, she spelled out her concerns with the rule, saying its positives are outweighed by its negatives.
“First and foremost, the final rule applies the same regulatory expectations for small banks as it does for the largest banks,” Bowman said. “For example, a wide range of community banks – those with more than $2 billion in assets – are treated as ‘large banks’ under the final rule, forcing these banks to comply with the same CRA evaluation standards as a bank with $2 trillion in assets.” She also said that the rule exceeds the authority granted by Congress, particularly provisions to evaluate banks outside of their deposit-taking footprint.
“Perhaps most concerning about the final rule is that it may incentivize banks to reduce their support for certain communities, forcing them to pare back lending in areas where there is a need for credit accessibility,” she said. Bowman also shared her concerns about a Fed proposal to lower the regulatory cap on debit card interchange fees. “While the board's proposed rule suggests that it could result in benefits to consumers, I am concerned that the costs of this fee cap revision for consumers – through the form of increased costs for banking products and services – will be real, while the benefits to consumers – such as lower prices at merchants – may not be realized,” she said.
Fed's Barr: CRA Rule Provides More Clarity on Project Eligibility
The recently unveiled Community Reinvestment Act modernization rule will provide greater clarity to banks about what actions regulators will count toward fulfilling their CRA obligations, Federal Reserve Vice Chairman for Supervision Michael Barr said last Friday. During a Q&A at a National Housing Conference event, Barr said the changes were meant to provide greater consistency and greater transparency to both communities and banks about CRA eligibility.
“We do that primarily in two ways,” Barr said. “One is there is a set of illustrative, eligible activities that are spelled out in detail in the rules. So really, for the first time, you can say in the rule itself, ‘Here are the activities that count.’ And the second thing is we set up a process so if a community or bank has an activity, and they're not sure whether it counts or it doesn't count, they can come to the bank regulators and show them the project and say, ‘Is this a CRA-eligible project?’”
Barr also said that community development will be measured in many ways. “There's community development investments that get specially called out,” he said. “There’s community development lending. We made sure that we highlighted the importance of the Low-Income Housing Tax Credit and the New Markets Tax Credit as avenues for investment by banks because those tools are critical to serving low- and moderate-income communities. We have the ability of banks to get credit nationally for their community development activities, both lending and investment…This approach lets those dollars flow really where they're needed all across the country.”
Fed’s Cook: Nonbanks Pose Financial Stability Concerns
The banking sector has stabilized since bank failures earlier this year, but the vulnerabilities at certain nonbank financial institutions could play “a key role” in amplifying stress associated with tightening financial conditions and slowing economic activity, Federal Reserve Governor Lisa Cook said Monday. During a speech on financial stability at Duke University, Cook said that while she will continue to watch the banking sector for signs of renewed stress, she is closely monitoring nonbanks with “pronounced liquidity mismatches,” such as certain money market funds and open-end funds, as well as those with significant leverage, such as hedge funds.
At the same time, Cook said that the Financial Stability Oversight Council and the federal agencies represented on the council should continue to work together to ensure regulators have the appropriate information to assess the financial stability risks posed by nonbank activities and their interconnectedness with banks. “The financial system is substantially more resilient than it was in the mid-2000s,” she said. “However, vulnerabilities have risen somewhat in recent years, as highlighted by fragilities at [nonbanks], in the Treasury market and – most notably this year – at some banks.”
Cook also said it is important to enhance resilience at large banks, so she supports seeking public comment on the Basel III “endgame” proposal on bank capital requirements. “We cannot – and do not expect to – foresee all potential risks,” she said. “The financial system is too complex and evolves too rapidly for that to be possible. What we can do is remain vigilant to emerging vulnerabilities and build resilience to a variety of potential shocks.”