STATE GOVERNMENT RELATIONS
Carrasco, Goode Sworn in as New State Senators
Republicans Greg Goode and Cyndi Carrasco were sworn into office during a ceremony Wednesday in the Senate chamber, where they joined the 40-10 GOP majority. Goode is the state director for U.S. Sen. Todd Young and replaces Sen. Jon Ford, who announced his resignation last month. Carrasco serves as vice president and general counsel for the University of Indianapolis. She succeeds Sen. Jack Sandlin, who died in September.
FEDERAL GOVERNMENT RELATIONS
ICBA Advocacy Leads to Nationwide Community Bank Relief from 1071 Small-Business Rule
The Independent Community Bankers of America, the Independent Bankers Association of Texas and Texas First Bank announced Oct. 26 that the U.S. District Court for the Southern District of Texas has granted their request to expand injunctive relief from the Consumer Financial Protection Bureau's Section 1071 final rule. The court decision provides a nationwide injunction to all community banks and covered financial institutions, ensuring relief is not limited by trade association membership.
"Responding to motions filed by ICBA, IBAT and Texas First Bank, the U.S. District Court has rightfully expanded its temporary injunctive relief from the CFPB's Section 1071 final rule to all community banks across the country," ICBA President and CEO Rebeca Romero Rainey said. "In the motions and in a separate letter to the CFPB, ICBA reiterated what it has long said – the implementation of the bureau's 1071 rule should be suspended for all community banks subject to the final rule until the courts decide on the constitutionality of the agency's funding structure."
As ICBA told the CFPB in a March letter, a stay would provide regulatory certainty while the U.S. Supreme Court reviews a U.S. Court of Appeals for the Fifth Circuit decision that the CFPB's funding structure violates the Constitution's appropriations clause and separation of powers.
The CFPB's 1071 rule requires lenders to collect and report data on credit applicants, including the race, sex and ethnicity of the principal owners, as well as gross annual revenue. While the CFPB has the authority to exempt any class of financial institutions from the standards it develops and to limit mandatory data points to those required by the law, it has opted to apply the rule to the vast majority of community banks and to require data points far exceeding those required by law.
ICBA has long opposed the 1071 small-business data collection and reporting requirements and strongly supports a congressional resolution to nullify the rule, which passed through the Senate earlier this month and through the House Financial Services Committee in July. The resolution would reverse the harm of the rule and require the CFPB to craft a new rule that preserves the flow of credit to small businesses.
House Lawmakers Ask Banking Regulators to Review SEC Custody Rule
On Wednesday the Republican and Democratic leaders of two House subcommittees asked banking regulators to review the Security and Exchange Commission's proposed rule for safeguarding advisory client assets and determine whether it conflicts with their regulatory powers. In a joint letter, the four lawmakers urged the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency to engage the SEC "to mitigate potential unintended outcomes for investors, bank customers, financial markets and transmission channels for monetary policy effects."
The SEC proposal would significantly restructure and expand the current custody rule as part of the agency's attempt to address what it views as the potential risks posed by cryptocurrency. In May, four financial industry associations urged the SEC to withdraw the proposal, saying it represented a fundamental departure from current industry practice and could harm financial markets. The lawmakers expressed similar concerns, pointing to the proposed rule's requirement to segregate client cash, which would be a shift from current banking practices. The letter was signed by House Financial Institutions and Monetary Policy Subcommittee Chair Andy Barr, R-Ky., and Ranking Member Bill Foster, D-Ill., Capital Markets Subcommittee Chair Ann Wagner, R-Mo., and Ranking Member Brad Sherman, D-Calif.
"Deposit-taking, custody and safekeeping are among the oldest and most well-established banking activities," the lawmakers said. "Supervision and regulation of a bank's balance sheet and risk is the fundamental obligation of the banking regulators. Given the proposed rule's interplay with banking regulations which would alter aspects of the banking system, we request your response to these questions and strongly encourage you to engage with the commission, as necessary, to mitigate conflicts with prudential banking regulations and avoid unintended consequences for consumers and the broader banking system."
OCC Urges Banks to Adopt Cautious Approach to Venture Lending
In new policy guidance issued Wednesday, the Office of the Comptroller of the Currency said banks engaging in venture lending must do so in a safe and sound manner, in compliance with applicable laws and regulations, and with support from sound risk management systems. In the guidance, the OCC said it has observed that some banks have added, or are considering adding, new commercial lending activities targeting high-risk borrowers. Venture lending supports business formation, but new business ventures have a high probability of failure, the agency said.
