STATE GOVERNMENT RELATIONS
Lt. Gov. Crouch, IHCDA Announce Funding for Housing Youth Exiting Foster Care
According to an announcement by the Indiana Housing and Community Development Authority, Hoosier youth aging out of the foster care system will soon have access to an estimated 60 affordable rental housing units at locations in Goshen, Indianapolis, Jeffersonville and Merrillville.
La Keisha Jackson Wins Caucus to Succeed Sen. Breaux
Indianapolis City-County Councilor La Keisha Jackson was victorious in a Democratic caucus to replace the late state Sen. Jean Breaux. Jackson, a council member since 2014, won in a 30-15 vote over Chunia Graves. Jackson will complete Breaux's current Senate term, which runs until the November election for District 34.
Tucker Wins Fort Wayne Mayoral Caucus in Upset
Sharon Tucker was elected Mayor of the state's second-largest city during a Democratic caucus, defeating House Minority Leader Phil GiaQuinta and Stephanie Crandall, a top aide to the late Mayor Henry, on the second ballot.
FEDERAL GOVERNMENT RELATIONS
Fed: Bank System Remains Sound, Profitable
Over the past few months, the banking system has remained sound and resilient, with risk-based capital ratios well above regulatory requirements, the Federal Reserve concluded in the first of its two financial stability reports for 2024. The report, released last Friday, offers the Fed's assessment of the resilience of the U.S. financial system since October 2023, when the previous report was issued. While the Fed found the overall banking system sound, it noted that fair value losses on fixed-rate assets remained sizable for some banks, and some banks have concentrated exposures to loans backed by commercial real estate.
The Fed also noted that amid rising interest rates over the past two years, the profitability of the banking sector stayed solid. Banks’ average rates on interest-earning assets remained well above the average interest expense rates on liabilities, according to the report. "That said, interest expenses increased somewhat faster than interest income, reflecting a higher share of interest-bearing deposits on banks' balance sheets and somewhat higher deposit rates," it said. "As a result, net interest margins, which measure banks' yield on their interest-earning assets after netting out interest expenses, declined a notch in the aggregate in 2023."
In addition, the report provided an overview of the Bank Term Funding Program, which was established after the failures of Silicon Valley Bank and Signature Bank to provide an additional source of liquidity for depository institutions. Credit extended through the BTFP increased at a rapid pace initially, reaching a level above $60 billion by the end of March 2023, before slowing and surpassing $100 billion by the end of August 2023. According to the report, outstanding balances increased further in late 2023, surpassing $165 billion before gradually declining in early 2024. The BTFP ceased extending new loans on March 11. The program extended advances to 1,804 depository institutions, of which 1,706 (95%) were small institutions with total assets below $10 billion.
Kansas City Fed: Bank Aggregate CRE Exposure May Be a Poor Measure of Risk
While investors are closely monitoring banks' commercial real estate risks because of higher interest rates and changing work habits, CRE risks can vary substantially across property types and geographic locations, suggesting that aggregate CRE exposure may be a poor measure of risk, economists with the Federal Reserve Bank of Kansas City concluded in a recent bulletin.
The economists noted that there is currently a correlation between higher CRE concentrations and lower bank stock returns. However, they wrote that exposure to CRE risk depends on more than just loan concentration. Other key factors include the stringency of the bank's underwriting, its willingness and ability to monitor existing borrowers, and the capital and loan loss provisions it holds against potential losses. The characteristics and location of the underlying properties matter as well.
"Despite a relatively strong economic outlook, investors continue to closely assess the risks that commercial properties pose to banks, particularly those with sizable loan concentrations," the economists wrote. "Under closer examination, though, CRE risks are diverse and depend strongly on property type, property characteristics and geographic location. In addition, underwriting standards and loss absorption measures can differ substantially across banks. Thus, broad bank risk measures may not provide a complete picture of the risks CRE loans pose to individual banks."
Labor Department Finalizes Rule Expanding 'Fiduciary' Definition
The Department of Labor released a new rule Tuesday significantly broadening the definition of an investment advice "fiduciary" under the Employee Retirement Income Security Act, or ERISA. Under the final rule, a bank or other financial institution or representative assisting customers with a one-time rollover transaction likely will be deemed a "fiduciary." One-time annuity transactions will also be captured under the rule.
