STATE GOVERNMENT RELATIONS
State's Budget Surplus Takes Big Hit with Medicaid Costs, Dip in Revenue Growth
An unexpected $1 billion jump in projected Medicaid expenses to state government and a slowdown in tax revenue growth will mean a big hit to the state's budget surplus. Updated projections presented Tuesday to the State Budget Committee show that Indiana's cash reserves are expected to fall from about $2.9 billion – when the last budget year ended June 30 – to $2.1 billion at the end of June 2025.
Because of a forecasting error, the state will likely have to spend $984.3 million more than expected to cover Hoosiers' Medicaid expenses over the biennium, state officials said Tuesday. A majority of the unexpected costs will stem from older Hoosiers who want to age at home, they said. According to the agency, expenses for such Hoosiers are estimated to be nearly $1.5 billion more than forecast in April. Some other forecast changes are expected to result in saved Medicaid spending, offsetting some of the increase.
Lyness Becomes Fifth House Republican Not Seeking Reelection
Republican Rep. Randy Lyness has decided not to seek reelection next year and will retire from the state legislature after completing his term. Lyness was first elected to the House by a Republican caucus in 2015 and represents southeastern Indiana's heavily GOP-leaning House District 68. Garrett Bascom, who previously served as an aide to former Attorney General Curtis Hill, announced his Republican candidacy for the seat.
FEDERAL GOVERNMENT RELATIONS
Rep. Waters Seeks Answers on Navy Federal Credit Union's Lending Practices
Rep. Maxine Waters, D-Calif., this week called for the nation's largest credit union to "explain to Congress and their members" media reports alleging that it denied mortgage approvals to more than half of Black applicants. Navy Federal Credit Union approved more than 75% of the white borrowers who applied for a new conventional home purchase mortgage in 2022, but less than 50% of Black borrowers who applied for the same type of loan were approved, CNN reported last week. The approval gap between white and Black applicants was the largest of any of the 50 lenders that originated the most mortgage loans last year.
In a statement, Waters, who is the ranking member of the House Financial Service Committee, said she was "appalled and shocked" that Navy Federal has "routinely engaged in a pattern of discrimination." She also called on the Consumer Financial Protection Bureau, National Credit Union Administration and other regulators to investigate the credit union's lending practices.
"As a private institution that bears the name of an esteemed branch of the United States military, Navy Federal must explain both to Congress and their members how such practices took place, what immediate steps are being taken to correct the harm done and who in management will be held responsible," Waters said. "Its leadership should also share to what extent they prioritize diversity and inclusion, including on their management team and board, as well as in their hiring, promoting and contracting practices."
Biden Vetoes Resolution to Overturn CFPB Small Business Data Collection Rule
On Tuesday, President Biden vetoed a Senate joint resolution to overturn the Consumer Financial Protection Bureau’s final rule implementing Section 1071 of the Dodd-Frank Act, which requires the collection and reporting of credit application data for small businesses. S.J. Res 32 cleared both houses of Congress with bipartisan support, but it needed the president's signature to take effect.
Earlier this year, the American Bankers Association joined the Texas Bankers Association in suing to overturn the rule. In July, a Texas judge issued a preliminary injunction against enforcement of the rule until the U.S. Supreme Court issues a decision in a separate case concerning the constitutionality of the CFPB's funding structure.
Read Biden's statement on the veto
Lawmakers Seek Delay for Beneficial Ownership Reporting Implementation
On Tuesday, more than 80 House and Senate lawmakers urged the Treasury Department and Financial Crimes Enforcement Network to delay all beneficial ownership information reporting requirements by at least one year until the agency finalizes all outstanding rulemaking. The requirements are currently set to go into effect on Jan. 1.
In a joint letter, the lawmakers said FinCEN is "woefully behind" in educating small business owners and stakeholders about new obligations under the Corporate Transparency Act. They cited a National Federation of Independent Business survey finding that 90% of respondents were unfamiliar with the reporting requirements. "This lack of awareness and education is alarming and must be addressed before the law is implemented," they said.
The lawmakers further noted that FinCEN has not finalized two final rulemakings concerning BOI database access and customer due diligence. "We believe a year's delay will provide FinCEN and the business community with more time to educate owners of their new obligations," they said. "It will also give FinCEN time to review the new rules and improve and finalize the statute's regulatory framework."