Venture lending "often involves banks accepting high-risk characteristics that banks normally avoid when originating conventional commercial loans to borrowers with reliable cash flows and positive earnings," the OCC said. "Therefore, venture borrowers warrant strong underwriting analysis and monitoring commensurate with the level of risk in such loans. Venture lending facilities should include appropriate credit enhancements to mitigate the elevated risk of borrower failure."
A bank should maintain documentation to support the decision to grant the credit and allow for follow-up monitoring, as it would for any loan, the OCC said. "OCC examiners will scrutinize loan commitments that are underwritten without an adequate assessment of the borrower's capacity to repay and will determine whether such loans should be subject to supervisory criticism," it added. "Examiners will ask banks to determine the impact that any weak venture loan underwriting standards may have on the assumptions used in calculating loan loss reserves."
Federal Reserve Once Again Leaves Rates Untouched
The Federal Open Market Committee announced Wednesday that it would once again hold the federal funds rate at its current level, leaving the target range unchanged at 5.25-5.5%. The decision marked the third time this year that the committee has left the rate untouched, with committee members last deciding to hold steady during their September meeting.
In June the FOMC first paused the series of rate increases that began more than a year ago. Speaking to reporters, Fed Chairman Jerome Powell noted that higher interest rates have led to a flattening in the housing market and are weighing down on business investment. Still, the labor market continues to show strength, with the U.S. economy adding an average of 266,000 jobs per month in the last three months. Powell said the question facing board members is whether monetary policy is restrictive enough to gradually return inflation to the FOMC's 2% target, or whether further rate hikes will be needed. Rate cuts are off the table right now, he added.
"What we can say is that financial conditions have clearly tightened, and you can see that in the rates that consumers, households and businesses are paying, and over time that will have an effect," Powell said. "We just don't know how persistent it's going to be, and it's tough to try to translate that in a way that I'd be comfortable communicating into how many rate hikes that is."
Fiduciary Proposal Would Establish New Requirements for Retirement Advisers
On Tuesday the Labor Department proposed a new rule that would extend fiduciary status to advice on rollovers and investments related to commodities and insurance products like fixed annuities. In a fact sheet accompanying the announcement, the Biden administration said the purpose of the rule was to ensure advisers are not steering clients to products and fees that make the advisers money but may not be the best choice for savers.
The proposed rule would update the definition of an investment advice fiduciary under the Employee Retirement Income Security Act to establish the new requirements, according to the Labor Department. Among other provisions, the proposal would capture rollovers made from a 401(k) to an IRA as investment advice.
Biden Directs Federal Agencies to Consider New Regulation of AI
On Tuesday President Biden issued a sweeping executive order directing federal agencies to review and possibly draft new rules governing the use of artificial intelligence across multiple sectors of the economy, including financial services. Among other provisions, the order encourages agencies to use their authority to address financial stability risks posed by AI. It directs the Treasury Department to submit a report within 150 days on best practices for financial institutions to manage cybersecurity risks posed by AI. It also urges the Consumer Financial Protection Bureau and federal housing regulators to ensure AI isn't used to unlawfully discriminate in appraisals and lending.
The 100-plus page order will require the developers of many AI systems to share their safety test results and other critical information with the U.S. government, set standards and best practices for detecting AI-generated content as a tool for fighting consumer fraud, and establish an "advanced" cybersecurity program to develop AI tools to find and fix vulnerabilities in critical software, according to the White House. It also directs the Federal Communications Commission to review how AI may improve telecom network resiliency and spectrum efficiency, as well as aid the federal government's fight against unwanted robocalls and robotexts.
The order calls on Congress to pass legislation to protect people's privacy, including guidance for federal agencies to account for AI risks to privacy. In addition, it directs agencies to establish principles and best practices to mitigate the harms to workers displaced by AI.
As for AI in financial services, the order directs CFPB and the Federal Housing Finance Agency to "consider using their authorities" to ensure that AI systems comply with existing federal laws protecting against bias in underwriting and appraisals. The order also urges the CFPB and Department of Housing and Urban Development to issue guidance within 180 days "to combat unlawful discrimination" resulting from AI used in decisions about housing access and other real estate transactions.