The Biden administration pushed for adoption of the rule, saying it would ensure that advisers are not steering clients to products and fees that make advisers money but may not be the best choice for savers. The final rule expands the scope of an investment advice "fiduciary" by substantially rewriting the current regulation's so-called "five-part test." As a result, there will likely be other nonfiduciary services that now will likely be captured as "fiduciary" under the rule, with its attendant liability risks and compliance costs.
Although the department has sought to clarify through illustrations the dividing line between fiduciary and nonfiduciary activity, banks and other institutions providing retirement services to customers will need to reassess the full range of their investment programs and activities, particularly those that currently are considered nonfiduciary, to determine whether and the extent to which such activities may now trigger ERISA fiduciary status.
Labor Department Issues Final Rule to Increase Overtime Eligibility
The Department of Labor Tuesday also issued a final rule that would significantly increase the number of employees who are subject to the Fair Labor Standards Act's overtime and minimum wage requirements. The rule was issued despite objections from industry groups that increasing the salary threshold would harm employees by limiting remote and flexible scheduling options, limit career advancement, and reduce access to incentive pay and other benefits. Employer organizations representing nonfinancial companies are considering filing a lawsuit to challenge the rule.
Under the rule, the standard salary level is set at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Bureau region, a significant increase above the existing salary level of $35,568. An employee whose salary falls below the salary level is automatically classified as a nonexempt employee and is subject to federal overtime and minimum wage requirements. Employees whose salary falls above the salary level may qualify for exempt status if the employee satisfies the "duties test," which the final rule did not change.
The salary level under the rule will increase to $43,888 as of Jul. 1, and then to $58,656 as of Jan. 1, 2025. The rule also requires DOL to update the salary level automatically every three years using the methodology in the rule. In addition, the rule increases, to $132,964 on Jul. 1, the amount of income an employee must receive to be subject to the "highly compensated employee," or HCE, test – an abbreviated duties test available to determine whether employees who meet a higher salary threshold are exempt. The HCE test's compensation threshold then increases to $151,164 per year (including at least $1,128 paid on a salary or fee basis) as of Jan. 1, 2025.
CFPB Releases Supervisory Highlights on Mortgage Servicing
The CFPB released a supervisory highlights report this week covering key findings and supervisory actions in mortgage servicing. This report underscores the bureau's ongoing efforts to scrutinize mortgage servicers in the aftermath of the pandemic. The document highlights ongoing monitoring of emerging risks in default servicing activity post-COVID-19 and the increase in foreclosure starts.
Although CFPB communications emphasized servicers levying so-called "illegal junk fees," the majority of the report's content addresses regulatory breaches and operational shortcomings, particularly concerning streamlined loss mitigation processes. The report also demonstrates an enhanced application of unfair, deceptive or abusive acts or practices, or UDAAP, in the mortgage servicing sector, categorizing several practices as deceptive or unfair, even though they fall under the purview of Regulation X. A proposed rule revision regarding Regulation X is anticipated to be published in May.
Read the supervisory highlights
Federal Trade Commission Bans Noncompete Clauses
The Federal Trade Commission finalized a new rule on Tuesday to ban the use of noncompete clauses in employee contracts. While the FTC does not have regulatory authority over banks, it does have authority over bank affiliates.
The final rule makes it illegal for an employer to enter into a noncompete with a worker, maintain a noncompete with a worker or tell workers they are subject to a noncompete. Noncompete agreements with senior executives entered into before the rule's effective date – which is 120 days after the rule's publication in the Federal Register – remain in force under the final rule. Existing noncompetes with other workers are not enforceable after the effective date.
Last April, the U.S. Chamber of Commerce and nearly 300 national, state and local trade associations and chambers of commerce joined in a comment letter opposing the FTC rule. The groups asserted that noncompetes serve pro-competitive interests by encouraging investment in employees and helping companies protect their intellectual property, and that the FTC lacks the statutory authority to issue a rule, among other arguments.