Federal Agencies Update CRA 'Small Bank' Definitions
The Federal Reserve and Federal Deposit Insurance Corp. announced Wednesday the asset-size thresholds that will be used to define "small bank" and "intermediate small bank" under Community Reinvestment Act regulations for 2024. A small bank will be defined as an institution that, as of Dec. 31 of either of the prior two calendar years, had assets of less than $1.564 billion. An intermediate small bank will be an institution with assets of at least $391 million as of Dec. 31 of both of the prior two calendar years and less than $1.564 billion as of Dec. 31 of either of the prior two calendar years. The new thresholds take effect Jan. 1, 2024.
FDIC Issues Guidance for Managing Commercial Real Estate Risk
Citing concerns about recent trends in commercial real estate, the Federal Deposit Insurance Corp. Monday issued guidance to "reemphasize" the importance of strong capital and robust credit risk-management practices for financial institutions with CRE concentrations. The document replaces similar guidance issued by the agency in 2008.
In the guidance, the FDIC said that the CRE market and lending conditions have been "significantly influenced" by governmental and societal responses to the COVID-19 pandemic, rapidly rising interest rates and the prolonged inverted yield curve. At the same time, CRE investment property capitalization rates have not kept pace with recent rapid increases in long-term interest rates, "which leads to concerns about general over-valuation of underlying collateral," the agency said.
"Refinancing office and multi-family loans could be challenging in an environment of pressured rent growth, higher interest rates and lower property values, particularly for those institutions with CRE concentrations in areas with surplus office and multi-family space," the FDIC said. "The FDIC's concern also extends to the subset of banks with elevated [construction and development] concentrations, which subset has risen in recent quarters, but remains well below the 2007 peak. Banks with significant exposure to C&D loans had substantial credit losses during the 2008-2013 banking crisis, and banks currently engaged in C&D lending could be affected by weaknesses in the current economic environment and real estate fundamentals."
The guidance lists six risk management actions for financial institutions with significant CRE concentrations: Maintain strong capital levels, ensure that credit loss allowances are appropriate, manage C&D and CRE loan portfolios closely, maintain updated financial and analytical information, bolster loan workout infrastructure, and maintain adequate liquidity and diverse funding sources. The agency added that institutions are encouraged to continue making CRE credit available in their communities "using prudent lending standards that rely on strong underwriting and loan administration practices."
House Bill Would Reform CFPB's UDAAP Authority
A House bill introduced last week would reform the Consumer Financial Protection Bureau’s unfair, deceptive or abusive acts and practices authority under the Dodd-Frank Act to provide certainty for lenders and credit providers, according to its sponsor.
The Rectifying UDAAP Act by Rep. Andy Barr, R-Ky., would clarify standards for UDAAP enforcement actions brought by the CFPB. The proposed changes require the CFPB "to provide the transparency financial institutions need to serve consumers and ensure there is ample access to credit in our consumer markets," said Barr, chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy.
Earlier this year, a federal judge in Texas granted summary judgment to the American Bankers Association, Texas Bankers Association, U.S. Chamber of Commerce and several other co-plaintiffs in a lawsuit challenging the CFPB's UDAAP exam manual, which the groups said unlawfully expanded the statutory definition of "unfairness" to encompass discrimination.
Regulators Add AI to List of Financial Stability Risks
For the first time, the Financial Stability Oversight Council has labeled the use of artificial intelligence in financial services as an emerging vulnerability in the financial system. The FSOC last week released its annual report on financial risks, and new this year was the inclusion of AI, which the council said has the potential to spur innovation and drive efficiency, "but its use in financial services requires thoughtful implementation and supervision to manage potential risks."
"Generative AI models use large datasets to identify patterns that allow the generation of new content including text, software code, images and other media," FSOC said in the report. "Many AI approaches present 'explainability' challenges that make it difficult to assess the suitability and reliability of AI models and to assess the accuracy and potential bias of AI output. In addition, the reliance of AI systems on large datasets and third-party vendors introduces operational risks related to data controls, privacy and cybersecurity."
The FSOC is also continuing to monitor cybersecurity and climate-related financial risks, "particularly in light of the growing number of cybersecurity incidents and climate-related events." In addition, the council removed LIBOR-related vulnerability from this year's report "following the progress made in transitioning to more robust alternative reference rates."